3,500,000 Shares
The ServiceMaster Company
Common Stock
(par value $.01 per share)
------------------------------------
The 3,500,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), of The ServiceMaster Company, a Delaware corporation (the
"Company"), offered hereby may be issued from time to time in the future by the
Company on the completion of acquisitions of assets, businesses or securities,
or on the payment of dividends on or conversion of shares of preferred stock or
the conversion of or payment of interest on convertible notes issued in
connection with such acquisitions of other businesses, properties or securities.
This Prospectus may also be used, with the Company's prior consent, by persons
or entities who have received or will receive shares covered by this Prospectus
in connection with such acquisitions and who wish to offer and sell such shares
under circumstances requiring or making desirable its use and by certain donees
of such persons or entities.
It is expected that the terms of acquisitions involving the issuance of
the shares of Common Stock covered by this Prospectus will be determined by
direct negotiations with the owners or controlling persons of the assets,
businesses or securities to be acquired, and that the shares of Common Stock
issued will be valued at prices reasonably related to the market price of the
Common Stock either at or about the time an agreement is entered into concerning
the terms of the acquisition or at or about the time the shares are delivered.
No underwriting discounts or commissions will be paid, although finder fees and
certain other fees may be paid in connection with certain acquisitions. Any
person receiving such fees may be deemed to be an "underwriter" within the
meaning of the Securities Act of 1933, as amended (the "1933 Act"), and any
profit on the resale of shares of Common Stock purchased by them may be deemed
to be underwriting commissions or discounts under the 1933 Act.
The Common Stock is listed on the New York Stock Exchange, Inc. (the
"NYSE") under the symbol "SVM." On July 17, 1998, the closing sale price of the
Common Stock on the NYSE was $353/16 per share. See "Common Stock Price Range
and Dividends."
All references to numbers of shares of Common Stock, or options for
shares of Common Stock, and all references to market and option prices per
share, and income per share in this Prospectus have been adjusted to reflect all
stock dividends and stock splits of the Company through the date of this
Prospectus.
----------------------
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.
----------------------
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.
----------------------
The date of this Prospectus is August 4, 1998.
<PAGE>
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION..........................................................3
SUMMARY ......................................................................4
THE REINCORPORATION............................................................8
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS ....................................8
SECURITIES COVERED BY THIS PROSPECTUS.........................................10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................13
BUSINESS .....................................................................21
MANAGEMENT....................................................................30
OWNERSHIP OF COMMON STOCK.....................................................39
DESCRIPTION OF COMMON STOCK...................................................41
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY ..............................45
LEGAL MATTERS.................................................................46
EXPERTS .....................................................................46
INDEX TO FINANCIAL STATEMENTS................................................F-1
------------------------------------
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "1934 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") under the symbol "SVM" 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-1 (together with all amendments and exhibits thereto, the "Registration
Statement") under the 1933 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 or incorporated by reference
to 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.
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. 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. 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.
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.
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.
4
<PAGE>
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.
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
On April 14, 1998, the Company acquired the business and assets of
Quantum Resources Corporation, a temporary employer services company
headquartered in Richmond, Virginia.
On May 11, 1998, the Company completed a combined primary/secondary
offering of its Common Stock at a price of $28.75 per share. 7,600,000 shares
were sold by the Company and approximately 6,550,000 shares were sold by
existing stockholders. The net proceeds to the Company after the underwriting
discount and expenses of the offering were approximately $209,000,000.
On July 28, 1998, the Company announced a three-for-two share split
effective on August 26, 1998 for shareholders of record on August 12, 1998. Any
fractional shares will be redeemed in cash. The Company also announced that it
anticipates a dividend payment for the fourth quarter of 1998 of $0.09 per
share. This would result in an expected 1998 distribution of $0.33 per share on
a post-split basis and $0.495 per share on a pre-split basis. This post-split
figure is slightly higher than the Company's previously announced intention to
distribute $0.49 per share on a pre-split basis. None of the references in this
prospectus to shares outstanding, net income per share, cash distributions per
share or market price per share reflect the foregoing August 1998 3-for-2 share
split.
5
<PAGE>
SUMMARY 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 financial information for the three months
ended March 31, 1997 and March 31, 1998 are derived from unaudited consolidated
financial statements and the accounting records of the Company, and, in the
opinion of the Company, reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of results for interim
periods. The information presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and accompanying notes
included elsewhere in this Prospectus.
<TABLE>
Three Months Ended Year Ended December 31,
--------------------------- ---------------------------------------------------------
March 31, March 31,
1998 1997 1997 1996 1995 1994 1993(2)
--------------------------- ---------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results:
Operating revenue................ $ 981,788 $ 817,136 $ 3,961,502 $ 3,458,328 $ 3,202,504 $ 2,985,207 $ 2,758,859
Cost of services rendered and products
sold............................. 794,797 657,145 3,058,160 2,681,008 2,499,700 2,356,435 2,192,684
---------------------------------------------------------------------------------------
Selling and administrative expense ---------------------------------------------------------------------------------------
Operating income................. 69,773 58,600 343,933 295,218 251,867 214,026 173,044
Non-operating expense (income):
Interest expense(3)........... 24,095 10,392 76,447 38,298 35,855 31,543 32,483
Interest and investment income (3,435) (2,567) (14,304) (10,183) (7,310) (5,389) (5,882)
---------------------------------------------------------------------------------------
Minority interest............. ---------------------------------------------------------------------------------------
Income before income taxes....... 49,113 48,627 274,279 252,397 177,607 142,638 117,893
Provision for income taxes (pro forma 19,843 19,645 110,809 101,968 71,753 57,626 47,629
corporate form in 1997-1993)(4).. ---------------------------------------------------------------------------------------
Net income (pro forma corporate form 29,270 28,982 163,470 150,429 105,854 85,012 79,264
in 1997-1993).................... ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Basic net income per share (pro forma
corporate form in 1997-1993)(4)(6) $ 0.16 $ 0.13 $ 0.86 $ 0.71 $ 0.61 $ 0.50 $ 0.42
Diluted net income per share (pro
forma corporate form in 1997-
1993)(4)(6)...................... $ 0.15 $ 0.13 $ 0.82 $ 0.69 $ 0.59 $ 0.48 $ 0.40
Cash distributions per share to
shareholders..................... $ 0.12 $ 0.11 $ 0.47 $ 0.44 $ 0.42 $ 0.41 $ 0.40
Partnership Information: (4)
Income before income taxes....... $ 48,627 $ 274279 $ 252397 $ 177607 $ 142638 $ 117893
Provision for income taxes....... 1,767 10,203 7,257 5,580 2,755 2,146
One time tax benefit relating to change -------------------------------------------------------------------------
in tax status(5)................. -- $ 65,000 -- -- -- --
Net income....................... -------------------------------------------------------------------------
-------------------------------------------------------------------------
Other Data:
EBITDA(7)........................ $ 94,445 $ 77,419 $ 443,788 $ 369,701 $ 279,450 $ 228,389 $ 200,332
Net cash provided from operations 12,585 30,428 371,889 341,386 297,425 253,863 169,103
Property additions............... 23,354 12,970 46,232 42,952 44,624 32,202 33,113
Operating income margin.......... 7.1% 7.2% 8.7% 8.5% 7.9% 7.2% 6.3%
Percent increase in pro forma
diluted net income per share..... 15.4% 8.3% 18.8% 16.9% 22.9% 20.0% 21.2%
</TABLE>
6
<PAGE>
<TABLE>
Three Months Ended Year Ended December 31,
--------------------------- ---------------------------------------------------------
March 31, March 31,
1998 1997 1997 1996 1995 1994 1993(2)
--------------------------- ---------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results:
Operating revenue................ $ 981,788 $ 817,136 $ 3,961,502 $ 3,458,328 $ 3,202,504 $ 2,985,207 $ 2,758,859
Cost of services rendered and products
sold............................. 794,797 657,145 3,058,160 2,681,008 2,499,700 2,356,435 2,192,684
Selling and administrative expenses----------------------------------------------------------------------------------------
Operating income................. 69,773 58,600 343,933 295,218 251,867 214,026 173,044
Non-operating expense (income):
Interest expense(3)........... 24,095 10,392 76,447 38,298 35,855 31,543 32,483
Interest and investment income (3,435) (2,567) (14,304) (10,183) (7,310) (5,389) (5,882)
Minority interest............. ----------------------------------------------------------------------------------------
Income before income taxes....... 49,113 48,627 274,279 252,397 177,607 142,638 117,893
Provision for income taxes (pro forma
corporate form in 1997-1993)(4).. ----------------------------------------------------------------------------------------
Net income (pro forma corporate form--------------------------------------------------------------------------------------
in 1997-1993).................... ---------------------------------------------------------------------------------------
Financial Position at Period End:
Working capital.................. $ 35,130 $ 50,083 $ 35,907 $ 73,782 $ 20,309 $ 26,650 $ 46,773
Total assets..................... 2,698,231 $ 2,185,624 2,475,224 1,846,841 1,649,890 1,230,839 1,122,461
Long-term debt................... 1,379,936 $ 572,863 1,247,845 482,315 411,903 386,511 384,509
Shareholders' equity (3)......... 548,867 972,192 524,438 796,767 746,660 307,266 289,219
- ---------------------------
</TABLE>
(1) All per share data reflect the three-for-two share splits in 1993, 1996
and 1997. For interim accounting purposes, certain costs directly
associated with the generation of lawn care revenues are initially
deferred and recognized as expense as the related revenues are recognized.
All such costs are fully recognized within the fiscal year in which they
are incurred.
(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
corporate 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 acquisition of Barefoot, Inc.
("Barefoot") and approximately $626 million to fund the repurchase of the
19 percent ownership interest in ServiceMaster held by Waste Management,
Inc. ("WMX"). 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's Discussion and Analysis of Financial Condition and Results
of Operations."
(4) 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 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>
Before One-Time Benefit Actual
------------------------------------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
------------------------------------------- -------------------------------------------------------
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>
In addition, with respect to the three-month period ended March 31, 1997,
basic and diluted net income per share was $.22 and $.21, respectively, in
partnership form.
(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 economic 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 includes no dilution from options, debentures or other
financial instruments and is computed by dividing income available to
common stockholders by the weighted average number of shares outstanding.
Diluted earnings per share reflects the potential dilution of convertible
securities and options to purchase common stock. Basic earnings per share
are calculated based on 186,597,000 shares in the three month period ended
March 31, 1998, 190,629,000 shares in 1997, 216,309,000 shares in the three
month period ended March 31, 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 192,970,000 shares in the three
month period ended March 31, 1998, 199,760,000 shares in 1997, 224,429,000
shares in the three month period ended March 31, 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"). 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.
7
<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 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 1933 Act and Section
21E of the 1934 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.
8
<PAGE>
Continued Consolidation of the U.S. Hospital Market. In recent years,
there has been an ongoing 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.
9
<PAGE>
SECURITIES COVERED BY THIS PROSPECTUS
This Prospectus covers shares of Common Stock that may be issued from
time to time in the future by the Company on the completion of acquisitions of
assets, businesses or securities, or on the payment of dividends on or
conversion of shares of preferred stock or the conversion of or payment of
interest on convertible notes issued in connection with such acquisitions of
other businesses, properties or securities. The consideration offered by the
Company in such acquisitions, in addition to the shares of Common Stock offered
by this Prospectus, may include cash, debt or other securities (which may be
convertible into shares of Common Stock covered by this Prospectus), or
assumption by the Company of liabilities of the business, properties or
securities being acquired or of their owners, or a combination thereof.
It is expected that the terms of acquisitions involving the issuance of
the shares of Common Stock covered by this Prospectus will be determined by
direct negotiations with the owners or controlling persons of the assets,
businesses or securities to be acquired, and that the shares of Common Stock
issued will be valued at prices reasonably related to the market price of the
Common Stock either at or about the time an agreement is entered into concerning
the terms of the acquisition or at or about the time the shares are delivered.
No underwriting discounts or commissions will be paid, although finder fees and
certain other fees may be paid in connection with certain acquisitions. Any
person receiving such fees may be deemed to be an "underwriter" within the
meaning of the 1933 Act, and any profit on the resale of shares of Common Stock
purchased by them may be deemed to be underwriting commissions or discounts
under the 1933 Act.
The Company may from time to time, in an effort to maintain an orderly
market in the Common Stock or for other reasons, negotiate agreements with
persons receiving Common Stock covered by this Prospectus that will limit the
number of shares that may be sold by such persons at specified intervals. Such
agreements may be more restrictive than restrictions on sales made pursuant to
the exemption from registration requirements of the 1933 Act, including the
requirements under Rule 144 or Rule 145(d), and certain persons party to such
agreements may not otherwise be subject to such 1933 Act requirements. The
Company anticipates that, in general, such negotiated agreements will be of
limited duration and will permit the recipients of Common Stock issued in
connection with acquisitions to sell up to a specified number of shares per
business day or days.
With the consent of the Company, this Prospectus may also be used by
persons who have received or will receive from the Company Common Stock covered
by this Prospectus and who may wish to sell such stock under circumstances
requiring or making desirable its use. This Prospectus may also be used, with
the Company's consent, by pledgees, donees or assignees of such persons. The
Company's consent to any such use may be conditioned upon the agreement by such
persons not to offer more than a specified number of shares following
supplements or amendments to this Prospectus, which the Company may agree to use
its best efforts to prepare and file at certain intervals. The Company may
require that any such offering be effected in an organized manner through
securities dealers.
Sales by means of this Prospectus may be made from time to time
privately at prices to be individually negotiated with the purchasers, or
publicly through transactions in the over-the-counter market or on a securities
exchange (which may involve block transactions), at prices reasonably related to
market prices at or about the time of sale or at negotiated prices.
Broker-dealers participating in such transactions may act as agent or as
principal and, when acting as agent, may receive commissions from the purchasers
as well as from the sellers (if also acting as agent for the purchasers). The
Company may indemnify any broker-dealer participating in such transactions
against certain liabilities, including liabilities under the 1933 Act. Profits,
commissions and discounts on sales by persons who may be deemed to be
underwriters within the meaning of the 1933 Act may be deemed underwriting
compensation under the 1933 Act.
Stockholders may also offer shares of stock covered by this Prospectus
by means of prospectuses under other registration statements or pursuant to
exemptions from the registration requirements of the 1933 Act, including sales
which meet the requirements of Rule 144 or Rule 145(d) under the 1933 Act.
Stockholders should seek the advice of their own counsel with respect to the
legal requirements for such sales.
10
<PAGE>
SELECTED 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 financial information for the three months
ended March 31, 1997 and March 31, 1998 are derived from unaudited consolidated
financial statements and the accounting records of the Company, and, in the
opinion of the Company, reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of results for interim
periods. The information presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and accompanying notes
included elsewhere in this Prospectus.
<TABLE>
Three Months Ended Year Ended December 31,
--------------------------- ---------------------------------------------------------
March 31, March 31,
1998 1997 1997 1996 1995 1994 1993(2)
--------------------------- ---------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results:
Operating revenue................ $ 981,788 $ 817,136 $ 3,961,502 $ 3,458,328 $ 3,202,504 $ 2,985,207 $ 2,758,859
Cost of services rendered and products
sold............................. 794,797 657,145 3,058,160 2,681,008 2,499,700 2,356,435 2,192,684
s
Selling and administrative expense ----------------------------------------------------------------------------------------
Operating income................. 69,773 58,600 343,933 295,218 251,867 214,026 173,044
Non-operating expense (income):
Interest expense(3)........... 24,095 10,392 76,447 38,298 35,855 31,543 32,483
Interest and investment income (3,435) (2,567) (14,304) (10,183) (7,310) (5,389) (5,882)
Minority interest............. ---------------------------------------------------------------------------------------
Income before income taxes....... 49,113 48,627 274,279 252,397 177,607 142,638 117,893
Provision for income taxes (pro forma 19,843 19,645 110,809 101,968 71,753 57,626 47,629
corporate form in 1997-1993)(4).. ---------------------------------------------------------------------------------------
Net income (pro forma corporate form 29,270 28,982 163,470 150,429 105,854 85,012 79,264
in 1997-1993).................... ---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Basic net income per share (pro forma
corporate form in 1997-1993)(4)(6) $ 0.16 $ 0.13 $ 0.86 $ 0.71 $ 0.61 $ 0.50 $ 0.42
Diluted net income per share (pro
forma corporate form in 1997-
1993)(4)(6)...................... $ 0.15 $ 0.13 $ 0.82 $ 0.69 $ 0.59 $ 0.48 $ 0.40
Cash distributions per share to
shareholders..................... $ 0.12 $ 0.11 $ 0.47 $ 0.44 $ 0.42 $ 0.41 $ 0.40
Partnership Information: (4)
Income before income taxes....... $ 48,627 $ 274279 $ 252397 $ 177607 $ 142638 $ 117893
Provision for income taxes....... 1,767 10,203 7,257 5,580 2,755 2,146
One time tax benefit relating to change -------------------------------------------------------------------------
in tax status(5)................. -- $ 65,000 -- -- -- --
Net income.......................
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Other Data:
EBITDA(7)........................ $ 94,445 $ 77,419 $ 443,788 $ 369,701 $ 279,450 $ 228,389 $ 200,332
Net cash provided from operations 12,585 30,428 371,889 341,386 297,425 253,863 169,103
Property additions............... 23,354 12,970 46,232 42,952 44,624 32,202 33,113
Operating income margin.......... 7.1% 7.2% 8.7% 8.5% 7.9% 7.2% 6.3%
Percent increase in pro forma
diluted net income per share..... 15.4% 8.3% 18.8% 16.9% 22.9% 20.0% 21.2%
</TABLE>
11
<PAGE>
<TABLE>
Three Months Ended Year Ended December 31,
--------------------------- ---------------------------------------------------------
March 31, March 31,
1998 1997 1997 1996 1995 1994 1993(2)
--------------------------- ---------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results:
Operating revenue................ $ 981,788 $ 817,136 $ 3,961,502 $ 3,458,328 $ 3,202,504 $ 2,985,207 $ 2,758,859
Cost of services rendered and products
sold............................. 794,797 657,145 3,058,160 2,681,008 2,499,700 2,356,435 2,192,684
Selling and administrative expenses---------------------------------------------------------------------------------------
Operating income................. 69,773 58,600 343,933 295,218 251,867 214,026 173,044
Non-operating expense (income):
Interest expense(3)........... 24,095 10,392 76,447 38,298 35,855 31,543 32,483
Interest and investment income (3,435) (2,567) (14,304) (10,183) (7,310) (5,389) (5,882)
Minority interest............. ----------------------------------------------------------------------------------------
Income before income taxes....... 49,113 48,627 274,279 252,397 177,607 142,638 117,893
Provision for income taxes (pro forma
corporate form in 1997-1993)(4).. ----------------------------------------------------------------------------------------
Net income (pro forma corporate form---------------------------------------------------------------------------------------
in 1997-1993).................... ----------------------------------------------------------------------------------------
Financial Position at Period End:
Working capital.................. $ 35,130 $ 50,083 $ 35,907 $ 73,782 $ 20,309 $ 26,650 $ 46,773
Total assets..................... 2,698,231 $ 2,185,624 2,475,224 1,846,841 1,649,890 1,230,839 1,122,461
Long-term debt................... 1,379,936 $ 572,863 1,247,845 482,315 411,903 386,511 384,509
Shareholders' equity (3)......... 548,867 972,192 524,438 796,767 746,660 307,266 289,219
</TABLE>
- ---------------------------
(1) All per share data reflect the three-for-two share splits in 1993, 1996
and 1997. For interim accounting purposes, certain costs directly
associated with the generation of lawn care revenues are initially
deferred and recognized as expense as the related revenues are recognized.
All such costs are fully recognized within the fiscal year in which they
are incurred.
(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
corporate 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 acquisition of Barefoot, Inc
("Barefoot") and approximately $626 million to fund the repurchase of the
19 percent ownership interest in ServiceMaster held by Waste Management,
Inc. ("WMX"). 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's Discussion and Analysis of Financial Condition and Results
of Operations."
(4) 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 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 Benefit Actual
------------------------------------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
------------------------------------------- -------------------------------------------------------
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>
In addition, with respect to the three-month period ended March 31, 1997,
basic and diluted net income per share was $.22 and $.21, respectively in
partnership form.
(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 economic 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 includes no dilution from options, debentures or other
financial instruments and is computed by dividing income available to
common stockholders by the weighted average number of shares outstanding.
Diluted earnings per share reflects the potential dilution of convertible
securities and options to purchase common stock. Basic earnings per share
are calculated based on 186,597,000 shares in the three month period ended
March 31, 1998, 190,629,000 shares in 1997, 216,309,000 shares in the three
month period ended March 31, 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 192,970,000 shares in the three
month period ended March 31, 1998, 199,760,000 shares in 1997, 224,429,000
shares in the three month period ended March 31, 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"). 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.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
First Quarter 1998 Compared to First Quarter 1997
Revenues increased 20 percent over the first quarter of 1997 to $982
million through a combination of acquisitions and solid growth from base
operations. Approximately half of the growth resulted from the formation of
ServiceMaster Employer Services through an acquisition of a professional
employer organization in August of 1997. This service line has a significant
impact on revenues and margins, because the entire payroll of the employees for
whom services are provided is recognized both as revenue and operating cost. As
a result, the margins are low in this business and reduce the Company's
consolidated operating income margin. Operating income increased 19 percent to
$69.8 million while margins decreased to 7.1 percent of revenue from 7.2 percent
in 1997. Operating margins excluding ServiceMaster Employer Services increased
to 7.8 percent of revenue, reflecting improved operating efficiencies and the
continued growth of the higher margin businesses. Corporate earnings per share
in the first quarter were $.15 compared to pro forma corporate earnings per
share of $.13 last year, an increase of 15 percent. Pro forma information
presents the results of operations as if the Company had been a taxable
corporation in both periods. On this same basis, net income grew one percent,
from $29.0 million to $29.3 million. Net income growth was affected heavily by
higher interest expense, resulting primarily from the transaction with WMX in
which the Company repurchased WMX's 19 percent ownership interest in
ServiceMaster (40.7 million shares) for $626 million on April 1, 1997. Earnings
per share grew at a faster rate than net income because the transaction reduced
shares outstanding significantly.
The ServiceMaster Consumer Services business unit achieved strong
double digit increases in revenues and profits. Strong growth in all five
operating companies and the addition of Rescue Rooter, an acquisition in the
plumbing business, contributed to an overall 21 percent increase in segment
revenues. TruGreen-ChemLawn operations started the year with excellent revenue
growth and improved margins. Impressive revenue increases across service lines
reflected customer count increases and favorable weather conditions. Another
important development was the entry into the commercial landscape business
through acquisitions of four regional companies during the quarter, which
broadened the presence in the commercial sector of the market. Terminix achieved
strong increases in revenues and profits and significantly improved margins
reflecting favorable weather conditions and strong growth in higher margin
renewal business. American Home Shield had very strong increases in both
revenues and profits with double digit increases in real estate and
direct-to-consumer sales as well as strong renewal growth. The franchise
operations, Residential/Commercial and Merry Maids, achieved strong growth with
encouraging results in our company-owned businesses.
The ServiceMaster Management Services business unit reported a modest
increase in revenue with profits below last year. The Healthcare Services market
achieved revenue growth although profits were lower, reflecting investments in
the business and continued competitive pressures in the acute care sector of the
market. Profits in the Education Management Services market increased reflecting
improved margins from base business as well as the favorable effect of the
elimination of costs incurred last year related to unwinding a large contract.
The Business & Industry group reported modest growth in revenue and profits
comparable to last year.
Cost of services rendered and products sold increased 21 percent due
primarily to the addition of ServiceMaster Employer Services, as well as general
business growth. Cost of services increased as a percentage of revenue to 81.0
percent from 80.4 percent in 1997. Excluding ServiceMaster Employer Services,
cost of services increased only 9 percent and decreased as a percentage of
revenue to 79.6 percent. This decrease primarily reflects the changing mix of
the business as ServiceMaster Consumer Services increases in size in
relationship to the overall business of the Company as well as productivity
improvements and the successful integration of acquisitions at ServiceMaster
Consumer Services. The ServiceMaster Consumer Services businesses generally
operate at higher gross margin levels than the rest of the business but also
incur somewhat higher selling and administrative expenses as a percentage of
revenues.
Selling and administrative expenses increased 16 percent due to general
business growth and acquisitions, and decreased as a percentage of revenue to
11.9% in 1998 from 12.4% in 1997. This decrease as a percentage of revenue
13
<PAGE>
is primarily attributable to the addition of ServiceMaster Employer Services and
efficiency gains at ServiceMaster Consumer Services, offset in part by the
changing business mix of the Company noted above.
Interest expense increased over the prior year primarily due to
increased debt levels associated with the repurchase of ServiceMaster shares
from WMX and acquisitions. Interest and investment income increased due to gains
on sale of marketable securities at American Home Shield in 1998.
1997 Compared with 1996
Revenues 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 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.
14
<PAGE>
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 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.
15
<PAGE>
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 profits. 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.
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.
16
<PAGE>
Fiscal Year End 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.
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). The one-year
term loan option was not exercised and the $250 million 364-day revolving credit
facility expired on March 31, 1998.
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
17
<PAGE>
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 entities, and the interests of the General Partners in 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 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 compounded 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
18
<PAGE>
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,
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993(1)
(In thousands, except percentage data) ------------------------------------------------------------------------
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
(65,000) -- -- -- --
Tax benefit relating to change in tax status..... ------------------------------------------------------------------------
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.
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.
1998 First Quarter Financial Position Update
Net cash provided from operations of $13 million was below the first
quarter level in 1997. The decrease primarily reflects the timing of interest
payments relating to the public debt issued in August of 1997, the acceleration
of prepayment collections at TruGreen-ChemLawn into the fourth quarter of 1997
and the current year funding of seasonal investments for the acquired lawn care
operations. Due to the seasonality of the lawn care and pest control operating
cycles, the Company's working capital needs are the highest during the first
quarter. Management believes that funds generated from operations and other
existing resources will continue to be adequate to satisfy ongoing working
capital needs of the Company.
Federal taxes on the Company's earnings, while accrued in the
consolidated income statement, will not have to be paid until the first quarter
of 1999. At that time, the Company will be responsible for its 1998 obligation
and will begin making estimated tax payments for 1999 as well.
Accounts and notes receivable grew over year end levels reflecting
general business growth, increased seasonal activity in the ServiceMaster
Consumer Services segment, and acquisitions. Inventories also increased over
year end levels as a result of normal seasonal build-ups in the pest control and
lawn care businesses. Prepaids and other assets have increased from year end
because of seasonality in the lawn care business. The lawn care operation defers
certain marketing costs that are incurred during the first quarter but are
directly associated with revenues realized in subsequent quarters of the current
year. These costs are then amortized over the balance of the current lawn care
production season, as the related revenues are recognized. Deferred revenues
also grew significantly, reflecting strong growth and increases in customer
prepayments for lawn care services as well as increased volume of warranty
contracts written at American Home Shield.
19
<PAGE>
Property and equipment increased due to general business growth and
acquisitions. Capital expenditures grew primarily due to investments in
predictive dialers at TruGreen-ChemLawn and computer system upgrades throughout
the organization. The Company has no material capital commitments at this time.
Intangible assets increased from year end primarily reflecting the effect of the
acquisitions, which included Rescue Rooter (a plumbing business), commercial
landscape companies and other smaller ServiceMaster Consumer Services companies.
Accrued liabilities increased from year end reflecting seasonal activity at
ServiceMaster Consumer Services. Debt levels increased due to the seasonal
nature of the Company's operating cash flows, combined with the effects of
acquisitions, property additions and share repurchases.
Total shareholders' equity increased to $549 million in 1998 from $524
million at December 31, 1997 reflecting earnings growth, as well as the shares
issued for acquisitions, partially offset by distributions and treasury share
repurchases. The Company continues to repurchase shares in the open market or in
privately negotiated transactions pursuant to the authorization previously
granted by the Board of Directors. Cash distributions paid directly to
shareholders totaled $22 million or $.12 per share. The 9 percent decrease from
the prior year primarily reflects the April 1997 repurchase of ServiceMaster
shares from WMX offset in part by a 6 percent increase in distributions per
share.
In April, the Company filed a Form S-3 registration statement with the
Securities and Exchange Commission to offer up to 10.6 million shares of Common
Stock which included approximately 7.6 million shares to be newly issued by the
Company and the remaining 3 million shares to be sold by existing shareholders.
Due to strong investor demand, the selling shareholders component of the
offering was increased from 3 million to 6.55 million shares, including the
exercise of the over-allotment option by the underwriters. On May 11, the public
offering of approximately 14.15 million shares was priced at $28.75 per share.
The net proceeds to the Company after the underwriting discount and offering
expenses were approximately $209 million and will be used to reduce outstanding
debt under existing bank credit facilities, thereby reducing interest expense
and increasing the Company's financial flexibility.
20
<PAGE>
BUSINESS
The Company; Principal Business Groups
ServiceMaster is a holding company whose shares of common stock are
traded on the NYSE. Through its subsidiaries, the Company is engaged in
providing a variety of specialty services to homeowners and commercial
facilities and supportive management services in several markets, including the
healthcare market, the education market and certain segments of the business and
industry market.
The Company is organized into three principal operating groups:
ServiceMaster Consumer Services, ServiceMaster Management Services and
ServiceMaster Employer Services. Each of these operating groups is headed by a
limited partnership or a corporation which has its own group of operating
subsidiaries. The parent companies for the operating groups are ServiceMaster
Consumer Services Limited Partnership, which was formed in the summer of 1990;
ServiceMaster Management Services Limited Partnership, which was formed in
December 1991; and ServiceMaster Employer Services, Inc. which was formed in
August 1997. All of the parent companies for the operating groups are wholly
owned by the Company. All subsidiaries of the operating group parent companies
are wholly owned, except for Rescue Rooter, L.L.C., a subsidiary of
ServiceMaster Consumer Services in which senior Rescue Rooter management will
acquire equity interests of not more than 10 percent in total and which are
subject to certain put and call rights.
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 conducted by the
operating subsidiaries of ServiceMaster Consumer Services L.P. Such marks are
registered and are renewed at each registration expiration date.
Within ServiceMaster Consumer Services, franchises are important for
the TruGreen-ChemLawn, Terminix, ServiceMaster Residential/Commercial, Merry
Maids, AmeriSpec and Furniture Medic businesses. Nevertheless, revenues and
profits derived from franchise-related activities constitute less than 10% of
the revenue and profits of the consolidated ServiceMaster enterprise. 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.
ServiceMaster Consumer Services
ServiceMaster Consumer Services provides specialty services to
homeowners and commercial facilities through eight companies: TruGreen L.P.
("TruGreen-ChemLawn"); The Terminix International Company L.P.
("Terminix"); ServiceMaster Residential/Commercial Services L.P.
("Res/Com"); Merry Maids L.P. ("Merry Maids"); American Home Shield
Corporation ("American Home Shield" or "AHS"); AmeriSpec, Inc.
("AmeriSpec"); Furniture Medic L.P. ("Furniture Medic"); and Rescue Rooter
L.L.C. ("Rescue Rooter"). Rescue Rooter was acquired by ServiceMaster
Consumer Services on January 1, 1998. The services provided by these
companies include: lawn care, tree and shrub services and indoor plant
maintenance services under the "TruGreen", "ChemLawn" and "Barefoot"
service marks; termite and pest control services under the "Terminix"
service mark; residential and commercial cleaning and disaster restoration
services under the "ServiceMaster" service mark; domestic housekeeping
services under the "Merry Maids" service mark; home systems and appliance
warranty contracts under the "American Home Shield" service mark; home
inspection services under the "AmeriSpec" service mark; on-site furniture
repair and restoration under the "Furniture Medic" service mark; and
plumbing and drain cleaning services under the "Rescue Rooter" service
mark.
The services provided by the eight Consumer Services companies are
part of the ServiceMaster "Quality Service Network" and are accessed by
calling a single toll-free telephone number: 1-800-WE SERVE. ServiceMaster
21
<PAGE>
focuses on establishing relationships to provide one or more of these services
on a repetitive basis to customers. Since 1986, the number of customers served
by ServiceMaster Consumer Services has increased from fewer than one million
domestic customers to more than 9.6 million worldwide customers.
For most of 1997, the first-tier subsidiary of the ServiceMaster parent
entity was primarily responsible for overseeing the ServiceMaster Consumer
Services businesses which were conducted in foreign markets. However, at the end
of 1997, responsibility for such businesses was transferred to the appropriate
subsidiary of ServiceMaster Consumer Services L.P.
TruGreen-ChemLawn. TruGreen-ChemLawn is a wholly-owned subsidiary of
ServiceMaster Consumer Services L.P. As of December 31, 1997, TruGreen-ChemLawn
had 206 company-owned branches and 84 franchised branches. With over 3 million
residential and commercial customers, TruGreen-ChemLawn is the leading provider
of lawn care services in the United States. TruGreen-ChemLawn provides lawn,
tree and shrub care services in Saudi Arabia and Turkey through licensing
arrangements and in Canada through a subsidiary. TruGreen-ChemLawn also provides
interior plantscape services to commercial customers. The TruGreen-ChemLawn
businesses are seasonal in nature.
On February 24, 1997, the Company's predecessor, for the benefit of
TruGreen-ChemLawn, completed the acquisition of 99.38% of the outstanding stock
of Barefoot through a tender offer. On February 26, 1997, the remaining 0.62% of
the Barefoot stock was acquired through a statutory merger. In these
transactions, Barefoot stockholders collectively received approximately
$84,800,000 in cash and 8,621,055 limited partner shares (post-June 1997 3-for-2
share split) of the Company's predecessor. For purposes of these transactions,
the Barefoot stock was valued at $16.00 per share and the Company's shares were
valued at $16.9389 per share (post-June 1997 3-for-2 share split). The aggregate
value of the Barefoot transaction (including the amount paid in redemption of
the Barefoot shareholders rights plan and transaction expenses) was
approximately $237,000,000. At the time of the transaction, Barefoot was the
second largest provider of professional lawn care services in the United States.
Terminix. Terminix is a wholly-owned subsidiary of ServiceMaster
Consumer Services L.P. With over 3 million residential and commercial customers,
Terminix, through its company-owned branches and through franchisees, is the
leading provider of termite and pest control services in the United States. As
of December 31, 1997, Terminix was providing these services through 290
company-owned branches in 45 states and Mexico and through 241 franchised
branches in 28 states. Terminix also manages the following European pest control
companies, all of which are subsidiaries of TMX-Europe B.V., a wholly-owned
subsidiary of the Company: Terminix Peter Cox Ltd., a leading pest control and
wood preservation company in the United Kingdom and Ireland; Terminix Protekta
B.V. and Riwa B.V., each a leading pest control company in the Netherlands and
Belgium; Anticimex Development B.V., a holding company for the leading pest
control company in Sweden and which also operates in Norway; and the Stenglein
Group, a group of pest control companies in Germany. Terminix also provides
termite and pest control services through licensing arrangements with local
service providers in seven other countries. The Terminix business is seasonal in
nature.
Res/Com. Res/Com is a wholly-owned subsidiary of ServiceMaster Consumer
Services L.P. ServiceMaster, through Res/Com, is the leading franchisor in the
United States in the residential and commercial cleaning field. Res/Com provides
carpet and upholstery cleaning and janitorial services, disaster restoration
services and window cleaning services. As of December 31, 1997, these services
were provided to approximately 1.7 million residential and commercial customers
worldwide through a network of over 4,500 independent franchisees. Res/Com
provides its services through subsidiaries in Canada, Germany, Ireland and the
United Kingdom, and through licensing arrangements with local service providers
in six other countries.
Merry Maids. Merry Maids is a wholly-owned subsidiary of ServiceMaster
Consumer Services L. P. Merry Maids is the organization through which
ServiceMaster provides domestic house cleaning services. With approximately
352,000 worldwide customers, Merry Maids is the leading provider of domestic
house cleaning services in the United States. As of December 31, 1997, these
services were provided through 27 company-owned branches in 19 states and
through 797 licensees operating in all 50 states. Merry Maids also provides
domestic house cleaning services through subsidiaries in Canada and the United
Kingdom and through licensing arrangements with local service providers in three
other countries.
22
<PAGE>
American Home Shield. AHS is a wholly-owned subsidiary of ServiceMaster
Consumer Services L.P. AHS is a leading provider of home systems and appliance
warranty contracts ("warranty contracts") in the United States, providing
homeowners with contracts covering the repair or replacement of built-in
appliances, hot water heaters and electrical, plumbing, central heating and
central air conditioning systems which malfunction by reason of normal wear and
tear. Warranty contracts are sold through participating real estate brokerage
offices in conjunction with resales of single-family residences to homeowners.
AHS also sells warranty contracts directly to non-moving homeowners by renewing
existing contracts and through various other distribution channels which are
currently being expanded. As of December 31, 1997, AHS warranty contracts
provided for services to approximately 568,000 homes through approximately
13,000 independent repair maintenance contractors in 49 states and the District
of Columbia, with operations in California, Texas and Arizona accounting for
27%, 18% and 6%, respectively, of gross contracts written by AHS. AHS also
provides home service warranty contracts through licensing arrangements with
local service providers in three other countries.
AmeriSpec. AmeriSpec is a wholly-owned subsidiary of AHS. AmeriSpec is
a leading provider of home inspection services in the United States. During
1997, AmeriSpec conducted approximately 100,000 home inspections in 42 states
and Canada, with operations in California, New York and Illinois accounting for
23%, 6% and 5%, respectively, of the gross number of inspections conducted
through AmeriSpec.
Furniture Medic. Furniture Medic is a wholly-owned subsidiary of
ServiceMaster Consumer Services L.P. Furniture Medic provides on-site furniture
repair and restoration services in 47 states. As of December 31, 1997, these
services were provided through 513 licensees. Furniture Medic also provides its
services through subsidiaries in Canada and the United Kingdom and through
licensing arrangements with local service providers in two other countries.
Rescue Rooter. Rescue Rooter is a wholly-owned subsidiary of
ServiceMaster Consumer Services L.P. Rescue Rooter acquired the business and
assets of Rescue Industries, Inc. on January 1, 1998. Rescue Rooter provides
plumbing and drain cleaning services in ten states through 20 company-owned
branches and one franchise location. In 1997, Rescue Rooter's predecessor
performed services for approximately 400,000 customers. Certain key employees of
Rescue Rooter will be afforded the opportunity to collectively purchase up to a
10% equity interest in Rescue Rooter pursuant to a management equity plan. Such
interest will be subject to reciprocal put and call rights which will become
exercisable on January 1, 2003 and which will be consummated on the basis of the
then fair market value of the interest.
ServiceMaster Management Services
ServiceMaster pioneered the providing of supportive management services
to health care facilities by instituting housekeeping management services in
1962. Since then, ServiceMaster has expanded its management services business
such that it now provides a variety of supportive management services to health
care, education and business and industrial customers (including the management
of housekeeping, plant operations and maintenance, laundry and linen, grounds
and landscaping, clinical equipment maintenance, food service, energy
management, and total facility management). ServiceMaster's general 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
manner.
Management Services L.P. is organized into three divisions, each of
which provides service on a nationwide basis within its market. These
markets are: Healthcare Management Services; Education Management Services;
and Business & Industry Management Services.
For most of 1997, the first-tier subsidiary of the ServiceMaster parent
entity was primarily responsible for overseeing the Management Services
businesses which were conducted in foreign markets. However, at the end of 1997,
responsibility for such businesses was transferred to ServiceMaster Management
Services L.P.
As of December 31, 1997, ServiceMaster was providing supportive
management services to approximately 1,568 health care customers and to
approximately 375 educational and commercial customers. These services were
being provided in all 50 states and the District of Columbia. Outside of the
United States, ServiceMaster was providing management services through
subsidiaries in Canada and Japan, through an affiliated company in Mexico, and
through licensing arrangements with local service providers in nineteen other
countries.
23
<PAGE>
ServiceMaster Healthcare Management Services. The ServiceMaster
Healthcare Services division of ServiceMaster Management Services L.P. combines
the resources of the healthcare segment of ServiceMaster Management Services
L.P., Diversified Health Services, and their respective subsidiaries to form a
comprehensive health services organization which provides management services to
acute care and long-term care facilities; freestanding, hospital-based, and
government-owned nursing homes; skilled nursing facilities; assisted living
facilities; and hospital-based home health care agencies (as well as the direct
operation of freestanding home health care agencies). Various other healthcare
related services are provided by operating units within the Healthcare Services
division. As of December 31, 1997, the ServiceMaster Healthcare Services
companies had management services contracts with 1,568 customers in all 50
states.
ServiceMaster Education Management Services. The Education division of
ServiceMaster Management Services L.P. is a leading provider to the education
market of maintenance, custodial and grounds services. The facilities which
comprise the education market include primary schools, secondary schools and
school districts, private specialty schools and colleges and universities. As of
December 31, 1997, ServiceMaster was serving 273 educational customers.
ServiceMaster believes there is potential for expansion in the education market
due to its current relatively low penetration of that market and the trend of
educational facilities to consider outsourcing more of their service
requirements. However, a majority of the educational facilities continue to
assume direct responsibility for managing their support functions.
ServiceMaster Business & Industry Management Services. The Business &
Industry division of ServiceMaster Management Services L.P. is a leading
provider of plant operations and maintenance, custodial and grounds management
services to business and industrial customers in selected markets. Such markets
include the food processing, transportation, healthcare products and automotive
markets. ServiceMaster believes that there is potential for expansion in these
business and industrial markets due to ServiceMaster's current low penetration
of those markets, the trend of businesses to consider outsourcing more of their
service requirements and the trend of governmental units to privatize parts of
their operations. As of December 31, 1997, ServiceMaster was serving
approximately 100 business or industrial customers.
ServiceMaster Employer Services
ServiceMaster Employer Services, through its subsidiary, CSI, is one of
the nation's largest professional employer organizations. It provides more than
790 clients with administrative processing of payroll, worker's compensation
insurance, health insurance, unemployment insurance and other employee benefits.
International Operations
Supportive management services and consumer services in international
markets are provided through licensing arrangements with local service providers
and ownership of foreign operating companies. Except as noted below, these
activities in Europe, Latin America and the Middle East are administered as part
of the operations of ServiceMaster Management Services L.P. and ServiceMaster
Consumer Services L.P., respectively. Operating arrangements and market
expansion efforts in the Pacific Rim are administered by the parent company.
In 1997, ServiceMaster disposed of its interests in the
Tarmac/ServiceMaster management services joint venture in England and the
Raab Karcher/ServiceMaster management services joint venture in Germany.
These dispositions resulted in a small profit on the Company's investment.
Other Activities
Supporting Departments. The Company has various departments responsible
for technical, engineering, management information, planning and market
services, and product and process development activities. Various administrative
support departments provide personnel, public relations, administrative,
education, accounting, financial and legal services.
24
<PAGE>
Manufacturing Division. ServiceMaster has a manufacturing division
which formulates, combines and distributes supplies, products and equipment that
are used internally in providing management services to customers and which are
sold to licensees for use in the operation of their businesses. ServiceMaster
has a small share of the market for the manufacture and distribution of cleaning
equipment, chemicals and supplies.
Venture Fund. ServiceMaster Venture Fund L.L.C., a subsidiary of the
parent company (the "Venture Fund"), invests in emerging growth companies which
show an ability to provide innovative service technologies to ServiceMaster's
current and new customers. The Venture Fund is managed so as not to be intrusive
to the ongoing operations of the Company's operating units.
Industry Position, Competition and Customers
The following information is based solely upon estimates made by the
management of ServiceMaster and cannot be verified. In considering
ServiceMaster's industry and competitive positions, it should be recognized that
ServiceMaster competes with many other companies in the sale of its services,
franchises and products and that some of these competitors are larger or have
greater financial and marketing strength than ServiceMaster.
The principal methods of competition employed by ServiceMaster in the
Consumer Services business are name recognition, assurance of customer
satisfaction and a history of providing quality services to homeowners. The
principal methods of competition employed by ServiceMaster in each of the
operating units in the Management Services business are price, quality of
service and experience in providing management services. The principal methods
of competition employed by ServiceMaster in the Employer Services business are
name recognition, assurance of customer satisfaction and financial strength.
Consumer Services
Subsidiaries of Consumer Services provide a variety of residential and
commercial services under their respective names on the basis of their and
ServiceMaster's reputation, the strength of their service marks, their size and
financial capability, and their training and technical support services. The
markets served by Terminix and TruGreen-ChemLawn are seasonal in nature.
Lawn Care Services. TruGreen-ChemLawn, both directly and through
franchisees, provides lawn care services to residential and commercial
customers. Competition within the lawn care market is strong, coming mainly from
regional and local, independently-owned firms and from homeowners who elect to
care for their lawns through their own personal efforts. TruGreen-ChemLawn is
the leading national lawn care company within this market. TruGreen-ChemLawn
also provides indoor plant maintenance to commercial customers.
Lawn care services are regulated by law in most of the states in which
TruGreen-ChemLawn provides such services. These laws require licensing which is
conditional on a showing of technical competence and adequate bonding and
insurance. The lawn care industry is regulated at the federal level under the
Federal Insecticide, Fungicide and Rodenticide Act, and lawn care companies
(such as TruGreen-ChemLawn) which apply herbicides and pesticides are regulated
under the Federal Environmental Pesticide Control Act of 1972. Such laws,
together with a variety of state and local laws and regulations, may limit or
prohibit the use of certain herbicides and pesticides, and such restrictions may
adversely affect the business of TruGreen-ChemLawn.
Termite and Pest Control Services. The market for termite and pest
control services to commercial and residential customers includes many
competitors. Terminix is the leading national termite and pest control company
within this market. Competition within the termite and pest control market is
strong, coming mainly from regional and local, independently-owned firms
throughout the United States and from one other large company which operates on
a national basis.
Termite and pest control services are regulated by law in most of the
states in which Terminix provides such services. These laws require licensing
which is conditional on a showing of technical competence and adequate bonding
and insurance. The extermination industry is regulated at the federal level
under the Federal Insecticide, Fungicide and
25
<PAGE>
Rodenticide Act, and pesticide applicators (such as Terminix) are regulated
under the Federal Environmental Pesticide Control Act of 1972. Such laws,
together with a variety of state and local laws and regulations, may limit or
prohibit the use of certain pesticides, and such restrictions may adversely
affect the business of Terminix.
House Cleaning Services. The market for domestic house cleaning
services is highly competitive. In urban areas the market involves numerous
local companies and a few national companies. ServiceMaster believes that its
share of the total potential market for such services is small and that there is
significant potential for further expansion of its housecleaning business
through continued internal expansion and greater penetration of the
housecleaning market. Through its company-owned branches and its franchisees,
ServiceMaster has a small share of the market for the cleaning of residential
and commercial buildings.
Home Systems and Appliance Warranty Contracts. The market for home
systems and appliance warranty contracts is relatively new. ServiceMaster
believes that AHS maintains a favorable position in its industry due to the
system developed and used by AHS for accepting, dispatching and fulfilling
service calls from homeowners through a nationwide network of independent
contractors. AHS also has a computerized information system developed and owned
by AHS, and an electronic digital voice communication system through which AHS
handled more than 7.5 million calls in 1997.
Home Inspection Services. AmeriSpec is a leading provider of home
inspection services in the United States. Competition within this market is
strong, coming mainly from regional and local, independently-owned firms.
Furniture Repair Services. The market for on-site furniture repair
services is relatively new. ServiceMaster believes that Furniture Medic
maintains a favorable position in its industry due to its patented
environmentally sensitive procedure for repairing furniture in the customer's
home.
Plumbing and Drain Cleaning Services. The market for plumbing and drain
cleaning services is highly competitive in both the residential and commercial
sectors. Rescue Rooter believes that its share of the total potential market for
such services is small and that there is significant potential for future
expansion and penetration. Plumbing is regulated by most states in which Rescue
Rooter provides such services. The level of licensing varies from state to
state. There are no state or federal guidelines regulating drain cleaning
services.
Management Services
Health Care. Within the market consisting of general health care
facilities having 50 or more beds, ServiceMaster is the leading supplier of
plant operations and maintenance, housekeeping, clinical equipment maintenance,
and laundry and linen management services. As of December 31, 1997,
ServiceMaster was serving approximately 1,568 customers and managing
approximately 1,900 health care facilities. The majority of health care
facilities within this market not currently served by ServiceMaster assume
direct responsibility for managing their own non-medical support functions.
ServiceMaster believes that its management services for health care
facilities may expand by the addition of facilities not presently served, by
initiating additional services at facilities which use only a portion of the
services now offered, by the development of new services and by growth in the
size of facilities served. At the same time, industry consolidation, changes in
use and methods of health care delivery and payment for services (including in
particular changes in Medicare reimbursement regulations) continue to affect the
health care environment.
Education. ServiceMaster is a leading provider to the education market
of maintenance, custodial and grounds services. The facilities which comprise
the education market served by ServiceMaster include primary schools, secondary
schools and school districts, private specialty schools and colleges and
universities. As of December 31, 1997, ServiceMaster was serving approximately
273 customers and managing approximately 5,362 facilities. ServiceMaster
believes there is potential for expansion in the education market due to its
current relatively low penetration of that market and the trend of educational
facilities to consider outsourcing more of their service requirements. However,
a majority of the educational facilities continue to assume direct
responsibility for managing their support functions.
26
<PAGE>
Business and Industry. ServiceMaster is a leading provider of plant
operations and maintenance, custodial and grounds management services to
business and industrial customers in selected markets. ServiceMaster believes
that there is potential for expansion in those business and industrial markets
which ServiceMaster has elected to emphasize due to ServiceMaster's low current
penetration of those markets, the trend of businesses to consider outsourcing
more of their service requirements and the trend of governmental units to
privatize parts of their operations. The emphasized markets include the food
processing, transportation, healthcare products, and automotive markets. As of
December 31, 1997, ServiceMaster was serving approximately 100 customers and
managing approximately 530 business or industrial facilities.
Major Customers
ServiceMaster has no single customer which accounts for more than 10%
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. Revenues from governmental sources are
not material.
Employees
On December 31, 1997, ServiceMaster had a total of approximately 45,825
employees.
ServiceMaster provides its employees with annual vacation, medical,
hospital and life insurance benefits and the right to participate in additional
benefit plans.
Year 2000 Computer Program Compliance
Certain computer programs use two digits rather than four to define the
applicable year and consequently many systems may not function properly beyond
the year 1999 unless they are remediated. In addition, certain computer programs
are unable to recognize the year 2000 as a leap year. ServiceMaster has
conducted a review of its computer systems to identify systems that could be
affected by the year 2000 problem and has determined that the Company will need
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 will not 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 determining 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 of these systems could have a material
adverse impact on the Company.
Properties
The headquarters facility of ServiceMaster, which also serves as
headquarters for ServiceMaster Management Services, is owned by The
ServiceMaster Company and is located on a ten-acre tract at One ServiceMaster
Way, Downers Grove, Illinois. The initial structure was built in 1963, and two
additions were completed in 1968 and 1976. In early 1988, ServiceMaster
completed construction of a two-story 15,000 square foot addition for office
space, food service demonstrations and dining facilities. The building contains
approximately 118,900 square feet of air conditioned office space and 2,100
square feet of laboratory space. In the Spring of 1992, ServiceMaster completed
the conversion of approximately 30,000 square feet of space formerly used as a
warehouse to offices for Management Services and for The Kenneth and Norma
Wessner Training Center.
ServiceMaster owns a seven-acre, improved tract at 2500 Warrenville
Road, Downers Grove, Illinois, which is adjacent to its headquarters facility.
In 1993, ServiceMaster substantially remodeled the building and thereafter
leased approximately half the space (50,000 square feet) to a commercial tenant.
The balance of the space is utilized by ServiceMaster personnel.
27
<PAGE>
ServiceMaster leases a 50,000 square foot facility near Aurora,
Illinois which is used by ServiceMaster as a warehouse/distribution center.
ServiceMaster believes that the facilities described in the preceding
three paragraphs will satisfy the Company's needs for administrative and
warehouse space in the Chicago area for the immediate future.
ServiceMaster owns four properties in Cairo, Illinois, consisting of a
36,000 square foot, three-story building used for manufacturing and warehousing
equipment, supplies and products used in the business; a warehouse and package
facility comprising 30,000 square feet; a three-story warehouse and
manufacturing building consisting of 43,000 square feet; and a 2,500 square foot
building used for a machine shop. Management believes that the foregoing
manufacturing and warehouse facilities are adequate to support the current needs
of ServiceMaster.
The headquarters for ServiceMaster Consumer Services L.P. are located
in leased premises at 860 Ridge Lake Boulevard, Memphis, Tennessee. The 860
Ridge Lake Boulevard facility also serves as the headquarters for
TruGreen-ChemLawn, Terminix, Res/Com, Merry Maids, American Home Shield,
AmeriSpec and Furniture Medic. The headquarters for Rescue Rooter are located in
leased premises at 4850 Pacific Highway, San Diego, California.
TruGreen-ChemLawn owns 5 buildings which are used as branch sites for
lawn care services. These facilities are located in Texas (2 properties),
Colorado (1 property), Ohio (1 property), and Georgia (1 property).
Terminix owns 20 buildings which are used as branch sites for termite
and pest control services. These properties are all one-story buildings that
contain both office and storage space. These properties are located in New
Jersey (2 properties), California (2 properties), Florida (10 properties),
Georgia (1 property), Illinois (1 property) and Texas (4 properties).
American Home Shield has retained some leased space in the building at
90 South E Street, Santa Rosa, California, for administrative and sales
operations. Certain of American Home Shield's service and data processing
departments are located in premises owned by the company in Carroll, Iowa. This
facility consists of a 43,000 square foot building on a seven-acre site.
American Home Shield owns approximately 56 acres of land in Santa Rosa,
California of which 39 acres are under contracts for sales to occur in mid to
late 1998. This land is held for investment purposes and has been and will
continue to be offered for sale, with the timing of sales being affected by,
among other things, market demand, zoning regulations, and the availability of
financing to purchasers.
Rescue Rooter owns two buildings which are used for branch operations
to provide plumbing and drain cleaning services. These facilities are located,
respectively, in Phoenix, Arizona and St. Louis, Missouri.
In 1997, Diversified Health Services moved to a new leased headquarters
facility at 3839 Forest Hill-Irene Road, Memphis, Tennessee. DHS leases other
administrative facilities in St. Augustine, Florida; Atlanta, Georgia;
Minneapolis, Minnesota; Plymouth Meeting, Pennsylvania; Memphis, Tennessee; and
Dallas, Texas. As of December 31, 1997, DHS had an ownership interest in a
nursing home facility through a joint venture arrangement in which DHS has a 50%
interest.
The headquarters for ServiceMaster Employer Services are located at
3839 Forest Hill-Irene Road, Memphis, Tennessee. The company leases other
administrative facilities in Little Rock, Arkansas and Memphis, Tennessee. The
headquarters for Certified Systems, Inc., the principal subsidiary of
ServiceMaster Employer Services, is located in Mesquite, Texas.
Legal Proceedings
In the ordinary course of conducting its business activities,
ServiceMaster becomes involved in judicial and administrative proceedings which
involve both private and governmental authorities. As of March 6, 1998, these
proceedings included a number of general liability actions and
employment-related proceedings.
28
<PAGE>
Terminix was one of several defendants named in a suit filed by the
United States Environmental Protection Agency (the "EPA") on November 3, 1986 in
the United States District Court for the Western District of Tennessee, to
recover the costs of remediation at two sites in Tennessee which had been
designated by the EPA as "Superfund sites" under the Comprehensive Environmental
Response Compensation and Liability Act ("CERCLA"). In January 1992, the EPA
issued a Unilateral Administrative Order for Remedial Design and Remedial Action
which require Terminix and other initial defendants and third party defendants
to clean up one of these sites. Terminix agreed, on an interim basis, to a 10%
allocation of the cost of the remediation work. The parties to the interim
allocation agreement remained in disagreement with the EPA over the most
appropriate remediation procedures to be followed at the site and they were in
disagreement among themselves regarding the final allocations of responsibility.
With respect to the second site, the companies cited by the EPA all disclaimed
responsibility. Two of the defendant parties settled their disagreement with the
EPA but, until March 20, 1997, Terminix had not resolved its disagreement with
the other two defendant parties as to Terminix's proper participation. However,
on March 20, 1997, Terminix settled this matter with the other two parties as to
all past costs and agreed to arbitrate any disagreement over the allocation of
future costs. On October 22, 1997, the time expired in which a demand for
arbitration could be filed. Accordingly, Terminix's share of future remediation
costs was established at 10%. The aggregate financial commitment of Terminix is
well within the parameters set forth in the discussions of this matter in
previous periodic reports and is not material to Terminix's business, financial
condition or results of operations.
29
<PAGE>
MANAGEMENT
Directors of ServiceMaster
The Board of Directors of the Company consists of 17 persons. Pursuant
to the Company's Certificate of Incorporation and the Company's Bylaws, the
Board is divided into 3 classes with staggered terms of 3 years each so that the
term of office of one class expires at each Annual Meeting of the Stockholders.
Each class is identified by the year in which its terms of office expires. The
classes of directors as of the date of this Prospectus are: the Class of 1999,
consisting of 6 persons; the Class of 2000, consisting of 6 persons and the
Class of 2001, consisting of 5 persons. Information regarding each of the
directors is set forth below. The descriptions of the business experience of
these persons include the principal positions held by them from July 1993 to the
date of this Prospectus. The period of service as a director includes service as
a director with the Company's predecessor.
Class of 1999
Paul W. Berezny. President. Berezny Investments, Inc., a real estate
and development company. He is a member of the Audit Committee. Age 64.
Director since 1995.
Henry O. Boswell. Retired President of Amoco Production Company and
Chairman of the Board of Amoco Canada. Mr. Boswell is a director of Rowan
Companies, Inc., Houston, Texas, an offshore oil drilling company; and
Cabot Oil & Gas Corporation, Houston, Texas, an oil and gas production
company. He is a member of the Executive Committee, the Compensation
Committee (of which he is the chairman), the Nominating Committee, the
Employee Benefit Plan Oversight Committee, and the Finance Committee. Age
69. Director since 1985.
Carlos H. Cantu. President and Chief Executive Officer of the Company
since January 1, 1994. From May 1991 to December 31, 1993, Mr. Cantu was
President and Chief Executive Officer of ServiceMaster Consumer Services
L.P. Mr. Cantu is a director of First Tennessee National Corporation,
Memphis, Tennessee, a financial institution. He is a member of the
Executive Committee, the Nominating Committee, the Finance Committee, and
the Employee Benefit Plan Oversight Committee. Age 64. Director since 1988.
Vincent C. Nelson. Business investor. Mr. Nelson is a member of the
Executive Committee, the Nominating Committee (of which he is the
chairman), and the Audit Committee. Age 56. Director since 1978.
Steven S Reinemund. President and Chief Executive Officer of the
Frito-Lay Company, the packaged foods division of PepsiCo, Inc. From 1992 to
March 1996, he served as President and Chief Executive Officer of the North
American division of Frito-Lay. Mr. Reinemund is a director of PepsiCo, Inc.,
Purchase, New York, a food and beverage conglomerate, and a director of
Provident Companies, Inc., Chattanooga, Tennessee, an insurance company. Age 50.
Director since January 1, 1998.
Charles W. Stair. Vice Chairman of the Board of Directors. He was
President and Chief Executive Officer of ServiceMaster Management Services
L.P. from May 1991 to December 31, 1994. He is a member of the Nominating
Committee. Age 57. Director since 1986.
Class of 2000
Herbert P. Hess. Managing Director of Berents & Hess Capital
Management, Inc., Boston, Massachusetts, an investment management firm. He
is a member of the Executive Committee, the Finance Committee (of which he
is the chairman), the Employee Benefit Plan Oversight Committee, and the
Compensation Committee. Age 61. Director since 1981.
Michele M. Hunt. Private business consultant. From 1980 to July 1993,
she was employed by Herman Miller, Inc., an office furniture manufacturer,
and during the period from July 1990 to July 1993 she served as the
company's Corporate Vice President for People and Quality. Ms. Hunt is a
member of the Nominating Committee. Age 48. Director since 1995.
30
<PAGE>
Dallen W. Peterson. Chairman, Merry Maids Limited Partnership. He is a
member of the Finance Committee and the Employee Benefit Plan Oversight
Committee. Age 61. Director since 1995.
Phillip B. Rooney. Vice Chairman of the Board of Directors. From May
1996 to February 17, 1997, he was President and Chief Executive Officer of Waste
Management, Inc., Oak Brook, Illinois ("WMI") and from November 1984 to May
1996, he was President and Chief Operating Officer of WMI. Mr. Rooney is a
director of Van Kampen American Capital, Oak Brook, Illinois an investment
management company; Stone Container Corporation, Chicago, Illinois, a paper
manufacturing company; Illinois Tool Works, Inc., Glenview, Illinois, a
diversified manufacturing company; and Urban Shopping Centers, Inc., Chicago,
Illinois, a retail real estate management company. Age 53.
Director since 1994.
Burton E. Sorensen. Investor. From December 1984 to December 1995 he
served as Chairman, President and Chief Executive Officer of Lord
Securities Corporation. Mr. Sorensen is a director of Provident Companies,
Inc., Chattanooga, Tennessee, an insurance company. He is a member of the
Executive Committee, the Finance Committee, the Employee Benefit Plan
Oversight Committee, and the Compensation Committee. Age 68. Director since
1984.
David K. Wessner. Executive Vice President, HealthSystem Minnesota.
From November 1992 to December 1993, he was Executive Vice President,
Program and Process Improvement, Geisinger Health System. He is a member of
the Executive Committee, the Nominating Committee, and the Compensation
Committee. Age 46. Director since 1987.
Class of 2001
Lord Brian Griffiths of Fforestfach. International adviser to Goldman,
Sachs & Co. concerned with strategic issues related to their United Kingdom and
European operations and business development activities worldwide. He was made a
life peer at the conclusion of his service to the British Prime Minister during
the period 1985 to 1990. Lord Griffiths is a director of English, Welsh and
Scottish Railways Ltd., London, England, a railroad company; Herman Miller,
Inc., Zeeland, Michigan, an office furniture manufacturer; and Telewest
Communications plc, London, England, a television company. He is a member of the
Executive Committee and the Nominating Committee. Age 56. Director since 1992.
Sidney E. Harris. Dean, College of Business Administration, Georgia
State University. From July 1987 to July 1997, Dr. Harris was Professor of
Management at the Peter F. Drucker Graduate Management Center at the
Claremont Graduate School, Claremont, California. He was Dean of the
Graduate Management Center from September 1991 to July 1996. He is a
co-founder of the Institute for the Study of U.S./Japan Relations in the
World Economy. Dr. Harris is a director of Transamerica Investors, Inc.,
Los Angeles, California, a mutual funds investment company; and Amresco,
Inc., Dallas, Texas, a financial services company. He is a member of the
Executive Committee. Age 48. Director since 1994.
Gunther H. Knoedler. Retired Executive Vice President and Director
Emeritus of Bell Federal Savings and Loan Association, Chicago, Illinois.
He is a member of the Executive Committee and the Audit Committee (of which
he is the chairman). Age 68. Director since 1979.
James D. McLennan. President of McLennan Company, a full-service real
estate company. Mr. McLennan is a director of The Loewen Group, Inc., Burnaby,
B.C., Canada, a provider of funeral services; and Advocate Health Systems, Oak
Brook, Illinois, a health care provider. He is a member of the Audit Committee,
the Employee Benefit Plan Oversight Committee and the Compensation Committee.
Age 61. Director since 1986.
C. William Pollard. Chairman of the Board of Directors. He served as
Chief Executive Officer of the Company from May 1983 to December 31, 1993. Mr.
Pollard is a director of Herman Miller, Inc., Zeeland, Michigan, an office
furniture manufacturer; and Provident Companies, Inc., Chattanooga, Tennessee,
an insurance company. He is a member
31
<PAGE>
of the Executive Committee (of which he is the chairman), the Finance Committee,
the Employee Benefit Plan Oversight Committee, and the Nominating Committee. Age
60. Director since 1977.
Compensation of Directors
During the year 1997, directors of ServiceMaster Management Corporation
who were not employees and who satisfied the other independence standards of the
Bylaws ("independent directors") received $3,000 for each meeting of the Board
of Directors and each meeting of a committee which they attended. In addition,
each independent director received an annual stipend of $12,000. The Chairman of
the Audit Committee received an additional annual stipend of $2,000. In 1998,
the annual stipend for independent directors of the Company is $15,000 and the
fee for actual attendance at meetings of the Board or committees of the Board is
$3,000. Directors who are employees of the Company or any subsidiary do not
receive either a retainer or meeting fee. The Chairman of the Audit Committee
and the Chairman of the Compensation Committee are paid an additional stipend of
$2,000.
Each independent director of the Company may enter into a deferred fee
agreement whereby part or all of the fees payable to him or her as a director
are deferred and will either earn interest based on the five-year borrowing rate
for ServiceMaster or be used to purchase shares of the Company in a number
determined by the fair market value of such shares on the date of purchase. Upon
termination of a director's services as an independent director or attainment of
age 70, whichever occurs first, the director will receive the amount for his or
her deferred fee account in a lump sum or in installments or in shares of the
Company, depending on which deferral plan the director has elected.
The ServiceMaster 1994 Non-Employee Directors Option Plan (the
"Directors 1994 Option Plan") provides that options to purchase shares of the
Company may be granted from time to time by the Board of Directors to those
members of the Board who are not employees of any ServiceMaster entity. The
exercise price of options granted under the Directors 1994 Option Plan is the
fair market value of the shares at the time of the grant. In 1997, options were
granted to each of 14 independent directors in the total amount of 115,500
shares. This plan was discontinued at the end of 1997 and has been replaced by
the ServiceMaster 1998 Non-Employee Directors Discounted Stock Option Plan.
Compensation Committee Interlocks and Insider Participation
The persons who served as members of the Compensation Committee of the
Board of Directors of ServiceMaster Management Corporation during 1997 were
Henry O. Boswell (Chairman), Herbert P. Hess, Phillip B. Rooney (until May 1,
1997), James D. McLennan (appointed in October 1997), Burton D. Sorensen
(appointed in October 1997) and David K. Wessner (appointed in October 1997).
These same persons other than Mr. Rooney are now serving as the members of the
Compensation Committee of the Board of Directors of the Company. The
Compensation Committee consists solely of independent members of the board of
directors.
There are no interlocking arrangements involving service by any
executive officer of the Company on the Compensation Committee of another entity
and an executive officer of such other entity serving on the ServiceMaster
Compensation Committee.
Executive Officers of ServiceMaster
The following table shows: (i) the names and ages as of July 1, 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. 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 60 Chairman and Director 1977
32
<PAGE>
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
Services, and a Senior Management Adviser 1987
Robert F. Keith 41 President and Chief Operating Officer, Management 1986
Services, and 1986 a Senior Management Adviser
Robert D. Erickson 54 Executive Vice President and a Senior Management 1976
Adviser
Brian D. Oxley 47 Executive Vice President 1983
Vernon T. Squires 63 Senior Vice President and General Counsel 1987
Stephen E. Reiter 46 Senior Vice President and Chief Information Officer 1998
Steven C. Preston 37 Executive Vice President and Chief Financial Officer 1997
Eric R. Zarnikow 39 Vice President and Treasurer 1994
Deborah A. O'Connor 35 Vice President and Controller 1993
</TABLE>
Messrs. Pollard, Cantu, Stair and Rooney are also Directors of the
Company. See "Directors of ServiceMaster" above for biographical
information with respect to such persons.
Robert D. Erickson. Executive Vice President. Mr. Erickson was a
director of ServiceMaster from May 1987 to May 1993. He previously served
as a director of ServiceMaster from May 1981 to June 1984. He served as the
President and Chief Operating Officer of ServiceMaster's international
business unit from October 1993 to December 1997, Executive Vice President
and Chief Operating Officer of the international division of ServiceMaster
from November 1992 to October 1993 and as Executive Vice President and
Chief Operating Officer, People Services, from January 1990 to October
1992.
Robert F. Keith. President and Chief Operating Officer, ServiceMaster
Management Services. He served as President and Chief Operating Officer,
ServiceMaster Consumer Services from July 1994 to December 31, 1996 and as
Group President, ServiceMaster Consumer Services, from November 1992 to
July 1994. He was Vice President, Treasurer and Chief Financial Officer of
The ServiceMaster Company L. P. from November 1989 to October 1992.
Ernest J. Mrozek. President and Chief Operating Officer, ServiceMaster
Consumer Services. He served as Senior Vice President and Chief Financial
Officer of the Registrant from January 1, 1995 to December 31, 1996. He served
as Vice President and Chief Financial Officer of the Registrant from May 1994 to
December 1994, as Vice President, Treasurer and Chief Financial Officer from
November 1, 1992 to April 30, 1994, and as Vice President and Chief Accounting
Officer, from January 1, 1990 to October 31, 1992.
Deborah A. O'Connor. Vice President and Controller since January 1,
1993. From July 1991 to December 1992, she was Manager of Financial Projects.
She previously had practiced public accounting with Arthur Andersen LLP since
1984.
Brian D. Oxley. Executive Vice President, New Business Initiatives. He
served as President and Chief Operating Officer of ServiceMaster Management
Services and ServiceMaster Healthcare Services from January 1994 to
December 31, 1996. From November 1992 to December 31, 1993, he served as
the President and Chief Executive Officer of the International and New
Business Development Group. He served as Executive Vice President, New
33
<PAGE>
Business Development from January 1991 to November 11, 1992 and as President of
International Services from January 1, 1988 to November 11, 1992.
Steven C. Preston. Executive Vice President and Chief Financial Officer
since July 1, 1998. He served as Senior Vice President and Chief Financial
Officer from April 1, 1997 to June 30, 1998. From August 1993 to March 1997, he
was Senior Vice President and Corporate Treasurer for First Data Corporation,
Atlanta, Georgia. From October 1985 to August 1993, he served as an investment
banker at Lehman Brothers, New York, New York.
Stephen E. Reiter. Senior Vice President and Chief Information Officer
since July 1, 1998. From May 8, 1996 to May 31, 1998, he was Vice President and
Partner for Computer Science Corporation, an outsourcing firm providing ITO
outsourcing and purchasing and materials management support to the chemical,
oil, gas and utilities industries. From June 1, 1994 to May 31, 1996 he was a
Principal/Practice Leader with A.T. Kearney, a management consulting firm
operating as a wholly-owned subsidiary of Electronic Data Systems (EDS). For the
preceding three-year period, he was a Vice President and Chief Information
Officer with Tenneco, Inc., a global industrial manufacturer in auto parts and
packaging.
Vernon T. Squires. Senior Vice President and General Counsel since
January 1, 1988. He served as Vice President and General Counsel from April 1,
1987 until December 31, 1987. He was an associate and partner with the law firm
of Wilson & McIlvaine in Chicago, specializing in corporate and tax law, from
1960 to April 1, 1987. He is presently of counsel to that firm.
Eric R. Zarnikow. Vice President and Treasurer since May 1, 1994. From
August 1991 to April 1994, he served as Vice President and Treasurer of
Gaylord Container Corporation.
34
<PAGE>
Executive Officer Compensation; Summary Compensation Table
The following table sets forth all compensation awarded to, earned by,
or paid to the Chief Executive Officer of ServiceMaster and ServiceMaster's next
four most highly compensated executive officers during or in respect of the year
1997. Each of the listed persons was holding the office indicated in the table
on the last day of December 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
---------------------------------------------
------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Annual Restricted Underlying
Compen- Stock Options/ LTIP All
Salary Bonus sation Awards SARs Payouts Other
Compensation
Name and Principal Position Year ($) ($)(B) ($) ($) (#)(C) ($) ($)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Carlos H. Cantu..................... 1997 $450,000 $900,021 - - 150,000 - -
President and Chief Executive Officer1996 $388,000 $679,000 - - 112,500 - -
1995 $380,000 $665,000 - - 168,750 - -
C. William Pollard.................. 1997 $375,000 $557,934 - - 112,500 - -
Chairman 1996 $300,000 $300,000 - - 112,500 - -
1995 $300,000 0 - - 225,000 - -
Ernest J. Mrozek.................... 1997 $275,000 $382,618 - - 202,500 - -
President, Consumer Services 1996 $220,000 $264,000 - - 56,250 - -
1995 $208,000 $299,600 - - 33,750 - -
Robert F. Keith..................... 1997 $285,000 $337,619 - - 202,500 - -
President, Management Services 1996 $255,000 $281,000 - - 78,750 - -
1995 $240,000 $276,000 - - 112,500 - -
Vernon T. Squires................... 1997 $230,000 $302,983 - - 45,000 - -
Sr. V. President and Gen. Counsel 1996 $220,000 $264,000 - - 45,000 - -
1995 $208,000 $249,600 - - 33,750 - -
</TABLE>
- ---------------------------
(A) The Summary Compensation Table does not include the cash distributions made
in respect of the year 1997 by ServiceMaster Management Corporation (the
managing general partner of ServiceMaster Limited Partnership and The
ServiceMaster Company Limited Partnership) to the persons listed in the
table in their capacity as stockholders of ServiceMaster Management
Corporation. Such distributions were dividends and represented a return on
the investment made by such persons in the corporation. The source of these
dividends was the cash distributions made to ServiceMaster Management
Corporation by ServiceMaster Limited Partnership and The ServiceMaster
Company Limited Partnership on the 1% carried interests held by
ServiceMaster Management Corporation in each of these two partnerships
throughout the year 1997. As part of the Reincorporating Merger which was
completed at the end of 1997 (described on page 1), the two partnerships
were terminated, ServiceMaster Management Corporation was dissolved, and
the requirement for direct investments by senior management in a managing
general partner of the parent entity and the principal subsidiary was
eliminated. Accordingly, the foregoing dividend payments will not occur in
1998 or thereafter. Effective January 1, 1998, the Company has instituted a
long-term performance based award program. The following table has been
prepared as an extension of the Summary Compensation Table in order to show
both the 1997 payments reflected in the Summary Compensation Table and the
ServiceMaster Management Corporation dividends paid to the persons listed
in the Summary Compensation Table for the year 1997.
35
<PAGE>
<TABLE>
<CAPTION>
1997 Summary Compensation and ServiceMaster
Management Corporation Dividend Table
(Supplement to the Summary Compensation Table)
(a) (b) (c) (d) (e)
Total Annual Long-Term
Compensation ServiceMaster Compensation
for 1997 (from Management Total of (from
Compensation Corporation Columns Compensation
Name and Principal Position Table) Dividends (b) & (c) Table)*
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Carlos H. Cantu............................... $ 1,350,021 $ 727,742 $ 2,077,763 $ 150,000
President and Chief Executive Officer
C. William Pollard............................ $ 932,934 $ 698,118 $ 1,631,052 $ 112,500
Chairman
Ernest J. Mrozek.............................. $ 657,618 $ 340,283 $ 997,901 $ 202,500
President, Consumer Services
Robert F. Keith............................... $ 622,619 $ 340,283 $ 962,902 $ 202,500
President, Management Services
Vernon T. Squires............................. $ 532,983 $ 174,505 $ 707,488 $ 45,000
Sr. Vice President and General Counsel
</TABLE>
------------------------------------
*Securities underlying options awarded in 1997.
(B) The amounts shown in column (d) of the Summary Compensation Table include
payments made under the ServiceMaster Incentive Compensation Plan plus
payments made in connection with a gain arising from the Reincorporation.
(C) The numbers of shares listed in column (g) of the Summary Compensation
Table have been adjusted, where appropriate, for 3-for-2 share splits
occurring in June 1996 and June 1997.
The following table summarizes the number and terms of the stock
options granted during the year 1997 to the named executive officers.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(a) (b) (c) (d) (e) (f)
---Number-of-------%-of-Total------Exercise-or------Expiration------Grant Date
Securities Options/SARs Base Price Date Value (B)
Underlying Granted to ($/sh)(A)
Options/SARs Employees
Granted (#) 1997
Name and Principal Position (A)
- ----------------------------------------- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Carlos H. Cantu......................... 150,000 4.3% $ 16.83 02-12-2007 $ 621,000
President and Chief Executive Officer
C. William Pollard...................... 112,500 3.2% $ 16.83 02-12-2007 465,750
Chairman
Ernest J. Mrozek........................ 202,500 5.7% $ 16.83 02-12-2007 838,350
President, Consumer Services
Robert F. Keith......................... 202,500 5.7% $ 16.83 02-12-2007 838,350
President, Management Services
Vernon T. Squires....................... 45,000 1.3% $ 16.83 02-12-2007 186,300
Sr. Vice President and General Counsel
</TABLE>
- -----------------------
(A) The options listed in column (b) were granted in February 1997. The number
of shares shown in column (b) and the exercise price shown in column (d)
have been adjusted to reflect the 3-for-2 split in the Company's shares
effected in June 1997. Each of the options listed in column (b) is subject
to a vesting schedule under which the option becomes exercisable in 20%
increments on the 1st, 2nd, 3rd, 4th and 5th anniversaries of grant date.
(B) In accordance with Item 402(c)(2)(vi)(B) of Regulation S-K of the
Commission, the grant date value of each of these options has been
estimated based on the Black-Scholes option pricing model by an
independent consulting firm using the following assumptions: a risk-free
rate of interest of 6.07%, a volatility rate of 21.17%, a 3.31%
distribution yield, and an expected life
36
<PAGE>
of seven years. The values of the options which are shown in the table are
theoretical and do not necessarily reflect the actual values which the
option holders may eventually realize. Such actual values will depend on
the extent to which the market value of the Company's shares at a future
date exceeds the exercise price of the options.
The following table summarizes the exercises of stock options during
the year 1997 by the named executive officers and the number of, and the spread
on, unexercised options held by such officers at December 31, 1997.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Number-of-Securities
Underlying Unexercised Value of Unexercised In-
Options/SARs at FY- the-Money Options/SARs
Shares-Acquired-on End(#) at FY-End(4)
Exercise (#) Value ------------------------- -------------------------
Exercisable/ Realized Exercisable/Unexercisable Exercisable/Unexercisable
- -------------------------------- -------------------- ------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Carlos H. Cantu, .............. 0 $0 22,500/240,000 $283,124/$2,995,497
Chief Executive Officer
C. William Pollard............. 0 $0 22,500/202,500 $283,124/$2,529,747
Ernest J. Mrozek............... 0 $0 21,455/247,500 $354,563/$3,206,300
Robert F. Keith................ 0 $0 77,381/265,500 $1,448,672/$3,482,799
Vernon T. Squires.............. 0 $0 9,000/81,000 $138,250/$1,111,900
</TABLE>
A table for long-term incentive plan awards is omitted because no
long-term incentive plan awards were granted to any of the named officers during
the year 1997.
Employment and Severance Arrangements
The Company has an employment agreement in effect with each of the
executive officers named in the Summary Compensation Table. Each of such
agreements establish a 1998 base salary, provide that certain information
proprietary to the Company be kept confidential, provide for certain
restrictions on employment with a competitor or a customer following termination
of employment with the Company and is terminable by the Company without prior
notice in the case of misconduct, nonperformance or incompetent performance and
upon two weeks' notice in all other cases subject to certain exceptions and
limitations.
The Company does not presently have employment agreements with any
members of the Company's senior management under which termination benefits are
provided if a change in control of the Company occurs. The Board of Directors is
considering the desirability of such arrangements, as well as the desirability
of a more broadly based plan to cover employees who are not members of senior
management and who meet certain employment longevity standards.
The ServiceMaster 1998 Equity Incentive Plan provides that all stock
options granted prior to the occurrence of a change in control shall become
immediately exercisable upon the occurrence of a change in control and shall
remain exercisable thereafter throughout the entire terms of the options.
37
<PAGE>
Indebtedness of Management
One executive officer, Robert F. Keith, was indebted to the Company in
excess of $60,000 at some point during the year 1997. The indebtedness was
incurred by reason of tax loans made in connection with one or more share grants
("Share Grants") made before 1997 under the ServiceMaster Share Grant Award Plan
and a bridge loan arising from a relocation. $223,924 is the largest amount of
such indebtedness outstanding during the year 1997 and $30,766 is the amount of
such indebtedness outstanding on June 30, 1998. Interest on the tax loans made
in respect of the Share Grants was charged to the borrower at a rate between 8%
and 9% per annum. No interest was charged on the relocation loan.
The relocation loan has been paid in full.
38
<PAGE>
OWNERSHIP OF COMMON STOCK
As of July 1, 1998, no one is the beneficial owner of more than five
percent of the Common Stock. The following table sets forth as of July 1, 1998
the beneficial ownership of the Common Stock with respect to ServiceMaster's
directors, senior management advisers and those executive officers named in the
Summary Compensation Table and the Company's directors and officers as a group:
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership (1)
--------------------------------------------------------------------------
(1) (2) (3) (4) (5)
Sole Voting Total Percent
and Ownership Ownership
Investment Other
- --------------------------------------------------------- --------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Paul W. Berezny (3)(4)(6)(8)............................. 85,127 799,371 884,498 0.444%
Henry O. Boswell (2)(4).................................. 46,582 64,327 110,909 0.056%
Carlos H. Cantu (4)(5)(12)............................... 391,550 1,637,553 2,029,103 1.020%
Robert D. Erickson (4)(5)(6)(7).......................... 671,487 82,261 753,748 0.379%
Brian Griffiths (4)...................................... 10,320 0 10,320 0.005%
Sidney E. Harris (4)..................................... 6,720 1,125 7,845 0.004%
Herbert P. Hess (4)(8)................................... 158,595 20,250 178,845 0.090%
Michele M. Hunt (4)...................................... 6,720 0 6,720 0.003%
Donald K. Karnes (4)..................................... 1,283,923 0 1,283,923 0.645%
Robert F. Keith (4)(5)................................... 206,806 104,560 311,366 0.156%
Gunther H. Knoedler (4).................................. 47,015 0 47,015 0.024%
James D. McLennan (4).................................... 34,983 0 34,983 0.018%
Ernest J. Mrozek (4)(5).................................. 287,482 40,793 328,275 0.165%
Vincent C. Nelson (4)(8)(9)(10).......................... 109,400 611,241 720,641 0.362%
Dallen W. Peterson (4)................................... 1,649,168 0 1,649,168 0.829%
C. William Pollard (4)(5)(11)............................ 788,070 142,593 930,663 0.468%
Steven C. Preston (4).................................... 46,347 0 46,347 0.023%
Steven S Reinemund (4)................................... 2,520 10,000 12,520 0.006%
Phillip B. Rooney (3)(4)................................. 259,559 9,000 268,559 0.135%
David M. Slott (4)....................................... 401,830 291,264 693,094 0.348%
Burton E. Sorensen (4)................................... 19,703 0 19,703 0.010%
Vernon T. Squires (4)(5)................................. 252,863 40,793 293,656 0.148%
Charles W. Stair (5)(6)(13).............................. 608,633 107,978 716,611 0.360%
David K. Wessner (3)(4)(8)(14)(15)....................... 116,984 743,505 860,489 0.432%
All directors and officers as a group (135 persons) (16). 13,503,536 6,442,181 19,945,717 10.024%
</TABLE>
- ---------------------------
(1) The shares owned by each person and by all directors and officers as a
group, and the shares included in the total number of shares, have been
adjusted, and the percentage ownership figures have been computed, in
accordance with Rule 13d- 3(d)(1)(i).
(2) Shares in column (3) include 41,772 shares owned by spouse as to which
beneficial ownership is disclaimed.
(3) Shares in column (3) include shares held by spouse and/or other family
members.
(4) Shares in column (2) include shares which may be acquired within sixty days
under options granted under the ServiceMaster Share Option Plan, the
ServiceMaster 10-Plus Option Plan, the ServiceMaster 1998 Equity Incentive
Plan, the ServiceMaster Non-Employee Directors Option Plan and/or the
ServiceMaster 1998 Non-Employee Directors Discounted Stock Option Plan.
(5) Shares in column (3) include shares held in one or more investment
partnerships in which the listed person is a partner with shared voting
power and investment power.
(6) Shares in column (2) include shares held in trust for the benefit of family
members as to which beneficial ownership is disclaimed.
(7) Shares in column (3) include 64,779 shares owned by spouse or held in trust
for the benefit of family members as to which beneficial ownership is
disclaimed.
(8) Shares in column (3) include shares held in trust for benefit of self
and/or family members.
(9) Shares in column (2) include 30,862 shares in trust for the benefit of
family members as to which beneficial ownership is disclaimed. Shares
in column (3) include 10,657 shares held in trust for the benefit of
family members as to which beneficial ownership is disclaimed.
39
<PAGE>
(10) Shares in column (3) include 387,674 shares owned by a charitable trust
of which Vincent C. Nelson is a trustee. Mr. Nelson disclaims
beneficial ownership of such shares.
(11) Shares in column (3) include 34,830 shares owned by a charitable
foundation of which C. William Pollard is a director. Mr. Pollard
disclaims beneficial ownership of such shares. Shares in column (3)
also include 22,951 shares in trust for the benefit of family members.
(12) Shares in column (3) include 22,875 shares owned by a charitable
foundation of which Carlos H. Cantu is an officer. Mr. Cantu disclaims
beneficial ownership of such shares.
(13) Shares in column (3) include 39,600 shares owned by a charitable
foundation of which Charles W. Stair is a director. Mr. Stair disclaims
beneficial ownership of such shares.
(14) Shares in column (3) include 612,500 shares owned by a charitable
foundation of which David K. Wessner is a director. Mr. Wessner
disclaims beneficial ownership of such shares.
(15) Shares in column (3) include 363,747 shares held by an investment company
of which David K. Wessner is a shareholder and one of four directors.
(16) Includes 3,160,427 shares which certain officers of ServiceMaster, through
the exercise of their respective rights, may acquire within 60 days under
share purchase agreements, options granted under the ServiceMaster Share
Option Plan and options granted under the ServiceMaster 10-Plus Option
Plan. No options granted under the ServiceMaster 1998 Equity Incentive Plan
were exercisable on July 1, 1998. Shares purchasable by the persons
identified in the Summary Compensation Table under one or more of the
foregoing plans are as follows: Mr. Cantu--52,500 shares; Mr.
Pollard--45,000 shares; Mr. Mrozek--73,205 shares; Mr. Keith--133,631
shares; Mr. Squires--27,000 shares and all executive officers as a
group--618,361 shares.
40
<PAGE>
DESCRIPTION OF COMMON 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 July
1, 1998, 196,165,572 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 July 1, 1998, the Board of Directors had
approved the issuance of 7,500,000 shares of Common Stock under the Company's
equity incentive plans, and of that number approximately 2,160,000 were subject
to issuance under outstanding stock options. 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.
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.
41
<PAGE>
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 "ByLaws") 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.
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
42
<PAGE>
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 the
Company which are owned beneficially and of record by such stockholder and such
beneficial owner.
Amendments to the Restated Certificate and Bylaws. 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. Amendment of the Bylaws
requires either the approval of 80% of the sitting directors in office at the
time such amendment is approved or the approval of the holders of 80% of the
outstanding Common Stock.
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
43
<PAGE>
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.
44
<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
subsequent to December 31, 1997 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 0.102/3
Third Quarter........................................ 12.83 11.78 0.102/3
Fourth Quarter....................................... 13.50 12.28 0.102/3
Year ended December 31, 1996:
First Quarter........................................ 14.89 12.92 0.102/3
Second Quarter....................................... 15.67 13.75 0.102/3
Third Quarter........................................ 16.50 14.33 0.111/3
Fourth Quarter....................................... 17.75 15.83 0.111/3
Year ended December 31, 1997:
First Quarter........................................ 18.50 16.38 0.111/3
Second Quarter....................................... 23.88 18.13 0.111/3
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....................................... 38.25 26.88 0.12
</TABLE>
As of July 1, 1998, there were approximately 35,200 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.
45
<PAGE>
LEGAL MATTERS
Certain legal matters regarding the issuance of the Common Stock, under
laws other than federal or state securities laws, have been passed upon for the
Company by the General Counsel of the Company.
EXPERTS
The financial statements and schedules included 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 are included herein in reliance upon the authority of said firm as
experts in giving said reports.
46
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
The ServiceMaster Company (and Predecessor) Page
----
<S> <C>
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 F-5
31, 1995........................................................................................
Statements of Financial Position as of December 31, 1997 and December 31, 1996....................... F-6
Statements Cash Flows for the years ended December 31, 1997, December 31, 1996 and December F-7
31, 1995........................................................................................
Statements of Shareholders' Equity for the years ended December 31, 1997, December 31, 1996 and F-8
December 31, 1995...............................................................................
Notes to Consolidated Financial Statements for the years ended December 31, 1997, December 31, F-9
1996 and December 31, 1995......................................................................
</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--(Continued)
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
122,665 70,991
Prepaid expenses and other assets......................................... -----------------------------------------
594,084 499,334
Total current assets................................................... -----------------------------------------
Property, Plant, and Equipment, at Cost:
Land and buildings........................................................ 46,632 47,536
316,021 273,177
Equipment................................................................. -----------------------------------------
362,653 320,713
204,383 174,313
Less: accumulated depreciation............................................ -----------------------------------------
158,270 146,400
Net property, plant, and equipment..................................... -----------------------------------------
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
159,561 102,641
Notes receivable, long-term securities, and other assets.................. -----------------------------------------
2,475,224 1,846,841
Total Assets........................................................... -----------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
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
------------------------------------------------------
371,889 341,386 297,425
Net Cash Provided from Operations..................... ------------------------------------------------------
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 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)
1997
<S> <C> <C> <C> <C>
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 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
F-10
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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.
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:
F-11
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(in thousands)
--------------------
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
---------------------
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.
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:
F-12
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
1997 1996
------------------------------
(in thousands, except per
share data)
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
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:
----------------------------------------
(in thousands)
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 $ 233,689 $ 58,473 $ 42,763
acquired............................ ------------------------------------------
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)
Notes Payable:
<S> <C> <C>
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 noncancellable 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.
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
F-15
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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)
Net Income:
<S> <C> <C>
As reported (1).............................. $ 163,470 $ 150,429
SFAS 123 pro forma........................... $ 160,966.00 $ 149,480.00
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 $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:
F-16
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
<TABLE>
<CAPTION>
Weighted
Average
Share Exercise
Options Price Range Price Share Grants Price Range
--------------- ---------------- ---------------- -------------- -------------
Total exercisable and outstanding
<S> <C> <C> <C> <C> <C>
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
Canceled, 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
Remaining Average Number Average
Number Life Exercise Exercisable Exercise
Range of outstanding Price at 12/31/97 Price
Exercise Prices at 12/31/97
-----------------------------------------------------------------------------------------------
<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, except 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 $ 0.86 $ 151,544 220,286 $ 0.69 $ 106,985 182,135 $ 0.59
-------------------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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)
Operating Revenue:
<S> <C> <C> <C> <C> <C>
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 45,299
-----------------------------------------------------------------------------
$ 329,076 34% $ 245,140 43% $ 172,019
</TABLE>
F-19
<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)
Pro forma Corporate Net Income:
<S> <C> <C> <C> <C> <C>
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-20
<PAGE>
THE SERVICEMASTER COMPANY
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
------------------- ---------------------
<S> <C> <C>
Operating Revenue....................................................... $ 981,788 $ 817,136
Operating Costs and Expenses:
Cost of services rendered and products sold............................. 794,797 657,145
Selling and administrative expenses..................................... 117,218 101,391
------------------ ----------------------
Total operating costs and expenses......................................
912,015 758,536
------------------ ----------------------
Operating Income........................................................ 69,773 58,600
Non-operating Expense (Income):
Interest expense........................................................ 24,095 10,392
Interest and investment income.......................................... (3,435) (2,567)
Minority interest....................................................... -- 2,148
------------------ ----------------------
Income before Income Taxes.............................................. 49,113 48,627
Provision for income taxes (pro forma in 1997)(1)....................... 19,843 19,645
Net Income (pro forma in 1997)(1)....................................... $29,270 $ 28,982
------------------- ----------------------
Per Share:
Basic (pro forma in 1997)(1)............................................ $.16 $.13
------------------------------------------
Diluted (pro forma in 1997)(1).......................................... $.15 $.13
------------------------------------------
Cash Distributions Per Share............................................ $.12 $.11 1/3
</TABLE>
(1) The Company converted from partnership to corporate form on December
26, 1997. Prior to the conversion, the partnership entity was not subject
to federal and state income taxes, as its taxable income was allocated to
the Company's shareholders. The results shown above for the period ended
March 31, 1997 have been restated to adjust the actual historical
information for that period to a basis that assumes that reincorporation
had occurred as of the beginning of that year. Actual net income for the
period ended March 31, 1997, as previously reported (i.e., excluding the
effects of pro forma corporate income taxes), was $46,860 (basic and
diluted net income per share was $.22 and $.21, respectively).
(2) Basic earnings per share are calculated based on 186,597 shares in 1998 and
216,309 shares in 1997 while diluted earnings per share are calculated based on
192,970 shares in 1998 and 224,429 shares in 1997. All share and per share data
have been restated to reflect the three-for-two share split declared on May 9,
1997 and payable to shareholders of record as of June 11, 1997.
See Notes to Consolidated Financial Statements
F-21
<PAGE>
THE SERVICEMASTER COMPANY
Consolidated Statements of Financial Position
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
As of
March 31, December 31,
1998 1997
------------------------------------------
Assets
Current Assets:
<S> <C> <C>
Cash and cash equivalents................................................... $ 32,860 $ 64,876
Marketable securities....................................................... 64,459 59,248
Receivables, less allowances of $31,971 and $32,221, respectively........... 315,371 299,138
Inventories................................................................. 57,364 48,157
Prepaid expenses and other assets........................................... 192,208 122,665
------------------------------------------
Total current assets............................................... 662,262 594,084
------------------------------------------
Property and Equipment:
At cost............................................................ 419,845 362,653
Less: accumulated depreciation..................................... 237,076 204,383
------------------------------------------
Net property and equipment......................................... 182,769 158,270
------------------------------------------
Intangible assets, primarily trade names and goodwill, net of
accumulated amortization of $227,891 and $218,293, respectively... 1,692,702 1,563,309
Notes receivable, long-term securities, and other assets.................... 160,498 159,561
------------------------------------------
Total assets.......................................................
$ 2,698,231 $ 2,475,224
------------------------------------------
------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities:
Account payable............................................................. $ 83,285 $ 84,673
Accrued liabilities......................................................... 289,605 270,667
Deferred revenues........................................................... 220,501 181,298
Current portion of long-term obligations.................................... 33,741 21,539
-------------------------------------------
Total current liabilities.......................................... 627,132 558,177
-------------------------------------------
Long-Term Debt.............................................................. 1,379,936 1,247,845
Other Long-Term Obligations................................................. 142,296 144,764
Commitments and Contingencies...............................................
Shareholders' Equity:
Common stock $0.01 par value, authorized 1 billion shares; issued and
outstanding 187,158 and 186,629 shares, respectively............... 1,872 1,866
Additional paid-in capital.................................................. 531,094 519,424
Retained earnings........................................................... 72,146 65,000
Restricted stock............................................................ (4,048) (4,270)
Treasury stock.............................................................. (52,197) (57,582)
------------------------------------------
Total shareholders' equity......................................... 548,867 524,438
------------------------------------------
Total liabilities and shareholders' equity......................... $ 2,698,231 $ 2,475,224
------------------------------------------
------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
F-22
<PAGE>
THE SERVICEMASTER COMPANY
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
--------------------------------------------------
<S> <C> <C>
Cash and Cash Equivalents at January 1..................... $ 64,876 $ 72,009
Cash Flows from Operations:
Net Income................................................. 29,270 46,860
Adjustments to reconcile net income:
Depreciation..................................... 11,639 10,972
Amortization..................................... 9,598 7,428
Change in working capital, net acquisitions:
Receivables.................................. (12,535) (12,403)
Inventories and other current assets......... (70,791) (65,210)
Accounts payable............................. (2,394) 2,906
Deferred revenues............................ 38,026 39,197
Accrued liabilities.......................... 7,269 (642)
Other, net....................................... 2,503 1,320
--------------------------------------------------
Net Cash Provided from Operations.......................... 12,585 30,428
--------------------------------------------------
Cash Flows from Investing Activities:
Business acquisitions, net of cash acquired........... (106,481) (96,405)
Property additions.................................... (23,354) (12,970)
Payments to sellers of acquired businesses............ (3,757) (1,062)
Notes receivable and financial investments............ (1,012) (1,558)
Sale of equipment and other assets.................... 748 553
Net purchases of investment securities................ (693) (763)
--------------------------------------------------
Net Cash Used for Investing Activities..................... (134,495) (112,205)
--------------------------------------------------
Cash Flows from Financing Activities:
Long-term borrowings, net............................. 123,242 100,785
Payments of borrowings and other obligations.......... (10,586) (14,618)
Distributions to shareholders and shareholders' trust. (22,124) 24,815)
Purchase of ServiceMaster shares...................... (4,018) (10,151)
Proceeds from employee share option plans............. 1,990 1,957
Other................................................. 1,390 (208)
--------------------------------------------------
Net Cash Provided from Financing Activities................ 89,894 52,950
--------------------------------------------------
Cash Decrease during the Period............................ (32,016) (28,827)
--------------------------------------------------
Cash and Cash Equivalents at March 31...................... $ 32,860 $ 43,182
--------------------------------------------------
--------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
F-23
<PAGE>
THE SERVICEMASTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: The consolidated financial statements include the accounts of
ServiceMaster and its significant subsidiaries, collectively referred to as "the
Company". Intercompany transactions and balances have been eliminated in
consolidation.
Note 2: The consolidated financial statements included herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest Annual Report
to shareholders and the Annual Report to the Securities and Exchange Commission
on Form 10-K for the year ended December 31, 1997. In the opinion of the
Company, all adjustments, consisting only of normal and recurring adjustments,
necessary to present fairly the financial position of The ServiceMaster Company
as of March 31, 1998 and December 31, 1997, and the results of operations and
cash flows for the three months ended March 31, 1998 and 1997, have been
included. The preparation of the financial statements requires management to
make certain estimates and assumptions required under generally accepted
accounting principles which may differ from the actual results. The results of
operations for any interim period are not necessarily indicative of the results
which might be obtained for a full year.
Note 3: For interim accounting purposes, certain costs directly associated with
the generation of lawn care revenues are initially deferred and recognized as
expense as the related revenues are recognized. All such costs are fully
recognized within the fiscal year in which they are incurred.
Note 4: On May 9, 1997, the Company's Board of Directors declared a
three-for-two share split effective June 25, 1997, for shareholders of record on
June 11, 1997. All share and per share data have been restated for all periods
presented to reflect this three-for-two split.
Note 5: Basic earnings per share includes no dilution from options, debentures
or other financial instruments and is computed by dividing income available to
common stockholders by the weighted average number of shares outstanding.
Diluted earnings per share reflects the potential dilution of convertible
securities and options to purchase common stock. The following chart reconciles
both the numerator and the denominator of the basic earnings per share
computation to the numerator and denominator of the diluted earnings per share
computation.
<TABLE>
<CAPTION>
Three months Three months
ended March 31, 1998 ended March 31, 1997
------------------------------------------------------------------------------------------
(in thousands, except per share data)
Pro-forma
Income Shares EPS Income Shares EPS
------------------ ----------- ------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 29,270 186,597 $ 0.16 $ 28,982 216,309 $ 0.13
Effect of dilutive securities, net of tax:
Options -- 5,941 -- 4,493
9% Convertible debenture -- -- 246 3,195
6% Convertible debenture 32 432 32 432
------------------------------- ------------ ------------------------------- -------------
Diluted earnings per share $ 29,302 192,970 $ 0.15 $29,260 224,429 $ 0.13
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
</TABLE>
Note 6: In the Consolidated Statements of Cash Flows, the caption Cash and Cash
Equivalents includes investments in short-term, highly-liquid securities having
a maturity of three months or less. Supplemental information relating to the
Consolidated Statements of Cash Flows for the three months ended March 31, 1998
and 1997 is presented in the following table. The increase in interest paid in
1998 is primarily due to overall higher debt balances relating to the WMX share
repurchase in April 1997 as well as the timing of payments on the public debt.
F-24
<PAGE>
(In thousands)
1998 1997
------------------- ----------------------
Cash paid or received for:
Interest expense................. $ 31,910 $ 11,205
Interest and dividend income.... $ 2,007 $ 1,942
Note 7: Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This statement
establishes standards for reporting and display of comprehensive income and its
components in financial statements. Total comprehensive income for the three
months ended March 31, 1998 and 1997 was $31.3 million and $24.7 million,
respectively, which included primarily net income and unrealized gains on
marketable securities.
In 1998, Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", and Statement of Position No.
98-5, "Reporting on the Costs of Start Up and Preoperating Activities", were
issued. These statements, which must be adopted no later than January 1999, have
not yet been implemented by the Company. The Company does not expect the
adoption of these statements to have a material impact to the financial
statements.
F-25