American Home Shield 2009 Annual Report Download - page 82

Table of Contents
Notes to the Consolidated Financial Statements (Continued)
Note 1. Significant Accounting Policies (Continued)
operations) consists principally of continuing monthly fees based upon the franchisee's customer level revenue. Monthly fee revenue is recognized when the
related customer level revenue is reported by the franchisee and collectability is reasonably assured. Franchise revenue also includes initial fees resulting from
the sale of a franchise. These fees are fixed and are recognized as revenue when collectability is reasonably assured and all material services or conditions
relating to the sale have been substantially performed. Total profits from the franchised operations (excluding trade name licensing) were $66.5 million,
$63.7 million, $24.1 million and $31.6 million million for the years ended December 31, 2009 and 2008, the Successor period from July 25, 2007 to
December 31, 2007 and the Predecessor period from January 1, 2007 to July 24, 2007, respectively. Consolidated operating income from continuing
operations was $257.2 million, $197.8 million, $33.2 million and $143.9 million for the years ended December 31, 2009 and 2008, the Successor period from
July 25, 2007 to December 31, 2007 and the Predecessor period from January 1, 2007 to July 24, 2007, respectively. The Company evaluates the performance
of its franchise businesses based primarily on operating profit before corporate general and administrative expenses, interest expense and amortization of
intangible assets. The portion of total franchise fee income related to initial fees received from the sale of a franchise was immaterial to the Company's
Consolidated Financial Statements for all periods.
The Company had $449.7 million and $443.4 million of deferred revenue at December 31, 2009 and 2008, respectively. Deferred revenue consists
primarily of payments received for annual contracts relating to home service contracts, termite baiting, termite inspection, pest control and lawn care services.
Deferred Customer Acquisition Costs: Customer acquisition costs, which are incremental and direct costs of obtaining a customer, are deferred and
amortized over the life of the related contract in proportion to revenue recognized. These costs include sales commissions and direct selling costs which can
be shown to have resulted in a successful sale.
Interim Reporting: TruGreen LawnCare has significant seasonality in its business. In the winter and spring, this business sells a series of lawn
applications to customers which are rendered primarily in March through October (the production season). This business incurs incremental selling expenses
at the beginning of the year that directly relate to successful sales for which the revenues are recognized in later quarters. On an interim basis, TruGreen
LawnCare defers these incremental selling expenses, pre-season advertising costs and annual repairs and maintenance procedures that are performed primarily
in the first quarter. These costs are deferred and recognized in proportion to the contract revenue over the production season, and are not deferred beyond the
calendar year-end. Other business segments of the Company also defer, on an interim basis, advertising costs incurred early in the year. These pre-season
costs are deferred and recognized approximately in proportion to revenue over the balance of the year, and are not deferred beyond the calendar year-end.
Advertising: As discussed in the "Interim Reporting" note above, certain pre-season advertising costs are deferred and recognized approximately in
proportion to the revenue over the year. Certain other advertising costs are expensed when the advertising occurs. The cost of direct-response advertising at
Terminix and TruGreen LawnCare, consisting primarily of direct-mail promotions, is capitalized and amortized over its expected period of future benefits.
Advertising expense for the years ended December 31, 2009 and 2008, the Successor period from July 25,
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