American Home Shield 2008 Annual Report Download - page 46

Table of Contents
recording property and equipment at its fair value in connection with purchase accounting. Excluding purchase accounting, these costs decreased as a
percentage of revenue to 26.5 percent for the combined periods for the year ended December 31, 2007 from 26.9 percent for the year ended December 31,
2006. The decrease in selling and administrative expenses as a percentage of revenue primarily reflects lower functional support costs and improved sales
labor efficiency at TruGreen LawnCare and Terminix.
Amortization expense was $5.2 million for the Predecessor period from January 1, 2007 to July 24, 2007 and $132.7 million for the Successor period
from July 25, 2007 to December 31, 2007 compared to $7.2 million for the year ended December 31, 2006. The increase reflects $128.5 million of
amortization for the Successor period from July 25, 2007 to December 31, 2007 related to recording amortizable intangible assets of $844.0 million in
purchase accounting.
Non-operating expense totaled $6.5 million for the Predecessor period from January 1, 2007 to July 24, 2007 and $181.7 million for the Successor period
from July 25, 2007 to December 31, 2007 compared with $43.6 million for the year ended December 31, 2006. This change includes a $148.2 million increase
in interest expense for the combined periods for the year ended December 31, 2007, primarily resulting from the increased debt levels related to the Merger,
and a $0.9 million decrease in interest and investment income for the combined periods for the year ended December 31, 2007 reflecting (1) the impact to
investment gains and income realized on the American Home Shield investment portfolio from revaluing the investment portfolio in purchase accounting, and
(2) lower investment income resulting from a decrease in the market value of investments within an employee deferred compensation trust (for which there is
a corresponding and offsetting decrease in compensation expense within operating income).
Successor Predecessor
(In millions)
Jul. 25, 2007 to
Dec. 31, 2007
Jan. 1, 2007 to
Jul. 24, 2007
Year Ended
Dec. 31, 2006
Realized gains(1) $ 4,187 $ 25,091 $ 22,797
Impairments(2) (10,936) (928) (2,439)
Deferred compensation trust(3) (2,402) 2,880 3,437
Other(4) 5,588 1,581 2,147
Interest and net investment income $ (3,563) $ 28,624 $ 25,942
Represents the net investment gains (losses) and the interest and dividend income realized on the American Home Shield investment portfolio.
Represents other than temporary declines in the value of certain investments in the American Home Shield investment portfolio.
Represents investment income (loss) resulting from a change in the market value of investments within an employee deferred compensation trust (for
which there is an offsetting adjustment in compensation expense within operating loss (income)).
Represents a portion of the earnings generated by SMAC and interest income on other cash balances.
The effective tax rate on income (loss) from continuing operations was 37.6 percent for the Predecessor period from January 1, 2007 to July 24, 2007 and
(35.1) percent for the Successor period from July 25, 2007 to December 31, 2007 compared to 33.9 percent for the year ended December 31, 2006. The
effective tax rate for the combined periods for the year ended December 31, 2007 includes reductions in tax expense resulting from the favorable resolution of
state tax items related to a prior non-recurring transaction, as well as the incremental deferred tax benefits that became recognizable during the second quarter
of 2007 upon the conversion of the minority equity interests in Terminix into eight million shares of ServiceMaster common stock. These factors were offset,
in part, by the unfavorable impact of merger related book expenses that are not deductible for federal income tax reporting purposes.
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