<PAGE>
FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NOS. 333-49707 AND 333-52385
12,600,000 SHARES
SERVICEMASTER(R) LOGO
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
Of the 12,600,000 shares of Common Stock offered, 10,710,000 shares are
being offered hereby in the United States and 1,890,000 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 12,600,000 shares of Common Stock offered, 7,600,000 shares are being
sold by The ServiceMaster Company and 5,000,000 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 May 11, 1998, the last reported sale price of the
Common Stock on the New York Stock Exchange was $28.75 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.......... $28.75 $1.18 $27.57 $27.57
Total (3).......... $362,250,000 $14,868,000 $209,532,000 $137,850,000
</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 $406,922,929, $16,701,532 and
$180,689,396, 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 May 15, 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 May 11, 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 10,710,000 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 1,890,000 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.................... 4,250,000 shares
International Offering........... 750,000 shares
Total.......................... 5,000,000 shares
Common Stock to be outstanding
after the Offerings(2)............ 195,392,000 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 187,792,000 shares outstanding as of April 30, 1998 and excludes:
(i) 11,977,558 shares of Common Stock issuable upon exercise of outstanding
stock options, and (ii) 6,718,780 shares of Common Stock reserved for
future issuance under the Company's existing equity incentive plans.
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 $209 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 May 11, 1998)............. 29.00 26.88 0.12
</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).................. 550,000 340,968
Other................................................ 98,803 98,803
---------- ----------
Total long-term debt............................... 1,247,845 1,038,813
---------- ----------
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............................. 519,424 728,380
Retained earnings...................................... 65,000 65,000
Restricted stock....................................... (4,270) (4,270)
Treasury stock......................................... (57,582) (57,582)
---------- ----------
Total shareholders' equity......................... 524,438 733,470
---------- ----------
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 were
reserved for future issuance as a result of the approval of certain equity
incentive plans 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
<PAGE>
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.
22
<PAGE>
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.
23
<PAGE>
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.
26
<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
28
<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 1.8 844,157 2,480,011 1.3 655,843
G. Walter Hansen
Charitable Trust dated
12/18/86............... 933,600 * 318,252 615,348 * 288,588
Kenneth N. Hansen, Jr.
Charitable Trust dated
12/18/86............... 627,954 * 214,061 413,893 * 194,109
Kenneth N. Hansen, Sr.
and Kenneth N. Hansen,
Jr. Charitable
Remainder Unitrust(3).. 202,500 * 76,924 125,576 * 59,763
Darlene K. Hansen
Charitable Trust dated
12/18/86............... 202,500 * 69,030 133,470 * 62,595
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 * 39,394 30,606 * 30,606
ServiceMaster Profit
Sharing, Savings and
Retirement Plan(4)..... 7,718,039 4.1 3,000,000 4,718,039 2.4 --
Wessner Foundation(5)... 1,012,500 * 137,663 874,837 * 262,337
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. ......................................... 1,994,500
Credit Suisse First Boston Corporation........................ 1,994,500
Merrill Lynch, Pierce, Fenner & Smith Incorporated............ 1,994,500
Morgan Stanley & Co. Incorporated............................. 1,994,500
Robert W. Baird & Co., Incorporated........................... 297,000
BancAmerica Robertson Stephens................................ 297,000
George K. Baum & Company...................................... 297,000
William Blair & Company, L.L.C................................ 297,000
Brean Murray & Co., Inc....................................... 190,000
Cowen & Company............................................... 190,000
Janney Montgomery Scott Inc................................... 190,000
Monness, Crespi, Hardt & Co., Inc............................. 190,000
J.P. Morgan Securities Inc.................................... 297,000
NationsBanc Montgomery Securities, Inc........................ 297,000
Piper Jaffray Inc............................................. 190,000
----------
Total..................................................... 10,710,000
==========
</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 $0.71 per share. The U.S. Underwriters may allow,
and such dealers may reallow, a concession not in excess of $0.10 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 1,890,000 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
U-1
<PAGE>
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.
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 10,710,000 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 at the time of
issuance 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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
12,600,000 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>
12,600,000 SHARES
SERVICEMASTER(R) [LOGO]
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
Of the 12,600,000 shares of Common Stock offered, 1,890,000 shares are being
offered hereby in an international offering outside the United States and
10,710,000 shares are being offered in a concurrent United States offering.
The public offering price and the aggregate underwriting discount per share
will be identical for both offerings. See "Underwriting".
Of the 12,600,000 shares of Common Stock offered, 7,600,000 shares are being
sold by The ServiceMaster Company and 5,000,000 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 May 11, 1998, the last reported sale price of the
Common Stock on the New York Stock Exchange was $28.75 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.......... $28.75 $1.18 $27.57 $27.57
Total (3).......... $362,250,000 $14,868,000 $209,532,000 $137,850,000
</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 International
Underwriters an option for 30 days to purchase up to an additional 233,076
shares of Common Stock at the offering price per share, less the
underwriting discount, solely to cover over-allotments. Additionally, such
Selling Stockholders have granted the U.S. Underwriters a similar option
with respect to an additional 1,320,765 shares as part of the concurrent
U.S. offering. If such options are exercised in full, the total offering
price, underwriting discount and proceeds to the Selling Stockholders will
be $406,922,929, $16,701,532 and $180,689,396, respectively. See
"Underwriting".
----------------
The shares offered hereby are offered severally by the International
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 May 15, 1998 against payment therefor in
immediately available funds.
GOLDMAN SACHS INTERNATIONAL CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH INTERNATIONAL MORGAN STANLEY DEAN WITTER
CREDIT LYONNAIS SECURITIES BMO NESBITT BURNS INTERNATIONAL LTD.
----------------
The date of this Prospectus is May 11, 1998.
<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.
---------------
This Prospectus does not constitute an offer to sell or the solicitation of
an offer to buy the shares offered hereby in any jurisdiction in which such
offer or solicitation is unlawful. There are restrictions on the offer and
sale of the shares offered hereby in the United Kingdom. All applicable
provisions of the Financial Services Act 1986 and the Public Offers of
Securities Regulations 1995 with respect to anything done by any person in
relation to the shares offered hereby, in, from or otherwise involving the
United Kingdom must be complied with. See "Underwriting".
In the Prospectus, references to "dollars", "U.S.$" and "$" are to United
States dollars.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, THE
PACIFIC STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
3
<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 "International Underwriters"), and each of such
International Underwriters, for whom Goldman Sachs International, Credit
Suisse First Boston (Europe) Limited, Merrill Lynch International and Morgan
Stanley & Co. International Limited 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 International................................... 434,000
Credit Suisse First Boston (Europe) Limited................... 434,000
Merrill Lynch International................................... 434,000
Morgan Stanley & Co. International Limited.................... 434,000
Credit Lyonnais Securities.................................... 77,000
BMO Nesbitt Burns International Ltd........................... 77,000
---------
Total..................................................... 1,890,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
International Underwriters are committed to take and pay for all of the shares
offered hereby, if any are taken.
The International 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 $0.71 per share. The International
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $0.10 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 an Underwriting
Agreement with the underwriters of the U.S. offering (the "U.S. Underwriters"
and, collectively with the International Underwriters, the "Underwriters")
providing for the concurrent offer and sale of 10,710,000 shares of Common
Stock in an offering in 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 U.S. offering, and vice versa. The representatives of the U.S.
Underwriters are Goldman, Sachs & Co., Credit Suisse First Boston Corporation,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co.
Incorporated.
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 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 named herein 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
U-1
<PAGE>
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.
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 International
Underwriters an option exercisable for 30 days after the date of this
Prospectus to purchase up to an aggregate of 233,076 additional shares of
Common Stock solely to cover over-allotments, if any. If the International
Underwriters exercise their over-allotment option, the International
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
1,890,000 shares of Common Stock offered hereby. Such Selling Stockholders
have also granted the U.S. Underwriters a similar option to purchase up to an
aggregate of 1,320,765 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 at the time of
issuance or (ii) may not be sold by the holder thereof until after expiration
of the Lock-Up Period.
Each International Underwriter has also agreed that (a) it has not offered
or sold and prior to the date six months after the date of issue of the shares
of Common Stock will not offer or sell any shares of Common Stock to persons
in the United Kingdom except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995, (b) it has complied, and will comply, with all applicable
provisions of the Financial Services Act 1986 of Great Britain with respect to
anything done by it in relation to the shares of Common Stock in, from or
otherwise involving the United Kingdom, and (c) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received
by it in connection with the issuance of the shares of Common Stock to a
person who is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1996 of Great Britain
or is a person to whom the document may otherwise lawfully be issued or passed
on.
Buyers of shares of Common Stock offered hereby may be required to pay stamp
taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the public offering price.
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
U-2
<PAGE>
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.
Lord Griffiths of Fforestfach, a director of the Company, is currently an
international adviser to Goldman, Sachs & Co.
U-3
<PAGE>
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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>
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12,600,000 SHARES
THE SERVICEMASTER COMPANY
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
-----------
SERVICEMASTER(R)
-----------
GOLDMAN SACHS INTERNATIONAL
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY DEAN WITTER
REPRESENTATIVES OF THE UNDERWRITERS
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