American Home Shield 2002 Annual Report Download - page 35

Management believes that funds generated from
operations and other existing resources will continue to
be adequate to satisfy ongoing working capital needs of
the Company. The Company has a committed revolving
credit facility for $490 million, which will expire in
December 2004. As of December 31, 2002, the Company
had issued approximately $136 million of letters of
credit under the facility and had unused commitments
of approximately $354 million. The Company also has
$550 million of senior unsecured debt and equity
securities available for issuance under an effective shelf
registration statement.
In 2001, the Company entered into an agreement to
ultimately sell, on a revolving basis, certain receivables
to unrelated third party purchasers. At December 31,
2002 and 2001, there were no receivables outstanding
that had been sold to third parties. The agreement is a
364-day facility that is renewable at the option of the
purchasers. The Company may sell up to $65 million of
its receivables to these purchasers in the future and
therefore has immediate access to cash proceeds from
these sales. The amount of the eligible receivables varies
during the year based on seasonality of the business and
will at times limit the amount available to the Company.
The Company maintains operating lease facilities with
banks totaling $95 million which provide for the acqui-
sition and development of properties to be leased by the
Company. There are residual value guarantees of these
properties up to 82 percent of the fair market value of
the properties. At December 31, 2002, there was approx-
imately $72 million funded under these facilities. Of the
$95 million in facilities, $80 million expires in October
2004 and $15 million expires in January 2008. Approx-
imately $15 million of these leases that involve constructed
properties have been included on the balance sheet as
assets with related debt as of December 31, 2002 and 2001.
The majority of the Company’s vehicle fleet is leased
through operating leases. The lease terms are non-
cancelable for the first twelve month term, then are
month-to-month leases, cancelable at the Company’s
option. There are residual value guarantees (ranging
from 70 percent to 87 percent depending on the agreement)
on these vehicles, which historically have not resulted
in significant net payments to the lessors. At December
31, 2002, there was approximately $257 million of
residual value relating to the Company’s fleet.
The following table presents the Company’s obligations
and commitments:
(In millions) Total < 1 Yr 2-3 Yrs 4-5 Yrs > 5 Yrs
Debt balances $ 835 $ 31 $175 $ 70 $559
Non-cancelable
operating leases 261 63 90 57 51
Total amount $1,096 $ 94 $265 $127 $610
As of December 31, 2002, the Company had approxi-
mately $136 million of letters of credit issued under its
bank credit facility and approximately $26 million of
annually renewable surety bonds outstanding that primarily
support obligations the Company has under insurance
programs. If the surety bonds are not renewed, the Company
expects to replace them with letters of credit issued
under its bank credit facility.
Discontinued Operations
The assets and liabilities related to discontinued busi-
nesses have been classified in separate captions on the
Consolidated Statements of Financial Position. This
includes the assets and liabilities specifically related to
the CSI, LandCare Construction, and Terminix Europe
businesses. The decrease in assets of the discontinued
operations reflects the sale of equipment and receivable
collections. The decline in liabilities from discontinued
operations represents the settlement of insurance
claims and other cash payments. The remaining liabilities
primarily represent the obligations related to long-term
insurance claims and litigation exposures.
Continuing Operations
Receivables are slightly below the level last year
reflecting improved collections and days sales out-
standing at several businesses. Deferred customer
acquisition costs increased reflecting growth in the volume
of baiting contracts written at Terminix. The Company
capitalizes sales commissions and other direct contract
acquisition costs relating to termite baiting and pest
contracts, as well as home warranty agreements. Property
and equipment decreased slightly, reflecting general
business growth offset by depreciation expense on larger-
scale technology projects. The Company does not have
any material capital commitments at this time.
Deferred revenue increased reflecting growth in warranty
contracts written at American Home Shield, increased
volume in termite baiting contracts and customer
prepayments in the lawn care business.
As of the date of the Company’s acquisition of ARS in
1999, certain members of management acquired, at fair
market value, equity interests in the HVAC and plumbing
operations. In the fourth quarter of 2002, the Company
repurchased, at fair market value, these shares.
ServiceMaster 31
Management Discussion & Analysis of Financial Condition & Results of Operations