SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999. Commission File number 1-14762
THE SERVICEMASTER COMPANY
(Exact Name of Registrant as Specified in its Certificate)
(Successor to ServiceMaster Limited Partnership)
Delaware 36-3858106
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One ServiceMaster Way, Downers Grove, Illinois 60515-1700
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (630) 271-1300
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
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Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by Check Mark Whether the Registrant (1) Has Filed All Reports
Required to Be Filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 During the Preceding 12 Months (or for such Shorter Period That the
Registrant Was Required to File Such Reports), and (2) Has Been Subject to Such
Filing Requirements for the Past 90 Days. Yes O No
The Aggregate Market Value of Shares Held by Non-Affiliates of the
Registrant As of March 15, 2000 was $3,580,033,732. The Number of Shares
Outstanding of the Registrant's Common Stock as of March 15, 2000 was
305,045,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Registrant's Annual Report to Shareholders for the
year ended December 31, 1999 are incorporated into Part I, Part II and Part IV
of this Form 10-K.
Certain parts of the Registrant's Definitive Proxy Statement for the
April 28, 2000 Annual Meeting of Shareholders are incorporated into Part III of
this Form 10-K.
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PART I
Item 1. Business
This annual report on Form 10-K is filed by The ServiceMaster Company,
a Delaware corporation (hereinafter sometimes referred to as the "Registrant").
The Registrant and its affiliated entities are referred to as "ServiceMaster" or
the "Company" or the "ServiceMaster enterprise." The Registrant is the successor
to ServiceMaster Limited Partnership, a Delaware limited partnership. On
December 26, 1997, by means of a statutory merger, the Registrant succeeded to
and became substituted for ServiceMaster Limited Partnership as the publicly
traded parent entity in the ServiceMaster enterprise.
Forward-Looking Statements
This Annual Report on Form 10-K contains or incorporates by reference
certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company intends that such forward-looking
statements be subject to the safe harbors created by such legislation. 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. Among
the factors that could result in such differences are the impact of weather
conditions; increased competition; labor shortages; the continued consolidation
of the U.S. hospital market; and the ability of the Company to make acquisitions
at reasonable prices. 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 statements 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 and the Company
notes that past performance in operations and share price is not necessarily
predictive of future performance.
Principal Business Groups
The Registrant 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 and Commercial Services, whose operating units are
headquartered in Memphis, Tennessee, and ServiceMaster Management Services,
whose operating units are for the most part headquartered in Downers Grove,
Illinois. (The Consumer and Commercial Services group was identified in Form
10-K Reports for years prior to the 1999 report as "Consumer Services", but that
designation is now a misnomer in that several of the Memphis-based companies
provide a significant volume of services to commercial customers).
The two principal operating groups have their own holding companies,
ServiceMaster Consumer Services Limited Partnership and ServiceMaster Management
Services Limited Partnership, each of which is a wholly owned subsidiary of the
Registrant. All subsidiaries of the operating group parent companies are wholly
owned, except for WeServeHomes.com and two other units in which senior
management for those units have purchased nominal equity interests 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
Consumer and Commercial companies. Such marks are registered and are renewed at
each registration expiration date.
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Within the Consumer and Commercial group, franchises are important for
the TruGreen ChemLawn, Terminix, ServiceMaster Clean (formerly 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 and Commercial Services
ServiceMaster Consumer and Commercial Services provides specialty services
to homeowners and commercial facilities principally through eight companies:
TruGreen LawnCare L.L.C ("TruGreen ChemLawn"); TruGreen LandCare L.L.C.
(formerly LandCare U.S.A., Inc. which was acquired by ServiceMaster in March
1999); The Terminix International Company L.P. ("Terminix"); ServiceMaster
Residential/Commercial Services L.P. ("ServiceMaster Clean"); 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 and includes the assets and
business of American Residential Services, a company acquired by ServiceMaster
in April 1999. The services provided by these companies include: lawn care, tree
and shrub services and indoor plant maintenance services under the "TruGreen",
"ChemLawn" and "Barefoot" service marks; landscaping services under the
"TruGreen" and "LandCare" service marks; termite and pest control services under
the "Terminix" service mark; residential and commercial cleaning and disaster
restoration services under the "ServiceMaster" and "ServiceMaster Clean" service
marks; 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; plumbing and drain cleaning services under the "Rescue Rooter" service
mark; and electrical, plumbing, heating, ventilating and air conditioning
services under the "ARS" service mark.
The services provided by Consumer and Commercial 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 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
Consumer and Commercial Services has increased from fewer than one million
domestic customers to more than 12 million worldwide customers.
Oversight responsibility for the Consumer and Commercial Services
businesses which are conducted in foreign markets is in the appropriate Consumer
and Commercial domestic operating unit.
TruGreen ChemLawn. As of December 31, 1999, TruGreen ChemLawn had 230
company-owned branches and 105 franchised branches. With nearly 3.5 million
residential and commercial customers, TruGreen ChemLawn is the leading provider
of lawn care services in the United States. TruGreen ChemLawn provides lawn,
tree and shrub care services in Egypt, Japan, the Palestine Authority, 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.
TruGreen LandCare. 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). The
landscaping business previously conducted by TruGreen ChemLawn was combined with
the business of the acquired company and now operates as TruGreen LandCare
L.L.C. TruGreen LandCare is a leading provider of commercial landscaping
services. As of December 31, 1999, TruGreen LandCare had 165 company-owned
branches with approximately 17,000 customers. The Company has established a
capital structure for TruGreen LandCare whereby 90% of the invested capital is
in the form of intercompany debt and 10% in the form of equity. In 1999, members
of senior management of TruGreen LandCare purchased 8.65% of the equity
interest, representing 0.865% of the total investment in TruGreen LandCare at
this time, pursuant to a management equity plan. Such interest is subject to
reciprocal put and call rights which will become exercisable on April 1, 2004
and which will be consummated on the basis of the then fair market value of the
interest. The intercompany debt has been eliminated in the consolidated
financial statements of the company.
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Terminix. With over 2.5 million domestic 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, 1999, Terminix was providing these services through
251 company-owned branches and 208 franchised branches in 45 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 Ltd., a leading pest control and wood preservation company in the
United Kingdom and Ireland; Terminix 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 Terminix GmbH & Co. KG (formerly 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 28 other countries and through a subsidiary in Mexico. The Terminix
business is seasonal in nature.
ServiceMaster Clean. ServiceMaster Clean is the leading franchisor in
the United States in the residential and commercial cleaning field.
ServiceMaster Clean provides carpet and upholstery cleaning and janitorial
services, disaster restoration services and window cleaning services. As of
December 31, 1999, these services were provided to approximately 1.6 million
residential and commercial customers worldwide through a network of over 4,170
independent franchisees. ServiceMaster Clean 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.
Furniture Medic. Furniture Medic provides on-site furniture repair and
restoration services in 46 states. As of December 31, 1999, these services were
provided through 600 worldwide licensees. Furniture Medic also provides its
services through subsidiaries in Canada and the United Kingdom and through a
licensing arrangement with a local service provider in one other country.
Merry Maids. With approximately 415,000 worldwide customers, Merry
Maids is the leading provider of domestic house cleaning services in the United
States. As of December 31, 1999, these services were provided through 33
company-owned branches and 1,187 licensees operating in all 50 states and
internationally. 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 9 other countries.
American Residential Services/Rescue Rooter. American Residential
Services ("ARS"), a leading provider of electrical, plumbing, heating,
ventilation and air conditioning services, was acquired by ServiceMaster in
April 1999 and the ARS business was thereafter combined with the business of
Rescue Rooter, which provides plumbing and drain cleaning services. As combined,
the ARS/Rescue Rooter business performed services for approximately 1.3 million
customers in 1999 in 21 states through 93 company-owned branches and one
franchise location. Rescue Rooter also provides plumbing and drain cleaning
services through a licensing arrangement with a local service provider in one
other country. The Company has established a capital structure for ARS/Rescue
Rooter whereby 90% of the invested capital is in the form of intercompany debt
and 10% in the form of equity. In 1999, members of senior management of the
combined businesses purchased 8.5% of the equity interest, representing 0.85% of
the total investment in ARS/Rescue Rooter at this time, pursuant to a management
equity plan. Such interest is subject to reciprocal put and call rights which
will become exercisable on July 1, 2004 and which will be consummated on the
basis of the then fair market value of the interest. The intercompany debt has
been eliminated in the consolidated financial statements of the company.
American Home Shield. AHS is a wholly-owned subsidiary of ServiceMaster
Consumer Services L.P. AHS is a leading provider of home systems and appliance
warranty contracts ("warranty contracts") in the United States, providing
homeowners with contracts covering the repair or replacement of built-in
appliances, hot water heaters and electrical, plumbing, central heating and
central air conditioning systems which malfunction by reason of normal wear and
tear. Warranty contracts are sold through participating real estate brokerage
offices in conjunction with resales of single-family residences to homeowners.
AHS also sells warranty contracts directly to non-moving homeowners by renewing
existing contracts and through various other distribution channels which are
currently being expanded. As of December 31, 1999, AHS warranty contracts
provided for services to approximately 795,000 homes through approximately
21,750 independent repair maintenance contractors in 50 states and the District
of Columbia, with operations in California, Texas and Arizona accounting for
24%, 22% and
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7%, respectively, of gross contracts written by AHS. AHS also provides home
service warranty contracts through a licensing arrangement with a local service
provider in Saudi Arabia.
AmeriSpec. AmeriSpec is a wholly-owned subsidiary of AHS. AmeriSpec is
a leading provider of home inspection services in the United States. AmeriSpec
provides home inspection services through one company-owned branch and 345
franchise locations. During 1999, AmeriSpec conducted approximately 133,000 home
inspections in 47 states and Canada, with operations in California, New York and
Illinois accounting for 22%, 6% and 5%, respectively, of the gross number of
inspections conducted through AmeriSpec.
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, 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 is organized into operating units,
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
Management Services senior management and designated parent company officers.
As of December 31, 1999, ServiceMaster Management Services was
providing supportive management services to approximately 1,290 health care
customers and to approximately 470 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 and through licensing arrangements with
local service providers in 24 other countries.
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, 1999, the Healthcare division was serving in
approximately 1,290 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.
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, 1999, ServiceMaster was serving 280 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.
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
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governmental units to privatize parts of their operations. As of December 31,
1999, ServiceMaster was serving approximately 190 business or industrial
customers.
1999 Strategic Business Initiatives
During the year 1999, the Company launched two new strategic business
initiatives.
E-Commerce Initiative. The Company initiated planning for the
organization of a new Internet company to provide comprehensive on-line
solutions for home services, products and information. On January 20, 2000, the
Company, in conjunction with Kleiner, Perkins, Caufield & Byers ("KPCB"),
announced the formation and initial funding of WeServeHomes.com, Inc. ("WSH"),
as the Internet company which will provide such solutions at a website having
the URL "WeServeHomes.com". The equity interests in WSH are currently divided
between ServiceMaster (approximately 84%) and KPCB (approximately 16%, for which
KPCB contributed $15 million in cash on January 19, 2000). KPCB also received
warrants to purchase an additional $11.5 million in capital stock. Certain
senior managers in the ServiceMaster enterprise will purchase an approximate 1%
equity interest for $1 million in transactions which are expected to be
completed in April 2000. ServiceMaster will support the Internet company through
intensive co-branding efforts, access to the customer base of its Consumer and
Commercial Services operating units, the fulfillment support of those units, and
licenses for the use of certain trademarks.
Site Service and Information Resources Initiatives. The Company expanded
its outsourcing, site service and information resources to the business and
commercial markets.
Other Businesses
ServiceMaster Diversified Health Services. In 1999, ServiceMaster
Diversified Health Services ("DHS") provided management services to
freestanding, hospital-based and government-owned nursing homes, skilled nursing
facilities, and assisted living facilities; the sale of various medical products
and supplies; and pharmacy management. In January 1999, DHS sold its hospice
business in connection with the ServiceMaster Home Health Care sale described
below. In December 1999, DHS sold its rehabilitation services business and its
architectural services business.
ServiceMaster Employer Services. ServiceMaster Employer Services is one
of the nation's larger professional employer organizations. It provides more
than 990 clients with administrative processing of payroll, workers compensation
insurance, health insurance, unemployment insurance and other employee benefits.
International Operations. Consumer and commercial services and
supportive management services in international markets are provided either
through licensing arrangements with local entities or 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 the appropriate Consumer and Commercial Services or
Management Services operating units. Operating arrangements and market expansion
efforts in the Pacific Rim are administered by the parent company.
Dispositions
Energy Management Services. In January 1999, ServiceMaster transferred
its energy management services business to a subsidiary of Texas Utilities
Company and acquired a 15% equity interest in the subsidiary company. In June
1999, ServiceMaster sold this 15% equity interest to Texas Utilities Company.
Premier Automotive Services. In April 1999, ServiceMaster sold one of
its specialty services units (Premier Automotive Services) to Durr AG. Premier
Automotive Services provided cleaning services for paint booths and other
related maintenance services in the automotive industry.
Home Health Care. On January 4, 1999, ServiceMaster announced the
completion of its strategic review of its home health care business and its
decision to sell its direct operations of home health care agencies and certain
support operations. This decision was implemented at various points throughout
the year such that, by December
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31, 1999, the company's home health care services were limited to providing
consulting services to certain providers of home health care.
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 and Commercial 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 and Commercial Operating Units
The Consumer and Commercial Services operating units 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.
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Landscaping and Tree Services. TruGreen LandCare provides landscaping
and tree services to commercial customers. (See page 2 for a discussion of the
acquisition of LandCare USA, Inc.). The landscape and tree services industry is
highly competitive. Most competitors of TruGreen LandCare's landscape services
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.
Heating, Ventilating and Air Conditioning Services. The market for
heating, ventilating and air conditioning services is highly competitive in both
the residential and commercial sectors. ARS 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. Many states in which ARS
provides heating, ventilating, and air conditioning services regulate such
services. The level of regulation and licensing varies from state to state.
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.
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
handles requests for service.
Residential and Commercial 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 company-owned branches and
franchisees, ServiceMaster Clean and Merry Maids have a small share of the
market for the cleaning of residential and commercial buildings.
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.
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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.
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, 1999,
ServiceMaster was serving approximately 1,290 customers and managing
approximately 1,620 health care facilities. The majority of health care
facilities within this market not currently served by ServiceMaster assume
direct responsibility for managing their own non-medical support functions.
ServiceMaster believes that its management services for health care
facilities may expand by the addition of facilities not presently served, by
initiating additional services at facilities which use only a portion of the
services now offered, by the development of new services and by growth in the
size of facilities served. At the same time, industry consolidation, changes in
use and methods of health care delivery and payment for services (including in
particular changes in Medicare reimbursement regulations) continue to affect the
health care environment.
Education. ServiceMaster is a leading provider to the education market
of maintenance, custodial and grounds services. The facilities which comprise
the education market served by ServiceMaster include primary schools, secondary
schools and school districts, private specialty schools and colleges and
universities. As of December 31, 1999, ServiceMaster was serving approximately
280 customers and managing approximately 4,845 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, 1999, ServiceMaster was serving approximately 190 customers and
managing approximately 5,500 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, 1999, ServiceMaster had a total of approximately 72,000
employees.
ServiceMaster provides its employees with annual vacation, medical,
hospital and life insurance benefits and the right to participate in additional
benefit plans which are described in the Notes to Financial Statements included
in the Company's Annual Report to Shareholders for the Year Ended December 31,
1999.
Year 2000 Computer Program Compliance
Throughout the year 1999, the Company proceeded with its program (the
"Y2K Program") to address Year 2000 ("Y2K") issues as they might affect the
Company's information technology ("IT") systems, electronic data
8
<PAGE>
interfaces and its non-IT hardware. The Y2K Program met its objective and the
Company experienced no material difficulties in its internal programs in the
transition from the year 1999 to the year 2000. The Company also did not
experience any material Y2K-related difficulties with its providers of goods and
services, and the Company did not experience any material Y2K-related
difficulties in facilities in which the Company was providing services to its
customers.
Several of the projects carried out as part of the Y2K Program were
upgrades of systems which the Company would have undertaken irrespective of Y2K
concerns. In some cases, including a new accounting and financial reporting
system for the parent company and its Management Services group, work on these
systems was 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 American Home Shield Corporation and a new operating and
financial system for the operations making up TruGreen LandCare).
The Company's Y2K costs were not material to the Company's results of
operations or financial position. All Y2K costs (as well as the costs of
installing the system upgrades referred to above) were funded from cash from
operations.
Item 2. 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 building contains approximately 118,900 square
feet of air conditioned office space, 2,100 square feet of laboratory space and
space for food service demonstrations and dining facilities. In 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.
ServiceMaster leases approximately half the space (50,000 square feet) to a
commercial tenant and 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.
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 five 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; a 2,500 square foot
building used for a machine shop; and a warehouse facility consisting of 6,000
square feet. ServiceMaster also leases one warehouse property with 14,000 square
feet in Cairo, Illinois. Management believes that the foregoing manufacturing
and warehouse facilities are adequate to support the current needs of
ServiceMaster.
The headquarters for ServiceMaster Consumer Services L.P. are located
in leased premises at 860 Ridge Lake Boulevard, Memphis, Tennessee. The 860
Ridge Lake Boulevard facility also serves as the headquarters for TruGreen
ChemLawn, TruGreen LandCare, Terminix, American Home Shield, AmeriSpec, ARS and
Rescue Rooter. The headquarters for ServiceMaster Clean, Merry Maids and
Furniture Medic are located in leased premises at 889 Ridge Lake Boulevard,
Memphis, Tennessee.
A 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.
9
<PAGE>
TruGreen ChemLawn owns eight 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 (3), and Texas (1). TruGreen-ChemLawn also
leases 199 facilities used as branch sites.
TruGreen LandCare owns four facilities in Texas which are used as branch
locations. It leases 185 facilities for branch operations.
Terminix owns 21 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 (9), Georgia (1), New Jersey (2), Tennessee (1), and
Texas (5). Terminix also leases 232 facilities in 39 states for branch
operations.
American Home Shield leases office space in Santa Rosa and San Ramos,
California, for sales and service 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.
Out of the 110 acres of land in Santa Rosa, California, which American
Home Shield owned at the time of its acquisition by ServiceMaster in 1989, the
company owned 16.6 acres on March 17, 2000. This remaining land is divided into
two lots, both of which are under contract to close via escrow in February 2001.
Rescue Rooter owns four buildings and leases 23 facilities which are
used for branch operations to provide plumbing and drain cleaning services, and
heating, ventilating and air conditioning services. The owned facilities are
located in four states, and leased facilities are located in ten states.
American Residential Services owns eight buildings and leases 74
facilities, all of which are used for branch operations to provide electrical,
plumbing, heating, ventilating, and air conditioning services. The owned
facilities are located in seven states, and the leased facilities are located in
16 states.
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 Pennsylvania and Tennessee. As of March 1,
2000, DHS has an ownership interest in three nursing home facilities, leases one
nursing home facility, and leases five 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.
Item 3. Legal Proceedings
In the ordinary course of conducting its business activities,
ServiceMaster becomes involved in judicial and administrative proceedings which
involve both private parties and governmental authorities. As of March 17, 2000,
these proceedings included a number of general liability actions and a very
small number of environmental proceedings.
Ray D. Martin v. ServiceMaster. In June 1996, Ray D. Martin, a former
salesman employed by ServiceMaster's Management Services unit, filed a lawsuit
in the State Court of Fulton County, Georgia (Civ. Action File No. 96VS114677J),
which as originally filed contended that the company had not paid him the full
amount of commission due him on a sale in which he was involved. In the course
of the pre-trial proceedings, the trial court entered a default judgment against
the company (thereby leaving under the court's orders only the question of
damages to be considered at the trial). On September 13, 1999, the jury awarded
the plaintiff compensatory damages of approximately $1 million and on September
14, 1999, a jury awarded the plaintiff punitive damages and fees of $135
million. On September 29, 1999, the trial court entered final judgment for the
plaintiff on the basis of these verdicts in a total amount of $136,259,417.79.
Under Georgia law, that judgment will accrue post-judgment interest at a
statutory rate of 12% per annum, except for the portion of the judgment
($77,189) that represents pre-judgment interest. On October 14, 1999, the
company filed a motion for judgment
10
<PAGE>
notwithstanding the verdict or, in the alternative, for a new trial and/or
remittitur and a hearing on this motion was held on March 9, 2000. The trial
court presently has the matter under advisement. ServiceMaster believes that the
award of $135 million in punitive damages is not supportable by the facts of the
case or by applicable state law and that the judgment will be reversed or
substantially reduced by the trial court or, if necessary, by an appellate
court.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.
11
<PAGE>
PART II
Item 5. Market for Registrant's Shares and Related Shareholder Matters
Except for the information set forth in the second and third sentences
of this Item 5, the portions of the ServiceMaster Annual Report to Shareholders
for 1999 under the captions "Statements of Shareholders' Equity" (page 37) and
"Cash Dividends Per Share" and "Price Per Share" in the Quarterly Operating
Results table (page 46) supply the information required by this item and such
portions are hereby incorporated herein by reference. The Registrant's shares of
common stock are listed and traded on the New York Stock Exchange under the
symbol "SVM". At March 15, 2000, the Registrant's shares of common stock were
held of record by approximately 41,000 persons. The Company estimates that
another 53,000 persons held shares of the Registrant's common stock in the names
of nominees.
Item 6. Selected Financial Data
The portion of the ServiceMaster Annual Report to Shareholders for 1999
in the Financial Statements and Management Discussion section ("FSMD Section")
under the caption "Eleven Year Financial Summary" (pages 30-31) supplies the
information required by this item and such portion is hereby incorporated herein
by reference.
Item 7. Management Discussion and Analysis of Financial Condition and Results
of Operations
Management Discussion and Analysis of Financial Condition and Results
of Operations for the three years ended December 31, 1999, is contained in the
FSMD Section of the ServiceMaster Annual Report to Shareholders for 1999 on
pages 25-29 and is hereby incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated statements of financial position of ServiceMaster as
of December 31, 1999 and 1998, and the consolidated statements of income, cash
flows and shareholders' equity for the years ended December 31, 1999, 1998, and
1997 and notes to the consolidated financial statements are contained in the
FSMD Section of the ServiceMaster Annual Report to Shareholders for 1999 on
pages 32-46 are incorporated herein by reference. The report of Arthur Andersen
LLP thereon dated January 24, 2000, and the summary of significant accounting
policies are contained in the FSMD Section of the ServiceMaster Annual Report to
Shareholders for 1999 on page 33 and are hereby incorporated herein by
reference.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
12
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
The information contained under the heading "Election of Directors" in
the definitive proxy statement for the Company's April 28, 2000 Annual Meeting
of the Shareholders is incorporated herein by reference.
Senior Management Advisers
The Bylaws of the Company provide that the Board of Directors may
appoint officers of the Company or a subsidiary and other persons having a
special relationship to ServiceMaster to serve as Senior Management Advisers.
Senior Management Advisers attend the meetings of the Board and advise the Board
but do not have the power to vote. The Board has determined that providing a
greater number of officers the opportunity to advise and interact with the Board
is in the best interest of ServiceMaster as well as the individual officers. The
Senior Management Advisers receive no special compensation for their services in
this capacity.
The Board of Directors has appointed the persons listed below as Senior
Management Advisers effective as of the 1999 annual meeting of the Board of
Directors to serve in such capacity until the annual meeting of the Board of
Directors in 2000 or until otherwise determined by the Board of Directors.
Robert D. Erickson, age 56, is an 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, age 49, is Group President of ServiceMaster Consumer
and Commercial Services. He served as President and Chief Operating Officer of
TruGreen ChemLawn from January 1992 to December 1995.
Robert F. Keith, age 43, is Group President of ServiceMaster Management
Services. He served as President and Chief Operating Officer, ServiceMaster
Management Services from January 1, 1997 to October 2, 1998, and President and
Chief Operating Officer, ServiceMaster Consumer Services from July 1994 to
December 31, 1996.
Ernest J. Mrozek, age 46, is Group President of ServiceMaster Consumer
and Commercial Services. He served as President and Chief Operating Officer,
ServiceMaster Consumer Services from January 1, 1997 to October 2, 1998, and
Senior Vice President and Chief Financial Officer of the Registrant from January
1, 1995 to December 31, 1996
Steven C. Preston, age 39, has served as 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 7, 1997, he was Senior Vice President and Corporate Treasurer for
First Data Corporation, Atlanta, GA.
David M. Slott, age 41, is President and Chief Operating Officer of
TruGreen Limited Partnership. He served as Executive Vice President and Chief
Operating Officer of TruGreen Limited Partnership from May 1, 1994 to December
31, 1995.
Richard W. Williams, age 50, is President of Education Management
Services. He served as Executive Vice President of Education Management Services
from January 1, 1994 to April 1, 1996.
13
<PAGE>
The following table shows: (i) the names and ages (as of March 1, 2000)
of the present executive officers of the Registrant; (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 Registrant and its
predecessor company continuously since the year shown. There are no arrangements
or understandings between any executive officer and any other person pursuant to
which the officer was or is to be selected as an officer.
<TABLE>
<CAPTION>
First Became
Name Age Present Position An Officer
- ------------------ --- ------------------------------------------------------------ ------------
<S> <C> <C> <C>
C. William Pollard 61 Chairman, Chief Executive Officer and Director 1977
Carlos H. Cantu 66 Senior Chairman and Director 1986
Robert D. Erickson 56 Executive Vice President and a Senior Management Adviser 1976
Donald K. Karnes 49 Group President, Consumer and Commercial Services, and a
Senior Management Adviser 1992
Ernest J. Mrozek 46 Group President, Consumer and Commercial Services, and a
Senior Management Adviser 1987
Robert F. Keith 43 Group President, Management Services, and 1986
a Senior Management Adviser
Phillip B. Rooney 55 President, Business Services Group, and Director 1997
Vernon T. Squires 65 Senior Vice President and General Counsel 1987
Steven C. Preston 39 Executive Vice President and Chief Financial Officer, and
a Senior Management Adviser 1997
Eric R. Zarnikow 40 Senior Vice President and Treasurer 1994
Deborah A. O'Connor 37 Senior Vice President and Controller 1993
</TABLE>
Messrs. Pollard and Cantu are also Directors of the Company. See "Election
of Directors" in the definitive proxy statement for the Company's 2000 Annual
Meeting of the Shareholders for biographical information with respect to these
persons. Messrs. Erickson, Karnes, Mrozek, Keith, and Preston are Senior
Management Advisers. See page 13 for biographical information with respect to
these persons.
Phillip B. Rooney, age 55, is also a Director of the Company. He
presently serves as President, Business Services Group. From May 1996 to
February 1997 he was President and Chief Executive Officer of Waste Management,
Inc., Oakbrook, Illinois ("WMI") and from November 1984 to May 1996 he was
President and Chief Operating Officer of WMI. Mr. Rooney is a director of Van
Kampen American Capital, Oak Brook, Illinois, an investment management company;
Stone Container Corporation, Chicago, Illinois, a paper manufacturing company;
Illinois Tool Works, Inc., Glenview, Illinois, a diversified manufacturing
company; and Urban Shopping Centers, Inc., Chicago, Illinois, a retail real
estate management company.
Vernon T. Squires, age 65, has served as Senior Vice President and
General Counsel since January 1, 1988. He served as Vice President and General
Counsel from April 1, 1987 until December 31, 1987. He was an associate and
partner with the law firm of Wilson & McIlvaine in Chicago, specializing in
corporate and tax law, from 1960 to April 1, 1987.
14
<PAGE>
Eric R. Zarnikow, age 40, has served as Senior Vice President and
Treasurer since December 10, 1999. He served as Vice President and Treasurer
from May 1, 1994 until December 9, 1999.
Deborah A. O'Connor, age 37, has served as Senior Vice President and
Controller since December 10, 1999. She served as Vice President and Controller
from January 1, 1993 until December 9, 1999.
Compliance With Section 16(a) of The Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
ServiceMaster's shares, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission (the "Commission") and the New York
Stock Exchange. The Commission's regulations require certain officers, directors
and greater-than-ten-percent shareholders to furnish to the Company copies of
all Section 16(a) forms that they file. During 1999, the Company received
Section 16(a) forms from such officers and directors. As of January 1, 2000, the
Company did not have any shareholders with an interest greater than ten percent.
Based solely on a review of the copies of Section 16(a) forms received
by the Company or on written representations from certain reporting persons that
no Form 5 was required for those persons, the Company believes that during 1999
the officers and directors of the Company complied with applicable filing
requirements.
Item 11. Executive Compensation
The information contained under the heading "Executive Compensation"
(except those portions relating to Item 13 below) in the definitive proxy
statement for the Company's April 28, 2000 Annual Meeting of Shareholders is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Principal Shareholders"
and "Management Ownership" in the definitive proxy statement for the Company's
April 28, 2000 Annual Meeting of the Shareholders is incorporated herein by
reference.
Item 13. Certain Relationships and Related Miscellaneous Transactions
The information contained under the heading "Executive Compensation"
(except those portions relating to Item 11 above) and the subheadings
"Compensation of Directors" and "Ownership Information" in the definitive proxy
statement for the Company's April 28, 2000 Annual Meeting of the Shareholders is
incorporated herein by reference.
15
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Schedules and Exhibits
1. Financial Statements
The documents shown below are contained in the Financial
Statements and Management Discussion and Analysis section of
the ServiceMaster Annual Report to Shareholders for 1999, on
pages 32-46 and are incorporated herein by reference:
Summary of Significant Accounting Policies
Report of Independent Public Accountants
Consolidated Statements of Income for the three years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Financial Position as of
December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the three
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for
the three years ended December 31,1999, 1998 and 1997
Notes to the Consolidated Financial Statements
2. Financial Statements Schedules
Schedule IV--Amounts Receivable from Related Parties and
Underwriters, Promoters, and Employees other than Related
Parties:
None
Included in Part IV of this Report:
Schedule VIII--Valuation and Qualifying Accounts
Report of Independent Public Accountants on Schedules
Exhibit 11 -- Exhibit Regarding Detail of Income Per
Share Computation
Exhibit 23 -- Consent of Independent Public
Accountants
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 notes thereto.
16
<PAGE>
3. Exhibits
The exhibits filed with this report are listed on pages 24-27
herein (the "Exhibits Index").
The following entries in the Exhibits Index are management
contracts or compensatory plans in which a director or any of
the named executive officers of the Registrant does or may
participate. Reference is made to the Exhibits Index for the
filing with the Commission which contains such contract or
plan.
<TABLE>
<CAPTION>
Exhibit Contract or Plan
------- ----------------
<C> <S>
10.2 Deferred Directors Fee Agreement
10.3 Incentive Reward Compensation Plan
10.4 ServiceMaster Profit Sharing and Retirement Plan as amended and
restated effective October 1, 1999
10.5 Senior Executive Ownership Election Plan
10.6 ServiceMaster 10-Plus Plan. See also Item 10.11 *
10.8 Directors Deferred Fees Plan (ServiceMaster Shares Alternative)
10.11 ServiceMaster 10-Plus Plan as amended September 3, 1991 *
10.13 ServiceMaster 1994 Non-Employee Directors Share Option Plan**
10.15 ServiceMaster 1997 Share Option Plan *
10.17 ServiceMaster 1998 Equity Incentive Plan
10.20 ServiceMaster 1998 Non-Employee Directors Discounted Stock Option Plan
10.21 ServiceMaster 1998 Long-Term Performance Award Plan
</TABLE>
---------
* Superseded by Item 10.17
** Superseded by Item 10.20
17
<PAGE>
(b) Reports on Form 8-K filed during the last quarter of 1999
None
Certain Undertakings With Respect To Registration Statements on Form S-8
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the Registrant hereby undertakes as follows which undertaking shall be
incorporated by reference into each of the Registrant's Registration Statements
on Form S-8, including No. 333-89037:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 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 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 Act and will be governed by the final
adjudication of such issue.
18
<PAGE>
SCHEDULE VIII
THE SERVICEMASTER COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Additions Deductions
--------- ----------
Balance at Charged to Write-offs of Balance at
Beginning of Costs and Uncollectible end of
Description Period Expenses Accounts Period
----------- ------------------ ------------- ------------------ -------------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999:
Allowance for doubtful accounts --
Accounts receivable (current) $34,153 28,797 25,747 $37,203
------------------ ------------- ------------------ -------------
Notes receivable (current) $4,835 688 3,715 $1,808
------------------ ------------- ------------------ -------------
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
------------------ ------------- ------------------ -------------
</TABLE>
19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of The ServiceMaster Company:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in The ServiceMaster Company's annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated January 24, 2000. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedules included
in Part IV in the Form 10-K are the responsibility of the Company's management
and are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
supporting schedules have been subjected to the auditing procedures applied in
the audit of the basic financial statements and, in our opinion, fairly state in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
January 24, 2000
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
THE SERVICEMASTER COMPANY
Registrant
Date: March 17, 2000 By /s/ C. WILLIAM POLLARD
C. William Pollard
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in their capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------- -------------------------------------- ---------------
<S> <C> <C>
/s/ C. WILLIAM POLLARD Chairman, Chief Executive Officer March 17, 2000
C. William Pollard and Director
/s/ CARLOS H. CANTU Senior Chairman and Director March 17, 2000
Carlos H. Cantu
/s/ STEVEN C. PRESTON Executive Vice President and March 17, 2000
Steven C. Preston Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
/s/ PAUL W. BEREZNY, JR. Director March 17, 2000
Paul W. Berezny, Jr.
/s/ BRIAN GRIFFITHS Director March 17, 2000
Brian Griffiths
/s/ SIDNEY E. HARRIS Director March 17, 2000
Sidney E. Harris
21
<PAGE>
/s/ GLENDA A. HATCHETT Director March 17, 2000
Glenda A. Hatchett
/s/ HERBERT P. HESS Director March 17, 2000
Herbert P. Hess
/s/ MICHELE M. HUNT Director March 17, 2000
Michele M. Hunt
/s/ GUNTHER H. KNOEDLER Director March 17, 2000
Gunther H. Knoedler
/s/ JAMES D. McLENNAN Director March 17, 2000
James D. McLennan
/s/ VINCENT C. NELSON Director March 17, 2000
Vincent C. Nelson
/s/ DALLEN W. PETERSON Director March 17, 2000
Dallen W. Peterson
/s/ PHILLIP B. ROONEY Director March 17, 2000
Phillip B. Rooney
/s/ STEVEN S REINEMUND Director March 17, 2000
Steven S Reinemund
/s/ BURTON E. SORENSEN Director March 17, 2000
Burton E. Sorensen
22
<PAGE>
/s/ CHARLES W. STAIR Director March 17, 2000
Charles W. Stair
/s/ DAVID K. WESSNER Director March 17, 2000
David K. Wessner
</TABLE>
23
<PAGE>
Exhibit
No. Description of Exhibit
- ------- -------------------------------------------------------------------
2.1 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").
2.2 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 on file with the Secretary of State
of the State of Delaware.
2.3 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
on file with the Secretary of State of the State of Delaware.
2.4 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).
2.5 Agreement and Plan of Merger dated as of March 22, 1999 by and
among American Residential Services, Inc., The ServiceMaster
Company and SVM M9 Acquisition Corporation is incorporated by
reference to Exhibit C(1) to the Schedule 14D-1 to the Tender Offer
Statement as filed by The ServiceMaster Company on March 29, 1999.
2.6 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.
2.7 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.
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 the ServiceMaster Limited Partnership, The ServiceMaster Company
Limited Partnership, and ServiceMaster Incorporated of Delaware
Registration Statement on Form S-3 filed with the Securities and
Exchange Commission on July 28, 1997 (the "July 28, 1997
Registration Statement").
24
<PAGE>
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.
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 Fourth Supplemental Indenture dated as of August 10, 1999 by and between
The ServiceMaster Company and the Harris Trust and Savings Bank as trustee
is incorporated by reference to Exhibit 3 to the Current Report on Form 8-K
as filed by The ServiceMaster Company on August 16, 1999 (the "Company
August 16, 1999 8-K").
4.8 Indenture dated as of November 18, 1999 between The ServiceMaster
Company and the Harris Trust and Savings Bank as trustee, including
the form of note annexed thereto as Exhibit 1, is incorporated by
reference to Exhibit 4.16 to The ServiceMaster Company Registration
Statement on Form S-3 filed with the Securities and Exchange
Commission on November 19, 1999 (SEC File Number 333-91381) (the
"November 19, 1999 Registration Statement").
4.9 Form of 6.95% Note due August 14, 2007 is incorporated by reference to
Exhibit 4.2 to the July 28, 1997 Registration Statement.
4.10 Form of 7.45% Note due August 14, 2027 is incorporated by reference to
Exhibit 4.2 to the July 28, 1997 Registration Statement.
4.11 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.
4.12 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.
4.13 Form of 7.875% Note due August 15, 2009 is incorporated by reference to
Exhibit 4 to the Company August 16, 1999 8-K.
4.14 Form of 7.875% Note due August 15, 2009 is incorporated by reference to
Exhibit 5 to the Company August 16, 1999 8-K.
10.1 $750,000,000 Credit Agreement among The ServiceMaster Company
Limited Partnership, the First National Bank of Chicago and Morgan
Guaranty Trust Company dated as of April 1, 1997, is incorporated
by reference to Exhibit 10.2 to the 1997 10-K.
25
<PAGE>
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 and Retirement Plan as amended and
restated as of October 1,1999 is incorporated by reference to
Exhibit 99.1 to The ServiceMaster Company Registration Statement on
Form S-8 (No. 333-89037) filed with the SEC on October 14, 1999.
10.5 Senior Executive Ownership Election Plan as approved by the Board of
Directors on December 10, 1999.
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").
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.
10.10Form 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").
10.12Form 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 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").
26
<PAGE>
10.16Form of Option Agreement for the ServiceMaster 1997 Share Option Plan is
incorporated by reference to Exhibit 10.29 to the 1996 10-K.
10.17ServiceMaster 1998 Equity Incentive Plan as adopted on December 17, 1997
and approved by the shareholders on May 1, 1998 is incorporated by
reference to Exhibit 10.15 to the 1997 10-K.
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 1997 10-K.
10.19Form of Option Agreement for the ServiceMaster 1998 Equity Incentive Plan
(Incentive Stock Options) is incorporated by reference to Exhibit 10.21 to
the 1997 10-K.
10.20ServiceMaster 1998 Non-Employee Directors Discounted Stock Option Plan is
incorporated by reference to Exhibit 10.21 to the 1997 10-K.
10.21ServiceMaster 1998 Long-Term Performance Award Plan is incorporated by
reference to Exhibit 10.22 to the 1997 10-K.
11 Exhibit regarding detail of income per share computation for each
of the three years ended December 31, 1999, 1998 and 1997 is
incorporated by reference to the footnote on page 45 of the 1999
Annual Report (defined in Exhibit 13).
13 The ServiceMaster Annual Report to Shareholders for the year ended
December 31, 1999 (the "1999 Annual Report"). The parts of the 1999
Annual Report which are expressly incorporated into this report by
reference shall be deemed filed with this report. All other parts
of the 1999 Annual Report are furnished for the information of the
Commission and are not filed with this report.
21 Subsidiaries of Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule (EDGAR filing only)
99.1 Amended and Restated Agreement of Limited Partnership for
ServiceMaster Consumer Services Limited Partnership dated November
8, 1990 is incorporated by reference to Exhibit 4.4 to the Current
Report on Form 8-K as filed by ServiceMaster Limited Partnership on
November 21, 1990.
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.
99.3 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.
27
SENIOR EXECUTIVE OWNERSHIP ELECTION PLAN
In accordance with resolutions adopted by the Board of Directors on
December 10, 1999, this Senior Executive Ownership Election Plan is hereby
established to provide for the granting of stock options under the ServiceMaster
1998 Equity Incentive Plan (or any plan intended as a successor thereto) to
selected Senior Executive of The ServiceMaster Company or its subsidiaries.
1. Statement of Purpose
1.1 The purpose of the Senior Executive Ownership Election Plan is
establish a procedure for granting stock options to Senior Executive of the
company which will be in lieu of cash payments under certain of the company's
incentive compensation plans. This procedure will result in a significant part
of the compensation of the Senior Executive who elect to participate to be
dependent upon the growth and prosperity of the Company and will align such part
of their compensation with the interests of the stockholders of the Company.
2. Definitions
As used in this document, the following terms have the indicated
meanings:
"Senior Executive Ownership Election Plan" means the provisions set forth
in this document. These provisions are sometimes referred to as the "Ownership
Election Plan."
"Compensation Committee" means the Compensation Committee of the Board of
Directors of the Company.
"APC Plan" means the ServiceMaster Additional Provisional Compensation
Plan or any incentive compensation plan which is intended to be a successor plan
thereto.
"LTPA Plan" means the ServiceMaster Long-Term Performance Award Plan or
any incentive compensation plan which is intended to be a successor plan
thereto.
"Company" means The ServiceMaster Company.
"Subsidiary" means any organization in which the Company is the direct
or indirect beneficial owner of not less than 50% of all issued and outstanding
equity interests.
"Electing Executive" means an officer of the Company or a Subsidiary
who makes the election described in Section 4.
"Election Year" means each of the years 2000, 2001 and 2002.
1
<PAGE>
"Principal Stock Option Plan" means the ServiceMaster 1998 Equity
Incentive Plan or any stock option plan which is intended to be a successor plan
thereto.
"Options" means options to purchase shares of common stock of the
Company on the terms and conditions set forth in this Ownership Election Plan
3. Duration of the Ownership Election Plan
3.1 The Ownership Election Plan commenced on December 10, 1999 and
shall continue in effect until terminated by the Board of Directors. However,
the termination of the Ownership Election Plan shall not affect the status of
Options previously granted under the Ownership Election Plan.
4. Elections to Purchase Options in Lieu of Certain Cash Payments
4.1 Election. With respect to each of the Election Years, a person who
is selected to participate in the Incentive Plan Alternative for that year may
elect to receive Options in lieu of a payment in cash of --
(a) up to 75% of the amount of his or her APC Plan compensation for
that Election Year as projected as set forth in Section 4.2(a);
or
(b) up to 75% of the amount of his or her LTPA Plan compensation
for that Election Year as projected as set forth in Section
4.2(a); or
(c) up to 75% of the total of the amount of his APC Plan
compensation and his or her LTPA Plan compensation for that
Election Year as projected as set forth in Section 4.2(a).
4.2 Calculation of Number of Options Granted. The number of shares for
which Options will be granted by reason of an election made pursuant to Section
4.1 shall be determined as follows:
(a) A projection of the Electing Executive's APC Plan compensation for
the Election Year ("Estimated APC") and a projection of the Electing Executive's
LTPA Plan compensation for the Election Year ("Estimated LTPA") shall be made by
the Chief Executive Officer and the Chief Financial Officer and, after approval
of such projections by the Chairman of the Compensation Committee, they shall
serve as the basis for the calculations set forth below.1
2
<PAGE>
(b) The Electing Executive shall specify a percentage, not to exceed
75%, of his or her Estimated APC and/or his or her Estimated LTPA which the
Electing Executive wishes to utilize under this Ownership Election Plan for the
Election Year. The dollar amounts resulting from applying the percentages so
specified to Estimated APC and/or Estimated LTPA are referred to as the
"Electing Executive's APC Utilization" and the "Electing Executive's LTPA
Utilization".
(c) The number of Options granted to the Electing Executive shall be
referenced to a dollar figure which is determined by multiplying the Electing
Executive's APC Utilization or the Electing Executive's LTPA Utilization or the
sum of the Electing Executive's APC Utilization and the Electing Executive's
LTPA Utilization, as the case may be, by a multiple derived from the following
table:
Election Multiple
----------- --------
The election is to utilize APC Plan compensation but not LTPA
compensation 4
The election is to utilize LTPA Plan compensation but not APC
Plan compensation 4
The election is to utilize both APC Plan compensation
and LTPA Plan compensation but the full 75% allowable is not
elected for both plans 4
The election is to utilize both APC Plan compensation and
LTPA compensation and the full 75% allowable is elected for 5
both plans.
(d) The dollar amount determined under paragraph (c) shall be divided
by the closing price of the Company's shares of common stock on the New York
Stock Exchange on December 10 of the year immediately preceding the Election
Year (the "Share Price"). If any December 10 is not a trading day, then the
trading day which most nearly precedes December 10 shall be used.2
4.3 Example. The application of the procedure described in Section 4.2
is shown by the following examples. Assume that at the end of December 1999 the
Election Officer's Estimated APC is $200,000 and the Electing Executive's
Estimated LTPA is $150,000. The Share Price is $11.50.
3
<PAGE>
Example 1. The Electing Executive elects to use the full 75%
of his Estimated APC but he does not utilize any of his
Estimated LTPA.
Estimated APC x 75% = $150,000
Option Shares = 150,000 x 4 = 52,173.
-----------
11.50
Example 2. The Electing Executive elects to use the full 75%
of his Estimated LTPA but he does not utilize any of his
Estimated APC Base.
Estimated LTPA x 75% = $112,500
Option Shares = 112,500 x 4 = 39,130
-----------
11.50
Example 3. The Electing Executive elects to use the full 75%
of his Estimated APC and his Estimated LTPA.
Option Shares = (150,000 + 112,500) x 5 = 114,130
-----------------------
11.50
Example 4. In Example 2, assume that the Electing Executive
elected to receive the portion of his LTPA Plan compensation
not utilized for Options in the form of ServiceMaster shares.
As a result, the calculations in Example 2 are adjusted as
follows:
Estimated LPTA x 75% x 1.2 3 = $135,000
Option Shares = 135,000 x 4 = 46,956
-----------
11.50
A similar adjustment would be made in the LTPA component of
Example 3.
4.4 Effect of a Shortfall in Actual APC Plan Compensation and/or Actual
LTPA Compensation Relative to APC and/or LTPA Utilization Amounts. If the
Electing Executive's actual APC Plan compensation figure for an Election Year
and/or his or her actual LTPA Plan compensation figure for an Election Year is
less than the Electing Executive's APC Utilization and/or the Electing
Executive's LTPA Utilization, a shortfall will exist in the calculations used to
compute the number of Options granted to the Electing Executive. Such shortfall
must be made up by the Electing Executive through one or the other or both of
the following alternatives:
4
<PAGE>
(a) the Electing Executive may pay the Company cash in the amount
of the shortfall; or
(b) the Electing Executive may authorize the Company to offset his
or her APC Plan compensation and/or his or her LTPA Plan
compensation for the next year by the amount of the shortfall.
If the Electing Executive selects alternative (a), payment shall be made not
later than 30 days after he or she has been notified by the Company of the
existence of a shortfall in the requisite coverage for the Options which were
previously granted.
4.5 Procedure for Making an Election. Each person who is offered an
opportunity to elect to receive Options under this Ownership Election Plan shall
make his or her participation decision by signing and delivering to the Company
an election form for the Ownership Election Plan. This form shall accompany the
LTPA Election Form B (which is needed to cover the portion of LTPA compensation
not utilized for Options). A copy of these two forms are set forth as Exhibits 1
and 2. The election forms must be delivered to the Vice President, Compensation
by not later than December 31 of the year immediately preceding the year to the
elections pertain.
5. Term of Options; Grant Date; Exercise Price
5.1 Term. Each Option granted pursuant to this Plan shall be for a term
which commences on the Grant Date and ends on December 31 of the tenth year
following the year in which the Option was granted. (Thus, for example, an
option granted on December 10, 1999 will expire on December 31, 2009).
5.2 Grant Date. Each Option granted under the Ownership Election Plan shall
be deemed granted on the date referred to in Section 4(d).
5.3. Exercise Price. The price at which the shares subject to an Option may
be purchased shall be the price referred to in Section 4.2(d), i.e., the Share
Price.
6. Vesting Schedule
6.1 Basic Schedule. Subject to section 6.2, each Option granted under the
Ownership Election Plan shall become vested at the rate of 10% per year for the
first eight full years of the term of the Option. The remaining 20% of the
Option shall vest at the end of the ninth year. Vesting shall commence on the
31st day of December of the year immediately following the year in which the
Option was granted and shall continue on the 31st day of December of each
succeeding year.
6.2 Acceleration of Vesting in Certain Circumstances.
(a) For purposes of this Section 6.2, the term "Base Year" means the
calendar year in which an Option is granted.
5
<PAGE>
(b) If the financial statements for the Company for the third year
following the Base Year reflect compounded growth in the Company's net income of
at least 15% relative to the net income for the Company for the Base Year
(determined in each case before revenue and expenses attributable to e-commerce
investments), an additional 50% of all Options granted to the Electing Executive
in the Base Year shall become vested. If such net income target is not achieved
in the third year (so that additional vesting did not occur for that year) but
is achieved in the fourth year, an additional 30% of all Options granted to the
Electing Executive in the Base Year shall become vested. If such net income
target is not achieved in either the third year or the fourth year (so that
additional vesting did not occur for either of those years) but is achieved in
the fifth year, an additional 20% of all Options granted to the Electing
Executive in the Base Year shall become vested. Such additional vesting shall
occur on the date on which the Company releases its financial statements for
such third year, fourth year or fifth year, as appropriate.
6.3 Illustration of the Vesting Rules. The following table illustrates the
vesting provisions of Sections 6.1 and 6.2.
Assume that an Electing Executive has made an election in December 1999
which results in the grant of an Option for 10,000 shares. Further assume that
the 15% target growth rate in net income is satisfied at the end of the third
year.
Cumulative
Normal Normal Accelerated Total
Date Vesting Vesting Vesting Vested
--------- --------- ------------- ------------ ------------
12/31/00 1,000 1,000 - 1,000
12/31/01 1,000 2,000 - 2,000
12/31/02 1,000 3,000 - 3,000
1/25/03 5,000 8,000
12/31/03 1,000 4,000 9.000
12/31/04 1,000 5,000 10,000
------------ --------- ------------- ---------------- -----------
vesting if accelerated vesting had not occurred:
12/31/05 1,000 6,000 - 6,000
12/31/06 1,000 7,000 - 7,000
12/31/07 1,000 8,000 - 8,000
12/31/08 2,000 10,000 10,000
6.4 Possible Modification of the Accelerated Vesting Rule. The
Compensation Committee may approve an acceleration in vesting of an Option
following the third anniversary of the Option even though the growth rate
target(s) may not have fully been met in the third year if the Compensation
Committee considers acceleration in vesting to be in the best interests of the
Company and appropriate in the light of a Senior Executive's performance of his
or her responsibilities.
6
<PAGE>
7. Term Sheet.
7.1 Options granted under the Incentive Alternative shall be evidenced
by delivery to the optionee of a term sheet which shall be substantially in the
form of Exhibit 2.
8. Change of Control
8.1 Change of Control Defined. "Change of Control" of the Company
means:
(i) the Company is merged or consolidated or organized into or with
another corporation or other legal person (an "Acquiror") and as a result of
such merger, consolidation or reorganization less than 75% of the outstanding
voting securities or other capital interests of the surviving, resulting or
acquiring corporation or other legal person are owned in the aggregate by the
stockholders of the Company, directly or indirectly, immediately prior to such
merger, consolidation or reorganization, other than by the Acquiror or any
corporation or other legal person controlling, controlled by or under common
control with, the Acquiror; or
(ii) the Company sells all or substantially all of its business and/or
assets to an Acquiror, of which less than 75% of the outstanding voting
securities or other capital interests are owned in the aggregate by the
stockholders of the Company, directly or indirectly, immediately prior to such
sale, other than by any corporation or other legal person controlling,
controlled by or unde3r common control with the Acquiror; or
(iii) a report is filed on Schedule 13D or Schedule 14D-1 (or any
successor schedule, form or report), each as promulgated pursuant to the
Securities Exchange Act of 1934 (the "Exchange Act"), disclosing that any person
or group (as the terms "person" and "group" are used in Section 13d(3) or
Section 14(d)(2) of the Exchange Act and the rules and regulations promulgated
thereunder has become the beneficial owner (as the term "beneficial owner" is
defined in Rule 13d-3 or any successor rule or regulation promulgated under the
Exchange Act) of 20% or more of the issued and outstanding shares of voting
securities of the Company; or
(iv) during any period of two consecutive years, individuals who at the
beginning of any such period constitute the directors of the Company cease for
any reason to constitute at least a majority thereof unless the election, or the
nomination for election by the Company's stockholders, of each new director of
the Company was approved by a vote of at least two-thirds of such directors then
still in office who were directors of the Company at the beginning of any such
period.
8.2 Effect of a Change of Control. Upon the occurrence of a Change of
Control, unless otherwise specifically prohibited under applicable laws, or by
the rules and regulations of any governing governmental agencies or national
securities exchanges, any and all Options granted hereunder shall become
immediately exercisable and shall remain exercisable through their entire term.
7
<PAGE>
9. Relationship to the Principal Stock Option Plan
9.1 The Ownership Election Plan constitutes an administrative feature
of the Principal Stock Option Plan. All provisions of the Principal Stock Option
Plan and such polices which the Compensation Committee has approved with respect
to the administration of the Principal Stock Option Plan shall apply to Options
granted under the Ownership Election Plan to the extent not inconsistent with
the latter.
9.2 Section 9.1 is specifically intended to apply to cases of death,
disability and retirement under certain circumstances (but Section 9.1 is not
limited to such matters).
10. Effect of Termination of Employment
10.1 If an Electing Executive terminates his or her employment with the
Company or a Subsidiary, vested Options will expire six months after the
employment termination date and Options not vested at the employment termination
date will expire at that date; provided, that this rule does not apply if
termination of employment occurs by reason of death or disability or voluntary
retirement in certain circumstances. The latter situations are governed by
Section 9.1.
8
<PAGE>
Appendix A
This Appendix A lists the several special rules which are involved in the
application of the ServiceMaster Long-Term Performance Award Plan. This plan
will be in effect in the year 2000 but will probably not be continued in its
present form beyond that date and any successor plan is not likely to involve
the same special rules. Thus, in order to simplify the main text of the
Ownership Election Plan, this Appendix will set out the factors to be taken into
account in applying the Long-Term Performance Award Plan to the Ownership
Election Plan with respect to the year 2000.
1. If an Electing Executive was a participant in the Long-Term Performance
Award Plan in the years 1998 and/or 1999, 20% of his award was held
back for payment at the end of the year 2000, depending upon the extent
to which the Company met its SMIXX goals. The Estimated LTPA for 2000
will not include a payout of any part of the 1998 and 1998 holdbacks
but will include such portion of the year 2000 holdback amount which is
expected to be paid out after the close of that year.
2. The Long-Term Performance Award Plan provides for a 20% increase in an
award if the participant elects to take his or her award in
ServiceMaster shares. If an Electing Executive (i) elects to utilize
the full 75% of his or her Estimated APC and Estimated LPTA for Options
and (ii) elects to take the remainder of his year 2000 Long-Term
Performance Award in ServiceMaster shares, the Estimated LTPA figure
will be increased by 20%.
- --------
1 The projections for Estimated LTPA for the year 2000 are affected by
several complex rules in the Long-Term Performance Award Plan. Because that
plan will terminate at the end of the year 2000, these rules are not set
out in this Section 4.2 but they are covered in Appendix A.
2 The closing price on the New York Stock Exchange for December 10, 1999 was
$11.50. Accordingly, that figure shall be used in paragraph (d) for
elections made in respect of the year 2000.
3 See Appendix A for an explanation of this 1.2 factor.
9
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For years ended December 31,
(In thousands, except per share data) 1999 1998 Change
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS:
<S> <C> <C> <C>
Customer level revenue (1) ............................................ $ 7,335,000 $ 6,355,000 + 15%
Operating revenue ..................................................... 5,703,535 4,724,119 + 21%
Operating income ...................................................... 383,174 396,422 - 3%
OPERATING INCOME BEFORE NON-RECURRING ITEMS, NET (2) .................. 468,674 396,422 + 18%
Net income ............................................................ 173,563 189,992 - 9%
NET INCOME BEFORE NON-RECURRING ITEMS, NET (2)......................... 224,863 189,992 + 18%
Per share: (3)
Basic .......................................................... $ 0.56 $ 0.66 - 15%
Diluted ........................................................ $ 0.55 $ 0.64 - 14%
BASIC BEFORE NON-RECURRING ITEMS, NET (2) ...................... $ 0.73 $ 0.66 + 11%
DILUTED BEFORE NON-RECURRING ITEMS, NET (2) .................... $ 0.72 $ 0.64 + 13%
Cash dividends per share .............................................. $ 0.36 $ 0.33 + 9%
FINANCIAL POSITION:
Total assets .......................................................... $ 3,870,215 $ 2,914,851
Long-term debt ........................................................ 1,697,582 1,076,167
Shareholders' equity .................................................. 1,205,716 956,486
SHARE PRICE RANGE :
(Traded on the New York Stock Exchange under the symbol SVM)
High price ............................................................ $ 22.00 $ 25.50
Low price ............................................................. $ 10.13 $ 16.00
Closing price ......................................................... $ 12.31 $ 22.06
</TABLE>
(1) Customer level revenue represents the combined revenues of the Company's
direct operations and the estimated revenues of its various independently
licensed franchisees.
(2) In the second quarter of 1999, the Company realized an after-tax gain of $30
million ($50.1 million pretax) relating to the sales of its Premier automotive
business and its remaining 15 percent interest in ServiceMaster Energy
Management, and recorded a one-time after-tax charge of $81 million ($135.6
million pretax) relating to its Diversified Health Services business.
(3) Basic earnings per share are calculated based on 307,637 shares in 1999 and
289,315 shares in 1998, while diluted earnings per share are calculated based on
314,406 shares in 1999 and 298,887 shares in 1998. All share and per share data
reflect the three-for-two share split in August 1998.
1
<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 AND JUNE 1997)
The terms "Company" and "ServiceMaster" refer to the operations of
ServiceMaster Limited Partnership and The ServiceMaster Company, its successor
corporation.
1999 COMPARED WITH 1998
Revenues increased 21 percent to $5.7 billion, reflecting strong growth from
acquisitions and increases in base operations. Approximately six percent of the
revenue increase resulted from internal growth and small tuck-in acquisitions in
established businesses, while the newer initiatives, including landscaping,
plumbing, and heating/air conditioning services, provided 21 percent of the
growth. This growth was partially offset by the sale of Premier and
ServiceMaster Energy Management and the wind-down of the Home Health Care
business. Operating income before non-recurring items increased 18 percent over
the prior year. Margins decreased to 8.2 percent of revenue from 8.4 percent in
1998, resulting from a shift in business mix as the new initiatives in
landscaping, heating/air conditioning, and plumbing represented a higher portion
of revenue. The Company expects to realize significant margin improvements in
these businesses as they become integrated. Operating margins excluding these
operations increased 10 basis points even though a severe drought in the
Mid-Atlantic and Northeast regions of the country in 1999 reduced margins in
TruGreen ChemLawn, the Company's largest operating unit. Diluted earnings per
share before non-recurring items increased 13 percent to $.72, compared with
$.64 last year. Net income on this same basis grew 18% to $225 million from $190
million in 1998. Net income grew at a faster rate than earnings per share due to
an increase in shares outstanding, resulting from shares issued for acquisitions
and the Company's equity offering in May 1998.
During the year, the Company realized an after-tax gain of $30 million relating
to the sale of its Premier automotive business and the sale of its remaining 15
percent interest in ServiceMaster Energy Management. In addition, the Company
recorded a one-time after-tax charge of $81 million relating to its Diversified
Health Services business. These items reduced net income from ongoing operations
by $51 million ($85.5 million pre tax). As a result, the Company reported net
income of $174 million, with diluted earnings per share of $.55.
Graph Comparison of Customer Level Revenue and Operating Revenue
for the Last 5 Years
Graph Comparison of Diluted Earnings Per Share for the Last 5 Years
During 1999, the Company launched two new strategic business initiatives. The
first initiative focuses on broadening the Company's core service capabilities
to the consumer market by creating an e-commerce alternative for selling,
providing, and bundling our service offerings and related products. The other
initiative involves expanding the Company's outsourcing, site service, and
information resources to the business and commercial market. The Company expects
earnings per share to continue to grow at double-digit rates for the next two
years, but at less than historical levels because of the investments that the
Company will be making to support these directives, which are likely to be $.03
to $.05 per share in 2000.
In January 2000, the Company announced the formation and initial funding of
WeServeHomes.com, a separate Internet company that will offer comprehensive
on-line solutions for the consumer market by providing home services, products,
and information. ServiceMaster owns 84 percent of WeServeHomes.com through the
contribution of its 1-800-WE-SERVE call center and the assets of its Internet
business. In addition, ServiceMaster will support the new company through
intensive co-branding efforts, access to its customer base and third-party
contractor relationships, fulfillment support, and licensing the use of certain
trademarks. Kleiner Perkins Caufield & Byers (Kleiner Perkins), one of the
nation's most respected and successful venture capital firms, contributed $15
million and holds a 16 percent ownership interest with warrants to purchase an
additional $11.5 million in stock at the same price. The initial investment by
Kleiner Perkins will help fund site design and development, infrastructure
support and promotional expenditures. In addition, expenses in 2000 associated
with WeServeHomes.com will be reduced by the amount of the Kleiner Perkins
investment.
The Consumer and Commercial Services business unit achieved a 53 percent
increase in revenues to $3.1 billion, reflecting solid growth in established
businesses, as well as contributions from the Company's landscaping, heating/air
conditioning, and plumbing initiatives. Net income increased eight percent to
$171 million, reflecting profit increases at all of the companies except
TruGreen. TruGreen reported a substantial increase in revenues and profits
comparable to last year, reflecting the impact of severe weather conditions on
the lawn care operations partially offset by increases from the landscape
initiative.
25
<PAGE>
TruGreen ChemLawn, the Company's lawn care operations, reported modest revenue
growth but lower profits due to the effects of the extreme drought in the
Northeast and the Mid-Atlantic regions of the country. Solid revenue growth in
commercial accounts helped support the weaker growth in residential lawn care
services resulting from the unfavorable summer weather conditions over the last
two years. Through the acquisitions of LandCare USA and other smaller
businesses, the Company has become the largest provider of commercial landscape
services in the country. Over 20 percent of the Consumer and Commercial Services
segment's revenue growth came from this new initiative. TruGreen LandCare, the
Company's landscape operations, achieved significant increases through
acquisitions but also realized strong double-digit internal growth. Terminix
achieved strong growth in revenues and profits, resulting from increases in
termite completions and renewals, improved branch efficiencies, and the
successful integration of acquisitions. Growth in new termite customers reflects
a continued strong demand for termite baiting systems. American Home Shield
achieved double-digit growth in revenues and profits, reflecting increases in
warranty contracts sold through all distribution channels. In addition, a
greater percentage of its revenues was derived from customer renewals, which
carry higher margins and retention rates. The combined Rescue Rooter and
American Residential Services operations reported strong growth in revenues and
profits. American Residential Services, which was acquired in April 1999,
provides comprehensive maintenance, repair and replacement services for heating,
ventilation and air conditioning (HVAC), plumbing, electrical and other systems,
and major appliances in homes and commercial buildings. This acquisition
establishes the Company as one of the country's leading providers of these
services and also complements the Company's established plumbing business. In
addition, it significantly expands the Company's service offerings on a
nationwide basis and provides added support for American Home Shield. Both the
HVAC and plumbing operations achieved good internal growth and productivity
gains. The franchise operations, ServiceMaster Clean (formerly
Residential/Commercial) and Merry Maids, achieved solid increases in revenues
and profits despite an extremely tight labor market, with continued growth of
Company-owned operations, increased license sales, and productivity
improvements.
The traditional Management Services business reported revenues of $1.9 billion
and net income of $77 million. These results include a $30 million after-tax
gain relating to the sales of its Premier automotive unit and its remaining 15
percent interest in ServiceMaster Energy Management. Revenues and net income
from continuing operations both increased three percent. This growth includes
the benefit of overhead efficiency gains realized throughout the business units.
The traditional Healthcare market reported a modest decrease in revenues and
profits consistent with last year. The Company achieved solid revenue and profit
increases in both the Business & Industry and Education markets, reflecting
increased volume and lower overhead spending. The base of annualized revenue
from continuing operations grew two percent for the year, which reflected a
strong sales year and an increased number of contracts served.
On April 21, 1999, the Company sold its Premier business unit to Durr AG of
Germany for $76 million. Premier provides cleaning services for paint booths and
other related maintenance service in the automotive industry. The Company
believes that alliances or significant incremental investments would have been
required to remain competitive in this industry. The sale of Premier allowed
ServiceMaster to realize the significant appreciation in its investment and to
reinvest the proceeds in initiatives more central to the Company's core
strategies. The sale resulted in an after-tax gain of approximately $25 million
($42 million pretax). Also in the second quarter, the Company sold its remaining
15 percent interest in ServiceMaster Energy Management to its partner, Texas
Utilities, which resulted in an after-tax gain of $5 million ($8 million
pretax).
Other Operations include primarily Employer Services, the professional
employer organization, Diversified Health Services, which provides services and
products to the long-term care market, and the Company's headquarters
operations. Net income before non-recurring items improved from 1998, reflecting
favorable interest allocations and gains on financial investments partially
offset by reduced profitability in the Diversified Health Services operations.
The long-term care industry has recently undergone a dramatic transition
period, largely as a result of changes in government reimbursement and
compliance policies. The Company's Diversified Health Services unit manages
long-term facilities and, in a number of cases, had helped finance these
facilities, generally in return for a long-term management contract and a share
in the market appreciation of the facility. This company's operations had also
provided a number of ancillary services and products, including rehabilitation
therapy, medical supplies, pharmacy, and design and build services. During the
year, the Company announced that it was undertaking a strategic review and
assessment of its Diversified Health Services business due to changes in
reimbursement and compliance policies and the resulting financial difficulties
of a number of its customers. Based on the review of the business and the credit
risks involved, the Company reduced the scope of the services it offered
substantially, including ancillary services, and decided to eliminate all future
credit extension activities. As a result of the review, the Company recorded in
the second quarter of 1999 an after-tax charge of $81 million ($135.6 million
pretax) for the restructuring and write-down of assets related to Diversified
Health Services. Approximately $12 million of the charge related to provisions
for future expected cash expenditures. Since that time, the Company has
terminated several customer relationships, with the corresponding overhead
structure eliminated, and reduced the scope of its ancillary services. The
Company continues to believe that the charge was adequate and the remaining
provisions are sufficient to cover future requirements.
On a consolidated basis, cost of services rendered and products sold
increased 21 percent, primarily due to acquisitions and general business growth.
Cost of services rendered and products sold increased as a percentage of
revenues to 78.2 percent in 1999 from 77.9 percent in 1998. The landscaping,
heating/air conditioning and plumbing acquisitions have significantly affected
this comparison because their cost of services as a percentage of
26
<PAGE>
revenues is higher than the average for the enterprise. Excluding these
platforms, cost of services rendered and products sold decreased as a percentage
of revenues to 76.0 percent from 77.7 percent in 1998. This decrease primarily
reflects the changing mix of the business as TruGreen ChemLawn and Terminix
increase in size in relationship to the overall business of the Company. The
TruGreen ChemLawn and Terminix businesses generally operate at higher gross
margin levels than the rest of the business, but also incur somewhat higher
selling and administrative expenses as a percentage of revenues.
Consolidated selling and administrative expenses increased 20 percent over the
prior year and, as a percentage of revenues, decreased to 13.6 percent in 1999
from 13.7 percent in 1998. The platform initiatives noted above have lower
selling and administrative expenses, as a percentage of revenues, than the
Company average.
Interest expense increased over the prior year, primarily due to increased
debt levels associated with acquisitions. The increase in interest and
investment income primarily resulted from additional gains realized on financial
investments. The tax provision reflects a higher effective tax rate compared
with last year, primarily due to the non-deductibility of goodwill related to
several large acquisitions completed in 1999.
As more fully described in the notes to the consolidated financial statements,
a lawsuit is currently pending in Atlanta, Georgia wherein the plaintiff, a
former salesman, claimed that the Company wrongfully declined to pay a
commission of approximately $180,000. In September 1999, the jury returned a
verdict of approximately $1 million in compensatory damages and $135 million in
punitive damages. The Company has filed a motion for judgment notwithstanding
the verdict or, in the alternative, for a new trial. If the outcome of the
post-trial proceedings is not satisfactory to the Company, the Company will
appeal. The Company believes, on advice of counsel, that the award of $135
million in punitive damages is not supportable by the facts of the case or by
applicable state law. The Company is not presently able to reasonably estimate
the ultimate outcome of this case, and accordingly, minimal expense has been
recorded. If the adverse judgment is sustained after all appeals are concluded
(which is a result not anticipated by the Company), the Company's results of
operations for a particular year could be materially adversely affected.
However, the Company, based on discussions with outside legal counsel, believes
that the ultimate outcome of this litigation is not expected to have a material
adverse effect on the Company's financial condition or results of operations.
The Company did not experience any significant computer system problems in the
transition from the year 1999 to the year 2000 and the Company did not
experience any significant year 2000 problems with its suppliers or customers.
The Company substantially completed all of its year 2000 remediation efforts
before December 31, 1999, and the costs of addressing year 2000 issues were not
material to the Company's results of operations or financial position.
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
revenues from 8.7 percent in 1997. Operating margins excluding the professional
employer organization improved 10 basis points over 1997, reflecting the
continued strong growth of higher margin businesses, productivity improvements
and the successful integration of acquisitions at Consumer and Commercial
Services.
Pro forma information is presented for 1997 in order to compare the continuing
results of operations as if the Company had been a taxable corporation. 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 and Commercial Services business unit achieved a 23 percent
increase in revenues, reflecting strong growth from both internal sources and
acquisitions, including the Rescue Rooter plumbing business and commercial
landscaping companies. Net income increased 28 percent, reflecting solid
double-digit profit increases at all of the companies. TruGreen 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 Clean (formerly
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 acquired all the assets of ServiceMaster Energy
Management and was owned 85 percent by Texas Utilities and 15 percent by
ServiceMaster.
27
<PAGE>
(This 15 percent interest was subsequently sold by the Company in 1999.)
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 better customer
retention and the favorable effect of eliminating costs incurred in 1997 related
to unwinding a large contract.
Revenues of Other Operations 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
as well as 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 discontinued its outsourced management contracts of home health care
agencies, but continues to provide consulting services to hospitals and other
providers of home health care. The Company incurred and established reserves of
approximately $32 million (pretax) 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 1997.
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
revenues. This reflects the changing mix of the enterprise as Consumer and
Commercial Services increased in size relative to the overall business of the
Company. The Consumer and Commercial 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 revenues, decreased from 14.1 percent in 1997
to 13.7 percent in 1998.
Interest expense increased over the prior year, reflecting increased debt
levels associated with the first quarter 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.
Graph Comparison of Profits and Cash from Operations before Taxes
for the Last 5 Years
1999 FINANCIAL POSITION
Net cash provided from operations of $257 million was significantly below the
prior year level, primarily reflecting the deferral of the 1998 federal tax
payment until March of 1999. Federal taxes of $79 million on the Company's 1998
earnings were accrued in the financial statements in 1998, but not paid until
the first quarter of 1999. (Excluding all tax payments, cash provided from
operations increased five percent to $433 million.) Working capital needs
increased over 1998, reflecting the growth in the Company's commercial services,
especially the landscaping operations, which experienced a significant increase
in receivables.
Cash and marketable securities totaled approximately $114 million at December
31, 1999. Debt levels increased, reflecting the 1998 tax payment combined with
the effects of acquisitions, capital spending, and dividends. The Company is a
party to a number of long-term debt agreements which require it to comply with
certain financial covenants, including limitations on indebtedness, restricted
payments, fixed charge coverage ratios and net worth. The Company is in
compliance with the covenants related to these debt agreements. Management
believes that funds generated from operations and other existing financial
resources will continue to be adequate to satisfy the ongoing operating needs of
the Company. In addition, the Company had $390 million of unused commitment on
its revolving bank facility at December 31, 1999.
In August 1999, the Company completed a senior unsecured debt offering of $250
million, 7.875 percent notes priced to yield 7.98 percent and due August 15,
2009. The net proceeds were used to repay a portion of the Company's borrowings
under its revolving bank credit facility, thereby, reducing the Company's
exposure to short term interest rate fluctuations.
28
<PAGE>
On March 18, 1999, the Company completed the acquisition of LandCare USA, Inc.
(LandCare) in a stock-for-stock merger for $331 million. The Company issued
shares valued at approximately $191 million and assumed debt or made cash
payments of approximately $140 million. The acquisition of LandCare, one of the
nation's leading commercial landscape companies, significantly broadened the
Company's landscape initiative and provides TruGreen the opportunity to
integrate its traditional fertilizer and weed control services with landscape
maintenance and installation. The Company installed a new operating and
financial system which will support the Company in achieving operating
efficiencies, coordinating purchases, and monitoring progress on receivable
collections.
On April 27, 1999, the Company acquired American Residential Services (ARS),
establishing the Company as one of the nation's leading providers of heating,
ventilation, and air conditioning services. The Company acquired ARS for
approximately $292 million in cash and assumed debt.
Accounts receivable increased reflecting general business growth, the
acquisitions of ARS and LandCare and longer collection periods as the Company
increases its presence in the commercial sector. The net balance reflects the
current year write-down of certain Diversified Health Services receivables due
from nursing homes. Property and equipment increased, primarily resulting from
investments in information technology throughout the enterprise as well as
general business growth and acquisitions. The Company does not have any material
capital commitments at this time.
Total acquisitions were approximately $938 million ($623 million of which was
from the LandCare and ARS acquisitions). Approximately 28 percent of the
acquisition consideration was in the form of shares. Certain members of
management acquired minority ownership interests in the landscaping operations
and the heating/air conditioning and plumbing operations. The increase of $577
million in intangible assets included $251 million from LandCare and $225
million from ARS, as well as amounts from various other smaller commercial
landscape and pest control companies. This increase was partially offset by the
write-down of impaired goodwill relating to the Diversified Health Services
operations.
Accounts payable and other accrued liabilities increased due to general
business growth and the effects of acquisitions. Deferred revenues increased
primarily as a result of strong growth in warranty contracts written at American
Home Shield, increases in customer prepayments for pest control services, and
the acquisition of ARS.
Total shareholders' equity increased to $1.2 billion in 1999 from $956 million
at December 31, 1998, reflecting current year net income and shares issued for
acquisitions, partially offset by shareholder dividends. The Company continues
to repurchase shares in the open market or in privately negotiated transactions
pursuant to the authorizations previously granted by the Board of Directors.
Approximately $93 million of shares were repurchased in 1999. In October 1999,
the Company announced that its Board of Directors authorized the repurchase of
$150 million in shares over time (in addition to an existing authorization for
funding benefit and option plans) in the open market or in privately negotiated
transactions. At year-end, the aggregate market value of the Company's
outstanding shares was approximately $3.8 billion.
Cash dividends paid directly to shareholders totaled $111 million, or $.36 per
share, a nine percent per share increase over the prior year. The total amount
of cash distributions increased 16 percent from the prior year, reflecting this
per share increase as well as an increase in shares outstanding over the prior
year. (In 1997, the Company maintained a shareholders' trust which was
established for the benefit of its Partnership shareholders. The trust was
terminated upon reincorporation. However, in 1998, it received approximately $20
million in tax refunds relating to its final 1997 tax return.)
Graph Comparison of Cash Dividends Declared for the Last 5 Years
While the Company has historically increased its dividend payment, 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 2000 of $.38 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 that demonstrates the exceptional
cash-generating abilities of the Company's businesses. EBITDA (before
non-recurring items) in 1999 of $629 million, grew 22 percent and exceeded net
income by over $400 million or 180%. EBITDA should not be considered an
alternative to net income in measuring the Company's performance or be 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.
IN ACCORDANCE WITH THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THE
COMPANY NOTES THAT STATEMENTS THAT LOOK FORWARD IN TIME, WHICH INCLUDE
EVERYTHING OTHER THAN HISTORICAL INFORMATION, INVOLVE RISKS AND UNCERTAINTIES
THAT MAY AFFECT THE COMPANY'S ACTUAL RESULTS OF OPERATIONS. FACTORS WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE THE FOLLOWING (AMONG OTHERS):
WEATHER CONDITIONS ADVERSE TO CERTAIN OF THE COMPANY'S CONSUMER AND COMMERCIAL
SERVICES BUSINESSES, LABOR SHORTAGES, THE ENTRY OF ADDITIONAL COMPETITORS IN ANY
OF THE MARKETS SERVED BY THE COMPANY, CONSOLIDATION OF HOSPITALS IN THE
HEALTHCARE MARKET, THE CONDITION OF THE U.S. ECONOMY, AND OTHER FACTORS LISTED
FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
29
<PAGE>
ELEVEN YEAR FINANCIAL SUMMARY
All share and per share data reflect the three-for-two share splits in 1998,
1997, 1996, 1993 and 1992.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
<S> <C> <C> <C>
Operating revenue .................................................. $ 5,703,535 $ 4,724,119 $ 3,961,502
Cost of services rendered and products sold......................... 4,459,035 3,679,612 3,058,160
Selling and administrative expenses ................................ 775,826 648,085 559,409
Other, net (1) ..................................................... 85,500 - -
------- ------- -------
Operating income .................................................. 383,174 396,422 343,933
------- ------- -------
OPERATING INCOME BEFORE NON-RECURRING ITEMS, NET (1) ............... 468,674 396,422 343,933
Percentage of operating revenue ................................ 8.2% 8.4% 8.7%
Non-operating expense (income)..................................... 86,981 77,644 69,654
Provision for income taxes (2) ..................................... 122,630 128,786 110,809
------- ------- -------
Net income (pro forma prior to 1998)(2) ............................ $ 173,563 $ 189,992 $ 163,470
============= ============= =============
NET INCOME BEFORE NON-RECURRING ITEMS, NET (1) ..................... $ 224,863 $ 189,992 $ 163,470
============= ============= =============
Percentage of operating revenue ............................... 3.9% 4.0% 4.1%
Earnings per share (pro forma prior to 1998):(2)
Basic........................................................... $ 0.56 $ 0.66 $ 0.57
Diluted......................................................... $ 0.55 $ 0.64 $ 0.55
BASIC BEFORE NON-RECURRING ITEMS, NET (1)....................... $ 0.73 $ 0.66 $ 0.57
DILUTED BEFORE NON-RECURRING ITEMS, NET (1)..................... $ 0.72 $ 0.64 $ 0.55
Shares used to compute basic net income per share................... 307,637 289,315 285,944
Shares used to compute diluted net income per share................. 314,406 298,887 299,640
Shares outstanding, net of treasury shares.......................... 307,530 298,030 279,944
Cash distributions per share........................................ $ 0.36 $ 0.33 $ 0.31
Share price range:
High price...................................................... $ 22.00 $ 25.50 $ 19.67
Low price....................................................... $ 10.13 $ 16.00 $ 10.92
FINANCIAL POSITION (at year end):
Current assets...................................................... $ 959,238 $ 670,202 $ 594,084
Current liabilities................................................. 845,804 753,697 558,177
Working capital..................................................... 113,434 (83,495) 35,907
Current ratio....................................................... 1.1-1 .9-1 1.1-1
Total assets........................................................ $ 3,870,215 $ 2,914,851 $ 2,475,224
Non-current liabilities............................................. 1,818,695 1,204,668 1,392,609
Minority interest/deferred gain..................................... - - -
Shareholders' equity................................................ 1,205,716 956,486 524,438
PERCENTAGE RETURN ON WEIGHTED-AVERAGE SHAREHOLDERS' EQUITY.......... 19% 25% 26%
</TABLE>
(1) In the above presentation, the operating results in 1999 and 1990 through
1993 have been stated to exclude the impact of non-recurring items. In 1999, the
Company realized an after-tax gain of $30 million ($50.1 million pretax)
relating to the sale of its Premier automotive business and its remaining 15
percent interest in ServiceMaster Energy Management, and recorded a one-time
after-tax charge of $81 million ($135.6 million pretax) relating to its
Diversified Health Services business. In the years 1990 through 1993, the
Company recorded gains on issuance of subsidiary shares, restructuring charges,
and a change in accounting for post-retirement benefits.
30
<PAGE>
<TABLE>
<CAPTION>
ELEVEN YEAR FINANCIAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
<S> <C> <C> <C> <C>
Operating revenue .................................................. $3,458,328 $3,202,504 $2,985,207 $2,758,859
Cost of services rendered and products sold......................... 2,681,008 2,499,700 2,356,435 2,192,684
Selling and administrative expenses ................................ 482,102 450,937 414,746 393,131
Other, net (1) ..................................................... - - - -
-------- -------- -------- --------
Operating income .................................................. 295,218 251,867 214,026 173,044
-------- -------- -------- --------
OPERATING INCOME BEFORE NON-RECURRING ITEMS, NET (1) ............... 295,218 251,867 214,026 173,044
Percentage of operating revenue ................................ 8.5% 7.9% 7.2% 6.3%
Non-operating expense (income)..................................... 42,821 74,260 71,388 24,952
Provision for income taxes (2) ..................................... 101,968 71,753 57,626 59,829
-------- ------- ------- -------
Net income (pro forma prior to 1998)(2) ............................ $ 150,429 $ 105,854 $ 85,012 $ 88,263
========== ========== ========== ==========
NET INCOME BEFORE NON-RECURRING ITEMS, NET (1) ..................... $ 150,429 $ 105,854 $ 85,012 $ 70,264
========== ========== ========== ==========
Percentage of operating revenue ............................... 4.3% 3.3% 2.8% 2.5%
Earnings per share (pro forma prior to 1998):(2)
Basic........................................................... $ 0.47 $ 0.41 $ 0.33 $ 0.35
Diluted......................................................... $ 0.46 $ 0.39 $ 0.32 $ 0.34
BASIC BEFORE NON-RECURRING ITEMS, NET (1)....................... $ 0.47 $ 0.41 $ 0.33 $ 0.28
DILUTED BEFORE NON-RECURRING ITEMS, NET (1)..................... $ 0.46 $ 0.39 $ 0.32 $ 0.27
Shares used to compute basic net income per share................... 317,381 260,382 255,650 253,919
Shares used to compute diluted net income per share................. 330,429 273,203 266,892 266,231
Shares outstanding, net of treasury shares.......................... 320,396 321,341 256,419 257,901
Cash distributions per share........................................ $ 0.29 $ 0.28 $ 0.27 $ 0.26
Share price range:
High price...................................................... $ 11.83 $ 9.00 $ 8.41 $ 9.19
Low price....................................................... $ 8.61 $ 6.37 $ 6.37 $ 5.22
FINANCIAL POSITION (at year end):
Current assets...................................................... $ 499,334 $ 393,239 $ 331,045 $ 291,325
Current liabilities................................................. 425,552 372,930 304,395 244,552
Working capital..................................................... 73,782 20,309 26,650 46,773
Current ratio....................................................... 1.2-1 1.1-1 1.1-1 1.2-1
Total assets........................................................ $1,846,841 $1,649,890 $1,230,839 $1,122,461
Non-current liabilities............................................. 607,614 517,603 483,906 471,177
Minority interest/deferred gain..................................... 16,908 12,697 135,272 117,513
Shareholders' equity................................................ 796,767 746,660 307,266 289,219
PERCENTAGE RETURN ON WEIGHTED-AVERAGE SHAREHOLDERS' EQUITY.......... 19% 24% 28% 28%
</TABLE>
<TABLE>
<CAPTION>
ELEVEN YEAR FINANCIAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
<S> <C> <C> <C> <C>
Operating revenue .................................................. $2,488,854 $2,109,941 $1,825,750 $1,609,267
Cost of services rendered and products sold......................... 2,021,010 1,762,700 1,545,527 1,387,448
Selling and administrative expenses ................................ 326,477 225,814 177,941 129,035
Other, net (1) ..................................................... 78,935 - 6,500 -
-------- -------- -------- --------
Operating income .................................................. 62,432 121,427 95,782 92,784
------- -------- ------- -------
OPERATING INCOME BEFORE NON-RECURRING ITEMS, NET (1) ............... 141,367 121,427 102,282 92,784
Percentage of operating revenue ................................ 5.7% 5.8% 5.6% 5.8%
Non-operating expense (income)..................................... (60,867) 34,020 10,398 24,016
Provision for income taxes (2) ..................................... 49,813 35,312 34,495 27,782
------- ------- ------- ------
Net income (pro forma prior to 1998)(2) ............................ $ 73,486 $ 52,095 $ 50,889 $ 40,986
========== ========== ========== ==========
NET INCOME BEFORE NON-RECURRING ITEMS, NET (1) ..................... $ 56,994 $ 48,614 $ 42,843 $ 40,986
========== ========== ========== ==========
Percentage of operating revenue ............................... 2.3% 2.3% 2.3% 2.5%
Earnings per share (pro forma prior to 1998):(2)
Basic........................................................... $ 0.29 $ 0.22 $ 0.21 $ 0.17
Diluted......................................................... $ 0.28 $ 0.21 $ 0.21 $ 0.17
BASIC BEFORE NON-RECURRING ITEMS, NET (1)....................... $ 0.23 $ 0.20 $ 0.18 $ 0.17
DILUTED BEFORE NON-RECURRING ITEMS, NET (1)..................... $ 0.22 $ 0.20 $ 0.18 $ 0.17
Shares used to compute basic net income per share................... 249,828 240,276 239,730 245,058
Shares used to compute diluted net income per share................. 262,941 252,579 243,038 249,219
Shares outstanding, net of treasury shares.......................... 255,386 243,527 242,939 230,396
Cash distributions per share........................................ $ 0.26 $ 0.25 $ 0.24 $ 0.23
Share price range:
High price...................................................... $ 5.90 $ 5.13 $ 3.13 $ 3.19
Low price....................................................... $ 4.35 $ 2.89 $ 2.60 $ 2.78
FINANCIAL POSITION (at year end):
Current assets...................................................... $ 257,542 $ 217,517 $ 237,262 $ 219,661
Current liabilities................................................. 206,755 157,458 158,046 135,375
Working capital..................................................... 50,787 60,059 79,216 84,286
Current ratio....................................................... 1.2-1 1.4-1 1.5-1 1.6-1
Total assets........................................................ $1,005,531 $ 843,660 $ 796,935 $ 593,693
Non-current liabilities............................................. 511,211 376,638 372,052 410,056
Minority interest/deferred gain..................................... 77,906 187,583 170,831 9,174
Shareholders' equity................................................ 209,659 121,981 96,006 39,088
PERCENTAGE RETURN ON WEIGHTED-AVERAGE SHAREHOLDERS' EQUITY.......... 33% 45% 80% 84%
</TABLE>
(2) 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 before 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 that year.
The pro forma provision for income taxes has been calculated assuming that the
Corporation's effective tax rate had been approximately 40 percent of pretax
earnings. Actual historical net income per share as a partnership for the three
prior periods was as follows:
1997 (A) 1996 1995
----- ---- ----
Net Income $264,076 $245,140 $172,019
EPS: Basic $ .92 $ .77 $ .66
Diluted $ .89 $ .75 $ .64
(A) Including the one-time tax gain related to reincorporation, net income was
$329,076 and basic and diluted earnings per share were $1.15 and $1.10,
respectively.
31
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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. Certain immaterial 1998 and
1997 amounts have been reclassified to conform with the 1999 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. The more
significant areas requiring the use of management estimates relate to the
allowance for receivables, accruals for self-insured medical, workers
compensation, auto and general liability insurance, the possible outcomes of
outstanding litigation and useful lives for depreciation and amortization.
REVENUES: Revenues from lawn care, termite, pest control, heating/air
conditioning and plumbing services are recognized as the services are provided.
Revenues from landscaping services are recognized based upon agreed monthly
contract payments or when services are performed for non-contractual
arrangements. Revenues on the Company's commercial installation contracts are
recognized on the percentage of completion method in the ratio that total
incurred costs bear to total estimated costs.
Home warranty contract fees are recognized as revenues ratably over the life
of the contract while the contract costs are expensed as incurred. Franchised
services revenues (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.
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 are recognized as the
services are rendered. Consistent with 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, 1999. 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 ($260 million) and goodwill ($2.2
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 Diversified Health Services business and the
discontinued Home Health Care operations, have been indicated by these
comparisons. Based on the reviews, when 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, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement was subsequently amended to defer its effective date. The Company
intends to adopt this Statement in January 2001 as required by the amended
Statement. Adoption of this Statement is not expected to have a material impact
on the Company's financial statements.
32
<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,
1999 and 1998, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. 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, 1999 and 1998, and the
consolidated results of operations and cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 24, 2000
33
<PAGE>
STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUE............................................................ $ 5,703,535 $ 4,724,119 $ 3,961,502
OPERATING COSTS AND EXPENSES:
Cost of services rendered and products sold ................................. 4,459,035 3,679,612 3,058,160
Selling and administrative expenses ......................................... 775,826 648,085 559,409
Other, net (1) .............................................................. 85,500 - -
------ ------ ------
Total operating costs and expenses .......................................... 5,320,361 4,327,697 3,617,569
--------- --------- ---------
OPERATING INCOME ............................................................ 383,174 396,422 343,933
NON-OPERATING EXPENSE (INCOME):
Interest expense ............................................................ 108,955 92,945 76,447
Interest and investment income .............................................. (21,974) (15,301) (14,304)
Minority interest ........................................................... - - 7,511
------ ------ ------
INCOME BEFORE INCOME TAXES .................................................. 296,193 318,778 274,279
Provision for income taxes (pro forma corporate form in 1997)(2) ............ 122,630 128,786 110,809
------- ------- -------
NET INCOME (pro forma corporate form in 1997 )(1),(2)........................ $ 173,563 $ 189,992 $ 163,470
============= ============= ==============
</TABLE>
<TABLE>
<CAPTION>
PER SHARE (pro forma corporate form in 1997):(1), (2), (3)
<S> <C> <C> <C>
BASIC..................................................................... $0.56 $0.66 $0.57
----- ----- -----
DILUTED................................................................... $0.55 $0.64 $0.55
----- ----- -----
</TABLE>
(1) In 1999, the Company realized an after-tax gain of $30 million ($50.1
million pretax) relating to the sales of its Premier automotive business
and its remaining 15 percent interest in ServiceMaster Energy Management,
and recorded a one-time after-tax charge of $81 million ($135.6 million
pretax) relating to its Diversified Health Services business. Excluding the
impact of those items, net income and earnings per share were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------- -----------
<S> <C> <C> <C>
Net income before non-recurring items, net........... $ 224,863 $ 189,992 $ 163,470
Per share before non-recurring items, net:
Basic............................................. $ 0.73 $ 0.66 $ 0.57
====== ====== ======
Diluted........................................... $ 0.72 $ 0.64 $ 0.55
====== ====== ======
</TABLE>
(2) 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 year ended December 31, 1997 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 partnership net income in 1997 was $329 million ($264
million before the one-time tax gain) and basic and diluted earnings per
share were $1.15 and $1.10, respectively ($0.92 and $0.89 before the
one-time tax gain).
(3) Basic earnings per share are calculated based on 307,637 shares in 1999,
289,315 shares in 1998, and 285,944 shares in 1997, while diluted earnings
per share are calculated based on 314,406 shares in 1999, 298,887 shares in
1998, and 299,640 shares in 1997. All share and per share data reflect the
three-for-two share splits in August 1998 and June 1997.
See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statements.
34
<PAGE>
STATEMENTS OF FINANCIAL POSITION
(In thousands)
<TABLE>
<CAPTION>
As of December 31,
1999 1998
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
ASSETS:
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents.................................................... $ 59,834 $ 66,400
Marketable securities ....................................................... 54,376 54,022
Receivables, less allowances of $39,011 in 1999 and $38,988 in 1998 ......... 558,842 372,375
Inventories.................................................................. 82,861 49,770
Prepaid expenses and other assets............................................ 140,690 102,835
Deferred taxes and tax receivables........................................... 62,635 24,800
------ ------
Total current assets...................................................... 959,238 670,202
------- -------
PROPERTY, PLANT, AND EQUIPMENT, AT COST:
Land and buildings........................................................... 71,972 53,068
Equipment.................................................................... 587,838 388,141
------- -------
659,810 441,209
Less: accumulated depreciation.............................................. 341,712 229,049
------- -------
Net property, plant, and equipment........................................... 318,098 212,160
------- -------
OTHER ASSETS:
Intangible assets, primarily trade names and goodwill,
less accumulated amortization of $343,316 in 1999 and $272,254 in 1998 .... 2,461,389 1,884,002
Notes receivable, long-term securities, and other assets .................... 131,490 148,487
------- -------
Total Assets.............................................................. $ 3,870,215 $ 2,914,851
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable............................................................. $ 145,237 $ 110,523
Accrued liabilities:
Payroll and related expenses.............................................. 99,910 96,199
Insurance and related expenses............................................ 53,412 56,748
Income taxes payable...................................................... 6,479 84,165
Other..................................................................... 211,529 149,477
Deferred revenues............................................................ 257,521 204,969
Current portion of long-term debt............................................ 71,716 51,616
------ ------
Total current liabilities................................................. 845,804 753,697
------- -------
LONG-TERM DEBT............................................................... 1,697,582 1,076,167
OTHER LONG-TERM OBLIGATIONS.................................................. 121,113 128,501
COMMITMENTS AND CONTINGENCIES (see Notes)
SHAREHOLDERS' EQUITY:
Common stock $0.01 par value, authorized 1 billion shares; issued and
outstanding of 307,530 shares in 1999 and 298,030 shares in 1998 ........... 3,075 2,980
Additional paid-in capital................................................... 1,033,568 788,124
Retained earnings............................................................ 241,701 179,840
Accumulated other comprehensive income ...................................... (1,821) 3,911
Restricted stock............................................................. (2,577) (3,383)
Treasury stock............................................................... (68,230) (14,986)
------- -------
Total shareholders' equity................................................ 1,205,716 956,486
--------- -------
Total Liabilities and Shareholders' Equity................................... $ 3,870,215 $ 2,914,851
=========== ===========
</TABLE>
See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statements.
35
<PAGE>
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS AT JANUARY 1...................................... $ 66,400 $ 64,876 $ 72,009
CASH FLOWS FROM OPERATIONS:
NET INCOME.................................................................. 173,563 189,992 329,076
Adjustments to reconcile net income to
net cash provided from operations:
Depreciation ......................................................... 67,382 50,644 45,392
Amortization.......................................................... 71,062 53,961 47,670
Non-recurring items, net.............................................. 85,500 - -
Tax asset recorded upon reincorporation............................... - - (65,000)
Change in working capital, net of acquisitions:
Receivables........................................................... (49,130) (46,205) (6,853)
Inventories and other current assets.................................. (32,368) (2,360) (14,210)
Accounts payable...................................................... (2,703) 18,475 5,603
Deferred revenues..................................................... 28,026 22,033 30,012
Deferred 1998 tax payment............................................. (78,500) 78,500 -
Deferred income tax expense........................................... 20,300 36,400 -
Accrued liabilities................................................... (25,022) 2,472 (82)
Other, net.............................................................. (1,535) 1,627 281
--------- --------- ---------
NET CASH PROVIDED FROM OPERATIONS........................................... 256,575 405,539 371,889
--------- --------- ---------
MEMO: NET CASH PROVIDED FROM OPERATIONS EXCLUDING ALL TAX PAYMENTS ....... 433,491 413,986 377,989
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions...................................................... (88,754) (75,297) (46,232)
Sale of equipment and other assets...................................... 8,021 6,941 4,134
Business acquisitions, net of cash acquired............................. (510,512) (222,452) (233,689)
Proceeds from sale of businesses........................................ 70,344 45,893 -
Net purchases of investment securities.................................. (12,474) (11,011) (16,753)
Notes receivable and financial investments.............................. (19,357) (10,645) (3,593)
Payments to sellers of acquired businesses.............................. (12,664) (10,271) (4,723)
--------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES...................................... (565,396) (276,842) (300,856)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings, net......................................................... 1,263,427 310,190 888,528
Payment of borrowings and other obligations............................. (776,183) (564,448) (160,155)
Proceeds from stock offering............................................ - 208,561 -
Shareholders dividends (and distributions to trust in 1997)............. (111,702) (75,152) (155,883)
Purchase of ServiceMaster stock......................................... (93,046) (18,310) (657,191)
Proceeds from employee share plans...................................... 19,259 12,638 6,526
Other................................................................... 500 (652) 9
--------- --------- ---------
NET CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES...................... 302,255 (127,173) (78,166)
--------- --------- ---------
CASH INCREASE (DECREASE) DURING THE YEAR.................................... (6,566) 1,524 (7,133)
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT DECEMBER 31.................................... $ 59,834 $ 66,400 $ 64,876
========== ========== ==========
</TABLE>
See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statements.
36
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
CORPORATE EQUITY
---------------------------------------
ADDITIONAL LIMITED ACCUMULATED
COMMON PAID-IN RETAINED PARTNERS' COMPREHENSIVE
STOCK CAPITAL EARNINGS EQUITY INCOME
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996..............................$ - $ - $ - $ 856,268 $ 6,357
========================================================================
Net income 1997 ........................................ 65,000 264,076
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment ................... 4,269
Foreign currency translation ($3,580 tax expense).... (5,283)
------------------------------------------------------------------------
Total comprehensive income ............................. 65,000 264,076 (1,014)
Shareholder distributions .............................. (155,883)
Shares issued under options, debentures,
grant plans and other (6,552 shares) ................ 21,165
Treasury shares repurchased from WMX
(61,112 shares) ..................................... (625,978)
Treasury shares purchased and related costs
(2,051 shares) ......................................
Shares issued for the acquisition of Barefoot,
Inc. and other acquisitions (16,161 shares) ......... 156,299
Conversion to corporate form............................ 2,799 513,148 (515,947)
------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997..............................$ 2,799 $ 513,148 $ 65,000 $ - $ 5,343
========================================================================
Net income 1998 ........................................ 189,992
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment ................... (485)
Foreign currency translation ($640 tax expense)...... (947)
------------------------------------------------------------------------
Total comprehensive income ............................. 189,992 (1,432)
Shareholder dividends .................................. (75,152)
Shares issued in public offering (11,400 shares)........ 114 208,447
Shares issued under option, debentures,
grant plans and other (2,514 shares)................. 25 9,403
Treasury shares purchased and related costs
(888 shares)......................................... (9)
Shares issued for acquisitions (5,059 shares).......... 51 57,126
------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998.............................. $2,980 $ 788,124 $ 179,840 $ - $ 3,911
========================================================================
Net income 1999 ........................................ 173,563
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment ................... (3,730)
Foreign currency translation ($1,424 tax expense) ... (2,002)
------------------------------------------------------------------------
Total comprehensive income ............................. 173,563 (5,732)
Shareholder dividends .................................. (111,702)
Shares issued under option, debentures,
grant plans and other (1,979 shares)................. 20 5,076
Treasury shares purchased and related costs
(7,049 shares)....................................... (70)
Shares issued for acquisitions (14,570 shares)......... 145 240,368
------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999..............................$ 3,075 $1,033,568 $ 241,701 $ - $ (1,821)
========================================================================
</TABLE>
<TABLE>
<CAPTION>
TREASURY RESTRICTED TOTAL
STOCK STOCK EQUITY
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996..............................$ (60,000) $ (5,858) $ 796,767
==========================================
Net income 1997 ........................................ 329,076
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment ................... 4,269
Foreign currency translation ($3,580 tax expense).... (5,283)
------------------------------------------
Total comprehensive income ............................. 328,062
Shareholder distributions .............................. (155,883)
Shares issued under options, debentures,
grant plans and other (6,552 shares) ................ 3,511 1,588 26,264
Treasury shares repurchased from WMX
(61,112 shares) ..................................... (625,978)
Treasury shares purchased and related costs
(2,051 shares) ...................................... (31,213) (31,213)
Shares issued for the acquisition of Barefoot,
Inc. and other acquisitions (16,161 shares) ......... 30,120 186,419
Conversion to corporate form............................
------------------------------------------
BALANCE, DECEMBER 31, 1997..............................$ (57,582) $ (4,270) $ 524,438
==========================================
Net income 1998 ........................................ 189,992
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment ................... (485)
Foreign currency translation ($640 tax expense)...... (947)
------------------------------------------
Total comprehensive income ............................. 188,560
Shareholder dividends .................................. (75,152)
Shares issued in public offering (11,400 shares)........ 208,561
Shares issued under option, debentures,
grant plans and other (2,514 shares)................. 13,507 887 23,822
Treasury shares purchased and related costs
(888 shares)......................................... (18,301) (18,310)
Shares issued for acquisitions (5,059 shares).......... 47,390 104,567
------------------------------------------
BALANCE, DECEMBER 31, 1998..............................$ (14,986) $ (3,383) $ 956,486
==========================================
Net income 1999 ........................................ 173,563
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment ................... (3,730)
Foreign currency translation ($1,424 tax expense) ... (2,002)
------------------------------------------
Total comprehensive income ............................. 167,831
Shareholder dividends .................................. (111,702)
Shares issued under option, debentures,
grant plans and other (1,979 shares)................. 13,630 806 19,532
Treasury shares purchased and related costs
(7,049 shares)....................................... (92,976) (93,046)
Shares issued for acquisitions (14,570 shares)......... 26,102 266,615
------------------------------------------
BALANCE, DECEMBER 31, 1999..............................$ (68,230) $ (2,577) $1,205,716
==========================================
</TABLE>
All share data reflect the three-for-two share splits in August 1998 and June
1997.
Disclosure of reclassification amounts (net of tax) relating to comprehensive
income:
1999 1998 1997
---- ---- ----
Unrealized holding gains arising in period $ 555 $ 3,295 $ 5,904
Less: gains realized (4,285) (3,780) (1,635)
------- ------- -------
Net unrealized gains on securities $(3,730) $ (485) $ 4,269
======== ========= =========
See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statement
37
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS UNIT REPORTING
The business of the Company is primarily conducted through the ServiceMaster
Consumer and Commercial 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 and Commercial
Services unit provides a variety of specialty services to residential and
commercial customers. The Management Services unit provides a variety of
supportive management services to health care, education and commercial
accounts. The Company derives substantially all of its revenues from customers
in the United States with less than five percent generated in foreign markets.
The Other Operations group includes primarily ServiceMaster Employer Services,
a professional employer organization that provides clients with administrative
processing of payroll, workers' compensation insurance, health insurance,
unemployment insurance and other employee benefit plans; Diversified Health
Services, which provides services and products to the long-term care industry;
and the Company's headquarters operations.
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 for 1997 is presented on a pro forma basis as if the
Company had been a taxable corporation and corporate taxes had been allocated to
the segments. Certain immaterial amounts have been reclassified to conform with
the 1999 presentation.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
<TABLE>
<CAPTION>
Consumer
& Commercial Management Other
Services Services Operations Consolidated
---------------------------------------------------------
1999
<S> <C> <C> <C> <C>
Operating revenue .......................................... $ 3,133,420 $ 1,940,887 $ 629,228 $5,703,535
Operating income ........................................... 382,411 124,736 (123,973) 383,174
OPERATING INCOME, EXCLUDING NON-RECURRING ITEMS(1) ......... 382,411 74,636 11,627 468,674
Net interest expense (income) .............................. 87,422 (5,538) 5,097 86,981
Provision for income taxes ................................. 123,923 53,152 (54,445) 122,630
----------- ----------- --------- ----------
Net income ................................................. $ 171,066 $ 77,122 $ (74,625) $ 173,563
=========== =========== ========= ==========
NET INCOME, EXCLUDING NON-RECURRING ITEMS (1)............... $ 171,066 $ 47,463 $ 6,334 $ 224,863
=========== =========== ========= ==========
Identifiable assets ........................................ $ 3,356,367 $ 224,694 $ 289,154 $3,870,215
Depreciation and amortization expense ...................... 110,496 19,424 8,524 138,444
Capital expenditures ....................................... 53,996 30,370 4,388 88,754
1998
Operating revenue .......................................... $ 2,048,185 $ 2,040,948 $ 634,986 $4,724,119
Operating income ........................................... 305,408 112,919 (21,905) 396,422
OPERATING INCOME, EXCLUDING NON-RECURRING ITEMS (1 ) ....... 305,408 74,919 16,095 396,422
Net interest expense (income) .............................. 39,175 (1,882) 40,351 77,644
Provision for income taxes ................................. 107,552 46,380 (25,146) 128,786
----------- ----------- --------- ----------
Net income ................................................. $ 158,681 $ 68,421 $ (37,110) $ 189,992
=========== =========== ========= ==========
NET INCOME, EXCLUDING NON-RECURRING ITEMS (1) .............. $ 158,681 $ 45,774 $ (14,463) $ 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
Provision for income taxes (pro forma corporate form)....... 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
</TABLE>
(1): In 1999, this line excludes the $50 million pretax gain in the Management
Services segment related to the sale of its Premier business and its
remaining 15 percent interest in ServiceMaster Energy Management and the
$136 million pretax charge in the Other Operations segment related to the
Diversified Health Services operation, which included write-downs for the
impairment of assets. In 1998, this line excludes a $38 million pretax gain
recorded in Management Services related to the formation of a strategic
venture which acquired 85% of the assets of ServiceMaster Energy Management
and 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.
38
<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 a federal corporate tax on ServiceMaster operations beginning
in 1998. 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 and it became the successor entity
through which the public invests in ServiceMaster.
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. 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 the reorganization, The ServiceMaster Limited Partnership was the
publicly held entity that had 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
As previously noted, prior to reincorporation at the end of 1997, most
operations conducted by the Company and its subsidiary partnerships had been
exempt from federal corporate income tax. 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 reconciliation of income tax computed at the U.S. federal statutory tax
rate to the Company's effective income tax rate is as follows:
1999 1998
---- ----
Tax at U.S. federal statutory rate 35.0% 35.0%
State and local income taxes,
net of U.S. federal benefit 4.0% 4.4%
Non-deductible amortization 1.4% -
Other 1.0% 1.0%
------- -------
Effective rate 41.4% 40.4%
===== =====
Income tax expense consists of:
1999
--------------------------------------
(In thousands) CURRENT DEFERRED TOTAL
-------- -------- -------
U.S. federal $ 76,830 $26,400 $103,230
State and local 14,000 5,400 19,400
$ 90,830 $31,800 $122,630
======== ======= ========
1998
--------------------------------------
(In thousands) CURRENT DEFERRED TOTAL
-------- -------- -------
U.S. federal $ 76,646 $30,200 $106,846
State and local 15,740 6,200 21,940
$ 92,386 $36,400 $128,786
======== ======= ========
Deferred income tax expense results from timing differences in the recognition
of income and expense for income tax and financial reporting purposes.
Deferred income tax balances 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 asset will be realized on future tax
returns, primarily from the generation of future taxable income. Significant
components of the Company's deferred tax balances are as follows:
1999 1998
---- ----
(In thousands) Deferred tax assets (liabilities):
Current:
Prepaid expenses and other $(26,700) $ (23,400)
Accounts receivable allowance 12,900 7,400
Accrued insurance and
related expenses 24,900 24,100
Other accrued expenses 33,600 16,700
------ ------
Total current asset 44,700 24,800
Long-term:
Long-term assets (43,100) (500)
Insurance expenses 32,300 32,500
Other long-term obligations (9,000) (11,600)
------ -------
Total long term asset (liability) (19,800) 20,400
-------- --------
Net deferred tax asset $ 24,900 $ 45,200
=========== ===========
Total tax payments in 1999 were $177 million, of which $79 million represented
the 1998 federal tax payment that was deferred into 1999. There were no federal
taxes paid in 1998 and approximately $8 million of state tax payments were made
in the year.
39
<PAGE>
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.
During 1999, the Company completed two significant acquisitions. In March, the
Company acquired LandCare USA (LandCare) which, when combined with the existing
landscape operations of the Company, created the largest commercial landscaping
company in America. In April, the Company acquired American Residential Services
(ARS), establishing the Company as one of the nation's leading providers of
heating, ventilation, and air conditioning services. The fair market values of
the assets acquired less liabilities assumed for LandCare and ARS acquisitions
were $331 million and $292 million, respectively. The excess of the
consideration paid over the fair value of the tangible assets relating to
LandCare and ARS businesses was $251 million and $225 million, respectively,
which was recorded as goodwill and tradenames that are being amortized over 40
years. Certain preliminary value allocations are subject to change during 2000
as additional information (primarily asset appraisals) is obtained.
Certain members of management acquired, at fair market value, equity interests
in the landscaping operations and the heating/air conditioning and plumbing
operations. The Company and the holders of minority interests in the landscaping
and heating/air conditioning operations have the respective options to acquire
or sell the minority interests between 2004 and 2009. The purchase price will be
determined based on the fair market value of the entities at the future
transaction date. The minority interest acquisition will be recorded as
additional purchase cost at the time of payment.
Also during the year, the Company acquired many smaller companies primarily in
the landscaping, lawn care, and pest control businesses. The aggregate fair
market value of the assets acquired less liabilities assumed for these purchases
was $315 million, including approximately $278 million of goodwill.
PRIOR YEARS -
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, was one of the largest
plumbing and drain cleaning companies in America. Ruppert was one of the
Mid-Atlantic's largest commercial landscape companies. National Britannia, which
was the third largest pest control company in the United Kingdom, significantly
increased the international presence of Terminix. The aggregate fair market
value of the assets acquired less liabilities assumed, for these acquisitions
was $143 million, which consisted almost entirely of 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
net assets acquired was $293 million, including approximately $249 million of
goodwill.
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 $247 million, including approximately $267
million of intangible assets, primarily goodwill.
Supplemental cash flow information regarding the Company's acquisitions is as
follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Fair value of assets acquired .............. $ 1,078,105 $ 459,400 $ 577,849
Less liabilities assumed ................... (140,477) (23,167) (93,452)
----------- --------- ---------
Net assets acquired ........................ $ 937,628 $ 436,233 $ 484,397
Net cash paid for acquisitions ............. $ 510,512 $ 222,452 $ 233,689
Shares issued .............................. 266,615 104,567 186,419
Seller financed and assumed debt ........... 160,501 109,214 64,289
----------- --------- ---------
Payment for acquisitions.................... $ 937,628 $ 436,233 $ 484,397
</TABLE>
40
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
OTHER EVENTS-CURRENT YEAR
In the first quarter of 1999, the Company announced that it was undertaking a
strategic review and assessment of the services that comprised the Diversified
Health Services operation due to changes in reimbursement and compliance
policies and the resulting financial difficulties of a number of its customers.
Diversified Health Services has provided general management services for
long-term care facilities, as well as a number of ancillary services, including
rehabilitation therapy, medical supplies, pharmacy, and design and build
services. In addition, the Company provided financing to certain facilities
generally in return for a long-term management contract and a share in the
market appreciation of the facility. Based on the review of the business and the
credit risks involved, the Company reduced the scope of the services it offered
substantially, including its ancillary services, and eliminated all future
credit extension activities. As a result of this review, the Company recorded an
after-tax charge of $81 million in the second quarter relating to Diversified
Health Services. Since that time, the Company has terminated several customer
relationships, decreased the level of overhead costs in the operations, and
reduced the scope of its ancillary services.
The following summarizes the components of the charge:
(After-tax in millions)
Write-down of impaired assets,
primarily goodwill $ 51
Write-down of receivables,
loans, and investments in nursing homes 19
Provisions for losses on contractual requirements
and exit costs of certain ancillary services 11
----
Total $ 81
====
Given the uncertainty in the industry and the decision to reduce the size and
scope of Diversified Health Services, the Company reviewed the expected cash
flows from the business, which were less than the carrying value of the assets,
and accordingly, recorded an impairment charge primarily relating to goodwill
associated with the business. A significant amount of receivables, loans, and
investments in nursing homes were written down largely due to the deterioration
in the financial viability of the customers which resulted primarily from
changes in Medicare reimbursement levels. The majority of the receivable
write-down related to seven troubled nursing homes. As previously noted, the
Company recorded an $11 million charge to provide for losses and exposures
relating to contracts and services. The Company has exited a number of client
arrangements in which customers were not paying Diversified Health Services and
the prospect of collection continues to be low. Approximately $5 million of the
provision has been utilized and the Company continues to believe that the
remaining reserve is adequate and appropriate.
On April 21, 1999, the Company sold its Premier business unit to Durr AG of
Germany for $76 million. Premier provides cleaning services for paint booths and
other related maintenance services in the automotive industry. The Company
believes that alliances or significant incremental investments would have been
required to remain competitive in this industry. The sale of Premier allowed
ServiceMaster to realize the significant appreciation in its investment and to
reinvest the proceeds in initiatives more central to the Company's core
strategies. The sale resulted in an after-tax gain of approximately $25 million
($42 million pretax). Also in the quarter, the Company sold its remaining 15
percent interest in ServiceMaster Energy Management to its partner, Texas
Utilities, which resulted in an after-tax gain of $5 million ($8 million
pretax).
PRIOR YEAR
In 1998, the Company formed a strategic venture with Texas Utilities Company
for the ownership and operation of the ServiceMaster Energy Management business.
The venture acquired all of the assets of ServiceMaster Energy Management and
was owned 85 percent by Texas Utilities and 15 percent by ServiceMaster. This
transaction resulted in a pretax gain of $38 million. During 1999, the Company
sold its remaining 15% interest in the venture.
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.
Consequently, in late 1998, the Company determined to discontinue its activities
in the Home Health Care business and recognized certain impairment losses and
wrote off certain accounts receivable. At the time, the Company also established
after-tax reserves of $5 million related to the costs associated with exiting
certain customer arrangements. The Company substantially completed the exit of
direct Home Health Care operations in the first quarter of 1999, and determined
that the reserve was adequate and appropriate. The results of operations of the
Home Health Care business were not material to the Company's financial results
for the periods presented.
COMMITMENTS AND CONTINGENCIES
The Company carries insurance policies on insurable risks which it believes to
be appropriate. The Company generally has self insured retention limits and has
obtained fully insured layers of coverage above such self insured retention
limits. Accruals for self insurance losses are made based on the Company's
claims experience and actuarial assumptions.
The Company has certain liabilities with respect to existing or potential
claims, lawsuits, and other proceedings. The Company accrues for these
liabilities when it is probable that future costs will be incurred and such
costs can be reasonably estimated.
41
<PAGE>
In June 1996, Ray D. Martin, a former salesman employed by ServiceMaster's
Management Services unit, filed a lawsuit in Fulton County, Georgia which
contended that the Company had not paid him the full amount of commission due to
him on a sale in which he was involved. The Company believed that the commission
was not payable under the Company's commission policies and procedures. The
amount then at issue was approximately $180,000. In the course of the pre-trial
proceedings, the trial court entered a default judgment against the Company.
Consequently, the Company was not permitted to defend its position and the only
issue left to be considered at the trial was the question of damages. In
addition, the trial court then permitted the plaintiff to amend his complaint to
include a tort claim, which allowed for the levying of punitive damages.
However, the trial court did not permit the Company to file an answer to the
amended complaint or otherwise to make the point that there is no basis for a
tort claim in the circumstances of this case. On September 29, 1999, the trial
court entered final judgment for the plaintiff in a total amount of $136
million. Under Georgia law, that judgement will accrue post-judgment interest at
a statutory rate of 12 percent per annum, except for the portion of the judgment
that represents pre-judgment interest. On October 14, 1999, the Company filed a
motion for judgment notwithstanding the verdict or, in the alternative, for a
new trial. The Company, based on advice of outside legal counsel, believes that
the award of $135 million in punitive damages is not supportable by the facts of
the case or by applicable state law. The Company is not presently able to
reasonably estimate the ultimate outcome of this case, and accordingly, minimal
expense has been recorded. In the event that the adverse judgment is sustained
after all appeals (which is not anticipated by the Company), it would be likely
that the Company's results of operations for a particular year may be materially
adversely affected. However, the Company believes, based on advice from legal
counsel, that the ultimate outcome of this litigation is not expected to have a
material adverse effect on the Company's financial condition or results of
operations.
The Company believes that other legal proceedings and currently pending
litigation arising in the ordinary course of business will not have a material
effect on the consolidated financial statements.
SUBSEQUENT EVENT
In January 2000, the Company announced the formation and initial funding of
WeServeHomes.com, a separate Internet company that will provide comprehensive
on-line solutions for homeowners including home services, products, and
information. ServiceMaster owns 84 percent of WeServeHomes.com and Kleiner
Perkins Caufield & Byers (Kleiner Perkins), contributed $15 million to hold a 16
percent ownership interest with warrants to purchase an additional $11.5 million
in stock at the same price. The expenses in 2000 associated with
WeServeHomes.com will be reduced by the amount of the Kleiner Perkins
investment.
EMPLOYEE BENEFIT PLANS
Contributions to qualified profit sharing plans were made in the amount of
$11.6 million in 1999, $9.9 million in 1998 and $8.2 million in 1997. Under the
Employee Share Purchase Plan, the Company contributed $1.3 million in 1999, $1.2
million in 1998 and $1.1 million in 1997. These funds defrayed part of the cost
of the shares purchased by employees.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
LONG-TERM DEBT
Long-term debt includes the following:
(In thousands) 1999 1998
- -------------------------------------------------------------------------------
Notes Payable:
10.57%, maturing in 2000.....................$ 9,000 $ 18,000
8.38%, maturing in 2000 - 2001 ............. 20,000 30,000
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
7.88%, maturing in 2009 .................... 250,000 -
7.10%, maturing in 2018 .................... 150,000 150,000
7.45%, maturing in 2027 .................... 200,000 200,000
7.25%, maturing in 2038 .................... 150,000 150,000
Revolving credit facilities ................... 382,500 50,000
International borrowings ...................... 93,048 48,272
Other ......................................... 164,750 131,511
Less current portion .......................... (71,716) (51,616)
----------- -----------
Total long-term debt...........................$ 1,697,582 $ 1,076,167
=========== ===========
- -------------------------------------------------------------------------------
The Company is party to a number of long-term debt agreements that 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.
In June 1997, 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 November 1999, the
Company filed a registration statement for the sale of an additional $700
million in unsecured senior debt securities or equity interests. As of year end,
the Company had $800 million of securities available for issuance under these
shelf registration statements. 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. In August 1999, the Company completed a senior
unsecured debt offering of $250 million, 7.875 percent notes priced to yield
7.98 percent and due August 15, 2009. 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.
42
<PAGE>
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 $390 million of unused commitment as of
December 31, 1999.
The Company is exposed to interest rate fluctuations on its floating rate
debt. As of year end, the Company had approximately $220 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. In May 1999, the Company entered into a
three-year interest rate swap agreement to fix the interest rate on $175 million
of floating rate bank borrowings at an average rate of 5.88%.
Cash interest payments were $97 million in 1999, $88 million in 1998, and $63
million in 1997. Average rates paid on the revolving credit facility were 5.5
percent in 1999, 5.9 percent in 1998, and 6.0 percent in 1997. Future scheduled
long-term debt payments are $71.7 million in 2000 (average rate of 4.4 percent),
$72.6 million in 2001 (average rate of 5.3 percent), $57.2 million in 2002
(average rate of 5.9 percent), and $42.0 million in 2003 (average rate of 5.2
percent) and $40.7 million in 2004 (average rate of 5.6 percent). Notes payable
of $19.0 million due in 2000 are intended to be refinanced by the long term
revolving credit facility in 2000 and therefore are not included in the $71.7
million of current liabilities. The $382.5 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 2004.
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 $1.7 billion.
Future long-term noncancelable operating lease payments are $44.7 million in
2000, $34.8 million in 2001, $26.5 million in 2002, $19.3 million in 2003, $13.5
million in 2004 and $23.8 million thereafter. Rental expense for 1999, 1998, and
1997 was $137.9 million, $103.8 million, and $83.9 million, respectively.
The Company maintains a $95 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, 1999, approximately $64 million was funded under this
facility.
CASH AND MARKETABLE SECURITIES
Marketable securities held at December 31, 1999 and 1998, with maturities 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. The
Company's investments consist primarily of publicly-traded debt and common
equity securities. As of December 31, 1999, the aggregate market value of the
Company's short- and long-term investments in debt and equity securities was
$103 million and the aggregate cost basis was $96 million.
Interest and dividend income received on cash and marketable securities was
$9.0 million, $8.9 million, and $8.3 million, in 1999, 1998, and 1997,
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 reports all changes in equity during a period, except those
resulting from investment by owners and distribution to owners. Comprehensive
Income, which encompasses net income, unrealized gains on marketable securities,
and the effect of foreign currency translation is disclosed in the Statement of
Shareholders' Equity.
1999 1998 1997
---- ---- ----
Unrealized holding gains
Arising in period .... $1,026 $5,529 $9,908
Tax expense ............ 471 2,234 4,004
------ ------ ------
Net of tax amount ...... $ 555 $3,295 $5,904
====== ====== ======
Gains realized ......... $7,239 $6,342 $2,743
Tax expense ............ 2,954 2,562 1,108
------ ------ ------
Net of tax amount ...... $4,285 $3,780 $1,635
====== ====== ======
Accumulated comprehensive income included the following components as of
December 31:
1999 1998 1997
---- ---- ----
Unrealized gain on
Securities ..... $ 4,023 $ 7,753 $ 8,238
Foreign currency
translation .... (5,844) (3,842) (2,895)
------- ------- -------
Total ............ $(1,821) $ 3,911 $ 5,343
======= ======= =======
43
<PAGE>
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 also were converted from partnership
shares to corporate stock on a one-for-one basis.
In May 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.
In July 1998, the Company filed a shelf registration statement to issue up to
5.3 million shares of common stock in connection with future, unidentified
acquisitions. In April 1999, the Company filed another shelf registration, which
increased the shares available for issuance to 13.9 million. These filings allow
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 6.4 million shares available at year end.
As of December 31, 1999, there were 24.3 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.
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:
(In thousands, except per share data)
1999 1998 1997
---- ---- ----
Net Income:
As reported (1) $173,563 $189,992 $163,470
SFAS 123 Pro forma $166,601 $185,555 $160,966
Net Income Per Share:
Basic: As reported (1) $.56 $.66 $.57
SFAS 123 Pro forma $.54 $.64 $.56
Diluted: As reported (1) $.55 $.64 $.55
SFAS 123 Pro forma $.53 $.62 $.54
(1) Pro forma corporate form in 1997.
The SFAS 123 pro forma net income reflects options granted in 1999, 1998 and
1997. Had awards been granted in earlier years that carried similar vesting
requirements as the current options, then the pro forma compensation expense
presented would have been higher. Consequently, the pro forma disclosure is not
indicative of pro forma results which may be expected in future years.
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 1999, 1998 and 1997: risk-free interest rates of 5.4 percent, 5.6
percent and 6.3 percent, respectively; volatility rates of 25 percent, 22
percent and 21 percent, respectively; distribution yields of 2.5 percent, 1.9
percent and 3.2 percent, respectively; and average expected lives of seven
years. The options granted to employees in 1999, 1998 and 1997 have
weighted-average fair values of $4.15, $5.17, and $2.81, 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.
44
<PAGE>
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, 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
TRANSACTIONS DURING 1999
Granted to employees 6,599,732 $ 11.50 - 21.16 $ 15.55 ----- -----
Assumed in acquisitions 1,779,395 $ 6.48 - 45.79 $ 19.02 ----- -----
Exercised, paid, or vested (1,355,345) $ 0.73 - 18.26 $ 7.61 (248,900) $ 2.86 - 7.96
Terminated or resigned (435,069) $ 0.73 - 45.79 $ 19.32 ----- -----
Total exercisable, December 31, 1999 10,006,644 $ 2.24 - 45.79 $ 10.37 ----- -----
Total outstanding, December 31, 1999 23,501,439 $ 2.24 - 45.79 $ 12.85 713,830 $ 2.86 - 7.96
=========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Options outstanding at December 31, 1999:
Range of Number Outstanding Remaining Weighted-Average Number Exercisable Weighted-Average
Exercise Prices at 12/31/99 Life Exercise Price at 12/31/99 Exercise Price
=================================================================================================================================
<S> <C> <C> <C> <C> <C>
$ 2.24 - 6.44 2,549,353 3.5 years $ 5.18 2,549,353 $ 5.18
6.48 - 10.78 4,826,967 5.5 years 8.95 3,315,054 8.73
11.22 - 15.94 8,252,322 8.0 years 11.81 2,928,303 12.44
16.12 - 22.77 7,556,423 8.5 years 18.21 993,033 18.52
27.20 - 45.79 316,374 7.0 years 33.07 220,901 31.01
- ---------------------------------------------------------------------------------------------------------------------------------
$ 2.24 - 45.79 23,501,439 7.0 years $ 12.85 10,006,644 $ 10.37
=================================================================================================================================
</TABLE>
EARNINGS PER SHARE
Basic earnings per share are 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 1999 For year ended 1998
------------------------------------------------------------
(In thousands, except per share data) Income Shares EPS Income Shares EPS
------------------------------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS (PRO FORMA CORPORATE FORM IN 1997) $173,563 307,637 $0.56 $189,992 289,315 $0.66
EFFECT OF DILUTIVE SECURITIES, NET OF TAX:
Options 6,769 9,391
Convertible debentures - - 32 181
---------------------- ------------ ---------
DILUTED EPS (PRO FORMA CORPORATE FORM IN 1997) $173,563 314,406 $0.55 $190,024 298,887 $0.64
========================================== =================
</TABLE>
For year ended 1997
------------------------------
(In thousands, except per share data) Income Shares EPS
--------------------- --------
BASIC EPS (PRO FORMA CORPORATE FORM IN 1997) $163,470 285,944 $0.57
EFFECT OF DILUTIVE SECURITIES, NET OF TAX:
Options 8,333
Convertible debentures 1,114 5,363
---------------------
DILUTED EPS (PRO FORMA CORPORATE FORM IN 1997) $164,584 299,640 $0.55
===================== ========
45
<PAGE>
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
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.
<TABLE>
<CAPTION>
(Unaudited, in thousands, except per share data)
Percent Incr. Percent Incr.
1999 '99-'98 1998 '98-'97 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE:
First Quarter ................... $1,115,062 14% $ 981,788 20% $ 817,136
Second Quarter .................. 1,537,074 23 1,244,627 23 1,010,794
Third Quarter ................... 1,584,225 24 1,273,093 17 1,090,114
Fourth Quarter .................. 1,467,174 20 1,224,611 17 1,043,458
---------- ---------- ----------
$5,703,535 21% $4,724,119 19% $3,961,502
GROSS PROFIT:
First Quarter ................... $ 215,247 15% $ 186,991 17% $ 159,991
Second Quarter .................. 368,237 26 293,261 14 257,260
Third Quarter ................... 359,885 14 316,718 23 257,449
Fourth Quarter .................. 301,131 22 247,537 8 228,642
---------- ---------- ----------
$1,244,500 19% $1,044,507 16% $ 903,342
NET INCOME:
(PRO FORMA IN 1997)
First Quarter ...................... $ 35,609 22% $ 29,270 1% $ 28,982
Second Quarter ..................... 18,035 (68) 56,404 21 46,707
BEFORE NON-RECURRING ITEMS, NET . 69,335 23 56,404 21 46,707
Third Quarter ...................... 66,637 18 56,352 20 46,793
Fourth Quarter ..................... 53,282 11 47,966 17 40,988
---------- ---------- ----------
$ 173,563 (9)% $ 189,992 16% $ 163,470
BEFORE NON-RECURRING ITEMS, NET . $ 224,863 18% $ 189,992 16% $ 163,470
BASIC NET INCOME PER SHARE:
(PRO FORMA IN 1997)
First Quarter ....................... $ 0.12 9% $ 0.11 22% $ 0.09
Second Quarter ...................... 0.06 (70) 0.20 18 0.17
BEFORE NON-RECURRING ITEMS, NET .. 0.22 10 0.20 18 0.17
Third Quarter ....................... 0.21 11 0.19 12 0.17
Fourth Quarter ...................... 0.17 6 0.16 7 0.15
---------- ---------- ----------
$ 0.56 (15)% $ 0.66 16% $ 0.57
BEFORE NON-RECURRING ITEMS, NET ... $ 0.73 11% $ 0.66 16% $ 0.57
DILUTED NET INCOME PER SHARE:
(PRO FORMA IN 1997)
First Quarter ........................ $ 0.12 20% $ 0.10 11% $ 0.09
Second Quarter ....................... 0.06 (68) 0.19 19 0.16
BEFORE NON-RECURRING ITEMS, NET ... 0.22 16 0.19 19 0.16
Third Quarter ........................ 0.21 11 0.19 19 0.16
Fourth Quarter ....................... 0.17 6 0.16 14 0.14
---------- ---------- ----------
$ 0.55 (14)% $ 0.64 16% $ 0.55
BEFORE NON-RECURRING ITEMS, NET ... $ 0.72 13% $ 0.64 16% $ 0.55
CASH DIVIDENDS PER SHARE:
First Quarter ........................ $ 0.09 13% $ 0.08 7% $ 0.07 1/2
Second Quarter ....................... 0.09 13 0.08 7 0.07 1/2
Third Quarter ........................ 0.09 13 0.08 - 0.08
Fourth Quarter ....................... 0.09 - 0.09 13 0.08
---------- ---------- --------------
$ 0.36 9% $ 0.33 6% $ 0.31
PRICE PER SHARE:
First Quarter ........................ $ 22.00 - 17.50 $ 19.63 - 16.50 $ 12.33 - 10.92
Second Quarter ....................... 20.94 - 17.31 25.50 - 17.92 15.92 - 12.09
Third Quarter ........................ 18.56 - 14.00 24.75 - 19.75 19.67 - 15.17
Fourth Quarter ....................... 16.25 - 10.13 23.81 - 16.00 19.50 - 14.00
</TABLE>
All share and per share data reflect the three-for-two share splits in August
1998 and June 1997.
46
EXHIBIT 21
SUBSIDIARIES OF THE SERVICEMASTER COMPANY
As of March 17, 2000, ServiceMaster had the following subsidiaries:
<TABLE>
<CAPTION>
State or Country
of
Incorporation
Subsidiary or Organization
- ---------- ----------------
<S> <C>
ServiceMaster Consumer Services Limited Partnership........................................................Delaware
ServiceMaster Consumer Services, Inc. ....................................................................Delaware
TruGreen Limited Partnership...............................................................................Delaware
TruGreen, Inc. ...........................................................................................Delaware
Barefoot Inc. ............................................................................................Delaware
Barefoot Grass Lawn Services, Inc. .......................................................................Delaware
Barefoot Services L.L.C. .................................................................................Delaware
TruGreen LandCare L.L.C. 1.................................................................................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
Merry Maids Limited Partnership............................................................................Delaware
Merry Maids, Inc. ........................................................................................Delaware
American Home Shield Corporation 2.........................................................................Delaware
AmeriSpec, Inc. ..........................................................................................Delaware
Furniture Medic Limited Partnership........................................................................Delaware
Furniture Medic, Inc. ....................................................................................Delaware
Rescue Rooter L.L.C. .....................................................................................Delaware
American Residential Services, Inc. 3......................................................................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
CMI Group, Inc. .........................................................................................Wisconsin
Halliwell Engineering Associates L.L.C. ..................................................................Delaware
ServiceMaster Employer Services, Inc. 4....................................................................Delaware
The ServiceMaster Acceptance Company Limited Partnership...................................................Delaware
ServiceMaster AM Limited Partnership.......................................................................Delaware
ServiceMaster Acceptance Corporation.......................................................................Delaware
ServiceMaster Holding Corporation..........................................................................Delaware
ServiceMaster Strategic Limited Partnership................................................................Delaware
The ServiceMaster Company Limited Partnership..............................................................Delaware
ServiceMaster Management Corporation.......................................................................Delaware
ServiceMaster Limited................................................................................United Kingdom
ServiceMaster Operations Germany GmbH.......................................................................Germany
ServiceMaster Japan, Inc. ...................................................................................Japan
TMX-Europe B.V. ...................................................................................The Netherlands
Terminix Ltd. 5 .....................................................................................United Kingdom
Terminix B.V. .....................................................................................The Netherlands
Riwa B.V. .........................................................................................The Netherlands
Anticimex Development AB 6...................................................................................Sweden
Terminix GmbH & Co. KG......................................................................................Germany
LTCS Investment Limited Partnership........................................................................Delaware
ServiceMaster Home Health Care Services Inc. .............................................................Delaware
ServiceMaster Diversified Health Services, Inc. 7..........................................................Delaware
ServiceMaster Diversified Health Services Limited Partnership 8...........................................Tennessee
We Serve America, Inc. ...................................................................................Delaware
WeServeHomes.com, Inc. ...................................................................................Delaware
</TABLE>
- ---------------------------
1 TruGreen LandCare L.L.C. has 6 subsidiaries.
2 American Home Shield Corporation has 18 subsidiaries through which it
carries on its business in the various states in which it markets its
products.
3 American Residential Services, Inc. has 47 subsidiaries.
4 ServiceMaster Employer Services has 5 subsidiaries.
5 Terminix Ltd. has 35 subsidiaries.
6 Anticimex Development AB has 4 subsidiaries.
7 ServiceMaster Diversified Health Services, Inc. has 3 subsidiaries.
8 ServiceMaster Diversified Health Services, L. P. has 37 subsidiaries.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this Form 10-K of our report dated January 24,
2000 of The ServiceMaster Company Annual Report to Shareholders for the year
ended December 31, 1999. It should be noted that we have not audited any
financial statements of the Company subsequent to December 31, 1999, or
performed any audit procedures subsequent to the date of our report.
Arthur Andersen LLP
Chicago, Illinois
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS APPEARING IN EXHIBIT 13 TO THIS FORM 10-K AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001052045
<NAME> The ServiceMaster Company
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1999 JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<EXCHANGE-RATE> 1 1 1
<CASH> 59,834 66,400 64,876
<SECURITIES> 54,376 54,022 59,248
<RECEIVABLES> 597,853 411,363 331,359
<ALLOWANCES> 39,011 38,988 32,221
<INVENTORY> 82,861 49,770 48,157
<CURRENT-ASSETS> 959,238 670,202 594,084
<PP&E> 659,810 441,209 362,653
<DEPRECIATION> 341,712 229,049 204,383
<TOTAL-ASSETS> 3,870,215 2,914,851 2,475,224
<CURRENT-LIABILITIES> 845,804 753,697 558,177
<BONDS> 1,697,582 1,076,167 1,247,845
0 0 0
0 0 0
<COMMON> 3,075 2,980 2,799
<OTHER-SE> 1,202,641 953,506 521,639
<TOTAL-LIABILITY-AND-EQUITY> 3,870,215 2,914,851 2,475,224
<SALES> 0 0 0
<TOTAL-REVENUES> 5,703,535 4,724,119 3,961,502
<CGS> 0 0 0
<TOTAL-COSTS> 4,459,035 3,679,612 3,058,160
<OTHER-EXPENSES> 861,326 648,085 559,409
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 108,955 92,945 76,447
<INCOME-PRETAX> 296,193 318,778 274,279
<INCOME-TAX> 122,630 128,786 110,809
<INCOME-CONTINUING> 173,563 189,992 163,470
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 173,563 189,992 163,470
<EPS-BASIC> 0.56 0.66 0.57
<EPS-DILUTED> 0.55 0.64 0.55
</TABLE>
