American Home Shield 2010 Annual Report Download - page 54

Table of Contents
termination, the minimum required expenditures over the term of the agreement have been included in the table above.
Outsourcing agreements include commitments for the purchase of certain outsourced services from third party vendors (see further
discussion of the Company's agreement with IBM below). Because these agreements are integral to the operations of the Company and
due to termination provisions contained in these agreements, the Company has concluded that it is appropriate to include the total
anticipated costs over the life of the agreements in the table above.
On December 11, 2008, the Company entered into an agreement with IBM pursuant to which IBM provides information technology
operations and applications development services (collectively, the "IT Services") to the Company. ServiceMaster will pay IBM for the
IT Services under the agreement through a combination of fixed and variable charges, with variable charges fluctuating based on the
Company's actual need for IT Services. As amended on November 1, 2010, future minimum annual fixed charges for IT Services range
between $14.0 million and $16.0 million. The Company estimates that the future variable charges for the IT Services will be in the
range of $14.0 million to $16.0 million per year, which estimates are based on the current projected usage of IT Services during the
term of the agreement.
ServiceMaster has the right to terminate the agreement both for cause and for its convenience. Upon termination of the agreement for
convenience and in the case of certain other termination events, ServiceMaster would be required to pay a termination charge to IBM,
which charge may be material. IBM has the right to terminate the agreement only in the event of a failure by the Company to make
timely payment of any fees due and payable. In the event of termination by either party and upon the Company's request, IBM is
obligated to provide termination assistance services at agreed-upon pricing for up to 24 months.
(4)
Due to the uncertainty with respect to the timing of future cash flows associated with unrecognized tax benefits at December 31, 2010, the Company is
unable to reasonably estimate the period of cash settlement with the respective taxing authority. Accordingly, $13.7 million of unrecognized tax benefits have
been excluded from the contractual obligations table above. See the discussion of income taxes in Note 5 of the Consolidated Financial Statements.
Financial Position—Continuing Operations
Receivables increased from prior year levels, reflecting an increase in home service contracts written at American Home Shield and unfavorable
collection trends partially attributable to increases in revenue in service lines with longer than average collection terms.
There is seasonality in the lawn care operations. In the winter and spring, this business sells a series of lawn applications to customers, which are
rendered primarily in March through October. On an ongoing basis, these direct and incremental selling expenses which relate to successful sales will be
deferred and recognized over the production season and are not deferred beyond the calendar year-end. In addition, the Company will continue to capitalize
sales commissions and other direct contract acquisition costs relating to termite baiting, termite inspection and protection contracts and pest contracts, as well
as home service contracts. These costs vary with and are directly related to a new sale, and will be amortized over the life of the related contract.
Current deferred tax assets decreased from prior year primarily due to the deduction of certain prepaid items for income tax purposes.
Property and equipment increased from prior year levels, reflecting vehicle purchases, real estate purchases in connection with purchases of properties
previously under lease as further discussed in "Liquidity," recurring capital needs and information technology projects.
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