SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
__X__ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-14762
THE SERVICEMASTER COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-3858106
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One ServiceMaster Way, Downers Grove, Illinois 60515-1700
(Address of principal executive offices) (Zip Code)
630-271-1300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No___.
Indicate the number of shares outstanding of each of the issuer's classes of
shares: 196,522,730 shares on August 7, 1998.
This document consists of 13 pages, including the cover page.
<PAGE>
TABLE OF CONTENTS
Page
No.
----
THE SERVICEMASTER COMPANY (Registrant) -
Part I. Financial Information
- ------- ---------------------
Consolidated Statements of Income for the three and
six months ended June 30, 1998 and June 30, 1997 2
Consolidated Statements of Financial Position
as of June 30, 1998 and December 31, 1997 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and June 30, 1997 4
Notes to Consolidated Financial Statements 5
Management Discussion and Analysis of Financial Position
and Results of Operations 7
Signature 12
1
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
THE SERVICEMASTER COMPANY
Consolidated Statements of Income
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating Revenue......................... $ 1,244,627 $ 1,010,794 $ 2,226,415 $ 1,827,930
Operating Costs and Expenses:
Cost of services rendered
and products sold........................ 951,366 753,534 1,746,163 1,410,679
Selling and administrative expenses....... 179,466 158,823 296,684 260,214
------------- ------------- ------------- ------------
Total operating costs and expenses........ 1,130,832 912,357 2,042,847 1,670,893
------------- ------------- ------------- ------------
Operating Income.......................... 113,795 98,437 183,568 157,037
Non-operating Expense (Income):
Interest expense.......................... 24,545 20,800 48,640 31,192
Interest and investment income............ (5,389) (2,746) (8,824) (5,313)
Minority interest......................... - 2,015 - 4,163
------------ ------------- ------------- ------------
Income before Income Taxes................ 94,639 78,368 143,752 126,995
Provision for income taxes
(pro forma in 1997) (1).................. 38,235 31,661 58,078 51,306
------------ ------------- ------------- ------------
Net Income (pro forma in 1997) (1) ....... $ 56,404 $ 46,707 $ 85,674 $ 75,689
============ ============= ============= ============
Per Share
Basic (pro forma in 1997) (1) (2)........ $ .30 $ .26 $ .45 $ .38
====== ====== ====== ======
Diluted (pro forma in 1997) (1) (2)...... $ .29 $ .25 $ .44 $ .37
====== ====== ====== ======
Cash Distributions ...................... $ .12 $ .11 1/3 $ .24 $ .22 2/3
====== ========= ====== =========
On July 24, 1998, the Board of Directors of the Company declared a three-for-two
share split effective August 26, 1998, for shareholders of record on August 12,
1998. The following presents the per share data restated to reflect the
three-for-two share split.
Basic..................................... $ .20 $ .17 $ .30 $ .25
====== ====== ====== ======
Diluted................................... $ .19 $ .16 $ .29 $ .24
====== ====== ====== ======
Cash Distributions........................ $ .08 $ .07 1/2 $ .16 $ .15
====== ========= ====== ======
(1) The Company converted from partnership to corporate form on December 26,
1997. The results shown above for the periods ended June 30, 1997 have been
restated to adjust the actual historical information to a basis that assumes
that reincorporation had occurred as of the beginning of that year. Actual net
income, as previously reported (i.e., excluding the effects of pro forma federal
and state income taxes), was $75,707 and $122,567 for the three months and six
months ended June 30, 1997, respectively (basic and diluted net income per share
were $.42 and $.40 for the three months ended, and $.62 and $.59 for the six
months ended June 30, 1997, respectively).
(2) Basic earnings per share are calculated based on 191,185 shares and 181,737
shares for the three months ended June 30, 1998 and 1997, respectively and
188,667 shares and 198,927 shares for the six months ended June 30, 1998 and
1997, respectively. Diluted earnings per share are calculated based on 197,627
shares and 190,762 shares for the three months ended June 30, 1998 and 1997,
respectively and 195,073 shares and 207,500 shares for the six months ended June
30, 1998 and 1997, respectively.
See Notes to Consolidated Financial Statements
</TABLE>
2
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<TABLE>
<CAPTION>
THE SERVICEMASTER COMPANY
Consolidated Statements of Financial Position
(In thousands)
As of
June 30, December 31,
1998 1997
------------ -------------
Assets
Current Assets:
<S> <C> <C>
Cash and cash equivalents............................................ $ 52,324 $ 64,876
Marketable securities................................................ 65,580 59,248
Receivables, less allowances of $37,576
and $32,221, respectively......................................... 381,345 299,138
Inventories.......................................................... 55,135 48,157
Prepaid expenses and other assets.................................... 179,008 122,665
------------ -------------
Total current assets............................................. 733,392 594,084
------------ -------------
Property and Equipment:
At cost........................................................... 432,802 362,653
Less: accumulated depreciation................................... 240,730 204,383
------------ -------------
Net property and equipment....................................... 192,072 158,270
------------ -------------
Intangible assets, primarily trade names and goodwill,
net of accumulated amortization of $241,843
and $218,293, respectively........................................ 1,724,106 1,563,309
Notes receivable, long-term securities, and other assets............. 154,650 159,561
------------ -------------
Total assets..................................................... $ 2,804,220 $ 2,475,224
============ =============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable..................................................... $ 98,943 $ 84,673
Accrued liabilities.................................................. 338,872 270,667
Deferred revenues.................................................... 212,895 181,298
Current portion of long-term obligations............................. 30,535 21,539
------------ -------------
Total current liabilities........................................ 681,245 558,177
------------ -------------
Long-Term Debt....................................................... 1,173,159 1,247,845
Other Long-Term Obligations.......................................... 129,679 144,764
Commitments and Contingencies .......................................
Shareholders' Equity:
Common stock $0.01 par value, authorized 1 billion shares; issued
and outstanding 196,449 and 186,629 shares, respectively......... 1,964 1,866
Additional paid-in capital........................................... 742,704 519,424
Retained earnings.................................................... 115,957 65,000
Restricted stock..................................................... (3,826) (4,270)
Treasury stock....................................................... (36,662) (57,582)
------------ ------------
Total shareholders' equity....................................... 820,137 524,438
------------ ------------
Total liabilities and shareholders' equity....................... $ 2,804,220 $ 2,475,224
============ ============
See Notes to Consolidated Financial Statements
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
THE SERVICEMASTER COMPANY
Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
June 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash and Cash Equivalents at January 1................................ $ 64,876 $ 72,009
Cash Flows from Operations:
Net Income............................................................ 85,674 122,567
Adjustments to reconcile net income
to net cash provided from operations:
Depreciation................................................... 24,366 22,318
Amortization................................................... 23,550 20,035
Change in working capital, net of acquisitions:
Receivables.................................................. (61,538) (41,729)
Inventories and other current assets......................... (54,687) (47,011)
Accounts payable............................................. 11,197 3,635
Deferred revenues............................................ 29,682 34,473
Accrued liabilities.......................................... 48,350 (4,667)
Other, net..................................................... 779 (451)
------------ ------------
Net Cash Provided from Operations..................................... 107,373 109,170
------------ ------------
Cash Flows from Investing Activities:
Business acquisitions, net of cash acquired....................... (144,053) (103,145)
Property additions................................................ (40,241) (23,384)
Payments to sellers of acquired businesses........................ (5,130) (2,102)
Sale of equipment and other assets ............................... 2,814 2,727
Notes receivable and financial investments........................ (2,657) (7,939)
Net purchases of investment securities............................ (2,133) (1,134)
------------ ------------
Net Cash Used for Investing Activities................................ (191,400) (134,977)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from stock offering...................................... 209,391 -
Payments of borrowings and other obligations...................... (293,632) (150,170)
Long-term borrowings, net......................................... 185,571 827,950
Distributions to shareholders and shareholders' trust............. (34,718) (48,402)
Proceeds from employee share option plans......................... 5,877 4,701
Purchase of ServiceMaster shares.................................. (4,019) (640,785)
Other............................................................. 3,005 (524)
------------ ------------
Net Cash Provided from (used for) Financing Activities................ 71,475 (7,230)
------------ ------------
Cash Decrease during the Period....................................... (12,552) (33,037)
------------ ------------
Cash and Cash Equivalents at June 30.................................. $ 52,324 $ 38,972
============ ============
See Notes to Consolidated Financial Statements
</TABLE>
4
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: The consolidated financial statements include the accounts of
ServiceMaster and its significant subsidiaries, collectively referred to as "the
Company". Intercompany transactions and balances have been eliminated in
consolidation.
Note 2: The consolidated financial statements included herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest Annual Report
to shareholders and the Annual Report to the Securities and Exchange Commission
on Form 10-K for the year ended December 31, 1997. In the opinion of the
Company, all adjustments, consisting only of normal and recurring adjustments,
necessary to present fairly the financial position of The ServiceMaster Company
as of June 30, 1998 and December 31, 1997, and the results of operations for the
three month and six month periods ended June 30, 1998 and 1997, and the cash
flows for the six months ended June 30, 1998 and 1997 have been included. The
preparation of the financial statements requires management to make certain
estimates and assumptions required under generally accepted accounting
principles which may differ from the actual results. The results of operations
for any interim period are not necessarily indicative of the results which might
be obtained for a full year.
Note 3: 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. All such costs are fully
recognized within the fiscal year in which they are incurred.
Note 4: 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.
Diluted earnings per share reflects the potential dilution of convertible
securities and options to purchase common stock. The following chart reconciles
both the numerator and the denominator of the basic earnings per share
computation to the numerator and denominator of the diluted earnings per share
computation.
<TABLE>
<CAPTION>
Three months Three months
ended June 30, 1998 ended June 30, 1997
------------------------------- ------------------------------
Pro forma
(in thousands, except per share data) Income Shares EPS Income Shares EPS
---------- -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 56,404 191,185 $ 0.30 $ 46,707 181,737 $ 0.26
====== ======
Effect of dilutive securities, net of tax:
Options - 6,442 - 5,398
Convertible debentures - - 277 3,627
---------- -------- ---------- --------
Diluted earnings per share $ 56,404 197,627 $ 0.29 $ 46,984 190,762 $ 0.25
========== ======== ====== ========== ======== ======
</TABLE>
5
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<TABLE>
<CAPTION>
Six months Six months
ended June 30, 1998 ended June 30, 1997
------------------------------- ------------------------------
Pro forma
(in thousands, except per share data) Income Shares EPS Income Shares EPS
---------- -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 85,674 188,667 $ 0.45 $ 75,689 198,927 $ 0.38
====== ======
Effect of dilutive securities, net of tax:
Options - 5,974 - 4,946
Convertible debentures 32 432 554 3,627
---------- -------- ---------- --------
Diluted earnings per share $ 85,706 195,073 $ 0.44 $ 76,243 207,500 $ 0.37
========== ======== ====== ========== ======== ======
</TABLE>
Note 5: In the Consolidated Statements of Cash Flows and on the Balance Sheet,
the caption Cash and Cash Equivalents includes investments in short-term,
highly-liquid securities having a maturity of three months or less. Supplemental
information relating to the Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 is presented in the following table. The
increase in interest paid in 1998 from 1997 is primarily due to overall higher
debt balances throughout the six month period (relating to the first quarter
impact of the April 1997 WMX share repurchase) as well as the timing of payments
on the public debt.
<TABLE>
<CAPTION>
(In thousands)
1998 1997
--------- ---------
Cash paid or received for:
<S> <C> <C>
Interest expense............................................ $ 44,475 $ 23,385
Interest and dividend income................................ $ 4,268 $ 3,901
</TABLE>
Note 6: Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This statement
establishes standards for reporting and display of comprehensive income and its
components in financial statements. Total comprehensive income which included
primarily net income and unrealized gains on marketable securities was $54.9
million and $48.9 million for the three months ended June 30, 1998 and 1997,
respectively, and $86.3 million and $73.6 million for the six months ended June
30, 1998 and 1997, respectively.
In 1998, Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", and Statement of Position No.
98-5, "Reporting on the Costs of Start Up and Preoperating Activities", were
issued. The Company intends to adopt these policies beginning in 1999 as
required by the Statements. The Company does not expect the adoption of these
statements to have a material impact to the financial statements.
In June 1998, the Financial Accounting Standards Board issued a Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The Company intends to adopt this Statement in January
2000 as required by the Statement. Adoption of this Statement is not expected to
have a material impact on the Company's financial statements.
6
<PAGE>
THE SERVICEMASTER COMPANY
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
Revenues increased 23 percent over the second quarter of 1997 to $1.2 billion
through a combination of acquisitions and solid growth from base operations.
Approximately 9 percent of the growth resulted from the formation of Employer
Services through an acquisition of a professional employer organization in
August of 1997. Professional employer organizations provide clients with
administrative processing of payroll, workers' compensation insurance, health
insurance, unemployment insurance and other employee benefit plans. This service
line has a significant impact on revenues and margins, because the entire
payroll of the employees for whom services are provided is recognized both as
revenue and operating cost. As a result, the margins are low in this business
and reduce the Company's consolidated operating income margin. Operating income
increased 16 percent to $113.8 million while margins decreased to 9.1 percent of
revenue from 9.7 percent in 1997. Operating margins excluding Employer Services
increased to 9.9 percent of revenue, reflecting improved operating efficiencies
and the continued growth of the higher margin businesses. Diluted earnings per
share in the second quarter were $.29 compared to pro forma diluted earnings per
share of $.25 last year, an increase of 16 percent. On this same basis, net
income grew 21 percent, from $46.7 million to $56.4 million. Net income grew at
a faster rate than earnings per share reflecting the increase in shares
outstanding resulting from the Company's equity offering in May 1998.
The Consumer Services business unit achieved double digit increases in revenues
and profits. The segment's profit growth included solid double digit increases
at all of the companies. Strong growth from both internal sources and
acquisitions, including the Rescue Rooter plumbing business, contributed to an
overall 20 percent increase in segment revenues. TruGreen-ChemLawn achieved
strong revenue increases from base operations and acquisitions, as well as
improved margins reflecting continued productivity improvements, cost controls
and the successful integration of acquisitions. The Company has also further
broadened its service lines with acquisitions of commercial landscaping
companies. Terminix achieved double digit growth in revenues and profits due to
excellent increases in termite completions and improved margins reflecting
strong growth in the higher margin renewal business, favorable weather, and
improved efficiencies. American Home Shield experienced strong momentum and very
good volume increases with double digit growth in real estate and
direct-to-consumer sales as well as strong renewal growth. The franchise
operations, Residential/Commercial and Merry Maids, achieved good profit growth
reflecting improvements in company-owned operations and cost controls. Rescue
Rooter achieved very good results, reflecting increased focus on marketing and
effective cost controls.
The Management Services business unit reported good revenue growth from
acquisitions and internal sources but margin pressures in the healthcare
businesses resulted in profits below last year. The Healthcare market achieved
slight revenue growth with profits below last year due to industry pressures,
7
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investments in the business, and reduced margins in the Company's
non-traditional service lines. Education reported increases in revenues and
profits, resulting from improved retention and strong cost controls. The
Business & Industry group reported strong growth primarily reflecting
acquisitions with a solid increase in new customer contracts.
Cost of services rendered and products sold increased 26 percent primarily due
to the addition of Employer Services, which carries a lower gross margin level
than the rest of the business, as well as general business growth. Cost of
services increased as a percentage of revenue to 76.4 percent in 1998 from 74.5
percent in 1997.
Selling and administrative expenses increased 13 percent due to general business
growth and acquisitions, and decreased as a percentage of revenue to 14.4
percent in 1998 from 15.7 percent in 1997. This decrease as a percentage of
revenue is primarily attributable to the addition of Employer Services, which
incurs lower levels of selling and administrative expenses as a percentage of
revenue, as well as efficiency gains at Consumer Services.
Interest expense increased over the prior year primarily due to increased debt
levels associated with acquisitions and higher rates. Interest and investment
income increased due to growth in and strong returns from the investment
portfolio at American Home Shield as well as gains realized on sales of
marketable securities.
SIX MONTHS ENDED JUNE 30, 1998 AS COMPARED TO JUNE 30, 1997
Revenues for the six months increased 22 percent over 1997 to $2.2 billion
reflecting solid internal growth and the effect of acquisitions. As discussed in
the three months comparison, a significant amount of the growth (9 percent)
resulted from the newly acquired professional employer organization. Operating
income increased 17 percent to $183.6 million while margins decreased to 8.2
percent of revenue from 8.6 percent in 1997. Operating margins excluding
Employer Services increased to 9.0 percent of revenue, reflecting strong growth
of our higher margin businesses, productivity improvements and the successful
integration of acquisitions. Diluted earnings per share for the six months were
$.44 compared to pro forma diluted earnings per share of $.37 last year, an
increase of 19 percent. On this same basis, net income grew 13 percent, from
$75.7 million to $85.7 million. Earnings per share grew at a faster rate than
net income primarily due to higher interest expense and a lower number of
shares outstanding related to the Company's repurchase of ServiceMaster
shares from Waste Management Inc. (WMX) in April 1997, partially offset by the
Company's equity offering in May 1998.
The Consumer Services business unit continued to achieve double digit increases
in revenue and profits reflecting good base business growth and acquisitions.
TruGreen-ChemLawn realized double digit increases in revenue and profit during
the first six months of the year reflecting solid customer count increases,
accelerated production due to favorable weather conditions and the entry into
the commercial landscape business through acquisitions of regional companies.
Strong revenue and profit growth at the Terminix operations were a result of
excellent growth in termite completions and renewals as well as margin
improvements reflecting improved efficiencies and favorable weather
8
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conditions. American Home Shield reported double digit increases in revenue
and profit with strong increases in real estate sales and direct-to
- -consumer sales. Residential/Commercial and Merry Maids reported good profit
growth for the six months as a result of operational improvements and cost
controls. Rescue Rooter performed well, reflecting marketing and productivity
initiatives.
The Management Services business unit reported revenue growth for the six months
primarily related to acquisitions as well as modest base business growth.
Profits for the six months were below the prior year level as increases in the
Education and Business & Industry markets were offset by reduced profitability
in the Healthcare market. For the six months, the Healthcare market achieved
good revenue growth with profits reduced from last year reflecting increased
pressures in the industry, more investments in the business compared to 1997 and
profitability declines in non-traditional service lines. The Education market
achieved strong profit growth due to better retention as well as the favorable
effect of the elimination of costs incurred last year related to unwinding a
large contract. The Business & Industry group reported strong revenue and profit
growth compared to last year primarily reflecting acquisitions with improved
sales and customer retention in the base business.
Cost of services rendered and products sold increased 24 percent primarily due
to the addition of Employer Services, as well as general business growth. Cost
of services increased as a percentage of revenue to 78.4 percent in 1998 from
77.2 percent in 1997. Excluding Employer Services, cost of services increased 12
percent and decreased as a percentage of revenue to 77.0 percent. This decrease
primarily reflects the changing mix of the business as Consumer Services
increases in size in relationship to the overall business of the Company. The
Consumer Services businesses generally operates at higher gross margin levels
than the rest of the business but also incur somewhat higher selling and
administrative expenses as a percentage of revenue.
Selling and administrative expenses increased 14 percent due to general business
growth and acquisitions and decreased as a percentage of revenue to 13.3 percent
in 1998 from 14.2 percent in 1997. This decrease as a percentage of revenue is
primarily attributable to the addition of Employer Services and the efficiency
gains at Consumer Services, offset in part by the changing business mix of the
Company noted above.
Interest expense increased over the prior year primarily due to increased debt
outstanding throughout the six months relating to the repurchase of
ServiceMaster shares held by WMX and acquisitions. Interest and investment
income increased due to growth in the investment portfolio at American Home
Shield, as well as gains realized on sales of marketable securities.
FINANCIAL POSITION
Net cash provided from operations of $107.4 million represents a slight decrease
compared to the first six months of 1997, reflecting the timing of certain
items. The decline was primarily due to the acceleration of customer prepayments
at TruGreen-ChemLawn into the fourth quarter of 1997 due to a successful
pre-season selling campaign and the current year funding of early seasonal
investments for the acquired lawn care operations. Due to the seasonality of the
lawn care and pest control operating cycles, the Company's working capital
9
<PAGE>
needs are higher during the first half of the year than in the second half, with
a corresponding impact on funds provided from operations. Management believes
that funds generated from operations and other existing resources will continue
to be adequate to satisfy the ongoing working capital needs of the Company.
Federal taxes on the Company's earnings, while accrued in the consolidated
income statement, will not have to be paid until the first quarter of 1999. At
that time, the Company will be responsible for its 1998 obligation and will
begin making estimated payments for 1999 as well. In addition, a large portion
of the tax expense will be deferred for a longer period due to the significant
timing differences between book and tax basis. Since the Company is able to
defer its 1998 tax payment, the cash flow is fairly comparable to last year when
the Company was in partnership form and paid no federal taxes.
In the second quarter, the Company filed a Form S-3 Registration Statement, and
14.15 million Company shares were sold at $28.75 per share. This included
approximately 7.6 million of newly issued shares from the Company and 6.55
million shares sold by existing shareholders. The net proceeds to the Company,
after the underwriting discount and offering expenses, was approximately $209
million and was used to reduce outstanding debt under existing bank credit
facilities.
The increase in accounts and notes receivable over year end levels reflects
general business growth, increased seasonal build-ups in the Consumer Services
segment, and acquisitions. The increase in inventories is a result of normal
seasonal build-ups in the pest control and lawn care businesses.
Prepaids and other assets have increased from year end because of seasonality in
the lawn care business. The lawn care operation defers certain marketing costs
that are incurred during the first six months but are directly associated with
revenues that are realized in subsequent quarters of the current year. These
costs are then amortized over the balance of the current lawn care production
season, as the related revenues are recognized. In addition, prepaid expenses
have also increased due to the deferral of contract acquisition costs at
American Home Shield which have grown as a result of the increased volume of
warranty contracts written. Deferred revenues also increased significantly,
reflecting strong growth and increases in customer prepayments for lawn care
services, as well as warranty contracts.
Property and equipment increased due to general business growth and
acquisitions. Capital expenditures grew primarily due to investments in
automatic dialers at TruGreen-ChemLawn and computer system upgrades throughout
the organization. The Company has no material commitments at this time.
Intangible assets increased from year end primarily reflecting the effect of
acquisitions, which included Rescue Rooter, commercial landscape companies and
other smaller Consumer Services and Management Services companies.
Accrued liabilities increased from year end reflecting seasonal activity at
Consumer Services and an increase in income taxes payable. The tax liability
represents taxes payable on 1998 earnings which payment has been deferred until
first quarter 1999.
10
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Debt levels decreased reflecting the use of proceeds from the equity offering to
pay down debt offset in part by acquisitions, capital spending and
distributions. The Company is a party to a number of long-term debt agreements
which require it to maintain compliance 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.
Total shareholders' equity increased to $820.1 million in 1998 from $524.4
million at December 31, 1997 reflecting the equity offering, strong growth in
earnings and shares issued for acquisitions which were partially offset by
shareholder distributions. Cash distributions paid directly to shareholders for
the six months ended June 30, 1998, totaled $45 million or $.24 per share. Total
cash distributions paid to shareholders was consistent with the prior year
primarily reflecting a 6 percent increase in per share distributions offset by
the April 1997 repurchase of ServiceMaster shares from WMX.
On July 23, 1998, the Company filed a Form S-1 Shelf Registration Statement with
the Securities and Exchange Commission to issue up to 3.5 million shares of
common stock in connection with the completion of future acquisitions.
11
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 1998
THE SERVICEMASTER COMPANY
(Registrant)
By: /s/Steven C. Preston
-------------------------------------------------
Steven C. Preston
Executive Vice President and Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM SERVICEMASTER'S QUARTERLY REPORT TO SHAREHOLDERS
FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001052045
<NAME> THE SERVICEMASTER COMPANY
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 52,324 38,972
<SECURITIES> 65,580 52,075
<RECEIVABLES> 418,921 352,661
<ALLOWANCES> 37,576 31,810
<INVENTORY> 55,135 52,020
<CURRENT-ASSETS> 733,392 579,423
<PP&E> 432,802 339,010
<DEPRECIATION> 240,730 187,871
<TOTAL-ASSETS> 2,804,220 2,199,746
<CURRENT-LIABILITIES> 681,245 498,867
<BONDS> 1,173,159 1,166,506
0 0
0 0
<COMMON> 1,964 0
<OTHER-SE> 818,173 405,498
<TOTAL-LIABILITY-AND-EQUITY> 2,804,220 2,199,746
<SALES> 0 0
<TOTAL-REVENUES> 2,226,415 1,827,930
<CGS> 0 0
<TOTAL-COSTS> 1,746,163 1,410,679
<OTHER-EXPENSES> 296,684 260,214
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 48,640 31,192
<INCOME-PRETAX> 143,752 126,995
<INCOME-TAX> 58,078 51,306
<INCOME-CONTINUING> 85,674 75,689
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 85,674 75,689
<EPS-PRIMARY> .45 .38
<EPS-DILUTED> .44 .37
</TABLE>
