<PAGE>
As filed with the Securities and Exchange Commission on March 26, 1999
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
-----------------
The ServiceMaster Company
(Exact name of registrant as specified in its charter)
----------------------------
8741
(Primary Standard Industrial Classification Code No.)
Delaware One ServiceMaster Way 36-3858106
(State or other Downers Grove, Illinois 60515 (I.R.S. Employer
jurisdiction of (630) 271-1300 Identification No.)
incorporation or (Address, including zip code,
organization) and telephone number,
including area code, of
Registrant's principal executive offices)
-----------------------------
Vernon T. Squires
Senior Vice President and General Counsel
The ServiceMaster Company
One ServiceMaster Way
Downers Grove, Illinois 60515-1700, (630) 271-1300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of all communications, including communications sent to agent for
service, should be sent to:
Robert H. Kinderman, Esq.
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601, (312) 861-2000
-----------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[_]
CALCULATION OF REGISTRATION FEE (2) (3)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Amount to be Proposed Maximum Proposed Maximum Amount of
Registered Offering Price Aggregate Registration
Title of Each Class of Securities to be Registered Per Unit (1) Offering Price Fee
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per share, and related
Preferred Stock Purchase Rights..................... 8,625,000 $19.56 $168,726,563 $46,906
====================================================================================================================================
</TABLE>
(1) Reflects the average of the high and low prices on the New York Stock
Exchange Composite Tape on March 22, 1999 pursuant to Rule 457(c) under the
Securities Act of 1933, as amended.
(2) The value attributable to the Preferred Stock Purchase Rights is reflected
in the value attributable to the Common Stock.
(3) Pursuant to Rule 429 under the Securities Act of 1993, as amended, includes
5,250,000 shares which were previously registered on Form S-1 by the
Registrant (Registration No. 333-59659) and for which the Registrant
previously paid a registration fee. Pursuant to Rule 429, the prospectus
included in this Registration Statement is a combined prospectus that also
related to the Form S-1 Registration Statement of the Registrant filed on
July 23, 1998 (Registration No. 333-59659).
-----------------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 9(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 26, 1999
8,625,000 Shares
The ServiceMaster Company
Common Stock
(par value $0.01 per share)
We may issue up to 8,625,000 shares of Common Stock from time to time in the
future in connection with the acquisition of businesses.
This Prospectus may also be used under certain limited circumstances in
connection with the resale of Common Stock that was originally issued pursuant
to this Prospectus.
The Common Stock is listed on the New York Stock Exchange, Inc. under the symbol
SVM. On March 22, 1999, the closing sale price of the Common Stock on the NYSE
was $19.56 per share.
This Prospectus provides you with detailed information about ServiceMaster. We
encourage you to read this entire document carefully. In addition, you may
obtain information about ServiceMaster from documents that we have filed with
the Securities and Exchange Commission.
This Prospectus is dated March [__], 1999. You should be aware that the delivery
of this Prospectus and the sale of Common Stock pursuant to this Prospectus will
not in any way create an implication that the information contained in this
Prospectus is accurate or complete at any time after March [__], 1999.
We are not making an offer of Common Stock in any state where the offer is not
permitted.
Neither the SEC nor any state securities regulators have approved the Common
Stock to be issued under this Prospectus or determined if this Prospectus is
accurate or adequate. Any representation to the contrary is a criminal offense.
Prospectus dated March [__], 1999
1
<PAGE>
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION..........................................................3
SUMMARY........................................................................4
REINCORPORATION OF THE PREDECESSOR LIMITED PARTNERSHIP.........................8
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS.....................................8
SECURITIES COVERED BY THIS PROSPECTUS.........................................10
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.........................................................13
BUSINESS......................................................................19
MANAGEMENT....................................................................30
OWNERSHIP OF COMMON STOCK.....................................................39
DESCRIPTION OF COMMON STOCK...................................................41
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY...............................45
LEGAL MATTERS.................................................................45
EXPERTS.......................................................................45
INDEX TO FINANCIAL STATEMENTS................................................F-1
2
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information we file at the public reference facilities of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the SEC at
Seven World Trade Center, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from commercial document retrieval
services and at the web site maintained by the SEC at http://www.sec.gov.
Our Common Stock is traded on the New York Stock Exchange, Inc. (the "NYSE")
under the symbol SVM and you can inspect our reports and other information at
the offices of the NYSE, 20 Broad Street, New York, New York 10005.
ServiceMaster filed a Registration Statement on Form S-1 to register with the
SEC the Common Stock offered by this Prospectus. As allowed by SEC rules, this
Prospectus does not contain all the information you can find in the Registration
Statement or the exhibits to the Registration Statement.
3
<PAGE>
SUMMARY
This summary highlights selected information from this Prospectus and may not
contain all of the information that is important to you. 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
"Reincorporation of the Predecessor Limited Partnership."
You should be aware that 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. All references we make to numbers of shares of Common Stock,
or options for shares of Common Stock, and all references we make 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.
ServiceMaster
ServiceMaster, with operating revenue of approximately $4.7 billion in 1998,
is one of the largest providers of residential services to individual customers
and supportive management services to businesses and institutions in the United
States. In addition, we have operations in 41 countries around the world.
Our consumer services business ("ServiceMaster Consumer Services") provides
services to over 10.5 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 and heating and air
conditioning 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.
Our management services business ("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, food service, laundry and linen services, total
facilities management and other 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.
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 website of the Company and the information
contained therein are not a part of this Prospectus.
4
<PAGE>
Recent Developments
On November 2, 1998, ServiceMaster and LandCare USA, Inc. ("LandCare")
announced approval by their boards of directors of a definitive agreement under
which ServiceMaster would acquire Houston-based LandCare in a stock-for-stock
merger. The LandCare shareholders approved the transaction at a special meeting
held on March 18, 1999 and the transaction uses was closed on the same day. This
acquisition will broaden the ability of ServiceMaster's TruGreen-ChemLawn
subsidiary to integrate fully its traditional fertilizer and weed control
services with landscape maintenance and installation, as well as indoor
plantcare, for commercial customers.
On January 4, 1999, ServiceMaster announced the formation of a strategic
venture with Texas Utilities Company for the ownership and operation of
ServiceMaster's energy management business. The new venture, which is owned 85%
by Texas Utilities and 15% by ServiceMaster, acquired all the assets of
ServiceMaster Energy Management.
Also on January 4, 1999, ServiceMaster announced the completion of its
strategic review of its home health care business and the decision to sell its
direct operations of home health care agencies and certain support operations
and to discontinue its outsourced operation of home health care agencies.
ServiceMaster will continue to provide consulting services to hospitals and
other providers of home health care.
On March 23, 1999, ServiceMaster announced that ServiceMaster and American
Residential Services, Inc. ("ARS") had entered into a definitive agreement under
which ServiceMaster will initiate a cash tender offer for all of the outstanding
shares of common stock of American Residential Services, Inc. at a price of
$5.75 per share. The total acquisition cost is approximately $92 million in cash
and $180 million of assumed indebtedness. Completion of the tender offer is
subject to certain conditions, including the tender of at least 52% of the
outstanding ARS shares. The offer and withdrawal rights are scheduled to expire
on April 26, 1999 unless the offer is extended.
5
<PAGE>
SUMMARY FINANCIAL DATA
(In thousands, except for per share and percentage data)(1)
We are providing the following summary financial information about us for
your benefit. This information is derived from our audited financial statements
for each of the fiscal years shown below. The following information is only a
summary and you should read it in connection with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in this
Prospectus and our consolidated financial statements and notes beginning on page
F-1 of this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results: $4,724,119 $3,961,502 $3,458,328 $3,202,504 $2,985,207
Operating revenue..................
Cost of services rendered and
products sold................... 3,679,612 3,058,160 2,681,008 2,499,700 2,356,435
Selling and administrative expenses..... 648,085 559,409 482,102 450,937 414,746
---------- ---------- ---------- ---------- ----------
Operating income........................ 396,422 343,933 295,218 251,867 214,026
Non-operating expense (income):
Interest expense(2).................... 92,945 76,447 38,298 35,855 31,543
Interest and investment income......... (15,301) (14,304) (10,183) (7,310) (5,389)
Minority interest...................... -- 7,511 14,706 45,715 45,234
---------- ---------- ---------- ---------- ----------
Income before income taxes.............. 318,778 274,279 252,397 177,607 142,638
Provision for income taxes (pro forma 128,786 110,809 101,968 71,753 57,626
corporate form prior to 1998)(3)....... ---------- ---------- ---------- ---------- ----------
Net income (pro forma corporate form $ 189,992 $ 163,470 $ 150,429 $ 105,854 $ 85,012
prior to 1998)......................... ========== ========== ========== ========== ==========
Basic net income per share (pro forma
corporate form prior to
1998)(3)(6).... $ 0.66 $ 0.57 $ 0.47 $ 0.41 $ 0.33
Diluted net income per share (pro forma
corporate form prior to
1998)(3)(6).... $ 0.64 $ 0.55 $ 0.46 $ 0.39 $ 0.32
Cash distributions per share............ $ 0.33 $ 0.31 $ 0.29 $ 0.28 $ 0.27
Partnership Information: (3)
Income before income taxes.............. $ 274,279 $ 252,397 $ 177,607 $ 142,638
Provision for income taxes.............. 10,203 7,257 5,588 2,755
One time tax benefit relating to change 65,000 -- -- --
in tax status(4)....................... ---------- ---------- ---------- ----------
Net income.............................. $ 329,076 $ 245,140 $ 172,019 $ 139,883
========== ========== ========== ==========
Other Data:
EBITDA(7)............................... $ 516,328 $ 443,788 $ 369,701 $ 279,450 $ 228,389
Net cash provided from operations (5)... 405,539 371,889 341,386 297,425 253,863
Property additions...................... 75,297 46,232 42,952 44,624 32,202
Operating income margin................. 8.4% 8.7% 8.5% 7.9% 7.2%
Percent increase in pro forma diluted
net income per share................... 16.4% 19.6% 17.9% 21.9% 18.5%
Financial Position at Period End:
Working capital (5)..................... $ (83,495) $ 35,907 $ 73,782 $ 20,309 $ 26,650
Total assets............................ 2,914,851 2,475,224 1,846,841 1,649,890 1,230,839
Long-term debt.......................... 1,076,167 1,247,845 482,315 411,903 386,511
Shareholders' equity (2)................ 956,486 524,438 796,767 746,660 307,266
</TABLE>
- ----------------------------
(1) All per share data reflect the three-for-two share splits in 1996, 1997 and
1998.
(2) In 1997, the Company incurred bank borrowings of approximately $91 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
6
<PAGE>
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."
(3) 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 was as follows:
<TABLE>
<CAPTION>
Before One-Time Tax Benefit (4) Actual
--------------------------------- --------------------------
1997 1996 1995 1994 1997 1996 1995 1994
------- ------ ------ ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic...................................... $0.92 $0.77 $0.66 $0.55 $1.15 $0.77 $0.66 $0.55
Diluted.................................... $0.89 $0.75 $0.64 $0.53 $1.10 $0.75 $0.64 $0.53
</TABLE>
(4) As a result of the Reincorporation, the Company recorded a deferred tax
asset in 1997 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 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 following Reincorporation. See "The Reincorporation."
(5) In the first year after reincorporation, the Company was able to defer the
payment of its 1998 federal taxes until March 1999. Therefore the 1998 cash
flow is fairly comparable to 1997 when the Company was in partnership form
and paid no taxes. The current liabilities include the 1998 tax payable
amount.
(6) Basic earnings per share are calculated based on 289,315 shares in 1998,
285,944 shares in 1997, 317,381 shares in 1996, 260,382 shares in 1995, and
255,650 shares in 1994 while diluted earnings per share are calculated
based on 298,887 shares in 1998, 299,640 shares in 1997, 330,429 shares in
1996, 273,203 in 1995 and 266,892 shares in 1994. (Numbers are in
thousands.)
(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>
REINCORPORATION OF THE PREDECESSOR LIMITED PARTNERSHIP
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,
landscaping 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, landscaping 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.
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
8
<PAGE>
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)
We are providing the following summary financial information about us for
your benefit. This information is derived from our audited financial statements
for each of the fiscal years shown below. The following information is only a
summary and you should read it in connection with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in this
Prospectus and our consolidated financial statements and notes beginning on page
F-1 of this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results: $4,724,119 $3,961,502 $3,458,328 $3,202,504 $2,985,207
Operating revenue..................
Cost of services rendered and products
sold................................... 3,679,612 3,058,160 2,681,008 2,499,700 2,356,435
Selling and administrative expenses..... 648,085 559,409 482,102 450,937 414,746
---------- ---------- ---------- ---------- ----------
Operating income........................ 396,422 343,933 295,218 251,867 214,026
Non-operating expense (income):
Interest expense(2).................... 92,945 76,447 38,298 35,855 31,543
Interest and investment income......... (15,301) (14,304) (10,183) (7,310) (5,389)
Minority interest...................... -- 7,511 14,706 45,715 45,234
---------- ---------- ---------- ---------- ----------
Income before income taxes.............. 318,778 274,279 252,397 177,607 142,638
Provision for income taxes (pro forma 128,786 110,809 101,968 71,753 57,626
corporate form prior to 1998)(3)....... ---------- ---------- ---------- ---------- ----------
Net income (pro forma corporate form $ 189,992 $ 163,470 $ 150,429 $ 105,854 $ 85,012
prior to 1998)......................... ========== ========== ========== ========== ==========
Basic net income per share (pro forma
corporate form prior to 1998)(3)(6).... $ 0.66 $ 0.57 $ 0.47 $ 0.41 $ 0.33
Diluted net income per share (pro forma
corporate form prior to 1998)(3)(6).... $ 0.64 $ 0.55 $ 0.46 $ 0.39 $ 0.32
Cash distributions per share............ $ 0.33 $ 0.31 $ 0.29 $ 0.28 $ 0.27
Partnership Information: (3)
Income before income taxes.............. $ 274,279 $ 252,397 $ 177,607 $ 142,638
Provision for income taxes.............. 10,203 7,257 5,588 2,755
One time tax benefit relating to change 65,000 -- -- --
in tax status(4)....................... ---------- ---------- ---------- ----------
Net income.............................. $ 329,076 $ 245,140 $ 172,019 $ 139,883
========== ========== ========== ==========
Other Data:
EBITDA(7)............................... $ 516,328 $ 443,788 $ 369,701 $ 279,450 $ 228,389
Net cash provided from operations (5)... 405,539 371,889 341,386 297,425 253,863
Property additions...................... 75,297 46,232 42,952 44,624 32,202
Operating income margin................. 8.4% 8.7% 8.5% 7.9% 7.2%
Percent increase in pro forma diluted 16.4% 19.6% 17.9% 21.9% 18.5%
net income per share...................
Financial Position at Period End:
Working capital (5)..................... $ (83,495) $ 35,907 $ 73,782 $ 20,309 $ 26,650
Total assets............................ 2,914,851 2,475,224 1,846,841 1,649,890 1,230,839
Long-term debt.......................... 1,076,167 1,247,845 482,315 411,903 386,511
Shareholders' equity (2)................ 956,486 524,438 796,767 746,660 307,266
- ----------------------------------------
</TABLE>
(1) All per share data reflect the three-for-two share splits in 1996, 1997 and
1998.
(2) In 1997, the Company incurred bank borrowings of approximately $91 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
11
<PAGE>
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."
(3) 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 was as follows:
<TABLE>
<CAPTION>
Before One-Time Tax Benefit (4) Actual
--------------------------------- --------------------------
1997 1996 1995 1994 1997 1996 1995 1994
------- ------ ------ ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic...................................... $0.92 $0.77 $0.66 $0.55 $1.15 $0.77 $0.66 $0.55
Diluted.................................... $0.89 $0.75 $0.64 $0.53 $1.10 $0.75 $0.64 $0.53
</TABLE>
(4) As a result of the Reincorporation, the Company recorded a deferred tax
asset in 1997 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 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 following Reincorporation. See "The Reincorporation."
(5) In the first year after reincorporation, the Company was able to defer the
payment of its 1998 federal taxes until March 1999. Therefore the 1998 cash
flow is fairly comparable to 1997 when the Company was in partnership form
and paid no taxes. The current liabilities include the 1998 tax payable
amount.
(6) Basic earnings per share are calculated based on 289,315 shares in 1998,
285,944 shares in 1997, 317,381 shares in 1996, 260,382 shares in 1995, and
255,650 shares in 1994 while diluted earnings per share are calculated based
on 298,887 shares in 1998, 299,640 shares in 1997, 330,429 shares in 1996,
273,203 in 1995 and 266,892 shares in 1994. (Numbers are in thousands.)
(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 DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All share and per share data reflect the three-for-two share splits in
August 1998, June 1997 and June 1996)
The terms "Company" and "ServiceMaster" refer to the operations of ServiceMaster
Limited Partnership and The ServiceMaster Company, its successor corporation.
1998 Compared with 1997
Revenues increased 19 percent to $4.7 billion through a combination of
acquisitions and solid growth from base operations. Approximately eight percent
of the revenue increase resulted from internal growth and small tuck-in
acquisitions in existing service lines, primarily lawn care and pest control,
with another six percent coming from platform acquisitions primarily in plumbing
and landscaping. The remaining five percent of the revenue growth represented
the acquisition of a professional employer organization in August 1997. The
professional employer organization has a significant impact on revenues and
margins, because the entire employee payroll of the customer 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 margins. Operating income
increased 15 percent to $396 million, while margins decreased to 8.4 percent of
revenue from 8.7 percent in 1997. Operating margins excluding the professional
employer organization improved 10 basis points over last year, reflecting the
continued strong growth of higher margin businesses, productivity improvements
and the successful integration of acquisitions at Consumer Services.
Pro forma information is presented for 1997 and 1996 to compare the
continuing results of operations as if the Company had been a taxable
corporation in all years. On this basis, net income grew 16 percent to $190
million. Basic and diluted earnings per share increased 16 percent to $.66 and
$.64, respectively.
The Consumer Services business unit achieved a 23 percent increase in
revenue, reflecting strong growth from both internal sources and acquisitions,
including the Rescue Rooter plumbing business and commercial landscaping
companies. Net income increased 27 percent, reflecting solid double-digit profit
increases at all of the companies. TruGreen-ChemLawn reported strong growth in
revenues and profits, reflecting base business growth and the entry into the
commercial landscape market through the acquisition of several companies. The
successful integration of acquisitions and other cost initiatives helped offset
the effects of severe summer weather conditions in many regions of the country.
Terminix achieved strong double-digit growth in revenues and profits, resulting
from excellent increases in termite completions and renewals and improved
margins. Higher customer retention levels and efficiency improvements
contributed to the increased margins. American Home Shield continued to
experience exceptional momentum with very strong double-digit increases in
warranty contracts written due to excellent growth in real estate and direct-to-
consumer sales, as well as strong renewal growth. This volume increase was
partially affected by increased service orders relating to expensive air
conditioning repairs due to the extreme heat experienced in many parts of the
country. The franchise operations, ServiceMaster Residential/Commercial and
Merry Maids, achieved solid revenue increases and higher margins, reflecting
improvements in company-owned operations and cost controls. The Rescue Rooter
operations reported very good results, reflecting improved marketing efforts,
productivity improvements and effective cost controls.
The traditional Management Services business achieved a seven percent
revenue increase as a result of acquisitions and modest growth in the base
business. Profits increased significantly due to a $38 million pretax gain
relating to the formation of a strategic venture between ServiceMaster and Texas
Utilities Company. The new venture has acquired all the assets of ServiceMaster
Energy Management and will be owned 85 percent by Texas Utilities and 15 percent
by ServiceMaster. This new business combination will provide the Company with an
expanded ability to provide comprehensive energy solutions to customers.
Excluding this gain, profits were one percent below the prior year level as
increases in the Business & Industry and Education markets were offset by
reduced profitability in the Healthcare market. The traditional Healthcare
market reported a slight decline in revenues with lower profits than last year
as a result of continued industry pressures and additional investments in the
business compared with the prior year. The Company achieved significant revenue
and profit increases in the Business & Industry market, reflecting the
successful integration of acquisitions and increased sales in the base business.
The Education market reported strong growth in profits due to
13
<PAGE>
better customer retention and the favorable effect of eliminating costs incurred
last year related to unwinding a large contract.
Other operations includes primarily Diversified Health Services, which
provides services and products to the long-term care market and Employer
Services, the professional employer organization. Revenues increased
significantly as the 1998 results include a full year of the professional
employer organization that was acquired in August 1997. Operating income was
down significantly from the prior year, reflecting a large charge related
primarily to the home health care operations and operational losses. In late
1998, the Company completed a strategic review of its Home Health Care business
and concluded that, without significant investment to make home health care one
of its core businesses, it could not profitably provide high quality service in
the future and continue to satisfy all the changes and the requirements of new
governmental reimbursement programs. The Company plans to sell its direct
operations of home health care agencies and certain support operations. In
addition, the Company is discontinuing its outsourced management contracts of
home health care agencies, but will continue to provide consulting services to
hospitals and other providers of home health care. The Company incurred and
established reserves of approximately $32 million (pre-tax) relating to home
health care, which included a write-down for the impairment of assets and costs
relating to exiting customer arrangements. An additional $6 million pretax
charge was recorded that was specifically designated for other Diversified
Health Services reserve needs. In addition to these charges and losses in home
health care, the decrease in operating income reflects margin reductions in
other Diversified Health Services operations and the non-recurrence of
transaction gains recognized in the prior year.
On a consolidated basis, cost of services rendered and products sold
increased 20 percent and increased as a percentage of revenue to 77.9 percent in
1998 from 77.2 percent in 1997. The addition of Employer Services had an impact
on the overall increase in costs as this business line carries a lower gross
margin level than the rest of the enterprise. Excluding Employer Services, cost
of services rendered and products sold decreased 10 basis points, as a
percentage of revenue. This reflects the changing mix of the enterprise as
Consumer Services increased in size relative to the overall business of the
Company. The Consumer Services unit operates at a higher gross profit margin
than the Management Services business unit, but incurs relatively higher levels
of selling and administrative costs.
Consolidated selling and administrative expenses increased 16 percent over
the prior year, and as a percentage of revenue, decreased from 14.1 percent in
1997 to 13.7 percent in 1998.
Interest expense increased over the prior year, reflecting increased debt
levels in the first quarter associated with the 1997 repurchase of shares
previously held by Waste Management, Inc. The impact of larger seasonal
borrowings, primarily due to acquisitions and higher interest rates associated
with the refinancing of floating-rate bank debt with longer term, fixed-rate
debt, was partially offset by proceeds from the May 1998 equity offering.
Interest and investment income increased over the prior year levels due to
growth in the investment portfolio at American Home Shield, as well as gains
realized on sales of marketable securities.
Minority interest expense decreased as the General Partners' interests in
the parent entities were eliminated upon reincorporation.
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
Barefoot operations. These improvements were offset in part by the impact of
the 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 1997 and 1996.
On this basis, net income grew nine percent to $163 million. Basic earnings per
share increased 21 percent to $.57 and diluted earnings per share were up 20
percent to $.55. Earnings per share grew at a higher rate than net income due
to the transaction with Waste Management, Inc. (WMX) in which the Company
14
<PAGE>
repurchased WMX's 19 percent ownership interest in ServiceMaster (61.1 million
shares) for $626 million on April 1, 1997. This transaction increased interest
expense significantly and reduced shares outstanding.
Historical partnership net income, which did not include a provision for
corporate taxes, was $329 million, including a one-time tax gain of $65 million
realized upon reincorporation. The resulting historical basic and diluted
earnings per share were $1.15 and $1.10, respectively. This gain represented
the difference between the tax and book basis of the enterprise's assets and
liabilities, which was recognized as a result of the reincorporation.
Partnership net income excluding this gain increased eight percent to $264
million. On this basis, basic and diluted earnings per share were $.92 and
$.89, reflecting increases of 19 percent.
The Consumer Services business unit 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 revenues
and profits, reflecting the Barefoot acquisition, increases in the customer
base, improved branch efficiencies, strong sales of ancillary products 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 revenues 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.
The traditional Management Services business segment achieved five percent
growth in revenue, reflecting the Premier Manufacturing Support Services
(Premier) acquisition completed in 1996 and, to a lesser degree, growth in the
base business. The base business growth resulted from improvements in
Healthcare and Business & Industry, offset by reductions in Education. Pro
forma net income was up three percent compared with 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 IntegratedService 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, revenues and profits
declined due to the discontinuation of certain large accounts and margin
pressures in certain accounts.
Revenues in other operations increased significantly, reflecting the August
1997 acquisition of Certified Systems, Inc. (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. Other operations
primarily include CSI and Diversified Health Services. Pro forma net income
reflects the additional interest expense incurred at the parent level 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 Consumer Services increased in size relative to the overall
business of the Company. The Consumer Services unit operates at a higher gross
profit margin than the Management Services business unit, 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.
15
<PAGE>
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 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.
1998 Financial Position
The Company reported a nine percent increase in cash flows from operations
to $406 million and a two percent increase in free operating cash flows (defined
as cash flows from operations less net property additions) to $337 million. Cash
flows grew at a lower rate than net income, primarily due to the acceleration of
customer prepayments at TruGreen-ChemLawn into 1997, the full year funding of
preseason investments for Barefoot, and the timing of interest payments. Free
operating cash flow represents the cash available for enhancing shareholder
value (e.g., acquisitions, dividends and share repurchases) after financing the
growth of existing business units. 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.
In the first year following reincorporation, the Company was able to defer
the payment of its federal taxes until March 1999. At that time the Company will
pay its 1998 obligation and will begin making estimated payments for its 1999
liability. Reported cash from operations reflects the deferral of this 1998 tax
payment which is approximately $83 million. Since the Company is able to defer
its 1998 tax payment, the cash flow is fairly comparable to last year when the
Company was in partnership form and paid no federal taxes. As a result of the
reincorporation, the Company also recognized a step-up in the tax basis of its
assets, which is being amortized against taxable income. The step-up resulted in
a reduction of the Company's cash tax payments in excess of $25 million per
annum for the current year and for the ensuing 14 years.
Cash and marketable securities totaled approximately $120 million at
December 31, 1998. Debt levels decreased, reflecting the use of proceeds from
the May 1998 equity offering to pay down debt, as well as strong cash from
operations partially offset by acquisitions, capital spending and distributions.
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. In addition, the Company had $700 million of unused commitment on
its revolving bank facility at December 31, 1998. 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.
During the year, the Company filed a Form S-3 registration statement and
21.2 million Company shares were sold at $19.17 per share. This included
approximately 11.4 million of newly-issued shares from the Company and 9.8
million shares sold by existing shareholders. The net proceeds to the Company
after the underwriting discount and offering expenses were approximately $209
million and were used to reduce outstanding debt under existing bank credit
facilities, thereby reducing interest expense and increasing the Company's
financial flexibility.
ServiceMaster also filed a Form S-1 shelf registration statement to issue
up to 5.3 million shares of common stock in connection with future unidentified
acquisitions. As of December 31, 1998, approximately 3.5 million shares had been
issued with 1.8 million shares remaining available for future acquisitions.
In February 1998, the Company also completed a $300 million senior
unsecured dual-tranche debt offering. The offering consisted of $150 million at
7.10 percent due March 1, 2018 and $150 million at 7.25 percent due March 1,
2038. The net proceeds were used to refinance borrowings under bank credit
facilities, reducing the Company's exposure to short-term interest rate
fluctuations.
The Company completed a number of acquisitions in 1998, which included
primarily lawn care, commercial landscape and pest control companies. Three of
the largest transactions were Rescue Industries, Inc.,
16
<PAGE>
National Britannia and Ruppert Landscape Company. Rescue Industries, Inc., which
operates under the trade name Rescue Rooter, was acquired in January 1998 and is
one of the largest companies in America specializing in plumbing and drain
cleaning services. The October 1998 acquisition of National Britannia, the third
largest pest control company in the United Kingdom, further strengthens the
company's ability to grow its Terminix business in Europe and continues the
strategy of the enterprise to expand internationally. Ruppert Landscape Company
was purchased in August 1998 and represents one of the Mid-Atlantic's largest
commercial landscape companies.
In March 1999, the Company is expected to complete the acquisition of
LandCare USA, Inc. (LandCare) in a stock-for-stock merger. The acquisition of
LandCare, one of the nation's leading commercial landscape companies, will
significantly broaden the Company's landscape initiative and will provide
TruGreen-ChemLawn the opportunity to fully integrate its traditional fertilizer
and weed control services with landscape maintenance and installation.
Accounts receivable increased, reflecting general business growth and
acquisitions. Property and equipment increased primarily due to investments in
computer systems and technology upgrades throughout the enterprise as well as
general business growth. The Company does not have any material capital
commitments at this time. The increase in intangible assets reflects the above
mentioned acquisitions as well as various commercial landscape companies and
other smaller companies.
Accounts payable and other accrued liabilities increased due to general
business growth and the effects of acquisitions. As previously discussed, there
is a significant current liability relating to the income taxes payable on 1998
earnings. Deferred revenues increased primarily as a result of strong growth in
warranty contracts written at American Home Shield.
Total shareholders' equity increased to $956 million in 1998 from $524
million at December 31, 1997, reflecting the May 1998 equity offering, strong
growth in earnings and shares issued for acquisitions, partially offset by
shareholder distributions. 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.
At year end, the aggregate market value of the Company's outstanding shares
exceeded $6.5 billion. ServiceMaster shareholders have experienced compounded
total returns exceeding 20 percent annually over the last three-, 10- and 20-
year periods.
Cash distributions paid directly to shareholders totaled $96 million, or
$.33 per share, a six percent per share increase over the prior year. The total
amount of cash distributions, including payments made to the shareholders' trust
described below, decreased 52 percent from the prior year, reflecting a
substantial reduction in payments to the shareholders' trust, partially offset
by the six percent increase in direct shareholder distributions.
The shareholders' trust was established for the benefit of Partnership
shareholders. Each year, the trust was allocated a portion of the Partnership's
taxable income and received cash payments in amounts sufficient to pay its
income tax obligations resulting from this income allocation. Cash
distributions made to the trust in 1997 totaled $65 million. The trust was
terminated upon reincorporation and had no residual resources. In 1998, it
received approximately $20 million in tax refunds relating to its final 1997 tax
return.
Several years ago, the Company adopted a pattern of annual increases in
dividends to shareholders for the remaining term of the Partnership. In
corporate form, the Company has increased, and expects to continue to increase,
its dividend payment each year. The timing and amount of future dividend
increases will be at the discretion of the Board of Directors and will depend
on, among other things, the Company's corporate finance objectives and cash
requirements. The Company has announced its intended cash dividends for 1999 of
$.36 per share.
Earnings before interest, taxes, depreciation and amortization (EBITDA) is
a commonly-used supplemental measurement of a company's ability to generate cash
flow and is used by many of the Company's investors and lenders. Management
believes that EBITDA is another measure which demonstrates the exceptional cash-
generating abilities of the Company's businesses. EBITDA in 1998 of $516 million
has grown 16 percent, comparable to the growth in net income. EBITDA should not
be considered an alternative to net income in measuring the Company's
performance, or be
17
<PAGE>
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.
18
<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 two principal operating groups: ServiceMaster
Consumer Services and ServiceMaster Management Services. The Company also has a
third operating group: 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 principal
operating groups are ServiceMaster Consumer Services Limited Partnership, which
was formed in the summer of 1990, and ServiceMaster Management Services Limited
Partnership, which was formed in December 1991. The parent companies for the
principal 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 have acquired 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, landscaping 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
19
<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 10.5 million worldwide customers.
Oversight responsibility for the ServiceMaster Consumer Services businesses
which are conducted in foreign markets is in 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, 1998, TruGreen-ChemLawn
had 289 company-owned branches and 103 franchised branches. With over 3 million
residential and commercial customers, TruGreen-ChemLawn is the leading provider
of lawn care services in the United States and a leading provider of commercial
landscaping services. TruGreen-ChemLawn provides lawn, tree and shrub care
services in Egypt, Japan, 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 March 18, 1999, ServiceMaster completed
the acquisition of LandCare USA, Inc., a leading provider of commercial
landscaping services and tree services (including line clearing and tree care).
ServiceMaster thereafter combined the LandCare USA business with the commercial
landscaping business of TruGreen-ChemLawn.
Terminix. Terminix is a wholly-owned subsidiary of ServiceMaster Consumer
Services L.P. With over 2.5 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, 1998, Terminix was providing these services through 256 company-
owned branches in 40 states and through 240 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 A.B., 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
twenty-seven other countries and through subsidiaries in eight 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, 1998, these services
were provided to approximately 1.7 million residential and commercial customers
worldwide through a network of over 4,420 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 17 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
345,000 worldwide customers, Merry Maids is the leading provider of domestic
house cleaning services in the United States. As of December 31, 1998, these
services were provided through 27 company-owned branches in 19 states and
through 829 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 eight
other countries.
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
20
<PAGE>
December 31, 1998, AHS warranty contracts provided for services to approximately
700,000 homes through approximately 12,250 independent repair maintenance
contractors in 50 states and the District of Columbia, with operations in
California, Texas and Arizona accounting for 32%, 26% and 8%, 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 1998,
AmeriSpec conducted approximately 135,000 home inspections in 45 states and
Canada, with operations in California, New York and Illinois accounting for 27%,
5% and 4%, 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 46 states. As of December 31, 1998, these
services were provided through 581 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 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, and heating and air conditioning services, in 12 states
through 25 company-owned branches and one franchise location. In 1998, Rescue
Rooter performed services for approximately 410,000 customers. As of March 1,
1999 certain key employees of Rescue Rooter had purchased an aggregate 8.35%
equity interest in Rescue Rooter pursuant to a management equity plan. Such
interest is 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.
ServiceMaster 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. The responsibility for overseeing the
Management Services businesses which are conducted in foreign markets lies with
ServiceMaster Management Services L.P.
As of December 31, 1998, ServiceMaster was providing supportive management
services to approximately 1,602 health care customers and to approximately 498
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 twenty-five other countries.
ServiceMaster Healthcare Management Services. The Healthcare division of
ServiceMaster Management Services L.P. is a leading provider to the health care
market of supportive management services, including the management of
housekeeping, plant operations and maintenance, laundry and linen, grounds and
landscaping, clinical equipment maintenance, food services and total facility
management. As of December 31, 1998, the Healthcare division was serving in
approximately 1,846 healthcare facilities. Although the healthcare market has
undergone significant consolidation in recent years, ServiceMaster believes that
there continues to be potential for expansion in the healthcare market due to
the trend of healthcare facilities to outsource more of their service
requirements.
21
<PAGE>
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, 1998, ServiceMaster was serving 281 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, 1998, ServiceMaster was serving
approximately 217 business or industrial customers.
The Business and Industry division includes Premier Manufacturing Support
Services Limited Partnership. Premier is a leading provider of facility
management services in the automotive industry, specializing in paint booth
cleaning services. As of December 31, 1998, Premier was serving 77 customer
locations in ten countries.
Other Businesses
ServiceMaster Diversified Health Services. In 1998, ServiceMaster
Diversified Health Services ("DHS") provided management services to
freestanding, hospital-based and government-owned nursing homes, skilled nursing
facilities, and assisted living facilities; design, development, refurbishing
and construction consulting services to long-term care facilities;
rehabilitation services; the sale of various medical produces and supplies; and
pharmacy management.
ServiceMaster Home Health Care. During the year 1998, ServiceMaster Home
Health Care Services Inc., a wholly owned subsidiary of the Company, provided
management services to hospital-based home health care agencies (as well as the
direct operation of freestanding home health care agencies). On January 4,
1999, the Company announced the completion of its strategic review of its home
health care business and the decision to sell its direct operations of home
health care agencies and certain support operations and to discontinue its
outsource and operation of home health care agencies. ServiceMaster Home Health
Care Services will continue to provide consulting services to hospitals and
other providers of home health care.
ServiceMaster Employer Services. ServiceMaster Employer Services is one of
the nation's larger professional employer organizations. It provides more than
950 clients with administrative processing of payroll, workers compensation
insurance, health insurance, unemployment insurance and other employee benefits.
Energy Management. During the year 1998, the Company provided energy
management services through Energy Management Services, a division of
ServiceMaster Management Services L.P. On January 4, 1999, the Company
announced the formation of a strategic venture with Texas Utilities Company for
the ownership and operation of the energy management business. The new venture
acquired all the assets of ServiceMaster Energy Management and is owned 85% by
Texas Utilities Company and 15% by the Company.
International Operations. Consumer services and supportive management
services in international markets are provided through licensing arrangements
and ownership of foreign operating companies acquired by ServiceMaster. 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.
22
<PAGE>
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.
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.
Landscaping and Tree Services. TruGreen-ChemLawn provides landscaping and
tree services to commercial customers. (See page 22 for a discussion of the
acquisition of LandCare USA, Inc.). The landscape and tree services
23
<PAGE>
industry is highly competitive. Most of TruGreen-ChemLawn's landscape services
competitors are small, owner-operated companies operating in a limited
geographic market but there are a few large companies operating in multiple
markets. Competition in the line clearing market is characterized by a small
number of large companies. The commercial tree services market is characterized
by a large group of small competitors, most of which are owner-operated
businesses operating in limited geographic areas and a few larger companies
operating in one or more regions.
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 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 4.9
million calls in 1998.
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, 1998, ServiceMaster
was serving approximately 1,602 customers and managing approximately 1,846
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.
24
<PAGE>
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, 1998, ServiceMaster was serving approximately
281 customers and managing approximately 5,700 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.
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, 1998, ServiceMaster was serving approximately 217 customers and
managing approximately 817 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, 1998, ServiceMaster had a total of approximately 51,740
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
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. 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.
25
<PAGE>
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" 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 February 28, 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 has 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.
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 the Company's
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.
Year 2000 Risks. The Company believes that its greatest Year 2000
compliance risk, in terms of magnitude of risk, 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 chemical 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 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
26
<PAGE>
available to franchisees software from third-party developers from whom
appropriate Y2K compliance 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.
Definition. As used in this Year 2000 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.
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.
ServiceMaster owns a 50,000 square foot facility near Aurora, Illinois
which is used by ServiceMaster as a warehouse/distribution center. Ownership of
this facility was acquired on February 11, 1999 by a deed in lieu of foreclosure
from the company with whom ServiceMaster had, on August 2, 1989, entered into a
sale/leaseback arrangement.
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. ServiceMaster also leases two warehouse
properties, one 14,000 square feet and the other 6,000 square feet, in Cairo,
Illinois. Management believes that the foregoing manufacturing and warehouse
facilities are adequate to support the current needs of ServiceMaster.
27
<PAGE>
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, Furniture Medic
and Rescue Rooter.
A new call center is located in leased premises at 6399 Shelby View Drive,
Memphis, Tennessee. The center contains approximately 60,000 square feet of air
conditioned office space from which telephone sales, scheduling services, and
other business functions are conducted.
TruGreen-ChemLawn owns 8 buildings which are used as branch sites for lawn
care services. These facilities are located in Colorado (1), Florida (1),
Georgia (1), Michigan (1), Ohio (2), and Texas (2). TruGreen-ChemLawn also
leases 337 facilities used as branch sites.
Terminix owns 22 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 California (3),
Florida (10), Georgia (1), Illinois (1), New Jersey (2), Tennessee (1), and
Texas (4).
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 17 acres of land in Santa Rosa,
California of which 11.2 acres are under contracts for sales to occur in the
second quarter of 1999. 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 three buildings and leases 23 facilities which are used
for branch operations to provide plumbing and drain cleaning services, and
heating and air conditioning services. The owned facilities are located,
respectively, in Phoenix, Arizona; Round Lake, Illinois; and St. Louis,
Missouri. The leased facilities are located in California (11), Colorado (1),
Indiana (2), Ohio (1), Oregon (1), Tennessee (1), Texas (4), Utah (1), and
Washington (1).
The headquarters for Diversified Health Services are located in a leased
facility at 3839 Forest Hill-Irene Road, Memphis, Tennessee. DHS leases other
administrative facilities in St. Augustine, Florida; Minneapolis, Minnesota;
Plymouth Meeting, Pennsylvania; Memphis, Tennessee; and Irving, Texas. As of
March 1, 1999, through a joint venture and subsidiaries, DHS had an ownership
interest in four nursing home facilities and DHS leased several nursing home and
assisted living facilities. These facilities are located in Alabama,
Connecticut, Florida, Michigan, Tennessee, and Texas.
The headquarters for ServiceMaster Employer Services ("SES") and Certified
Systems, Inc., the principal subsidiary of SES, are located at 3218 Highway 67,
Mesquite, Texas. SES leases other administrative facilities in Little Rock,
Arkansas, and Memphis, Tennessee.
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 1, 1999, these proceedings
included a number of general liability actions and employment-related
proceedings which were ordinary routine litigation incidental to the Company's
business.
American Home Shield Class Action. A lawsuit was instituted in November
1997 and is currently pending in the District Court of Harris County, Texas
against ServiceMaster, ServiceMaster's American Home Shield subsidiary ("AHS")
and AHS' Texas subsidiary ("AHS-Texas") in which three plaintiffs, Brian
Carmichael, Penny Carmichael
28
<PAGE>
and Tanja Kortz, claim that AHS-Texas violated certain provisions of two Texas
consumer protection statues in the course of soliciting new and renewal service
contracts. (A second lawsuit of a similar nature was filed in the same court by
Edward Thorne III. This case has been abated pending disposition of the
certification issue described below.) The plaintiffs have requested the court to
permit the lawsuit to be maintained as a class action on behalf of all customers
who purchased service contracts since late 1993. Theoretically, this would place
some 300,000 contracts in issue. The plaintiffs have further claimed that the
number of contracts in issue times a statutory penalty of $1,000 per contract
represents the measure of damages. ServiceMaster believes that AHS-Texas
accurately represented the coverage provided in its service agreements and that
the changes in the wording of its renewal contacts were routine updates or
clarifications. In this regard, it is noteworthy that most of the AHS-Texas
contract forms were reviewed and approved by the Texas Real Estate commission
before the forms were distributed. In any and all events, no material actual
damages have been suffered by anyone in this matter. Furthermore, ServiceMaster
believes that the lawsuit cannot be sustained as a class action and the statutes
in question were not intended to be applied in the manner advanced by the
plaintiffs (and in fact cannot be so applied under the federal constitution).
Accordingly, ServiceMaster believes that the ultimate outcome of these cases
will not be material to ServiceMaster's 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, and of Unicom Corporation, Chicago,
Illinois, the parent company of Commonwealth Edison, an electric utility
company. He is a member of the Executive Committee, the Nominating Committee,
the Finance Committee, and the Employee Benefit Plan Oversight Committee. Age
65. 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 57. Director since 1978.
Steven S Reinemund. Chairman 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. He is a member
of the Nominating Committee. 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 58. 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 62. Director since 1981.
30
<PAGE>
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 49. Director since 1995.
Dallen W. Peterson. Retired Chairman, Merry Maids Limited Partnership. He
is a member of the Finance Committee and the Employee Benefit Plan Oversight
Committee. Age 62. Director since 1995.
Phillip B. Rooney. Vice Chairman of the Board of Directors. From June 5,
1996 to February 17, 1997, he was President and Chief Executive Officer of WMX
Technologies, 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; Illinois Tool Works, Inc., Glenview, Illinois, a diversified
manufacturing company; and Urban Shopping Centers, Inc., Chicago, Illinois, a
retail real estate management company. Age 54. 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 69. Director since 1984.
David K. Wessner. President, HealthSystem Minnesota. From August 1994 to
July 1998 he served as Executive Vice President of 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 47.
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 Times Newspaper Holding
Ltd., London, England, a newspaper company; English, Welsh and Scottish
Railways, London, England, a rail freight company; Herman Miller, Inc., Zeeland,
Michigan, an office furniture manufacturer; and Trillium Investments GP Limited,
London, England, a facilities management company. He is a member of the
Executive Committee and the Nominating Committee. Age 57. Director since 1992.
Sidney E. Harris. Dean, Robinson 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. 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 49. 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 69. 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
and the Compensation Committee. Age 62. 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 1998, directors of The ServiceMaster Company 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 $15,000. The Chairman of the
Audit Committee and the Chairman of the Compensation Committee each received an
additional annual stipend of $2,000. Directors who are employees of the Company
or any subsidiary do not receive either a retainer or meeting fee.
The ServiceMaster 1998 Non-Employee Directors Discounted Stock Option Plan
as approved by the Board of Directors in December 1997 and by the shareholders
of the Company in May 1998 provides that options to purchase shares of the
Company may be granted to those independent members of the Board who elect to
accept such portions in lieu of retainer and meeting fees that would otherwise
be paid in cash. The total amount of retainer and attendance fees for which
share options may be granted under this plan is $42,000 each year. Each option
granted under this plan has an exercise price per share equal to 85% of the fair
market value per share of the underlying shares of common stock of the Company
on the date the option is granted. The number of shares for which each option is
granted is determined by dividing the retainer or fee by 15%. In 1998, options
for a total of 114,903 shares were granted to eleven independent directors under
the Discounted Stock Option Plan.
Each independent director of the Company may enter into a deferred fee
agreement whereby part or all of the fees payable in cash 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.
Compensation Committee Interlocks and Insider Participation
The persons who served as members of the Compensation Committee of the
Board of Directors during 1998 were Henry O. Boswell (Chairman), Herbert P.
Hess, James D. McLennan, Burton D. Sorensen and David K. Wessner. 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 March 1, 1999 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.
32
<PAGE>
<TABLE>
<CAPTION>
First Became
Name Age Present Position An Officer
- ---- --- ------------------ -----------
<S> <C> <C> <C>
C. William Pollard 60 Chairman and Director 1977
Carlos H. Cantu 65 President and Chief Executive Officer and Director 1986
Phillip B. Rooney 54 Vice Chairman and Director 1997
Charles W. Stair 58 Vice Chairman and Director 1973
Donald K. Karnes 48 Group President, Consumer Services and a 1992
Senior Management Adviser
Ernest J. Mrozek 45 Group President, Consumer Services and a 1987
Senior Management Adviser
Robert F. Keith 42 President and Chief Operating Officer, Health Care 1986
Management Services and a Senior Management Adviser
Robert D. Erickson 55 Executive Vice President and a Senior Management 1976
Adviser
Vernon T. Squires 64 Senior Vice President and General Counsel 1987
Stephen E. Reiter 46 Senior Vice President and Chief Information Officer 1998
Steven C. Preston 38 Executive Vice President and Chief Financial Officer 1997
and a Senior Management Adviser
Eric R. Zarnikow 39 Vice President and Treasurer 1994
Deborah A. O'Connor 36 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.
Donald K. Karnes. Group President, ServiceMaster Consumer Services. He has
served as Group President of TruGreen-ChemLawn and Terminix since January 1996.
He served as President and Chief Operating Officer of TruGreen-ChemLawn from
January 1992 to December 1995.
Robert F. Keith. President, Healthcare Management Services. He served as
President and Chief Operating Officer, ServiceMaster Management Services, from
January 1, 1997 to October 2, 1998, 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.
Ernest J. Mrozek. Group President, ServiceMaster Consumer Services. He
served as President and Chief Operating Officer, ServiceMaster Consumer Services
from January 1, 1997 to October 2, 1998, as Senior Vice
33
<PAGE>
President and Chief Financial Officer of the Registrant from January 1, 1995 to
December 31, 1996, as Vice President and Chief Financial Officer of the
Registrant from May 1994 to December 1994, and as Vice President, Treasurer and
Chief Financial Officer from November 1, 1992 to April 30, 1994.
Deborah A. O'Connor. Vice President and Controller since January 1,
1993.
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.
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 has served as Secretary since December 7, 1998.
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
1998. Each of the listed persons was holding the office indicated in the table
on the last day of December 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation (B)
-------------------------------------
<S> <C> <C> <C> <C>
(a) (b) (c) (d) (e)
Other
Annual
Compen-
Salary Bonus sation
Name and Principal Position Year ($) ($)(C) ($)
- ------------------------------------------------- -------------------------------------
Carlos H. Cantu.................................. 1998 475,000 570,000 -
President and Chief Executive Officer 1997 450,000 900,021 -
1996 388,000 679,000 -
C. William Pollard............................... 1998 400,000 300,000 -
Chairman 1997 375,000 550,934 -
1996 300,000 300,000 -
Phillip B. Rooney (A)............................ 1998 300,000 325,000 -
Vice Chairman 1997 166,667 200,000 -
1996 -- -- -
Ernest J. Mrozek................................. 1998 290,000 290,000 -
Group President, Consumer Services 1997 275,000 382,618 -
1996 220,000 264,000 -
Steven C. Preston (A)........................... 1998 256,250 281,250 -
Executive Vice President and Chief 1997 180,000 242,983 -
Financial Officer 1996 -- -- -
</TABLE>
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------------
Awards Payouts
--------------------- -------------------
(a) (b) (f) (g) (h) (i)
Securities
Restricted Underlying
Stock Options/ LTIP All
Awards SARs Payouts Other
Name and Principal Position Year ($) (#)(D) ($)(E) ($)
- ------------------------------------------------------- ----- ---------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Carlos H. Cantu.................................. 1998 - 150,000 469,580 -
President and Chief Executive Officer 1997 - 225,000 - -
1996 - 168,750 - -
C. William Pollard............................... 1998 - 112,500 349,368 -
Chairman 1997 - 168,750 - -
1996 - 168,750 - -
Phillip B. Rooney (A)............................ 1998 - 75,000 338,098 -
Vice Chairman 1997 - 348,750 - -
1996 - 10,125 - -
Ernest J. Mrozek................................. 1998 - 52,500 270,948 -
Group President, Consumer Services 1997 - 303,750 - -
1996 - 84,375 - -
Steven C. Preston (A)........................... 1998 - 45,000 253,573 -
Executive Vice President and Chief 1997 - 337,500 - -
Financial Officer 1996 - 0 - -
- ------------------
</TABLE>
(A) Neither Mr. Rooney nor Mr. Preston were employed by the Company in 1996.
The option shares shown for Mr. Rooney in column (g) for the year 1996 were
issued in connection with his service as a director.
(B) 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 8), 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 instituted a
long-term performance based award program. The following table has been
prepared as a supplement to 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>
1997 Summary Compensation and ServiceMaster
Management Corporation Dividend Table
(Supplement to the Summary Compensation Table)
<TABLE>
<CAPTION>
(a) (b) (c) (d)
Total Annual
Compensation ServiceMaster
For 1997 (from Management Total of
Compensation Corporation Columns
Name and Principal Position Table) Dividends (b) and (c)
- -------------------------------------------------- -------------- ------------ -----------
<S> <C> <C> <C>
Carlos H. Cantu................................... $1,350,021 $727,742 $2,077,763
President and Chief Executive Officer
C. William Pollard................................ $ 932,434 $698,118 $1,631,052
Chairman
Phillip B. Rooney................................. $ 366,667 N/A $ 366,667
Vice Chairman
Ernest J. Mrozek.................................. $ 657,618 $340,283 $ 997,901
Group President, Consumer Services
Steven C. Preston................................. $ 525,000 $174,555 $ 699,555
Executive Vice President and Chief
Financial Officer
</TABLE>
-----------------------------------------
Footnotes to Summary Compensation Table (continued)
(C) 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.
(D) 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, June 1997 and August 1998.
(E) This column (h) shows the amounts paid or credited to the five named
executive officers in respect of the year 1998 pursuant to the Company's
1998 Long-Term Performance Award Plan (the "LTPA Plan") as approved by the
Company's stockholders in May 1998. The LTPA Plan did not exist prior to
1998. Awards under the LTPA Plan are paid (or credited, if a participant
elects to defer payment pursuant to the Company's deferred compensation
plan) either in cash or in shares of common stock. To the extent that stock
is elected as the form of payment, such election will entitle the
participant to shares in a number which, at their then fair market value,
reflects 120% of the amount which would be paid if the payment were made in
cash. The total amount payable each year under the LTPA Plan is determined
by the performance of the Company with respect to growth in earnings per
share relative to the preceding year, growth in economic value relative to
the preceding year, growth in revenue relative to the preceding year and a
comparison of the Company's total return to stockholders relative to the
S&P 500 total return. 20% of the total payout for the year 1998 was, in
accordance with the LTPA Plan, held back for payment in whole or in part in
early 2001. The extent to which the held-back amount is paid will depend
upon the extent to which the Company achieved its strategic planning
objectives for the five-year planning cycle ending on December 31, 2000. A
participant's interest in the held-back amount is forfeited in the case of
certain terminations of his or her employment. The amount held back for
each of the five named executive officers in respect of the year 1998 in
shown in the Long-Term Incentive Plans table on page 38.
36
<PAGE>
The following table summarizes the number and terms of the stock options
granted during the year 1998 to the named executive officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f)
Number of
Securities % of Total
Underlying Options/SARs
Options/SARs Granted to Exercise or
Granted (k#) Employees Base Price Expiration Grant Date
Name and Principal Position (A) 1998 ($/Sh) (A) Date Value (B)
- ------------------------------------------------ ------------ ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Carlos H. Cantu.................................. 150,000 4.6% $18.2583 2-15-08 $762,000
President and Chief Executive Officer
C. William Pollard............................... 112,500 3.4% $18.2583 2-15-08 $571,500
Chairman
Phillip P. Rooney................................ 75,000 2.3% $18.2583 2-15-08 $381,000
Vice Chairman
Ernest J. Mrozek................................. 52,500 1.7% $18.2583 2-15-08 $266,700
Group President, Consumer Services
Steven C. Preston................................ 45,000 1.4% $18.2583 2-15-08 $228,600
Executive Vice President and Chief
Financial Officer
- -------------------------------------
</TABLE>
(A) The options listed in column (b) were granted in February 1998. The number
of shares shown in column (b) and the exercise price shown in column (d)
have been adjusted to reflect the 3-for-2 split in the Company's shares
effected in August 1998. Each of the options listed in column (b) is
subject to a vesting schedule under which the option becomes exercisable in
20% increments on the 1st, 2nd, 3rd, 4th and 5th anniversaries of grant
date.
(B) In accordance with Item 402(c)(2)(vi)(B) of Regulation S-K of the
Commission, the grant date value of each of these options has been
estimated based on the Black-Scholes option pricing model by an independent
consulting firm using the following assumptions: a risk-free rate of
interest of 5.6%, a volatility rate of 22%, a 1.9% distribution yield, and
an expected life of seven years. The values of the options which are shown
in the table are theoretical and do not necessarily reflect the actual
values which the option holders may eventually realize. Such actual values
will depend on the extent to which the market value of the Company's shares
at a future date exceeds the exercise price of the options.
The following table summarizes the exercises of stock options during the
year 1998 by the named executive officers and the number of, and the spread on,
unexercised options held by such officers at December 31, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities
Underlying Unexercised Value of Unexercised In-
Value Options/SARs at FY- The-Money Options/SARs
Shares Acquired on Realized End(#) At FY-End($)
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------------------------- ------------------- --------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
Carlos H. Cantu,...................... 0 $0 112,500/431,250 1,249,587/3,664,676
Chief Executive Officer
C. William Pollard.................... 0 $0 101,250/348,750 1,127,628/3,034,163
Phillip B. Rooney..................... 0 $0 71,775/360,075 602,773/2,368,214
Ernest J. Mrozek...................... 0 $0 109,808/346,125 1,311,648/3,482,248
Steven C. Preston..................... 0 $0 67,500/315,000 706,453/2,744,627
</TABLE>
37
<PAGE>
LONG-TERM INCENTIVE PLANS AWARDS IN 1998 (A)
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f)
Estimated future payouts
Under non-stock price-based plans
-------------------------------------------
Performance or
Other period
Number of shares, until
units or other Maturation or Threshold Target Maximum
Name rights (#) Payout ($ or #) ($ or #) ($ or #)
- -------------------- ----------------- -------------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Carlos. H. Cantu, CEO 1,000 2001 $117,395
C. William Pollard 620 2001 $ 87,342
Phillip B. Rooney 600 2001 $ 84,525
Ernest J. Mrozek 577 2001 $ 67,737
Steven C. Preston 500 2001 $ 63,393
</TABLE>
(A) This table pertains to the awards made in respect of the year 1998 under
the Company's 1998 Long-Term Performance Award Plan (the "LTPA Plan"). See
footnote (D) to the Summary Compensation Table for a description of the
LTPA Plan. The figures in column (b) show the number of units awarded for
the year 1998 to each of the named executive officers. The LTPA Plan has a
total of 10,000 participation units. The figures in column (f) reflect the
amounts held back from the awards to each of such persons for the year 1998
for payment in 2001. The extent to which such held-back amounts are in
fact paid will depend upon the extent to which the Company achieved its
strategic planning objectives for the five-year planning cycle ending on
December 31, 2000. If and to the extent such held-back amounts are not
paid to the named executive officers, the unpaid sums will revert to the
Company.
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 1999 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.
Indebtedness of Management
No executive officer was indebted to the Company in excess of $60,000 at
any point during the year 1998.
38
<PAGE>
OWNERSHIP OF COMMON STOCK
As of March 1, 1999, no one is the beneficial owner of more than five
percent of the Common Stock. The following table sets forth as of January 1,
1999 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
and
Investment Total Percent
Name of Beneficial Owner Power Other Ownership Ownership
- -------------------------------------------------------------- ---------------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Paul W. Berezny (3)(4)(6)(8).................................. 139,607 1,198,779 1,338,386 0.448%
Henry O. Boswell (2)(4)....................................... 83,706 91,108 174,814 0.058%
Carlos H. Cantu (4)(5)(12).................................... 693,031 2,428,929 3,121,960 1.043%
Robert D. Erickson (4)(5)(7).................................. 1,044,268 123,391 1,167,659 0.390%
Brian Griffiths (4)........................................... 34,723 0 34,723 0.012%
Sidney E. Harris (4).......................................... 22,710 1,687 24,397 0.008%
Herbert P. Hess (4)(8)........................................ 251,725 30,375 282,100 0.094%
Michele M. Hunt (4)........................................... 22,136 0 22,136 0.007%
Donald K. Karnes (4).......................................... 1,948,459 0 1,948,459 0.651%
Robert F. Keith (4)(5)........................................ 457,100 104,339 561,439 0.188%
Gunther H. Knoedler (4)....................................... 76,277 0 76,277 0.026%
James D. McLennan (4)......................................... 65,744 0 65,744 0.022%
Ernest J. Mrozek (4)(5)....................................... 519,096 61,189 580,285 0.193%
Vincent C. Nelson (4)(8)(9)(10)............................... 59,386 787,547 846,933 0.283%
Dallen W. Peterson (4)........................................ 2,473,273 0 2,473,273 0.827%
C. William Pollard (4)(5)(11)................................. 1,120,978 223,540 1,344,518 0.449%
Steven C. Preston (4)......................................... 144,000 0 144,000 0.048%
Steven S Reinemund (4)........................................ 10,002 15,000 25,002 0.008%
Phillip B. Rooney (3)(4)...................................... 419,581 13,500 433,081 0.145%
David M. Slott (4)............................................ 622,227 439,938 1,062,165 0.355%
Burton E. Sorensen (4)........................................ 43,477 0 43,477 0.015%
Charles W. Stair (5)(6)(13)................................... 891,824 103,092 994,916 0.333%
David K. Wessner (3)(4)(8)(14)(15)............................ 299,727 1,710,459 2,010,186 0.672%
All directors and officers as a group (128 persons) (16)...... 21,021,936 9,107,406 30,129,342 9.898%
</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 60,658 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 97,168 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.
39
<PAGE>
(9) Shares in column (2) include 43,804 shares in trust for the benefit of
family members as to which beneficial ownership is disclaimed. Shares in
column (3) include 16,252 shares held in trust for the benefit of family
members as to which beneficial ownership is disclaimed.
(10) Shares in column (3) include 353,211 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 35,620 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 34,426 shares
in trust for the benefit of family members.
(12) Shares in column (3) include 11,523 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 59,400 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 731,162 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 545,620 shares held by an investment company
of which David K. Wessner is a shareholder and one of four directors.
(16) Includes 5,419,879 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. 20% of the options granted under the ServiceMaster 1998 Equity
Incentive Plan in February 1998 were exercisable on March 1, 1999. None of
the options granted under the ServiceMaster 1998 Equity Incentive Plan in
February 1999 were exercisable on March 1, 1999. Shares purchasable by the
persons identified in the Summary Compensation Table under one or more of
the foregoing plans are as follows: Mr. Cantu - 187,500 shares;
Mr. Pollard - 157,500 shares; Mr. Rooney - 91,050 shares; Mr. Mrozek -
197,933 shares; Mr. Preston - 144,000 shares; and all executive officers
as a group 1,502,981 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 March 1, 1999,
approximately 300,000,000 shares of Common Stock (excluding treasury shares)
were issued and outstanding and no shares of Preferred Stock were issued and
outstanding. In addition, as of March 1, 1999, 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, 1998. 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 "By-Laws") does not purport to be complete and is
subject to and qualified in its entirety by reference to the Restated
Certificate and the By-Laws, which are incorporated by reference as exhibits to
the Registration Statement of which this Prospectus is a part.
Classification of Directors. The Company's Restated Certificate and By-
Laws provide that its Board of Directors shall be divided into three classes,
each class being as nearly equal in number as reasonably practicable, and that
at each annual meeting of the Company's stockholders, the successors to the
Directors whose terms expire that year shall be elected for a term of three
years. The number of Directors is fixed by the affirmative vote of the majority
of the Directors then in office, but may not be less than three. Newly created
Directorships and any vacancies on the Board of Directors are filled by a
majority vote of the remaining Directors then in office, even if less than a
quorum. Except in certain limited circumstances, no Director may be removed from
the Board prior to the time such person's term would expire unless (i) such
removal is for cause and (ii) such removal has been approved by the affirmative
vote of the holders of 67% of the outstanding voting shares of the Company. The
Restated Certificate requires that a majority of the members of the Board be
"independent directors," which is defined to generally include any person (i)
who is not and has not been employed by any ServiceMaster unit within one year;
(ii) is not a "Related Person" (as hereinafter defined) and has not been
employed by a Related Person within one year; (iii) is not a party to any
agreement, requirement or arrangement under which such person may be obligated
to act in his or her capacity as a Director in accordance with instructions
provided by any person who is not independent (including, but not limited to, a
Related Person); and (iv) is not subject to any relationship, arrangement or
circumstance (including any relationship with a Related Person) which, in the
judgment of a majority of the independent Directors (the "Independent Board
Majority") is reasonably possible will interfere with such person's exercise of
independent judgment as a Director.
Special Meetings. The By-Laws provide that stockholder action can be taken
only at an annual or special meeting of stockholders and cannot be taken by
written consent in lieu of a meeting. The By-Laws provide that, except as
otherwise required by law, special meetings of the stockholders can only be
called pursuant to a resolution adopted by a majority of the Board of Directors.
Stockholders are not permitted to call a special meeting or to require the Board
to call a special meeting.
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
42
<PAGE>
to such Related Person's having become a Related Person. The term "Business
Combination" is defined under the Restated Certificate to mean (a) any merger or
consolidation of the Company or a subsidiary of the Company with or into a
Related Person; (b) any sale, lease, exchange, transfer or other disposition of
all or any substantial part (as defined in the Restated Certificate) of the
assets either of the Company (including without limitation any voting securities
of a subsidiary) or of a subsidiary of the Company to a Related Person; (c) any
merger or consolidation of a Related Person with or into the Company or a
subsidiary of the Company; (d) any sale, lease, exchange, transfer or other
disposition of all or any substantial part of the assets of a Related Person to
the Company or a subsidiary of the Company; (e) the issuance of any securities
of the Company or a subsidiary of the Company to a Related Person; (f) any
recapitalization that would have the effect of increasing the voting power of a
Related Person; and (g) any agreement, contract or other arrangement providing
for any of the transactions described in this definition of a Business
Combination.
Action by Written Consent. The By-Laws provide that a holder of Common
Stock or any other class of stock at any time issued by the Company shall not
have the right to take action by written consent. Rather, stockholders shall
only have the right to act with respect to any particular issue at a meeting of
stockholders at which that issue is properly up for a vote by stockholders.
Stockholder Proposals. Stockholders are only entitled to make proposals to
be voted upon by stockholders at an annual meeting if they comply with certain
procedures set forth in the By-Laws, which require, among other things, that the
proposing stockholder must deliver a written notice identifying such proposal to
the office of the Company's General Counsel at the Company's headquarters no
later than the close of business on the 60th day nor earlier than the close of
business on the 90th day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that if the date of the annual meeting is
more than 30 days before or more than 60 days after such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier than the
close of business on the 90th day prior to such annual meeting and not later
than the close of business on the later of the 60th day prior to such annual
meeting or the 10th day following the day on which public announcement of the
date of such meeting is first made by the Company. At a special stockholders
meeting, a stockholder's proposal will be timely for that meeting if it is
actually delivered to the General Counsel's office at the Company's headquarters
no later than the close of business on the 10th day following the day on which
the Company first publicly announced the date of the special meeting and that a
vote by stockholders will be taken at that meeting. Such stockholder's proposal
notice must: (i) contain a description of the proposal, the reasons for the
proposal and any material interest in such proposal by the proposing stockholder
or the beneficial owner of the stockholder's record shares; (ii) contain an
affirmation by the proposing stockholder that the stockholder satisfies the
requirements specified in the By-Laws for presentation of such proposal; and
(iii) as to the stockholder making the proposal and the beneficial owner, if
any, on whose behalf the proposal is made (x) the name and address of such
stockholder, as they appear on the Company's books, and of such beneficial owner
and the telephone number at which each may be reached during normal business
hours through the time for which the meeting is scheduled and (y) the class and
number of shares of 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
43
<PAGE>
time the transaction commenced (excluding stock held by directors who are also
officers of the Company and by employee stock plans that do not provide
employees with the rights to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer); or (iii) at
or following the transaction in which such person became an interested
stockholder, the business combination is approved by the Company's Board of
Directors and approved at a meeting of stockholders by the Affirmative vote of
the holders of at least two-thirds of the Company's outstanding voting stock not
owned by the interested stockholder. Under Section 203, the restrictions
described above also do not apply to certain business combinations proposed by
an interested stockholder following the earlier of the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who had not been an interested stockholder during the previous
three years or who became an interested stockholder with the approval of a
majority of the Company's directors, if such extraordinary transaction is
approved or not opposed by a majority of the directors who were directors prior
to any person becoming an interested stockholder during the previous three years
or were recommended for election or elected to succeed such directors by a
majority of such directors.
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 for
the year 1998 and for the Partnership Shares for all other periods as reported
on the New York Stock Exchange Composite Tape and the cash dividends paid per
share of Common Stock or the cash distributions paid per Partnership Share for
the periods indicated. The prices have been adjusted to give retroactive effect
to ServiceMaster's three-for-two share splits in August 1998, 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, 1996:
First Quarter.................................. $ 9.93 $ 8.61 $ 0.07-1/8
Second Quarter................................. 10.45 9.17 0.07-1/8
Third Quarter.................................. 11.00 9.55 0.07-1/2
Fourth Quarter................................. 11.83 10.55 0.07-1/2
Year ended December 31, 1997:
First Quarter.................................. 12.33 10.92 0.07-1/2
Second Quarter................................. 15.92 12.09 0.07-1/2
Third Quarter.................................. 19.67 15.17 0.08
Fourth Quarter................................. 19.50 14.00 0.08
Year ended December 31, 1998:
First Quarter.................................. 19.63 16.50 0.08
Second Quarter................................. 25.50 17.92 0.08
Third Quarter.................................. 24.75 19.75 0.09
Fourth Quarter................................. 23.81 16.00 0.09
Year ended December 31, 1999:
First Quarter (through March 22, 1999)......... 22.00 17.50 0.09
</TABLE>
As of February 15, 1999, there were approximately 28,724 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 28 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 1999 will be $0.36 per share.
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.
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The ServiceMaster Company (and Predecessor) Page
----
Report of Independent Public Accountants.................................. F-2
Summary of Significant Accounting Policies................................ F-3
Statements of Income for the years ended December 31, 1998,
December 31, 1997, and December 31, 1996.............................. F-4
Statements of Financial Position as of December 31, 1998 and
December 31, 1997..................................................... F-5
Statements Cash Flows for the years ended December 31, 1998,
December 31, 1997 and December 31, 1996............................... F-6
Statements of Shareholders' Equity for the years ended December 31, 1998,
December 31, 1997 and December 31, 1996................................ F-7
Notes to Consolidated Financial Statements for the years ended December 31,
1998, December 31, 1997 and December 31, 1996.......................... F-8
See Notes to Consolidated Financial Statements
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,
1998 and 1997, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. 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, 1998 and 1997, and the
consolidated results of operations and cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 25, 1999
F-2
<PAGE>
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 1997 and 1996 amounts have been reclassified to conform with the 1998
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, pest control, and plumbing 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 while the 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 manages people who are employees of the facility, the
payroll costs for such employees are recognized by the Company and 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 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 three
percent of the inventory value at December 31, 1998. 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 three to 10 years. Intangible
assets consist primarily of trade names ($177 million) and goodwill ($1.7
billion). These assets are amortized on a straight-line basis over their
estimated useful lives, which are predominately 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,
other than that noted in the discontinued Home Health Care operations, have been
indicated by these comparisons. Based on the reviews, if the undiscounted future
cash flows are less than the carrying amount of the asset, an impairment loss is
recognized based on the asset's fair value, and the carrying amount of the asset
is reduced accordingly.
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: Basic earnings per share is based on the weighted-average
number of common shares outstanding during the year. Shares potentially issuable
under options have been considered outstanding for purposes of the diluted
earnings per share calculation.
Newly Issued Accounting Statements and Positions: In 1998, Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," and Statement of Position No. 98-5, "Reporting on
the Costs of Start Up and Preoperating Activities," were issued. The Company
intends to adopt these policies beginning in 1999 as required by the Statements.
The Company does not expect the adoption of these Statements to have a material
impact on the financial statements.
Also in 1998, the Financial Accounting Standards Board issued 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.
F-3
<PAGE>
Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue............................................................ $4,724,119 $3,961,502 $3,458,328
Operating Costs and Expenses:
Cost of services rendered and products sold.................................. 3,679,612 3,058,160 2,681,008
Selling and administrative expenses.......................................... 648,085 559,409 482,102
---------- ---------- ----------
Total operating costs and expenses........................................... 4,327,697 3,617,569 3,163,110
---------- ---------- ----------
Operating Income............................................................. 396,422 343,933 295,218
Non-operating Expense (Income):
Interest expense............................................................. 92,945 76,447 38,298
Interest and investment income............................................... (15,301) (14,304) (10,183)
Minority interest............................................................ -- 7,511 14,706
---------- ---------- ----------
Income before Income Taxes................................................... 318,778 274,279 252,397
Provision for income taxes (pro forma corporate form in 1997 and 1996)/(1)/.. 128,786 110,809 101,968
---------- ---------- ----------
Net Income (pro forma corporate form in 1997 and 1996)/(1)/.................. $ 189,992 $ 163,470 $ 150,429
---------- ---------- ----------
Per Share (pro forma corporate form in 1997 and 1996):/(1),(2)/
Basic...................................................................... $O.66 $0.57 $O.47
---------- ---------- ----------
Diluted.................................................................... $0.64 $O.55 $0.46
---------- ---------- ----------
</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 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. The results
shown above for the years ended December 31, 1997 and 1996 have been restated to
adjust the actual historical partnership information to a pro forma basis that
assumes that reincorporation had occurred as of the beginning of the year. Upon
reincorporation, the Company recognized a significant increase in the tax basis
of certain assets and recorded a $65 million tax gain related to
reincorporation, which represented the difference between the tax basis and book
value of its assets. The Company's historical net income and net income per
share as a partnership were as follows:
<TABLE>
<CAPTION>
Before One-Time
---------------
Tax Benefit Actual
--------------- -------------
Partnership Information as Recorded: 1997 1996 Earnings Per Share: 1997 1996 1997 1996
- ------------------------------------ -------- -------- ------------------- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes.................... $274,279 $252,397 Basic $.92 $.77 $1.15 $.77
Partnership tax provision..................... 10,203 7,257 Diluted $.89 $.75 $1.10 $.75
Tax benefit relating to change in tax status.. 65,000 --
-------- --------
Net income.................................... $329,076 $245,140
======== ========
</TABLE>
(2) Basic earnings per share are calculated based on 289,315 shares in 1998,
285,944 shares in 1997, and 317,381 shares in 1996, while diluted earnings per
share are calculated based on 298,887 shares in 1998, 299,640 shares in 1997,
and 330,429 shares in 1996. All share and per share data reflect the three-for-
two share splits in August 1998, June 1997 and June 1996.
See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Statements of Financial Position (In thousands)
As of December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Current Assets:
Cash and cash equivalents................................................................. $ 66,400 $ 64,876
Marketable securities..................................................................... 54,022 59,248
Receivables, less allowances of $38,988 in 1998 and $32,221 in 1997....................... 372,375 299,138
Inventories............................................................................... 49,770 48,157
Prepaid expenses and other assets......................................................... 127,635 122,665
------------ ------------
Total current assets.................................................................. 670,202 594,084
------------ ------------
Property, Plant, and Equipment, at Cost:
Land and buildings........................................................................ 53,068 46,632
Equipment................................................................................. 388,141 316,021
------------ ------------
441,209 362,653
Less: accumulated depreciation............................................................ 229,049 204,383
------------ ------------
Net property, plant, and equipment........................................................ 212,160 158,270
------------ ------------
Other Assets:
Intangible assets, primarily trade names and goodwill,
less accumulated amortization of $272,254 in 1998 and S218,293 in 1997................... 1,884,002 1,563,309
Notes receivable, long-term securities, and other assets.................................. 148,487 159,561
------------ ------------
Total Assets.......................................................................... $ 2,914,851 $ 2,475,224
------------ ------------
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts payable.......................................................................... $ 110,523 $ 84,673
Accrued liabilities:
Payroll and related expenses............................................................ 96,199 85,315
Insurance and related expenses.......................................................... 56,748 55,909
Income taxes payable.................................................................... 84,165 8,423
Other................................................................................... 149,477 121,020
Deferred revenues......................................................................... 204,969 181,298
Current portion of long-term debt......................................................... 51,616 21,539
------------ ------------
Total current liabilities............................................................. 753,697 558,177
------------ ------------
Long-Term Debt............................................................................ 1,076,167 1,247,845
Other Long-Term Obligations............................................................... 128,501 144,764
Commitments and Contingencies (see Notes)
Shareholders' Equity:
Common stock $0.01 par value, authorized 1 billion shares; issued and
outstanding of 298,030 shares in 1998 and 279,944 shares in 1997......................... 2,980 2,799
Additional paid-in capital................................................................ 788,124 513,148
Retained earnings......................................................................... 179,840 65,000
Accumulated other comprehensive income.................................................... 3,911 5,343
Restricted stock.......................................................................... (3,383) (4,270)
Treasury stock............................................................................ (14,986) (57,582)
------------ ------------
Total shareholders' equity............................................................ 956,486 524,438
------------ ------------
Total Liabilities and Shareholders' Equity................................................ $ 2,914,851 $ 2,475,224
------------ ------------
See accompanying Summary of Significant Accounting Policies and Notes to the Consolidated
Financial Statements.
</TABLE>
F-5
<PAGE>
Statements of Cash Flows (In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and Cash Equivalents at January 1................... $ 64,876 $ 72,009 $ 23,113
Cash Flows from Operations:
Net Income............................................... 189,992 329,076 245,140
Adjustments to reconcile net income to
net cash provided from operations:
Depreciation........................................... 50,644 45,392 41,658
Amortization........................................... 53,961 47,670 37,348
Tax asset recorded upon reincorporation................ -- (65,000) --
Change in working capital, net of acquisitions:
Receivables............................................ (46,205) (6,853) (19,084)
Inventories and other current assets................... (2,360) (14,210) (12,666)
Accounts payable....................................... 18,475 5,603 10,302
Deferred revenues...................................... 22,033 30,012 17,602
Deferred 1998 tax payment.............................. 83,000 -- --
Deferred income tax expense............................ 36,400 -- --
Accrued liabilities.................................... (2,028) (82) 13,140
Other, net.............................................. 1,627 281 7,946
--------- --------- ---------
Net Cash Provided from Operations........................ 405,539 371,889 341,386
--------- --------- ---------
Cash Flows from Investing Activities:
Property additions...................................... (75,297) (46,232) (42,952)
Sale of equipment and other assets...................... 6,941 4,134 2,664
Business acquisitions, net of cash acquired............. (222,452) (233,689) (58,473)
Proceeds from sale of businesses........................ 45,893 -- 4,526
Net purchases of investment securities.................. (11,011) (16,753) (20,075)
Notes receivable and financial investments.............. (10,645) (3,593) 3,304
Payments to sellers of acquired businesses.............. (10,271) (4,723) (3,742)
--------- --------- ---------
Net Cash Used for Investing Activities................... (276,842) (300,856) (114,748)
--------- --------- ---------
Cash Flows from Financing Activities:
Borrowings, net......................................... 310,190 888,528 123,732
Payment of borrowings and other obligations............. (564,448) (160,155) (82,857)
Proceeds from stock offering............................ 208,561 -- --
Distributions to shareholders and shareholders' trust... (75,152) (155,883) (146,520)
Purchase of ServiceMaster stock......................... (18,310) (657,191) (76,556)
Proceeds from employee share plans...................... 12,638 6,526 6,835
Distributions to holders of minority interests.......... -- (542) (3,074)
Other................................................... (652) 551 698
--------- --------- ---------
Net Cash Used for Financing Activities................... (127,173) (78,166) (177,742)
--------- --------- ---------
Cash Increase (Decrease) During the Year................. 1,524 (7,133) 48,896
--------- --------- ---------
Cash and Cash Equivalents at December 31................. $ 66,400 $ 64,876 $ 72,009
--------- --------- ---------
</TABLE>
See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
Statements of Shareholders' Equity
(In thousands)
Corporate Equity
---------------------------------
Additional Limited Accumulated
Common Paid-in Retained Partners' Comprehensive Treasury Restricted Total
Stock Capital Earnings Equity Income Stock Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995....... $ - $ - $ - $ 761,710 $ 5,904 $ (13,405) $ (7,549) $ 746,660
================================================================================================
Net income 1996.................. 245,140 245,140
Other comprehensive income, net
of tax:
Unrealized gains on securities,
net of reclassification
adjustment.................... 1,452 1,452
Foreign currency translation
($678 tax expense)............ (999) (999)
------------------------------------------------------------------------------------------------
Total comprehensive income....... 245,140 453 245,593
Shareholder distributions........ (146,520) (146,520)
Shares issued under option,
subscription, grant plans and
other (3,667 shares)............ (7,166) 2,506 1,691 (2,969)
Treasury shares purchased and
related costs (7,825 shares).... (76,556)
Shares issued for acquisitions
(3,213 shares).................. 3,104 27,455 30,559
------------------------------------------------------------------------------------------------
Balance, December 31, 1996....... $ - $ - $ - $ 856,268 $ 6,357 $ (60,000) $ (5,858) $ 796,767
================================================================================================
Net income 1997.................. 65,000 264,076 329,076
Other comprehensive income, net
of tax:
Unrealized gains on securities,
net of reclassification
adjustment.................... 4,269 4,269
Foreign currency translation
($3,580 tax expense).......... (5,283) (5,283)
------------------------------------------------------------------------------------------------
Total comprehensive income....... 65,000 264,076 (1,014) 328,062
Shareholder distributions........ (155,883) (155,983)
Shares issued under option,
debentures, grant plans and
other (6,552 shares)............ 21,165 3,511 1,588 26,264
Treasury shares repurchased from
WMX (61,112 shares)............. (625,978) (625,978)
Treasury shares purchased and
related costs (2,051 shares..... (31,213) (31,213)
Shares issued for the acquisition
of Barefoot, Inc. and other
acquisitions (16,161 shares).... 156,299 30,120 186,419
Conversion to corporate form..... 2,799 513,148 (515,947)
------------------------------------------------------------------------------------------------
Balance, December 31, 1997....... $ 2,799 $513,148 $ 65,000 $ - $ 5,343 $ (57,582) $ (4,270) $ 524,438
================================================================================================
Net income 1998.................. 189,992 189,992
Other comprehensive income, net
of tax:
Unrealized gains on securities,
net of reclassification
adjustment.................... (485) (485)
Foreign currency translation
($640 tax expense)............ (947) (947)
------------------------------------------------------------------------------------------------
Total comprehensive income....... 189,992 (1,432) 188,560
Shareholder distributions........ (75,152) (75,152)
Shares issued in public offering
(11,400 shares)................. 114 208,447 208,561
Shares issued under option,
debentures, grant plans and
other (2,514 shares)............ 25 9,403 13,507 887 23,822
Treasury shares purchased and
related costs (888 shares)...... (9) (18,301) (18,310)
Shares issued for acquisitions
(5,059 shares).................. 51 57,126 47,390 104,567
------------------------------------------------------------------------------------------------
Balance, December 31, 1998....... $ 2,980 $788,124 $179,840 $ - $ 3,911 $ (14,986) $ (3,383) $ 956,486
================================================================================================
</TABLE>
All share data reflect the three-for-two share splits in August 1998, June 1997
and June 1996.
Disclosure of reclassiflcation amounts (net of tax) relating to comprehensive
income:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unrealized holding gains arising in period $ 3,295 $ 5,904 $ 2,795
Less: gains realized (3,780) (1,635) (1,343)
-------- -------- --------
Net unrealized gains on securities $ (485) $ 4,269 $ 1,452
======== ======== ========
</TABLE>
See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statements.
F-7
<PAGE>
Notes to the Consolidated Financial Statements
Business Unit Reporting
The business of the Company is primarily conducted through the ServiceMaster
Consumer Services and ServiceMaster Management Services operating units. In
accordance with Statement of Financial Accounting Standards No. 131, the
Company's reportable segments are strategic business segments that offer
different services. They are managed separately because each business requires
different technology and marketing strategies. 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. 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, workers' compensation insurance, health insurance,
unemployment insurance and other employee benefit plans, and Diversified Health
Services, which provides services and products to the long-term care industry.
In the previous year, Diversified Health Services was reflected in the
Management Services operating unit. It is now reflected in the other operations
group for all years. The Company has reclassified Diversified Health Services
into the other operations segment due to the unique nature of the services it
provides and the industry factors which affect its performance. It also operates
in a highly regulated industry and is managed separately from the other service
lines.
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 other operations.
The following information prior to 1998 is presented on a pro forma basis as
if the Company had been a taxable corporation in all years and corporate taxes
had been allocated to the segments.
F-8
<PAGE>
Notes to the Consolidated Financial Statements
<TABLE>
<CAPTION>
(In thousands) Consumer Management Other
Services Services Operations Consolidated
-----------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Operating revenue................................ $ 2,048,185 $ 2,040,948 $ 634,986 $ 4,724,119
Operating income................................. 305,408 112,919 (21,905) 396,422
Net interest expense (income).................... 42,259 (1,882) 37,267 77,644
Income before income taxes....................... 263,149 114,801 (59,172) 318,778
Provision for income taxes....................... 106,309 46,380 (23,903) 128,786
----------- ----------- ----------- -----------
Net income....................................... $ 156,840 $ 68,421 $ (35,269) $ 189,992
=========== =========== =========== ===========
Net income, excluding ususual items (Note)....... $ 156,840 $ 45,774 $ (12,622) $ 189,992
=========== =========== =========== ===========
Identifiable assets.............................. $ 2,244,652 $ 237,924 $ 432,275 $ 2,914,851
Depreciation and amortization expense............ $ 71,369 $ 22,023 $ 11,213 $ 104,605
Capital expenditures............................. $ 36,206 $ 29,757 $ 9,334 $ 75,297
1997
Operating revenue................................ $ 1,662,519 $ 1,905,291 $ 393,692 $ 3,961,502
Operating income................................. 235,064 76,224 32,645 343,933
Net interest and non-operating expense (income).. 27,740 (1,264) 43,178 69,654
Income before income taxes....................... 207,324 77,488 (10,533) 274,279
Corporate provision for income taxes............. 83,759 31,304 (4,254) 110,809
----------- ----------- ----------- -----------
Net income (pro forma corporate form)............ $ 123,565 $ 46,184 $ (6,279) $ 163,470
=========== =========== =========== ===========
Identifiable assets.............................. $ 1,783,186 $ 212,727 $ 479,311 $ 2,475,224
Depreciation and amortization expense............ $ 63,010 $ 21,315 $ 8,737 $ 93,062
Capital expenditures............................. $ 16,778 $ 21,232 $ 8,222 $ 46,232
1996
Operating revenue................................ $ 1,461,696 $ 1,816,953 $ 179,679 $ 3,458,328
Operating income................................. 185,895 75,577 33,746 295,218
Net interest and non-operating expense........... 14,233 276 28,312 42,821
Income before income taxes....................... 171,662 75,301 5,434 252,397
Corporate provision for income taxes............. 69,352 30,422 2,194 101,968
----------- ----------- ----------- -----------
Net income (pro forma corporate form)............ $ 102,310 $ 44,879 $ 3,240 $ 150,429
=========== =========== =========== ===========
Identifiable assets.............................. $ 1,394,177 $ 236,038 $ 216,626 $ 1,846,841
Depreciation and amortization expense............ $ 52,446 $ 21,304 $ 5,256 $ 79,006
Capital expenditures............................. $ 19,915 $ 17,852 $ 5,185 $ 42,952
</TABLE>
Note: This line excludes the $38 million pretax gain in the
Management Services segment related to the formation of a strategic
venture which acquired the assets of ServiceMaster Energy Management
and the pretax charges totaling $38 million in the Other Operations
segment related primarily to the home health care operations, which
included a write-down for the impairment of assets and costs relating
to exiting customer arrangements.
F-9
<PAGE>
Notes to the Consolidated Financial Statements
Reincorporation
Most operations of ServiceMaster and its subsidiary partnerships were
conducted from 1986 through 1997 in partnership form, free of federal corporate
income tax. Had ServiceMaster remained a partnership, the Internal Revenue Code
would have imposed federal corporate tax on ServiceMaster 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 terms "the Company" and
"ServiceMaster" are used to collectively refer to the Partnership and its
successor corporation, The ServiceMaster Company.) At the time of
reincorporation, each outstanding limited partnership share was converted into
one share of $0.01 par value common stock. No federal income taxes were imposed
on the shareholders of the Partnership as a result of the reincorporation.
Pro forma information has been presented in the accompanying financial
statements in order to compare the continuing results of operations as if the
Company had been a taxable entity in 1997 and 1996. The pro forma tax provision
has been calculated assuming that the Company's effective tax rate had been
approximately 40 percent of pretax earnings.
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 payout of
any income allocated to its capital account prior to reincorporation.
Income Taxes
Prior to reincorporation at the end of 1997, most operations conducted by
the Company and its subsidiary partnerships were exempt from federal corporate
income tax since 1986. As a result of the reincorporation, the Company
recognized a step-up in the tax basis of its assets, which is being amortized
against taxable income. The step-up resulted in a reduction of the Company's
cash tax payments in excess of $25 million per annum for the current year and
for the ensuing 14 years.
The reconciliation of income tax for 1998 computed at the U.S. federal
statutory tax rate to the Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
<S> <C>
Tax at U.S. federal statutory rate 35.0%
State and local income taxes,
net of U.S. federal benefit 4.4%
Other 1.0%
-----
Effective rate 40.4%
=====
</TABLE>
Income tax expense for 1998 consists of:
<TABLE>
<CAPTION>
(In thousands) Current Deferred Total
-------- -------- ---------
<S> <C> <C> <C>
U.S. federal $ 76,646 $ 30,200 $ 106,846
State and local 15,740 6,200 21,940
-------- -------- ---------
$ 92,386 $ 36,400 $ 128,786
======== ======== =========
</TABLE>
Deferred income tax expense of $36.4 million for the year ended December
31, 1998 results from timing differences in the recognition of income and
expense for income tax and financial reporting purposes.
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. Significant
components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
--------- --------
Deferred tax assets (liabilities):
<S> <C> <C>
Current:
Prepaid expenses and other $ (23,400) $ (11,500)
Accounts receivable allowance 7,400 12,000
Accrued insurance and
related expenses 24,100 18,000
Other accrued expenses 16,700 18,100
Long-Term:
Long-term assets (500) 13,000
Insurance expenses 32,500 32,000
Other long-term obligations (11,600) -
--------- --------
Net deferred tax assets $ 45,200 $ 81,600
========= ========
</TABLE>
There were no federal taxes paid in 1998 and approximately $5 million of state
tax payments were made in the year. In the first year of corporate form, the
Company was able to defer the remaining 1998 tax payments into 1999.
Acquisitions
Current Year-
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.
In 1998, the Company completed a number of acquisitions, including Rescue
Industries, Inc. (Rescue), Ruppert Landscape Company (Ruppert), National
Britannia and other lawn care, landscape and pest control businesses. Rescue,
which operates under the Rescue Rooter trade name, is one of the largest
F-10
<PAGE>
Notes to the Consolidated Financial Statements
plumbing and drain cleaning companies in America. Ruppert is one of the Mid-
Atlantic's largest commercial landscape companies. National Britannia, the third
largest pest control company in the United Kingdom, significantly increases the
international presence of Terminix. The aggregate fair market value of the
assets acquired less liabilities assumed for these acquisitions was $139
million, which consisted almost entirely of intangible assets, primarily
goodwill. During the year, the Company acquired a number of smaller companies
primarily in the lawn care, landscaping and pest control businesses. The
aggregate fair market value of the assets acquired less seller financed notes
and liabilities assumed for these purchases was $194 million, including
approximately $249 million of goodwill.
On November 1, 1998, the Company entered into an agreement to acquire
LandCare USA, Inc., one of the leading commercial landscape companies in the
country. The transaction is expected to be consummated in March 1999.
Prior Years-
On February 24, 1997, the Company acquired Barefoot Inc., (Barefoot) the
second largest professional residential lawn care services company in the United
States. The Company paid approximately $237 million by issuing 12.9 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.
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 a number of other
lawn care and pest control businesses. The Company also purchased the minority
interests of Management Services 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 Manufacturing Support Services, 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.
Supplemental cash flow information regarding the Company's acquisitions is
as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Fair value of assets acquired................. $ 465,380 $ 590,600 $134,377
Less liabilities assumed...................... (132,381) (157,741) (43,781)
--------- --------- --------
Net assets acquired........................... 332,999 432,859 90,596
Less shares issued............................ (104,567) (186,419) (30,559)
Less cash acquired............................ (5,980) (12,751) (1,564)
--------- --------- --------
Business acquisitions, net of cash acquired... $ 222,452 $ 233,689 $ 58,473
--------- --------- --------
</TABLE>
Other Events
The Company formed a strategic venture with Texas Utilities Company for the
ownership and operation of the ServiceMaster Energy Management business. The new
venture acquired all of the assets of ServiceMaster Energy Management and is
owned 85 percent by Texas Utilities and 15 percent by ServiceMaster. This
transaction resulted in a pretax gain of $38 million.
In late 1998, the Company completed a strategic review of its Home Health
Care operations and concluded that, without significant investment, it could not
profitably provide high quality service in the future and continue to satisfy
all the changes and the requirements of new governmental reimbursement programs.
The Company has decided to sell its direct operations and is discontinuing its
outsourced management operation of home health care agencies. The Company will
continue to provide consulting services to hospitals and other providers of home
health care.
During the course of the Company's strategic review of its Home Health Care
operations, the Company assessed the recoverability of the carrying value of the
intangible assets and fixed assets which resulted in pretax impairment losses of
$13 million and $3 million, respectively. In accordance with Statement of
Financial Accounting Standards No. 121, these losses reflect the amounts by
which the carrying values of these assets exceed their estimated fair values
determined by their future discounted cash flows. In addition, the Company has
recorded a pretax charge of $8 million related to the costs associated with
exiting customer arrangements in the Home Health Care business. In response to
the impact that changes in governmental reimbursement programs have begun to
have on the financial condition of certain customers of the Home Health Care and
Diversified Health Services businesses, the Company increased its reserves for
accounts receivable by $8 million and $6 million, respectively.
F-11
<PAGE>
Notes to the Consolidated Financial Statements
Employee Benefit Plans
Contributions to qualified profit sharing plans were made in the amount of
$9.9 million in 1998, $8.2 million in 1997, and $6.9 million in 1996. Under the
Employee Share Purchase Plan, the Company contributed $1.2 million in 1998, $1.1
million in 1997, and $1.0 million in 1996. These funds defrayed part of the cost
of the shares purchased by employees.
F-12
<PAGE>
Notes to the Consolidated Financial Statements
Long-Term Debt
Long-term debt includes the following:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
Notes Payable:
10.57%, maturing in 1999 - 2000........................$ 18,000 $ 27,000
8.38%, maturing in 1999 - 2001........................ 30,000 40,000
10.81%, maturing in 2000 - 2002........................ 55,000 55,000
6.65%, maturing in 2002 - 2004........................ 70,000 70,000
7.40%, maturing in 2006............................... 125,000 125,000
6.95%, maturing in 2007............................... 100,000 100,000
7.10%, maturing in 2018............................... 150,000 -
7.45%, maturing in 2027............................... 200,000 200,000
7.25%, maturing in 2038............................... 150,000 -
6.00%, subordinated, convertible at $5.53 per share... - 3,581
Revolving credit facilities.............................. 50,000 550,000
International borrowings................................. 48,272 29,856
Other.................................................... 131,511 68,947
Less current portion..................................... (51,616) (21,539)
---------- ----------
Total long-term debt.....................................$1,076,167 $1,247,845
========== ==========
------------------------------------------------------------------------------
</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.
ServiceMaster filed a shelf registration statement with the Securities and
Exchange Commission for the sale of up to $950 million in unsecured senior debt
securities or equity interests in June 1997. As of year end, the Company had
$350 million of securities available for issuance under this shelf registration
statement. The first debt issuance from the shelf occurred in August 1997. It
included two tranches of debt totaling $300 million. The Company completed a
second $300 million dual-tranche offering of unsecured senior notes in February
1998, that consisted 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 of these
offerings reduced borrowings under bank credit facilities and thereby reduced
exposure to short-term interest rate fluctuations.
In May 1998, the Company filed a Form S-3 registration statement under
which 11.4 million newly-issued shares were sold at $19.17 per share. The net
proceeds to the Company were approximately $209 million and were used to reduce
outstanding debt under existing bank credit facilities.
The Company has a committed revolving credit facility for up to $750
million maturing in April 2002. The facility can be used for general Company
purposes. The revolving credit facility had $700 million of unused commitment as
of December 31, 1998.
The Company is exposed to interest rate fluctuations on its floating rate
debt. As of year end, the Company had approximately $100 million in floating
rate borrowings. The Company has, from time to time, entered into interest rate
swap or similar arrangements to mitigate its exposure to interest rate
fluctuations, and does not, as a matter of policy, enter into hedging contracts
for trading or speculative purposes. As of year end, the Company was not a party
to any interest rate swaps.
Cash interest payments were $88 million in 1998, $63 million in 1997, and
$34 million in 1996. Average rates paid on the revolving credit facility were
5.9 percent in 1998, 6.0 percent in 1997 and 5.6 percent in 1996. Future
scheduled long-term debt payments are $51.6 million in 1999 (average rate of 4.2
percent), $67.7 million in 2000 (average rate of 6.0 percent), $44.3 million in
2001 (average rate of 6.7 percent), $45.9 million in 2002 (average rate of 6.6
percent), and $34.8 million in 2003 (average rate of 5.4 percent). Notes payable
of $19 million due in 1999 are intended to be refinanced by the long term
revolving credit facility in 1999 and therefore are not included in the $51.6
million of current liabilities. The $50 million revolving credit facility
balance as of year end has not been included in the scheduled payments above as
the Company expects to extend the revolving credit facility beyond 2003.
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 $1.1 billion.
Future long-term noncancelable operating lease payments are $33.4 million
in 1999, $25.5 million in 2000, $17.9 million in 2001, $11.3 million in 2002,
$6.6 million in 2003, and $7.4 million thereafter. Rental expense for 1998,
1997, and 1996 was $103.8 million, $83.9 million, and $74.8 million,
respectively.
The Company maintains an $80 million operating lease facility with a bank
which provides for the acquisition and development of properties to be leased by
the Company. The Company has guaranteed the residual value of the properties
under the lease up to 82 percent of the fair market value at the commencement of
the lease. The Company does not expect to be required to make residual value
payments and therefore, no amounts have been included in the future payments
above. At December 31, 1998, approximately $38 million was funded under this
facility.
F-13
<PAGE>
Notes to the Consolidated Financial Statements
Cash and Marketable Securities
Marketable securities held at December 31, 1998 and 1997, 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, 1998, the aggregate market value of the
Company's short- and long-term investments in debt and equity securities was $97
million and the aggregate cost basis was $84 million. In 1998, the Company
entered into a hedging arrangement in a notional amount of $40 million expiring
November 1999, designed to protect its equity portfolio against a decline in the
equity market. This arrangement, which is linked to the Standard & Poor's 500
Index, provides protection for a market decline of up to 15 percent, while it
caps the potential appreciation at 15 percent. At year end, the fair market
value of this arrangement was an immaterial net liability to the Company. There
was no participation in the trading of derivative securities in 1998 or 1997.
Interest and dividend income received on cash and marketable securities was
$8.9 million, $8.3 million and $8.0 million, in 1998, 1997 and 1996,
respectively. 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.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," which requires the reporting of all changes in
equity during a period, except those resulting from investment by owners and
distribution to owners. The Company has chosen to disclose Comprehensive Income,
which encompasses net income, unrealized gains on marketable securities, and the
effect of foreign currency translation, in the Statement of Shareholders'
Equity.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unrealized holding gains
arising in period $ 5,529 $ 9,908 $ 4,690
Tax expense 2,234 4,004 1,895
------- ------- -------
Net of tax amount $ 3,295 $ 5,904 $ 2,795
======= ======= =======
Gains realized $ 6,342 $ 2,743 $ 2,254
Tax expense 2,562 1,108 911
------- ------- -------
Net of tax amount $ 3,780 $ 1,635 $ 1,343
======= ======= =======
</TABLE>
Accumulated comprehensive income included the following components as of
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unrealized gain on
securities $ 7,753 $ 8,238 $ 3,969
Foreign currency
translation (3,842) (2,895) 2,388
------- ------- -------
Total $ 3,911 $ 5,343 $ 6,357
======= ======= =======
</TABLE>
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. 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. On May 15, 1998, the Company filed a Form S-3
registration statement, and 21.2 million Company shares were sold at $19.17 per
share. This included approximately 11.4 million of newly-issued shares from the
Company and 9.8 million shares sold by existing shareholders. The net proceeds
to the Company, after the underwriting discount and offering expenses, were
approximately $209 million and were used to reduce outstanding debt under
existing bank credit facilities.
On July 23, 1998, the Company filed a Form S-1 shelf registration statement
to issue up to 5.3 million shares of common stock in connection with future,
unidentified acquisitions. The S-1 allows the Company to issue registered shares
much more efficiently when acquiring privately-held companies. The Company plans
to use the shares over time in connection with purchases of roll-up acquisitions
and small strategic acquisitions. There were approximately 3.5 million shares
issued at year end.
On April 1, 1997, the Company bought Waste Management, Inc.'s (WMX) entire
ownership interest in ServiceMaster for approximately $626 million. This
transaction resulted in the Company acquiring the 61.1 million Company shares
held by WMX and canceling WMX's option to purchase an additional 4.2 million
Company shares.
As of December 31, 1998, there were 18.1 million 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.
F-14
<PAGE>
Notes to the Consolidated Financial Statements
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>
(In thousands, except per share data)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Income:
As reported (1) $189,992 $163,470 $150,429
SFAS 123 pro forma $185,555 $160,966 $149,480
Net Income Per Share:
Basic: As reported (1) $.66 $.57 $.47
SFAS 123 pro forma $.64 $.56 $.47
Diluted: As reported (1) $.64 $.55 $.46
SFAS 123 pro forma $.62 $.54 $.45
</TABLE>
(1) Pro forma corporate form prior to 1998.
The SFAS 123 pro forma net income reflects options granted in 1998, 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 1998.
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 1998, 1997 and 1996: risk-free interest rates of 5.6 percent, 6.3
percent and 5.6 percent, respectively; volatility rates of 22 percent, 21
percent and 27 percent, respectively; distribution yields of 1.9 percent, 3.2
percent and 3.2 percent, respectively; and average expected lives of seven
years. The options granted to employees in 1998, 1997 and 1996 have weighted-
average fair values of $5.17, $2.81 and $2.40, 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.
F-15
<PAGE>
Notes to the Consolidated Financial Statements
A summary of option and grant transactions during the last three years is
summarized below:
<TABLE>
<CAPTION>
Share Price Weighted-Avg. Share Price
Options Range Exercise Price Grants Range
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Total exercisable, December 31, 1995 14,033,661 $ 0.73- 7.63 $ 5.46 ----- -----
Total outstanding, December 31, 1995 18,252,411 $ 0.73- 9.78 $ 6.46 2,205,738 $ 2.86-7.96
Transactions during 1996
Granted to employees 4,154,625 $ 9.26-10.78 $ 9.40 ----- -----
Exercised, paid, or vested (5,470,646) $ 0.73- 7.63 $ 5.56 (398,997) $ 2.86-7.96
Terminated or resigned (360,274) $ 2.79- 7.63 $ 3.89 ----- -----
Total exercisable, December 31, 1996 8,202,741 $ 0.73- 7.63 $ 5.49 ----- -----
Total outstanding, December 31, 1996 16,576,116 $ 0.73-10.78 $ 7.56 1,806,741 $ 2.86-7.96
Transactions during 1997
Granted to employees 5,295,785 $11.23-18.42 $11.62 ----- -----
Exercised, paid, or vested (1,892,034) $ 2.17- 9.26 $ 5.17 (430,460) $ 2.86-7.96
Cancelled, related to WMX (4,218,750) $ 9.78 $ 9.78 ----- -----
Terminated or resigned (440,960) $ 1.97-11.22 $ 7.11 (120,175) $ 2.86-7.96
Total exercisable, December 31, 1997 6,919,718 $ 0.73-10.78 $ 6.05 ----- -----
Total outstanding, December 31, 1997 15,320,157 $ 0.73-18.42 $ 8.65 1,256,106 $ 2.86-7.96
Transactions during 1998
Granted to employees 3,574,376 $15.74-22.77 $18.29 ----- -----
Exercised, paid, or vested (1,604,784) $ 2.25-11.22 $ 6.29 (293,376) $ 2.86-7.96
Terminated or resigned (377,023) $ 0.73-18.26 $ 8.57 ----- -----
Total exercisable, December 31, 1998 7,269,279 $ 0.73-22.33 $ 7.51 ----- -----
Total outstanding, December 31, 1998 16,912,726 $ 0.73-22.77 $10.89 962,730 $ 2.86-7.96
====================================================================================================================================
</TABLE>
Options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Range of Number Outstanding Remaining Weighted-Average Number Exercisable Weighted-Average
Exercise Prices at 12/31/98 Life Exercise Price at 12/31/98 Exercise Price
====================================================================================================================
<S> <C> <C> <C> <C> <C>
$ 0.73- 5.14 1,896,782 3.0 years $ 3.74 1,896,782 $ 3.74
6.44- 9.33 6,040,722 6.5 years 8.27 4,048,253 7.78
10.78-22.77 8,975,222 8.5 years 14.17 1,428,808 12.50
- --------------------------------------------------------------------------------------------------------------------
$ 0.73-22.77 16,912,726 7.0 years $10.89 7,373,848 $ 7.65
====================================================================================================================
</TABLE>
F-16
<PAGE>
Notes to the Consolidated Financial Statements
Earnings Per Share
Basic earnings per share 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.
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.
<TABLE>
<CAPTION>
For year ended 1998 For year ended 1997 For year ended 1996
-----------------------------------------------------------------------------------------
(In thousands, except per share data) Income Shares EPS Income Shares EPS Income Shares EPS
--------- -------- ------ --------- -------- ------ --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
(pro forma corporate form in
1997 and 1996) $ 189,992 289,315 $ 0.66 $ 163,470 285,944 $ 0.57 $ 150,429 317,381 $ 0.47
====== ====== ======
Effect of Dilutive Securities, net of tax
Options 9,391 8,333 7,607
Convertible debentures 32 181 1,114 5,363 1,115 5,441
--------- ------- --------- ------- --------- -------
Diluted EPS
(pro forma corporate form in
1997 and 1996) $ 190,024 298,887 $ 0.64 $ 164,584 299,640 $ 0.55 $ 151,544 330,429 $ 0.46
========= ======== ====== ========= ======== ====== ========= ======= ======
</TABLE>
Quarterly Operating Results
Quarterly operating results and related growth for the last three years in
revenues, gross profit, net income, and basic and diluted net income per share
are shown in the table below. Net income and earnings per share amounts for 1997
and 1996 have been restated to a basis that assumes reincorporation had occurred
as of the beginning of each year. 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.
F-17
<PAGE>
<TABLE>
<CAPTION>
(unaudited, in thousands, except per share data)
Percent Incr. Percent Incr.
1998 '98-'97 1997 '97-'96 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenue:
First Quarter $ 981,788 20% $ 817,136 10% $ 740,299
Second Quarter 1,244,627 23 1,010,794 10 916,931
Third Quarter 1,273,093 17 1,019,114 18 927,227
Fourth Quarter 1,224,611 17 1,043,458 19 873,871
--------------- --------------- ---------------
$ 4,724,119 19% $ 3,961,502 15% $ 3,458,328
Gross Profit:
First Quarter $ 186,991 17% $ 159,991 13% $ 142,116
Second Quarter 293,261 14 257,260 16 221,505
Third Quarter 316,718 23 257,449 17 219,127
Fourth Quarter 247,537 8 228,642 18 194,572
--------------- --------------- ---------------
$ 1,044,507 16% $ 903,342 16% $ 777,320
Net Income:
(pro forma in 1997 and 1996):
First Quarter $ 29,270 1% $ 28,982 15% $ 25,188
Second Quarter 56,404 21 46,707 8 43,326
Third Quarter 56,352 20 46,793 11 42,262
Fourth Quarter 47,966 17 40,988 3 39,653
--------------- --------------- ---------------
$ 189,992 16% $ 163,470 9% $ 150,429
Basic Net Income Per Share:
(pro forma in 1997 and 1996):
First Quarter $ 0.11 22% $ 0.09 13% $ 0.08
Second Quarter 0.20 18 0.17 21 0.14
Third Quarter 0.19 12 0.17 31 0.13
Fourth Quarter 0.16 7 0.15 25 0.12
--------------- --------------- ---------------
$ 0.66 16% $ 0.57 21% $ 0.47
Diluted Net Income Per Share:
(pro form in 1997 and 1996):
First Quarter $ 0.10 11% $ 0.09 13% $ 0.08
Second Quarter 0.19 19 0.16 23 0.13
Third Quarter 0.19 19 0.16 23 0.13
Fourth Quarter 0.16 14 0.14 17 0.12
--------------- --------------- ---------------
$ 0.64 16% $ 0.55 20% $ 0.46
Cash Distributions Per Share:
First Quarter $ 0.08 7% $ 0.07 1/2 5% $ 0.07 1/8
Second Quarter 0.08 7 0.07 1/2 5 0.07 1/8
Third Quarter 0.08 - 0.08 7 0.07 1/2
Fourth Quarter 0.09 13 0.08 7 0.07 1/2
--------------- --------------- ---------------
$ 0.33 6% $ 0.31 6% $ 0.29 1/4
Price Per Share:
First Quarter $ 19.63 - 16.50 $ 12.33 - 10.92 $ 9.93 - 8.61
Second Quarter 25.50 - 17.92 15.92 - 12.09 10.45 - 9.17
Third Quarter 24.75 - 19.75 19.67 - 15.17 11.00 - 9.55
Fourth Quarter 23.81 - 16.00 19.50 - 14.00 11.83 -10.55
</TABLE>
All share and per share data reflect the three-for-two share splits in August
1998, June 1997 and June 1996.
F-18
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following is a statement of estimated expenses (other than the SEC
registration fee) in connection with the issuance and distribution of the
securities being registered:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 46,906
Accounting Fees and Expenses................................ 10,000
Legal Fees and Expenses..................................... 50,000
Miscellaneous Expenses...................................... 4,000
---------
Total.................................................... $ 110,906
---------
</TABLE>
Item 14. Indemnification of Directors and Officers.
The ServiceMaster Company (the "Company") is incorporated under the laws of
the State of Delaware. Section 145 of the DGCL, inter alia ("Section 145")
provides that a Delaware corporation may indemnify any persons who were, are or
are threatened to be made, parties to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was illegal. A Delaware corporation may indemnify any persons who are,
were or are threatened to be made, a party to any threatened, pending or
completed action or suit by or in the right of the corporation by reason of the
fact that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the corporation's best
interests, provided that no indemnification is permitted without judicial
approval if the officer, director, employee or agent is adjudged to be liable to
the corporation. Where an officer, director, employee or agent is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses that such officer or
director has actually and reasonably incurred.
Article Ten of the Restated Certificate ("Article Ten") provides that no
person shall have any liability of any kind by reason of a Relevant Loss
(defined below) caused in whole or in part by any act or failure to act which
occurred while such person was an officer or director of the Company except: (i)
obligations arising under the express terms of any written contract to which
such person is a party; (ii) the obligation to return to the Company an amount
up to the value actually realized by such person by stewing or by any other
action which constitutes a criminal felony; (iii) any liability imposed by
contract or applicable law which is founded on, arises from or is related to
activities by such person (or such person's agents or affiliates) which are in
competition with any business of the Company or any of its affiliates; and (iv)
any other liability from which it shall not be possible to exempt such person
under applicable law either as constituted on the date on which the Restated
Certificate was filed with the Secretary of State of Delaware (the "Filing
Date") or at any time thereafter. The term "Relevant Loss" designates and
includes any loss, damage or expense of any lurid (i) experienced for any reason
by the Company or by any entity controlled by the Company; (ii) which any person
may experience by reason of any purchase (or failure to purchase), maintenance
of an interest in, sale (or failure to sell) or failure to obtain payment of any
amount due on any note, debenture, preferred stock, common stock or other
security issued or issuable by the Company or (iii) which shall otherwise be
caused in whole or in part by or arise in connection with (or would not have
occurred but for) such person's service as a director or officer of the Company.
In addition,
II-1
<PAGE>
Article Ten provides that every director of the Company shall be exempt (except
to the extent expressly set forth therein) from any personal liability to the
Company or any of the Company's stockholders for monetary damages for breach of
fiduciary duty as a director to the fullest extent permitted by (i) Section
102(b)(7) of the DGCL as constituted on the Filing Date or (ii) any provision of
the law of the State of Delaware as constituted at any time after the December
11, 1991.
Except as otherwise provided in the Restated Certificate, Article Eleven of
the Restated Certificate ("Article Eleven") provides that the Company shall
indemnify any person against, and shall reimburse, such person for any amount
which such person shall pay to satisfy, settle or otherwise deal with, any
attempt to impose any liability or obligation of any kind upon such person if
such attempt or such liability or obligation or both shall arise in connection
with or by reason of, or would not have arisen but for, Covered Service (defined
below) by such person (or any agreement by such person to serve as a director or
officer of the Company or to provide other Covered Service) including, but not
limited to: (i) any claim resulting from any loss, injury, damage, harm or other
disadvantage which the Company, any affiliate, any employee plan or any person
who acquires, holds, or disposes of any interest in any security issued by the
Company suffers or is alleged to have suffered; (ii) any claim resulting from
any act or failure to act by any person which is (or is alleged to be) beyond
the scope of his or her authority, contrary to instructions or orders or
contrary to his or her duties or applicable law; and (iii) any attempt by any
governmental authority or other person to impose any fine or penalty or to
obtain any other recovery by reason of any actual or alleged breach of any law
or other governmental requirement.
The term "Covered Service" designates and includes: (a) service as a
director or officer of the Company; (b) service by a person while he or she is
an officer or director of the Company (i) as an agent or representative of the
Company, (ii) in any other capacity with the Company, (iii) as a director,
officer, employee, agent or representative of, or in any other capacity with,
any affiliate, (iv) in any capacity with any Employee Plan (as defined therein),
and (v) in any other capacity in which such person shall have been asked to
serve by the Company's Board of Directors or Chief Executive Officer; (c) any
services which constituted "Covered Service" under the Amended and Restated
Agreement of United Partnership for ServiceMaster Limited Partnership; and (d)
any other service of any kind by any person with any organization or entity of
any kind (whether or not affiliated with the Company) which shall be designated
in writing as Covered Service by a majority of the members of the Company's
Board of Directors or by the Company's Chief Executive Officer. Service is
deemed to constitute "Covered Service" if it is so designated by the terms in
the preceding sentence regardless of whether it shall have been performed prior
to, at, or after the time Article Eleven became part of the Company's
Certificate of Incorporation. Any person is entitled to rely upon any written
confirmation provided by the Company's Chief Executive Officer or by the
Company's Board of Directors that service by such person in any capacity
specified in such confirmation will constitute Covered Service and to rely upon
the protection afforded by Article Eleven in connection with such service.
Except to the extent the Company shall otherwise expressly agree in
writing, the Company is not obligated under Article Eleven to reimburse any
person for or otherwise indemnify any person against: (a) any obligation the
person may have under any written contract except to the extent such obligation
arises by reason of any action taken by such person to satisfy, settle or
otherwise deal with any claim against which such person is entitled to
indemnification from the Company under Article Eleven or otherwise; (b) any
income taxes payable by reason of salary, bonus or other income or gain actually
realized by such person in connection with any Covered Service; (c) any
liability imposed by contract or applicable law which is founded on, arises from
or is related to activities by such person (or such person's agents or
affiliates) which are in competition with any business of the Company or any of
its affiliates; and (d) any obligation to pay an amount up to the value
personally realized by such person by stewing or by any other action which
constitutes a criminal felony. Except as otherwise provided in the Restated
Certificate, the Company is not obligated under Article Eleven to Indemnify any
person in connection with a proceeding (or part thereof) initiated by such
person unless such proceeding (or part thereof) was authorized by the Board of
Directors of the Company.
Article Eleven provides that each person who was or is made a party or is
threatened to be made a party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he or she is or was a director or officer of the Company,
agreed to serve as a director or officer of the Company or is or was providing
any other Covered Service, whether the basis of such proceeding is alleged
action in an official capacity as a director or officer of the Company or in any
other Covered Service position, shall, except as otherwise provided therein, be
indemnified and hold harmless by the Company to the fullest extent authorized by
II-2
<PAGE>
Delaware law against all expense, liability and loss (including attorneys' fees,
judgments, fines, excise taxes or penalties arising under the Employee
Retirement Income Security Act as amended from time to time and amounts paid in
settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to be a director or officer of the Company or to provide any other Covered
Service and shall inure to the heirs, executors and administrators of such
person.
Article Eleven provides that the Company shall reimburse any Covered Person
(as defined therein) for any payment made by such person for any legal fees or
other expenses reasonably incurred by such person in order to investigate,
evaluate, defend against, pay in full, settle or otherwise deal with (i) any
Covered Claim (as defined therein) or (ii) any development or state of facts
which could give rise to a Covered Claim.
Article Eleven also provides that any officer of the Company or any member
of its Board of Directors shall have the right and power to execute on behalf of
the Company any written contract with any other person providing indemnification
or other protection to such other person in connection with service by such
other person as a director or officer of the Company or in connection with any
other Covered Service by such person, and any such contract shall be legal,
valid and binding upon the Company and shall be enforceable against the Company
in accordance with its terms to the maximum extent permitted by Article Eleven
or by applicable law, if it shall be approved by a majority of the members of
the Company's Board of Directors exclusive of the person to whom indemnification
is provided by such contract. The rights of any person under any particular
contract made in accordance with the provisions of the preceding sentence shall
not be impaired or eliminated (i) by reason of the fact that all or any one or
more of the members of the Board who approved such contracts shall be parties to
contracts affording them similar protection (regardless of when those other
contracts shall have been approved or signed) or shall otherwise have been
provided with protection similar to that provided in the particular contract or
shall be subject to the same claims against which the particular contract is
intended to protect or (ii) for any other reason whatsoever. It is expressly
intended that each person with whom the Company shall enter into a written
contract to provide indemnification or other protection in connection with such
person's service as an officer or director of the Company or in connection with
other Covered Service by such person shall be entitled to rely upon (and shall
conclusively be presumed to have relied upon) the rights which such contract
purports to provide to such person. No separate written contract shall however
be necessary in order for any person to obtain any indemnification or payment to
which Article Eleven purports to entitle such person, and any Covered Person who
has no separate contact of any kind with the Company shall be entitled to
receive all indemnification, payments and other benefits which the provisions in
Article Eleven purport to provide to such Covered Person.
The rights to indemnification and payment provided by Article Eleven are
not exclusive of any other right of any kind which any person may have or at any
time acquire under or by reason of any other provision in the Restated
Certificate, the Company's By-Laws, any agreement, any law or other action by
any governmental authority, or otherwise.
Article Eleven authorizes the Company to purchase and maintain insurance on
behalf of any person who is or was a director or officer of the Company, or is
or was serving in any other capacity with the Company, any Employee Plan or any
other organization against any expense, liability or loss whether or not the
Company would have the power to indemnify such person against such expense,
liability or loss under the provisions of Article Eleven, under applicable law
or otherwise.
In addition, Section 145 further authorizes a corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him and incurred by him in
any such capacity, arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
All of the Company's directors and the officers are covered by insurance
policies maintained and held in effect by the Company against certain
liabilities for actions taken in such capacities, including liabilities under
the Securities Act of 1933.
II-3
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
None
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits. See Index to Exhibits.
(b) Financial Statement Schedules.
Schedule VIII - Valuation and Qualifying Accounts.
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
financial statements or the notes thereto.
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective
amendment shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933, as amended, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933, as amended, and will be
governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
II-4
<PAGE>
(1) For purposes of determining any liability under the Securities
Act of 1933, as amended, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933, as amended, shall be
deemed to be part of this Registration Statement as of the time
it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
Schedule VIII
THE SERVICEMASTER COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Additions
Charged Deductions
Balance at to Costs Write-offs of Balance at
Beginning of and Uncollectible end of
Description Period Expenses Accounts Period
- ----------- ------------ ---------- ------------- ----------
<S> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Allowance for doubtful accounts--
Accounts receivable (current) $27,544 25,998 19,389 $34,153
------- ------ ------ -------
Notes receivable (current) $ 4,677 686 528 $ 4,835
------- ------ ------ -------
AS OF DECEMBER 31, 1997:
Allowance for doubtful accounts--
Accounts receivable (current) $24,117 20,183 16,756 $27,544
------- ------ ------ -------
Notes receivable (current) $ 2,170 2,507 0 $ 4,677
------- ------ ------ -------
AS OF DECEMBER 31, 1996:
Allowance for doubtful accounts--
Accounts receivable (current) $18,029 20,517 14,429 $24,117
------- ------ ------ -------
Notes receivable (current) $ 2,439 59 328 $ 2,170
------- ------ ------ -------
</TABLE>
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Downers
Grove, State of Illinois, on March 22, 1999.
The ServiceMaster Company, As Registrant
By: /s/ Vernon T. Squires
-------------------------------------
Vernon T. Squires
Senior Vice President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed on March 22, 1999 by the following
persons in the capacities indicated:
Signature Title
--------- -----
* Chairman and Director of The ServiceMaster
- --------------------------------- Company
C. William Pollard
* President, Chief Executive Officer and
- --------------------------------- Director of The ServiceMaster Company
Carlos H. Cantu
*
- --------------------------------- Vice Chairman and Director of The Service
Charles W. Stair Master Company
*
- --------------------------------- Vice Chairman and Director of The Service
Phillip B. Rooney Master Company
*
- --------------------------------- Director of The ServiceMaster Company
Paul W. Berezny, Jr.
*
- --------------------------------- Director of The ServiceMaster Company
Henry O. Boswell
*
- --------------------------------- Director of The ServiceMaster Company
Brian Griffiths
*
- --------------------------------- Director of The ServiceMaster Company
Sidney E. Harris
*
- --------------------------------- Director of The ServiceMaster Company
Herbert P. Hess
*
- --------------------------------- Director of The ServiceMaster Company
Michelle M. Hunt
II-7
<PAGE>
SIGNATURE TITLE
--------- -----
* Director of The ServiceMaster Company
------------------------
Gunther H. Knoedler
* Director of The ServiceMaster Company
------------------------
James D. McLennan
* Director of The ServiceMaster Company
------------------------
Vincent C. Nelson
* Director of The ServiceMaster Company
------------------------
Dallen W. Peterson
* Director of The ServiceMaster Company
------------------------
Steven S Reinemund
* Director of The ServiceMaster Company
------------------------
Burton E. Sorensen
* Director of The ServiceMaster Company
------------------------
David K. Wessner
* The undersigned, by signing his name hereto, does sign and execute this
Registration Statement pursuant to the Powers of Attorney executed by the
above-named officers and directors of The ServiceMaster Company and filed
with the Securities and Exchange Commission on behalf of such officers and
directors.
By: /s/ VERNON T. SQUIRES
-----------------------
Vernon T. Squires
Attorney-in-Fact
II-8
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
2.1 Acquisition agreement dated December 5, 1996 by and among
ServiceMaster Limited Partnership, ServiceMaster Acquisition
Corporation and Barefoot Inc. is incorporated by Registration
Statement on Form S-4 as filed by ServiceMaster Limited Partnership on
January 17, 1997 (SEC Registration No. 333-17759).
2.2 Plan and Agreement of Merger dated December 5, 1996 by and among
ServiceMaster Limited Partnership, ServiceMaster Acquisition
Corporation and Barefoot Inc. is incorporated by reference to Annex
A-2 to the Offering Circular/Prospectus included as part of the
Registration Statement on Form S-4 as filed by ServiceMaster Limited
Partnership on January 17, 1997 (SEC Registration No. 333-17759).
2.3 Merger and Reorganization Agreement as amended and restated on October
3, 1997 is incorporated by reference to Exhibit 5 to the Current
Report on Form 8-K as filed by ServiceMaster Limited Partnership on
December 29, 1997 (the "SMLP December 29, 1997 8-K") and to Exhibit 5
to the Current Report on Form 8-K as filed by The ServiceMaster
Company on Form 8-K on February 26, 1998 (second of three 8-K reports
filed on that date) (the "Company February 26, 1998 8-K, No. 2").
2.4 Certificate of Merger of NewSub B, Inc. into ServiceMaster Limited
Partnership in accordance with Section 17-211 of the Delaware Revised
Uniform Limited Partnership Act (the "Reincorporating Merger"), the
filing of which was certified by the Secretary of State of the State
of Delaware on December 17, 1997 and the effective date and time of
which was December 26, 1997 at 11:59 P.M., Eastern Standard Time, is
incorporated by reference to Exhibit 2.4 to the Report on Form 10-K as
filed by ServiceMaster on May 15, 1998 (the "1998 l0 K").
2.5 Certificate of Merger of ServiceMaster Limited Partnership and The
ServiceMaster Company Limited Partnership with and into The
ServiceMaster Company, a Delaware corporation, in accordance with the
General Corporation Law of the State of Delaware, the filing of which
was certified by the Secretary of State of the State of Delaware on
December 18, 1997 and the effective date and time of which was January
1, 1998 at 12:01 A.M., Eastern Standard Time, is incorporated by
reference to Exhibit 2.5 to the 1998 10-K.
2.6 The Plan of Reorganization and Agreement and Plan of Merger dated as
of November 1, 1998 by and among LandCare USA, Inc., The ServiceMaster
Company and SVM Acquisition Corporation is incorporated by reference
to Appendix A to the Proxy Statement/Prospectus included as part of
the Registration Statement on Form S-4 as filed by The ServiceMaster
Company on February 10, 1999 (SEC Registration No. 333-70191).
3.1 Amended and Restated Certificate of Incorporation of The ServiceMaster
Company, a Delaware corporation, as filed with the Secretary of State,
State of Delaware, on November 6, 1997 is incorporated by reference to
Exhibit 1 to the SMLP December 29, 1997 8-K and to Exhibit 1 to the
Company February 26, 1998 8-K, No. 2.
3.2 Bylaws of The ServiceMaster Company as adopted on November 3, 1997 are
incorporated by reference to Exhibit 2 to the SMLP December 29, 1997
8-K and to Exhibit 2 to the Company February 26, 1998 8-K, No. 2.
II-9
<PAGE>
Exhibit
Number Description of Exhibit
- ------- ----------------------
4.1 Shareholder Rights Agreement between The ServiceMaster Company and the
Harris Trust and Savings Bank as adopted on December 12, 1997 is
incorporated by reference to Exhibit 3 to the SMLP December 29, 1997
8-K and to Exhibit 3 to the Company February 26, 1998 8-K, No.2.
4.2 The ServiceMaster Company: Certificate of Designation, Preferences and
Rights of Junior Participating Preferred Stock, Series A, is
incorporated by reference to Exhibit 4 to the SMLP December 29, 1997
8-K and to Exhibit 4 to the Company February 26, 1998 8-K, No. 2.
4.3 Indenture dated as of August 15, 1997 among The ServiceMaster Company
(as successor to ServiceMaster Limited Partnership and The
ServiceMaster Company Limited Partnership) and the Harris Trust and
Savings Bank as trustee is incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-3 of the ServiceMaster Limited
Partnership and ServiceMaster Incorporated of Delaware filed with the
Securities and Exchange Commission on July 28, 1997 (the "July 28,
1997 Registration Statement").
4.4 First Supplemental Indenture dated as of August 15, 1997 among The
ServiceMaster Company (as successor to ServiceMaster Limited
Partnership and The ServiceMaster Company Limited Partnership) and the
Harris Trust and Savings Bank as trustee, is incorporated by reference
to Exhibit 4.4 to the Annual Report on Form 10-K for the year ended
December 31, 1997 as filed by The ServiceMaster Company (the "1997
10-K").
4.5 Second Supplemental Indenture dated as of January 1, 1998 among The
ServiceMaster Company (as successor to ServiceMaster Limited
Partnership and The ServiceMaster Company Limited Partnership) and the
Harris Trust and Savings Bank as trustee is incorporated by reference
to Exhibit 2 to the Current Report on Form 8-K as filed by The
ServiceMaster Company on Form 8-K on February 26, 1998 (first of three
8-K reports filed on that date) (the "Company February 26, 1998 8-K,
No. 1").
4.6 Third Supplemental Indenture dated as of March 2, 1998 among The
ServiceMaster Company and the Harris Trust and Savings Bank as trustee
is incorporated by reference to Exhibit 4.3 to the Current Report on
Form 8-K as filed by The ServiceMaster Company on February 27, 1998
(the "Company February 27, 1998 8-K").
4.7 Form of 6.95% Note due August 14, 2007 is incorporated by reference
to Exhibit 4.1 to the July 28, 1997 Registration Statement.
4.8 Form of 7.45% Note due August 14, 2027 is incorporated by reference to
Exhibit 4.2 to the July 28, 1997 Registration Statement.
4.9 Form of 7.10% Note due March 1, 2018 is incorporated by reference to
Exhibit 4.1 to the Company February 27, 1998 8-K.
4.10 Form of 7.25% Note due March 1, 2038 is incorporated by reference to
Exhibit 4.2 to the Company February 27, 1998 8-K.
5 Opinion of counsel regarding legality.
II-10
<PAGE>
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.1 $750,000,000 Five-Year Credit Agreement dated as of April 1, 1997
among The ServiceMaster Company Limited Partnership, the First
National Bank of Chicago and Morgan Guaranty Trust Company, is
incorporated by reference to Exhibit 10.2 to the 1998 10-K.
10.2 Form of Deferred Directors Fee Agreement as assumed by The
ServiceMaster Company in the Reincorporating Merger is incorporated by
reference to Exhibit 10(c)(4) to the Annual Report on Form 10-K for
the year ended December 31, 1980 as filed by ServiceMaster Limited
Partnership (the "1980 10-K").
10.3 Incentive Reward Compensation Plan as assumed by The ServiceMaster
Company in the Reincorporating Merger is incorporated by reference to
Exhibit 10(c)(6) to the 1980 10-K.
10.4 ServiceMaster Profit Sharing, Savings and Retirement Plan as assumed
by The ServiceMaster Company in the Reincorporating Merger amended and
restated effective January 1, 1987 is incorporated by reference to the
exhibit so captioned to the Annual Report on Form 10-K for the year
ended December 31, 1987 as filed by ServiceMaster Limited Partnership
(the "1987 10-K").
10.5 The Terminix International Company L.P. Profit Sharing Retirement Plan
(previously known as Cook International, Inc. Profit Sharing
Retirement Plan) effective January 1, 1984; Amendment No. One to The
Terminix International Company L.P. Profit Sharing Retirement Plan
effective January 1, 1986 and April 1, 1986; Amendment No. Two,
effective April 1, 1986; Amendment No. Three, effective January 1,
1987 and January 1, 1988; The Terminix International Company L.P.
Profit Sharing Retirement Trust, all of which are incorporated by
reference to Exhibit 10.15 to the 1987 10-K.
10.6 ServiceMaster 10-Plus Plan as assumed by The ServiceMaster Company
in the Reincorporating Merger is incorporated by reference to Exhibit
4.2 to the ServiceMaster Limited Partnership registration Statement on
Form S-8 (No. 33-39148) filed with the SEC on February 26, 1991 (the
"10-Plus Registration Statement").
10.7 Form of Option Agreement for the ServiceMaster 10-Plus Plan is
incorporated by reference to Exhibit 4.3 to the 10-Plus Registration
Statement.
10.8 Form of Directors Deferred Fees Plan (ServiceMaster Shares
Alternative) as assumed by The ServiceMaster Company in the
Reincorporating Merger is incorporated by reference to Exhibit 10.18
to the Annual Report on Form 10-K for the year ended December 31, 1990
(the "1990 10-K").
II-11
<PAGE>
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.9 Form of Directors Deferred Fees Agreement (ServiceMaster Shares
Alternative) as assumed by The ServiceMaster Company in the
Reincorporating Merger is incorporated by reference to Exhibit 10.19
of the 1990 10-K.
10.10 Form of ServiceMaster Deferred Fees Plan Trust is incorporated by
reference to Exhibit 10.20 of the 1990 10-K.
10.11 ServiceMaster 10-Plus Plan as amended September 3, 1991 and as assumed
by The ServiceMaster Company in the Reincorporating Merger is
incorporated by reference to Exhibit 10.21 to the Annual Report on
Form 10-K for the year ended December 31, 1991 (the "1991 10-K").
10.12 Form of Option Agreement for the ServiceMaster 10-Plus Plan as amended
September 3, 1991 is incorporated by reference to Exhibit 10.22 to the
1991 10-K.
10.13 ServiceMaster 1994 Non-Employee Directors Share Option Plan as assumed
by The ServiceMaster Company in the Reincorporating Merger is
incorporated by reference to Exhibit 4.2 to the ServiceMaster Limited
Partnership Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on October 5, 1994 (the "Directors
Share Plan Registration Statement").
10.14 Form of Option Agreement for the ServiceMaster 1994 Non-Employee
Director Share Option Plan is incorporated by reference to Exhibit 4.3
to the Directors Share Plan Registration Statement.
10.15 ServiceMaster 1997 Share Option Plan as assumed by The ServiceMaster
Company in the Reincorporating Merger is incorporated by reference to
Exhibit 10.28 to the Annual Report on Form 10-K for the year ended
December 31,1996 as filed by ServiceMaster Limited Partnership (the
"1996 10-K").
10.16 Form of Option Agreement for the ServiceMaster 1997 Share Option
Plan is incorporated by reference to Exhibit 10.29 to the 1996 10-K.
10.17 ServiceMaster 1998 Equity Incentive Plan as adopted on December 11,
1997 and approved by the shareholders on May 1, 1998 is incorporated
by reference to Exhibit A to the Definitive Proxy Statement for the
Registrant's May 1, 1998 Annual Meeting of Stockholders (the "1998
Proxy Statement").
10.18 Form of Option Agreement for the ServiceMaster 1998 Equity Incentive
Plan (Non-Qualifying Stock Options), is incorporated by reference to
Exhibit 10.20 to the 1998 10-K.
10.19 Form of Option Agreement for the ServiceMaster 1998 Equity Incentive
Plan (Incentive Stock Options), is incorporated by reference to
Exhibit 10.21 to the 1998 10-K.
10.20 ServiceMaster 1998 Non-Employee Directors Discounted Stock Option
Plan as adopted on December 11, 1997 and approved by the shareholders
on May 1, 1998 is incorporated by reference to Exhibit B to the 1998
Proxy Statement.
10.21 ServiceMaster 1998 Long-Term Performance Award Plan as adopted on
December 11, 1997 is incorporated by reference to Exhibit C to the
1998 Proxy Statement.
II-12
<PAGE>
Exhibit
Number Description of Exhibit
- ------- ----------------------
21 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Counsel (included in Exhibit 5).
24 Power of Attorney.
99.1 Amended and Restated Agreement of Limited Partnership of ServiceMaster
Consumer Services Limited Partnership effective June 30, 1992 is
incorporated by reference to Exhibit 28.12 to the Annual Report on
Form 10-K for the year ended December 31, 1992 as filed by
ServiceMaster Limited Partnership.
99.2 Amended and Restated Agreement of Limited Partnership of ServiceMaster
Management Services Limited Partnership dated December 1991 is
incorporated by reference to Exhibit 28.10 to the 1991 10-K.
II-13
<PAGE>
Exhibit 5
March 22, 1999
The ServiceMaster Company
One ServiceMaster Way
Downers Grove, Illinois 60515-1700
Re: Acquisition Shelf
Registration of Common Stock
On Form S-1 Under the Securities Act of 1933
I am Senior Vice President and General Counsel of The ServiceMaster
Company, a Delaware corporation (the "Company"). In that capacity, I have
participated in the preparation of, and I am familiar with the contents of the
Registration Statement on Form S-1 of the Company (the "Registration
Statement"), which is to be filed with the Securities and Exchange Commission on
or about the date of this letter, to register under the Securities Act of 1933
(the "Securities Act") an aggregate of 8.625 million shares of common stock, par
value $.01 per share (the "Acquisition Shares") to be issued by the Company
which may be used by the Company or its subsidiaries to make acquisitions. The
term "acquisitions" as used in this letter means: acquisitions by the Company or
any of its subsidiaries of businesses (whether structured as purchases of
property employed in the acquired business, acquisitions of stock or other
interests representing ownership interests in the acquired business, mergers or
in some other permissible manner) or to satisfy obligations arising out of
convertible debt, warrants or other convertible or option-like securities
delivered in connection with any such acquisitions or other transactions
described in the prospectus included in the Registration Statement as initially
filed.
I have reviewed the resolutions adopted by the Company's Board of Directors
(the "Board") on March 20, 1998 relating to the subject registration (the
"Registration Resolutions"). I have also reviewed such other records and
documents as I have deemed necessary in order to enable me to express the
opinions stated herein.
On the basis of the foregoing and subject to the limitations and
assumptions identified in this letter, I am of the opinion that when delivered
at the direction of the Company to satisfy the obligations of the Company or one
of its subsidiaries in connection with future Acquisitions, the Acquisition
Shares so delivered will be duly authorized, validly issued, fully paid and
nonassessible.
For purposes of this letter, I have assumed that: (i) the Registration
Statement will become effective under the Securities Act before any Acquisition
Shares covered by the Registration Statement are sold; (ii) the terms governing
the issuance and/or delivery of the Acquisition Shares in connection with any
particular acquisition will be approved by the Board or by persons to whom the
Board effectively delegates authority to approve such issuance and/or delivery;
(iii) the certificates used to represent the Acquisition Shares will comply as
to form with the By-laws of the Company, the General Corporation Law of the
State of Delaware and applicable resolutions adopted by the Board and will bear
all necessary signatures and authentications, and (iii) the Company will receive
the consideration for the Acquisition Shares prescribed in the relevant
authorizations for the delivery of those shares and such consideration will be
in excess of one cent per share. I have also made other assumptions which I
believe to be appropriate for purposes of this letter.
My advice on every legal issue addressed in this letter is based
exclusively on the Delaware General Corporation Law and the federal law of the
United States.
I hereby consent to the inclusion of this letter as an exhibit to the
Registration Statement and to the reference in each prospectus filed in
connection with the Registration Statement to my having issued the opinions
expressed herein.
Very truly yours,
/s/ Vernon T. Squires
Vernon T. Squires
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE SERVICEMASTER COMPANY
As of March 22, 1999, ServiceMaster had the following subsidiaries:
<TABLE>
<CAPTION>
State or Country
of
Incorporation
Subsidiary or Organization
- ---------------------------------------------------- -----------------
<S> <C>
ServiceMaster Holding Corporation............................................................... Delaware
ServiceMaster Consumer Services Limited Partnership............................................. Delaware
ServiceMaster Consumer Services, Inc............................................................ Delaware
TruGreen Limited Partnership.................................................................... Delaware
TruGreen, Inc................................................................................... Delaware
Barefoot Inc.................................................................................... Delaware
Barefoot Grass Canada, Inc...................................................................... Delaware
Barefoot Services L.L.C......................................................................... Delaware
LandCare USA, Inc............................................................................... Delaware
The Terminix International Company Limited Partnership.......................................... Delaware
Terminix International, Inc..................................................................... Delaware
ServiceMaster Residential/Commercial Services Limited Partnership............................... Delaware
ServiceMaster Residential/Commercial Services Management Corporation............................ Delaware
ServiceMaster Direct Distributor Company Limited Partnership.................................... Delaware
ServiceMaster DDC, Inc.......................................................................... Delaware
Merry Maids Limited Partnership................................................................. Delaware
Merry Maids, Inc................................................................................ Delaware
American Home Shield Corporation (1)............................................................ Delaware
AmeriSpec, Inc.................................................................................. Delaware
Furniture Medic Limited Partnership............................................................. Delaware
Furniture Medic, Inc............................................................................ Delaware
Rescue Rooter L.L.C............................................................................. Delaware
ServiceMaster Management Services Limited Partnership........................................... Delaware
ServiceMaster Management Services, Inc.......................................................... Delaware
ServiceMaster Aviation Services Limited Partnership............................................. Delaware
ServiceMaster Aviation Management Corporation................................................... Delaware
ServiceMaster Aviation L.L.C.................................................................... Illinois
Premier Manufacturing Support Services Limited Partnership (2).................................. Delaware
Quantum Resources Corporation................................................................... Delaware
Alabama Mid-South Company....................................................................... Delaware
CMI Group, Inc.................................................................................. Wisconsin
ServiceMaster Employer Services, Inc. (3)....................................................... Delaware
The ServiceMaster Acceptance Company Limited Partnership........................................ Delaware
ServiceMaster AM Limited Partnership............................................................ Delaware
ServiceMaster Acceptance Corporation............................................................ Delaware
ServiceMaster Direct Marketing Corporation...................................................... Illinois
- ----------------------------------------------------
</TABLE>
(1) American Home Shield Corporation has 17 subsidiaries through which it
carries on its business in the various states in which it markets its
products.
(2) Premier Manufacturing Support Services Limited Partnership has 12
subsidiaries through which it carries on its business outside of the United
States.
(3) ServiceMaster Employer Services, Inc. has 6 subsidiaries.
<PAGE>
SUBSIDIARIES OF THE SERVICEMASTER COMPANY--(CONTINUED)
<TABLE>
<S> <C>
ServiceMaster International Limited Partnership................................................................Delaware
ServiceMaster International Management Corporation.............................................................Delaware
ServiceMaster Limited....................................................................................United Kingdom
ServiceMaster Operations Germany GmbH...........................................................................Germany
ServiceMaster Japan, Inc..........................................................................................Japan
TMX-Europe B.V..........................................................................................The Netherlands
Terminix Peter Cox Ltd...................................................................................United Kingdom
Terminix Protekta B.V. .................................................................................The Netherlands
Riwa B.V. ..............................................................................................The Netherlands
Anticimex Development AB (1).....................................................................................Sweden
TMX-Schadlingsbekampfungsgesellschaft mbH (2)...................................................................Germany
LTCS Investment Limited Partnership............................................................................Delaware
ServiceMaster Home Health Care Services Inc. ..................................................................Delaware
ServiceMaster Diversified Health Services, Inc. (3)............................................................Delaware
ServiceMaster Diversified Health Services Limited Partnership (4).............................................Tennessee
We Serve America, Inc..........................................................................................Delaware
</TABLE>
- -------------------------------------------------
(1) Anticimex Development AB has 5 subsidiaries.
(2) The Stenglein group includes 2 subsidiaries.
(3) ServiceMaster Diversified Health Services, Inc. has 4 subsidiaries.
(4) ServiceMaster Diversified Health Services, L.P. has 32 subsidiaries.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
-----------------------
Arthur Andersen LLP
Chicago, Illinois
March 22, 1999
<PAGE>
Exhibit 24
Power of Attorney
I hereby appoint each of Vernon T. Squires or Steven C. Preston or Eric R.
Zarnikow or Susan D. Baker or any other person occupying the office of General
Counsel, Chief Financial Officer, Treasurer, or Secretary with The ServiceMaster
Company ("ServiceMaster") at the time any action hereby authorized shall be
taken to act as my attorney-in-fact and agent for all purposes specified in this
Power of Attorney. I hereby authorize each person identified by name or office
in the preceding sentence (each of whom is herein called by "authorized
representative") acting alone to sign and file on my behalf in all capacities I
may at any time have with ServiceMaster (including but not limited to the
position of director or any officership position): (i) a registration statement
prepared under the Securities Act of 1933 registering common stock to be used by
ServiceMaster or any of its subsidiaries for (x) future purchases of businesses,
whether by way of acquisitions of assets, acquisitions of stock or statutory
mergers, and (y) such other transactions as may be approved by the President and
Chief Executive Officer of ServiceMaster or in accordance with authority
delegated by ServiceMaster's Board of Directors on or after the date hereof and
(ii) any pre-effective or post-effective amendment to such registration
statement. I hereby authorized each authorized representative in my name and on
my behalf to execute every document and take every other action which such
authorized representative deems necessary or desirable in connection with the
registration statement identified in this Power of Attorney and any sale of
securities or other transaction accomplished by means of such registration
statement.
At the discretion of the President and Chief Executive Officer of ServiceMaster,
the registration of the common stock contemplated in the preceding paragraph may
be made by means of separate registration statements rather than the single
registration statement specified in the preceding paragraph; and, in that event,
the authorizations in the preceding paragraph shall apply to each such
registration statement.
This instrument shall remain in effect until and unless I shall give written
notice to ServiceMaster's President and Chief Executive Officer or
ServiceMaster's General Counsel or ServiceMaster's Chief Financial Officer of my
election to revoke this instrument. No such revocation shall be effective to
revoke the authority for any action taken pursuant to this Power of Attorney
prior to such delivery of such revocation.
This instrument shall be governed by the law of the State of Illinois.
Dated: March 20, 1998
Signature
/s/ C. William Pollard
----------------------
C. William Pollard
/s/ Carlos H. Cantu
----------------------
Carlos H. Cantu
/s/ Charles W. Stair
----------------------
Charles W. Stair
/s/ Phillip B. Rooney
----------------------
Phillip B. Rooney
/s/ Paul W. Berezny, Jr.
----------------------
Paul W. Berezny, Jr.
/s/ Henry O. Boswell
----------------------
Henry O. Boswell
/s/ Brian Griffiths
-----------------------
Brian Griffiths
/s/ Sidney E. Harris
-----------------------
Sidney E. Harris
/s/ Herbert P. Hess
-----------------------
Herbert P. Hess
/s/ Michelle M. Hunt
-----------------------
Michelle M. Hunt
/s/ Gunther H. Knoedler
-----------------------
Gunther H. Knoedler
/s/ James D. McLennan
-----------------------
James D. McLennan
/s/ Vincent C. Nelson
-----------------------
Vincent C. Nelson
/s/ Dallen W. Peterson
-----------------------
Dallen W. Peterson
/s/ Steven S Reinemund
-----------------------
Steven S Reinemund
/s/ Burton E. Sorensen
-----------------------
Burton E. Sorensen
/s/ David K. Wessner
-----------------------
David K. Wessner
