American Home Shield 2004 Annual Report Download - page 54

52 ServiceMaster 2004 annual report
notes to the consolidated financial statements
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 any 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, 2004, ServiceMaster had $550 million of senior
unsecured debt securities and equity interests available for
issuance under an effective shelf registration statement.
The Company has a committed revolving bank credit facility
for up to $500 million that expires in May 2009. The facility can
be used for general Company purposes. As of December 31,
2004, the Company had issued approximately $158 million of
letters of credit under the facility and had unused commitments
of approximately $342 million. At the Company’s current credit
ratings, the interest rate under the facility is LIBOR plus 125
basis points.
As of December 31, 2004, the Company had approximately $5
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.
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 agreements, 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 percent 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 percent to a variable rate based on LIBOR. In accordance with
SFAS 133 “Accounting for Derivative 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 recognized in current earnings.
Cash interest payments were $60 million in 2004, $61 million in
2003 and $76 million in 2002. There were no material borrow-
ings under the revolving credit facility in 2004, 2003 and 2002.
Future scheduled long-term debt payments are $160.7 million
in 2005 (average rate of 8.0 percent), $12.9 million in 2006
(average rate of 6.4 percent), $62.1 million in 2007 (average
rate of 6.7 percent), $25.2 million in 2008 (average rate of 4.0
percent) and $184.5 million in 2009 (average rate of 7.9 percent).
The Company’s next public debt maturity of $138 million is in
April 2005 and this amount is included in the 2005 scheduled
debt payments above. The Company intends to fund this debt
payment with long-term financing under existing credit facilities.
Based on annual projected cash flows, the amount of the bor-
rowing is expected to be largely repaid by December 31, 2005.
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 shareholders’ equity. As of
December 31, 2004 and 2003, the Company’s investments consist
primarily of domestic publicly traded debt of $108.8 million and
$94.9 million, respectively and common equity securities of
$130.7 million and $88.2 million, respectively.
The aggregate market value of the Company’s short- and long-
term investments in debt and equity securities was $239.5 million
and $183.1 million and the aggregate cost basis was $226.4 million
and $173.2 million at December 31, 2004 and 2003, respectively.
Interest and dividend income received on cash and marketable
securities was $15.4 million, $13.4 million, and $9.7 million, in
2004, 2003, and 2002, 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, 2004, the net
unrealized gains in the investment portfolio totaled $13 million,
while the unrealized losses in the aggregate were immaterial and
totaled less than $2.5 million and the portion of unrealized losses
older than one year was less than $.5 million.