American Home Shield 2004 Annual Report Download - page 53

2004 annual report ServiceMaster 51
September 2009. 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, 2004, the Company’s residual value guarantee related to
the leased assets totaled $56 million for which the Company has
recorded the estimated fair value of this guarantee (approximately
$1.2 million) in the Consolidated Statements of Financial Position.
In the normal course of business, the Company periodically
enters into agreements that incorporate indemnification pro-
visions. While the maximum amount which the Company may be
exposed under such agreements cannot be estimated, the Company
does not expect these guarantees 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 and warranty claims in the
American Home Shield business are made based on the Company’s
claims experience and actuarial assumptions. At December 31,
2004, these accruals totaled $188 million, with $79 million
included in “Self-insured claims and related expenses” and
$109 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 environ-
mental 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 $9.3 million for 2004, $4.6 million for 2003 and $9.2
million for 2002. Under the Employee Share Purchase Plan, the
Company contributed $.8 million in 2004, $.8 million in 2003
and $.9 million in 2002. 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) 2004 2003
8.45% maturing in 2005 $ 137,499 $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 82,241 96,424
Less current portion (23,247) (33,781)
Total long-term debt $ 781,841 $ 785,490
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 circumstances, 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 2004, the Company was in compliance with
the covenants related to these debt agreements and based on its
operating outlook for 2005, expects to be able to maintain
compliance in the future.