SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
__X__ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 1-14762
THE SERVICEMASTER COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-3858106
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One ServiceMaster Way, Downers Grove, Illinois 60515-1700
(Address of principal executive offices) (Zip Code)
630-271-1300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No_____.
Indicate the number of shares outstanding of each of the issuer's classes of
shares: 311,316,447 shares as of May 5, 1999.
This document consists of 17 pages, including the cover page.
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TABLE OF CONTENTS
Page
No.
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THE SERVICEMASTER COMPANY (Registrant) -
Part I. Financial Information
- ------- ---------------------
Consolidated Statements of Income for the
three months ended March 31, 1999 and March 31, 1998 2
Consolidated Statements of Financial Position
as of March 31, 1999 and December 31, 1998 3
Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and March 31, 1998 4
Notes to Consolidated Financial Statements 5
Management Discussion and Analysis of Financial Position
and Results of Operations 8
Part II. Other Information
- -------- -----------------
Item 5: Other Information 15
Sale of Premier Manufacturing Support Services
Signature 16
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
THE SERVICEMASTER COMPANY
Consolidated Statements of Income
(In thousands, except per share data)
Three Months Ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
Operating Revenue.............................................. $ 1,115,062 $ 981,788
Operating Costs and Expenses:
Cost of services rendered
and products sold.............................................. 899,815 794,797
Selling and administrative expenses............................ 136,619 117,218
----------- -----------
Total operating costs and expenses............................. 1,036,434 912,015
----------- -----------
Operating Income............................................... 78,628 69,773
Non-operating Expense (Income):
Interest expense............................................... 21,948 24,095
Interest and investment income................................. (3,621) (3,435)
----------- -----------
Income before Income Taxes..................................... 60,301 49,113
Provision for income taxes..................................... 24,692 19,843
----------- -----------
Net Income..................................................... $ 35,609 $ 29,270
=========== ===========
Per Share: (1) (2)
Basic.......................................................... $ .12 $ .10
===== =====
Diluted........................................................ $ .12 $ .10
===== =====
Dividends per share (2)........................................ $ .09 $ .08
===== =====
(1) Basic earnings per share are calculated based on 299,602 shares in 1999 and
279,895 shares in 1998 while diluted earnings per share are calculated based
on 307,959 shares in 1999 and 289,455 shares in 1998.
(2) On July 24, 1998, the Board of Directors of the Company declared a
three-for-two share split effective August 26, 1998, for shareholders of
record on August 12, 1998. All shares and per share data have been restated
for all periods presented to reflect the three-for-two split.
See Notes to Consolidated Financial Statements
</TABLE>
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<TABLE>
<CAPTION>
THE SERVICEMASTER COMPANY
Consolidated Statements of Financial Position
(In thousands)
As of
March 31, December 31,
1999 1998
------------ -------------
Assets
Current Assets:
<S> <C> <C>
Cash and cash equivalents............................................ $ 31,488 $ 66,400
Marketable securities................................................ 54,592 54,022
Receivables, less allowances of $41,159
and $38,988, respectively......................................... 430,649 372,375
Inventories.......................................................... 63,810 49,770
Prepaid expenses and other assets.................................... 214,854 127,635
------------ -------------
Total current assets............................................. 795,393 670,202
------------ -------------
Property and Equipment:
At cost........................................................... 578,626 441,209
Less: accumulated depreciation................................... 302,177 229,049
------------ -------------
Net property and equipment....................................... 276,449 212,160
------------ -------------
Intangible assets, primarily trade names and goodwill,
net of accumulated amortization of $282,934
and $272,254, respectively........................................ 2,231,194 1,884,002
Notes receivable, long-term securities, and other assets............. 142,773 148,487
------------ -------------
Total assets.....................................................$ 3,445,809 $ 2,914,851
============ =============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable.....................................................$ 122,328 $ 110,523
Income taxes payable................................................. 27,616 84,165
Accrued liabilities.................................................. 262,107 302,424
Deferred revenues.................................................... 254,916 204,969
Current portion of long-term obligations............................. 47,164 51,616
------------ -------------
Total current liabilities........................................ 714,131 753,697
------------ -------------
Long-Term Debt....................................................... 1,412,177 1,076,167
Other Long-Term Obligations.......................................... 136,164 128,501
Commitments and Contingencies .......................................
Shareholders' Equity:
Common stock $0.01 par value, authorized 1 billion shares; issued
and outstanding 310,150 and 298,030 shares, respectively......... 3,102 2,980
Additional paid-in capital........................................... 1,008,108 788,124
Retained earnings.................................................... 189,743 179,840
Accumulated other comprehensive income............................... (79) 3,911
Restricted stock..................................................... (3,181) (3,383)
Treasury stock....................................................... (14,356) (14,986)
------------ -------------
Total shareholders' equity....................................... 1,183,337 956,486
------------ -------------
Total liabilities and shareholders' equity.......................$ 3,445,809 $ 2,914,851
============ =============
See Notes to Consolidated Financial Statements
</TABLE>
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<TABLE>
<CAPTION>
THE SERVICEMASTER COMPANY
Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
March 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash and Cash Equivalents at January 1................................ $ 66,400 $ 64,876
Cash Flows from Operations:
Net Income............................................................ 35,609 29,270
Adjustments to reconcile net income
to net cash flows from operations:
Depreciation................................................... 14,893 11,639
Amortization................................................... 10,680 9,598
Change in working capital, net of acquisitions:
Receivables.................................................. (13,462) (12,535)
Inventories and other current assets......................... (88,536) (70,791)
Accounts payable............................................. (2,137) (2,394)
Deferred revenues............................................ 40,500 38,026
Accrued liabilities.......................................... (21,764) 7,269
Deferred 1998 tax payment.................................... (78,478) -
Other, net..................................................... 3,175 2,503
------------- ------------
Net Cash Provided from (Used for) Operations.......................... (99,520) 12,585
------------- ------------
Cash Flows from Investing Activities:
Business acquisitions, net of cash acquired....................... (172,445) (106,481)
Property additions................................................ (24,731) (23,354)
Sale of equipment and other assets .............................. 2,821 748
Payments to sellers of acquired businesses........................ (3,525) (3,757)
Notes receivable and financial investments........................ (2,105) (1,012)
Net purchases of investment securities............................ (4,431) (639)
------------- ------------
Net Cash Used for Investing Activities................................ (204,416) (134,495)
------------- ------------
Cash Flows from Financing Activities:
Borrowings, net................................................... 415,991 123,242
Payment of borrowings and other obligations....................... (122,444) (10,586)
Shareholders' dividends........................................... (25,705) (22,124)
Purchase of ServiceMaster stock................................... (4,341) (4,018)
Proceeds from employee share plans................................ 5,023 1,990
Other............................................................. 500 1,390
------------- ------------
Net Cash Provided from Financing Activities........................... 269,024 89,894
------------- ------------
Cash Decrease during the Period....................................... (34,912) (32,016)
------------- ------------
Cash and Cash Equivalents at March 31................................. $ 31,488 $ 32,860
============= ============
See Notes to Consolidated Financial Statements
</TABLE>
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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, 1998. 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, 1999 and December 31, 1998, and the results of operations and
cash flows for the three months ended March 31, 1999 and 1998, 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 July 24, 1998, the Company's Board of Directors declared a
three-for-two share split effective August 26, 1998, for shareholders of record
on August 12, 1998. 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, 1999 ended March 31, 1998
------------------------------- ------------------------------
(In thousands, except per share data) Income Shares EPS Income Shares EPS
------ ------ --- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $35,609 299,602 $0.12 $29,270 279,895 $0.10
====== ======
Effect of dilutive securities, net of tax:
Options - 8,357 - 8,913
6% Convertible debenture - - 32 647
---------- --------- ---------- ---------
Diluted earnings per share $35,609 307,959 $0.12 $29,302 289,455 $0.10
========== ========= ====== ========== ========= ======
</TABLE>
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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, 1999
and 1998 is presented in the following table. The increase in interest paid in
1999 is primarily due to the timing of payments. The significant increase in
income taxes paid in 1999 reflects the payment of the 1998 federal tax
obligation.
<TABLE>
<CAPTION>
(In thousands)
1999 1998
Cash paid or (received for): ------ ------
- ----------------------------
<S> <C> <C>
Interest expense............................................ $ 33,551 $ 31,910
Interest and dividend income................................ $ (2,104) $ (2,007)
Income taxes................................................ $ 79,549 $ 2,700
</TABLE>
Note 7: Total comprehensive income for the three months ended March 31, 1999 and
1998 was $31.6 million and $31.3 million, respectively, which included primarily
net income and unrealized gains on marketable securities.
Note 8: On March 18, 1999, the Company completed the acquisition of LandCare
USA, Inc. (LandCare) which, when combined with the existing landscape operations
of ServiceMaster, created the largest commercial landscaping company in America
with annualized revenues in excess of $550 million. The Company issued shares
valued at approximately $192 million and assumed debt of approximately $127
million ($117 million of which was paid off at closing). The acquisition has
been accounted for using the purchase method and the results of LandCare have
been included in the Company's financial statements since the date of
acquisition. The excess of the consideration paid over the fair value of the
business of $260 million was recorded as goodwill and is being amortized on a
straight-line basis over 40 years. This allocation of purchase price is
preliminary and subject to change as additional information is obtained related
to the fair values of the acquired net assets.
Note 9: The business of the Company is primarily conducted through the
ServiceMaster Consumer and Commercial Services and ServiceMaster Management
Services operating units. The Consumer and Commercial 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. The Company derives
substantially all of its revenues from customers in the United States with less
than five percent generated in foreign markets.
The Other Operations group includes primarily ServiceMaster Employer Services, a
professional employer organization that provides clients with administrative
processing of payroll, insurance, and other employee benefit programs,
Diversified Health Services which provides services and products to the
long-term care industry, and the Company's headquarters operation. Segment
information as of and for the three months ended March 31 are as follows:
<TABLE>
<CAPTION>
Consumer & Commercial Management Other
1999 Services Services Operations Consolidated
- ------------------------- --------------------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Operating Revenue $ 461,977 $ 501,212 $ 151,873 $ 1,115,062
Operating Income $ 62,541 $ 19,202 $ (3,115) $ 78,628
Total Assets $ 2,819,610 $ 243,204 $ 382,995 $ 3,445,809
1998
- -------------------------
Operating Revenue $ 363,892 $ 473,886 $ 144,010 $ 981,788
Operating Income $ 49,537 $ 18,316 $ 1,920 $ 69,773
Total Assets $ 2,009,192 $ 207,976 $ 481,063 $ 2,698,231
</TABLE>
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Note 10: In late 1998, the Company determined to discontinue its activities
in the Home Health Care business and established pretax reserves of
$8 million related to the costs associated with exiting certain customer
arrangements. At the time, the Company also recognized certain impairment
losses and wrote-off certain accounts receivable. The Company has
substantially completed the exit of direct Home Health Care operations in the
first quarter, and has determined that the reserve is adequate. The results of
operations of the Home Health Care business were not material to the Company's
financial results for the periods presented.
Note 11: In June 1998, the Financial Accounting Standards Board issued a
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Company intends to adopt this statement
in January 2000 as required by the Statement. Adoption of this Statement is not
expected to have a material impact on the Company's financial statements.
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THE SERVICEMASTER COMPANY
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
- -------------------------------------------------
Revenues increased 14 percent to $1.1 billion in the first quarter of 1999
through a combination of acquisitions and solid base business growth.
Approximately nine percent of the revenue increase resulted from internal growth
and small roll-up acquisitions in existing service lines; primarily lawn care
and pest control, with another five percent coming from other acquisitions
primarily in landscaping. Operating income increased 13 percent to $78.6
million, while margins of 7.1 percent of revenue remained consistent with 1998.
The operating margin benefit from the more rapid growth of the Company's higher
margin businesses was offset by losses in the Diversified Health Services
operations. Diluted earnings per share in the first quarter were $.12 compared
to $.10 last year. Net income grew 22 percent to $35.6 million, a faster rate
than earnings per share due to an increase in shares outstanding resulting from
the Company's equity offering in May 1998, and shares issued for acquisitions.
The Consumer and Commercial Services business unit reported revenue of $462
million, an increase of 27 percent, and operating income of $62.5 million, 26
percent higher than last year. The segment's growth included double digit
increases at all of the companies in this unit, reflecting acquisitions and
internal growth. TruGreen-ChemLawn achieved strong revenue and profit growth,
which included the successful ongoing integration of the commercial landscape
business. About 12 percent of the segment's revenue growth came from the entry
into commercial landscaping. With the acquisition of LandCare USA, which was
completed on March 18, the Company becomes the largest provider of commercial
landscape services in the country and provides TruGreen-ChemLawn the opportunity
to integrate its traditional fertilizer and weed control services with landscape
maintenance and installation. The lawn care operations had increased volume and
good customer count increases, despite less favorable weather conditions in many
parts of the country compared to the prior year. Terminix reported strong
increases in revenues and profits with continued strong customer reception of
newer treatment alternatives, improved margins reflecting strong growth in
higher margin termite completions and in the renewal contracts as well as the
integration of acquisitions. American Home Shield had excellent increases in
both revenues and profits, with double digit increases in warranty contracts
sold through all distribution channels, which includes real estate, customer
renewals, and direct-to-consumer sales. Rescue Rooter reported very strong
growth in revenue and profits, as a result of strong base business growth, the
successful integration of acquisitions, as well as productivity improvements.
The franchise operations, Residential/Commercial and Merry Maids, reported
strong growth in revenues and profits, despite an extremely tight labor market,
with continued strong growth of company owned operations, increased franchise
license sales, and effective cost controls.
On April 27, 1999, the Company successfully completed its tender offer for the
outstanding shares of American Residential Services (ARS) at a purchase price of
$5.75 per share in cash. Subsequent to the completion of the tender offer, the
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Company and ARS effected a merger and ARS became a wholly-owned subsidiary of
the Company. ARS provides comprehensive maintenance, repair and replacement
services for HVAC, plumbing, electrical and other systems, and major appliances
in homes and commercial buildings. The acquisition of ARS establishes the
Company as one of the country's leading providers of heating, ventilation, and
air conditioning services and will complement the Company's Rescue Rooter
plumbing business. ARS will also support the HVAC services offered to the
residential market by the Company through its American Home Shield warranty
program and its maintenance management services of commercial HVAC equipment in
hospitals and schools.
The Management Services business unit reported a six percent increase in
revenues to $501 million and a five percent increase in operating income to
$19.2 million. This growth reflects the benefit of acquisitions and internal
growth, partially offset by the sale of the Company's Energy Management business
in late 1998. The Healthcare market experienced a moderate decline in revenue
and profits, primarily due to the effects of customer terminations in 1998 and
continued margin pressures in the acute care sector of the market. The overhead
reduction initiatives put in place last year helped offset lower gross margins.
The Education market reported solid increases in revenues and profits,
reflecting continued good sales momentum and controlled overhead spending. The
Business & Industry group achieved strong growth in revenue and profits,
reflecting base business growth and the integration of acquisitions.
On April 21, 1999, the Company sold one of its specialty units, Premier
Manufacturing Support Services (Premier), to Durr AG of Germany for $76 million.
Premier provides cleaning services for paint booths and other related
maintenance services in the automotive industry. The Company believes that
alliances or significant incremental investments would have been required to
remain competitive in this industry. The sale of Premier allowed ServiceMaster
to realize the significant appreciation in its investment and to reinvest the
proceeds in initiatives more central to the Company's core strategies. The sale
resulted in an after-tax gain of approximately $25 million, which will be
recorded in the second quarter.
The Diversified Health Services operation, which provides a variety of services
and products to the long-term healthcare market, reported an operating loss in
the quarter. Changes in reimbursement policies and regulatory compliance
standards have had a significant impact on the companies serving this industry.
As a result, the Company has begun a strategic review and assessment of services
comprising this business unit to determine how they fit into the Company's
longer-term strategic objectives.
Cost of services rendered and products sold increased 13 percent, due primarily
to general business growth and acquisitions, but decreased as a percentage of
revenue to 80.7 percent from 81.0 percent in 1998. This decrease primarily
reflects the changing mix of the business, as Consumer and Commercial 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 Consumer and Commercial Services. The Consumer and Commercial
Services businesses generally operate at higher gross margin levels
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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 17 percent, due to general
business growth and acquisitions, and increased as a percentage of revenue to
12.3 percent from 11.9 percent in 1998. This increase as a percentage of revenue
is primarily due to the changing business mix of the Company noted above.
Interest expense decreased from the prior year, reflecting a lower level of
average outstanding borrowings, primarily due to the May 1998 equity offering.
FINANCIAL POSITION
- ------------------
Net cash used for operations of $100 million was significantly below the first
quarter level in 1998. The decrease primarily reflects the deferral of the 1998
federal tax payment until March of 1999 as well as increased investments in the
Company's seasonal businesses, including additional investments in the
commercial landscaping operation, and the timing of certain payments throughout
the enterprise. Federal taxes of $78 million on the Company's 1998 earnings were
accrued for in the financial statements in 1998, but not paid until the first
quarter of 1999. Excluding this tax payment, cash used for operations was $21
million. (Some of the tax expense in 1998 and 1999 will be deferred for longer
periods of time due to the significant timing difference between book and tax
basis.) Due to the seasonality of the lawn care, landscape 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.
Accounts and notes receivable grew over year end levels, reflecting general
business growth, increased seasonal activity in the Consumer and Commercial
Services segment, and acquisitions, primarily LandCare. Inventories also
increased over year end levels as a result of normal seasonal build-ups in the
lawn care business and acquisitions.
Prepaids and other assets have increased from year end because of seasonality in
the lawn care business and the increased volume of warranty contracts written at
American Home Shield. 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 at American Home Shield and increases in customer
prepayments for lawn care services.
Property and equipment increased due to general business growth and
acquisitions, primarily LandCare. Capital expenditures grew, reflecting
increased investments in technology throughout the organization, business
growth, and recurring capital needs. The Company has no material capital
commitments at this time.
10
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Intangible assets increased $347 million from year end, reflecting the effect of
the acquisitions, which included $260 million from LandCare and various smaller
acquisitions in the Consumer and Commercial Services segment.
Accrued liabilities decreased from year end, primarily due to the 1998 tax
payment made in March of 1999. Debt levels increased due to the seasonal nature
of the Company's operating cash flows and the 1998 tax payment, combined with
the effects of acquisitions and property additions. The Company is party to a
number of long-term debt agreements which require it to maintain compliance with
certain financial covenants, including limitations on indebtedness, restricted
payments, fixed charge coverage ratios, and net worth. The Company is in
compliance with the covenants related to these debt agreements.
Total shareholders' equity increased to $1.2 billion in 1999 from $956 million
at December 31, 1998, reflecting earnings growth as well as the shares issued
for acquisitions, partially offset by cash dividends and treasury share
repurchases. Cash dividends paid directly to shareholders totaled $27 million or
$.09 per share. The increase from the prior year reflects a 13 percent increase
in the dividend rate per share and an increase in shares outstanding, primarily
resulting from the May 1998 equity offering and shares issued in acquisitions.
YEAR 2000 READINESS DISCLOSURE
- ------------------------------
Year 2000 Compliance. Certain computer programs use two digits rather than four
to define the applicable year and consequently may not function properly beyond
the year 1999 unless they are remediated. In addition, some computer programs
are unable to recognize the year 2000 as a leap year. These problems may also
exist in chips embedded in various types of equipment. The Company has long been
aware of this Year 2000 (Y2K) problem. The Company is dealing with the Y2K
problem in part through system upgrades, which were planned to occur in the
normal course of business. In other cases, the Company has put programs into
place which the Company believes will result in the completion of necessary
remediation efforts prior to the year 2000.
State of Readiness. The Company has initiated a program (the "Y2K program") to
address Y2K issues as they affect the Company's information technology (IT)
systems, electronic data interfaces and its non-IT hardware and services. The
Y2K program was set up to use the following steps as appropriate: inventory -
assessment - planning renovation - testing - implementation. In addition, the
program calls for inquiries of the Company's major suppliers of goods and
services to determine their Y2K status and a review of the Company's
relationships with its customers to determine if the Company has any
responsibility for the status of the customers' IT and/or non-IT systems and
hardware.
In 1998, the Company began to monitor its progress on the Y2K program on a
consolidated basis and completed an inventory which covered both IT and non-IT
items for all operating companies and administrative units within the
ServiceMaster enterprise. All items in the inventory were placed in one of four
categories: mission critical, critical, important and ordinary within the
context of the operating company or administrative unit involved. (A "mission
critical"
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or "critical" designation for an item within an operating company or
administrative unit does not necessarily hold the same level of criticality from
the perspective of the entire ServiceMaster enterprise.)
Remediation plans have been developed for the mission critical and critical
matters, with milestones established for each plan which enable management to
measure the progress made in respect of a plan against the work schedule
established for that plan. Although these plans encompass many separately
identifiable items, from a ServiceMaster enterprise standpoint, there are nine
projects (the "Key Projects") which management has identified as either mission
critical or critical and which will require a measurable amount of attention to
remediate. Although all of the Key Projects are scheduled for completion before
the end of the year 1999, most of the Key Projects are scheduled for completion
by June 30, 1999. As of May 10, 1999, work on each of the Key Projects was on
schedule and the Company believes that all Key Projects will be completed in
accordance with their scheduled completion dates.
The Company utilized the services of an outside consultant for the Y2K program
to help identify Y2K issues and to develop a system to closely monitor
remediation work. In early 1998, the Company established a Y2K committee in the
parent unit with responsibility for monitoring the Y2K program in each of the
Company's operating units and for providing status reports to the Board of
Directors.
In addition to the Key Projects, remediation plans are being developed for
LandCare USA, Inc. and American Residential Services, which were acquired in
March and April of 1999, respectively. In both cases, the companies have
extensive branch networks which operate on a variety of different platforms. The
Company intends to remediate these branches by implementing a common operating
system where possible by year end, and implementing Y2K upgrades to the existing
systems in the other branches. At this time, the Company does not expect Y2K
problems to occur as a result of the 1999 acquisitions which will have a
material adverse effect on the ServiceMaster enterprise.
Year 2000 Costs. Several of the Key Projects are upgrades of systems which the
Company would have undertaken irrespective of the Y2K problem. In some cases,
including a new accounting and financial reporting system for the parent company
and its Management Services subsidiary, work on these systems has been
accelerated in view of Y2K issues. Other upgrades or new systems were already
scheduled for completion prior to the year 2000, such as a new support system
for the Company's American Home Shield subsidiary and a new accounting and
billing system for the recently developed commercial landscape business within
the Company's TruGreen-ChemLawn subsidiary. References to "Year 2000 costs" in
this report do not include the costs of projects for which no acceleration is
occurring due to Y2K issues.
The Company's Year 2000 costs to date are not material to its results of
operations or financial position and the Company does not expect its future Year
2000 costs to be material to the Company's results of operations or financial
position. All Year 2000 costs (as well as the costs of installing the system
upgrades referred to above) have been, and are expected to continue to be,
funded with cash from operations.
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Year 2000 Risks. The Company believes that its greatest risk in respect of the
Year 2000 problem, is that key third party suppliers of goods or services may
fail to complete their own remediation efforts in a timely manner and thereby
provoke an interruption in the ability of one or more of the operating segments
of the Company to provide uninterrupted services to their customers. Utility
services (electrical, water and gas), telephone service, banking services and,
to a much lesser degree, the delivery of certain products are the critical items
in this regard. Based on the Company's inquiries to its providers of goods and
services and on the basis of the Company's general knowledge of the state of
readiness of the utility companies and banks with which it does business, the
Company does not expect to suffer any material interruption in the services on
which the Company depends.
The Company has reviewed its agreements with certain of its customers, including
particularly the customers of its Management Services units for whom such units
provide facility management services. The Company is satisfied that it is not
responsible, contractually or otherwise, for the Y2K readiness of the customer's
IT and non-IT systems and hardware, and the Company is in the process of
notifying all of its customers to this effect where, in the Company's judgment,
the nature of the customers' business or facility warranted such notices.
Where the Company uses its own software in the course of providing management
services, the Company is responsible to make such software Y2K ready. The
Company is confident that such software is already, or soon will be, Y2K ready.
For those units of the Company which sell franchises and which provide software
to the franchisees, such software is already, or soon will be, fully Y2K ready
or, alternatively, provision has been made for making available to franchisees
software from third-party developers from whom appropriate Y2K assurances have
been or will be received.
Contingency Plans. At this time, the Company fully expects all of its internal
key IT and non-IT systems to be Y2K ready well in advance of the end of the year
1999. If it appears that timely delivery of any Key Projects becomes
questionable, the Company will immediately develop appropriate contingency
plans.
The Company presently expects that its significant providers of goods and
services are or will be Y2K ready by the end of the year 1999. The Company will
continue to make inquires of its key suppliers for the purpose of testing this
expectation. Insofar as the Company is exposed to risks originating in Y2K
problems at key suppliers, the Company will utilize short-term solutions, but no
practical long-term contingency plans for these external Y2K problems are
possible.
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.
13
<PAGE>
Definition. As used in this Year 2000 Readiness Disclosure Statement, the term
"year 2000 ready" or "Y2K ready" when used with reference to a item of software
or equipment means the capability of the software or equipment to process
correctly (including calculating, comparing, sequencing, displaying, or
storing), transmit, or receive date data from, into, and between the 20th and
21st centuries, and during the years 1999 and 2000, and to make leap year
calculations, provided that all products used with the software or equipment
properly exchange accurate date data with it.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 5: OTHER INFORMATION
SALE OF PREMIER MANUFACTURING SUPPORT SERVICES
- ----------------------------------------------
On April 27, 1999, the Company announced the sale of Premier Manufacturing
Support Services (Premier) to Durr AG of Germany. Premier provides cleaning
services for paint booths and other related maintenance services in the
automotive industry. The sale price of Premier was $76 million, resulting in an
after-tax gain of approximately $25 million.
In accordance with the Private Securities Litigation Reform Act of 1995, the
Company notes that statements that look forward in time, which include
everything other than historical information, involve risks and uncertainties
that may affect the Company's actual results of operations. Factors which could
cause actual results to differ materially include the following (among others):
weather conditions adverse to certain of the Company's Consumer and Commercial
Services businesses, labor shortages, the entry of additional competitors in any
of the markets served by the Company, consolidation of hospitals in the
healthcare market, the condition of the U.S. economy, the inability of key
suppliers to achieve timely Y2K compliance in their delivery systems or the
inability of the Company to make its own systems Y2K compliant, and other
factors listed from time to time in the Company's filings with the Securities
and Exchange Commission.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 1999
THE SERVICEMASTER COMPANY
(Registrant)
By: /s/Steven C. Preston
-------------------------------------------------
Steven C. Preston
Executive Vice President and Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE SERVICEMASTER QUARTERLY REPORT TO
SHAREHOLDERS FOR THE PERIOD ENDED MARCH 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> THE SERVICEMASTER COMPANY
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 31,488 32,860
<SECURITIES> 54,592 64,459
<RECEIVABLES> 471,808 347,342
<ALLOWANCES> 41,159 31,971
<INVENTORY> 63,810 57,364
<CURRENT-ASSETS> 795,393 662,262
<PP&E> 578,626 419,845
<DEPRECIATION> 302,177 237,076
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