American Home Shield 2005 Annual Report Download - page 46

SERVICEMASTER 2005 ANNUAL REPORT P.44
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 guaran-
tees and indemnifications to have a material adverse effect
on its Consolidated Financial Statements.
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. In 2005, Terminix recorded a $10
million unfavorable correction in estimating prior years’
termite damage claim reserves. At December 31, 2005,
these accruals totaled $211 million, with $93 million included
in “Self-insured claims and related expenses” and $118
million included in “Other long-term obligations” in the
accompanying Consolidated Statements of Financial
Position. 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.
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 adverse
effect on its Consolidated Financial Statements.
Employee Benefit Plans
Discretionary contributions to qualified profit sharing and
non-qualified deferred compensation plans were made in
the amount of $9.9 million for 2005, $9.3 million for 2004
and $4.6 million for 2003. Under the Employee Share
Purchase Plan, the Company contributed $.8 million in
2005, 2004 and 2003. These funds defrayed part of the
cost of the shares purchased by employees.
Minority Interest Ownership and Related Parties
The Company continues to have minority investors in
Terminix. This minority ownership reflects an interest issued
to the prior owners of the Allied Bruce Terminix Companies in
connection with the acquisition of that entity. At any time, the
former owners may convert this equity security into eight
million ServiceMaster common shares. The ServiceMaster
shares are included in the shares used in the calculation of
diluted earnings per share, when their inclusion has a dilutive
impact. Subsequent to December 31, 2005, ServiceMaster
has the ability to require conversion of the security into
ServiceMaster common shares, provided the closing share
price of ServiceMaster’s common stock averages at least
$15 per share for 40 consecutive trading days.
Long-Term Debt
Long-term debt includes the following:
(In thousands) 2005 2004
8.45% maturing in 2005 $—$ 137,499
6.95% maturing in 2007 49,225 49,225
7.88% maturing in 2009 179,000 179,000
7.10% maturing in 2018 79,473 79,473
7.45% maturing in 2027 195,000 195,000
7.25% maturing in 2038 82,650 82,650
Other 72,802 82,241
Less current portion (19,222) (23,247)
Total long-term debt $ 638,928 $ 781,841
The Company is party to a number of debt agreements
which require it to maintain certain financial and other
covenants, including limitations on indebtedness (debt
cannot exceed 3.25 times earnings before interest, taxes,
depreciation, and amortization (EBITDA)) and a minimum
interest coverage ratio (EBITDA needs to exceed four times
interest expense). In addition, under certain circum-
stances, the agreements may limit the Company’s ability to
pay dividends and repurchase shares of common stock.
These limitations are not expected to be an inhibiting factor
in the Company’s future dividend and share repurchase
plans. Failure by the Company to maintain these covenants
could result in the acceleration of the maturity of the debt.
Throughout 2005, the Company was in compliance with
the covenants related to these debt agreements and,
based on its operating outlook for 2006, expects to be able
to maintain compliance in the future.
The Company does not have any debt agreements that
contain put rights or provide for acceleration of maturity as
a result of a change in credit rating. However, the Company
has a number of debt agreements which contain standard
ratings-based “pricing grids” where the interest rate
payable under the agreement changes if and when the
Company’s credit rating changes. While the Company
does not expect a negative change in credit ratings, the
impact on interest expense resulting from any changes in
credit ratings is not expected to be material to the Company.
Notes to the Consolidated Financial Statements