UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
-------
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
---------
TRANSITION REPORT PURSUANT TO SECTION 13 OR
---------
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-14762
THE SERVICEMASTER COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-3858106
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3250 Lacey Road, Downers Grove, Illinois 60515-1700
(Address of principal executive offices) (Zip Code)
630-663-2000
(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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: 298,933,000 shares of common stock on April 28, 2003.
TABLE OF CONTENTS
Page
NO.
THE SERVICEMASTER COMPANY (Registrant) -
PART I. FINANCIAL INFORMATION
Item 1 : Financial Statements
Condensed Consolidated Statements of Income for the three months
ended March 31, 2003 and March 31, 2002 2
Condensed Consolidated Statements of Financial Position
as of March 31, 2003 and December 31, 2002 3
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and March 31, 2002 4
Notes to Condensed Consolidated Financial Statements 5
Item 2: Management Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3: Quantitative and Qualitative Disclosures About
Market Risk 16
Item 4: Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 18
Item 6: Exhibits and Reports on Form 8-K 18
Signature 19
Exhibit 99.1: Certification of Chief Executive Officer Pursuant
to Section 1350 of Chapter 63 of Title 18 of the
United States Code 22
Exhibit 99.2: Certification of Chief Financial Officer Pursuant
to Section 1350 of Chapter 63 of Title 18 of the
United States Code 23
1
PART I. FINANCIAL INFORMATION
THE SERVICEMASTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31,
2003 2002
--------- ---------
OPERATING REVENUE ............................................. $ 733,665 $ 734,263
OPERATING COSTS AND EXPENSES:
Cost of services rendered and products sold ................... 537,919 530,811
Selling and administrative expenses ........................... 169,245 161,602
Goodwill, trade name and other intangible amortization ........ 1,640 2,154
--------- ---------
Total operating costs and expenses ............................ 708,804 694,567
--------- ---------
OPERATING INCOME .............................................. 24,861 39,696
NON-OPERATING EXPENSE (INCOME):
Interest expense .............................................. 16,283 22,541
Interest and investment income ................................ (1,219) (2,932)
Minority interest and other expense, net ...................... 2,072 1,570
--------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ......... 7,725 18,517
Provision for income taxes .................................... 3,050 6,659
--------- ---------
INCOME FROM CONTINUING OPERATIONS ............................. 4,675 11,858
Income (loss) from discontinued operations, net of income taxes - (217)
--------- ---------
NET INCOME .................................................... $ 4,675 $ 11,641
========= =========
PER SHARE:
BASIC EARNINGS PER SHARE:
Income from continuing operations before extraordinary items .. $ 0.02 $ 0.04
Discontinued operations, net .................................. - -
--------- ---------
$ 0.02 $ 0.04
========= =========
SHARES ........................................................ 297,801 300,173
DILUTED EARNINGS PER SHARE:
Income from continuing operations before extraordinary items .. $ 0.02 $ 0.04
Discontinued operations, net .................................. - -
--------- ---------
$ 0.02 $ 0.04
========= =========
SHARES ........................................................ 301,635 307,085
Dividends per share ........................................... $ 0.105 $ 0.10
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
THE SERVICEMASTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
(IN THOUSANDS)
As of Mar. 31, As of Dec 31,
ASSETS 2003 2002
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents ..................................................... $ 104,276 $ 227,409
Marketable securities ......................................................... 92,518 75,194
Receivables, less allowance of $27,209 and $27,616, respectively .............. 342,351 332,186
Inventories ................................................................... 75,336 67,748
Prepaid expenses and other assets ............................................. 71,763 39,464
Deferred customer acquisition costs ........................................... 74,912 48,419
Deferred taxes and income taxes receivable .................................... 125,169 123,100
Assets of discontinued operations ............................................. 1,183 5,654
----------- -----------
Total Current Assets ................................................... 887,508 919,174
----------- -----------
PROPERTY AND EQUIPMENT:
At cost .................................................................... 418,028 413,939
Less: accumulated depreciation ............................................. (224,960) (219,062)
----------- -----------
Net property and equipment ............................................... 193,068 194,877
----------- -----------
OTHER ASSETS:
Goodwill ...................................................................... 1,940,415 1,919,780
Intangible assets, primarily trade names ...................................... 253,844 257,781
Notes receivable .............................................................. 56,199 55,770
Long-term securities and other assets ......................................... 66,303 67,556
----------- -----------
Total Assets ........................................................... $ 3,397,337 $ 3,414,938
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................................................. $ 85,053 $ 92,121
Accrued liabilities:
Payroll and related expenses ............................................... 88,850 99,504
Self-insured claims and related expenses ................................... 77,009 84,521
Other ...................................................................... 107,277 102,380
Deferred revenues ............................................................. 438,027 397,290
Liabilities of discontinued operations ........................................ 19,767 32,113
Current portion of long-term debt ............................................. 33,342 31,135
----------- -----------
Total Current Liabilities .............................................. 849,325 839,064
----------- -----------
LONG-TERM DEBT ................................................................ 796,888 804,340
LONG-TERM LIABILITIES:
Deferred taxes ........................................................... 312,400 312,500
Liabilities of discontinued operations ................................... 28,800 28,800
Other long-term obligations .............................................. 113,864 111,225
----------- -----------
Total Long-Term Liabilities ........................................... 455,064 452,525
----------- -----------
MINORITY INTEREST ............................................................. 100,309 100,309
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock $0.01 par value, authorized 1 billion shares; issued
316,049 and 316,024 shares, respectively ................................. 3,160 3,160
Additional paid-in capital .................................................... 1,050,410 1,054,272
Retained earnings ............................................................. 329,209 355,893
Accumulated other comprehensive loss .......................................... (2,095) (849)
Restricted stock .............................................................. (4,661) (1,988)
Treasury stock ................................................................ (180,272) (191,788)
----------- -----------
Total Shareholders' Equity ............................................. 1,195,751 1,218,700
----------- -----------
Total Liabilities and Shareholders' Equity ............................. $ 3,397,337 $ 3,414,938
=========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
THE SERVICEMASTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Three Months Ended
March 31,
2003 2002
--------- ---------
CASH AND CASH EQUIVALENTS AT JANUARY 1 ....................................................... $ 227,409 $ 402,644
CASH FLOWS FROM OPERATIONS:
NET INCOME ................................................................................... 4,675 11,641
Adjustments to reconcile net income to net cash flows from operations:
Loss from discontinued operations .................................................... - 217
Depreciation expense ................................................................. 12,682 12,205
Amortization expense ................................................................. 1,640 2,154
Deferred income tax expense .......................................................... 2,448 8,890
Change in working capital, net of acquisitions:
Receivables ...................................................................... (15,672) (5,835)
Inventories and other current assets ............................................. (66,258) (70,938)
Accounts payable ................................................................. (6,991) (1,293)
Deferred revenues ................................................................ 42,867 78,265
Accrued liabilities .............................................................. (14,368) (11,299)
Other, net ....................................................................... 1,911 1,830
--------- ---------
NET CASH PROVIDED FROM (USED FOR) OPERATIONS ................................................. (37,066) 25,837
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions ..................................................................... (10,549) (9,652)
Sale of equipment and other assets ..................................................... 980 790
Business acquisitions, net of cash acquired ............................................ (13,070) (4,412)
Notes receivable, financial investments and securities ................................. (14,016) 7,060
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES ....................................................... (36,655) (6,214)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments of debt ................................................................... (10,549) (54,127)
Purchase of ServiceMaster stock ........................................................ (1,901) -
Shareholders' dividends ................................................................ (31,359) (29,402)
Other, net ............................................................................. 2,273 6,354
--------- ---------
NET CASH USED FOR FINANCING ACTIVITIES ....................................................... (41,536) (77,175)
--------- ---------
--------- ---------
CASH USED FOR DISCONTINUED OPERATIONS ........................................................ (7,876) (26,234)
--------- ---------
CASH DECREASE DURING THE PERIOD .............................................................. (123,133) (83,786)
--------- ---------
CASH AND CASH EQUIVALENTS AT MARCH 31 ........................................................ $ 104,276 $ 318,858
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
THE SERVICEMASTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: The condensed consolidated financial statements include the accounts of
ServiceMaster and its subsidiaries, collectively referred to as "the Company".
Intercompany transactions and balances have been eliminated in consolidation.
NOTE 2: The condensed consolidated financial statements have been prepared by
the Company in accordance with generally accepted accounting principles (GAAP)
and pursuant to the rules and regulations of the Securities and Exchange
Commission. The Company suggests that the quarterly condensed consolidated
financial statements be read in conjunction with the consolidated 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, 2002. The condensed consolidated
financial statements reflect all adjustments, which are, in the opinion of
management, necessary for the fair presentation of the financial position,
results of operations and cash flows for the interim periods. The results of
operations for any interim period are not necessarily indicative of the results
which might be achieved for a full year.
NOTE 3: The Company has identified the most important accounting policies in
order to portray its financial position and results of operations. These relate
primarily to revenue recognition and the deferral of customer acquisition costs.
The following revenue recognition policies have not changed since year-end.
Revenues from lawn care, pest control, liquid and fumigation termite
applications, as well as heating/air conditioning and plumbing services are
recognized as the services are provided. Revenues from landscaping services are
recognized as they are earned based upon agreed monthly contract arrangements or
when services are performed for non-contractual arrangements. Revenues from the
Company's commercial installation contracts, primarily relating to heating,
ventilation and air conditioning (HVAC), are recognized on the percentage of
completion method in the ratio that total incurred costs bear to total estimated
costs. The Company eradicates termites through the use of baiting stations, as
well as through non-baiting methods (e.g., fumigation or liquid treatment).
Termite services using baiting stations as well as home warranty services
typically are sold through annual contracts for a one-time, upfront payment.
Direct costs of these contracts (ongoing service costs for termite completions
and claim costs for warranty contracts) are expensed as incurred. The Company
recognizes revenue over the life of these contracts in proportion to the
expected direct costs. Revenue from trade name licensing arrangements is
recognized when earned. Franchised revenues (which in the aggregate represent
approximately three percent of consolidated revenue) consist principally of
continuing monthly fees based upon the franchisee revenue. Monthly fee revenue
is recognized when the related franchise revenue is reported from the franchisee
and collectibility is assured and all material services or conditions relating
to the sale have been substantially performed. Total franchise fee income
(excluding trade name licensing) represented 35.4 percent and 21.5 percent of
consolidated operating income for the three months ended March 31, 2003 and
2002, respectively. The portion of total franchise fee income related to initial
fees received from the sale of a franchise were immaterial to the Company's
consolidated financial statements for all periods.
Customer acquisition costs, which are incremental and direct costs of obtaining
the customer, are deferred and amortized over the life of the contract in
proportion to revenue recognized. These costs include sales commissions and
direct selling costs which can be shown to have resulted in a successful sale.
TruGreen ChemLawn has significant seasonality to its business. In the winter and
early spring, this business sells a series of lawn applications to customers
which are rendered primarily in March through October. The Company incurs
incremental selling expenses at the beginning of the year that directly relate
to successful sales for which the revenues will be recognized in later quarters.
This business also defers, on an interim basis, pre-season advertising costs and
annual repairs and maintenance procedures that are performed in the first
quarter. These costs are deferred and recognized approximately in proportion to
the contract revenue over the production season, and are not deferred beyond the
calendar year-end.
As noted above, TruGreen's pre-season advertising costs are deferred and
recognized approximately in proportion to the contract revenue over the year.
Terminix also defers its advertising costs in the first
5
quarter and recognizes the expense over the year. These costs are not deferred
beyond the calendar year-end. The cost of direct-response advertising at
Terminix is capitalized and amortized over its expected period of future
benefits. This direct-response advertising consists primarily of direct-mail
promotions, for which the cost is capitalized and amortized over the one-year
customer contract life.
The preparation of the financial statements requires management to make certain
estimates and assumptions required under generally accepted accounting
principles which may differ materially from the actual results. Disclosures in
the 2002 Annual Report presented the significant areas that require the use of
management's estimates and discussed how management formed its judgment. The
areas discussed included the allowance for receivables, accruals for
self-insured retention limits related to medical, workers compensation, auto and
general liability insurance, the possible outcome of litigation and the useful
lives for depreciation and amortization expense and the valuation of tangible
and intangible assets. In 2003, there have been no changes in the significant
areas that require estimates or in the methodologies.
NOTE 4: 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.
NOTE 5: In accordance with Statement of Financial Accounting Standards (SFAS)
142, "Goodwill and Other Intangible Assets," the Company's goodwill and
indefinite lived intangible assets are not being amortized. Goodwill and
intangible assets that are not amortized are subject to at least an annual
assessment for impairment by applying a fair-value based test. In the first
quarter, the Company reviewed its intangible balances and removed the fully
amortized asset as well as the related accumulated amortized balance on the
financial statements. During this process certain reclassifications between
categories were made. The following table summarizes the goodwill and intangible
asset balances:
(IN THOUSANDS) As of As of
March 31, December 31,
2003 2002
-------------- -----------------
Goodwill (1) $1,940,415 $1,919,780
Trade names (1) 238,550 238,550
Other intangible assets 43,490 78,284
Accumulated amortization (2) (28,196) (59,053)
-------------- -----------------
Net other intangibles 15,294 19,231
-------------- -----------------
Total $2,194,259 $2,177,561
============== =================
(1) Not subject to amortization.
(2) Annual amortization expense of approximately $7 million in 2003 is expected
to decline over the next five years.
The table below presents, by segment, the goodwill and trade names that are not
subject to amortization:
(IN THOUSANDS) March 31, December 31,
2003 2002
------------------ ------------------
TruGreen $935,009 $916,216
Terminix 711,200 709,955
American Home Shield 72,085 72,085
ARS/AMS 347,968 347,968
Other Operations 112,703 112,106
------------------ ------------------
Total $2,178,965 $2,158,330
================== ==================
6
NOTE 6: Basic earnings per share is computed by dividing income available to
common stockholders by the weighted-average number of shares outstanding for the
period. The weighted average common shares for the diluted earnings per share
calculation includes the incremental effect related to outstanding options whose
market price is in excess of the exercise price. Shares potentially issuable
under convertible securities have not been considered outstanding in the diluted
earnings per share calculations for both periods as their impact is
anti-dilutive.
The following table reconciles both the numerator and the denominator of the
basic earnings per share from continuing operations computation to the numerator
and the denominator of the diluted earnings per share from continuing operations
computation.
(IN THOUSANDS, EXCEPT PER SHARE DATA) Three Months Three Months
Ended March 31, 2003 Ended March 31, 2002
-------------------------------- ------------------------------
CONTINUING OPERATIONS: INCOME SHARES EPS INCOME SHARES EPS
- ---------------------- -------- -------- ------ -------- -------- ------
Basic earnings per share $4,675 297,801 $0.02 $11,858 300,173 $0.04
======== =======
Effect of dilutive securities -options 3,834 6,912
---------- --------- ---------- ---------
Diluted earnings per share $4,675 301,635 $0.02 $11,858 307,085 $0.04
========== ========= ======== ========== ========= =======
NOTE 7: Beginning in 2003, the Company is accounting for employee stock options
as compensation expense in accordance with SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 148 "Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of FASB Statement No. 123", provides alternative
methods of transitioning to the fair value based method of accounting for
employee stock options as compensation expense. The Company is using the
"prospective method" of SFAS 148 and will expense the fair value of new employee
option grants awarded subsequent to 2002. If the Company continues its
historical pattern of option granting, the impact is expected to be
approximately $.005 per share in 2003, growing to approximately $.03 per share
over five years.
Prior to 2003, the Company accounted for employee share options under the
intrinsic method of Accounting Principles Board Opinion 25, as permitted under
GAAP. Had compensation expense for employee options been determined under the
fair value based method of SFAS 123, proforma reported net income and net
earnings per share would reflect the following:
Three Months Ended
March 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
----------------------------------
Net income as reported $4,675 $11,641
Add back: Stock-based compensation
expense included in reported net income,
net of related tax effects 164 -
Deduct: Total stock-based compensation
expense determined under fair value
method,
net of related tax effects (1,877) (1,894)
--------------- ---------------
Proforma net income $2,962 $9,747
=============== ===============
Basic Earnings Per Share:
As reported $0.02 $0.04
Proforma $0.01 $0.03
Diluted Earnings Per Share:
As reported $0.02 $0.04
Proforma $0.01 $0.03
NOTE 8: In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46). Under this
Interpretation, certain entities known as "Variable Interest Entities" (VIE)
must be consolidated by the "primary beneficiary" of the entity. The primary
beneficiary is generally defined as having the majority of the risks and rewards
arising from the VIE. For VIE's in which a significant (but not majority)
variable interest is held, certain disclosures are required. The Company is
required to apply the requirements of FIN 46 starting with its third quarter
2003 Form 10-Q filing. The
7
Company is presently assessing the impact of this Interpretation; however, it is
not expected to have a material impact on the Consolidated Financial Statements.
Based on information as of March 31, 2003, adoption of this Interpretation in
2003 could result in approximately $5 million to $60 million of real estate
operating leases being included on the balance sheet as assets with associated
debt.
NOTE 9: In the Condensed 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 Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002 is presented in the following table:
(IN THOUSANDS)
2003 2002
----------- -----------
CASH PAID OR (RECEIVED) FOR:
Interest expense...................... $ 23,491 $ 28,969
Interest and dividend income.......... $ (2,156) $ (3,198)
Income taxes.......................... $ 618 $ 28,090
The decrease in interest paid in 2003 is primarily due to reduced debt levels.
The tax payment in 2002 resulted from the gain on the sale of the Management
Services business.
NOTE 10: Total comprehensive income was $3.4 million and $13.1 million for the
three months ended March 31, 2003 and 2002, respectively. Total comprehensive
income includes primarily net income, changes in unrealized gains and losses on
marketable securities and foreign currency translation balances.
NOTE 11: In 2001, the Company entered into an agreement which provides for the
ongoing revolving sale of a designated pool of accounts receivable of TruGreen
and Terminix to a wholly-owned, bankruptcy-remote subsidiary, ServiceMaster
Funding LLC. ServiceMaster Funding LLC has entered into an agreement to
transfer, on a revolving basis, an undivided percentage ownership interest in a
pool of accounts receivable to unrelated third party purchasers. ServiceMaster
Funding LLC retains an undivided percentage interest in the pool of accounts
receivable and bad debt losses for the entire pool are allocated first to this
retained interest. At March 31, 2003 and 2002, there were no receivables sold to
third parties under this agreement. However, the Company may sell its
receivables in the future which would provide an alternative funding source. The
agreement is a 364-day facility that is renewable at the option of the
purchasers. The Company may sell up to $65 million of its receivables to these
purchasers in the future and therefore has immediate access to cash proceeds
from these sales. The amount of the eligible receivables varies during the year
based on seasonality of the business and will at times limit the amount
available to the Company.
NOTE 12: In October 2001, the Company's Board of Directors approved a series of
strategic actions which were the culmination of an extensive portfolio review
process that was initiated in the first quarter of 2001. As part of this
portfolio review, the Company sold or exited certain non-strategic or
under-performing businesses in the fourth quarter of 2001 and third quarter of
2002. The results of these discontinued business units have been separately
classified as "Discontinued Operations" in the accompanying financial
statements.
The Company continues to carry certain assets on its financial statements
relating to these operations. Management is actively selling the remaining
equipment and collecting the outstanding receivables. The Company believes that
the remaining assets are presented at their net realizable value. In addition,
reserves and accrual balances remain on the financial statements relating to
these operations. Cash payments incurred in the first three months of 2003
include a cash adjustment to the purchase price of a 2001 disposition and
wind-down of LandCare Construction contracts. The remaining balances are
outlined in the table below.
In the fourth quarter of 2001, the Company recorded a charge for asset
impairments and other items which included accruals for residual value
guarantees on leased properties, severance for former executives and terminated
employees, and other costs.
The table below summarizes the activity during the three months ended March 31,
2003 for the remaining liabilities from the discontinued operations and the
reserves for items recorded in the fourth quarter of 2001. The Company believes
that the remaining reserves continue to be adequate and reasonable.
8
(IN THOUSANDS) Balance at Cash Balance at
December 31, Payments March 31,
2002 or Other 2003
------------ ---------- --------------
Remaining liabilities from
discontinued operations
LandCare Construction $14,000 $2,800 $11,200
Certified Systems, Inc. 13,600 400 13,200
Management Services 1,600 200 1,400
International businesses 21,400 8,900 12,500
Other 10,400 200 10,200
Reserves related to strategic
actions in the fourth
quarter of 2001 $15,500 $1,300 $14,200
NOTE 13: The business of the Company is conducted through five operating
segments: TruGreen, Terminix, American Home Shield, ARS/AMS and Other
Operations. In accordance with Statement of Financial Accounting Standards No.
131, the Company's reportable segments are strategic business units that offer
different services. The TruGreen segment provides residential and commercial
lawn care and landscaping services through the TruGreen ChemLawn and TruGreen
LandCare companies. The Terminix segment provides termite and pest control
services to residential and commercial U.S. customers. The American Home Shield
segment provides home warranties to consumers that cover HVAC, plumbing and
certain appliances. This segment also includes home inspection services provided
by AmeriSpec. The American Residential Services, (ARS) and American Mechanical
Services (AMS) segment provides HVAC and plumbing services provided under the
ARS, AMS and Rescue Rooter brand names. The Other Operations segment includes
the franchise operations of ServiceMaster Clean and Merry Maids, which provide
disaster restoration and cleaning services as well as the Company's headquarters
operations which provides various technology, marketing, finance and other
support services to the business units. Segment information is presented below.
9
(IN THOUSANDS) Three Months Three Months
Ended March 31, Ended March 31,
2003 2002
- --------------------------------------------------------------------------------------------------
Operating Revenue:
TruGreen $225,869 $229,143
Terminix 225,906 220,273
American Home Shield 94,224 85,916
ARS/AMS 151,433 165,091
Other Operations 36,233 33,840
- --------------------------------------------------------------------------------------------------
Total Operating Revenue $733,665 $734,263
==================================================================================================
Operating Income (Loss):
TruGreen $(8,830) $6,524
Terminix 33,528 37,936
American Home Shield 8,159 3,355
ARS/AMS (1,170) (2,886)
Other Operations (6,826) (5,233)
- --------------------------------------------------------------------------------------------------
Total Operating Income $24,861 $39,696
==================================================================================================
As of As of
March 31, 2003 Dec. 31, 2002
- --------------------------------------------------------------------------------------------------
Identifiable Assets:
TruGreen $1,188,442 $1,070,031
Terminix 839,102 841,437
American Home Shield 363,745 376,059
ARS/AMS 478,571 489,366
Other Operations (and discontinued businesses) 527,477 638,045
- --------------------------------------------------------------------------------------------------
Total Identifiable Assets $3,397,337 $3,414,938
==================================================================================================
10
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER 2003 COMPARED TO FIRST QUARTER 2002
CONSOLIDATED REVIEW
Revenue for the first quarter of 2003 was $734 million, consistent with 2002,
reflecting a solid increase at American Home Shield and growth in Terminix,
TruGreen LandCare and the franchise operations, offset by revenue declines in
the ARS/AMS segment and the lawn care operations of TruGreen. First quarter 2003
diluted earnings per share was $.02 compared to $.04 in 2002. Operating income
was $25 million, compared to $40 million in 2002. The decline in profitability
reflects the impact of late season cold weather and snowfall which delayed
TruGreen's lawn care production season into later quarters as well as reduced
lead flow in Terminix across southern regions of the country as cooler
temperatures significantly reduced termite swarms and pest activity.
Cost of services rendered and products sold increased one percent for the
quarter and increased as a percentage of revenue to 73.3 percent in 2003 from
72.3 percent in 2002. Selling and administrative expenses increased five percent
and increased as a percentage of revenue to 23.1 percent in 2003 from 22.0
percent in 2002. The increase in selling and administrative expenses primarily
reflects increased expenditures on marketing, as well as enterprise-wide
technology and regulatory compliance initiatives.
Net interest expense decreased $4 million from 2002, primarily reflecting
reduced debt levels. The tax provision in 2003 has returned to a normalized rate
of 40 percent, which is a higher effective tax rate than 2002. The 2002 rate
included the one-time benefit from utilizing the prior year net operating losses
of the ServiceMaster Home Service Center operations.
OUTLOOK
Despite adverse economic and weather conditions, the Company expects that its
business units will generate revenue and operating income growth in 2003.
However, the Company expects this business growth to be offset by the increased
cost of a higher tax rate and increased expenditures in marketing, technology,
and regulatory compliance initiatives. These factors, combined with the current
business trends, leads the Company to estimate that its 2003 earnings per share
from continuing operations will match last year's figure.
The Company expects to realize continuing benefits from its strategic sourcing
and Six Sigma initiatives and estimates they will contribute $.04 to $.05 per
diluted share in 2003. In addition, the Company's debt reduction program is
expected to reduce interest expense by approximately $.01 per diluted share in
2003. There are a number of factors that are expected to offset these items. The
Company anticipates continued increases in health care, insurance, and to a
lesser extent, fuel costs. The Company is aggressively focused on risk
management and safety programs and has an active fuel cost management program in
place. Nonetheless, based on current trends, cost increases in these areas are
expected to have a negative impact in 2003 of approximately $.05 per diluted
share. In addition, the Company has increased expenditures on marketing,
technology, and process improvement to enhance operating efficiency, build
greater customer satisfaction, and meet the demands of an increasingly
regulatory environment. These increased expenditures in 2003 are expected to
total $.03 to $.04 per diluted share. Finally, the 2002 effective income tax
rate included a one-time benefit of approximately $.04 per diluted share
resulting from the use of net operating losses of a subsidiary operation. The
effective income tax rate for 2003 is expected to be a more normalized rate of
approximately 40 percent.
11
KEY PERFORMANCE INDICATORS
The table below presents selected metrics related to customer counts and
customer retention for the three most profitable businesses of the Company.
These measures are presented on a rolling, twelve-month basis in order to avoid
seasonal anomalies.
KEY PERFORMANCE INDICATORS
As of March 31,
2003 2002
------------- ------------
TRUGREEN -
Growth in Full Program Contracts 2% -2%
Customer Retention Rate 63.5% 62.2%
TERMINIX -
Growth in Pest Control Customers 1% 11%
Pest Control Customer Retention Rate 75.2% 77.1%
Growth in Termite Customers 0% 8%
Termite Customer Retention Rate 88.6% 89.9%
AMERICAN HOME SHIELD -
Growth in Warranty Contracts 12% 15%
Customer Retention Rate 53.3% 52.6%
SEGMENT REVIEW
The TruGreen segment includes lawn care operations performed under the TruGreen
ChemLawn brand name and landscape maintenance services provided under the
TruGreen LandCare brand name. The TruGreen segment reported revenue of $226
million in 2003, one percent below 2002. The segment's operating loss for the
quarter was $9 million compared with operating income of $7 million in 2002. In
the lawn care operations, customer counts increased more than two percent,
however, revenue decreased eight percent as late season snowfall experienced
throughout the central, mid-Atlantic and eastern regions of the country delayed
TruGreen's ability to begin servicing residential contracts that had already
been sold. The Company estimates that approximately $10 million to $15 million
of production revenue was delayed to later quarters due to these weather
factors. Management is focused on taking measures to capture all of the revenue
associated with the contracts that have been sold, including ensuring that the
labor force and vehicle capacity will be in place to meet the production demand.
Operating income margins in the lawn care operations declined in 2003 compared
with 2002 due to the reduced level of production. In the landscape maintenance
business, revenue increased five percent during the first quarter of 2003
compared with 2002, reflecting a significant increase in snow removal revenue,
partially offset by a decline in the level of enhancement sales (higher priced
discretionary services such as seasonal flower plantings), which have been
impacted by the weak economy. Operating income margins in the landscaping
business declined in 2003 due to pricing pressures in the utility line clearing
operations. Capital employed (computed as the segment's total assets less
liabilities, exclusive of debt balances) in the TruGreen segment decreased one
percent to $1.01 billion at March 31, 2003 compared with $1.03 billion at March
31, 2002.
The Terminix segment, which includes the domestic termite and pest control
services, reported a three percent increase in revenue to $226 million from $220
million in 2002 and operating income of $34 million compared to $38 million in
2002. Revenue growth was supported by an increase in customer renewals and an
increase in the commercial pest control customer base. However, adverse cooler
temperatures that impacted many southern regions of the country significantly
impeded the development of the termite swarm and other pest activity. As a
result, termite and pest control sales leads have declined significantly. Due to
the seasonal nature of the termite swarm, it is expected that approximately $20
million of lost volume cannot be recovered. The adverse weather conditions
coupled with the weak economy contributed to the decline in customer retention
rates. Management is optimistic, however, that as heavy precipitation has left
several regions of the country with overall higher moisture levels, pending
warmer weather should result in an increase in termite and pest activity.
Operating income margins declined from 2002 and were impacted
12
by a reduction in volume of new sales activity and incremental costs associated
with Terminix's new information system. The rollout of this system to the
branches is expected to be completed by the second quarter of 2004. Capital
employed at March 31, 2003 was $602 million, consistent with $603 million at
March 31, 2002.
The American Home Shield segment, which provides home warranties to consumers
that cover HVAC, plumbing and other appliances, reported a 10 percent increase
in revenue to $94 million from $86 million in 2002 and operating income of $8
million compared to $3 million in 2002. Revenue growth was driven primarily by a
strong increase in renewals partially offset by a softening in new real estate
closings. Although retention rates continue to improve, mortgage refinancings
have resulted in an increase in cancellations in channels where the customer's
warranty payment is included in the mortgage statement. The Company continues to
expand its third-party sales channel and has successfully launched a
relationship with a major insurance carrier. Operating margins improved
substantially reflecting the leveraging of fixed costs from volume growth, a
lower claims rate and favorable trending of prior year claims. Capital employed
increased 15 percent to $101.7 million at March 31, 2003 compared to $88.5
million at March 31, 2002, reflecting volume growth in the business as well as a
higher level of investments.
The ARS/AMS segment provides direct HVAC and plumbing services under the
American Residential Services (ARS), Rescue Rooter, and American Mechanical
Services (AMS) (for large commercial accounts) brand names. Revenue for the
quarter totaled $151 million in 2003, a decrease of eight percent from $165
million in 2002. The decline in revenue primarily reflects significant reduction
in HVAC construction revenue in both the residential and commercial sectors,
partially offset by an increase in add-on replacement HVAC activity. Despite the
decline in revenue, the operating loss in the segment was reduced from $3
million in 2002 to $1 million, primarily due to improved gross margins and the
timing of expenditures. Higher gross margins in both HVAC and plumbing service
lines more than offset the lower earnings in the construction business. Capital
employed decreased six percent to $394.5 million at March 31, 2003 compared to
$421.5 million at March 31, 2002, reflecting reduced receivable levels.
The Other Operations segment includes the Company's ServiceMaster Clean, Merry
Maids, and international operations as well as its headquarters functions.
Reported segment revenue of $36 million in 2003 compared with $34 million in
2002, primarily reflected growth in the ServiceMaster Clean and Merry Maids
businesses. This segment reported an operating loss of $7 million in 2003
compared with a loss of $5 million in 2002, reflecting double-digit growth in
ServiceMaster Clean offset by increased expenditures related to marketing,
technology, and regulatory compliance initiatives. Capital employed in this
segment decreased significantly to $13.5 million at March 31, 2003 compared to
$274.9 million at March 31, 2002, primarily reflecting reduced cash levels
following the Company's debt reduction program.
FINANCIAL POSITION
Net cash flow used for operations was $37 million in the quarter, compared with
operations providing net cash of $26 million in the first quarter of 2002.
Historically, the first quarter is a period of investment for many of the
Company's businesses as they prepare for the summer and fall production season.
Consequently, the Company's first quarter cash flows from operations are lower
than in any other quarter, and, are often negative. Several items impact the
comparison of the 2003 cash flows from operations with 2002, with the largest
component being approximately $35 million in lower deferred revenue associated
with prepayments in 2003, primarily in TruGreen ChemLawn. TruGreen ChemLawn
typically receives prepayments for its services in the fourth and first
quarters. In preparation for the 2003 season, prepayment programs were launched
earlier than the prior year resulting in an acceleration of prepayments (and
cash flow) from the first quarter to the fourth quarter, relative to the prior
year. In addition, lower sales at Terminix and a reduced prepayment discount
resulted in fewer customers prepaying. Although many businesses continued to
show improvements in receivables management in 2003, there was not the same
level of incremental improvement that was experienced in 2002 when both TruGreen
LandCare and ARS made substantial improvements in their receivable levels. The
first quarter of 2002 also included a large payment for ServiceMaster Clean's
work at the Pentagon. The cash flow comparison was also impacted by the timing
of payments related to insurance, bonuses and vendors, with an increased level
of payments in 2003 compared to 2002. 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.
13
Cash and marketable securities totaled approximately $197 million at March 31,
2003. During 2002, the Company completed its debt reduction program announced in
October 2001. As a result of strong cash flows and the net proceeds received
from the Company's 2001 dispositions, total debt has been reduced by
approximately $1.0 billion over the last two years and represents the Company's
lowest debt levels in over five years. The debt reduction program enabled the
Company to lengthen its maturity profile by focusing debt reductions on shorter
maturities. Approximately 67 percent of the Company's debt now matures beyond
five years and 42 percent beyond fifteen years. The Company's next significant
debt maturity is not until 2005.
The Company maintains a three-year revolving credit facility for $490 million,
which will expire in December 2004. As of March 31, 2003 the Company had issued
approximately $147 million of letters of credit under the facility and had
unused commitments of approximately $343 million. The Company also has $550
million of senior unsecured debt and equity securities available for issuance
under an effective shelf registration statement. In addition, the Company has an
arrangement enabling it to sell, on a revolving basis, certain receivables to
unrelated third party purchasers. At March 31, 2003, there were no receivables
outstanding that had been sold to third parties. The agreement is a 364-day
facility that is renewable at the option of the purchasers. The Company may sell
up to $65 million of its eligible receivables to these purchasers in the future
and therefore has immediate access to cash proceeds from these sales. The amount
of eligible receivables varies during the year based on seasonality of the
business and will at times limit the amount available to the Company. The
Company also maintains lease facilities with banks totaling $95 million that
provide for the acquisition and development of properties to be leased by the
Company. There are residual value guarantees of these properties up to 82
percent of the fair market value of the properties. At March 31, 2003, there was
approximately $73 million funded under these facilities. Of the $95 million in
facilities, $80 million expires in October 2004 and $15 million expires in
January 2008. Approximately $15 million of these leases that involve constructed
properties have been included on the balance sheet as assets with related debt
as of March 31, 2003 and December 31, 2002, and the balance of the leases are
operating leases. The majority of the Company's vehicle fleet is leased through
operating leases. The lease terms are non-cancelable for the first twelve-month
term, then are month-to-month leases, cancelable at the Company's option. There
are residual value guarantees (ranging from 70 percent to 87 percent depending
on the agreement) on these vehicles, which historically have not resulted in
significant net payments to the lessors. At March 31, 2003, there was
approximately $256 million of residual value relating to the Company's fleet.
The following table presents the Company's obligations and commitments:
2004 and 2006 and 2008 and
(IN MILLIONS) TOTAL 2003 2005 2007 LATER YEARS
- ------------------------------------------------------------------------------------------------------
Debt balances $830 $24 $176 $71 $559
NON-CANCELABLE OPERATING LEASES (1) 267 51 99 63 54
- ------------------------------------------------------------------------------------------------------
Total amount $1,097 $75 $275 $134 $613
(1) Includes lease payments and residual value guarantees on leased properties.
There have been no material changes in the terms of the Company's financing
agreements since December 31, 2002. As described in the Company's latest Annual
Report to Shareholders, the Company is party to a number of debt agreements
which require it to maintain certain financial and other covenants, including
limitations on indebtedness and interest coverage ratio. In addition, under
certain circumstances, the agreements may limit the Company's ability to pay
dividends and repurchase shares of common stock. These limitations are not
expected to be a factor in the Company's future dividend and share repurchase
plans. Failure by the Company to maintain these covenants could result in the
acceleration of the maturity of the debt. At March 31, 2003, the Company was in
compliance with the covenants related to these debt agreements and based on its
operating outlook for the remainder of 2003, expects to be able to maintain
compliance in the future.
The assets and liabilities relating to the discontinued companies have been
classified in separate captions on the Condensed Consolidated Statements of
Financial Position. Assets of the discontinued operations have declined
reflecting cash collections on receivables and the sale of fixed assets. The
liabilities from discontinued operations have declined as a result of a cash
adjustment to the purchase price of the 2001
14
disposition of the Company's European pest control and property services
operations as well as certain other payments.
Receivables and inventories increased from year-end levels, reflecting general
business growth and increased seasonal activity. Prepaid expenses and other
assets increased from year-end primarily reflecting pre-season advertising costs
and annual repairs and maintenance procedures that are performed in the first
quarter at TruGreen ChemLawn and advertising at Terminix. These costs are
deferred and recognized in proportion to the contract revenue over the
production season, and are not deferred beyond the calendar year-end. Deferred
customer acquisition costs increased reflecting the seasonality in the lawn care
operations. In the winter and early spring, this business sells a series of lawn
applications to customers which are rendered primarily in March through October.
The lawn care operations incur incremental selling expenses at the beginning of
the year that directly relate to successful sales in which the revenues will be
recognized in later quarters. These costs are deferred and recognized in
proportion to the contract revenue over the production season, and are not
deferred beyond the calendar year-end. Deferred revenues increased reflecting
strong growth in warranty contracts written at American Home Shield.
Capital expenditures which include recurring capital needs and information
technology projects are approximately at the same levels as prior year. The
Company has no material capital commitments at this time. Tuck-in acquisitions
in the first quarter of 2003 totaled $13 million, compared with $4 million in
2002. The 2003 acquisitions occurred primarily at TruGreen ChemLawn.
Total shareholders' equity was $1.2 billion at March 31, 2003 and December 31,
2002, reflecting earnings growth which was offset by cash dividends. Cash
dividends paid directly to shareholders totaled $31 million or $.105 per share
for the three months ended March 31, 2003. In April 2003, the Company paid a
second quarter cash dividend of $.105 per share. If this quarterly dividend rate
continues through 2003, it would result in an annual payment for 2003 of $.42
per share, a 2.4% increase over 2002. The Company approves its actual dividend
payment on a quarterly basis and continually reviews its dividend policy, share
repurchase program and other capital structure objectives. Although the Company
has not undertaken material share repurchases during the first three months of
2003, it plans to continue its share repurchase program in the future. Decisions
relating to any future share repurchases will take various factors into
consideration such as the Company's desire to maintain investment grade ratings,
general business conditions, and other strategic investment opportunities.
FORWARD LOOKING STATEMENTS
THE COMPANY'S FORM 10-Q FILING CONTAINS STATEMENTS Date CONCERNING FUTURE
RESULTS AND OTHER MATTERS THAT MAY BE DEEMED TO BE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE
COMPANY INTENDS THAT THESE FORWARD-LOOKING STATEMENTS, WHICH LOOK FORWARD IN
TIME AND INCLUDE EVERYTHING OTHER THAN HISTORICAL INFORMATION, BE SUBJECT TO THE
SAFE HARBORS CREATED BY SUCH LEGISLATION. THE COMPANY NOTES THAT THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES THAT COULD AFFECT ITS
RESULTS OF OPERATIONS, FINANCIAL CONDITION OR CASH FLOWS. FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN A
FORWARD-LOOKING STATEMENT INCLUDE THE FOLLOWING (AMONG OTHERS): EXTREME WEATHER
CONDITIONS THAT AFFECT THE DEMAND FOR THE COMPANY'S SERVICES; COMPETITION IN THE
MARKETS SERVED BY THE COMPANY; LABOR SHORTAGES OR INCREASES IN WAGE RATES;
UNEXPECTED INCREASES IN OPERATING COSTS, SUCH AS HIGHER INSURANCE, HEALTH CARE
OR FUEL PRICES; INCREASED GOVERNMENTAL REGULATION OF TELEMARKETING; GENERAL
ECONOMIC CONDITIONS IN THE UNITED STATES, ESPECIALLY AS THEY MAY AFFECT HOME
SALES OR CONSUMER SPENDING LEVELS; TIME AND EXPENSES ASSOCIATED WITH INTEGRATING
AND WINDING DOWN BUSINESSES; AND OTHER FACTORS DESCRIBED FROM TIME TO TIME IN
DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION.
15
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The economy and its impact on discretionary consumer spending, labor wages, fuel
costs, insurance costs and medical inflation rates could be significant to
future operating earnings.
The Company does not hold or issue financial instruments for trading or
speculative purposes. The Company has entered into specific financial
arrangements in the normal course of business to manage certain market risks,
with a policy of matching positions and limiting the terms of contracts to
relatively short durations. The effect of financial instrument transactions is
not material to the Company's financial statements.
The Company generally maintains the majority of its debt at fixed rates (over
95% of total debt at December 31, 2002 and March 31, 2003) and, therefore, its
exposure to interest rate fluctuations is not significant to the Company's
results of operations. The payments on the approximately $73 million of funding
outstanding under the Company's real estate operating lease facilities as well
as its cancelable vehicle fleet and equipment operating leases are tied to
floating interest rates. However, the Company does not expect interest rate
fluctuations to be significant to the Company's results of operations.
The Company has several debt and lease agreements where the interest rate or
rent payable under the agreements automatically adjust based on changes in the
Company's credit ratings. While the Company is not currently expecting a change
in its credit ratings, based on amounts outstanding at March 31, 2003, a one
rating category improvement in the Company's credit ratings would reduce expense
on an annualized basis by approximately $0.7 million. A one rating category
reduction in the Company's credit ratings would increase expense on an
annualized basis by approximately $1.3 million.
The following table summarizes information about the Company's fixed rate debt
instruments as of December 31, 2002 and presents the principal cash flows and
related weighted-average interest rates by expected maturity dates. The fair
value of the Company's fixed rate debt was approximately $880 million at
December 31, 2002.
Expected Maturity Date
- --------------------------------------------------------------------------------
There-
(In millions) 2003 2004 2005 2006 2007 after Total
- -------------------- ------- ------- -------- ------- ------- --------- --------
Fixed rate debt $31 $24 $151 $11 $59 $559 $835
Avg. Rate 4.2% 4.8% 8.2% 6.0% 6.7% 7.5% 7.2%
================================================================================
16
CONTROLS AND PROCEDURES
The Company's Chairman and Chief Executive Officer, Jonathan P. Ward, and the
Company's Chief Financial Officer, Steven C. Preston, have evaluated the
Company's disclosure controls and procedures within 90 days of the filing of
this report.
Messrs. Ward and Preston have concluded that the Company's disclosure controls
and procedures provide reasonable assurance that the Company can meet its
disclosure obligations. The Company's disclosure controls and procedures are
based upon a roll-up of financial and non-financial reporting that is
consolidated in the principal executive office of the Company in Downers Grove,
Illinois. The reporting process is designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits with the
Commission is recorded, processed, summarized and reported within the time
periods specified in the Commission's rules and forms.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
17
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In the fourth quarter of 2001, ServiceMaster announced the sale of certain
subsidiaries of its Terminix European pest control and property services
operations. In the fourth quarter of 2002, the purchaser made a claim for a
purchase price adjustment, relating to an alleged breach of certain conditions
in the purchase agreement. In the course of responding to that claim,
ServiceMaster discovered that personnel of the former operations had made
unsupported monthly adjustments to certain accounts. In recognition of these
facts, ServiceMaster agreed to an adjustment to the purchase price consisting of
an $8 million cash payment and the cancellation of a previously reserved note.
On March 14, 2003, ServiceMaster contacted the Securities and Exchange
Commission on its own initiative and has provided the Commission with
information regarding the activities at the former subsidiary.
On May 14, 2003, the staff of the Securities and Exchange Commission advised
ServiceMaster that it had concluded its review of activities at the former
subsidiary and has not requested any additional information from ServiceMaster
with regard to those activities.
The Securities and Exchange Commission requires disclosure of certain
environmental matters where the amount involved exceeds $100,000. The Terminix
International Company Limited Partnership, a subsidiary of the Company, and the
Office of the Attorney General of the State of New York have been involved in
discussions regarding Terminix's compliance with Article 33 of the New York
Environmental Conservation Law regulating the application of pesticides. The
Company does not expect this matter to result in a material adverse effect on
its financial condition or results of operations.
ITEM 6(A): EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
99.1 Certification of Chief Executive Officer Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
99.2 Certification of Chief Financial Officer Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
ITEM 6(B): REPORTS ON FORM 8-K
A report on Form 8-K was filed on April 24, 2003, reporting under "Item 5. Other
Events". The purpose of the report was to provide under Item 7, the press
release issued by the Company on April 24, 2003 announcing the preliminary
financial results for the first quarter of 2003. This report also provides under
Item 7, restated quarterly consolidated statements of income for 2002 and 2001
and restated quarterly business segment disclosures for 2002 and 2001.
A report on Form 8-K was filed on March 17, 2003, reporting under "Item 5. Other
Events". The purpose of the report was to provide under Item 7, the press
release issued by the Company on March 17, 2003 announcing the preliminary
financial results for 2002 and restated results for 2001 and 2000.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2003
THE SERVICEMASTER COMPANY
(Registrant)
By: /S/STEVEN C. PRESTON
------------------------------------------------------
Steven C. Preston
Executive Vice President and Chief Financial Officer
19
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Jonathan P. Ward, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The ServiceMaster
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/S/ JONATHAN P. WARD
---------------------
Jonathan P. Ward
Chairman and Chief Executive Officer
20
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Steven C. Preston, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The ServiceMaster
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/S/ STEVEN C. PRESTON
----------------------
Steven C. Preston
Executive Vice President and Chief Financial Officer
21