American Home Shield 2002 Annual Report Download - page 55

In January 2001, Jonathan P. Ward, President and
Chief Executive Officer of ServiceMaster, purchased
from ServiceMaster a 5.50 percent convertible debenture
due January 9, 2011, with a face value of $1.1 million.
The Company loaned Mr. Ward the entire amount of the
purchase price through a 5.50 percent full recourse
loan due January 9, 2011. In May 2001, Mr. Ward purchased
a second 5.50 percent convertible debenture due May
10, 2011, with a face value of $1.1 million. The Company
loaned 50 percent of the purchase price of this second
debenture with a 5.50 percent full recourse loan due
May 10, 2011. Each debenture becomes convertible into
20,000 shares of ServiceMaster common stock on
December 31, in each of the years 2001 through 2005.
The Company has treated these transactions under variable
plan accounting and the impact to the financial statements
was immaterial in 2002 and 2001.
Long-Term Debt
Long-term debt includes the following:
(In thousands) 2002 2001
8.45% maturing in 2005 $ 137,499 $ 250,000
6.95% maturing in 2007 49,225 100,000
7.88% maturing in 2009 179,000 193,000
7.10% maturing in 2018 79,473 149,000
7.45% maturing in 2027 195,000 195,000
7.25% maturing in 2038 82,650 88,150
International borrowings -36,519
Other 112,628 143,524
Less current portion (31,135) (34,944)
Total long-term debt $ 804,340 $ 1,12 0,2 4 9
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 3.5 times earnings before interest, taxes,
depreciation, and amortization (EBITDA) and interest
coverage ratio (EBITDA needs to exceed four times
interest expense). In addition, under certain circum-
stances, the agreements may limit the Company’s ability
to pay dividends and repurchase 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, 2002, the Company was in
compliance with the covenants related to these debt
agreements and based on its operating outlook for 2003,
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. However, the
Company has a number of debt agreements which contain
standard ratings-based “pricing grids” where the interest
rate payable under the agreement changes as the Company’s
credit rating changes. While the Company does not
expect a negative change in credit ratings, the impact
on interest expense resulting from changes in credit
ratings is not expected to be material to the Company.
Since August 1997, ServiceMaster has issued $1.1 billion
of unsecured debt securities pursuant to registration
statements filed with the Securities and Exchange
Commission. As of December 31, 2002, ServiceMaster
had $550 million of senior unsecured debt securities
and equity interests available for issuance under an
effective shelf registration statement.
In the second quarter of 2002, the Company recorded
an extraordinary loss on early extinguishment of $9
million after-tax, or $.03 per diluted share, resulting
from the repurchase of its publicly traded debt with a
principal amount of $252 million including approxi-
mately $218 million repurchased in a tender offer.
In the fourth quarter of 2001, the Company repaid prior
to maturity, its 10.81 percent notes maturing 2001-2002,
6.65 percent notes maturing 2002-2004 and its 7.4 percent
notes maturing in 2006. In connection with the early
retirement of these notes, the Company paid “make-
whole” premiums of $17 million pretax. In addition,
during 2001, the Company repurchased, prior to maturity,
approximately $123.9 million of its public debt and
recognized a pretax gain of approximately $11 million.
The Company has a committed revolving bank credit
facility for up to $490 million that expires in December
2004. The facility can be used for general Company purposes.
As of December 31, 2002, the Company had issued
approximately $136 million of letters of credit under
the facility and had unused commitments of approxi-
mately $354 million. At the Company’s current credit
ratings, the interest rate under the facility is LIBOR
plus 125 to 150 basis points depending upon usage.
As of December 31, 2002, the Company had approxi-
mately $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.
The Company is exposed to interest rate fluctuations
on its floating rate debt. As of year-end, the Company
had no floating rate borrowings. The Company has,
from time to time, entered into interest rate swap or
similar arrangements to mitigate its exposure to interest
rate fluctuations, and does not, as a matter of policy,
enter into hedging contracts for trading or speculative
purposes. As of December 31, 2002, no interest rate
swaps were outstanding.
Cash interest payments were $76 million in 2002,
$128 million in 2001 and $130 million in 2000. Average
rates paid on the revolving credit facility were 5.0 percent
in 2001 and 6.6 percent in 2000. There were no material
borrowings under the facility in 2002. Future scheduled
long-term debt payments are $31.1 million in 2003
(average rate of 4.2 percent), $24.3 million in 2004
(average rate of 4.8 percent), $151.3 million in 2005
(average rate of 8.2 percent), $10.6 million in 2006
(average rate of 6.0 percent) and $59.1 million in 2007
(average rate of 6.7 percent).
ServiceMaster 51
Notes to Consolidated Financial Statements