FINANCIAL REPORTING CASE
Service Leader, Inc.
The mood is both upbeat and focused on this cool October morning. Executives and board members of Service Leader, Inc., are meeting with underwriters and attorneys to discuss the company's first bond offering in its 20-year history. You are attending in the capacity of company controller and two-year member of the board of directors. The closely held corporation has been financed entirely by equity, internally generated funds, and short-term bank borrowings.
Bank rates of interest, though, have risen recently and the company's unexpectedly rapid, but welcome, growth has prompted the need to look elsewhere for new financing. Under consideration are 15-year, 6.25% first mortgage bonds with a principal amount of $70 million. The bonds would be callable at 103 any time after June 30, 2013, and convertible into Service Leader common stock at the rate of 45 shares per $1,000 bond.
Other financing vehicles have been discussed over the last two months, including the sale of additional stock, nonconvertible bonds, and unsecured notes. This morning The Wall Street Journal indicated that market rates of interest for debt similar to the bonds under consideration are about 6.5%.
QUESTIONS / / /
By the time you finish this chapter, you should be able to respond appropriately to the questions posed in this case. Compare your response to the solution provided at the end of the chapter.
What does it mean that the bonds are “first mortgage” bonds? What effect does that have on financing? (page 749)
From Service Leader's perspective, why are the bonds callable? What does that mean? (page 749)
How will it be possible to sell bonds paying investors 6.25% when other, similar investments will provide the investors a return of 6.5%? (page 750)
Would accounting differ if the debt were designated as notes rather than bonds? (page 759)
Why might the company choose to make the bonds convertible into common stock? (page 769)