American Home Shield 2003 Annual Report Download - page 33

ServiceMaster    31
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 EBITDA, as defined) and interest coverage
ratio (EBITDA needs to exceed four times interest expense).
In addition, under certain circumstances, the agreements
may limit the Company’s ability to pay dividends and repur-
chase shares of common stock. These limitations are not
expected to be a 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. At December 31, 2003, the Company was in
compliance with the covenants and based on its operating
outlook for 2004 expects to be able to maintain compliance
in the future. The non-cash impairment charge associated
with goodwill and other intangible assets recorded in the
third quarter of 2003 does not affect the Company’s compli-
ance with its lending arrangements as its covenants are not
affected by unusual non-cash charges. 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.
Management believes that funds generated from operating
activities 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.
The Company expects to replace this facility prior to maturity.
As of December 31, 2003, the Company had issued approxi-
mately $153 million of letters of credit under the facility and
had unused commitments of approximately $337 million.
The Company also has $550 million of senior unsecured
debt and equity securities available for issuance under an
effective shelf registration statement. In addition, the Com-
pany has an arrangement enabling it to sell, on a revolving
basis, certain receivables to unrelated third party purchasers.
At December 31, 2003 and 2002, there were no receivables
outstanding that had been sold to third parties. The agree-
ment 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 acquisition
and development of branch properties to be leased by the
Company. There are residual value guarantees of these
properties for up to 82 percent of their fair market value.
At December 31, 2003, there was approximately $73 million
funded under these facilities. Approximately $20 million of
these leases have been included on the balance sheet as assets
with related debt as of December 31, 2003 ($15 million as of
December 31,2002).Of the $95 million available, $80 million
expires in October 2004 and $15 million expires in January
2008. If the Company does not renew the facility that expires
in October 2004, it may be required to purchase the leased
assets which total approximately $53 million.
The majority of the Company’s fleet and some equipment
is leased through operating leases. The lease terms are non-
cancelable for the first twelve month term, and then are
month-to-month, 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
and equipment, which historically have not resulted in
significant net payments to the lessors. At December 31,
2003, there was approximately $241 million of residual value
relating to the Company’s fleet and equipment leases.
The following table presents the Company’s contractual
obligations and commitments:
(In millions) Total < 1 Yr 2-3 Yrs 4-5 Yrs > 5 Yrs
Debt balances * $ 819 $ 34 $ 162 $ 83 $ 540
Non-cancelable
operating leases 290 72 112 63 43
Purchase
obligations:
Telecommunications 48 24 24 - -
Supply agreements
and other 38 24 7 5 2
Other long-term
liabilities: *
Insurance claims 138 48 49 19 22
Discontinued
operations and
other 61 16 10 5 30
Total amount $1,394 $ 218 $ 364 $ 175 $ 637
* These items are reported in the Consolidated Statements of Financial Position.
Not included in the table above are deferred income taxes
and the related interest payments on the Company’s long-term
debt. Deferred taxes total $276 million and are discussed in
the footnotes to the consolidated financial statements. The
majority of the Company’s debt is fixed rate debt. Therefore,
the Company has calculated the expected interest payments,
to be approximately $60 million, $51 million, $47 million,
$45 million, $42 million and $506 million in 2004, 2005,
2006, 2007, 2008 and thereafter, respectively.
Management Discussion and Analysis of
Financial Condition and Results of Operations