American Home Shield 2006 Annual Report Download - page 33

available for issuance under an effective shelf registration statement. In addition, the Company has an arrangement enabling it to
sell, on a revolving basis, certain receivables to unrelated third party purchasers. The agreement is a 364-day facility that is
renewable at the option of the purchasers. The Company may sell up to $70 million of its receivables to these purchasers in the
future and therefore would have immediate access to cash proceeds from these sales. The amount of the eligible receivables varies
during the year based on seasonality of the business that will at times limit the amount available to the Company. During 2005,
there were no receivables sold to third parties under this agreement.
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 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. At December 31, 2005, and throughout the year, the Company was in compliance with the
covenants 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.
The Company maintains operating lease facilities with banks totaling $68 million which provide for the acquisition and
development of branch properties to be leased by the Company. At December 31, 2005, there was approximately $68 million
funded under these facilities. Approximately $15 million of these leases have been included on the balance sheet as assets with
related debt as of December 31, 2005 and 2004. The remaining funded balances are treated as operating leases. Approximately $15
million of the available facility expires in January 2008 and the remaining $53 million expires in 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, 2005, 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 $0.9 million) in the Consolidated
Statements of Financial Position.
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, 2005, there were approximately $259 million of residual value
guarantees relating to the Company's fleet and equipment leases. The fair value of the assets under the leases is expected to fully
mitigate the Company's obligations under the agreements. At December 31, 2005 the Company has recorded the estimated fair
value of this guarantee (approximately $0.4 million) in the Consolidated Statements of Financial Position.
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* $ 658 $ 19 $ 88 $ 192 $ 359
Non-cancelable operating leases 277 80 113 58 26
Purchase obligations:
Telecommunications 57 26 31 — —
Supply agreements and other 45 27 16 2 —
Other long-term liabilities:*
Insurance claims 211 93 65 18 35
Businesses held pending sale and discontinued operations 16 6 6 2 2
Other 39 2 6 5 26
Total Amount $ 1,303 $ 253 $ 325 $ 277 $ 448
* These items are reported in the Consolidated Statements of Financial Position
Not included in the table above are deferred income tax liabilities and the related interest payments on the Company's long-term
debt. Deferred income tax liabilities totaled $113 million and are discussed in the Notes 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 on
debt outstanding as of December 31, 2005 to be approximately $49 million, $47 million, $43 million, $37 million, $27 million and
$445 million in 2006, 2007, 2008, 2009, 2010, and thereafter, respectively.
Financial Position - Continuing Operations
Receivables increased from prior year levels, reflecting a higher amount of credit sales at American Home Shield and an increased
level of fourth quarter snow-removal receivables at TruGreen LandCare. Inventory levels increased reflecting a new vendor
relationship at Terminix, as well as general business growth. Deferred customer acquisition costs were consistent with prior year
levels. The Company capitalizes sales commissions and other direct contract acquisition costs relating to termite baiting and pest
contracts, as well as home warranty agreements. These costs vary with and are directly related to a new sale. Property and
equipment declined slightly. The Company does not have any material capital commitments at this time.
The increase in accounts payable reflects a lengthening of payment terms resulting from improvements in the Company's processes.
The decrease in income taxes payable at December 31, 2005 primarily reflects the February 2005 federal tax payment related to the
IRS agreement. Deferred revenue increased, reflecting growth in warranty contracts written at American Home Shield, partially
offset by lower levels of deferred revenue at Terminix associated with the new termite bait product and the increased mix of liquid
applications.
The Company has minority investors in Terminix. This minority ownership reflects an interest issued to the former owners of the
Allied Bruce Terminix Companies in