American Home Shield 2003 Annual Report Download - page 55

ServiceMaster    53
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.
In December 2003 and January 2004, the Company entered
into interest rate swap agreements with a total notional
amount of $165 million. Under the terms of these agree-
ments,the Company pays a floating rate of interest (based on
a specified spread over six-month LIBOR) on the notional
amount and the Company receives a fixed rate of interest at
7.88% on the notional amount. The impact of these swap
transactions was to convert $165 million of the Company’s
debt from fixed rate at 7.88% to a variable rate based on
LIBOR. In accordance with SFAS 133 “Accounting for Deriv-
ative Instruments and Hedging Activities”, the Company’s
interest rate swap agreements are classified as fair value
hedges and, as such, gains and losses on the swaps as well as
the gains and losses on the related hedged items are recog-
nized in current earnings.
Cash interest payments were $61 million in 2003,$76 million
in 2002 and $128 million in 2001. Average rates paid on
the revolving credit facility were 5.0 percent in 2001. There
were no material borrowings under the facility in 2002 and
2003. Future scheduled long-term debt payments are $33.8
million in 2004 (average rate of 4.4 percent), $150.6 million
in 2005 (average rate of 8.3 percent), $12.1 million in 2006
(average rate of 6.0 percent), $60.0 million in 2007 (average
rate of 6.7 percent) and $22.8 million in 2008 (average rate of
3.7 percent).
The Company leases certain property and equipment under
various operating lease arrangements. Most of the property
leases provide that the Company pay taxes, insurance and
maintenance applicable to the leased premises. As leases for
existing locations expire, the Company expects to renew the
leases or substitute another location and lease.
The majority of the Company’s fleet and some equipment are
leased through operating leases. Lease terms are non-cance-
lable for the first 12 month term and 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 and equip-
ment, which historically have not resulted in significant net
payments to the lessors.There are no net payments reflected in
the future minimum lease obligation as the leases are cance-
lable and there are no expected net payments due under the
guarantees. At December 31, 2003 there was approximately
$241 million of residual value relating to the Company’s fleet
and equipment leases.
Rental expense for 2003, 2002 and 2001 was $160 million,
$153 million and $154 million, respectively. Future long-
term non-cancelable operating lease payments are $72.0
million in 2004, $61.4 million in 2005, $51.0 million in
2006, $37.9 million in 2007, $25.0 million in 2008 and $43.0
million thereafter.
The Company maintains operating lease facilities with banks
totaling $95 million which provide for the acquisition and
development of properties to be leased by the Company. The
Company has guaranteed the residual value of the properties
under the leases up to 82 percent of the fair market value at
the commencement of the lease. At December 31, 2003,
approximately $73 million was funded under these facilities.
Approximately $20 million and $15 million of these leases
have been recorded on the balance sheet as capital leases with
related assets and debt recorded as of December 31,2003 and
December 31,2002, respectively. Of the $95 million in facilities,
$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.
Cash and Marketable Securities
Cash, money market funds and certificates of deposits, with
maturities of three months or less, are included in the
Statements of Financial Position caption “Cash and Cash
Equivalents.”Marketable securities are designated as available
for sale and recorded at current market value, with unrealized
gains and losses reported in a separate component of share-
holders’equity. As of December 31, 2003 and 2002, the
Company’s investments consist primarily of domestic publicly
traded debt of $89.1 million and $73.6 million, respectively
and common equity securities of $94.0 million and $56.0
million, respectively.
The aggregate market value of the Company’s short- and
long-term investments in debt and equity securities was
$183.1 million and $129.6 million and the aggregate cost
basis was $173.2 million and $132.0 million at December 31,
2003 and 2002, respectively.
Interest and dividend income received on cash and marketable
securities was $8.4 million, $10.6 million, and $9.7 million,
in 2003, 2002, and 2001, respectively. Gains and losses on
sales of investments,as determined on a specific identification
basis, are included in investment income in the period they
are realized. The Company periodically reviews its portfolio
of investments to determine whether there has been an other
than temporary decline in the value of the investments from
factors such as deterioration in the financial condition of the
issuer or the market(s) in which it competes. At December
31, 2003, the unrealized gains in the investment portfolio
totaled $10 million, while the unrealized losses in the aggre-
gate were immaterial and totaled less than $.7 million and
the portion of unrealized losses older than one year was less
than $.2 million.
Notes to Consolidated Financial Statements