American Home Shield 2007 Annual Report Download - page 72

Notes to the Consolidated Financial Statements
payments due under the guarantees. At December 31, 2006 there was approximately $229 million of residual value guarantee
relating to the Company's fleet and equipment leases. The fair value of the assets under the leases is expected to fully mitigate the
Company's obligations under the agreements. At December 31, 2006 the Company has recorded the estimated fair value of this
guarantee (approximately $1.1 million) in the Consolidated Statement of Financial Position.
The Company maintains lease facilities with banks totaling $68 million which provide for the financing of branch properties to be
leased by the Company. At December 31, 2006, approximately $68 million was funded under these facilities. Approximately $15
million of these leases are treated as capital leases and have been included on the balance sheet as assets with related debt as of
December 31, 2006. The balance of the funded amount is treated as operating leases. Approximately $15 million of the total facility
expires in January 2008 and $53 million expires in September 2009. The Company has guaranteed the residual value of the
properties under the leases up to 82 percent of the fair market value at the commencement of the lease. At December 31, 2006, the
Company's residual value guarantee related to the leased assets totaled $53 million for which the Company has recorded the
estimated fair value of this guarantee (approximately $0.7 million) in the Consolidated Statements of Financial Position.
Approximately $27 million of the Company's assets are leased under capital leases, consisting of certain branch properties
discussed above, a call center facility, and equipment. Future lease payments under capital leases are approximately $2 million in
2007, $16 million in 2008, $1 million in 2009, $1 million in 2010, $4 million in 2011, and $3 million in 2012 thereafter.
In the normal course of business, the Company periodically enters into agreements that incorporate indemnification provisions.
While the maximum amount which the Company may be exposed under such agreements cannot be estimated, the Company does
not expect these guarantees and indemnifications to have a material effect on the Company's business, financial condition, or results
of operations.
The Company carries insurance policies on insurable risks at levels which it believes to be appropriate, including workers'
compensation, auto and general liability risks. The Company has self-insured retention limits and insured layers of excess insurance
coverage above such self-insured retention limits. Accruals for self-insurance losses, termite damage claims in the Terminix
business and warranty claims in the American Home Shield business are made based on the Company's claims experience and
actuarial assumptions. At December 31, 2006, these accruals totaled $202 million, with $89 million included in "Self-insured
claims and related expenses" and $113 million included in "Other long-term obligations" in the accompanying Consolidated
Statements of Financial Position. In 2005, Terminix recorded a $10 million unfavorable correction in estimating prior years' termite
damage claim reserves which is reflected in the total mentioned above. The Company has certain liabilities with respect to existing
or potential claims, lawsuits, and other proceedings. The Company accrues for these liabilities when it is probable that future costs
will be incurred and such costs can be reasonably estimated.
As part of the ARS and AMS sale agreements, the Company continues to be obligated to third parties with respect to bonds
(primarily performance and license type), operating leases for which the Company has been released as being the primary obligor,
certain real estate leased and operated by the buyers, and other guarantees of payment. The Company's obligations under these
agreements may be limited in terms of time and or amount, and in some cases, the Company may have recourse against the buyers
for any potential future payments made by the Company. At the present time, the Company does not believe it is probable that the
buyers will default on their obligations subject to guarantee. The fair value of the Company's obligations related to these guarantees
is not significant and no liability has been recorded.
The Company has guarantees on certain bonds issued by the divested companies, primarily performance and license type bonds.
The maximum payments the Company could be required to make if the buyers are unable to fulfill their obligations is
approximately $21 million at December 31, 2006. Approximately 50 percent of the bonds expire in 2007, with the remaining bonds
expiring primarily in 2008. The Company believes that if it were to incur a loss on any individual bond guarantee, the likelihood of
which the Company believes is remote, such loss would not have a material effect on the Company's business, financial condition
or results of operations.
In the ordinary course of conducting its business activities, the Company becomes involved in judicial, administrative and
regulatory proceedings involving both private parties and governmental authorities. These proceedings include general and
commercial liability actions and a small number of environmental proceedings. The Company does not expect any of these
proceedings to have a material effect on the Company's business, financial condition, or results of operations.
On November 8, 2006, InStar Services Group entered into a plea agreement with the United States Attorney's Office for the
Southern District of Florida requiring that InStar implement an environmental compliance plan, be placed on probation for a period
of up to five years, pay a fine of $0.5 million for each count, and make a contribution of $2.0 million to the Florida Environmental
Task Force Trust Fund. Under the plea agreement, the Company has agreed to take all reasonable steps necessary to ensure the
implementation and enforcement of the environmental compliance plan by InStar.
Since the conduct of InStar that was the subject of the plea agreement occurred prior to the Company's acquisition of InStar, the
Company pursued indemnification from the sellers of InStar for its damages and expenses including fines, contributions and
attorneys' fees. On December 19, 2006, the Company, InStar and the sellers entered into a settlement agreement and mutual release.
The sellers paid InStar $5 million in full settlement of all claims of InStar and/or the Company arising from the sale of InStar to the
Company.
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