SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
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THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
------------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR
---------
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-14762
THE SERVICEMASTER COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-3858106
(State or other jurisdictionof (IRS Employer Identification No.)
incorporation or organization)
One ServiceMaster Way, Downers Grove, Illinois 60515-1700
(Address of principal executive offices) (Zip Code)
630-271-1300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
shares: 299,755,658 shares of common stock on November 6, 2000.
1
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TABLE OF CONTENTS
Page
NO.
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THE SERVICEMASTER COMPANY (Registrant) -
PART I. FINANCIAL INFORMATION
Consolidated Statements of Income for the three and
nine months ended September 30, 2000 and September 30, 1999 2
Consolidated Statements of Financial Position
as of September 30, 2000 and December 31, 1999 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and September 30, 1999 4
Notes to Consolidated Financial Statements 5
Management Discussion and Analysis of Financial Position
and Results of Operations 8
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 13
Item 5: Other Information 14
Item 6: Exhibits and Reports on Form 8-K 15
Signature 16
2
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PART I. FINANCIAL INFORMATION
THE SERVICEMASTER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUE.................. $ 1,586,260 $ 1,584,225 $ 4,559,124 $ 4,236,361
OPERATING COSTS AND EXPENSES:
Cost of services rendered
and products ................... 1,237,853 1,224,340 3,554,787 3,292,992
sold
Selling and administrative expenses 241,218 226,898 659,849 589,615
Other, net (1) .................... -- -- -- 85,500
----------- ----------- ----------- -----------
Total operating costs and expenses 1,479,071 1,451,238 4,214,636 3,968,107
----------- ----------- ----------- -----------
OPERATING INCOME .................. 107,189 132,987 344,488 268,254
NON-OPERATING EXPENSE (INCOME):
Interest .......................... 35,503 30,083 103,048 80,921
expense
Interest and investment income .... (9,026) (10,125) (19,675) (19,395)
Minority interest income .......... (2,700) -- (9,062) --
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES ........ 83,412 113,029 270,177 206,728
Provision for income taxes ........ 35,928 46,392 114,311 86,447
----------- ----------- ----------- -----------
NET INCOME ........................ $ 47,484 $ 66,637 $ 155,866 $ 120,281
=========== =========== =========== ===========
PER SHARE
Basic (1) (2) .................. $ .16 $ .21 $ .51 $ .39
=========== =========== =========== ===========
Diluted (1) (2) ................ $ .16 $ .21 $ .51 $ .38
=========== =========== =========== ===========
DIVIDENDS PER SHARE .............. $ .10 $ .09 $ .28 $ .27
=========== =========== =========== ===========
</TABLE>
(1) 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. Excluding
the impact of these items, net income and earnings per share were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income before non-recurring items, net $ 47,484 $ 66,637 $ 155,866 $ 171,581
Per share before non-recurring items, net:
Basic ................................. $ .16 $ .21 $ .51 $ .56
========== ========== =========== ===========
Diluted ............................... $ .16 $ .21 $ .51 $ .55
========== ========== =========== ===========
</TABLE>
(2) Basic earnings per share are calculated based on 301,594 shares and 311,158
shares for the three months ended September 30, 2000 and 1999, respectively and
303,876 shares and 307,106 shares for the nine months ended September 30, 2000
and 1999, respectively. Diluted earnings per share are calculated based on
303,363 shares and 317,502 shares for the three months ended September 30, 2000
and 1999, respectively and 307,317 shares and 314,589 shares for the nine months
ended September 30, 2000 and 1999, respectively.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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THE SERVICEMASTER COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
As of
September 30, December 31,
2000 1999
------------ -------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents............................................ $ 57,609 $ 59,834
Marketable securities................................................ 52,526 54,376
Receivables, less allowances of $39,847
and $39,011, respectively......................................... 631,633 558,842
Inventories.......................................................... 89,103 82,861
Prepaid expenses and other assets.................................... 219,782 203,325
------------ -------------
Total current assets............................................. 1,050,653 959,238
------------ -------------
PROPERTY AND EQUIPMENT:
At cost........................................................... 668,211 659,810
Less: accumulated depreciation................................... 362,285 341,712
------------ -------------
Net property and equipment....................................... 305,926 318,098
------------ -------------
INTANGIBLE ASSETS, PRIMARILY TRADE NAMES AND GOODWILL,
net of accumulated amortization of $402,389
and $343,316, respectively........................................ 2,516,383 2,461,389
NOTES RECEIVABLE, LONG-TERM SECURITIES, AND OTHER ASSETS............. 158,023 131,490
------------ -------------
Total assets.....................................................$ 4,030,985 $ 3,870,215
============ =============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable.....................................................$ 148,125 $ 145,237
Income taxes payable................................................. 86,090 6,479
Accrued liabilities.................................................. 295,611 364,851
Deferred revenues.................................................... 274,706 257,521
Current portion of long-term obligations............................. 67,603 71,716
------------ -------------
Total current liabilities........................................ 872,135 845,804
------------ -------------
LONG-TERM DEBT....................................................... 1,832,829 1,697,582
OTHER LONG-TERM OBLIGATIONS.......................................... 122,548 121,113
SHAREHOLDERS' EQUITY:
Common stock $0.01 par value, authorized 1 billion shares; issued
and outstanding 300,400 and 307,530 shares, respectively......... 3,004 3,075
Additional paid-in capital........................................... 1,035,990 1,033,568
Retained earnings.................................................... 311,757 241,701
Accumulated other comprehensive income............................... 3,209 (1,821)
Restricted stock..................................................... (2,016) (2,577)
Treasury stock....................................................... (148,471) (68,230)
------------ -------------
Total shareholders' equity....................................... 1,203,473 1,205,716
------------ -------------
Total liabilities and shareholders' equity.......................$ 4,030,985 $ 3,870,215
============ =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
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THE SERVICEMASTER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
------------ ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS AT JANUARY 1................................ $ 59,834 $ 66,400
CASH FLOWS FROM OPERATIONS:
NET INCOME............................................................ 155,866 120,281
Adjustments to reconcile net income
to net cash flows from operations:
Depreciation .................................................. 59,340 47,295
Amortization................................................... 59,073 51,464
Non-recurring items, net....................................... - 85,500
Deferred 1998 tax payment...................................... - (78,500)
Tax refund from 1999 payments.................................. 39,000 -
Deferred income taxes.......................................... 63,539 24,073
Change in working capital, net of acquisitions:
Receivables.................................................. (77,144) (106,890)
Inventories and other current assets......................... (26,619) (30,856)
Accounts payable............................................. (9,622) (21,705)
Deferred revenues............................................ 5,388 9,429
Accrued liabilities.......................................... (32,650) (31,088)
Other, net..................................................... (1,297) (335)
------------- -------------
NET CASH PROVIDED FROM OPERATIONS..................................... 234,874 68,668
------------- ------------
MEMO: NET CASH PROVIDED FROM OPERATIONS EXCLUDING UNUSUAL TAX ITEMS 195,874 147,168
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions................................................ (58,709) (71,875)
Sale of equipment and other assets............................... 5,950 4,796
Business acquisitions, net of cash acquired....................... (131,281) (452,441)
Proceeds from business sales and minority interests............... 49,345 68,490
Payments to sellers of acquired businesses........................ (18,369) (9,589)
Notes receivable and financial investments........................ (14,299) (16,751)
Net purchases of investment securities............................ (3,424) (6,500)
------------- ------------
NET CASH USED FOR INVESTING ACTIVITIES................................ (170,787) (483,870)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings, net................................................... 505,942 1,164,916
Payment of borrowings and other obligations....................... (386,758) (692,665)
Purchase of ServiceMaster stock................................... (109,617) (35,174)
Shareholders' dividends........................................... (85,810) (83,072)
Proceeds from employee share plans................................ 9,978 16,019
Other............................................................. (47) 500
-------------- -------------
NET CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES................ (66,312) 370,524
-------------- ------------
CASH DECREASE DURING THE PERIOD....................................... (2,225) (44,678)
------------- ------------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30............................. $ 57,609 $ 21,722
============= ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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THE SERVICEMASTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: The consolidated financial statements include the accounts of
ServiceMaster and its significant subsidiaries, collectively referred to as "the
Company". Intercompany transactions and balances have been eliminated in
consolidation.
NOTE 2: The consolidated financial statements included herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest Annual Report
to Shareholders and the Annual Report to the Securities and Exchange Commission
on Form 10-K for the year ended December 31, 1999. In the opinion of the
Company, all adjustments necessary to present fairly the financial position of
The ServiceMaster Company as of September 30, 2000 and December 31, 1999, and
the results of operations for the three month and nine month periods ended
September 30, 2000 and 1999, and the cash flows for the nine months ended
September 30, 2000 and 1999 have been included. The preparation of the financial
statements requires management to make certain estimates and assumptions
required under generally accepted accounting principles which may differ from
the actual results. The results of operations for any interim period are not
necessarily indicative of the results which might be obtained for a full year.
NOTE 3: For interim accounting purposes, certain costs directly associated with
the generation of lawn care revenues are initially deferred and recognized as
expense as the related revenues are recognized. All such costs are fully
recognized within the fiscal year in which they are incurred.
NOTE 4: Basic earnings per share includes no dilution from options, debentures
or other financial instruments and is computed by dividing income available to
common stockholders by the weighted average number of shares outstanding.
Diluted earnings per share reflects the potential dilution of convertible
securities and options to purchase common stock. The following chart reconciles
both the numerator and the denominator of the basic earnings per share
computation to the numerator and denominator of the diluted earnings per share
computation.
<TABLE>
<CAPTION>
Three Months Three Months
Ended September 30, 2000 Ended September 30, 1999
----------------------------- ------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME SHARES EPS INCOME SHARES EPS
------ ------ --- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 47,484 301,594 $0.16 $ 66,637 311,158 $0.21
====== ======
Effect of dilutive securities -options - 1,769 - 6,344
---------- --------- --------- --------
Diluted earnings per share $ 47,484 303,363 $0.16 $ 66,637 317,502 $0.21
========== ========== ====== ========== ========= ======
</TABLE>
6
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<TABLE>
<CAPTION>
Nine Months Nine Months
Ended September 30, 2000 Ended September 30, 1999
------------------------------- ------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME SHARES EPS INCOME SHARES EPS
------ ------ --- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 155,866 303,876 $0.51 $ 120,281 307,106 $0.39
====== ======
Effect of dilutive securities -options - 3,441 - 7,483
--------- -------- --------- ---------
Diluted earnings per share $ 155,866 307,317 $0.51 $ 120,281 314,589 $0.38
========== ========== ====== ========== ========= ======
</TABLE>
NOTE 5: In the Consolidated Statements of Cash Flows, the caption Cash and Cash
Equivalents includes investments in short-term, highly-liquid securities having
a maturity of three months or less. Supplemental information relating to the
Consolidated Statements of Cash Flows for the nine months ended September 30,
2000 and 1999 is presented in the following table. The increase in interest paid
in 2000 is primarily due to higher levels of debt outstanding reflecting
acquisitions and the timing of payments. The change in tax payments relates to
the fact that in 2000 the Company received an income tax refund relating to 1999
overpayments. Last year the Company made the entire federal tax payment related
to the 1998 federal tax obligation.
(IN THOUSANDS)
2000 1999
--------- ---------
CASH PAID OR (RECEIVED FOR):
Interest expense....................................... $ 108,220 $ 84,135
Interest and dividend income........................... $ (7,647) $ (13,054)
Income taxes........................................... $ 9,836 $ 140,852
NOTE 6: Total comprehensive income was $42.1 million and $63.9 million for the
three months ended September 30, 2000 and 1999, respectively, and $160.9 million
and $113.4 million for the nine months ended September 30, 2000 and 1999,
respectively. Total comprehensive income includes primarily net income, changes
in unrealized gains on marketable securities and translation balances.
NOTE 7: The business of the Company is primarily conducted through the
ServiceMaster Consumer and Commercial Services and ServiceMaster Management
Services operating units. The Consumer and Commercial Services unit provides a
variety of specialty services to residential and commercial customers. The
Management Services unit provides a variety of supportive management services to
health care, education, and commercial accounts. The Company derives
substantially all of its revenues from customers in the United States with less
than five percent generated in foreign markets.
The Other Operations group includes primarily ServiceMaster Employer Services, a
professional employer organization that provides clients with administrative
processing of payroll, insurance, and other employee benefit programs; the
Company's headquarters operation; and certain businesses the Company has sold or
discontinued. Segment information as of and for the three months and nine months
ended September 30, 2000 and 1999 are as follows:
7
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<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
CONSUMER &
COMMERCIAL MANAGEMENT OTHER
2000 SERVICES SERVICES OPERATIONS CONSOLIDATED
-------------------------------------------------- ----------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenue $ 1,026,816 $ 477,624 $ 81,820 $ 1,586,260
Operating Income $ 102,990 $ 14,988 $ (10,789) $ 107,189
Total Assets $ 3,505,575 $ 236,084 $ 289,326 $ 4,030,985
1999
--------------------------------------------------
Revenue $ 943,585 $ 481,947 $ 158,693 $ 1,584,225
Operating Income $ 115,689 $ 21,134 $ (3,836) $ 132,987
Total Assets $ 3,298,910 $ 215,949 $ 276,525 $ 3,791,384
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
CONSUMER &
COMMERCIAL MANAGEMENT OTHER
2000 SERVICES SERVICES OPERATIONS CONSOLIDATED
-------------------------------------------------- ----------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenue $ 2,819,821 $ 1,419,891 $ 319,412 $ 4,559,124
Operating Income $ 324,649 $ 52,574 $ (32,735) $ 344,488
1999
--------------------------------------------------
Revenue $ 2,316,436 $ 1,407,745 $ 512,180 $ 4,236,361
Operating Income $ 318,025 $ 58,522 $ (108,293) $ 268,254
Operating Income Excluding Non-Recurring Items $ 318,025 $ 58,522 $ (22,793) $ 353,754
</TABLE>
NOTE 8: In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements,"
which was amended by SAB No. 101B in June 2000. SAB No.101B delayed the
implementation date of SAB No.101 to the fourth quarter of 2000. The SAB
provides guidance on the recognition, presentation and disclosure of revenue in
the financial statements. The Company intends to adopt the SAB in the fourth
quarter of 2000. This accounting change could affect the Company's method of
reporting profit from installing its termite baiting systems and could result in
a non-cash, one-time unfavorable adjustment in the range of $.02 to $.04 per
share.
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.
8
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THE SERVICEMASTER COMPANY
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
THIRD QUARTER 2000 COMPARED TO THIRD QUARTER 1999
Revenues of $1.6 billion were consistent with third quarter revenues of one year
ago. Revenue growth for the quarter was approximately three percent, after
adjusting for the impact of sold or discontinued businesses. Operating income
decreased 19 percent to $107.2 million, with margins decreasing to 6.8 percent
from 8.4 percent. Included in operating income are the costs relating to the
WeServeHomes.com initiative. These costs have been allocated to the Company's
partner, Kleiner Perkins, and are reflected as minority interest income below
the operating income line. Earnings per share for the quarter declined from $.21
to $.16 and net income decreased from $66.6 million to $47.5 million. These
results are in line with the Company's projections that were discussed in a
press release on October 2, 2000. The results reflect costs associated with
integrating the Company's recently acquired landscape businesses and increases
in fuel, health care and other labor-related expenses in its other business
units. Cash income per share (defined by the Company as net income with
amortization expense added back) was $.23 per share compared to $.27 last year.
Earnings per share for the full year 2000 are expected to be at the lower end of
the Company's previously indicated range of $.62 to $.66 per share. This
projection is before any potential impact relating to the interpretation and
adoption of the Securities and Exchange Commission's Staff Accounting Bulletin
No. 101. This accounting change could affect the Company's method of reporting
profit from installing its termite baiting systems and could result in a
non-cash, one-time adjustment in a range of $.02 to $.04 per share. The Company
expects profit from operations to improve in 2001. With investments to support
growth and higher interest costs, the Company anticipates single-digit growth in
earnings per share for 2001 and a return to a double-digit growth rate in 2002.
The Consumer and Commercial Services business unit reported revenue of $1.0
billion, an increase of 9 percent, with operating income declining 11 percent to
$103 million, reflecting the integration issues in the landscape operations and
higher fuel and other labor-related costs in most of its business units. The
largest factor in the labor-related costs has been an increase in employee
health care resulting from significantly higher-than-normal utilization as well
as rate increases. TruGreen ChemLawn, the Company's lawn care operations,
reported modest revenue increases reflecting higher customer counts, increased
productivity and price increases with slightly reduced profitability resulting
from higher labor-related costs. TruGreen LandCare, the commercial landscape
business, reported strong revenue growth, but reduced profitability resulting
from integration issues and operating cost issues including fuel and
labor-related costs. The Company has implemented organizational changes in this
business which it believes has strengthened leadership at all levels and
increased integration with the lawncare business. The commercial sale forces of
the two organizations have been combined to provide a stronger, more coordinated
approach to growing the commercial customer base. The integration will also
support the launch of landscape services to large residential cutomers. Terminix
achieved good revenue growth and lower profitability as a result of the increase
in fuel and labor-related costs. During the quarter, the Company implemented
leadership changes and other measures in Terminix Europe to address factors
which led to a decline in profitability. The
9
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combined American Residential Services (ARS)/Rescue Rooter operations continued
to achieve strong growth in revenues and significantly higher margins,
reflecting substantial improvements in the branch operations that were
performing below expectations at the time of acquisition. This business unit has
also benefited from a growing number of service work orders performed for
American Home Shield. American Home Shield posted solid revenue increases with
increased renewals and expanded direct sales to consumers, but also experienced
higher service-related costs, due in part to a change in revenue mix and timing
of certain items. The franchise operations, ServiceMaster Clean and Merry Maids,
achieved strong revenue increases and double-digit profit growth, reflecting
strong results from the company owned operations and productivity improvements.
The Management Services business unit reported revenues of $478 million,
consistent with one year ago. Operating income decreased to $15 million from $21
million, reflecting higher than anticipated start-up costs in a large hospital
system sale, as well as higher employee health care costs, and lower than
anticipated volume of large accounts in the education market. The traditional
business and industry services continue to achieve strong revenue and profit
growth.
The Company continues to focus on the growth and investment in its core
businesses. During the third quarter, the Company sold most of the remaining
operations of its Diversified Health Services (DHS) unit, which manages
long-term care facilities, to a company owned and operated by a former group of
senior managers of DHS. Also during the quarter, the Company sold its TruGreen
Interior Plantcare operations to Rentokil Tropical Plant Services for $44
million in cash. Neither of these transactions is expected to materially affect
ServiceMaster's operating results for the year.
WeServeHomes.com has now been launched in six major metropolitan markets, and
plans to enter 50 U.S. markets in 2001. The Company has recruited strong
operating, marketing, and technical talent to support the initiative.
WeServeHomes.com offers consumer services provided by ServiceMaster,
complementary services provided by third parties, and expects to offer products,
content and helpful tools which are useful to the busy homeowner.
Cost of services rendered and products sold increased one percent for the
quarter and increased as a percentage of revenue to 78.0 percent in 2000 from
77.3 percent in 1999, primarily reflecting increases in fuel, health care and
other labor-related costs. Selling and administrative expenses increased six
percent due to general business growth and acquisitions. As a percentage of
revenue, selling and administrative expenses increased to 15.2 percent in 2000
from 14.3 percent in 1999.
Interest expense increased from the prior year, primarily due to increased debt
levels associated with acquisitions and share repurchases. The tax provision
reflects a higher effective tax rate compared to last year, primarily due to the
non-deductibility of goodwill from acquisitions completed in 1999 and higher
state tax rates.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED TO SEPTEMBER 30, 1999
----------------------------------------------------------------------
Revenues for the nine months increased eight percent to $4.6 billion, primarily
reflecting the impact of acquisitions. The revenue growth in the nine months was
10
<PAGE>
stronger than the third quarter reflecting the impact of the new platform
initiatives (the LandCare acquisition was completed in March last year and the
ARS acquisition closed at the end of April last year) and stronger internal
growth in the first quarter. Operating income decreased three percent to $344
million with operating margins declining to 7.6 percent from 8.4 percent in
1999, excluding the prior year non-recurring unusual items. Operating margins
decreased primarily due to operating cost issues in the Company's recently
acquired landscape businesses, increases in fuel, health care and other
labor-related costs in its other business units, and the expenses associated
with the WeServeHomes.com initiative. Net income, before non-recurring items,
decreased nine percent for the nine months to $156 million and diluted earnings
per share, before non-recurring items, decreased seven percent to $.51. Cash
income per share (defined by the Company as net income with amortization expense
added back) decreased one percent for the nine months to $.70 per share from
$.71 last year. During the second quarter of 1999 the Company recorded a net
charge that reduced net income from ongoing operations by $51 million ($85.5
million pretax). As a result of this net charge, for the nine months last year,
the Company reported net income of $120 million and diluted earnings per share
of $.38.
The Consumer and Commercial Services unit achieved a 22 percent increase in
revenue to $2.8 billion and operating income of $324.6 million, two percent
higher than last year. The segment's revenue growth includes the entire nine
months of operations from the LandCare USA and American Residential Services
acquisitions completed last year. TruGreen ChemLawn reported modest revenue and
profit growth, reflecting the benefits of price increases and acquisitions
partially offset by volume challenges, increases in health care and other labor
costs, and increased fuel and equipment operating costs. Customer counts were
slightly above last year, with an improved retention rate. TruGreen LandCare
reported double-digit revenue growth from both internal sources and
acquisitions, with a significant decline in operating income reflecting
integration issues and higher operating and labor-related costs. The Company has
addressed certain operating issues by strengthening the management
infrastructure in troubled regions and integrating aspects of the lawn care
business with the landscape operations. Terminix achieved solid revenue growth
and a double-digit increase in profit, reflecting good increases in new termite
contracts, strong growth in contract renewals and productivity improvements. The
combined ARS/Rescue Rooter operations reported significant increases in revenues
and profits, reflecting double-digit internal growth at Rescue Rooter and an
additional four months of revenue from the ARS acquisition (which closed in late
April last year). This business continues to perform well and reflects strong
market demand for the services being provided. American Home Shield reported
double-digit revenue growth and a more modest increase in profits, reflecting
strong growth in higher margin customer renewals and direct-to-consumer sales
partially offset by higher service related costs. The franchise operations,
ServiceMaster Clean and Merry Maids, reported strong increases in revenues and
profits due to strong growth in both branch and franchise operations and strong
cost controls.
The Management Services business unit reported revenue growth of one percent to
$1.4 billion and operating income of $53 million, 10 percent below last year.
The segment's results include a $6 million non-recurring benefit from the
resolution of a foreign license agreement in the second quarter this year. This
business was affected by large terminations and the costs to unwind these
contracts, increased health care costs, and startup costs from a large new
contract with a for-profit
11
<PAGE>
hospital chain. The Company continues to invest in the Site Service outsourcing
initiative and is encouraged by its progress.
Cost of services rendered and products sold increased eight percent, due
primarily to general business growth and acquisitions. Cost of services
increased as a percentage of revenue to 78.0 percent in 2000 from 77.7 percent
in 1999.
Selling and administrative expenses increased 12 percent reflecting general
business growth, acquisitions and the investments in WeServeHomes.com. As a
percentage of revenue, selling and administrative expenses increased to 14.5
percent from 13.9 percent in 1999.
Interest expense increased from the prior year, primarily due to increased debt
levels associated with acquisitions and share repurchases. The tax provision,
before non-recurring items, reflects a higher effective tax rate compared to
last year, primarily due to the non-deductibility of goodwill from acquisitions
completed in 1999. Minority interest income primarily reflects the allocation of
costs to the Company's partner, Kleiner Perkins, in its WeServeHomes.com
subsidiary.
FINANCIAL POSITION
Net cash provided from operations of $235 million was significantly higher than
the first nine months of 1999. There are two unusual tax timing items in the
cash flow statements: (i) a $39 million tax refund realized through the third
quarter of 2000 and (ii) the payment of 1998 taxes in the first quarter of 1999.
Eliminating these items, cash provided from operations was $196 million, a $49
million increase from 1999, reflecting higher net income and lower working
capital usage. Every Consumer Services company reported an increase in cash
flows from operations when compared to the prior year. The cash flows reflect
improved receivables management in the landscape and HVAC operations. Management
believes that funds generated from operations and other existing resources will
continue to be adequate to satisfy ongoing working capital needs of the Company.
Accounts and notes receivable increased from year-end levels, reflecting general
business growth and increased seasonal activity in the Consumer and Commercial
Services segment. Inventories increased over year-end levels as a result of
seasonal impacts.
Prepaids and other assets have increased from year-end reflecting the
seasonality in the lawn care business. The lawn care operation defers certain
marketing costs that are incurred earlier in the year, but are directly
associated with revenues realized in subsequent quarters of the current year.
These costs are then amortized over the balance of the current lawn care
production season, as the related revenues are recognized. Deferred revenues
also grew reflecting strong growth at American Home Shield and increases in
customer prepayments for pest control services.
Capital expenditures which include recurring capital needs are below prior year
levels when the Company funded several large technology projects. The Company
has no material capital commitments at this time.
Intangible assets increased from year end, reflecting the effect of
acquisitions, primarily in the lawn care, landscape, pest control and
HVAC/plumbing businesses.
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Debt levels increased due to the seasonal nature of the Company's operating cash
flows combined with the effects of acquisitions, property additions, dividends
and share repurchases. The Company is party to a number of long-term debt
agreements which require it to maintain compliance with certain financial
covenants, including limitations on indebtedness, restricted payments, fixed
charge coverage ratios, and net worth. The Company is in compliance with the
covenants related to these debt agreements.
Total shareholders' equity was $1.2 billion at September 30, 2000 and December
31, 1999, reflecting earnings growth offset by cash dividends and treasury share
repurchases. Cash dividends paid directly to shareholders totaled $86 million or
$.28 per share for the nine months ended September 30, 2000. In the quarter, the
Company repurchased $54 million of shares under the repurchase program announced
last year and for the year has repurchased $110 million. In July 2000, the
Company announced that its Board of Directors authorized $350 million for a
share repurchase program. This authorization replaces the Company's previous
authorization of $150 million announced in October 1999. At September 30, 2000,
approximately $305 million was available under the new authorization for
additional share repurchases. The shares will be repurchased over time in the
open market and in privately-negotiated transactions.
THE COMPANY NOTES THAT STATEMENTS THAT LOOK FORWARD IN TIME, WHICH INCLUDE
EVERYTHING OTHER THAN HISTORICAL INFORMATION, INVOLVE RISKS AND UNCERTAINTIES
THAT AFFECT THE COMPANY'S RESULTS OF OPERATIONS. FACTORS WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN A
FORWARD-LOOKING STATEMENT INCLUDE THE FOLLOWING (AMONG OTHERS): WEATHER
CONDITIONS ADVERSE TO CERTAIN OF THE COMPANY'S CONSUMER AND COMMERCIAL SERVICES
BUSINESSES; THE ENTRY OF ADDITIONAL COMPETITORS IN ANY OF THE MARKETS SERVED BY
THE COMPANY; LABOR SHORTAGES; CONSOLIDATION OF HOSPITALS IN THE HEALTHCARE
MARKET; THE COST AND LENGTH OF TIME TO INTEGRATE ACQUIRED BUSINESSES; UNEXPECTED
CHANGES IN OPERATING COSTS; THE CONDITION OF THE U.S. ECONOMY; AND OTHER FACTORS
DISCUSSED ABOVE LISTED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION.
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PART II. OTHER INFORMATION
ITEM 1: 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.
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 to 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 the question of damages to be considered at the
trial. In September 1999, the jury awarded the plaintiff compensatory damages
and fees of approximately $1 million and punitive damages of $135 million. In
October 1999, the Company filed a motion for judgment notwithstanding the
verdict or, in the alternative, for a new trial. On June 1, 2000 the trial court
entered a new judgment in the amount of $461,440 in compensatory damages and $45
million in punitive damages, as well as amounts for attorney fees and interest.
The Company filed a notice of appeal that same day. On June 13, 2000, Mr. Martin
filed a notice of cross-appeal. Because the trial court clerk is still in the
process of preparing the record, the appeal has not yet been docketed in the
court of appeals, and the clerk does not expect to finish preparation of the
record before January or February of 2001. Accordingly, it is unlikely that the
appeal will be fully briefed and argued in the court of appeals before the
summer of 2001. ServiceMaster believes that the award of $45 million in punitive
damages is not supported by the facts of the case or by applicable state law and
that the judgment will be reversed by an appellate court. Under Georgia law, a
judgment accrues interest at the rate of 12% per annum. The Company continues to
not be able to reasonably estimate the ultimate outcome of this case, and
accordingly, minimal expense has been recorded. In the event that the existing
judgment is sustained, or the original judgment is reinstated, (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.
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ITEM 5: OTHER INFORMATION
The Company's 2001 Annual Meeting of Shareholders is expected to be held on
April 27, 2001. Pursuant to rules of the Securities and Exchange Commission
("SEC"), in order to be considered for inclusion in the Company's 2001 proxy
statement, a shareholder proposal must be received by the Company no later than
November 24, 2000. In addition, regardless of whether a shareholder proposal is
included in the Company's 2001 proxy statement, the Company's bylaws establish
an advance notice procedure for shareholder proposals to be brought before the
annual meeting of shareholders, including proposed nominations of persons for
election to the Board of Directors. Shareholders at the 2001 annual meeting may
consider a proposal or nomination brought by a shareholder of record on the
record date to be established for the 2001 annual meeting and who has given the
Company timely written notice, in proper form, of the shareholder's proposal or
nomination. A shareholder proposal or nomination intended to be brought before
the 2001 annual meeting must be delivered to the Corporate Secretary no earlier
than the close of business on January 13, 2001 and no later than the close of
business on February 12, 2001. If a timely and proper shareholder proposal is
delivered to the Corporate Secretary, the proposal is not included in the 2001
proxy statement, and the proposal is properly presented at the 2001 annual
meeting, the Company may exercise discretionary authority when voting on the
proposal if in the 2001 proxy statement the Company advises shareholders on the
nature of the proposal and how the Company intends to vote on the proposal,
unless the shareholder satisfies certain SEC requirements, including mailing a
separate proxy statement to the Company's shareholders. All proposals and
nominations should be directed to Sandra L. Groman, the Corporate Secretary, One
ServiceMaster Way, Downers Grove, Illinois, 60515.
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- -----------------------
3(ii) Bylaws of The ServiceMaster Company, as amended
through September 29, 2000 (incorporated by
reference to Exhibit 1.4 of Amendment No. 1 to Form
8-A/A (SEC File No. 1-14762) filed with the
Securities and Exchange Commission on October 6,
2000).
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2000
THE SERVICEMASTER COMPANY
(Registrant)
By: /S/STEVEN C. PRESTON
--------------------------------------------------
Steven C. Preston
Executive V.P. and Chief Financial Officer
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