<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 22, 1998
REGISTRATION NO. 333-49707
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
THE SERVICEMASTER COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE ONE SERVICEMASTER WAY 36-3858106
(STATE OR OTHER DOWNERS GROVE, ILLINOIS 60515 (I.R.S. EMPLOYER
JURISDICTION OF (630) 271-1300 IDENTIFICATION
INCORPORATION NO.)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
OR ORGANIZATION)
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
VERNON T. SQUIRES
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
THE SERVICEMASTER COMPANY
ONE SERVICEMASTER WAY
DOWNERS GROVE, ILLINOIS 60515-1700
(630) 271-1300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS, INCLUDING COMMUNICATIONS SENT TO AGENT FOR
SERVICE, SHOULD BE SENT TO:
ROBERT H. KINDERMAN, ESQ. KEITH L. KEARNEY, ESQ.
KIRKLAND & ELLIS DAVIS POLK & WARDWELL
200 EAST RANDOLPH DRIVE 450 LEXINGTON AVENUE
CHICAGO, ILLINOIS 60601 NEW YORK, NEW YORK 10017
(312) 861-2000 (212) 450-4000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following
box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest investment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement of the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 22, 1998
10,600,000 SHARES
SERVICEMASTER(R) LOGO
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
Of the 10,600,000 shares of Common Stock offered, 9,010,000 shares are being
offered hereby in the United States and 1,590,000 shares are being offered in a
concurrent international offering outside the United States. The public
offering price and the aggregate underwriting discount per share will be
identical for both offerings. See "Underwriting".
Of the 10,600,000 shares of Common Stock offered, 7,600,000 shares are being
sold by The ServiceMaster Company and 3,000,000 shares are being sold by the
Selling Stockholders. See "Selling Stockholders". The Company will not receive
any of the proceeds from the sale of shares by the Selling Stockholders.
The Common Stock of the Company is traded on the New York Stock Exchange
under the symbol "SVM". On April 20, 1998, the last reported sale price of the
Common Stock on the New York Stock Exchange was $28 1/16 per share. See "Price
Range of Common Stock and Dividend Policy".
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-----------
<TABLE>
<CAPTION>
PROCEEDS TO
PUBLIC UNDERWRITING PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Per Share........ $ $ $ $
Total (3)........ $ $ $ $
</TABLE>
- -----
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting".
(2) Before deducting estimated expenses of $500,000, payable by the Company.
(3) Certain of the Selling Stockholders have granted the U.S. Underwriters an
option for 30 days to purchase up to an additional 1,320,765 shares of
Common Stock at the offering price per share, less the underwriting
discount, solely to cover over-allotments in the United States.
Additionally, such Selling Stockholders have granted the International
Underwriters a similar option with respect to an additional 233,076 shares
as part of the concurrent international offering. If such options are
exercised in full, the total offering price, underwriting discount and
proceeds to the Selling Stockholders will be $ , $ and
$ , respectively. See "Underwriting".
-----------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1998 against payment therefor in immediately
available funds.
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
-----------
The date of this Prospectus is , 1998.
<PAGE>
[The inside front cover will fold out to display, through pictures, all of the
services provided by the Company's businesses as well as their respective
service marks. The inside front cover will include two bar charts, one
illustrating ServiceMaster revenue and earnings per share between 1973 and
1997 and the other depicting annual total returns of ServiceMaster
stockholders over the last 5 years, 10 years and 25 years]
<PAGE>
AVAILABLE INFORMATION
The ServiceMaster Company (the "Company") is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information filed by the Company and
its predecessors may be inspected and copied at the public reference
facilities of the Commission located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
can also be obtained at prescribed rates from the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549.
Such materials and other information concerning the Company and its
predecessors are also filed electronically with the Commission and are
accessible via the World Wide Web at http://www.sec.gov. The Common Stock is
traded on the New York Stock Exchange (the "NYSE"), and reports and other
information concerning the Company and its predecessors can also be inspected
at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which have been omitted in accordance with the rules and
regulations of the Commission. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to or incorporated by reference in the
Registration Statement of which this Prospectus forms a part, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
thereto. Copies of the Registration Statement and the exhibits and schedules
thereto may be inspected, without charge, at the offices of the Commission, or
obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
---------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company (File No. 1-14762) with the
Commission are hereby incorporated by reference in this Prospectus:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
(2) The Company's Proxy Statement, dated March 25, 1998; and
(3) The Company's Current Report on Form 8-K, dated April 21, 1998.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this
Prospectus and prior to the termination of the offering covered by this
Prospectus shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statement contained herein or in any document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
---------------
The Company will provide, without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy
of any and all of the information that has been or may be incorporated by
reference in this Prospectus, other than exhibits to such documents (unless
such exhibits are specifically incorporated by reference into such documents).
Such requests should be directed to The ServiceMaster Company, One
ServiceMaster Way, Downers Grove, Illinois 60515-1700, Attention: Secretary,
telephone (630) 271-1300.
---------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
COMMON STOCK, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and in the documents
incorporated by reference herein. This summary may contain forward-looking
statements, as defined in the Private Securities Litigation Reform Act of 1995.
Factors that could cause actual results to differ materially include, without
limitation, those identified in "Special Note on Forward-Looking Statements"
and elsewhere in this Prospectus and in the documents incorporated by reference
herein. Unless otherwise indicated or the context otherwise requires, all
references herein to the "Company" or "ServiceMaster" refer to The
ServiceMaster Company, a Delaware corporation, and its subsidiaries and their
respective predecessors. See "The Reincorporation". All share and per share
amounts reflect the three-for-two share splits in June 1993, June 1996 and June
1997.
SERVICEMASTER
ServiceMaster, with operating revenue of approximately $4 billion in 1997, is
one of the largest providers of residential and supportive management services
to individual consumers, businesses and institutions in the United States. In
addition, the Company has operations in 38 countries around the world.
ServiceMaster holds the number one or two position in each of its major
markets. The Company operates primarily through two units: ServiceMaster
Consumer Services ("ServiceMaster Consumer Services"), which contributed
approximately 68 percent of the Company's 1997 operating income, and
ServiceMaster Management Services ("ServiceMaster Management Services"), which
contributed 28 percent of 1997 operating income. The Company also has recently
formed a third unit, ServiceMaster Employer Services ("ServiceMaster Employer
Services"), which contributed less than one percent of 1997 operating income.
The Company has achieved 27 consecutive years of growth in revenue, net income
(excluding net one-time gains) and cash distributions. ServiceMaster
shareholders have realized compound annual total returns in excess of 33
percent over the last five years, 26 percent over the last 10 years and 24
percent over the last 20 years (in each case assuming reinvestment of all cash
distributions).
ServiceMaster Consumer Services provides services to over 9.6 million
residential and commercial customers under eight market-leading brand names:
TRUGREEN-CHEMLAWN for lawn, tree and shrub care and commercial landscape
and indoor plant maintenance;
TERMINIX for termite and pest control services;
AMERICAN HOME SHIELD and AMERISPEC for home system and appliance warranty
contracts and home inspection services;
RESCUE ROOTER for plumbing and drain cleaning services;
SERVICEMASTER RESIDENTIAL/COMMERCIAL SERVICES for heavy-duty residential
and commercial cleaning and disaster restoration services;
MERRY MAIDS for residential maid services; and
FURNITURE MEDIC for on-site furniture repair and restoration services.
These services comprise the "ServiceMaster Quality Service Network" and may be
accessed easily by calling a single toll-free telephone number: 1-800-WE SERVE.
4
<PAGE>
ServiceMaster Management Services provides facilities management services to
over 2,000 customers in the health care, education, and business and industrial
markets. These services include plant operations and maintenance, housekeeping,
grounds and landscaping, clinical equipment management, energy management, food
service, laundry and linen services, total facilities management and other
services. The Company historically has provided these services through three
principal operating units: Healthcare Services, Education Management Services
and Business & Industry Group.
ServiceMaster Employer Services is one of the nation's ten largest
professional employer organizations ("PEOs") and provides a full-range of
support in human resource services, including administrative processing of
payroll, worker's compensation insurance, health insurance, unemployment
insurance and other employee benefits, to approximately 800 customers with over
19,000 leased employees.
COMPANY STRENGTHS
The Company has achieved 27 consecutive years of growth in revenue, net
income (excluding net one-time gains) and cash distributions. The Company
believes that its strong historical performance and future prospects are
attributable to a number of Company strengths, which include the following:
. LEADING MARKET POSITIONS AND BRANDS. The Company holds the number one or
two position in each of its major markets and operates through a network
of over 7,600 service centers worldwide under well-recognized brand names
such as SERVICEMASTER, TRUGREEN-CHEMLAWN, TERMINIX, AMERICAN HOME SHIELD
and AMERISPEC, RESCUE ROOTER, MERRY MAIDS and FURNITURE MEDIC;
. RECURRING REVENUE AND CONSISTENT PERFORMANCE. The Company's consistent
performance is a result of the high percentage of recurring revenue
inherent in many of its businesses, strong internal growth, the addition
of new service lines and acquisitions;
. STRONG CASH FLOW CHARACTERISTICS. ServiceMaster has generated
consistently high cash flows with free operating cash flow (defined as
cash flows from operations less property additions) exceeding its net
income (excluding net one-time gains) on average by 32 percent per year
over the last five years;
. PROVEN ACQUISITION TRACK RECORD. The Company has successfully acquired,
integrated and grown a number of service businesses, which has resulted
in more than 70 percent of the Company's 1997 operating income being
derived from businesses acquired since 1986;
. LEADERSHIP IN PEOPLE DEVELOPMENT. The Company has been recognized by
business management experts for its strong culture and expertise in
attracting, training, motivating and retaining high-quality service
workers; and
. EXPERIENCED, SHAREHOLDER-FOCUSED MANAGEMENT. The Company's executive
officers average over 15 years of experience with the Company's
businesses and its officers collectively own over 10 percent of the
Company's outstanding Common Stock.
5
<PAGE>
GROWTH DRIVERS
The Company's growth strategy is to enhance its leadership positions in its
current service businesses and to expand its service offerings to take
advantage of its strengths, its large customer base and the highly fragmented
nature of its markets. The Company plans to implement its growth strategy by:
. FAVORABLE INDUSTRY AND DEMOGRAPHIC TRENDS. Continuing to provide time-
saving services to the steadily increasing number of homeowners and dual-
income families and taking advantage of the trend towards more active
outsourcing by commercial customers of their non-core support functions;
. FURTHER MARKET PENETRATION. Continuing to expand its customer base
through internal growth by enhancing its marketing efforts and expanding
its service offerings within existing markets, which are highly
fragmented and generally comprised of numerous smaller regional and local
competitors;
. ACQUISITION OPPORTUNITIES. Continuing to make "tuck-in" acquisitions
within its highly fragmented existing markets and continuing to expand
its service lines through acquisitions in closely related service
markets;
. GEOGRAPHIC EXPANSION. Continuing to expand geographically, both within
the United States and in international markets; and
. CROSS-SELLING OPPORTUNITIES. Further leveraging its strong customer base
by selling more services to that base; on average, a ServiceMaster
Consumer Services customer only uses a small number of the 15 different
services offered by the Company under its eight brand names.
The principal executive offices of ServiceMaster are located at One
ServiceMaster Way, Downers Grove, Illinois 60515-1700 and its telephone number
is (630) 271-1300. The Company maintains a website on the Internet at
http://www.ServiceMaster.com. The Company's website and the information
contained therein are not a part of this Prospectus.
RECENT DEVELOPMENTS
FIRST QUARTER OPERATING RESULTS. On April 21, 1998, ServiceMaster reported
record first quarter revenues of $982 million, up 20 percent over first quarter
1997, reflecting solid growth from base operations and the effect of
acquisitions. Net income of $29 million was up slightly compared with pro forma
1997 results, with diluted earnings per share increasing 15 percent to $0.15
and basic earnings per share increasing 23 percent to $0.16.
Revenue growth for the quarter reflects the addition of ServiceMaster
Employer Services, which the Company formed through the acquisition of a
professional employer organization in August 1997. This had a significant
impact on revenues, but did not affect profits materially. While reported
operating margins were 7.1 percent, operating margins excluding ServiceMaster
Employer Services increased 60 basis points to 7.8 percent. Results also
reflect the April 1997 repurchase by ServiceMaster of the 19 percent ownership
interest (40.7 million shares on a post-split basis) held by Waste Management
Inc. ("WMX") in ServiceMaster). This transaction increased interest expense and
reduced shares outstanding.
QUANTUM ACQUISITION. On April 14, 1998, ServiceMaster announced its
acquisition of Quantum Resources Corporation ("Quantum"), a temporary staffing
company serving customers primarily in technical areas, such as engineering and
information technology. Quantum had 1997 revenues of approximately $70 million
and has eight branches located primarily in the southeastern United States.
6
<PAGE>
THE OFFERINGS
The offering consists of 9,010,000 shares of Common Stock, par value $.01 per
share (including the associated preferred stock purchase rights, the "Common
Stock"), being offered in the United States (the "U.S. Offering") and the
offering of 1,590,000 shares of Common Stock being offered in a concurrent
international offering outside the United States (the "International
Offering"), which collectively are referred to as the "Offerings". The closing
of each offering is conditioned upon the closing of the other offering.
<TABLE>
<S> <C>
Common Stock offered by the
Company:
U.S. Offering.................... 6,460,000 shares
International Offering........... 1,140,000 shares
Total.......................... 7,600,000 shares
Common Stock offered by the Selling
Stockholders:(1)
U.S. Offering.................... 2,550,000 shares
International Offering........... 450,000 shares
Total.......................... 3,000,000 shares
Common Stock to be outstanding
after the Offerings(2)............ 194,777,000 shares
NYSE symbol........................ SVM
Use of proceeds.................... The net proceeds received by the Company
from the Offerings will be used to repay
borrowings outstanding under the Company's
revolving bank credit facility. See "Use of
Proceeds".
</TABLE>
- --------
(1) Assumes the over-allotment options are not exercised. The Company will not
receive any of the proceeds from the sale of shares by the Selling
Stockholders. See "Selling Stockholders".
(2) Based on 187,177,000 shares outstanding as of March 31, 1998 and excludes:
(i) 10,145,547 shares of Common Stock issuable upon exercise of outstanding
stock options, and (ii) 186,975 shares of Common Stock reserved for future
issuance under the Company's existing equity incentive plans. An additional
8,659,525 million shares of Common Stock will be reserved for future
issuance if certain equity incentive plans are approved by the Company's
shareholders at the annual meeting of shareholders on May 1, 1998.
Market data used throughout this Prospectus were obtained from internal
surveys and from industry publications. These industry publications generally
indicate that the information contained therein has been obtained from sources
believed to be reliable, but that the accuracy and completeness of such
information is not guaranteed. The Company has not independently verified the
market data included in such publications. Similarly, internal surveys, while
believed to be reliable, have not been verified by any independent sources.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE AND PERCENTAGE DATA)(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING RESULTS:
Operating revenue.......................... $3,961,502 $3,458,328 $3,202,504
Operating income........................... 343,933 295,218 251,867
Income before income taxes................. 274,279 252,397 177,607
Provision for income taxes(2).............. 10,203 7,257 5,588
One-time tax benefit relating to change in
tax status(3)............................. 65,000 -- --
---------- ---------- ----------
Net income................................. $ 329,076 $ 245,140 $ 172,019
========== ========== ==========
Cash distributions per share to
shareholders.............................. $ 0.47 $ 0.44 $ 0.42
PRO FORMA INFORMATION:(2)
Income before income taxes................. $ 274,279 $ 252,397 $ 177,607
Pro forma corporate provision for income
taxes..................................... 110,809 101,968 71,753
---------- ---------- ----------
Pro forma net income....................... $ 163,470 $ 150,429 $ 105,854
========== ========== ==========
Pro forma basic net income per share(4).... $ 0.86 $ 0.71 $ 0.61
Pro forma diluted net income per share(4).. $ 0.82 $ 0.69 $ 0.59
OTHER DATA:
EBITDA(5).................................. $ 443,788 $ 369,701 $ 279,450
Net cash provided from operations.......... 371,889 341,386 297,425
Property additions......................... 46,232 42,952 44,624
Operating income margin.................... 8.7% 8.5% 7.9%
Percent increase in pro forma diluted net
income per share.......................... 18.8% 16.9% 22.9%
</TABLE>
<TABLE>
<CAPTION>
AS
ADJUSTED(6) ACTUAL
----------- ----------
<S> <C> <C> <C> <C>
FINANCIAL POSITION AT PERIOD END:
Working capital................... $ 35,907 $ 35,907 $ 73,782 $ 20,309
Total assets...................... 2,475,224 2,475,224 1,846,841 1,649,890
Long-term debt.................... 1,043,868 1,247,845 482,315 411,903
Shareholders' equity(7)........... 728,415 524,438 796,767 746,660
</TABLE>
- --------
(1) All per share data reflect the three-for-two share splits in 1996 and 1997.
(2) The Company converted from partnership to corporate form on December 26,
1997. See "The Reincorporation". Prior to the Reincorporation (as defined),
the partnership was not subject to federal or state income taxes since its
taxable income was allocated to the Company's shareholders. As a result of
the Reincorporation, the Company is a taxable entity and is responsible for
such taxes. Pro forma information is presented to compare the continuing
results of operations as if the Company had been a taxable corporation in
the periods presented. The pro forma provision for income taxes has been
calculated assuming that the Company's effective tax rate was approximately
40 percent of pre-tax earnings. The Company's historical net income per
share as a partnership was as follows:
<TABLE>
<CAPTION>
BEFORE ONE-TIME
TAX BENEFIT ACTUAL
----------------- -----------------
1997 1996 1995 1997 1996 1995
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Basic.................................... $1.39 $1.16 $0.99 $1.73 $1.16 $0.99
Diluted.................................. $1.33 $1.12 $0.95 $1.66 $1.12 $0.95
</TABLE>
8
<PAGE>
(3) As a result of the Reincorporation, the Company recorded a deferred tax
asset that represents the tax effect of the difference between the book and
tax basis of the Company's assets and liabilities. This resulted in the
recognition of a deferred tax asset on the balance sheet and a
corresponding $65.0 million gain in the tax benefit line of the income
statement. The actual benefit to the Company of the tax basis step-up
significantly exceeds the amount of the gain and is expected to result in a
reduction of annual cash tax payments exceeding $25 million per year for 15
years. See "The Reincorporation".
(4) The Company adopted Statement of Financial Accounting Standard No. 128,
"Earnings Per Share," which requires the dual presentation of basic and
diluted earnings per share. Basic earnings per share replaces the
previously required presentation of primary earnings per share. Basic
earnings per share are calculated based on 190,629,000 shares in 1997,
211,587,000 shares in 1996 and 173,588,000 shares in 1995 while diluted
earnings per share are calculated based on 199,760,000 shares in 1997,
220,286,000 shares in 1996 and 182,135,000 shares in 1995.
(5) Represents earnings before interest expense, taxes, depreciation and
amortization ("EBITDA"). EBITDA is a commonly-used supplemental measurement
of a company's ability to generate cash flow. Management believes that
EBITDA is another measure which demonstrates the cash-generating abilities
of the Company's businesses. However, EBITDA should not be considered an
alternative to net income in measuring the Company's performance or used as
an exclusive measure of cash flow because it does not consider the impact
of working capital growth, capital expenditures, debt principal reductions
or other sources and uses of cash which are disclosed in the Consolidated
Statements of Cash Flows.
(6) The as adjusted balance sheet data at December 31,1997 gives effect to the
Offerings and the application by the Company of the net proceeds therefrom
to repay borrowings outstanding under its revolving bank credit facility.
See "Use of Proceeds" and "Capitalization".
(7) The decrease in shareholders' equity (as well as the number of outstanding
shares) in 1997 was due to the repurchase by the Company of WMX's 19
percent ownership interest in ServiceMaster for approximately $626 million,
together with other treasury share repurchases and cash distributions. See
"Use of Proceeds" and "Management Discussion and Analysis of Financial
Condition and Results of Operations".
9
<PAGE>
THE REINCORPORATION
ServiceMaster began its operations in 1947 and the shares of the parent
entity in the ServiceMaster enterprise have been publicly traded since 1962.
At the end of 1986, the parent entity was converted from a publicly traded
corporation to a publicly traded limited partnership (the "Parent
Partnership") in order to enable most of the operations of the enterprise to
be conducted free of federal corporate income tax. However, a year later, in
1987, Congress adopted legislation which effectively eliminated the benefits
of operating in partnership form after December 31, 1997. Accordingly, on
December 26, 1997, the Company succeeded to and became substituted for the
Parent Partnership as the parent entity in the ServiceMaster enterprise in a
reorganization (the "Reincorporation") in which all of the outstanding limited
partnership interests in the Parent Partnership ("Partnership Shares") were
converted to shares of Common Stock of the Company on a one-for-one basis.
Soon thereafter, the Parent Partnership and its immediate subsidiary (The
ServiceMaster Company Limited Partnership) were merged with and into the
Company and the existence of the two partnerships was thereby terminated.
The Reincorporation transactions were not taxable events for either
ServiceMaster or its shareholders. However, the Reincorporation did result in
a tax benefit to the Company in the form of a step-up in the tax basis of
certain of its assets. The basis step-up will be amortized against the
Company's taxable income over the next 15 years and is expected to result in a
reduction of annual cash tax payments exceeding $25 million per year over this
period.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Prospectus contains or incorporates by reference certain forward-
looking statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act and the Company intends that such forward-
looking statements be subject to the safe harbors created thereby. Such
forward-looking statements involve risks and uncertainties and include, but
are not limited to, statements regarding future events and the Company's
plans, goals and objectives. Such statements are generally accompanied by
words such as "intend," "anticipate," "believe," "estimate," "expect" or
similar statements. The Company's actual results may differ materially from
such statements. Factors that could cause or contribute to such differences
are set forth below as well as those factors discussed elsewhere in this
Prospectus and in the documents incorporated herein by reference. Although the
Company believes that the assumptions underlying its forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the results contemplated in such
forward-looking statements will be realized. The inclusion of such forward-
looking information should not be regarded as a representation by the Company
or any other person that the future events, plans or expectations contemplated
by the Company will be achieved. Furthermore, past performance in operations
and share price is not necessarily predictive of future performance.
SEASONALITY AND IMPACT OF WEATHER CONDITIONS. The Company's lawn care and
pest control businesses are highly seasonal in nature, with a significant
portion of their net revenues occurring in the spring and summer months of
each year. Adverse weather conditions could have a negative impact on the
demand for the Company's lawn care and pest control services.
INCREASED COMPETITION. The service industries in which the Company operates
are highly competitive with limited barriers to entry. The entry of new
competitors into one or more of the markets served by the Company could impact
the demand for the Company's services as well as impose additional pricing
pressures.
LABOR SHORTAGES. Most of the services provided by the Company are highly
labor intensive. In the event of a labor shortage, the Company may experience
difficulty in delivering its services in a high-quality manner and may be
forced to increase wages in order to attract a sufficient number of employees,
which could result in higher operating costs for the Company.
10
<PAGE>
CONTINUED CONSOLIDATION OF THE U.S. HOSPITAL MARKET. In recent years, there
has been an on-going consolidation of hospitals in the health care market.
This continued consolidation could adversely impact the level of demand for
the Company's health care management services and the prices which the Company
can charge for such services.
ABILITY TO CONTINUE ACQUISITION STRATEGY. The Company plans to continue to
pursue opportunities to expand through acquisitions. The Company's ability to
continue to make acquisitions at reasonable prices and to integrate the
acquired businesses are important factors in the Company's future growth.
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offerings are
estimated to be approximately $204 million after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company. The Company intends to use such proceeds to repay borrowings
outstanding under the Company's revolving bank credit facility.
The revolving bank credit facility provides for borrowings of up to $750
million, matures on April 1, 2002 and bears interest at floating rates (equal
to approximately 6% at December 31, 1997). The Company may incur additional
borrowings under its bank credit facilities to finance future acquisitions and
to fund internal growth.
In 1997, ServiceMaster incurred bank borrowings of approximately $91.0
million to finance the cash portion of its acquisition of Barefoot Inc.
("Barefoot") and approximately $626 million to fund its repurchase of WMX's 19
percent ownership interest in ServiceMaster (40.7 million shares repurchased
at approximately $15.38 per share, representing approximately a 10 percent
discount to the then-market price). As a result of this transaction, the
Company was able to also increase the amortizable tax basis of its assets by
over $450 million. WMX originally obtained its equity interest in
ServiceMaster in connection with ServiceMaster's acquisition from WMX in
November 1990 of the TruGreen business and certain pest control businesses.
See "Management Discussion and Analysis of Financial Condition and Results of
Operations".
The Company will not receive any of the proceeds from the sale of shares of
the Common Stock by the Selling Stockholders.
11
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is listed on the NYSE under the symbol "SVM". The following
table sets forth the high and low sale prices of the Common Stock for the
first quarter of 1998 and for the Partnership Shares for all other periods as
reported on the New York Stock Exchange Composite Tape and the cash dividends
paid per share of Common Stock or the cash distributions paid per Partnership
Share for the periods indicated. The prices have been adjusted to give
retroactive effect to ServiceMaster's three-for-two share splits in June 1997
and June 1996 (share prices have been rounded to the nearest one cent).
<TABLE>
<CAPTION>
CASH
DISTRIBUTIONS
HIGH LOW PAID
------ ------ -------------
<S> <C> <C> <C>
Year ended December 31, 1995:
First Quarter..................................... $11.11 $ 9.56 $0.10
Second Quarter.................................... 12.11 10.50 0.10 2/3
Third Quarter..................................... 12.83 11.78 0.10 2/3
Fourth Quarter.................................... 13.50 12.28 0.10 2/3
Year ended December 31, 1996:
First Quarter..................................... 14.89 12.92 0.10 2/3
Second Quarter.................................... 15.67 13.75 0.10 2/3
Third Quarter..................................... 16.50 14.33 0.11 1/3
Fourth Quarter.................................... 17.75 15.83 0.11 1/3
Year ended December 31, 1997:
First Quarter..................................... 18.50 16.38 0.11 1/3
Second Quarter.................................... 23.88 18.13 0.11 1/3
Third Quarter..................................... 29.50 22.75 0.12
Fourth Quarter.................................... 29.25 21.00 0.12
Year ended December 31, 1998:
First Quarter..................................... 29.44 24.75 0.12
Second Quarter (through April 20, 1998)........... 28.56 27.94 --
</TABLE>
As of March 31, 1998, there were approximately 36,000 holders of record of
the Common Stock. A recent last reported sale price on the NYSE for the Common
Stock is set forth on the cover page of this Prospectus.
The Company has consistently paid increasing dividends or cash distributions
over the last 27 years. The Company's current policy is to continue to
increase its dividend payment. The timing and amount of future dividends will
be at the discretion of the Board of Directors and will depend on, among other
things, the Company's results of operations, corporate finance objectives and
cash requirements. The Company has announced that its intended cash dividend
for 1998 will be $0.49 per share.
12
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1997: (i) the actual
consolidated capitalization of the Company and (ii) the consolidated
capitalization of the Company as adjusted to give effect to the Offerings and
the application of net proceeds therefrom as described under "Use of
Proceeds". The information set forth below should be read in conjunction with
the Consolidated Financial Statements and related notes thereto and other
financial information included in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
AS
ACTUAL ADJUSTED
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt................... $ 21,539 $ 21,539
========== ==========
Long-term debt:
Notes payable(1)..................................... $ 599,042 $ 599,042
Revolving bank credit facilities(1).................. 550,000 346,023
Other................................................ 98,803 98,803
---------- ----------
Total long-term debt............................... 1,247,845 1,043,868
---------- ----------
Shareholders' equity:
Preferred Stock, par value $.01 per share; 11,000,000
shares authorized; no shares issued and outstanding on
an actual or as adjusted basis........................ -- --
Common Stock, par value $.01 per share; 1.0 billion
shares authorized; 186,629,000 shares issued and
outstanding on an actual basis; and 194,229,000 shares
issued and outstanding on an as adjusted basis(2)..... 1,866 1,942
Additional paid-in capital............................. 519,424 723,325
Retained earnings...................................... 65,000 65,000
Restricted stock....................................... (4,270) (4,270)
Treasury stock......................................... (57,582) (57,582)
---------- ----------
Total shareholders' equity......................... 524,438 728,415
---------- ----------
Total capitalization............................... $1,772,283 $1,772,283
========== ==========
</TABLE>
- --------
(1) On March 2, 1998, the Company completed a $300 million dual-tranche
offering of unsecured senior notes consisting of $150 million principal
amount of 7.10 percent notes due March 1, 2018 and $150 million principal
amount of 7.25 percent notes due March 1, 2038. The net proceeds of this
offering were used to reduce the Company's indebtedness under the
revolving bank credit facility.
(2) Excludes: (i) 10,213,438 shares of Common Stock issuable upon exercise of
outstanding stock options, and (ii) 186,975 shares of Common Stock
reserved for future issuance under the Company's existing equity incentive
plans. An additional 8,659,525 million shares of Common Stock will be
reserved for future issuance if certain equity incentive plans are
approved by the Company's shareholders at the annual meeting of
shareholders on May 1, 1998.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE AND PERCENTAGE DATA)(1)
The following table sets forth consolidated financial information of the
Company as of and for each of the periods indicated. The selected financial
data for each of the years in the five-year period ended December 31, 1997 are
derived from the consolidated financial statements of ServiceMaster, which
statements have been audited by Arthur Andersen LLP, independent public
accountants for ServiceMaster. The information presented below should be read
in conjunction with "Management Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and
accompanying notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993(2)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Operating revenue....... $3,961,502 $3,458,328 $3,202,504 $2,985,207 $2,758,859
Cost of services
rendered and products
sold................... 3,058,160 2,681,008 2,499,700 2,356,435 2,192,684
Selling and
administrative
expenses............... 559,409 482,102 450,937 414,746 393,131
---------- ---------- ---------- ---------- ----------
Operating income........ 343,933 295,218 251,867 214,026 173,044
Non-operating expense
(income):
Interest expense(3).... 76,447 38,298 35,855 31,543 32,483
Interest and investment
income................ (14,304) (10,183) (7,310) (5,389) (5,882)
Minority interest...... 7,511 14,706 45,715 45,234 28,550
---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 274,279 252,397 177,607 142,638 117,893
Provision for income
taxes(4)............... 10,203 7,257 5,588 2,755 2,146
One-time tax benefit
relating to change in
tax status(5).......... 65,000 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income.............. $ 329,076 $ 245,140 $ 172,019 $ 139,883 $ 115,747
========== ========== ========== ========== ==========
Cash distributions per
share to shareholders.. $ 0.47 $ 0.44 $ 0.42 $ 0.41 $ 0.40
PRO FORMA
INFORMATION:(4)
Income before income
taxes.................. $ 274,279 $ 252,397 $ 177,607 $ 142,638 $ 117,893
Pro forma corporate
provision for income
taxes.................. 110,809 101,968 71,753 57,626 47,629
---------- ---------- ---------- ---------- ----------
Pro forma net income.... $ 163,470 $ 150,429 $ 105,854 $ 85,012 $ 70,264
========== ========== ========== ========== ==========
Pro forma basic net
income per share(6).... $ 0.86 $ 0.71 $ 0.61 $ 0.50 $ 0.42
Pro forma diluted net
income per share(6).... $ 0.82 $ 0.69 $ 0.59 $ 0.48 $ 0.40
OTHER DATA:
EBITDA(7)............... $ 443,788 $ 369,701 $ 279,450 $ 228,389 $ 200,332
Net cash provided from
operations............. 371,889 341,386 297,425 253,863 169,103
Property additions...... 46,232 42,952 44,624 32,202 33,113
Operating income margin. 8.7% 8.5% 7.9% 7.2% 6.3%
Percent increase in pro
forma diluted net
income per share....... 18.8% 16.9% 22.9% 20.0% 21.2%
FINANCIAL POSITION AT
PERIOD END:
Working capital......... $ 35,907 $ 73,782 $ 20,309 $ 26,650 $ 46,773
Total assets............ 2,475,224 1,846,841 1,649,890 1,230,839 1,122,461
Long-term debt.......... 1,247,845 482,315 411,903 386,511 384,509
Shareholders'
equity(3).............. 524,438 796,767 746,660 307,266 289,219
</TABLE>
- --------
(1) All per share data reflect the three-for-two share splits in 1993, 1996
and 1997.
(2) The Company's results in 1993 exclude a $30.2 million gain realized on the
issuance of subsidiary shares. Including such gain in the Company's
results for 1993, the Company had net income of $145,947,000, pro forma
net income of $88,263,000, pro forma basic net income per share of $0.52
and pro forma diluted net income per share of $0.51.
(3) In 1997, the Company incurred bank borrowings of approximately $91.0
million to finance the cash portion of the Barefoot acquisition and
approximately $626 million to fund the repurchase of WMX's 19 percent
ownership interest in ServiceMaster. The increase in interest expense and
the decrease in shareholders' equity (as well as the number of shares
outstanding) in 1997 is primarily the result of such borrowings and stock
repurchase. See "Management Discussion and Analysis of Financial Condition
and Results of Operations".
14
<PAGE>
(4) The Company converted from partnership to corporate form on December 26,
1997. Prior to the Reincorporation, the partnership was not subject to
federal or state income taxes since its taxable income was allocated to
the Company's shareholders. As a result of the Reincorporation, the
Company is a taxable entity and is responsible for such payments. Pro
forma information is presented to compare the continuing results of
operations as if the Company were a taxable corporation in the periods
presented. The pro forma provision for income taxes has been calculated
assuming that the Company's effective tax rate was approximately 40
percent of pre-tax earnings. The Company's historical net income per share
as a partnership (excluding a $30.2 million one-time gain realized in
1993) was as follows:
<TABLE>
<CAPTION>
BEFORE ONE-TIME TAX BENEFIT ACTUAL
----------------------------- -----------------------------
1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic........... $1.39 $1.16 $0.99 $0.82 $0.68 $1.73 $1.16 $0.99 $0.82 $0.68
Diluted......... $1.33 $1.12 $0.95 $0.80 $0.67 $1.66 $1.12 $0.95 $0.80 $0.67
</TABLE>
(5) As a result of the Reincorporation, the Company recorded a deferred tax
asset that represents the tax effect of the difference between the book
and tax basis of the Company's assets and liabilities. This resulted in
the recognition of a deferred tax asset on the balance sheet and a
corresponding $65.0 million gain in the tax benefit line of the income
statement. The actual benefit to the Company of the tax basis step-up
significantly exceeds the amount of the gain and is expected to result in
a reduction of annual cash tax payments exceeding $25 million per year for
15 years. See "The Reincorporation".
(6) The Company adopted Statement of Financial Accounting Standard No. 128,
"Earnings Per Share," which requires the dual presentation of basic and
diluted earnings per share. Basic earnings per share replaces the
previously required presentation of primary earnings per share. Basic
earnings per share are calculated based on 190,629,000 shares in 1997,
211,587,000 shares in 1996, 173,588,000 shares in 1995, 170,433,000 in
1994 and 169,279,000 in 1993 while diluted earnings per share are
calculated based on 199,760,000 shares in 1997, 220,286,000 shares in
1996, 182,135,000 shares in 1995, 177,928,000 in 1994 and 177,487,000 in
1993.
(7) Represents earnings before interest expense, taxes, depreciation and
amortization. EBITDA is a commonly-used supplemental measurement of a
company's ability to generate cash flow. Management believes that EBITDA
is another measure which demonstrates the cash-generating abilities of the
Company's businesses. However, EBITDA should not be considered an
alternative to net income in measuring the Company's performance or used
as an exclusive measure of cash flow because it does not consider the
impact of working capital growth, capital expenditures, debt principal
reductions or other sources and uses of cash which are disclosed in the
Consolidated Statements of Cash Flows.
15
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
Revenue increased 15 percent to $4 billion reflecting the effect of
acquisitions and growth from base operations. Operating income increased 17
percent to $344 million, while margins increased to 8.7 percent of revenue
from 8.5 percent in 1996, reflecting the continued strong growth of higher
margin businesses, productivity improvements and the integration of the
acquired operations of Barefoot. These improvements were offset in part by the
impact of Certified Systems, Inc. ("CSI"), the newly acquired professional
employer organization, which has significantly lower margins than the rest of
the Company's businesses. Operating income margins would have improved 50
basis points excluding this acquisition.
Pro forma information is presented which compares the continuing results of
operations as if the Company had been a taxable corporation in all years. On
this basis, net income grew 9 percent to $163 million. Basic earnings per
share increased 21 percent to $0.86 and diluted earnings per share were up 19
percent to $0.82. Earnings per share grew at a higher rate than net income due
to the transaction with WMX in which the Company repurchased WMX's 19 percent
ownership interest in ServiceMaster (40.7 million shares repurchased at
approximately $15.38 per share) for $626 million on April 1, 1997. This
transaction served to increase interest expense significantly and reduce
shares outstanding.
Historical net income was $329 million including a one-time tax gain of $65
million realized upon the Reincorporation. The resulting historical basic and
diluted earnings per share were $1.73 and $1.66, respectively. Partnership net
income excluding this gain increased 8 percent to $264 million. On this basis,
basic and diluted earnings per share were $1.39 and $1.33, increases of 20
percent and 19 percent, respectively.
ServiceMaster Consumer Services achieved a 14 percent increase in revenue
and a 21 percent increase in pro forma net income reflecting the successful
integration of the Barefoot business (which was acquired in February 1997)
combined with good growth from base operations and other acquisitions. The
TruGreen-ChemLawn operations achieved strong double-digit growth in revenue
and profits reflecting the Barefoot acquisition, increases in the customer
base, improved branch efficiencies, strong sales of ancillary services and
favorable weather conditions throughout most of the year. Terminix achieved
solid growth in revenue and profits for the year. Strong growth in renewals
and productivity improvements offset the effects of adverse weather conditions
on termite operations and increased termite remediation costs. American Home
Shield achieved very strong double-digit increases in both revenue and
profits, with excellent increases in contract renewals and direct-to-consumer
sales. This is consistent with an overall strategy to expand channels of
distribution in this business which have historically been concentrated in the
residential resale market. ServiceMaster Residential/Commercial and Merry
Maids reported modest profit growth and solid revenue growth for the year,
reflecting the conversion of certain franchises and distributors to company-
owned operations.
ServiceMaster Management Services, which includes Diversified Health
Services ("DHS"), achieved 7 percent growth in revenue reflecting the Premier
Manufacturing Support Services ("Premier") acquisition made last year and, to
a lesser degree, growth in the base business. The base business growth
resulted from improvements in Healthcare Services (which includes DHS) and
Business & Industry Group, offset by reductions in Education Management
Services. Pro forma net income was flat compared to the prior year. Despite
continuing competitive pressures and industry consolidation in the acute care
market, the Company achieved solid revenue increases and improved customer
retention in the healthcare market. Reported profits in this market were
comparable to the prior year. Within the acute care sector, good growth was
realized from sales of the Integrated Service product which provides
comprehensive service solutions to clients. The Company achieved significant
16
<PAGE>
revenue and profit increases in the Business & Industry market, largely as a
result of the successful integration of the Premier acquisition and modest
growth in the base business. In the Education market, revenue and profits
declined due to the discontinuation of certain large accounts and margin
pressures in certain accounts.
Revenue in the Company's New Business Development and Parent segment (which
includes ServiceMaster Employer Services) increased significantly, reflecting
the August 1997 acquisition of CSI, which added approximately $155 million in
revenue and minimal profits after acquisition related costs. CSI is a
professional employer organization that provides clients with administrative
processing of payroll, workers' compensation insurance, health insurance,
unemployment insurance, and other employee benefit plans. Pro forma net income
reflects the additional interest expense incurred relating to the WMX share
repurchase.
On a consolidated basis, cost of services rendered and products sold
increased 14 percent and decreased slightly as a percentage of revenue to 77.2
percent in 1997 from 77.5 percent in 1996. This reflects the changing mix of
the enterprise as ServiceMaster Consumer Services increased in size relative
to the overall business of the Company. ServiceMaster Consumer Services
operates at a higher gross profit margin than ServiceMaster Management
Services, but incurs relatively higher levels of selling and administrative
costs. However, much of this reduction in cost of goods sold was offset by the
acquisition of CSI which operates at significantly lower gross margins than
the Company's other businesses. Without CSI, cost of goods sold would have
been 76.5 percent of revenue in 1997.
Consolidated selling and administrative expenses increased 16 percent over
the prior year, and as a percentage of revenue, increased from 13.9 percent in
1996 to 14.1 percent in 1997, reflecting the changing business mix of the
Company described above.
Interest expense increased over the prior year primarily due to increased
debt levels associated with the repurchase of shares previously held by WMX
and acquisitions. Interest and investment income increased over the prior year
levels due to growth in, and strong returns from, the investment portfolio at
American Home Shield as well as a gain associated with the sale of an interest
in an international joint venture. Minority interest expense decreased due to
the repurchase of minority ownership interests in subsidiary entities.
Most operations conducted by the Company and its subsidiary partnerships
have been exempt from federal corporate income tax since 1986. However,
beginning in 1998, the Internal Revenue Code would have imposed federal
corporate tax on the Company's operations even if the Company remained in
partnership form. In anticipation of this change in tax status, ServiceMaster
shareholders approved a reincorporating merger which was completed on December
26, 1997, and the Company converted from partnership to corporate form. See
"The Reincorporation". As a result of the Reincorporation, the Company
recognized a step-up in the tax basis of its assets, which will be amortized
against taxable income in future years. Simultaneously, the Company recorded a
book gain representing the tax effect of the difference between the tax and
book basis of the Company's assets and liabilities. The actual value to the
Company of the tax basis step-up significantly exceeds the amount of the
deferred tax asset. The Company believes that the step-up will result in a
reduction in its annual cash tax payments in excess of $25 million per year
over the ensuing 15 years.
1996 COMPARED WITH 1995
Revenue increased 8 percent to $3.5 billion primarily due to internal
growth, with the effects of acquisition activity at both ServiceMaster
Consumer Services and ServiceMaster Management Services offsetting the
disposition of the Education Food Service line in early 1995. Operating income
increased 17 percent to $295 million, while margins increased to 8.5 percent
of revenue from 7.9 percent in 1995, reflecting the combined effects of the
continued rapid growth of our higher margin business units and the favorable
effects of overhead leveraging throughout the enterprise. Both net income and
earnings per share reflect the December 1995 acquisition of WMX's minority
ownership
17
<PAGE>
interest in ServiceMaster Consumer Services, which reduced minority interest
expense and increased the number of shares outstanding by approximately 41
million (on a post-split basis). Pro forma net income, restated as if the
Company were a taxpaying corporation, was $150 million, a 42 percent increase
over the comparable 1995 level with pro forma basic earnings per share at
$0.71, a 16 percent increase and pro forma diluted earnings per share at
$0.69, a 17 percent increase. Historical Partnership net income was $245
million, up 43 percent from the prior year while historical basic earnings per
share were $1.16, an increase of 17 percent and historical diluted earnings
per share were $1.12, an 18 percent increase.
ServiceMaster Consumer Services achieved a 13 percent increase in revenue
and pro forma net income growth of 23 percent. TruGreen-ChemLawn operations
had strong growth in revenue and profits despite unfavorable weather
conditions throughout the year. Continued strong growth in residential
services and strong commercial sales, combined with the favorable effects of
new service initiatives, such as interior plantscaping and home fertilizer
delivery, helped offset the weather-related adversities. Terminix achieved
solid growth in revenue as a result of increases in pest control sales and
termite completions. Profits also increased but at a less rapid pace due to
changes in the sales mix and higher production costs. American Home Shield
achieved very strong increases in warranty contracts written, earned revenue
and profit. These increases were primarily the result of strong internal
growth, small acquisitions and continued increases in contract renewals. The
ServiceMaster Residential/Commercial operations continued to achieve growth in
revenue and profits, reflecting the continued repurchase of distributors, as
well as steady internal growth which offset a decline in large disaster
recovery projects. The Merry Maids business achieved solid increases in
revenue and profits as a result of strong growth from existing franchises, as
well as the expansion of company-owned branch operations.
ServiceMaster Management Services, including DHS, achieved 18 percent
overall growth in pro forma net income for the year, reflecting significant
transaction-related fees and gains, strong cost controls and improved customer
retention, as well as the elimination of losses incurred in 1995 from the
discontinued Education Food Service business. Revenue for the traditional
businesses grew three percent over the prior year as improvements in Education
and Business & Industry were offset by slight reductions in Healthcare
Services. Revenue generated from the fourth quarter acquisition of Premier
offset the effect of the disposition of Education Food Service in February
1995. The traditional Healthcare business, which primarily serves the acute
care sector of the health care market, recorded profits that were consistent
with the prior year level. Strong cost controls and efficiency gains offset a
slight decline in revenue, reflecting continuing competitive pressures and
industry consolidations. DHS continued to achieve excellent growth in revenues
and profits, reflecting strong growth in management services, improvements in
the rehabilitation operations which were started in 1995, and a significant
increase in transaction-related fees and gains. The Education market
experienced solid revenue growth with an improved customer retention rate.
Profits decreased as a result of lower margins on a higher mix of large school
district contracts. The Business & Industry unit achieved double-digit
increases in both revenue and profits, with a substantial increase in services
to the aviation industry.
Revenue in the Company's New Business Development and Parent segment
decreased, reflecting the 1995 sale of a small business investment. Profits
were improved reflecting the purchase of the WMX minority ownership interest
in ServiceMaster Consumer Services in exchange for ServiceMaster shares.
On a consolidated basis, cost of services rendered and products sold
increased 7 percent but continued to decline as a percentage of revenue to
77.5 percent in 1996 from 78.1 percent in 1995. This decrease as a percentage
of revenue reflects the changing mix of the business as ServiceMaster Consumer
Services increases in size in relation to the overall business of the Company.
ServiceMaster Consumer Services operates at a higher gross profit margin than
ServiceMaster Management Services, but incurs relatively higher levels of
selling and administrative costs.
18
<PAGE>
Consolidated selling and administrative expenses increased 7 percent over
the prior year, but as a percentage of revenue, decreased from 14.1 percent in
1995 to 13.9 percent in 1996, reflecting good cost controls and improved
efficiencies.
Overall operating income margins continue to reflect effective leveraging
and rapid growth in higher margin businesses, improving to 8.5 percent of
revenues compared to 7.9 percent in 1995.
Interest income increased over prior year levels due to growth in the
investment portfolio at American Home Shield, as well as gains realized on
several sales of marketable securities during the year. Interest expense
increased over the prior year, reflecting increased borrowings relating to
acquisitions and treasury share purchases. The decrease in minority interest
expense primarily reflects the purchase from WMX of the minority interest in
ServiceMaster Consumer Services in December 1995.
1997 FINANCIAL POSITION
The Company continued to exhibit its excellent cash generating ability, with
cash flows from operations increasing 9 percent to $372 million and free
operating cash flows (defined as cash flows from operations less property
additions) increasing 9 percent to $326 million. The Company's free operating
cash flows represent the cash available for enhancing shareholder value (e.g.,
acquisitions, dividends and share repurchases) after financing the growth of
existing business units. Cash flows from the operating segments grew at strong
double digit rates and were partially offset by increased interest expense
relating to the WMX transaction. The Company's free operating cash flows have
consistently exceeded recurring net income as a result of relatively low
working capital and fixed asset requirements, combined with the effects of
noncash charges for depreciation and amortization.
Cash and marketable securities totaled approximately $124 million at
December 31, 1997. Debt levels increased despite strong operating cash flows
due to the repurchase of WMX's 19 percent ownership interest in the Company
for $626 million and acquisitions. The Company is a party to a number of long-
term debt agreements which require it to comply with certain financial
covenants, including limitations on indebtedness, restricted payments, fixed
charge coverage ratios and net worth. The Company is in compliance with the
covenants related to these debt agreements. Management believes that funds
generated from operations and other existing financial resources will continue
to be adequate to satisfy the ongoing operating needs of the Company. In
addition, the Company had $450 million of unused commitment on its revolving
bank facility at December 31, 1997.
On February 24, 1997, the Company completed the acquisition of Barefoot, the
second largest professional residential lawn care service company in the
United States. The aggregate value of this transaction was approximately $237
million with the payment consisting of $146 million of shares and the
remainder in cash.
On August 11, 1997, the Company acquired CSI, one of the nation's ten
largest PEOs. CSI provides clients with administrative processing of payroll,
workers' compensation insurance, health insurance, unemployment insurance and
other employee benefit plans.
Subsequent to year-end, ServiceMaster acquired Rescue Industries, Inc.,
which operates under the trade name Rescue Rooter. Rescue Rooter is one of the
largest companies in America specializing in plumbing and drain cleaning
services.
On April 1, 1997, ServiceMaster repurchased the entire 19 percent ownership
interest that WMX had held in the Company for approximately $626 million. WMX
had owned 40.7 million restricted shares of ServiceMaster and also had an
option to purchase an additional 2.8 million shares which was canceled as part
of the transaction. This transaction was immediately additive to earnings per
share and provided significant, incremental tax benefits to the Company.
19
<PAGE>
In April 1997, the Company also entered into a committed $1 billion multi-
currency revolving credit agreement, which includes a five-year revolving
credit facility of $750 million and a 364-day revolving credit facility of
$250 million with a one-year term loan option (two-year total term).
On July 28, 1997, ServiceMaster filed a Form S-3 shelf registration
statement with the Commission providing for the sale of up to $950 million in
either unsecured senior debt securities or equity interests. On August 14,
1997, the Company completed a $300 million dual-tranche debt offering
consisting of $100 million principal amount of 6.95 percent notes due August
15, 2007 and $200 million principal amount of 7.45 percent notes due August
15, 2027. On March 2, 1998, the Company completed a $300 million dual-tranche
offering of unsecured senior notes consisting of $150 million principal amount
of 7.10 percent notes due March 1, 2018 and $150 million principal amount of
7.25 percent notes due March 1, 2038. The net proceeds of these offerings were
used to refinance borrowings under bank credit facilities, thereby reducing
the Company's exposure to short-term interest rate fluctuations.
Because certain computer programs use two digits rather than four to define
the applicable year, many systems may not function properly beyond the year
1999. In addition, certain systems are unable to recognize the year 2000 as a
leap year. The Company has conducted a review of its computer systems to
identify those that could be affected by the year 2000 problem, and has
determined that it will be required to replace or remediate many of its
systems to facilitate their continuing reliable operation. The Company
currently believes that expenses directly related to this effort are not
expected to have a material impact on the results of its operations.
Although the Company believes that critical remediation efforts will be
completed prior to the year 2000, the untimely completion of these efforts
could, in certain circumstances, have a material adverse effect on the
operations of the Company. In addition, the Company is in the process of
establishing whether the external parties and systems with which the Company
interacts and external systems for which the Company has certain maintenance
responsibilities are in compliance and whether non-compliance could have a
material adverse impact on the Company.
Accounts receivable and inventories increased reflecting general business
growth and the acquisition of Barefoot. The increases in prepaid expenses and
other assets resulted from the strong growth at American Home Shield, where
initial direct contract costs are capitalized and expensed over the life of
the service contract, and the recording of deferred tax assets related to the
conversion to corporate form. Intangible assets have grown primarily due to
the acquisition of Barefoot, CSI, and other smaller companies. Property and
equipment increased primarily due to acquisitions and general business growth.
The Company does not have any material capital commitments at this time. Notes
receivable and other long-term assets increased due to the deferred tax assets
discussed above.
Accounts payable and other accrued liabilities increased due to general
business growth and the effects of acquisitions. Deferred revenue increased
primarily as a result of strong growth in warranty contracts written at
American Home Shield and an increase in customer prepayments at TruGreen-
ChemLawn.
At the end of 1997, there were no minority ownership interests in subsidiary
entitles, and the interests of the general partners of the two parent
partnership entities were eliminated upon the Reincorporation.
Total shareholders' equity decreased to $524 million in 1997 from $797
million at December 31, 1996, reflecting the repurchase of shares previously
owned by WMX and other treasury share repurchases and cash distributions. This
reduction was partially offset by strong growth in earnings, shares issued to
acquire Barefoot, and the gain recorded related to establishing the deferred
tax assets created upon the Reincorporation. The Company continues to
repurchase shares in the open
20
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market or in privately negotiated transactions pursuant to the authorization
previously granted by the Board of Directors. As of December 31, 1997, there
was $39 million of authorization remaining.
At year end, the aggregate market value of the Company's outstanding shares
exceeded $5 billion. An investor who held shares for the entire year realized
a total return on investment of 71 percent in 1997 (assuming reinvestment of
all dividends), exceeding market averages. ServiceMaster shareholders have
also experienced compound annual total returns (assuming reinvestment of all
cash distributions) exceeding 33 percent over the last five years, 26 percent
over the last 10 years and 24 percent over the last 20 years.
Cash distributions paid directly to shareholders totaled $89 million, or
$0.46 2/3 per share, a 6 percent per share increase over the prior year. The
total amount of cash distributions, including payments made to the
shareholders' trust described below, increased 6 percent to approximately $156
million.
In 1993, ServiceMaster established a trust for the benefit of Parent
Partnership shareholders. Each year, the trust was allocated the portion of
the Parent Partnership's taxable income which exceeded the level of direct
cash distributions, thereby reducing the taxable income of the shareholders.
The trust received cash payments from the Parent Partnership in amounts
sufficient to pay its income tax obligations on this allocated taxable income.
Cash distributions made to the trust totaled $65 million in 1997 and $50
million in 1996. The trust was terminated upon the Reincorporation and has no
residual resources or obligations except for its final income tax payment.
The return to corporate form is not expected to impact the enterprise's
future liquidity or capital resources materially. As a corporation, the
Company is responsible for the payment of corporate federal and state income
taxes. Nonetheless, the increased cash requirements related to corporate
income taxes will be significantly offset by the elimination of cash payments
to the Partnership's shareholder trust and the annual cash benefit resulting
from the step-up in tax basis in the enterprise's assets realized upon the
Reincorporation. In addition, management expects that the Company will not be
required to pay federal income taxes resulting from its 1998 earnings until
March of 1999. At that time, the Company will be responsible for its 1998
obligation and will begin making estimated payments for its 1999 obligations.
The following table presents net income before interest expense, taxes,
depreciation and amortization. EBITDA is a commonly-used supplemental
measurement of a company's ability to generate cash flow used by many of
ServiceMaster's investors and lenders. Many of the Company's existing long-
term debt arrangements require it to maintain specified levels of EBITDA.
Management believes that EBITDA is another measure which demonstrates the
cash-generating abilities of the Company's businesses.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
(IN THOUSANDS, EXCEPT 1997 1996 1995 1994 1993(1)
PERCENTAGE DATA) -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net income................... $329,076 $245,140 $172,019 $139,883 $115,747
Depreciation................. 45,392 41,658 38,332 32,885 29,674
Amortization................. 47,670 37,348 27,656 21,323 20,282
Tax benefit relating to
change in tax status........ (65,000) -- -- -- --
-------- -------- -------- -------- --------
Cash income.................. 357,138 324,146 238,007 194,091 165,703
Interest expense............. 76,447 38,298 35,855 31,543 32,483
Tax provision (while
organized as a partnership). 10,203 7,257 5,588 2,755 2,146
-------- -------- -------- -------- --------
EBITDA....................... $443,788 $369,701 $279,450 $228,389 $200,332
Growth over prior period..... 20% 32% 22% 14% 15%
</TABLE>
- --------
(1) The Company's results in 1993 exclude a $30.2 million gain realized on the
issuance of subsidiary shares. Including such gain in the Company's
results in 1993, the Company had net income of $145,947,000.
EBITDA should not be considered an alternative to net income in measuring
the Company's performance, or used as an exclusive measure of cash flow
because it does not consider the impact of working capital growth, capital
expenditures, debt principal reductions or other sources and uses of cash
which are disclosed in the Consolidated Statements of Cash Flows.
21
<PAGE>
BUSINESS
GENERAL
ServiceMaster is one of the largest providers of residential and supportive
management services in the United States. In addition, the Company has
operations in 38 countries and has over 9.6 million customers worldwide. The
Company has strong, well-recognized brand names and operates through a network
of more than 7,600 service centers worldwide. ServiceMaster holds the number
one or two position in each of its major markets.
ServiceMaster has an uninterrupted record of consistent growth in revenue
and net income. In 1997, the Company had customer level revenue, which
includes the estimated revenue of the Company's franchisees, of over $5.5
billion and operating revenue of approximately $4 billion. The Company has
achieved 27 consecutive years of growth in revenue, net income (excluding net
one-time gains) and cash distributions. ServiceMaster shareholders have
realized compound annual total returns in excess of 33 percent over the last
five years, 26 percent over the last 10 years and 24 percent over the last 20
years (in each case assuming reinvestment of all cash distributions).
ServiceMaster operates primarily through two units: ServiceMaster Consumer
Services, which contributed approximately 68 percent of the Company's 1997
operating income, and ServiceMaster Management Services, which contributed 28
percent of 1997 operating income. The Company also has recently formed a third
unit, ServiceMaster Employer Services, which contributed less than one percent
of 1997 operating income.
. ServiceMaster Consumer Services provides services to homeowners and
commercial customers under eight market-leading brand names: TRUGREEN-
CHEMLAWN, TERMINIX, AMERICAN HOME SHIELD and AMERISPEC, RESCUE ROOTER,
SERVICEMASTER RESIDENTIAL/COMMERCIAL SERVICES, MERRY MAIDS and FURNITURE
MEDIC.
. ServiceMaster Management Services provides facilities management services
to over 2,000 customers in the health care, education, and business and
industrial markets. These services include plant operations and
maintenance, housekeeping, grounds and landscaping, clinical equipment
management, energy management, food service, laundry and linen services,
total facilities management and other services.
. ServiceMaster Employer Services is one of the nation's ten largest PEOs
and provides a full-range of supportive human resource services,
including administrative processing of payroll, worker's compensation
insurance, health insurance, unemployment insurance and other employee
benefits, to approximately 800 customers with over 19,000 leased
employees.
The Company's strategy is to capitalize on favorable industry and
demographic trends; to serve and expand in markets where it can be the number
one or two company in such market; to maximize cross-selling opportunities; to
maintain the strong cash flow characteristics of its businesses; to pursue
"tuck-in" acquisitions and service line expansions; to focus on people-
intensive, service businesses; to expand geographically; and to continue to
adhere to its high standards of ethics and commitment to people.
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COMPANY STRENGTHS
The strong historical performance of ServiceMaster and its future prospects
are attributable to a number of important Company strengths.
LEADING MARKET POSITIONS AND BRANDS
ServiceMaster is one of the premier service companies in America, holding
the number one or two position in each of its major markets. The Company
operates through a network of over 7,600 service centers worldwide under well-
recognized brand names such as: SERVICEMASTER (management services, heavy-duty
cleaning and disaster restoration), TRUGREEN-CHEMLAWN (lawn, tree and shrub
care), TERMINIX (termite and pest control), AMERICAN HOME SHIELD and AMERISPEC
(home warranties and inspections), RESCUE ROOTER (plumbing and drain
cleaning), MERRY MAIDS (residential maid service) and FURNITURE MEDIC (on-site
furniture repair and restoration).
These strong brand names distinguish ServiceMaster from its competitors by
providing a high level of name recognition, conveying quality and trust and
providing an expectation of customer satisfaction.
RECURRING REVENUE AND CONSISTENT PERFORMANCE
ServiceMaster has grown through a combination of strong internal growth, the
addition of new service lines and acquisitions. The Company has achieved 27
consecutive years of growth in revenue, net income (excluding net one-time
gains) and cash distributions. ServiceMaster shareholders have realized
compound annual total returns in excess of 33 percent over the last five
years, 26 percent over the last 10 years and 24 percent over the last 20 years
(in each case assuming reinvestment of all cash distributions).
An important factor driving the Company's growth has been the high
percentage of recurring revenue inherent in many of the Company's businesses.
In addition, the Company has maintained its consistent operating performance
across a number of economic cycles.
STRONG CASH FLOW CHARACTERISTICS
ServiceMaster operates exclusively in the service sector, which is highly
labor intensive and requires relatively low fixed assets. ServiceMaster has
generated consistently high cash flows as a result of relatively low working
capital and capital expenditure requirements, combined with the effect of
noncash charges for depreciation and amortization. Over the past five years,
ServiceMaster's free operating cash flow (defined as cash flow from operations
less property additions) has, on average, exceeded its net income (excluding
net one-time gains) by 32 percent per year.
PROVEN ACQUISITION TRACK RECORD
ServiceMaster believes that one of its strengths is its ability to acquire,
integrate and grow service businesses. More than 70 percent of the Company's
operating income in 1997 was derived from businesses acquired since 1986.
ServiceMaster believes that it has improved the performance of all of its
significant acquisitions. For example, TruGreen and ChemLawn were unprofitable
when ServiceMaster acquired them in 1990 and 1992, respectively. In 1997,
TruGreen-ChemLawn was the largest unit contributor to ServiceMaster's
operating income.
LEADERSHIP IN PEOPLE DEVELOPMENT
ServiceMaster considers its people to be one of its greatest strengths,
particularly given the importance of a motivated, trained labor force in the
service industries in which it competes. A core objective of the Company is to
help people at all levels develop and realize their full potential. The
Company has been recognized by business management experts, such as Peter
Drucker and Noel Tichy, as one of the world's leading companies for people
development. This expertise is demonstrated by the Company's ability to
attract, train, motivate and retain high-quality service workers.
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EXPERIENCED, SHAREHOLDER-FOCUSED MANAGEMENT
A long-held fundamental ServiceMaster philosophy is that management should
participate in the risks and rewards of equity ownership in the Company. As a
result, the Company's officers collectively own over 10 percent of the
Company's outstanding Common Stock. ServiceMaster believes this philosophy has
been instrumental in attracting, motivating and retaining key management
personnel. In addition, ServiceMaster executive officers average over 15 years
of experience with ServiceMaster's businesses.
GROWTH DRIVERS
The Company's growth strategy is to enhance its leadership positions in its
current service businesses and to expand its service offerings to take
advantage of its strengths, its large customer base and the highly fragmented
nature of its markets. The Company plans to implement its growth strategy by
concentrating on the following opportunities:
FAVORABLE INDUSTRY AND DEMOGRAPHIC TRENDS
ServiceMaster Consumer Services' primary target market consists of
approximately 53 million U.S. households, a significant percentage of which
are dual-income families who are more frequent users of its services. The
number of home owners has increased from 40 million in 1970 to 67 million in
1997. The number of dual income families has increased from 27 million in 1970
to approximately 36 million in 1996. ServiceMaster believes that it is
uniquely positioned to provide single-source solutions for home service needs
to this growing market segment.
ServiceMaster Management Services' primary target markets consist of health
care facilities, educational institutions and commercial enterprises, each of
which increasingly is outsourcing the management of their non-core support
functions to improve quality and reduce costs.
ServiceMaster also believes that the aging population in the United States
is a favorable factor for both the Consumer Services and Management Services
businesses because of the Company's ability to assist the elderly homeowner
and serve the hospital and long-term care markets.
FURTHER MARKET PENETRATION
While ServiceMaster holds the number one or two position in each of its
major markets, such markets are highly fragmented and offer substantial
opportunities for increased market penetration. Each of the professional
service markets in which the Company operates represents a small percentage of
the overall market when do-it-yourself homeowners and companies that do not
outsource non-core functions are taken into consideration.
The Company continues to broaden its customer base by expanding its
marketing efforts and its service offerings within existing service lines.
ACQUISITION OPPORTUNITIES
Tuck-In Acquisitions. Because the Company operates in highly fragmented
markets, it continues to increase its market share by making acquisitions
within its existing service lines and believes that there are substantial
opportunities to continue to do so. These "tuck-in" acquisitions are used to
expand the Company's geographic reach, or are combined into the Company's
existing branch networks to provide additional operating leverage. For
example, over the past two years, the Company has acquired over 200 lawncare
companies, including Barefoot, and over 100 pest control companies, which have
been integrated into the Company's respective service lines.
Service Line Expansion. The Company has been successful in using
acquisitions to expand its service lines. ServiceMaster acquired Terminix in
1986, Merry Maids in 1988, American Home Shield in 1989, TruGreen in 1990,
ChemLawn in 1992 and DHS in 1993. Over the past two years, ServiceMaster has
acquired Rescue Rooter, AmeriSpec and Furniture Medic. The Company also formed
its Employer Services unit in 1997 with the acquisition of CSI.
24
<PAGE>
GEOGRAPHIC EXPANSION
The Company provides services to customers in all 50 states and 38 countries
around the world. However, geographic expansion continues to be a significant
growth opportunity for the Company's services. For example, American Home
Shield is concentrated on the West Coast, where approximately 55 percent of
California home resales involve a home warranty contract. On a nationwide
basis, fewer than approximately 12 percent of home resales involve a similar
contract. Additionally, Rescue Rooter, the Company's latest major acquisition,
is concentrated in the western United States, presenting an opportunity for
national expansion.
CROSS-SELLING OPPORTUNITIES
ServiceMaster enjoys significant cross-selling opportunities both within
each of and between its major operating units. Each of the ServiceMaster
Consumer Services businesses generally target customers with the same consumer
profile for each of the services it offers. On average, a ServiceMaster
Consumer Services customer only uses a small number of the 15 different
services offered by the Company under its eight brand names. To address this
opportunity, the Company has linked all of its consumer businesses through one
toll-free telephone number, 1-800-WE SERVE, and has developed a number of
programs designed to promote its other services to existing customers.
Similarly, ServiceMaster Management Services currently delivers approximately
two services on average to its customers. In today's competitive environment,
American businesses are increasingly looking to outsource a wider spectrum of
their non-core functions, offering growth and cross-selling potential in this
market.
International operations accounted for less than five percent of the
Company's operating income in 1997. The Company believes that the
international market represents a largely untapped opportunity and is pursuing
initiatives to sell its services directly to consumers abroad.
OVERVIEW OF OPERATING UNITS
ServiceMaster operates through two major units, ServiceMaster Consumer
Services and ServiceMaster Management Services, and a recently formed third
unit, ServiceMaster Employer Services.
CONSUMER SERVICES
ServiceMaster Consumer Services generated approximately 68 percent of the
Company's 1997 operating income. Substantially all of this 68 percent was
attributable to TruGreen-ChemLawn, Terminix and American Home Shield.
ServiceMaster Consumer Services provides services to homeowners and commercial
facilities under eight market-leading brand names:
TRUGREEN-CHEMLAWN for lawn, tree and shrub care and commercial landscape
and indoor plant maintenance;
TERMINIX for termite and pest control services;
AMERICAN HOME SHIELD and AMERISPEC for home system and appliance warranty
contracts and home inspection services;
RESCUE ROOTER for plumbing and drain cleaning services;
SERVICEMASTER RESIDENTIAL/COMMERCIAL SERVICES for heavy-duty residential
and commercial cleaning and disaster restoration services;
MERRY MAIDS for residential maid services; and
FURNITURE MEDIC for on-site furniture repair and restoration services.
ServiceMaster focuses on providing quality services and establishing
relationships to provide one or more of these services on a recurring basis to
customers. Since 1986, the number of customers
25
<PAGE>
served by ServiceMaster Consumer Services has increased from fewer than one
million domestic customers to more than 9.6 million customers worldwide. The
services provided by the eight Consumer Services companies comprise the
"ServiceMaster Quality Service Network" and can be accessed easily by calling
a single toll-free telephone number, 1-800-WE SERVE, or by contacting the
individual companies directly.
TRUGREEN-CHEMLAWN. TruGreen-ChemLawn is the largest provider of professional
lawn, tree and shrub care in the United States, providing services to over 3
million residential and commercial customers through 206 company-owned
branches and 84 franchised branches in 48 states and two foreign countries. In
addition, the Company began its indoor plant care business for commercial
customers in 1995 through an acquisition of a regional company and has become
the second largest company in that market. TruGreen-ChemLawn had 1997 customer
level revenue of $777 million.
TruGreen-ChemLawn is the largest company in the highly fragmented
professional lawn care market with an estimated market share of approximately
30 percent. The Company believes that the remainder of this market is shared
by approximately 7,700 companies. TruGreen-ChemLawn benefits from this highly
fragmented market because of its strong brand awareness and ability to
leverage its size to achieve economies of scale. The TruGreen-ChemLawn
business is seasonal in nature.
TruGreen-ChemLawn aggressively pursues acquisition opportunities to further
penetrate regional markets and achieve increased operating leverage. In
February 1997, ServiceMaster completed the acquisition of Barefoot for an
aggregate consideration of approximately $237 million and combined it with its
TruGreen-ChemLawn operations (except for certain Barefoot franchisees which
have been kept separate from TruGreen-ChemLawn). At the time of the
transaction, Barefoot was the second largest provider of professional lawn
care services in the United States. In 1998, TruGreen-ChemLawn entered the
commercial landscape maintenance market by acquiring four regional companies.
TruGreen-ChemLawn has acquired over 200 lawncare companies over the past two
years.
TERMINIX. Terminix is the largest provider of termite and pest control
services in the United States, providing services to over 3 million
residential and commercial customers through 290 company-owned branches and
241 franchised branches in 45 states and eight foreign countries. Terminix had
1997 customer level revenue of $862 million.
The termite and pest control industry also is highly fragmented. Terminix is
the number one company in the U.S. market, with an estimated market share of
approximately 16 percent. Based upon industry publications, the Company
believes that the second largest company in the industry is approximately two-
thirds the size of Terminix and that approximately 14,000 companies compete
for the remaining share of the market. Terminix has acquired over 100 pest
control companies over the past two years, and expects to continue to pursue
acquisitions to expand market share and increase operating leverage.
Terminix has recently broadened its service offering to increase convenience
and respond to the customer's need for flexibility. The Company is now
offering specialized plans that combine indoor and outdoor treatment options,
as well as a variety of service frequency options. The Terminix business is
seasonal in nature.
AMERICAN HOME SHIELD AND AMERISPEC. American Home Shield ("AHS") is the
largest provider of home service warranty contracts in the United States,
providing services to approximately 600,000 homes through approximately 13,000
independent repair maintenance contractors in 49 states and the District of
Columbia. AHS also provides home service warranty contracts through licensing
arrangements with local service providers in three other countries. AmeriSpec
is the largest provider of home inspections in North America, conducting
approximately 100,000 inspections through licensees in 41 states and Canada in
1997. AHS and AmeriSpec combined to achieve customer level revenue of $229
million in 1997.
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<PAGE>
AHS warranty contracts cover the repair or replacement of built-in
appliances, hot water heaters and electrical, plumbing, central heating, and
central air conditioning systems that malfunction by reason of normal wear and
tear. Service contracts are sold through participating real estate brokerage
offices, in conjunction with resales of single-family residences to
homeowners. AHS also sells service warranty contracts directly to homeowners
by renewing existing contracts and through various other distribution
channels.
AHS is the number one company in the home warranty market. The home warranty
industry was launched in California, where approximately 55 percent of home
resales involve a home warranty contract. On a nationwide basis, fewer than
approximately 12 percent of home resales involve a similar contract,
presenting a significant growth opportunity. AHS has benefited from a strategy
of renewing existing contracts, expanding geographically and marketing through
direct-to-consumer distribution channels, such as mortgage companies,
utilities and others.
RESCUE ROOTER. Rescue Rooter, which was acquired by the Company in 1998, is
the second largest provider of plumbing and drain cleaning services in the
United States, and provided services to over 365,000 customers in 1997 through
20 company-owned locations and one franchise location. The acquisition of
Rescue Rooter strategically expands the ServiceMaster Quality Service Network,
enabling the Company to provide customers with one of their most frequently-
requested services. The Company believes that Rescue Rooter is well-positioned
to expand in the highly fragmented plumbing and drain cleaning services
industry through internal growth, "tuck-in" acquisitions and synergies with
AHS (by providing warranty claim services to AHS customers).
SERVICEMASTER RESIDENTIAL/COMMERCIAL SERVICES. ServiceMaster
Residential/Commercial Services ("Res/Com") is the largest franchiser in the
heavy-duty residential and commercial cleaning industry in the United States,
serving approximately 1.7 million customers through a network of over 4,500
independent franchisees in the United States and ten foreign countries.
Res/Com provides carpet and upholstery cleaning, janitorial services, disaster
restoration services and window cleaning services to its residential and
commercial customers. Res/Com is the leading franchisor in this large
industry, which is characterized by many small independent companies and
several larger competitors.
MERRY MAIDS. Merry Maids is the largest provider of domestic house cleaning
services, providing services to approximately 352,000 customers through 26
company-owned branches in 18 states and 797 licensees in all 50 states and
five foreign countries.
FURNITURE MEDIC. In 1997, Furniture Medic provided on-site furniture repair
and restoration services to over 160,000 customers through 513 licensees in 47
states and four foreign countries.
MANAGEMENT SERVICES
ServiceMaster Management Services generated 28 percent of the Company's
operating income in 1997 and provides management and support services to
commercial customers in the healthcare, education and business and industrial
markets. The Company historically has provided these services through three
principal operating units: Healthcare Services, including DHS; Education
Management Services; and Business & Industry Group.
ServiceMaster pioneered the concept of providing support services to health
care facilities by introducing housekeeping management services in 1962. Since
then, ServiceMaster has expanded its management services business to include
the management of plant operations and maintenance, clinical equipment,
housekeeping, laundry and linen services, landscaping, food service, energy
management and total facility management to health care, educational and
commercial facilities. The
27
<PAGE>
DHS business within Healthcare Services provides management and other services
to nursing homes, skilled nursing facilities, assisted living facilities and
home health care agencies. ServiceMaster's programs and systems free the
customer to focus on its core business activity with confidence that the
support services are being managed and performed in an efficient and cost-
effective manner.
As of December 31, 1997, ServiceMaster Management Services was providing
management or support services to approximately 2,000 customers, with
approximately 7,750 combined facilities. These services were being provided in
all 50 states, the District of Columbia and 21 foreign countries.
A summary of each of the markets served by ServiceMaster Management Services
is set forth below:
HEALTHCARE. ServiceMaster is the largest provider of support services to
this market. The Company provides services to approximately 1,600 health care
customers, with approximately 1,900 facilities. These customers care for 5
million patients annually. ServiceMaster partners with hospitals, nursing
homes and health systems to improve the effectiveness and efficiency of non-
core functions. The Company's Integrated Service program, which provides
single-source management for multiple support functions in the health care
industry, has been particularly successful, demonstrating the importance and
competitive advantage of comprehensive solutions to health care customers.
The Company believes that it is well-positioned to benefit from the aging
population and the increased focus on cost containment in the health care
industry.
EDUCATION. ServiceMaster provides services to approximately 270 customers
with over 5,300 facilities and 2 million students. The Company serves both the
primary (grades kindergarten through twelfth) and secondary (college and
universities) markets. The education market is increasingly using outsourcing
as a means of improving quality and efficiency in the face of tighter budgets
and aging school buildings.
BUSINESS & INDUSTRY. ServiceMaster provides single service and total
facilities management to a variety of industries. Within this market,
ServiceMaster provides services to 102 customers, with more than 500
facilities. ServiceMaster has targeted the automotive, transportation and food
processing industries and it now serves virtually every major automotive
manufacturer, as well as more than 70 airlines in 30 airports around the
world.
EMPLOYER SERVICES
With the acquisition of CSI in August 1997, ServiceMaster launched its entry
into the PEO industry. ServiceMaster Employer Services provides administrative
processing of payroll, worker's compensation insurance, health insurance,
unemployment insurance and other employee benefits to approximately 800
clients with over 19,000 leased employees. CSI is one of the nation's ten
largest companies in the emerging PEO industry.
MAJOR CUSTOMERS
ServiceMaster has no single customer which accounts for more than 5% of its
total revenues. No part of the Company's business is dependent on a single
customer or a few customers the loss of which would have a material adverse
effect on the Company as a whole. Revenue from governmental sources is not
material.
TRADEMARKS AND SERVICE MARKS; FRANCHISES
The Company's trademarks and service marks are important for all elements of
the Company's business, although such marks are particularly important in the
advertising and franchising activities
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<PAGE>
conducted by the operating subsidiaries of ServiceMaster Consumer Services.
Such marks are registered and are renewed at each registration expiration
date. ServiceMaster(R), TruGreen-ChemLawn(R), Barefoot(R), Terminix(R),
American Home Shield(R) and AmeriSpec(R), Rescue Rooter(R), Merry Maids(R) and
Furniture Medic(R) are service marks of the Company.
Within ServiceMaster Consumer Services, franchises are important for the
TruGreen-ChemLawn, Terminix, ServiceMaster Res/Com, Merry Maids, AmeriSpec and
Furniture Medic businesses. Nevertheless, revenue and profits derived from
franchise-related activities constitute less than 10% of the revenue and
profits of the consolidated ServiceMaster enterprises. Franchise agreements
made in the course of these businesses are generally for a term of five years.
ServiceMaster's renewal history is that most of the franchise agreements which
expire in any given year are renewed.
CORPORATE OBJECTIVES
ServiceMaster considers its people to be one of its greatest strengths,
particularly given the importance of a motivated, trained labor force in the
service industries in which it competes. A core objective of the Company is to
help people at all levels develop and realize their full potential. The
Company's commitment to people is based on its four corporate objectives: To
honor God in all we do; To help people develop; To pursue excellence; and To
grow profitably.
29
<PAGE>
MANAGEMENT
The following table sets forth: (i) the names and ages (as of March 31,
1998) of the present executive officers of the Company; (ii) all positions
presently held by each officer; and (iii) the year each person became an
officer of the Company. Each person named has served as an officer of the
Company and its predecessor company continuously since the year shown. There
are no arrangements or understandings between any executive officer and any
other person pursuant to which the officer was or is to be selected as an
officer.
<TABLE>
<CAPTION>
FIRST
BECAME
NAME AGE PRESENT POSITION AN OFFICER
- ---- --- ---------------- ----------
<S> <C> <C> <C>
C. William Pollard...... 59 Chairman and Director 1977
Carlos H. Cantu......... 64 President and Chief Executive Officer and Director 1986
Charles W. Stair........ 57 Vice Chairman and Director 1973
Phillip B. Rooney....... 53 Vice Chairman and Director 1997
Ernest J. Mrozek........ 44 President and Chief Operating Officer, Consumer 1987
Services(1)
Robert F. Keith......... 41 President and Chief Operating Officer, Management 1986
Services(1)
Robert D. Erickson...... 54 Executive Vice President(1) 1976
Brian D. Oxley.......... 47 Executive Vice President(1) 1983
Vernon T. Squires....... 63 Senior Vice President and General Counsel 1987
Steven C. Preston....... 37 Senior Vice President and Chief Financial Officer(1) 1997
Eric R. Zarnikow........ 38 Vice President and Treasurer 1994
Deborah A. O'Connor..... 35 Vice President and Controller 1993
</TABLE>
- --------
(1) Such executive officer also serves as a Senior Management Advisor. The By-
Laws of the Company provide that the Board of Directors may appoint
officers of the Company or a subsidiary and other persons having a special
relationship to ServiceMaster to serve as Senior Management Advisers.
Senior Management Advisers attend the meetings of the Board and advise the
Board but do not have the power to vote. The Board has determined that
providing a greater number of officers the opportunity to advise and
interact with the Board is in the best interest of ServiceMaster as well
as the individual officers. The Senior Management Advisers receive no
special compensation for their services in this capacity.
30
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock by the Selling Stockholders as of March 31, 1998,
and as adjusted to reflect the sale of the Common Stock being offered hereby
by the Company and the Selling Stockholders. Beneficial ownership of the
Common Stock listed in the table has been determined in accordance with the
applicable rules and regulations promulgated by the Commission under the
Exchange Act.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR NUMBER OWNED AFTER SHARES
TO OFFERINGS OF SHARES OFFERINGS(1) SUBJECT TO
----------------- BEING ----------------- OVER-ALLOTMENT
SELLING STOCKHOLDERS NUMBER PERCENT OFFERED NUMBER PERCENT OPTIONS
-------------------- --------- ------- --------- --------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Glendal, Inc.(2)........ 3,324,168 1.8 491,185 2,832,983 1.5 508,815
G. Walter Hansen
Charitable Trust dated
12/18/86............... 933,600 * 271,002 662,598 * 335,838
Kenneth N. Hansen, Jr.
Charitable Trust dated
12/18/86............... 627,954 * 182,280 445,674 * 225,890
Kenneth N. Hansen, Sr.
and Kenneth N. Hansen,
Jr. Charitable
Remainder Unitrust(3).. 202,500 * 67,139 135,361 * 69,548
Darlene K. Hansen
Charitable Trust dated
12/18/86............... 202,500 * 58,781 143,719 * 72,844
G. Walter and Darlene
Hansen Charitable Trust
dated 1/22/98.......... 100,519 * 100,519 -- * --
Vincent C. Nelson 1998
Charitable Remainder
Unitrust(3)............ 70,000 * 34,383 35,617 * 35,617
ServiceMaster Profit
Sharing, Savings and
Retirement Plan(4)..... 7,718,039 4.1 1,500,000 6,218,039 3.2 --
Wessner Foundation(5)... 1,012,500 * 94,711 917,789 * 305,289
David K. and Patricia T.
Wessner, as joint
tenants(5)............. 486,291 * 100,000 386,291 * --
Wessner Investments,
Inc.(5) ............... 463,747 * 100,000 363,747 * --
</TABLE>
- --------
*Indicates less than 1%.
(1) Assumes the over-allotment options granted to the Underwriters by certain
of the Selling Stockholders are not exercised.
(2) Dallen W. Peterson, a Director of the Company, is President and a
stockholder of Glendal, Inc. ("Glendal"). As a result, Mr. Peterson may be
deemed to be the beneficial owner of such shares of Common Stock held by
Glendal.
(3) Vincent C. Nelson, a Director of the Company, serves as the sole trustee
of such trust. In such capacity, Mr. Nelson has the sole voting and
investment power with respect to such shares of Common Stock held by the
trust. As a result, Mr. Nelson may be deemed to be the beneficial owner of
such shares of Common Stock held by the trust. Mr. Nelson may also be
deemed to be the beneficial owner of an additional 274,869 shares of
Common Stock, including shares held in trust for the benefit of himself
and/or family members and shares that may be acquired within sixty days
under outstanding stock options held by Mr. Nelson.
(4) The Bank of New York is the trustee (the "Trustee") for the ServiceMaster
Profit Sharing, Savings and Retirement Plan (the "Retirement Plan"). With
respect to shares of Common Stock, the
31
<PAGE>
Trustee acts at the direction of the Board of Directors of the Company. As
of March 31, 1998, shares of Common Stock represented approximately 84
percent of the value of the assets held by the Retirement Plan.
(5) David K. Wessner is a Director of the Company. Mr. Wessner serves as a
director and President of Wessner Foundation and is a shareholder and one
of four directors of Wessner Investments, Inc. As a result, Mr. Wessner
may be deemed to be the beneficial owner of the shares of Common Stock
held by such entities. Mr. Wessner disclaims beneficial ownership of the
shares of Common Stock held by the Wessner Foundation. Mr. Wessner may
also be deemed to be the beneficial owner of an additional 75,605 shares
of Common Stock, including shares that may be acquired within sixty days
under outstanding stock options held by Mr. Wessner.
The Selling Stockholders will be responsible for their pro rata portion of
the registration fee and underwriting discount and for any legal fees which
they may incur in connection with the Offerings. The Company has agreed to pay
all other expenses associated with the Offerings.
32
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Under the Company's Amended and Restated Certificate of Incorporation (the
"Restated Certificate"), the Company is authorized to issue 1,000,000,000
shares of Common Stock, par value $0.01 per share, and 11,000,000 shares of
preferred stock, par value $0.01 per share (the "Preferred Stock"). As of
December 31, 1997, 186,629,000 shares of Common Stock (excluding treasury
shares) were issued and outstanding and no shares of Preferred Stock were
issued and outstanding. In addition, as of December 31, 1997, the Company had
10,464,000 shares of Common Stock reserved for issuance under the Company's
equity incentive plans. The number of authorized shares of Preferred Stock
includes 1,000,000 authorized shares of Junior Participating Preferred Stock,
Series A (the "Series A Preferred Stock") issuable pursuant to the rights
agreement dated as of December 15, 1997 between the Company and Harris Trust
and Savings Bank (the "Rights Plan"), none of which were outstanding as of
December 31, 1997. See "--Stock Purchase Rights".
COMMON STOCK
Subject to the rights of the holders of any Preferred Stock, each holder of
Common Stock on the applicable record date is entitled to receive such
dividends as may be declared by the Board of Directors out of funds legally
available therefor, and, in the event of liquidation, to share pro rata in any
distribution of the Company's assets after payment of liabilities. Each holder
of Common Stock is entitled to one vote for each share held of record on the
applicable record date on all matters presented to a vote of stockholders. The
outstanding Common Stock is, and the shares of Common Stock offered hereby by
the Company will be, fully paid and non-assessable.
Harris Trust and Savings Bank of Chicago, Illinois is the registrar and
transfer agent for the Common Stock.
STOCK PURCHASE RIGHTS
Each outstanding share of Common Stock includes, and each share of Common
Stock offered hereby will include, one preferred stock purchase right
(individually a "Right" and collectively the "Rights") provided under the
Rights Plan. Each Right entitles the holder, until the earlier of December 11,
2007 or the redemption of the Rights, to buy one one-thousandth of a share of
Series A Preferred Stock at a price of $130 per one one-thousandth of a share
(as may be adjusted to reflect stock splits since the issuance of the Rights).
The Series A Preferred Stock is nonredeemable and will have 1,000 votes per
share (subject to adjustment). The Company has reserved 1,000,000 shares of
Series A Preferred Stock for issuance upon exercise of such Rights.
In the event that any person becomes the beneficial owner of 15% or more of
the Company's Common Stock, the Rights (other than Rights held by the
acquiring stockholder) would become exercisable for that number of shares of
the Common Stock having a market value of two times the exercise price of the
Right. Furthermore, if after any person becomes the beneficial owner of 15% or
more of the Company's Common Stock the Company is acquired in a merger or
other business combination or 50% or more of its assets or earnings power were
sold, each Right (other than Rights held by the acquiring person) would become
exercisable for that number of shares of Common Stock (or securities of the
surviving company in a business combination) having a market value of two
times the exercise price of the Right.
The Company may redeem the Rights at one cent per Right prior to the
occurrence of an event that causes the Rights to become exercisable for Common
Stock.
33
<PAGE>
One Right will be issued in respect of each share of Common Stock issued
before the earlier of December 11, 2007 or the redemption of the Rights. As of
the date of this Prospectus, the Rights are not exercisable, certificates
representing the Rights have not been issued and the Rights automatically
trade with the shares of Common Stock. The Rights will expire on December 11,
2007, unless earlier redeemed.
PREFERRED STOCK
Shares of Preferred Stock may be issued from time to time in one or more
series. The Board is authorized to determine and alter all rights, preferences
and privileges and qualifications, limitations and restrictions thereof
(including, without limitation, voting rights and the limitation and exclusion
thereof) granted to or imposed upon any wholly unissued series of Preferred
Stock and the number of shares constituting any such series and the
designation thereof, to determine whether fractional shares can be issued in
any particular series and, if so, the nature of the fractional interests which
can be issued in that series, and to increase or decrease (but not below the
number of shares of such series then outstanding) the number of shares of any
series subsequent to the issue of shares of that series then outstanding. In
case the number of shares of any series is so decreased, the shares
constituting such reduction shall resume the status which such shares had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE AND BY-LAWS
The following summary of certain provisions of the Restated Certificate and
By-Laws of the Company (the "By-Laws") does not purport to be complete and is
subject to and qualified in its entirety by reference to the Restated
Certificate and the By-Laws, which are incorporated by reference as exhibits
to the Registration Statement of which this Prospectus is a part.
CLASSIFICATION OF DIRECTORS. The Company's Restated Certificate and By-Laws
provide that its Board of Directors shall be divided into three classes, each
class being as nearly equal in number as reasonably practicable, and that at
each annual meeting of the Company's stockholders, the successors to the
Directors whose terms expire that year shall be elected for a term of three
years. The number of Directors is fixed by the affirmative vote of the
majority of the Directors then in office, but may not be less than three.
Newly created Directorships and any vacancies on the Board of Directors are
filled by a majority vote of the remaining Directors then in office, even if
less than a quorum. Except in certain limited circumstances, no Director may
be removed from the Board prior to the time such person's term would expire
unless (i) such removal is for cause and (ii) such removal has been approved
by the affirmative vote of the holders of 67% of the outstanding voting shares
of the Company. The Restated Certificate requires that a majority of the
members of the Board be "independent directors," which is defined to generally
include any person (i) who is not and has not been employed by any
ServiceMaster unit within one year; (ii) is not a "Related Person" (as
hereinafter defined) and has not been employed by a Related Person within one
year; (iii) is not a party to any agreement, requirement or arrangement under
which such person may be obligated to act in his or her capacity as a Director
in accordance with instructions provided by any person who is not independent
(including, but not limited to, a Related Person); and (iv) is not subject to
any relationship, arrangement or circumstance (including any relationship with
a Related Person) which, in the judgment of a majority of the independent
Directors (the "Independent Board Majority") is reasonably possible will
interfere with such person's exercise of independent judgment as a Director.
SPECIAL MEETINGS. The By-Laws provide that stockholder action can be taken
only at an annual or special meeting of stockholders and cannot be taken by
written consent in lieu of a meeting. The By-Laws provide that, except as
otherwise required by law, special meetings of the stockholders can only be
called pursuant to a resolution adopted by a majority of the Board of
Directors. Stockholders are not permitted to call a special meeting or to
require the Board to call a special meeting.
34
<PAGE>
APPROVAL OF CERTAIN BUSINESS COMBINATIONS. The Restated Certificate provides
that the affirmative vote of the holders of not less than 80% of the
outstanding shares of the Common Stock held by stockholders other than a
"Related Person" (any person or entity which, together with its affiliates and
associates, beneficially owns in the aggregate 15% or more of the outstanding
Common Stock and any affiliate or associate of such person or entity) is
required for the approval or authorization of any "Business Combination" (as
hereinafter defined) of the Company with any Related Person; provided, that
the foregoing 80% voting requirement is not applicable if an "Independent
Board Majority" (a majority of the group comprised of all individuals who are
independent sitting directors) either (a) has expressly approved in advance
the acquisition of the outstanding shares of Common Stock that caused such
Related Person to become a Related Person or (b) has expressly approved such
Business Combination either in advance of or subsequent to such Related
Person's having become a Related Person. The term "Business Combination" is
defined under the Restated Certificate to mean (a) any merger or consolidation
of the Company or a subsidiary of the Company with or into a Related Person;
(b) any sale, lease, exchange, transfer or other disposition of all or any
substantial part (as defined in the Restated Certificate) of the assets either
of the Company (including without limitation any voting securities of a
subsidiary) or of a subsidiary of the Company to a Related Person; (c) any
merger or consolidation of a Related Person with or into the Company or a
subsidiary of the Company; (d) any sale, lease, exchange, transfer or other
disposition of all or any substantial part of the assets of a Related Person
to the Company or a subsidiary of the Company; (e) the issuance of any
securities of the Company or a subsidiary of the Company to a Related Person;
(f) any recapitalization that would have the effect of increasing the voting
power of a Related Person; and (g) any agreement, contract or other
arrangement providing for any of the transactions described in this definition
of a Business Combination.
ACTION BY WRITTEN CONSENT. The By-Laws provide that a holder of Common Stock
or any other class of stock at any time issued by the Company shall not have
the right to take action by written consent. Rather, stockholders shall only
have the right to act with respect to any particular issue at a meeting of
stockholders at which that issue is properly up for a vote by stockholders.
STOCKHOLDER PROPOSALS. Stockholders are only entitled to make proposals to
be voted upon by stockholders at an annual meeting if they comply with certain
procedures set forth in the By-Laws, which require, among other things, that
the proposing stockholder must deliver a written notice identifying such
proposal to the office of the Company's General Counsel at the Company's
headquarters no later than the close of business on the 60th day nor earlier
than the close of business on the 90th day prior to the first anniversary of
the preceding year's annual meeting; provided, however, that if the date of
the annual meeting is more than 30 days before or more than 60 days after such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the close of business on the 90th day prior to such annual
meeting and not later than the close of business on the later of the 60th day
prior to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made by the Company. At a
special stockholders meeting, a stockholder's proposal will be timely for that
meeting if it is actually delivered to the General Counsel's office at the
Company's headquarters no later than the close of business on the 10th day
following the day on which the Company first publicly announced the date of
the special meeting and that a vote by stockholders will be taken at that
meeting. Such stockholder's proposal notice must: (i) contain a description of
the proposal, the reasons for the proposal and any material interest in such
proposal by the proposing stockholder or the beneficial owner of the
stockholder's record shares; (ii) contain an affirmation by the proposing
stockholder that the stockholder satisfies the requirements specified in the
By-Laws for presentation of such proposal; and (iii) as to the stockholder
making the proposal and the beneficial owner, if any, on whose behalf the
proposal is made (x) the name and address of such stockholder, as they appear
on the Company's books, and of such beneficial owner and the telephone number
at which each may be reached during normal business hours through the time for
which the meeting is scheduled and (y) the class and number of shares of
35
<PAGE>
the Company which are owned beneficially and of record by such stockholder and
such beneficial owner.
AMENDMENTS TO THE RESTATED CERTIFICATE. The Restated Certificate provides
that no change in the Restated Certificate shall be effective unless it shall
have been approved by at least 80% of the Company's sitting directors and
shall have received such other approvals as may have been required by the
Company's By-Laws or by applicable law.
CERTAIN ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Company (or its majority-
owned subsidiaries) for three years following the time such person became an
interested stockholder unless: (i) before such person became an interested
stockholder, the Company's Board of Directors approved the transaction in
which the interested stockholder became an interested stockholder or approved
the business combination; (ii) upon consummation of the transaction that
resulted in the interested stockholder becoming an interested stockholder, the
interested stockholder owns at least 85% of the Company's voting stock
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the Company and by employee stock plans
that do not provide employees with the rights to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer); or (iii) at or following the transaction in which such person
became an interested stockholder, the business combination is approved by the
Company's Board of Directors and approved at a meeting of stockholders by the
Affirmative vote of the holders of at least two-thirds of the Company's
outstanding voting stock not owned by the interested stockholder. Under
Section 203, the restrictions described above also do not apply to certain
business combinations proposed by an interested stockholder following the
earlier of the announcement or notification of one of certain extraordinary
transactions involving the Company and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the Company's directors, if
such extraordinary transaction is approved or not opposed by a majority of the
directors who were directors prior to any person becoming an interested
stockholder during the previous three years or were recommended for election
or elected to succeed such directors by a majority of such directors.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Vernon T. Squires, Senior Vice President and General Counsel. As of
December 31, 1997, Mr. Squires held 322,821 shares of Common Stock and options
to purchase an aggregate of 90,000 shares of Common Stock. Certain legal
matters in connection with the Offerings will be passed upon by Kirkland &
Ellis, Chicago, Illinois (a partnership that includes professional
corporations) and for the U.S. Underwriters and the International Underwriters
by Davis Polk & Wardwell, New York, New York.
EXPERTS
The financial statements and schedule of the Company included and
incorporated by reference in this Prospectus and elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and included
and incorporated by reference in reliance upon the authority of said firm as
experts in giving said reports.
36
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE SERVICEMASTER COMPANY (AND PREDECESSOR)
Report of Independent Public Accountants.................................. F-2
Summary of Significant Accounting Policies................................ F-3
Statements of Income for the years ended December 31, 1997, December 31,
1996 and December 31, 1995............................................... F-5
Statements of Financial Position as of December 31, 1997 and December 31,
1996..................................................................... F-6
Statements of Cash Flows for the years ended December 31, 1997, December
31, 1996 and December 31, 1995........................................... F-7
Statements of Shareholders' Equity for the years ended December 31, 1997,
December 31, 1996 and December 31, 1995.................................. F-8
Notes to Consolidated Financial Statements for the years ended December
31, 1997, December 31, 1996 and December 31, 1995........................ F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of The ServiceMaster Company
We have audited the accompanying consolidated statements of financial
position of THE SERVICEMASTER COMPANY (organized under the laws of the State
of Delaware, formerly ServiceMaster Limited Partnership) AND SUBSIDIARIES, as
of December 31, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
ServiceMaster Company and Subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of operations and cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois,
January 26, 1998
F-2
<PAGE>
THE SERVICEMASTER COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation: The consolidated financial statements include the
accounts of ServiceMaster and its majority-owned subsidiary partnerships and
corporations, collectively referred to as the Company. Intercompany
transactions and balances have been eliminated in consolidation. Investments
in unconsolidated subsidiaries representing ownership of at least 20 percent,
but less than 50 percent, are accounted for under the equity method. Certain
immaterial 1996 and 1995 amounts have been reclassified to conform with the
1997 presentation. The preparation of the consolidated financial statements
requires management to make certain estimates and assumptions required under
generally accepted accounting principles which may differ from the actual
results.
Revenues: Revenues from lawn care, termite, and pest control services are
recognized as the services are provided. Revenues from franchised services
(which in aggregate represent less than 10 percent of consolidated totals)
consist of initial franchise fees received from the sales of licenses, sales
of products to franchisees, and continuing monthly fees based upon franchise
revenue.
Home warranty contract fees are recognized as revenues ratably over the life
of the contract. Customers' coverage under home warranty contracts is on a
"claims made" basis and contract costs are expensed as incurred.
Revenues from management services are recognized as services are rendered
and consist of contract fees which reflect the total price of such services.
Where the Company principally uses people who are employees of the facility,
the payroll costs for such employees are charged to the Company by the
facility and are included in "Cost of services rendered and products sold" in
the Consolidated Statements of Income. Receivables from the facilities are
reflected in the Consolidated Statements of Financial Position at the net
amount due, after deducting from the contract price all amounts chargeable to
the Company.
Revenues from the professional employer organization (PEO) are also
recognized as the services are rendered. Consistent with PEO industry
practice, revenues include the gross amount billed to clients which includes
payroll and other direct costs.
Inventory Valuation: Inventories are valued at the lower of cost (first-in,
first-out basis) or market. Inventory costs include material, labor, and
factory overhead and related handling costs. Raw materials represent less than
3 percent of the inventory value at December 31, 1997. The remaining inventory
is finished goods to be used on the customers' premises or sold to
franchisees.
Depreciation and Amortization: Buildings and equipment used in the business
are stated at cost and depreciated over their estimated useful lives using the
straight-line method for financial reporting purposes. The estimated useful
lives for building and improvements range from 10 to 40 years, while the
estimated useful lives for equipment range from 3 to 10 years. Intangible
assets consist primarily of trade names ($183 million), covenants not to
compete ($34 million) and goodwill ($1.3 billion). These assets are amortized
on a straight-line basis over their estimated useful lives as follows: trade
names 40 years; covenants not to compete--10 to 20 years; and goodwill--40
years. Long-lived assets, including fixed assets and intangible assets, are
periodically reviewed to determine recoverability by comparing their carrying
values to the undiscounted future cash flows expected to be realized from
their use. No recovery problems have been indicated by these comparisons. If
the undiscounted future cash flows had been less than the carrying amount of
the asset, an impairment loss would have been recognized based on the asset's
fair value, and the carrying amount of the asset would have been reduced
accordingly.
F-3
<PAGE>
THE SERVICEMASTER COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Income Taxes: The Company accounts for income taxes under the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
statement utilizes an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. Deferred income taxes are provided to reflect the
differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements.
Earnings Per Share: The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" which requires the dual presentation
of basic and diluted earnings per share. Basic earnings per share replaces the
previously required presentation of primary earnings per share and is based on
the weighted average number of common shares outstanding during the year.
Shares potentially issuable under options and convertible debentures which are
dilutive in nature have been considered outstanding for purposes of the
diluted earnings per share calculation.
F-4
<PAGE>
THE SERVICEMASTER COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Operating Revenue.......................... $3,961,502 $3,458,328 $3,202,504
Operating Costs and Expenses:
Cost of services rendered and products
sold.................................... 3,058,160 2,681,008 2,499,700
Selling and administrative expenses...... 559,409 482,102 450,937
---------- ---------- ----------
Total operating costs and expenses..... 3,617,569 3,163,110 2,950,637
---------- ---------- ----------
Operating Income........................... 343,933 295,218 251,867
Non-operating Expense (Income):
Interest expense......................... 76,447 38,298 35,855
Interest and investment income........... (14,304) (10,183) (7,310)
Minority interest, including General
Partners' 2 percent interest which
totaled $5,362 in 1997, $4,977 in 1996,
and $3,505 in 1995...................... 7,511 14,706 45,715
---------- ---------- ----------
Income before Income Taxes................. 274,279 252,397 177,607
Provision for income taxes (1)............. 10,203 7,257 5,588
Tax benefit relating to change in tax
status..................................... 65,000 -- --
---------- ---------- ----------
Net Income (1)......................... $ 329,076 $ 245,140 $ 172,019
========== ========== ==========
Pro Forma Information:
Income before Income Taxes............... $ 274,279 $ 252,397 $ 177,607
Corporate provision for income taxes (1). 110,809 101,968 71,753
---------- ---------- ----------
Net Income............................. $ 163,470 $ 150,429 $ 105,854
========== ========== ==========
Basic Net Income Per Share (1 and 2)....... $ 0.86 $ 0.71 $ 0.61
Diluted Net Income Per Share (1 and 2)..... $ 0.82 $ 0.69 $ 0.59
</TABLE>
- --------
(1) The Company converted from partnership to corporate form in a tax-free
exchange for shareholders on December 26, 1997. Prior to the conversion,
the Partnership was not subject to federal and state income taxes, as its
taxable income was allocated to the Company's shareholders. As a result of
the conversion, the Company is a taxable entity and is responsible for
such payments. Pro forma information is presented to compare the
continuing results of operations as if the Company were a taxable
corporation in 1997, 1996 and 1995. The pro forma provision for income
taxes has been calculated assuming that the Company's effective tax rate
was approximately 40 percent of pretax earnings.The Company's historical
net income per share as a Partnership was as follows:
<TABLE>
<CAPTION>
BEFORE ONE-
TIME TAX BENEFIT ACTUAL
----------------- -----------------
1997 1996 1995 1997 1996 1995
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Basic................................. $1.39 $1.16 $0.99 $1.73 $1.16 $0.99
Diluted............................... $1.33 $1.12 $0.95 $1.66 $1.12 $0.95
</TABLE>
(2) The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" which requires the dual presentation of basic and
diluted earnings per share. Basic earnings per share replaces the
previously required presentation of primary earnings per share. Basic
earnings per share are calculated based on 190,629 shares in 1997, 211,587
shares in 1996 and 173,588 shares in 1995 while diluted earnings per share
are calculated based on 199,760 shares in 1997, 220,286 shares in 1996 and
182,135 shares in 1995. All share and per share data reflect the three-
for-two share splits in June 1997 and June 1996.
See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statements.
F-5
<PAGE>
THE SERVICEMASTER COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
ASSETS 1997 1996
------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 64,876 $ 72,009
Marketable securities..................................... 59,248 42,404
Receivables, less allowances of $32,221 in 1997 and
$26,287 in 1996.......................................... 299,138 270,401
Inventories............................................... 48,157 43,529
Prepaid expenses and other assets......................... 122,665 70,991
---------- ----------
Total current assets.................................. 594,084 499,334
---------- ----------
Property, Plant, and Equipment, at Cost:
Land and buildings........................................ 46,632 47,536
Equipment................................................. 316,021 273,177
---------- ----------
362,653 320,713
Less: accumulated depreciation............................ 204,383 174,313
---------- ----------
Net property, plant, and equipment.................... 158,270 146,400
---------- ----------
Other Assets:
Intangible assets, primarily trade names and goodwill,
less accumulated amortization of $218,293 in 1997
and $170,623 in 1996..................................... 1,563,309 1,098,466
Notes receivable, long-term securities, and other assets.. 159,561 102,641
---------- ----------
Total Assets.......................................... $2,475,224 $1,846,841
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.......................................... $ 84,673 $ 66,025
Accrued liabilities:
Payroll and related expenses............................ 85,315 69,136
Insurance and related expenses.......................... 55,909 43,675
Other................................................... 129,443 92,756
Deferred revenues......................................... 181,298 138,339
Current portion of long-term obligations.................. 21,539 15,621
---------- ----------
Total current liabilities............................. 558,177 425,552
---------- ----------
Long-Term Debt.............................................. 1,247,845 482,315
Other Long-Term Obligations................................. 144,764 125,299
Commitments and Contingencies (see Notes)
Minority and General Partners' Interests
including General Partners' interest of $1,604 in 1996..... -- 16,908
Shareholders' Equity:
Partnership equity........................................ -- 862,625
Common stock $0.01 par value, authorized 1 billion shares;
issued and outstanding 186,629 shares.................... 1,866 --
Additional paid-in capital................................ 519,424 --
Retained earnings......................................... 65,000 --
Restricted stock.......................................... (4,270) (5,858)
Treasury stock............................................ (57,582) (60,000)
---------- ----------
Total shareholders' equity............................ 524,438 796,767
---------- ----------
Total Liabilities and Shareholders' Equity............ $2,475,224 $1,846,841
========== ==========
</TABLE>
See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statements.
F-6
<PAGE>
THE SERVICEMASTER COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and Cash Equivalents at January 1........ $ 72,009 $ 23,113 $ 14,333
Cash Flows from Operations:
Net Income.................................. 329,076 245,140 172,019
Adjustments to reconcile net income to net
cash provided from operations:
Depreciation............................ 45,392 41,658 38,332
Amortization............................ 47,670 37,348 27,656
Deferred tax asset recorded upon
reincorporation........................ (65,000) -- --
Change in working capital, net of
acquisitions:
Receivables............................. (6,853) (19,084) (28,503)
Inventories and other current assets.... (14,210) (12,666) (16,209)
Accounts payable........................ 5,603 10,302 10,773
Deferred revenues....................... 30,012 17,602 19,691
Accrued liabilities..................... (82) 13,140 24,287
Minority interest and other, net.......... 281 7,946 49,379
--------- --------- ---------
Net Cash Provided from Operations..... 371,889 341,386 297,425
--------- --------- ---------
Cash Flows from Investing Activities:
Property additions.......................... (46,232) (42,952) (44,624)
Business acquisitions, net of cash acquired. (233,689) (58,473) (42,763)
Net purchases of investment securities...... (16,753) (20,075) (6,820)
Payments to sellers of acquired businesses.. (4,723) (3,742) (2,908)
Sale of equipment and other assets.......... 4,134 2,664 2,250
Notes receivable and financial investments.. (3,593) 3,304 (12,250)
Proceeds from sale of businesses............ -- 4,526 23,255
--------- --------- ---------
Net Cash Used for Investing
Activities........................... (300,856) (114,748) (83,860)
--------- --------- ---------
Cash Flows from Financing Activities:
Long-term borrowings, net................... 888,528 123,732 96,067
Payment of borrowings and other obligations. (160,155) (82,857) (85,945)
Purchase of ServiceMaster shares............ (657,191) (76,556) (58,500)
Distributions to shareholders and
shareholders' trust........................ (155,883) (146,520) (127,070)
Proceeds from employee share option plans... 6,526 6,835 3,183
Distributions to holders of minority
interests.................................. (542) (3,074) (32,794)
Other....................................... 551 698 274
--------- --------- ---------
Net Cash Used for Financing
Activities........................... (78,166) (177,742) (204,785)
--------- --------- ---------
Cash Increase (Decrease) During the Year...... (7,133) 48,896 8,780
--------- --------- ---------
Cash and Cash Equivalents at December 31...... $ 64,876 $ 72,009 $ 23,113
========= ========= =========
</TABLE>
See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statements.
F-7
<PAGE>
THE SERVICEMASTER COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CORPORATE EQUITY
--------------------------
ADDITIONAL LIMITED
COMMON PAID-IN RETAINED PARTNERS' TREASURY RESTRICTED TOTAL
STOCK CAPITAL EARNINGS EQUITY SHARES SHARES EQUITY
------ ---------- -------- --------- -------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $ -- $ -- $ -- $ 364,673 $(48,497) $(8,910) $ 307,266
Net income 1995......... -- -- -- 172,019 -- -- 172,019
Shareholder
distributions.......... -- -- -- (127,070) -- -- (127,070)
Shares issued under
option, subscription,
and grant plans and
other (435 shares)..... -- -- -- 13,965 2,431 1,361 17,757
Treasury shares
purchased and related
costs (4,883 shares)... -- -- -- -- (58,500) -- (58,500)
Shares issued for the
acquisition of Consumer
Services minority
interest (40,741
shares)................ -- -- -- 265,227 91,161 -- 356,388
Shares issued for the
acquisition of the
TruGreen-ChemLawn
minority interest
(6,354 shares) and
other acquisitions..... -- -- -- 78,800 -- -- 78,800
------ -------- ------- --------- -------- ------- ---------
Balance, December 31,
1995................... $ -- $ -- $ -- $ 767,614 $(13,405) $(7,549) $ 746,660
Net income 1996......... -- -- -- 245,140 -- -- 245,140
Shareholder
distributions.......... -- -- -- (146,520) -- -- (146,520)
Shares issued under
option, subscription,
and grant plans and
other (2,453 shares)... -- -- -- (6,713) 2,506 1,691 (2,516)
Treasury shares
purchased and related
costs (5,157 shares)... -- -- -- -- (76,556) -- (76,556)
Shares issued for
acquisitions........... -- -- -- 3,104 27,455 -- 30,559
------ -------- ------- --------- -------- ------- ---------
Balance, December 31,
1996................... $ -- $ -- $ -- $ 862,625 $(60,000) $(5,858) $ 796,767
Net income 1997......... -- -- 65,000 264,076 -- -- 329,076
Shareholder
distributions.......... -- -- -- (155,883) -- -- (155,883)
Shares issued under
option, debentures, and
grant plans (4,319
shares) and other...... -- -- -- 20,151 3,511 1,588 25,250
Treasury shares
repurchased from WMX
(40,741 shares)........ -- -- -- (625,978) -- -- (625,978)
Treasury shares
purchased and related
costs (1,347 shares)... -- -- -- -- (31,213) -- (31,213)
Shares issued for the
acquisition of Barefoot
Inc. (8,614 shares) and
other acquisitions..... -- -- -- 156,299 30,120 -- 186,419
Conversion to corporate
form................... 1,866 519,424 -- (521,290) -- -- --
------ -------- ------- --------- -------- ------- ---------
Balance, December 31,
1997................... $1,866 $519,424 $65,000 $ -- $(57,582) $(4,270) $ 524,438
====== ======== ======= ========= ======== ======= =========
</TABLE>
- --------
All share data reflect the three-for-two share splits in June 1997 and June
1996.
See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statements.
F-8
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS UNIT REPORTING
The business of the Company is conducted through the ServiceMaster Consumer
Services, ServiceMaster Management Services, and New Business Development and
Parent operating units. The Consumer Services unit provides a variety of
specialty services to residential and commercial customers. The Management
Services unit provides a variety of supportive management services to health
care, education and commercial accounts. Included in this segment for all
periods is ServiceMaster Diversified Health Services, which provides
management services and other products and services to the long-term care
industry and had previously been reported in the New Business Development and
Parent unit. The New Business Development and Parent unit includes the newly
established ServiceMaster Employer Services, which has been grouped with
Parent due to the developmental status of this business. The Employer Services
unit provides clients with administrative processing of payroll, workers'
compensation insurance, health insurance, unemployment insurance and other
employee benefit plans. The International operations of the enterprise, which
had previously been reported in the New Business Development and Parent
operating unit, are now reflected within the Consumer Services and Management
Services operating units for all periods.
Information regarding the accounting policies used by the Company is
described in the Summary of Significant Accounting Policies. Operating
expenses of the business units consist primarily of direct costs and a royalty
payable to Parent based on the revenues or profits of the business unit.
Identifiable assets are those used in carrying out the operations of the
business unit and include intangible assets directly related to its
operations. The Company's headquarters facility and other investments are
included in the identifiable assets of New Business Development and Parent.
F-9
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following information is presented on a pro forma basis as if the
Company had been a taxable corporation in all years and corporate taxes have
been allocated to the segments. The 1996 and 1995 information reflects changes
made during the year to the royalty and interest expense allocation
methodology between Management Services and Parent. The consolidated results
were unaffected by these changes.
<TABLE>
<CAPTION>
NEW
BUSINESS
CONSUMER MANAGEMENT DEVELOPMENT
SERVICES SERVICES AND PARENT CONSOLIDATED
---------- ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997
Operating revenue............. $1,662,519 $2,113,598 $185,385 $3,961,502
---------- ---------- -------- ----------
Operating income.............. 234,714 96,067 13,152 343,933
---------- ---------- -------- ----------
Non-operating expenses........ 27,539 5,028 37,087 69,654
Income before income taxes.... 207,175 91,039 (23,935) 274,279
Corporate provision for income
taxes........................ 83,699 36,780 (9,670) 110,809
---------- ---------- -------- ----------
Pro forma corporate net
income..................... $ 123,476 $ 54,259 $(14,265) $ 163,470
========== ========== ======== ==========
Identifiable assets at
December 31, 1997............ $1,785,932 $ 420,185 $269,107 $2,475,224
Depreciation and amortization
expense...................... $ 63,261 $ 26,120 $ 3,681 $ 93,062
Capital expenditures.......... $ 19,488 $ 25,056 $ 1,688 $ 46,232
1996
Operating revenue............. $1,461,696 $1,982,687 $ 13,945 $3,458,328
---------- ---------- -------- ----------
Operating income.............. 185,895 97,264 12,059 295,218
---------- ---------- -------- ----------
Non-operating expenses........ 14,233 6,249 22,339 42,821
Income before income taxes.... 171,662 91,015 (10,280) 252,397
Corporate provision for income
taxes........................ 69,352 36,770 (4,154) 101,968
---------- ---------- -------- ----------
Pro forma corporate net
income..................... $ 102,310 $ 54,245 $ (6,126) $ 150,429
========== ========== ======== ==========
Identifiable assets at
December 31, 1996............ $1,394,177 $ 357,882 $ 94,782 $1,846,841
Depreciation and amortization
expense...................... $ 52,446 $ 23,855 $ 2,705 $ 79,006
Capital expenditures.......... $ 19,915 $ 21,676 $ 1,361 $ 42,952
1995
Operating revenue............. $1,289,835 $1,885,926 $ 26,743 $3,202,504
---------- ---------- -------- ----------
Operating income.............. 155,098 85,390 11,379 251,867
---------- ---------- -------- ----------
Non-operating expenses........ 15,751 7,964 50,545 74,260
Income before income taxes.... 139,347 77,426 (39,166) 177,607
Corporate provision for income
taxes........................ 56,296 31,280 (15,823) 71,753
---------- ---------- -------- ----------
Pro forma corporate net
income..................... $ 83,051 $ 46,146 $(23,343) $ 105,854
========== ========== ======== ==========
Identifiable assets at
December 31, 1995............ $1,239,599 $ 340,194 $ 70,097 $1,649,890
Depreciation and amortization
expense...................... $ 42,205 $ 21,492 $ 2,291 $ 65,988
Capital expenditures.......... $ 18,563 $ 20,611 $ 5,450 $ 44,624
</TABLE>
REINCORPORATION
Most operations of ServiceMaster and its subsidiary partnerships had been
conducted since 1986 free of federal corporate income tax. The Internal
Revenue Code would have imposed federal corporate tax on ServiceMaster's
operations beginning in 1998. In January 1992, in anticipation of this
F-10
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
change, the Partnership's shareholders approved a tax-free plan of
reorganization to return to corporate form.
The ServiceMaster Company was created as part of this plan. The
reorganization became effective December 26, 1997 and was structured as a
merger in which The ServiceMaster Company became the successor entity through
which the public now invests in ServiceMaster. (The term "the Company" or
"ServiceMaster" is used to collectively refer to the Partnership and its
successor corporation, The ServiceMaster Company.) At the time of
reincorporation each outstanding limited partnership share was converted into
one share of $0.01 par value common stock. No federal income taxes were
imposed on the shareholders of the Partnership as a result of the
reincorporation.
Pro forma information has been presented in the accompanying financial
statements in order to compare the continuing results of operations as if the
Company had been a taxable entity in 1997, 1996 and 1995. The pro forma
provision has been calculated assuming that the Company's effective tax rate
had been approximately 40 percent of pretax earnings. Management currently
estimates that the effective tax rate in the years following reincorporation
will also be approximately 40 percent. This estimate may differ from the
actual effective tax rate following reincorporation due to changes in
circumstances, statutory tax rates, acquisitions, etc.
Prior to December 26, 1997, The ServiceMaster Limited Partnership held as
its only asset a 99 percent interest in the profits, losses, and distributions
of The ServiceMaster Company Limited Partnership, which through subsidiaries
owned and operated the ServiceMaster business. The Managing General Partner
was ServiceMaster Management Corporation, which held a one percent interest in
the income of both Partnerships. As a result of the reorganization, The
ServiceMaster Company owns all of the general and limited partnership
interests in the Partnership. No payment or equity issuance was made to the
Managing General Partner in connection with the reorganization except for the
pay out of any income allocated to its capital account prior to
reincorporation.
INCOME TAXES
Prior to reincorporation, the Partnership (a publicly-traded partnership for
federal and state income tax purposes) was not directly subject to income
taxes. Since December 31, 1986 most of ServiceMaster's income or loss was
allocated directly to its partners. However, the Partnership had certain
subsidiaries which operated in corporate form, including American Home Shield,
its home health care businesses, and certain international operations. These
corporate form subsidiaries were subject to normal federal and state corporate
income taxes. Additionally, several of the Partnership's subsidiaries were
subject to state partnership business taxes and foreign business and income
tax payments which account for a significant portion of the provision for
income taxes that was previously reflected in the Partnership's consolidated
income statement.
As a result of the reincorporating merger, the Company recognized a step-up
in the tax basis of certain assets, that will be amortized against the taxable
income of the surviving enterprise in future years. As the reincorporation was
structured as a merger of affiliated entities, it did not have an impact on
the "book basis" of ServiceMaster's assets which are reflected in the
accompanying audited financial statements. As a result of the reincorporation,
the Company recorded deferred tax assets that represent the difference between
the book and tax basis of the enterprise. This resulted in the recognition of
deferred tax assets on the balance sheet and a corresponding $65 million gain
in the tax benefit line of the income statement. The actual benefit to the
Company of the basis step-up significantly exceeds the amount of the gain and
is expected to result in a reduction of cash tax payments exceeding $25
million per annum for 15 years.
F-11
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The pro forma provision for income taxes estimated at 40 percent differed
from the amounts computed by applying the U.S. federal tax rate of 35 percent
to pretax earnings primarily as a result of state income taxes, net of the
federal tax benefit.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. Management believes that,
based upon its lengthy and consistent history of profitable operations, it is
probable that the net deferred tax assets will be realized on future tax
returns, primarily from the generation of future taxable income. The Company's
deferred taxes include the deferred taxes created upon the conversion to
corporate form as well as the deferred taxes of the Company's subsidiaries
which already operated in corporate form prior to the Company's conversion.
Significant components of the Company's deferred tax assets at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Deferred tax assets:
Current:
Accounts receivable allowance.......................... $12,000
Accrued expenses....................................... 21,500
Long-Term:
Long-term assets....................................... 5,000
Insurance expenses..................................... 33,100
-------
Net deferred tax assets.................................... $71,600
=======
</TABLE>
ACQUISITIONS AND SALES
Acquisitions have been accounted for using the purchase method, and
accordingly, the results of operations of the acquired businesses have been
included in the Company's consolidated financial statements since their dates
of acquisition. The assets and liabilities of these businesses were recorded
in the financial statements at their estimated fair market values as of the
acquisition dates.
On February 24, 1997, the Company acquired Barefoot Inc., the second largest
professional residential lawn care services company in the United States. The
Company paid approximately $237 million by issuing 8.6 million shares and
paying $91 million in cash in exchange for all of the Barefoot stock. The
excess of the consideration paid over the fair value of the Barefoot business
of $254 million was recorded as goodwill which is being amortized on a
straight-line basis over 40 years.
On December 31, 1995, ServiceMaster completed a transaction with Waste
Management Inc. (WMX) in which WMX contributed its 27.76 percent interest in
Consumer Services to ServiceMaster and, in exchange, the Partnership issued
approximately 40.7 million unregistered shares and an option to purchase
approximately 2.8 million additional shares. This transaction represented a
negotiated acceleration of a conversion right previously held by WMX that was
first exercisable beginning in 1996. The unregistered shares and the option
included a number of voting and trading restrictions, including significant
limitations on open market sales, with the Company retaining a right of first
refusal. The shares issued to WMX were valued based upon the average market
price of unrestricted Company shares at the time the transaction was agreed to
and announced, adjusted to reflect the significant voting and trading
restrictions on the shares and other considerations. The valuation of these
shares issued to WMX was determined in part based on a review performed by an
international investment banking firm. The transaction generated approximately
$239 million of intangible assets, primarily trade names and goodwill, which
are being amortized on a straight-line basis over 40 years.
F-12
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On April 1, 1997, the Partnership completed the repurchase of all the
restricted shares and the option issued to WMX for $626 million.
The following schedule represents the unaudited pro forma consolidated
results of operations (after reincorporation tax adjustments) as if the
Barefoot acquisition and the WMX share repurchase had taken place at the
beginning of each period indicated:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Operating revenue................................... $3,962,729 $3,562,242
Operating income.................................... $ 342,282 $ 320,479
Net income.......................................... $ 153,295 $ 132,680
Basic EPS........................................... $ 0.84 $ 0.74
Diluted EPS......................................... $ 0.81 $ 0.71
</TABLE>
During 1997, the Company made several smaller acquisitions which included
Certified Systems, Inc., one of the nation's largest professional employer
organizations, Orkin's lawn care and plantscaping division and several other
lawn care and pest control businesses. The Company also purchased the minority
interests of Management and Diversified Health Services for a combination of
cash and Company shares, totaling approximately $25 million. The aggregate
fair market value of the assets acquired less liabilities assumed for these
smaller acquisitions was $196 million, including approximately $267 million of
intangible assets, primarily goodwill.
During 1996, the Company acquired Premier, a provider of management services
to the automotive industry, and several other smaller companies, predominately
pest control, lawn care and pharmacy management businesses. The aggregate fair
value of assets acquired less liabilities assumed was $91 million, including
approximately $96 million of intangible assets which are being amortized on a
straight-line basis over 40 years.
In January 1995, Consumer Services acquired the 15 percent minority interest
in TruGreen-ChemLawn in exchange for Partnership shares valued at $71 million.
This consideration represented 6.4 million shares valued at the quoted market
price of the shares at the time of the transaction. In February 1995, the
Company sold 80 percent of the Education Food Service business to DAKA
International, Inc. for $20 million. The gain realized on the sale was not
material to the overall results for the year.
Supplemental cash flow information regarding the Company's acquisitions is
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Fair value of assets acquired............ $ 590,600 $134,377 $ 502,430
Less liabilities assumed................. (157,741) (43,781) (24,246)
--------- -------- ---------
Net assets acquired...................... 432,859 90,596 478,184
Less shares issued....................... (186,419) (30,559) (435,188)
Less cash acquired....................... (12,751) (1,564) (233)
--------- -------- ---------
Business acquisitions, net of cash
acquired................................ $ 233,689 $ 58,473 $ 42,763
========= ======== =========
</TABLE>
F-13
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LONG-TERM DEBT
Long-term debt includes the following:
<TABLE>
<CAPTION>
1997 1996
---------- --------
(IN THOUSANDS,
EXCEPT
PER SHARE DATA)
<S> <C> <C>
Notes Payable:
6.65%, maturing in 2002-
2004..................... $ 70,000 $ 70,000
8.38%, maturing in 1998-
2001..................... 40,000 50,000
10.57%, maturing in 1998-
2000..................... 27,000 36,000
10.81%, maturing in 2000-
2002..................... 55,000 55,000
7.40%, maturing in 2006... 125,000 125,000
6.95%, maturing in 2007... 100,000 --
7.45%, maturing in 2027... 200,000 --
7.47%, refinanced in 1997. -- 50,000
9%, convertible at $5.74
per share................ -- 18,300
6%, subordinated,
convertible at $8.30 per
share.................... 3,581 3,581
Revolving credit
facilities............... 550,000 --
Other..................... 98,803 90,055
Less current portions..... (21,539) (15,621)
---------- --------
Total long-term debt.... $1,247,845 $482,315
========== ========
</TABLE>
The Company is party to a number of long-term debt agreements which require
it to comply with certain financial covenants, including limitations on
indebtedness, restricted payments, fixed charge coverage ratios and net worth.
The Company has been and currently is in compliance with the covenants related
to these debt agreements.
On July 28, 1997, ServiceMaster filed a Form S-3 shelf registration
statement with the Securities and Exchange Commission providing for the sale
of up to $950 million in either unsecured senior debt securities or equity
interests. On August 14, 1997 the Company successfully completed the issuance
of two tranches of debt. The first tranche, $100 million of 6.95 percent
notes, was priced to yield 6.99 percent and is due August 15, 2007. The second
tranche, $200 million of 7.45 percent notes, was priced to yield 7.47 percent
and is due August 15, 2027. Subsequent to year end, the Company completed a
$300 million dual-tranche offering of unsecured senior notes consisting of
$150 million, 7.10 percent notes due March 1, 2018 and $150 million, 7.25
percent notes due March 1, 2038. The net proceeds were used to reduce
borrowings under bank credit facilities thereby reducing the Company's
exposure to short-term interest rate fluctuations. Proceeds from future
offerings will be used for general corporate purposes, which may include
repayment of debt, repurchase of shares, acquisitions, capital expenditures
and working capital requirements. No decision has been made relating to the
potential future sale of other securities from the shelf. Any future decisions
will depend on the Company's capital needs and market conditions at the time.
In September 1996, the Company completed a $125 million private placement of
debt at an overall interest rate of 7.40 percent. Proceeds were used to pay
down the bank revolving credit facility.
The Company has a $1 billion multi-currency revolving credit agreement,
dated April 1, 1997, which includes a 364-day revolving credit facility of
$250 million with a five-year revolving credit facility of $750 million and a
one-year term loan option (two-year total term). The line of credit may be
used for general Company purposes. The revolving credit facility had $450
million of unused commitment as of December 31, 1997.
F-14
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest paid was $63 million in 1997, $34 million in 1996, and $34 million
in 1995. Average rates paid on the revolving credit facilities were 5.98
percent in 1997 and 5.62 percent in 1996. Future scheduled long-term debt
payments are $19 million in 1999, $37 million in 2000, $28 million in 2001 and
$32 million in 2002. The $19 million of notes payable due in 1998 are expected
to be refinanced by the long-term revolving credit facility in 1998 and
therefore are not considered current liabilities.
Based upon the borrowing rates currently available to the Company for long-
term borrowings with similar terms and maturities, the fair value of long-term
debt is approximately $1.3 billion.
Future long-term noncancelable operating lease payments are $30.1 million in
1998, $21.7 million in 1999, $15.1 million in 2000, $8.4 million in 2001, $4.7
million in 2002, and $6.9 million thereafter. Rental expense for 1997, 1996,
and 1995 was $83.9 million, $74.8 million, and $65.4 million, respectively.
EMPLOYEE BENEFIT PLANS
Contributions to qualified profit sharing plans were made in the amount of
$8.2 million in 1997, $6.9 million in 1996, and $6.2 million in 1995. Under
the Employee Share Purchase Plan, the Company contributed $1.1 million in
1997, $1.0 million in 1996, and $0.8 million in 1995. These funds defrayed
part of the cost of the shares purchased by employees.
CASH AND MARKETABLE SECURITIES
Marketable securities held at December 31, 1997 and 1996, with a maturity 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.
Marketable securities available for current operations are classified as
current assets while securities held for noncurrent uses are classified as
long-term. The Company's investments consist primarily of publicly-traded debt
and common equity securities. As of December 31, 1997, the aggregate market
value of the Company's short- and long-term investments in equity securities
was $87 million and the aggregate cost basis was $73 million. There has been
no material participation in derivative trading securities in 1997 or 1996.
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. Gross gains and losses on such sales were not material in 1997, 1996
or 1995.
Interest and dividend income received on cash and marketable securities was
$8.3 million, $8.0 million, and $6.8 million in 1997, 1996, and 1995,
respectively.
SHAREHOLDERS' EQUITY
The Company has authorized one billion shares of common stock with a par
value of $.01 and 11 million shares of preferred stock. There were no shares
of preferred stock issued or outstanding. In December 1997, ServiceMaster
converted from a publicly traded limited partnership to a corporation. At the
time of reincorporation, each outstanding limited partnership share was
converted into one share of common stock on a tax-free basis to the
shareholders. Upon reincorporation, all Limited Partners' equity was
transferred to common stock and additional paid-in capital. Earnings after the
reincorporation reflect only the tax benefit attributable to the conversion,
all other earnings for the year have been included in Limited Partners'
equity. The shares underlying the obligations and rights relating to the
employee option plans were also converted from partnership shares to corporate
stock on a one-for-one basis.
F-15
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1997, the Company filed a $950 million shelf registration statement with
the Securities and Exchange Commission for the sale of unsecured senior debt
securities and equity interests. No decision has been made relating to the
potential sale of equity securities from the shelf. Any future decision
regarding the sale of securities from the shelf will depend on the Company's
capital needs and market conditions at the time. On April 1, 1997, the Company
bought WMX's entire ownership interest in ServiceMaster for approximately $626
million. This transaction resulted in the Company acquiring the 40.7 million
Company shares held by WMX and canceling WMX's option to purchase an
additional 2.8 million Company shares.
As of December 31, 1997 there were 10,464,000 Company shares available for
issuance upon the exercise of employee options outstanding and future grants.
Share options are issued at a price not less than the fair market value on the
grant date and expire within ten years of the grant date. Certain options may
permit the holder to pay the option exercise price by tendering Company shares
that have been owned by the holder without restriction for an extended period.
Share grants carry a vesting period and are restricted as to the sale or
transfer of the shares.
The Company accounts for employee share options under Accounting Principles
Board Opinion 25, as permitted under generally accepted accounting principles.
Accordingly, no compensation cost has been recognized in the accompanying
financial statements related to these options. Had compensation cost for these
plans been determined consistent with Statement of Financial Accounting
Standards No. 123 (SFAS 123), which is an accounting alternative that is
permitted but not required, pro forma net income and net income per share
would reflect the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net Income:
As reported (1)......................................... $163,470 $150,429
SFAS 123 pro forma...................................... $160,966 $149,480
Net Income Per Share:
Basic
As reported (1)........................................$. 0.86 $ 0.71
SFAS 123 pro forma.................................... $ 0.84 $ 0.71
Diluted
As reported (1)........................................$. 0.82 $ 0.69
SFAS 123 pro forma.................................... $ 0.81 $ 0.68
</TABLE>
- --------
(1) Corporate form
The SFAS 123 pro forma net income reflects options granted in 1997 and 1996.
Since SFAS 123 does not apply to options granted prior to 1995, the pro forma
disclosure is not likely to be indicative of pro forma results which may be
expected in future years. This primarily relates to the fact that options vest
over several years and pro forma compensation cost is recognized as the
options vest. In addition, awards may have been granted in earlier years which
would have resulted in pro forma compensation cost in 1997.
The fair value of each option is estimated on the date of grant based on the
Black-Scholes option pricing model with the following weighted-average
assumptions in 1997 and 1996: a risk-free interest rate of 6.3 percent and 5.6
percent, respectively; a volatility rate of 21 percent and 27 percent,
respectively; a 3.2 percent distribution yield in both years; and an average
expected life of 7 years. The options granted to employees in 1997 and 1996
have a weighted-average fair value of $4.22 and
F-16
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$3.60, respectively and vest ratably over five years. The Company has
estimated the value of these options assuming a single weighted-average
expected life for the entire award.
A summary of option and grant transactions during the last three years is
summarized below:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARE EXERCISE SHARE
OPTIONS PRICE RANGE PRICE GRANTS PRICE RANGE
---------- ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Total exercisable and
outstanding
December 31, 1994...... 10,565,946 $ 1.09-11.45 $ 8.22 1,821,977 $ 4.30-11.33
Transactions during
1995:
Granted to employees... -- -- -- 14,625 $10.17-11.95
Issued to WMX.......... 2,812,500 $ 14.67 $14.67 -- --
Exercised, paid, or
vested................ (936,002) $ 1.09-11.45 $ 6.03 (317,786) $ 4.30-11.95
Terminated or resigned. (274,170) $ 1.97-11.45 $ 5.67 (48,324) $ 4.45- 4.57
Total exercisable,
December 31, 1995...... 9,355,774 $ 1.09-11.45 $ 8.19 -- --
Total outstanding,
December 31, 1995...... 12,168,274 $ 1.09-14.67 $ 9.69 1,470,492 $ 4.30-11.95
Transactions during
1996:
Granted to employees... 2,769,750 $13.89-16.17 $14.11 -- --
Exercised, paid, or
vested................ (3,647,097) $ 1.09-11.45 $ 8.33 (265,998) $ 4.30-11.95
Terminated or resigned. (240,183) $ 4.19-11.45 $ 5.83 -- --
Total exercisable,
December 31, 1996...... 5,468,494 $ 1.09-11.45 $ 8.24 -- --
Total outstanding,
December 31, 1996...... 11,050,744 $ 1.09-16.17 $11.35 1,204,494 $ 4.30-11.95
Transactions during
1997:
Granted to employees... 3,530,523 $16.84-27.63 $17.43 -- --
Exercised, paid, or
vested................ (1,261,356) $ 3.26-13.89 $ 7.75 (286,973) $ 4.30-11.95
Cancelled, related to
WMX................... (2,812,500) $ 14.67 $14.67 -- --
Terminated or resigned. (293,973) $ 2.96-16.83 $10.67 (80,117) $ 4.30-11.95
Total exercisable,
December 31, 1997...... 4,613,145 $ 1.09-16.17 $ 9.08 -- --
Total outstanding,
December 31, 1997...... 10,213,438 $ 1.09-27.63 $12.98 837,404 $ 4.30-11.95
</TABLE>
OPTIONS OUTSTANDING AT DECEMBER 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
RANGE OF NUMBER AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
- ------------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.09-$ 7.70 1,747,859 5.5 years $ 5.52 1,747,859 $ 5.52
$ 9.67-$14.67 4,696,706 8.5 years $12.25 2,812,786 $11.15
$16.17-$27.63 3,768,873 9.0 years $17.34 52,500 $16.17
- ------------- ---------- --------- ------ --------- ------
$ 1.09-$27.63 10,213,438 8.0 years $12.98 4,613,145 $ 9.08
============= ========== ========= ====== ========= ======
</TABLE>
EARNINGS PER SHARE
The Company adopted the Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," which requires the dual presentation of basic and
diluted earnings per share. Basic earnings per share replaces the previously
required presentation of primary earnings per share. The difference between
primary and basic earnings per share is that basic earnings per share includes
no dilution from options, debentures or other financial instruments and is
computed by dividing income available to common stockholders by the weighted
average number of shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of convertible securities and options to
purchase common stock. Diluted earnings per share is comparable to the
previously reported fully diluted earnings per share.
F-17
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following chart reconciles both the numerator and the denominator of the
basic earnings per share computation to the numerator and the denominator of
the diluted earnings per share computation on a pro forma basis. The
reconciling items would be identical for actual earnings per share purposes.
<TABLE>
<CAPTION>
FOR YEAR ENDED 1997 FOR YEAR ENDED 1996 FOR YEAR ENDED 1995
---------------------- ---------------------- ----------------------
INCOME SHARES EPS INCOME SHARES EPS INCOME SHARES EPS
-------- ------- ----- -------- ------- ----- -------- ------- -----
(IN THOUSANDS, EXEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pro forma Basic EPS..... $163,470 190,629 $0.86 $150,429 211,587 $0.71 $105,854 173,588 $0.61
Effect of Dilutive
Securities, net of tax
Options................ 5,556 5,072 4,866
9% convertible
debenture............. 986 3,143 986 3,195 1,002 3,249
6% convertible
debenture............. 128 432 129 432 129 432
-------- ------- ----- -------- ------- ----- -------- ------- -----
Pro forma Diluted EPS... $164,584 199,760 $0.82 $151,544 220,286 $0.69 $106,985 182,135 $0.59
======== ======= ===== ======== ======= ===== ======== ======= =====
</TABLE>
QUARTERLY OPERATING RESULTS
Quarterly operating results and related growth for the last three years in
revenues, gross profit, net income, pro forma net income and pro forma basic
and diluted net income per share are shown in the table below. For interim
accounting purposes, certain costs directly associated with the generation of
lawn care revenues are initially deferred and recognized as expense as the
related revenues are recognized. Full year results are not affected.
Certain amounts from prior periods have been reclassified to conform with
the current presentation.
<TABLE>
<CAPTION>
PERCENT PERCENT
INCREASE INCREASE
1997 '97-'96 1996 '96-'95 1995
---------- -------- ---------- -------- ----------
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Operating Revenue:
First Quarter........... $ 817,136 10% $ 740,299 5% $ 707,764
Second Quarter.......... 1,010,794 10 916,931 8 852,791
Third Quarter........... 1,090,114 18 927,227 9 854,383
Fourth Quarter.......... 1,043,458 19 873,871 11 787,566
---------- --- ---------- --- ----------
$3,961,502 15% $3,458,328 8% $3,202,504
Gross Profit:
First Quarter........... $ 159,991 13% $ 142,116 6% $ 133,458
Second Quarter.......... 257,260 16 221,505 10 200,728
Third Quarter........... 257,449 17 219,127 10 199,684
Fourth Quarter.......... 228,642 18 194,572 15 168,934
---------- --- ---------- --- ----------
$ 903,342 16% $ 777,320 11% $ 702,804
Net Income:
First Quarter........... $ 46,860 16% $ 40,513 40% $ 28,880
Second Quarter.......... 75,707 6 71,264 42 50,160
Third Quarter........... 75,759 10 68,800 44 47,750
Fourth Quarter.......... 130,750 NA 64,563 43 45,229
---------- --- ---------- --- ----------
$ 329,076 34% $ 245,140 43% $ 172,019
</TABLE>
F-18
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PERCENT PERCENT
INCREASE INCREASE
1997 '97-'96 1996 '96-'95 1995
------------ -------- ------------ -------- ------------
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Pro forma Corporate Net
Income:
First Quarter......... $ 28,982 15% $ 25,188 44% $ 17,494
Second Quarter........ 46,707 8 43,326 41 30,655
Third Quarter......... 46,793 11 42,262 43 29,587
Fourth Quarter........ 40,988 3 39,653 41 28,118
------------ --- ------------ --- ------------
$ 163,470 9% $ 150,429 42% $ 105,854
Pro forma Basic Net
Income Per Share:
First Quarter......... $ 0.13 8% $ 0.12 20% $ 0.10
Second Quarter........ 0.26 24 0.21 17 0.18
Third Quarter......... 0.26 30 0.20 18 0.17
Fourth Quarter........ 0.22 16 0.19 19 0.16
------------ --- ------------ --- ------------
$ 0.86 21% $ 0.71 16% $ 0.61
Pro forma Diluted Net
Income Per Share:
First Quarter......... $ 0.13 8% $ 0.12 20% $ 0.10
Second Quarter........ 0.25 25 0.20 18 0.17
Third Quarter......... 0.25 32 0.19 19 0.16
Fourth Quarter........ 0.21 17 0.18 13 0.16
------------ --- ------------ --- ------------
$ 0.82 19% $ 0.69 17% $ 0.59
Cash Distributions Per
Share:
First Quarter......... $ 0.11 1/3 6% $ 0.10 2/3 7% $ 0.10
Second Quarter........ 0.11 1/3 6 0.10 2/3 0 0.10 2/3
Third Quarter......... 0.12 6 0.11 1/3 6 0.10 2/3
Fourth Quarter........ 0.12 6 0.11 1/3 6 0.10 2/3
------------ --- ------------ --- ------------
$ 0.46 2/3 6% $ 0.44 5% $ 0.42
Price Per Share:
First Quarter......... $18.50-16.38 $14.89-12.92 $11.11- 9.56
Second Quarter........ 23.88-18.13 15.67-13.75 12.11-10.50
Third Quarter......... 29.50-22.75 16.50-14.33 12.83-11.78
Fourth Quarter........ 29.25-21.00 17.75-15.83 13.50-12.28
</TABLE>
- --------
All share and per share data reflect the three-for-two share splits in June
1997 and June 1996.
F-19
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
underwriters named below (the "U.S. Underwriters"), and each of such U.S.
Underwriters, for whom Goldman, Sachs & Co., Credit Suisse First Boston
Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan
Stanley & Co. Incorporated are acting as representatives, has severally agreed
to purchase from the Company and the Selling Stockholders, the respective
number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co. .........................................
Credit Suisse First Boston Corporation........................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................................
Morgan Stanley & Co. Incorporated.............................
---------
Total..................................................... 9,010,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the public offering price set forth on the cover
page of this Prospectus and in part to certain securities dealers at such
price less a concession of $ per share. The U.S. Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share
to certain brokers and dealers. After the shares of Common Stock are released
for sale to the public, the offering price and other selling terms may from
time to time be varied by the representatives.
The Company and the Selling Stockholders have entered into the International
Underwriting Agreement with the underwriters of the international offering
(the "International Underwriters" and, collectively with the U.S.
Underwriters, the "Underwriters") providing for the concurrent offer and sale
of 1,590,000 shares of Common Stock in an offering outside the United States.
The offering price and aggregate underwriting discounts and commissions per
share for the two offerings are identical. The closing of the offering made
hereby is a condition to the closing of the international offering, and vice
versa. The representatives of the International Underwriters are Goldman Sachs
International, Credit Suisse First Boston (Europe) Limited, Merrill Lynch
International and Morgan Stanley & Co. International Limited.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of
the U.S. Underwriters named herein has agreed that, as a part of the
distribution of the shares offered hereby and subject to certain exceptions,
it will offer, sell or deliver the shares of Common Stock, directly or
indirectly, only in the United States of America (including the States and the
District of Columbia), its territories, its possessions and other areas
subject to its jurisdiction (the "United States") and to U.S. persons, which
term shall mean, for purposes of this paragraph: (a) any individual who is a
resident of the United States or (b) any corporation, partnership or other
entity organized in or under the laws of the United States or any political
subdivision thereof and whose office most directly involved with the purchase
is located in the United States. Each of the International Underwriters has
agreed pursuant to the Agreement Between that, as a part of the distribution
of the shares offered as a part of the international offering, and subject to
certain exceptions, it will (i) not, directly or indirectly, offer, sell or
deliver shares of Common Stock (a) in the United States or to any U.S. persons
or (b) to any person who it believes intends to reoffer, resell or deliver the
shares in the United States or to any U.S. persons, and (ii) cause any dealer
to whom it may sell such shares at any concession to agree to observe a
similar restriction.
U-1
<PAGE>
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall
be the public offering price, less an amount not greater than the selling
concession.
Certain of the Selling Stockholders have granted the U.S. Underwriters an
option exercisable for 30 days after the date of this Prospectus to purchase
up to an aggregate of 1,320,765 additional shares of Common Stock solely to
cover over-allotments, if any. If the U.S. Underwriters exercise their over-
allotment option, the U.S. Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage thereof that
the number of shares to be purchased by each of them, as shown in the
foregoing table, bears to the 9,010,000 shares of Common Stock offered hereby.
Such Selling stockholders have also granted the International Underwriters a
similar option to purchase up to an aggregate of 233,076 additional shares of
Common Stock.
The Company and the Selling Stockholders have agreed that, during the period
beginning from the date of this Prospectus and continuing to and including the
date 90 days after the date of the Prospectus (the "Lock-Up Period"), they
will not offer, sell, contract to sell or otherwise dispose of any securities
of the Company (other than pursuant to stock incentive plans existing, or on
the conversion or exchange of convertible or exchangeable securities
outstanding, on the date of this Prospectus) which are substantially similar
to the shares of Common Stock or which are convertible into or exchangeable
for securities which are substantially similar to the shares of Common Stock
without the prior written consent of Goldman, Sachs & Co., except for the
shares of Common Stock offered in connection with the concurrent U.S. and
international offerings or shares of Common Stock that may be issued by the
Company in connection with acquisitions provided that the issued shares either
(i) do not exceed an aggregate market value of $30 million or (ii) may not be
sold by the holder thereof until after expiration of the Lock-Up Period.
In connection with the Offerings, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions, and purchases to cover syndicate short positions
created in connection with the Offerings. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of Common Stock than they are
required to purchase from the Company in the Offerings. The Underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the securities sold in the
offering for their account may be reclaimed by the syndicate if such Common
Stock is repurchased by the syndicate in stabilizing or covering transactions.
These activities may stabilize, maintain or otherwise affect the market price
of the Common Stock, which may be higher than the price that might otherwise
prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on the NYSE, in
the over-the-counter market or otherwise.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
This Prospectus may be used by Underwriters and dealers in connection with
offers and sales of the Common Stock, including shares initially sold in the
international offering, to persons located in the United States.
Lord Griffiths of Fforestfach, a director of the Company, is currently an
international adviser to Goldman, Sachs & Co.
U-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 3
Incorporation of Certain Documents by Reference........................... 3
Summary................................................................... 4
The Reincorporation....................................................... 10
Special Note on Forward-Looking Statements................................ 10
Use of Proceeds........................................................... 11
Price Range of Common Stock and Dividend Policy........................... 12
Capitalization............................................................ 13
Selected Consolidated Financial Data...................................... 14
Management Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 22
Management................................................................ 30
Selling Stockholders...................................................... 31
Description of Capital Stock.............................................. 33
Legal Matters............................................................. 36
Experts................................................................... 36
Index to Consolidated Financial Statements................................ F-1
Underwriting.............................................................. U-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10,600,000 SHARES
THE SERVICEMASTER COMPANY
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
-----------
SERVICEMASTER(R)
LOGO
-----------
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses (other than the SEC and NYSE fees) in connection with
the issuance and distribution of the securities being registered, other than
underwriting compensation, are:
<TABLE>
<S> <C>
SEC Registration Fee............................................ $102,263
NYSE Listing Fee................................................ 8,280
Legal Fees and Expenses......................................... 125,000
Accounting Fees and Expenses.................................... 75,000
Blue Sky Fees and Expenses...................................... 10,000
Printing and Engraving Fees..................................... 120,000
Miscellaneous................................................... 59,457
--------
Total....................................................... $500,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE COMPANY.
The ServiceMaster Company (the "Company") is incorporated under the laws of
the State of Delaware. Section 145 of the DGCL, inter alia ("Section 145")
provides that a Delaware corporation may indemnify any persons who were, are
or are threatened to be made, parties to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation),
by reason of the fact that such person is or was an officer, director,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best
interests and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was illegal. A Delaware
corporation may indemnify any persons who are, were or are threatened to be
made, a party to any threatened, pending or completed action or suit by or in
the right of the corporation by reason of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent
of another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit, provided
such person acted in good faith and in a manner he reasonably believed to be
in or not opposed to the corporation's best interests, provided that no
indemnification is permitted without judicial approval if the officer,
director, employee or agent is adjudged to be liable to the corporation. Where
an officer, director, employee or agent is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses that such officer or director has actually
and reasonably incurred.
Article Ten of the Restated Certificate ("Article Ten") provides that no
person shall have any liability of any kind by reason of a Relevant Loss
(defined below) caused in whole or in part by any act or failure to act which
occurred while such person was an officer or director of the Company except:
(i) obligations arising under the express terms of any written contract to
which such person is a party;
II-1
<PAGE>
(ii) the obligation to return to the Company an amount up to the value
actually realized by such person by stealing or by any other action which
constitutes a criminal felony; (iii) any liability imposed by contract or
applicable law which is founded on, arises from or is related to activities by
such person (or such person's agents or affiliates) which are in competition
with any business of the Company or any of its affiliates; and (iv) any other
liability from which it shall not be possible to exempt such person under
applicable law either as constituted on the date on which the Restated
Certificate was filed with the Secretary of State of Delaware (the "Filing
Date") or at any time thereafter. The term "Relevant Loss" designates and
includes any loss, damage or expense of any kind (i) experienced for any
reason by the Company or by any entity controlled by the Company; (ii) which
any person may experience by reason of any purchase (or failure to purchase),
maintenance of an interest in, sale (or failure to sell) or failure to obtain
payment of any amount due on any note, debenture, preferred stock, common
stock or other security issued or issuable by the Company or (iii) which shall
otherwise be caused in whole or in part by or arise in connection with (or
would not have occurred but for) such person's service as a director or
officer of the Company. In addition, Article Ten provides that every director
of the Company shall be exempt (except to the extent expressly set forth
therein) from any personal liability to the Company or any of the Company's
stockholders for monetary damages for breach of fiduciary duty as a director
to the fullest extent permitted by (i) Section 102(b)(7) of the DGCL as
constituted on the Filing Date or (ii) any provision of the law of the State
of Delaware as constituted at any time after the December 11, 1991.
Except as otherwise provided in the Restated Certificate, Article Eleven of
the Restated Certificate ("Article Eleven") provides that the Company shall
indemnify any person against, and shall reimburse such person for any amount
which such person shall pay to satisfy, settle or otherwise deal with, any
attempt to impose any liability or obligation of any kind upon such person if
such attempt or such liability or obligation or both shall arise in connection
with or by reason of, or would not have arisen but for, Covered Service
(defined below) by such person (or any agreement by such person to serve as a
director or officer of the Company or to provide other Covered Service)
including, but not limited to: (i) any claim resulting from any loss, injury,
damage, harm or other disadvantage which the Company, any affiliate, any
employee plan or any person who acquires, holds, or disposes of any interest
in any security issued by the Company suffers or is alleged to have suffered;
(ii) any claim resulting from any act or failure to act by any person which is
(or is alleged to be) beyond the scope of his or her authority, contrary to
instructions or orders or contrary to his or her duties or applicable law; and
(iii) any attempt by any governmental authority or other person to impose any
fine or penalty or to obtain any other recovery by reason of any actual or
alleged breach of any law or other governmental requirement.
The term "Covered Service" designates and includes: (a) service as a
director or officer of the Company; (b) service by a person while he or she is
an officer or director of the Company (i) as an agent or representative of the
Company, (ii) in any other capacity with the Company, (iii) as a director,
officer, employee, agent or representative of, or in any other capacity with,
any affiliate, (iv) in any capacity with any Employee Plan (as defined
therein), and (v) in any other capacity in which such person shall have been
asked to serve by the Company's Board of Directors or Chief Executive Officer;
(c) any services which constituted "Covered Service" under the Amended and
Restated Agreement of Limited Partnership for ServiceMaster Limited
Partnership; and (d) any other service of any kind by any person with any
organization or entity of any kind (whether or not affiliated with the
Company) which shall be designated in writing as Covered Service by a majority
of the members of the Company's Board of Directors or by the Company's Chief
Executive Officer. Service is deemed to constitute "Covered Service" if it is
so designated by the terms in the preceding sentence regardless of whether it
shall have been performed prior to, at, or after the time Article Eleven
became part of the Company's Certificate of Incorporation. Any person is
entitled to rely upon any written confirmation provided by the Company's Chief
Executive Officer or by the Company's Board of Directors that service by such
person in any capacity specified in such confirmation will constitute Covered
Service and to rely upon the protection afforded by Article Eleven in
connection with such service.
II-2
<PAGE>
Except to the extent the Company shall otherwise expressly agree in writing,
the Company is not obligated under Article Eleven to reimburse any person for
or otherwise indemnify any person against: (a) any obligation the person may
have under any written contract except to the extent such obligation arises by
reason of any action taken by such person to satisfy, settle or otherwise deal
with any claim against which such person is entitled to indemnification from
the Company under Article Eleven or otherwise; (b) any income taxes payable by
reason of salary, bonus or other income or gain actually realized by such
person in connection with any Covered Service; (c) any liability imposed by
contract or applicable law which is founded on, arises from or is related to
activities by such person (or such person's agents or affiliates) which are in
competition with any business of the Company or any of its affiliates; and (d)
any obligation to pay an amount up to the value personally realized by such
person by stealing or by any other action which constitutes a criminal felony.
Except as otherwise provided in the Restated Certificate, the Company is not
obligated under Article Eleven to indemnify any person in connection with a
proceeding (or part thereof) initiated by such person unless such proceeding
(or part thereof) was authorized by the Board of Directors of the Company.
Article Eleven provides that each person who was or is made a party or is
threatened to be made a party to or is otherwise involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was a director or officer of the
Company, agreed to serve as a director or officer of the Company or is or was
providing any other Covered Service, whether the basis of such proceeding is
alleged action in an official capacity as a director or officer of the Company
or in any other Covered Service position, shall, except as otherwise provided
therein, be indemnified and held harmless by the Company to the fullest extent
authorized by Delaware law against all expense, liability and loss (including
attorneys' fees, judgments, fines, excise taxes or penalties arising under the
Employee Retirement Income Security Act as amended from time to time and
amounts paid in settlement) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a person
who has ceased to be a director or officer of the Company or to provide any
other Covered Service and shall inure to the heirs, executors and
administrators of such person.
Article Eleven provides that the Company shall reimburse any Covered Person
(as defined therein) for any payment made by such person for any legal fees or
other expenses reasonably incurred by such person in order to investigate,
evaluate, defend against, pay in full, settle or otherwise deal with (i) any
Covered Claim (as defined therein) or (ii) any development or state of facts
which could give rise to a Covered Claim.
Article Eleven also provides that any officer of the Company or any member
of its Board of Directors shall have the right and power to execute on behalf
of the Company any written contract with any other person providing
indemnification or other protection to such other person in connection with
service by such other person as a director or officer of the Company or in
connection with any other Covered Service by such person, and any such
contract shall be legal, valid and binding upon the Company and shall be
enforceable against the Company in accordance with its terms to the maximum
extent permitted by Article Eleven or by applicable law, if it shall be
approved by a majority of the members of the Company's Board of Directors
exclusive of the person to whom indemnification is provided by such contract.
The rights of any person under any particular contract made in accordance with
the provisions of the preceding sentence shall not be impaired or eliminated
(i) by reason of the fact that all or any one or more of the members of the
Board who approved such contracts shall be parties to contracts affording them
similar protection (regardless of when those other contracts shall have been
approved or signed) or shall otherwise have been provided with protection
similar to that provided in the particular contract or shall be subject to the
same claims against which the particular contract is intended to protect or
(ii) for any other reason whatsoever. It is expressly intended that each
person with whom the Company shall enter into a written contract to provide
indemnification or other protection in connection with such person's service
as an officer or director of the Company or in
II-3
<PAGE>
connection with other Covered Service by such person shall be entitled to rely
upon (and shall conclusively be presumed to have relied upon) the rights which
such contract purports to provide to such person. No separate written contract
shall however be necessary in order for any person to obtain any
indemnification or payment to which Article Eleven purports to entitle such
person, and any Covered Person who has no separate contact of any kind with
the Company shall be entitled to receive all indemnification, payments and
other benefits which the provisions in Article Eleven purport to provide to
such Covered Person.
The rights to indemnification and payment provided by Article Eleven are not
exclusive of any other right of any kind which any person may have or at any
time acquire under or by reason of any other provision in the Restated
Certificate, the Company's By-Laws, any agreement, any law or other action by
any governmental authority, or otherwise.
Article Eleven authorizes the Company to purchase and maintain insurance on
behalf of any person who is or was a director or officer of the Company, or is
or was serving in any other capacity with the Company, any Employee Plan or
any other organization against any expense, liability or loss whether or not
the Company would have the power to indemnify such person against such
expense, liability or loss under the provisions of Article Eleven, under
applicable law or otherwise.
In addition, Section 145 further authorizes a corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation or enterprise, against any liability asserted against him and
incurred by him in any such capacity, arising out of his status as such,
whether or not the corporation would otherwise have the power to indemnify him
under Section 145.
All of the Company's directors and the officers are covered by insurance
policies maintained and held in effect by the Company against certain
liabilities for actions taken in such capacities, including liabilities under
the Securities Act of 1933.
ITEM 16. EXHIBITS.
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.(1)
Amended and Restated Certificate of Incorporation of the
4.1 Company.(2)(3)
4.2 By-Laws of the Company.(2)(3)
4.3 Specimen certificate representing the Common Stock.(1)
4.4 Rights Agreement, dated as of December 15, 1997, between the
Company and Harris Trust and Savings Bank, as trustee
(including form of rights certificate).(2)(3)
4.5 Certificate of Designation, Preferences and Rights of Junior
Participating Preferred Stock, Series A.(2)(3)
5.1 Opinion of Counsel.(1)
23.1 Consent of Counsel (included in Exhibit 5.1).(1)
23.2 Consent of Arthur Andersen LLP.(1)
24.1 Power of Attorney.(3)
27.1 Financial Data Schedule.(3)(4)
</TABLE>
- --------
(1) Filed herewith.
(2) Incorporated by reference to the Company's Current Report on Form 8-K,
dated December 19, 1997.
(3) Previously filed.
(4) Incorporated by reference to the same-numbered exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
(A) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act that is
incorporated by reference in the registration statement) shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(B) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(C) The undersigned registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrants pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE COMPANY
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS PRE-EFFECTIVE
AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN DOWNERS GROVE, ILLINOIS, ON THE DAY
OF APRIL 21, 1998.
The ServiceMaster Company, As
Registrant
/s/ Vernon T. Squires
By: _________________________________
Vernon T. Squires
Senior Vice President and General
Counsel
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS PRE-
EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED ON APRIL
21, 1998 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman and Director of The ServiceMaster
___________________________________________ Company
C. William Pollard
* President, Chief Executive Officer and
___________________________________________ Director of The ServiceMaster Company
Carlos H. Cantu
* Vice Chairman and Director of The
___________________________________________ ServiceMaster Company
Charles W. Stair
* Vice Chairman and Director of The
___________________________________________ ServiceMaster Company
Phillip B. Rooney
* Director of The ServiceMaster Company
___________________________________________
Paul W. Berezny, Jr.
* Director of The ServiceMaster Company
___________________________________________
Henry O. Boswell
* Director of The ServiceMaster Company
___________________________________________
Brian Griffiths
* Director of The ServiceMaster Company
___________________________________________
Sidney E. Harris
* Director of The ServiceMaster Company
___________________________________________
Herbert P. Hess
* Director of The ServiceMaster Company
___________________________________________
Michele M. Hunt
* Director of The ServiceMaster Company
___________________________________________
Gunther H. Knoedler
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Director of The ServiceMaster Company
___________________________________________
James D. McLennan
* Director of The ServiceMaster Company
___________________________________________
Vincent C. Nelson
* Director of The ServiceMaster Company
___________________________________________
Dallen W. Peterson
* Director of The ServiceMaster Company
___________________________________________
Steven S Reinemund
* Director of The ServiceMaster Company
___________________________________________
Burton E. Sorenson
* Director of The ServiceMaster Company
___________________________________________
David K. Wessner
</TABLE>
*The undersigned, by signing his name hereto, does sign and execute this Pre-
Effective Amendment No. 1 to Registration Statement pursuant to the Powers
of Attorney executed by the above-named officers and directors of The
ServiceMaster Company and previously filed with the Securities and Exchange
Commission on behalf of such officers and directors.
/s/ Vernon T. Squires
By: _________________________________
Vernon T. Squires
Attorney-in-Fact
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
------- -------------------- ----------
<C> <S> <C>
1.1 Form of Underwriting Agreement.(1)
4.1 Amended and Restated Certificate of Incorporation of the
Company.(2)(3)
4.2 By-Laws of the Company.(2)(3)
4.3 Specimen certificate representing the Common Stock.(1)
4.4 Rights Agreement, dated as of December 15, 1997, between
the Company and Harris Trust and Savings Bank, as trustee
(including form of rights certificate).(2)(3)
4.5 Certificate of Designation, Preferences and Rights of
Junior Participating Preferred Stock, Series A.(2)(3)
5.1 Opinion of Counsel.(1)
23.1 Consent of Counsel (included in Exhibit 5.1).(1)
23.2 Consent of Arthur Andersen LLP.(1)
24.1 Power of Attorney.(3)
27.1 Financial Data Schedule.(3)(4)
</TABLE>
- --------
(1) Filed herewith.
(2) Incorporated by reference to the Company's Current Report on Form 8-K,
dated December 19, 1997.
(3) Previously filed.
(4) Incorporated by reference to the same-numbered exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
<PAGE>
EXHIBIT 1.1
The ServiceMaster Company
Common Stock
(par value $.01 per share)
-------------------
Underwriting Agreement
(U.S. Version)
-------------------
_______________, 1998
Goldman, Sachs & Co.,
Credit Suisse First Boston Corporation
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Morgan Stanley & Co. Incorporated
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
The ServiceMaster Company, a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of 6,460,000 shares of common stock (par value $.01 per share) ("Stock") of the
Company and the shareholders of the Company named in Schedule II hereto (the
"Selling Shareholders") propose, subject to the terms and conditions stated
herein, to sell to the Underwriters an aggregate of 2,550,000 shares and, at the
election of the Underwriters, up to 1,320,765 additional shares of Stock. The
aggregate of 9,010,000 shares to be sold by the Company and the Selling
Shareholders is herein called the "Firm Shares" and the aggregate of 1,320,765
additional shares to be sold by the Selling Shareholders is herein called the
"Optional Shares". The Firm Shares and the Optional Shares that the Underwriters
elect to purchase pursuant to Section 2 hereof are herein collectively called
the "Shares".
1
<PAGE>
It is understood and agreed to by all parties that the Company and the
Selling Shareholders are concurrently entered into an agreement (the
"International Underwriting Agreement") providing for the sale by the Company
and the Selling Shareholders of up to a total of 1,823,076 shares of Stock (the
"International Shares"), including the overallotment option thereunder, through
arrangements with certain underwriters outside the United States (the
"International Underwriters"), for whom Goldman Sachs International and Credit
Suisse First Boston (Europe) Limited, Merrill Lynch International and Morgan
Stanley & Co. International Limited acting as lead managers. Anything herein or
therein to the contrary notwithstanding, the respective closings under this
Agreement and the International Underwriting Agreement are hereby expressly made
conditional on one another. The Underwriters hereunder and the International
Underwriters are simultaneously entering into an Agreement between U.S. and
International Underwriting syndicates (the "Agreement between Syndicates") which
provides, among other things, for the transfer of shares of Stock between the
two syndicates. Two forms of prospectus are to be used in connection with the
offering and sale of shares of Stock contemplated by the foregoing, one relating
to the Shares hereunder and the other relating to the International Shares. The
latter form of prospectus will be identical to the former except for certain
substitute pages as included in the registration statement and amendments
thereto as mentioned below. Except as used in Sections 2, 3, 4, 9 and 11 herein,
and except as the context may otherwise require, references hereinafter to the
Shares shall include all the shares of stock which may be sold pursuant to
either this Agreement or the International Underwriting Agreement, and
references herein to any prospectus whether in preliminary or final form, and
whether as amended or supplemented, shall include both the U.S. and the
international versions thereof.
1. (a) The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(i) A registration statement on Form S-3 (File No. 33-49707) (the
"Initial Registration Statement") in respect of the Shares has been filed
with the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in
the form heretofore delivered to you for each of the other Underwriters,
and, excluding exhibits thereto but including all documents incorporated by
reference in the prospectus contained therein, have been declared effective
by the Commission in such form; other than a registration statement, if
any, increasing the size of the offering (a "Rule 462(b) Registration
Statement"), filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended (the "Act"), which became effective upon filing, no other
document with respect to the Initial Registration Statement or document
incorporated by reference therein has heretofore been filed with the
Commission; and no stop order suspending the effectiveness of the Initial
Registration Statement, any post-effective amendment thereto or the Rule
462(b) Registration Statement, if any, has been issued and no proceeding
for that purpose has been initiated or, to the Company's knowledge,
threatened by the Commission (any preliminary prospectus included in the
Initial Registration Statement or filed with the Commission pursuant to
Rule 424(a) of the rules and regulations of the Commission under the Act is
hereinafter called a "Preliminary Prospectus"; the various parts of the
Initial Registration Statement and the Rule 462(b) Registration Statement,
if any, including all exhibits thereto and including (i) the information
contained in the form of final prospectus filed with the Commission
pursuant to
2
<PAGE>
Rule 424(b) under the Act in accordance with Section 5(a) hereof and deemed
by virtue of Rule 430A under the Act to be part of the Initial Registration
Statement at the time it was declared effective or such part of the Rule
462(b) Registration Statement, if any, became or hereafter becomes
effective and (ii) the documents incorporated by reference in the
prospectus contained in the Initial Registration Statement at the time such
part of the Initial Registration Statement became effective, each as
amended at the time such part of the Initial Registration Statement became
effective, are hereinafter collectively called the "Registration
Statement"; and such final prospectus, in the form first filed pursuant to
Rule 424(b) under the Act, is hereinafter called the "Prospectus"; and any
reference herein to any Preliminary Prospectus or the Prospectus shall be
deemed to refer to and include the documents incorporated by reference
therein pursuant to Item 12 of Form S-3 under the Act, as of the date of
such Preliminary Prospectus or Prospectus, as the case may be; any
reference to any amendment or supplement to any Preliminary Prospectus or
the Prospectus shall be deemed to refer to and include any documents filed
after the date of such Preliminary Prospectus or Prospectus, as the case
may be, under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and incorporated by reference in such Preliminary
Prospectus or Prospectus, as the case may be; and any reference to any
amendment to the Registration Statement shall be deemed to refer to and
include any annual report of the Company filed pursuant to Section 13(a) or
15(d) of the Exchange Act after the effective date of the Registration
Statement that is incorporated by reference in the Registration Statement);
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus filed with the Commission pursuant to Rule 424(a) of the rules
and regulations of the Commission under the Act, at the time of filing
thereof, conformed in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder, and did not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that this representation and warranty shall
not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein or by a
Selling Shareholder expressly for use in the preparation of the answers
therein to Item 7 of Form S-3;
(iii) The documents incorporated by reference in the Prospectus, when
they became effective or were filed with the Commission, as the case may
be, conformed in all material respects to the requirements of the Act or
the Exchange Act, as applicable, and the rules and regulations of the
Commission thereunder, and none of such documents contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; and any further documents so filed and incorporated by
reference in the Prospectus or any further amendment or supplement thereto,
when such documents become effective or are filed with the Commission, as
the case may be, will conform in all material respects to the requirements
of the Act or the Exchange Act, as applicable, and the rules and
regulations of the Commission thereunder and will not
3
<PAGE>
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. expressly for use therein or
by a Selling Shareholder expressly for use in the preparation of the
answers therein to Item 7 of Form S-3;
(iv) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder and do
not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. expressly for use therein or
by a Selling Shareholder expressly for use in the preparation of the
answers therein to Item 7 of Form S-3;
(v) Neither the Company nor any of its subsidiaries has sustained
since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or long-term
debt of the Company or any of its subsidiaries or any material adverse
change, or any development involving a prospective material adverse change,
in or affecting the general affairs, management, financial position,
shareholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the
Prospectus;
(vi) The Company and its subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of all such property taken as a
whole or any individual property that is material to the Company and do not
interfere with the use made and proposed to be made of such property by the
Company and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries;
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(vii) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each other jurisdiction in which it owns
or leases properties or conducts any business so as to require such
qualification, or is subject to no material liability or disability by
reason of the failure to be so qualified in any such jurisdiction; each
subsidiary of the Company has been duly organized and is validly existing
as a corporation, limited partnership or limited liability company in good
standing under the laws of its jurisdiction of organization;
(viii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid
and non-assessable and conform to the description of the Stock contained in
the Prospectus; and all of the equity interests of each subsidiary of the
Company have been duly and validly authorized and issued, are fully paid
and non-assessable and (except for directors' qualifying shares) are owned
directly or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims;
(ix) The Shares to be issued and sold by the Company to the
Underwriters hereunder and under the International Underwriting Agreement
have been duly and validly authorized and, when issued and delivered
against payment therefor as provided herein, will be duly and validly
issued and fully paid and non-assessable and will have the characteristics
described under the caption "Description of Capital Stock" in the
Prospectus;
(x) The issue and sale of the Shares to be sold by the Company
hereunder and under the International Underwriting Agreement and the
compliance by the Company with all of the provisions of this Agreement and
the International Underwriting Agreement and the consummation of the
transactions herein and therein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject, nor will such action result
in any violation of the provisions of the Certificate of Incorporation or
By-laws of the Company or any statute or any order, rule or regulation of
any court or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties except such
breaches, violations or defaults (other than in respect of the Certificate
of Incorporation or By-Laws of the Company) as would not, individually or
in the aggregate, reasonably be expected to have a material adverse effect
on the current or future consolidated position, shareholders' equity or
results of operation of the Company and its subsidiaries; and no consent,
approval, authorization, order, registration or qualification of or with
any such court or governmental agency or body is required for the issue and
sale of the Shares or the consummation by the Company of the transactions
contemplated by this Agreement and the International Underwriting
Agreement, except the registration under the Act of the Shares and such
consents, approvals, authorizations, registrations or
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qualifications as may be required under state or foreign securities or Blue
Sky laws in connection with the purchase and distribution of the Shares by
the Underwriters and the International Underwriters;
(xi) Neither the Company nor any of its subsidiaries is in violation
of its Certificate of Incorporation or By-laws or other organizational
document or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement or
instrument to which it is a party or by which it or any of its properties
may be bound;
(xii) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock and under the caption "Underwriting",
insofar as they relate to agreements to which the Company is a party and
purport to describe the provisions of the laws and documents referred to
therein, are accurate, complete and fair in all material respects;
(xiii) Other than as set forth in the Prospectus, there are no legal
or governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any of
its subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate
reasonably be expected to have a material adverse effect on the current or
future consolidated financial position, shareholders' equity or results of
operations of the Company and its subsidiaries; and, to the best of the
Company's knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(xiv) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
(xv) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes; and
(xvi) Arthur Anderson LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder.
(b) Each of the Selling Shareholders severally represents and warrants to,
and agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders necessary for
the execution and delivery by such Selling Shareholder of this Agreement,
the International Underwriting Agreement, the Power of Attorney and the
Custody Agreement hereinafter referred to, and for
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the sale and delivery of the Shares to be sold by such Selling Shareholder
hereunder and under the International Underwriting Agreement, have been
obtained; and such Selling Shareholder has full right, power and authority
to enter into this Agreement, the International Underwriting Agreement, the
Power-of-Attorney and the Custody Agreement and to sell, assign, transfer
and deliver the Shares to be sold by such Selling Shareholder hereunder and
under the International Underwriting Agreement;
(ii) The sale of the Shares to be sold by such Selling Shareholder
hereunder and under the International Underwriting Agreement and the
compliance by such Selling Shareholder with all of the provisions of this
Agreement, the International Underwriting Agreement, the Power of Attorney
and the Custody Agreement and the consummation of the transactions herein
and therein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any statute, indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which such Selling Shareholder is a party
or by which such Selling Shareholder is bound or to which any of the
property or assets of such Selling Shareholder is subject, nor will such
action result in any violation of the provisions of the organizational or
charter documents of such Selling Shareholder or any statute or any order,
rule or regulation of any court or governmental agency or body having
jurisdiction over such Selling Shareholder or the property of such Selling
Shareholder;
(iii) Such Selling Shareholder has, and immediately prior to each Time
of Delivery (as defined in Section 4 hereof) such Selling Shareholder will
have, good and valid title to the Shares to be sold by such Selling
Shareholder hereunder and under the International Underwriting Agreement,
free and clear of all liens, encumbrances, equities or claims; and, upon
delivery of such Shares and payment therefor pursuant hereto and thereto,
good and valid title to such Shares, free and clear of all liens,
encumbrances, equities or claims, will pass to the several Underwriters or
the International Underwriters, as the case may be;
(iv) During the period beginning from the date hereof and continuing
to and including the date 90 days after the date of the Prospectus, such
Selling Shareholder will not offer, sell, contract to sell or otherwise
dispose of, except as provided hereunder or under the International
Underwriting Agreement, any securities of the Company that are
substantially similar to the Shares, including but not limited to any
securities that are convertible into or exchangeable for, or that represent
the right to receive, Stock or any such substantially similar securities
(other than pursuant to employee stock option plan existing on, or upon the
conversion or exchange of convertible or exchangeable securities
outstanding as of, the date of this Agreement), without the prior written
consent of Goldman, Sachs & Co.;
(v) Such Selling Shareholder has not taken and will not take, directly
or indirectly, any action which is designed to or which has constituted or
which might reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Shares;
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(vi) The information furnished to the Company by such Selling
Shareholder expressly for use in the Registration Statement, any
Preliminary Prospectus filed with the Commission pursuant to Rule 424(a) of
the rules and regulations of the Commission under the Act, the Prospectus
or any amendment or supplement to the Registration Statement or the
Prospectus, when such document became effective or are filed with the
Commission, as the case may be, will conform in all material respects to
the requirements of the Act and the rules and regulations of the Commission
thereunder and does not contain, and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading;
(vii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Shareholder will deliver to you prior to or at
the First Time of Delivery (as hereinafter defined) a properly completed
and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations
in lieu thereof);
(viii) Certificates in negotiable form representing all of the Shares
to be sold by such Selling Shareholder hereunder and under the
International Underwriting Agreement have been placed in custody under a
Custody Agreement, in the form heretofore furnished to you (the "Custody
Agreement"), duly executed and delivered by such Selling Shareholder to
[Name of Custodian], as custodian (the "Custodian"), and such Selling
Shareholder has duly executed and delivered a Power of Attorney, in the
form heretofore furnished to you (the "Power of Attorney"), appointing the
persons indicated in Schedule II hereto, and each of them, as such Selling
Shareholder's attorneys-in-fact (the "Attorneys-in-Fact") with authority to
execute and deliver this Agreement on behalf of such Selling Shareholder,
to determine the purchase price to be paid by the Underwriters to the
Selling Shareholders as provided in Section 2 hereof, to authorize the
delivery of the Shares to be sold by such Selling Shareholder hereunder and
otherwise to act on behalf of such Selling Shareholder in connection with
the transactions contemplated by this Agreement, the International
Underwriting Agreement and the Custody Agreement; and
(ix) The Shares represented by the certificates held in custody for
such Selling Shareholder under the Custody Agreement are subject to the
interests of the Underwriters hereunder and the International Underwriters
under the International Underwriting Agreement; the arrangements made by
such Selling Shareholder for such custody, and the appointment by such
Selling Shareholder of the Attorneys-in-Fact by the Power of Attorney, are
to that extent irrevocable; the obligations of the Selling Shareholders
hereunder shall not be terminated by operation of law, whether by the death
or incapacity of any individual Selling Shareholder or, in the case of an
estate or trust, by the death or incapacity of any executor or trustee or
the termination of such estate or trust, or in the case of a partnership or
corporation, by the dissolution of such partnership or corporation, or by
the occurrence of any other event; if any individual Selling Shareholder or
any such executor or trustee should die or become
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incapacitated, or if any such estate or trust should be terminated, or if
any such partnership or corporation should be dissolved, or if any other
such event should occur, before the delivery of the Shares hereunder,
certificates representing the Shares shall be delivered by or on behalf of
the Selling Shareholders in accordance with the terms and conditions of
this Agreement, of the International Underwriting Agreement and of the
Custody Agreements; and actions taken by the Attorneys-in-Fact pursuant to
the Powers of Attorney shall be as valid as if such death, incapacity,
termination, dissolution or other event had not occurred, regardless of
whether or not the Custodian, the Attorneys-in-Fact, or any of them, shall
have received notice of such death, incapacity, termination, dissolution or
other event.
2. Subject to the terms and conditions herein set forth, (a) the
Company and each of the Selling Shareholders agree, severally and not jointly,
to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company and each of the Selling
Shareholders, at a purchase price per share of $.............., the number of
Firm Shares (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying the aggregate number of Firm Shares to be sold by the
Company and each of the Selling Shareholders as set forth opposite their
respective names in Schedule II hereto by a fraction, the numerator of which is
the aggregate number of Firm Shares to be purchased by such Underwriter as set
forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the aggregate number of Firm Shares to be purchased by
all of the Underwriters from the Company and all of the Selling Shareholders
hereunder and (b) in the event and to the extent that the Underwriters shall
exercise the election to purchase Optional Shares as provided below, each of the
Selling Shareholders named on Schedule II hereto agrees, severally and not
jointly, to sell to each of the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from such Selling Shareholders,
at the purchase price per share set forth in clause (a) of this Section 2, that
portion of the number of Optional Shares as to which such election shall have
been exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying such number of Optional Shares by a fraction the
numerator of which is the maximum number of Optional Shares which such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all of the Underwriters are entitled to purchase
hereunder.
The Selling Shareholders, as and to the extent indicated in Schedule
II hereto, hereby grant, severally and not jointly, to the Underwriters the
right to purchase at their election up to 1,351,500 Optional Shares, at the
purchase price per share set forth in the paragraph above, for the sole purpose
of covering overallotments in the sale of the Firm Shares. Any such election to
purchase Optional Shares shall be made in proportion to the maximum number of
Optional Shares to be sold by each Selling Shareholder as set forth in Schedule
II hereto. Any such election to purchase Optional Shares may be exercised only
by written notice from you to the Company and the Attorneys-in-Fact, given
within a period of 30 calendar days after the date of this Agreement and setting
forth the aggregate number of Optional Shares to be purchased and the date on
which such Optional Shares are to be delivered, as determined by you but in no
event earlier than the First Time of Delivery (as defined in Section 4 hereof)
or, unless you and the Attorneys-in-Fact otherwise agree in writing, earlier
than two or later than ten business days after the date of such notice.
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3. Upon the authorization by you of the release of the Firm Shares,
the several Underwriters propose to offer the Firm Shares for sale upon the
terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company and the Selling Shareholders, shall be delivered by or on
behalf of the Company and the Selling Shareholders to Goldman, Sachs & Co.,
through the facilities of The Depository Trust Company ("DTC"), for the account
of such Underwriter, against payment by or on behalf of such Underwriter of the
purchase price therefor by wire transfer of Federal (same-day) funds to the
account specified by the Company and each of the Selling Shareholders, as their
interests may appear, to Goldman, Sachs & Co. at least forty-eight hours in
advance. The Company will cause the certificates representing the Shares to be
made available for checking and packaging at least twenty-four hours prior to
the Time of Delivery (as defined below) with respect thereto at the office of
DTC or its designated custodian (the "Designated Office"). The time and date of
such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m.,
New York City time, on ............., 1998 or such other time and date as
Goldman, Sachs & Co., the Company and the Selling Shareholders may agree upon in
writing, and, with respect to the Optional Shares, 9:30 a.m., New York City
time, on the date specified by Goldman, Sachs & Co. in the written notice given
by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional
Shares, or such other time and date as Goldman, Sachs & Co., the Company and the
Selling Shareholders may agree upon in writing. Such time and date for delivery
of the Firm Shares is herein called the "First Time of Delivery", such time and
date for delivery of the Optional Shares, if not the First Time of Delivery, is
herein called the "Second Time of Delivery", and each such time and date for
delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including cross
receipts for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(k) hereof, will be delivered at the offices
of Davis Polk & Wardwell, 450 Lexington Avenue, New York, NY 10017 (the "Closing
Location"), and the Shares will be delivered at the Designated Office, all at
such Time of Delivery. A meeting will be held at the Closing Location at 2:00
p.m., New York City time, on the New York Business Day next preceding such Time
of Delivery, at which meeting the final drafts of the documents to be delivered
pursuant to the preceding sentence will be available for review by the parties
hereto. For the purposes of this Section 4, "New York Business Day" shall mean
each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in New York are generally authorized or obligated by law or
executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any
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supplement to the Registration Statement or Prospectus prior to the last Time of
Delivery which shall be disapproved by you promptly after reasonable notice
thereof; to advise you, promptly after it receives notice thereof, of the time
when any amendment to the Registration Statement has been filed or becomes
effective or any supplement to the Prospectus or any amended Prospectus has been
filed and to furnish you with copies thereof; to file promptly all reports and
any definitive proxy or information statements required to be filed by the
Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of the Prospectus and for so long as the
delivery of a prospectus is required in connection with the offering or sale of
the Shares; to advise you, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or supplementing
of the Registration Statement or Prospectus or for additional information; and,
in the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus or suspending any
such qualification, promptly to use its best efforts to obtain the withdrawal of
such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York Business
Day next succeeding the date of this Agreement or as soon as practicable
thereafter and from time to time, to furnish the Underwriters with copies of the
Prospectus in New York City in such quantities as you may reasonably request,
and, if the delivery of a prospectus is required by law at any time prior to the
expiration of nine months after the time of issue of the Prospectus in
connection with the original distribution of the Shares and if at such time any
events shall have occurred as a result of which the Prospectus as then amended
or supplemented would include an untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made when such Prospectus
is delivered, not misleading, or, if for any other reason it shall be necessary
during such period to amend or supplement the Prospectus or to file under the
Exchange Act any document incorporated by reference in the Prospectus in order
to comply with the Act or the Exchange Act, to notify you and upon your request
to file such document and to prepare and furnish without charge to each
Underwriter and to any dealer in securities as many copies as you may from time
to time reasonably request of an amended Prospectus or a supplement to the
Prospectus which will correct such statement or omission or effect such
compliance, and in case any Underwriter is required to deliver a prospectus in
connection with sales of any of the Shares at any time nine months or more after
the time of issue of the Prospectus, upon your request but at the expense of
such Underwriter, to prepare and deliver to such Underwriter as many copies as
you may request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
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(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
of the Commission thereunder (including, at the option of the Company, Rule
158);
(e) During the period beginning from the date hereof and continuing to
and including the date 90 days after the date of the Prospectus (the "Lock-Up
Period"), not to offer, sell, contract to sell or otherwise dispose of, except
as provided hereunder and under the International Underwriting Agreement, any
securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to stock incentive plans
existing on, or upon the conversion or exchange of convertible or exchangeable
securities outstanding as of, the date of this Agreement), without the prior
written consent of Goldman, Sachs & Co., except shares of Common Stock that may
be issued by the Company in connection with acquisitions provided that the
issued shares either (i) do not exceed an aggregate market value of $30 million
or (ii) may not be sold by the holder thereof until after expiration of the
Lock-Up Period;
(f) To furnish to its shareholders as soon as practicable after the
end of each fiscal year an annual report (including a balance sheet and
statements of income, shareholders' equity and cash flows of the Company and its
consolidated subsidiaries certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective date
of the Registration Statement), to make available to its shareholders a
consolidated summary financial information of the Company and its subsidiaries
for such quarter in reasonable detail;
(g) During a period of three years from the effective date of the
Registration Statement, to furnish to you upon your request copies of all
reports or other communications (financial or other) furnished to shareholders,
and to deliver to you as soon as they are available and upon your request,
copies of any reports and financial statements furnished to or filed with the
Commission or any national securities exchange on which any class of securities
of the Company is listed; and (ii) such additional information that has been
publicly disclosed concerning the business and financial condition of the
Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
shareholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement and the International Underwriting Agreement in the
manner specified in the Prospectus under the caption "Use of Proceeds";
(i) To use its best efforts to list, subject to notice of issuance,
the Shares on the New York Stock Exchange (the "Exchange"); and
(j) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement,
and the Company shall at the time of filing
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either pay to the Commission the filing fee for the Rule 462(b) Registration
Statement or give irrevocable instructions for the payment of such fee pursuant
to Rule 111(b) under the Act.
6. The Company and each of the Selling Shareholders covenant and agree
with one another and with the several Underwriters that (a) the Company will pay
or cause to be paid the following: (i) the fees, disbursements and expenses of
the Company's counsel and accountants in connection with the registration of the
Shares under the Act and all other expenses in connection with the preparation,
printing and filing of the Registration Statement, any Preliminary Prospectus
and the Prospectus and amendments and supplements thereto and the mailing and
delivering of copies thereof to the Underwriters and dealers; (ii) the cost of
printing or producing any Agreement among Underwriters, this Agreement, the
International Underwriting Agreement, the Agreement between Syndicates, the
Selling Agreements, the Blue Sky Memorandum, closing documents (including any
compilations thereof) and any other documents in connection with the offering,
purchase, sale and delivery of the Shares; (iii) all expenses in connection with
the qualification of the Shares for offering and sale under state securities
laws as provided in Section 5(b) hereof, including the fees and disbursements of
counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky survey (iv) all fees and expenses in connection
with listing the Shares on the Exchange; (v) the filing fees incident to, and
the fees and disbursements of counsel for the Underwriters in connection with,
securing any required review by the National Association of Securities Dealers,
Inc. of the terms of the sale of the Shares; (vi) the cost of preparing stock
certificates; (vii) the cost and charges of any transfer agent or registrar and
(viii) all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided for in this
Section; and (b) such Selling Shareholder will pay or cause to be paid all costs
and expenses incident to the performance of such Selling Shareholder's
obligations hereunder which are not otherwise specifically provided for in this
Section, including (i) any fees and expenses of counsel for such Selling
Shareholder, (ii) such Selling Shareholder's pro rata share of the registration
fee paid to the Commission for the registration of the Shares and (iii) all
expenses and taxes incident to the sale and delivery of the Shares to be sold by
such Selling Shareholder to the Underwriters hereunder, if any. In connection
with clause (b) (iii) of the preceding sentence, Goldman, Sachs & Co. agrees to
pay New York State stock transfer tax, and the Selling Shareholder agrees to
reimburse Goldman, Sachs & Co. for associated carrying costs if such tax payment
is not rebated on the day of payment and for any portion of such tax payment not
rebated. It is understood, however, that the Company shall bear the cost of any
other matters not directly relating to the sale and purchase of the Shares
pursuant to this Agreement, and that, except as provided in this Section, and
Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and
expenses, including the fees of their counsel, stock transfer taxes on resale of
any of the Shares by them, any advertising expenses connected with any offers
they may make, any travel expenses incurred by their representatives and any
costs associated with meetings arranged by them.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Shareholders herein are, at and as of such Time
of Delivery, true and correct, the condition that the Company and the Selling
Shareholders
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shall have performed all of its and their obligations hereunder theretofore to
be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) within the applicable time period prescribed for such filing by the
rules and regulations under the Act and in accordance with Section 5(a) hereof;
if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Davis Polk & Wardwell, counsel for the Underwriters, shall have
furnished to you such written opinion or opinions (a draft of each such opinion
is attached as Annex II(a) hereto), dated such Time of Delivery, with respect to
the matters covered in paragraphs (i), (ii), (vii), (xi) and (xiv) of subsection
(c) below as well as such other related matters as you may reasonably request,
and such counsel shall have received such papers and information as they may
reasonably request to enable them to pass upon such matters;
(c) Vernon T. Squires, Esq., Senior Vice President and General Counsel of
the Company, shall have furnished to you his written opinion (a draft of such
opinion is attached as Annex II(b) hereto), dated such Time of Delivery, in form
and substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
(including the Shares being delivered at such Time of Delivery) have been
duly and validly authorized and issued and are fully paid and non-
assessable; and the Shares conform to the description of the Stock
contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign corporation for
the transaction of business and is in good standing under the laws of each
other jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, or is subject to no material
liability or disability by reason of failure to be so qualified in any such
jurisdiction (such counsel being entitled to rely in respect of the opinion
in this clause upon opinions of local counsel and in respect of matters of
fact upon certificates of officers of the Company, provided that such
counsel shall state that they believe that both you and they are justified
in relying upon such opinions and certificates);
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(iv) Each subsidiary of the Company has been duly incorporated and is
validly existing as a corporation, limited partnership or limited liability
company in good standing under the laws of its jurisdiction of
organization; and all of the issued shares of capital stock of each such
subsidiary have been duly and validly authorized and issued, are fully paid
and non-assessable, and (except for directors' qualifying shares) are owned
directly or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims (such counsel being entitled to rely in
respect of the opinion in this clause upon opinions of local counsel and in
respect of matters of fact upon certificates of officers of the Company or
its subsidiaries, provided that such counsel shall state that they believe
that both you and they are justified in relying upon such opinions and
certificates);
(v) The Company and its subsidiaries have good and marketable title
in fee simple to all real property owned by them, in each case free and
clear of all liens, encumbrances and defects except such as are described
in the Prospectus or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made of
such property by the Company and its subsidiaries; and any real property
and buildings held under lease by the Company and its subsidiaries are held
by them under valid, subsisting and enforceable leases with such exceptions
as are not material and do not interfere with the use made and proposed to
be made of such property and buildings by the Company and its subsidiaries
(in giving the opinion in this clause, such counsel may state that no
examination of record titles for the purpose of such opinion has been made,
and that they are relying upon a general review of the titles of the
Company and its subsidiaries, upon opinions of local counsel and abstracts,
reports and policies of title companies rendered or issued at or subsequent
to the time of acquisition of such property by the Company or its
subsidiaries, upon opinions of counsel to the lessors of such property and,
in respect of matters of fact, upon certificates of officers of the Company
or its subsidiaries, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such opinions,
abstracts, reports, policies and certificates);
(vi) To the best of such counsel's knowledge and other than as set
forth in the Prospectus, there are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a party or of
which any property of the Company or any of its subsidiaries is the subject
which, if determined adversely to the Company or any of its subsidiaries,
would individually or in the aggregate have a material adverse effect on
the current or future consolidated financial position shareholders' equity
or results of operations of the Company and its subsidiaries; and, to the
best of such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(vii) This Agreement and the International Underwriting Agreement
have been duly authorized, executed and delivered by the Company;
(viii) The issue and sale of the Shares being delivered at such Time
of Delivery to be sold by the Company and the compliance by the Company
with all of the provisions of this Agreement and have the International
Underwriting Agreement and the consummation of the
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transactions herein and therein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument known to such counsel to which
the Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries is bound or to which any of the property or
assets of the Company or any of its subsidiaries is subject, nor will such
action result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or any statute or any order, rule
or regulation known to such counsel of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries or any
of their properties;
(ix) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the
Company of the transactions contemplated by this Agreement and the
International Underwriting Agreement, except the registration under the Act
of the Shares, and such consents, approvals, authorizations, registrations
or qualifications as may be required under state or foreign securities or
Blue Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters and the International Underwriters;
(x) Neither the Company nor any of its subsidiaries is in violation
of its Certificate of Incorporation or By-laws or agreement of limited
partnership or limited liability operating agreement or in default in the
performance or observance of any material obligation, agreement, covenant
or condition contained in any indenture, mortgage, deed of trust, loan
agreement, or lease or agreement or other instrument to which it is a party
or by which it or any of its properties may be bound;
(xi) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock and under the caption "Underwriting",
insofar as they relate to agreements to which the Company is a party and
insofar as they purport to describe the provisions of the laws and
documents referred to therein, are accurate, complete and fair;
(xii) The Company is not an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act;
(xiii) The documents incorporated by reference in the Prospectus or
any further amendment or supplement thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion), when
they became effective or were filed with the Commission, as the case may
be, complied as to form in all material respects with the requirements of
the Act or the Exchange Act, as applicable and the rules and regulations of
the Commission thereunder; and they have no reason to believe that any of
such documents, when such documents became effective or were so filed, as
the case may be, contained, in the case of a registration statement which
became effective under the Act, an untrue statement of a material fact, or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, or, in the case of other
documents which were filed under the Exchange Act with
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the Commission, an untrue statement of a material fact or omitted to state
a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made when such documents
were so filed, not misleading; and
(xiv) The Registration Statement and the Prospectus and any further
amendments and supplements thereto made by the Company prior to such Time
of Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) comply as to
form in all material respects with the requirements of the Act and the
rules and regulations thereunder; although they do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus, except for those
referred to in the opinion in subsection (xi) of this Section 7(c), they
have no reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion)
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that, as of its date, the Prospectus
or any further amendment or supplement thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion)
contained an untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as of
such Time of Delivery, either the Registration Statement or the Prospectus
or any further amendment or supplement thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion)
contains an untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and they do not
know of any amendment to the Registration Statement required to be filed or
of any contracts or other documents of a character required to be filed as
an exhibit to the Registration Statement or required to be incorporated by
reference into the Prospectus or required to be described in the
Registration Statement or the Prospectus which are not filed or
incorporated by reference or described as required;
In rendering such opinion, such counsel may state that they express no
opinion as to the laws of any jurisdiction outside the United States.
(d) Kirkland & Ellis, counsel for the Company, shall have furnished to
you their written opinion (a draft of such opinion is attached as Annex II(c)
hereto) dated such Time of Delivery, in form and substance satisfactory to you,
with respect to the matters covered in paragraphs (i), (ii), (vi), (vii),
(viii), (ix), (xi) and (xiv) of subsection (c) above;
(e) The respective counsel for each of the Selling Shareholders, as
indicated in Schedule II hereto, each shall have furnished to you their written
opinion with respect to each of the Selling Shareholders for whom they are
acting as counsel (a draft of each such opinion is attached as Annex II(d)
hereto), dated such Time of Delivery, in form and substance satisfactory to you,
to the effect that:
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(i) A Power-of-Attorney and a Custody Agreement have been duly
executed and delivered by such Selling Shareholder and constitute valid and
binding agreements of such Selling Shareholder in accordance with their
terms;
(ii) This Agreement and the International Underwriting Agreement have
been duly executed and delivered by or on behalf of such Selling
Shareholder; and the sale of the Shares to be sold by such Selling
Shareholder hereunder and thereunder and the compliance by such Selling
Shareholder with all of the provisions of this Agreement and the
International Underwriting Agreement, the Power-of-Attorney and the Custody
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation of
any terms or provisions of, or constitute a default under, any statute,
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which such Selling Shareholder is a
party or by which such Selling Shareholder is bound or to which any of the
property or assets of such Selling Shareholder is subject, nor will such
action result in any violation of the provisions of the organizational or
charter documents of such Selling Shareholder or any order, rule or
regulation known to such counsel of any court or governmental agency or
body having jurisdiction over such Selling Shareholder or the property of
such Selling Shareholder;
(iii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement and the International
Underwriting Agreement in connection with the Shares to be sold by such
Selling Shareholder hereunder or thereunder, except [name any such consent,
approval, authorization or order] which [has] [have] been duly obtained and
[is] [are] in full force and effect, such as have been obtained under the
Act and such as may be required under state or foreign securities or Blue
Sky laws in connection with the purchase and distribution of such Shares by
the Underwriters or the International Underwriters;
(iv) Immediately prior to such Time of Delivery, such Selling
Shareholder had good and valid title to the Shares to be sold at such Time
of Delivery by such Selling Shareholder under this Agreement and the
International Underwriting Agreement, free and clear of all liens,
encumbrances, equities or claims, and full right, power and authority to
sell, assign, transfer and deliver the Shares to be sold by such Selling
Shareholder hereunder and thereunder; and
(v) Good and valid title to such Shares, free and clear of all liens,
encumbrances, equities or claims, has been transferred to each of the
several Underwriters or International Underwriters, as the case may be.
In rendering such opinion, such counsel may state that they express no
opinion as to the laws of any jurisdiction outside the United States and in
rendering the opinion in paragraph (iv), such counsel may rely upon a
certificate of such Selling Shareholder in respect of matters of fact as to
ownership of, and liens, encumbrances, equities or claims on the Shares sold by
such Selling Shareholder, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such certificate;
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(f) On the date of the Prospectus at a time prior to the execution of this
Agreement, at 9:30 a.m., New York City time, on the effective date of any post-
effective amendment to the Registration Statement filed subsequent to the date
of this Agreement and also at each Time of Delivery, Arthur Anderson LLP shall
have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the effect set
forth in Annex I hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as Annex I(a) hereto and a draft of the
form of letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery is
attached as Annex I(b) hereto);
(g) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus any loss or interference with its
business from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the Prospectus, and
(ii) since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock or long-
term debt of the Company or any of its subsidiaries, or any development
involving a prospective change, in or affecting the general affairs, management,
financial position, shareholders' equity or results of operations of the Company
and its subsidiaries, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in Clause (i) or
(ii), is in the judgment of the Representatives so material and adverse as to
make it impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the terms and
in the manner contemplated in the Prospectus;
(h) On or after the date hereof (i) no downgrading shall have occurred in
the rating accorded the Company's debt securities by Moody's Investors Services
or Standard & Poor's Ratings Services, and (ii) neither of such organizations
shall have publicly announced that it has under surveillance or review, with
possible negative implications, its rating of any of the Company's debt
securities;
(i) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the Exchange; (ii) a suspension or material limitation in trading
in the Company's securities on the Exchange; (iii) a general moratorium on
commercial banking activities declared by either Federal or New York State
authorities; or (iv) the outbreak or escalation of hostilities involving the
United States or the declaration by the United States of a national emergency or
war, if the effect of any such event specified in this Clause (iv) in the
judgment of the Representatives makes it impracticable or inadvisable to proceed
with the public offering or the delivery of the Shares being delivered at such
Time of Delivery on the terms and in the manner contemplated in the Prospectus;
(j) The Shares to be sold by the Company and the Selling Shareholders at
such Time of Delivery shall have been duly listed, subject to notice of
issuance, on the Exchange;
(k) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of prospectuses on the New York Business
Day next succeeding the date of this Agreement or as soon as practicable
thereafter; and
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(l) The Company and the Selling Shareholders shall have furnished or
caused to be furnished to you at such Time of Delivery certificates of officers
of the Company and of the Selling Shareholders, respectively, satisfactory to
you as to the accuracy of the representations and warranties of the Company and
the Selling Shareholders, respectively, herein at and as of such Time of
Delivery, as to the performance by the Company and the Selling Shareholders of
all of their respective obligations hereunder to be performed at or prior to
such Time of Delivery, and as to such other matters as you may reasonably
request, and the Company shall have furnished or caused to be furnished
certificates as to the matters set forth in subsections (a) and (f) of this
Section.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) Each of the Selling Shareholders will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by such
Selling Stockholder expressly for use therein; and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that such Selling
Stockholder shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through Goldman, Sachs &
Co. expressly for use therein; provided,
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further, that the liability of a Selling Shareholder pursuant to this subsection
(b) shall not exceed the product of the number of Shares sold by such Selling
Shareholder including any Optional Shares and the initial offering price of the
Shares as set forth in the Prospectus.
(c) Each Underwriter will indemnify and hold harmless the Company and each
Selling Shareholder against any losses, claims, damages or liabilities to which
the Company or such Selling Shareholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by such
Underwriter through Goldman, Sachs & Co. expressly for use therein; and will
reimburse the Company and each Selling Shareholder for any legal or other
expenses reasonably incurred by the Company or such Selling Shareholder in
connection with investigating or defending any such action or claim as such
expenses are incurred.
(d) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
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(e) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a),
(b) or (c) above in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Shareholders on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (d) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Shareholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Shareholders on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering of the Shares purchased under this
Agreement (before deducting expenses) received by the Company and the Selling
Shareholders bear to the total underwriting discounts and commissions received
by the Underwriters with respect to the Shares purchased under this Agreement,
in each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Selling Shareholders on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company, each
of the Selling Shareholders and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this subsection (e) were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (e) to contribute are several in proportion to
their respective underwriting obligations and not joint. In no event shall the
liability of a Selling Shareholder under this Section 8(e) exceed the amount
that such Selling Shareholder would have been required to pay under Section 8(b)
had such indemnification been held to be available thereunder.
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(f) The obligations of the Company and the Selling Shareholders under this
Section 8 shall be in addition to any liability which the Company and the
respective Selling Shareholders may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company and to each person, if
any, who controls the Company or any Selling Shareholder within the meaning of
the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company and the Selling Shareholders shall be entitled to
a further period of thirty-six hours within which to procure another party or
other parties reasonably satisfactory to you to purchase such Shares on such
terms. In the event that, within the respective prescribed periods, you notify
the Company and the Selling Shareholders that you have so arranged for the
purchase of such Shares, or the Company and the Selling Shareholders notify you
that they have so arranged for the purchase of such Shares, you or the Company
and the Selling Shareholders shall have the right to postpone a Time of Delivery
for a period of not more than seven days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company agrees to file
promptly any amendments to the Registration Statement or the Prospectus which in
your opinion may thereby be made necessary. The term "Underwriter" as used in
this Agreement shall include any person substituted under this Section with like
effect as if such person had originally been a party to this Agreement with
respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Shareholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Shareholders shall have the right to require
each non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Shareholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all of the Shares to be purchased at such Time of Delivery,
or if the Company and the Selling Shareholders shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or
23
<PAGE>
Underwriters, then this Agreement (or, with respect to the Second Time of
Delivery, the obligations of the Underwriters to purchase and of the Selling
Shareholders to sell the Optional Shares) shall thereupon terminate, without
liability on the part of any non-defaulting Underwriter or the Company or the
Selling Shareholders, except for the expenses to be borne by the Company and the
Selling Shareholders and the Underwriters as provided in Section 6 hereof and
the indemnity and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Selling Shareholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company or any of the Selling Shareholders, or any officer
or director or controlling person of the Company or any controlling person of
any Selling Shareholder, and shall survive delivery of and payment for the
Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Shareholders shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof; but,
if for any other reason any Shares are not delivered by or on behalf of the
Company and the Selling Shareholders as provided herein, the Company will
reimburse the Underwriters through you for all out-of-pocket expenses approved
in writing by you, including reasonable fees and disbursements of counsel,
reasonably incurred by the Underwriters in making preparations for the purchase,
sale and delivery of the Shares not so delivered, but the Company and the
Selling Shareholders shall then be under no further liability to any Underwriter
in respect of the Shares not so delivered except as provided in Sections 6 and 8
hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with any Selling Shareholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Shareholder made or given by any
or all of the Attorneys-in-Fact for such Selling Shareholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 85 Broad Street, New York, New York 10004, Attention: Registration
Department; if to any Selling Shareholder shall be delivered or sent by mail,
telex or facsimile transmission to counsel for such Selling Shareholder at its
address set forth in Schedule II hereto; and if to the Company shall be
delivered or sent by mail, telex or facsimile transmission to the address of the
Company set forth in the Registration Statement, Attention: Vernon T. Squires,
Senior Vice President and General Counsel and Eric R. Zarnikow, Vice President
and Treasurer; provided, however, that any notice to an Underwriter pursuant to
Section 8(c) hereof shall
24
<PAGE>
be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its Underwriters' Questionnaire or telex
constituting such Questionnaire, which address will be supplied to the Company
or the Selling Shareholders by you on request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Selling Shareholders and, to the
extent provided in Sections 8 and 10 hereof, the officers and directors of the
Company and each person who controls the Company, any Selling Shareholder or any
Underwriter, and their respective heirs, executors, administrators, successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign and
return to us [one for the Company and each of the Representatives plus one for
each counsel and the Custodian, if any] counterparts hereof, and upon the
acceptance hereof by you, on behalf of each of the Underwriters, this letter and
such acceptance hereof shall constitute a binding agreement among each of the
Underwriters, the Company and each of the Selling Shareholders. It is understood
that your acceptance of this letter on behalf of each of the Underwriters is
pursuant to the authority set forth in a form of Agreement among Underwriters
(U.S. version), the form of which shall be submitted to the Company and the
Selling Shareholders for examination upon request, but without warranty on your
part as to the authority of the signers thereof.
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Shareholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and
binding Power-of-Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
THE SERVICEMASTER COMPANY
By:______________________________
Name:
25
<PAGE>
Title:
[Names of Selling Shareholders]
By:______________________________
Name:
Title:
As Attorney-in-Fact acting on behalf of
each of the Selling Shareholders named in
Schedule II to this Agreement.
Accepted as of the date hereof [at ....:]
Goldman, Sachs & Co.
Credit Suisse First Boston Corporation
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
By:______________________________
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
26
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares to be Maximum Option
Underwriter Purchased Exercised
----------- ----------------- ------------------
<S> <C> <C>
Goldman, Sachs & Co. ......................
Credit Suisse First Boston
Corporation..............................
Merrill Lynch, Pierce, Fenner &
Smith Incorporated.......................
Morgan Stanley & Co. Incorporated .........
[Names of other Underwriters]..............
----------------- ------------------
Total......................................
================= ==================
</TABLE>
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Sold if
Firm Shares to be Maximum Option
Sold Exercised
----------------- ------------------
<S> <C> <C>
The Company....................................
The Selling Shareholder(s)...................
[Name of Selling Shareholder](a)..........
[Name of Selling Shareholder](b)..........
[Name of Selling Shareholder](c)..........
[Name of Selling Shareholder](d)..........
[Name of Selling Shareholder](e)..........
----------------- ------------------
Total........................................
================= ==================
</TABLE>
_____
(a) This Selling Shareholder is represented by [NAME AND ADDRESS OF COUNSEL]
and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact of such Selling Shareholder.
(b) This Selling Shareholder is represented by [NAME AND ADDRESS OF COUNSEL]
and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO], and each of
them, as the Attorneys-in-Fact for such Selling Shareholder.
(c) This Selling Shareholder is represented by [NAME AND ADDRESS OF COUNSEL]
and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact of such Selling Shareholder.
(d) This Selling Shareholder is represented by [NAME AND ADDRESS OF COUNSEL]
and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO], and each of
them, as the Attorneys-in-Fact for such Selling Shareholder.
(e) This Selling Shareholder is represented by [NAME AND ADDRESS OF COUNSEL]
and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO], and each of
them, as the Attorneys-in-Fact for such Selling Shareholder.
<PAGE>
ANNEX I
[FORM OF ANNEX I DESCRIPTION OF COMFORT LETTER
FOR REGISTRATION STATEMENTS ON FORM S-3]
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to the
Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial
forecasts and/or pro forma financial information) examined by them and
included or incorporated by reference in the Registration Statement or the
Prospectus comply as to form in all material respects with the applicable
accounting requirements of the Act or the Exchange Act, as applicable, and
the related published rules and regulations thereunder; and, if applicable,
they have made a review in accordance with standards established by the
American Institute of Certified Public Accountants of the consolidated
interim financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company for the periods
specified in such letter, as indicated in their reports thereon, copies of
which have been [separately] furnished to the representatives of the
Underwriters (the "Representatives")[and are attached hereto];
(iii) They have made a review in accordance with standards established by
the American Institute of Certified Public Accountants of the unaudited
condensed consolidated statements of income, consolidated balance sheets
and consolidated statements of cash flows included in the Prospectus and/or
included in the Company's quarterly report on Form 10-Q incorporated by
reference into the Prospectus as indicated in their reports thereon copies
of which [have been separately furnished to the Representatives][are
attached hereto]; and on the basis of specified procedures including
inquiries of officials of the Company who have responsibility for financial
and accounting matters regarding whether the unaudited condensed
consolidated financial statements referred to in paragraph (vi)(A)(i) below
comply as to form in all material respects with the applicable accounting
requirements of the [Act and the Exchange] Act and the related published
rules and regulations, nothing came to their attention that caused them to
believe that the unaudited condensed consolidated financial statements do
not comply as to form in all material respects with the applicable
accounting requirements of the [Act and the Exchange] Act and the related
published rules and regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company
for the five most recent fiscal years included in the Prospectus and
included or incorporated by reference in Item 6 of the
<PAGE>
Company's Annual Report on Form 10-K for the most recent fiscal year agrees
with the corresponding amounts (after restatement where applicable) in the
audited consolidated financial statements for such five fiscal years which
were included or incorporated by reference in the Company's Annual Reports
on Form 10-K for such fiscal years;
(v) They have compared the information in the Prospectus under selected
captions with the disclosure requirements of Regulation S-K and on the
basis of limited procedures specified in such letter nothing came to their
attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an examination in
accordance with generally accepted auditing standards, consisting of a
reading of the unaudited financial statements and other information
referred to below, a reading of the latest available interim financial
statements of the Company and its subsidiaries, inspection of the minute
books of the Company and its subsidiaries since the date of the latest
audited financial statements included or incorporated by reference in the
Prospectus, inquiries of officials of the Company and its subsidiaries
responsible for financial and accounting matters and such other inquiries
and procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) (i) the unaudited condensed consolidated statements of
income, consolidated balance sheets and consolidated statements of
cash flows included in the Prospectus and/or included or incorporated
by reference in the Company's Quarterly Reports on Form 10-Q
incorporated by reference in the Prospectus do not comply as to form
in all material respects with the applicable accounting requirements
of the Exchange Act as it applies to Form 10-Q and the related
published rules and regulations, or (ii) any material modifications
should be made to the unaudited condensed consolidated statements of
income, consolidated balance sheets and consolidated statements of
cash flows included in the Prospectus or included in the Company's
Quarterly Reports on Form 10-Q incorporated by reference in the
Prospectus, for them to be conformity with generally accepted
accounting principles;
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited consolidated financial statements from which
such data and items were derived, and any such unaudited data and
items were not determined on a basis substantially consistent with the
basis for the corresponding amounts in the audited consolidated
financial statements included or incorporated by reference in the
Company's Annual Report on Form 10-K for the most recent fiscal year;
(C) the unaudited financial statements which were not included in
the Prospectus but from which were derived the unaudited condensed
financial statements referred to in Clause (A) and any unaudited
income statement data and balance sheet
2
<PAGE>
items included in the Prospectus and referred to in Clause (B) were not
determined on a basis substantially consistent with the basis for the
audited financial statements included or incorporated by reference in the
Company's Annual Report on Form 10-K for the most recent fiscal year;
(D) any unaudited pro forma consolidated condensed financial
statements included or incorporated by reference in the Prospectus do not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the published rules and regulations thereunder
or the pro forma adjustments have not been properly applied to the
historical amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to the date
of such letter, there have been any changes in the consolidated capital
stock (other than issuances of capital stock upon exercise of options and
stock appreciation rights, upon earn-outs of performance shares and upon
conversions of convertible securities, in each case which were outstanding
on the date of the latest balance sheet included or incorporated by
reference in the Prospectus) or any increase in the consolidated long-term
debt of the Company and its subsidiaries, or any decreases in consolidated
net current assets or shareholders' equity or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with amounts shown in the latest
balance sheet included or incorporated by reference in the Prospectus,
except in each case for changes, increases or decreases which the
Prospectus discloses have occurred or may occur or which are described in
such letter; and
(F) for the period from the date of the latest financial statements
included or incorporated by reference in the Prospectus to the specified
date referred to in Clause (E) there were any decreases in consolidated net
revenues or operating profit or the total or per share amounts of
consolidated net income or other items specified by the Representatives, or
any increases in any items specified by the Representatives, in each case
as compared with the comparable period of the preceding year and with any
other period of corresponding length specified by the Representatives,
except in each case for increases or decreases which the Prospectus
discloses have occurred or may occur or which are described in such letter;
and
(vii) In addition to the examination referred to in their report(s)
included or incorporated by reference in the Prospectus and the limited
procedures, inspection of minute books, inquiries and other procedures referred
to in paragraphs (iii) and (vi) above, they have carried out certain specified
procedures, not constituting an examination in accordance with generally
accepted auditing standards, with respect to certain amounts, percentages and
financial information specified by the Representatives which are derived from
the general accounting records of the Company and its subsidiaries, which appear
in the Prospectus (excluding documents incorporated by reference) or in Part II
of, or in exhibits and schedules to, the Registration Statement specified by the
Representatives or in documents incorporated by reference in the Prospectus
specified by the Representatives, and have compared certain of such amounts,
percentages and financial information with the accounting records of the Company
and its subsidiaries and have found them to be in agreement.
3
<PAGE>
EXHIBIT 4.3
NUMBER SHARES
smc
COMMON STOCK COMMON STOCK
THIS CERTIFICATE IS TRANSFERABLE
IN THE CITY OF CHICAGO OR IN NEW YORK CUSIP 81760N 10 9
[PHOTO APPEARS HERE]
The ServiceMaster Company
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
SEE REVERSE
FOR CERTAIN
DEFINITIONS
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $0.01 PAR VALUE EACH, OF
The ServiceMaster Company transferable on the books of the Corporation by the
holder hereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[WE SERVE LOGO]
/s/ Susan K. Parker /s/ Carlos H. Cantu
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
[LOGO SEAL OF DELAWARE]
COUNTERSIGNED AND REGISTERED:
HARRIS Trust and Savings BANK
TRANSFER AGENT
AND REGISTRAR
BY /s/ ???????????????
AUTHORIZED SIGNATURE
<PAGE>
The ServiceMaster Company
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS A STATEMENT OF THE DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES
THEREOF OF THE CORPORATION, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS
OF SUCH PREFERENCES AND/OR RIGHTS. SUCH REQUEST MAY BE MADE TO THE CORPORATION
OR THE TRANSFER AGENT.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ________________________ Custodian _______________________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right
of survivorship and not under Uniform Gifts to Minors Act
as tenants in common
__________________________________________________________
(State)
UNIF TRF MIN ACT -- __________________________ Custodian (until age _________)
(Cust)
_________________ under Uniform Transfers
(Minor)
to Minors Act ______________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, ______________________ hereby sell, assign and transfer unto
_______________________________________________________________________________
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
- --------------------------------------------------------------------------------
________________________________________________________________________ Shares
of the Corporation represented by the within Certificate, and do hereby
irrevocably constitute and appoint ____________________________________________
___________________________________________________________________ Attorney to
transfer the said stock on the books of the within-named Corporation with full
power of substitution in the premises.
Dated,____________________
X ________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE, IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT, OR ANY CHANGE WHATEVER.
X ______________________________________________
---------------------------------------------------
Signature(s) must be guaranteed by a qualified
Medallion Guarantee member.
---------------------------------------------------
This certificate also evidences and entitles the holder hereof to certain Rights
as set forth in a Rights Agreement between The ServiceMaster Company and Harris
Trust and Savings Bank, as Rights Agent, dated as of December 15, 1997 (the
"Rights Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principle executive offices of
The ServiceMaster Company. Under certain circumstances, as set forth in the
Rights Agreement, such Rights will be evidenced by separate certificates and
will no longer be evidenced by this certificate. The ServiceMaster Company will
mail to the holder of this certificate a copy of the Rights Agreement without
charge after receipt of a written request therefor. Under certain circumstances,
Rights that were, are or become beneficially owned by Acquiring Persons or their
Associates or Affiliates (as such terms are defined in the Rights Agreement) may
become null and void and the holder of any such Rights (including any subsequent
holder) shall not have any right to exercise such Rights.
<PAGE>
Exhibit 5.1
-----------
[Letterhead of ServiceMaster]
April 21, 1998
The ServiceMaster Company
One ServiceMaster Way
Downers Grove, Illinois 60515-1700
Re: Registration of Shares of Common Stock
on Form S-3 Under the Securities Act of 1933
--------------------------------------------
Ladies and Gentlemen:
I am Senior Vice President and General Counsel of The ServiceMaster
Company, a Delaware corporation (the "Company"). In that capacity, I have
participated in the preparation of, and I am familiar with the contents of the
Registration Statement on Form S-3 of the Company (Registration No. 333-49707)
(the "Registration Statement"), which was originally filed with the Securities
and Exchange Commission on April 9, 1998, which registers under the Securities
Act of 1933 (the "Securities Act") the public offering (the "Public Offering")
of an aggregate of 12,190,000 shares of common stock, par value $.01 per share
(the "Common Stock") of the Company, of which 7,600,000 shares are being offered
by the Company (the "Primary Shares") and 4,590,000 shares are being offered by
certain stockholders of the Company (the "Secondary Shares" and, together with
the Primary Shares, the "Shares").
I have reviewed the resolutions adopted by the Board of Directors of the
Company (the "Board") on March 20, 1998 relating to the Public Offering (the
"Authorizing Resolutions"). Such resolutions, among other things, (i) authorize
the Finance Committee of the Board to determine the number of shares of Common
Stock to be offered by the Company and the price for which those shares may be
sold, (ii) appoint Authorized Officers who are authorized to act on behalf of
the Company with respect the matters relevant to the registration under the
Securities Act of the Shares, (iii) authorize all or any one or more of the
Authorized Officers to approve the terms of the Underwriting Agreements pursuant
to which the Primary Shares will be sold to the Underwriters, (iv) authorize
each Authorized Officer to cause the Company to take such other actions as such
Authorized Officer determines to be within the scope of the resolution. Any
resolution which shall be approved by the Finance Committee or any authorization
which may be granted by all or any one or more of the Authorized Officers
pursuant to the authority delegated by the Authorizing Resolutions or authority
otherwise exercisable by such Committee or Officer or Officers is called an
"Implementing Authorization" in this letter. I have also reviewed such other
records and documents as I have deemed necessary in order to enable me to
express the opinions stated herein.
<PAGE>
The ServiceMaster Company
April 21, 1998
Page 2
On the basis of the foregoing and subject to the limitations and
assumptions identified in this letter, I am of the opinion that:
1. The Company is a corporation validly existing and in good standing
under the Delaware General Corporation Law.
2. The Primary Shares to be issued by the Company and duly authorized and
will be validly issued, fully paid and nonassessable assuming that: (i)
the issue and sale of the Primary Shares shall be authorized by an
appropriate Implementing Authorization adopted by the Board, (ii) the
certificates representing the Primary Shares comply as to form with the
By-laws of the Company, the General Corporation Law of the State of
Delaware and the Authorizing Resolutions and bear all necessary
signatures and authentications, and (iii) the Company has received the
prescribed consideration for the Primary Shares, which is in excess of
$.01 per share.
3. The Secondary Shares are duly authorized, validly issued, fully paid and
nonassessable.
All of my opinions assume that the Registration Statement will become
effective under the Securities Act before any Shares covered by the Registration
Statement are sold. I have also made other assumptions which I believe to be
appropriate for purposes of this letter.
My advice on every legal issue addressed in this letter is based
exclusively on the internal law of Illinois, the Delaware General Corporation
Law, or the federal law of the United States. This letter does not cover any law
which in my experience would generally not be considered by lawyers in Illinois
for purposes of the opinions contained in this letter. Without limiting by
implication the generality of the preceding sentence, this opinion does not
cover the securities laws of the state of Illinois or any other jurisdiction.
This opinion and consent may be incorporated by reference in a subsequent
registration on Form S-3 filed pursuant to Rule 462(b) under the Securities Act
with respect to the registration of additional shares of Common Stock for sale
in the Public Offering.
I hereby consent to the inclusion of this letter as an exhibit to the
Registration Statement and to the reference in each Prospectus included as part
of the Registration Statement to my having issued the opinions expressed herein.
Very truly yours,
/s/ Vernon T. Squires
Vernon T. Squires
Senior Vice President and General Counsel
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our report
included in this registration statement and to the incorporation by reference in
this registration statement of our report dated January 26, 1998 included in The
ServiceMaster Company's Form 10-K for the year ended December 31, 1997 and to
all references to our Firm included in this registration statement.
April 21, 1998 /s/ Arthur Andersen LLP
