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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997. Commission File number 1-14762
THE SERVICEMASTER COMPANY
(Exact Name of Registrant as Specified in its Certificate)
(Successor to ServiceMaster Limited Partnership)
Delaware 36-3858106
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One ServiceMaster Way, Downers Grove, Illinois 60515-1700
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (630) 271-1300
Securities registered pursuant to Section 12(b) of the Act: 195,259,782
Name of Each Exchange
Title of Each Class On Which Registered
------------------- -----------------------
Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by Check Mark Whether the Registrant (1) Has Filed All Reports
Required to Be Filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such Shorter Period That the
Registrant Was Required to File Such Reports), and (2) Has Been Subject to Such
Filing Requirements for the Past 90 Days. Yes X No
The Aggregate Market Value of Shares Held by Non-Affiliates of the
Registrant As of March 24, 1998 was $4,965,812,051.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Registrant's Annual Report to Stockholders for the
year ended December 31, 1997 are incorporated into Part I, Part II and Part IV
of this Form 10-K.
Certain parts of the Registrant's Definitive Proxy Statement for the May 1,
1998 Annual Meeting of Stockholders is incorporated into Part III of this Form
10-K.
PART I
Item 1. Business
The Company as Successor to ServiceMaster Limited Partnership
This annual report on Form 10-K is filed by The ServiceMaster Company,
a Delaware corporation (hereinafter sometimes called the "Registrant"). The
Registrant is the corporate successor to ServiceMaster Limited Partnership, a
Delaware limited partnership (the "Parent Partnership"). For the period January
1, 1987 to December 26, 1997, the Parent Partnership was the publicly traded
parent entity in the ServiceMaster enterprise. On December 26, 1997, by means of
a statutory merger in which a subsidiary of the Registrant merged with and into
the Parent Partnership (the "Reincorporating Merger"), the Registrant succeeded
to and became substituted for the Parent Partnership as the publicly traded
parent entity in the ServiceMaster enterprise. Pursuant to the Reincorporating
Merger, on December 26, 1997 the shares of limited partner interest in the
Parent Partnership converted to shares of common stock of the Registrant on a
one-for-one basis. On January 1, 1998, the Parent Partnership was merged with
and into the Registrant and the Parent Partnership thereby went out of
existence.
This Form 10-K for the year 1997, although necessarily filed by the
Registrant, pertains to the organization and business of the ServiceMaster
enterprise as headed by the Parent Partnership for virtually all of the year
1997. However, the Reincorporating Merger provided for a carryover to the
Registrant of all directors and officers of ServiceMaster Management Corporation
(the managing general partner of the Parent Partnership), the Parent Partnership
and The ServiceMaster Company Limited Partnership. Accordingly, references
herein to directors and executive officers are to such persons in their
capacities as directors and officers of the Registrant and its predecessor
entities. The Registrant and its affiliated entities are hereinafter referred to
as "ServiceMaster" or the "Company" or the "ServiceMaster enterprise".
Forward-Looking Statements
In accordance with the Private Securities Litigation Reform Act of
1995, the Company notes that statements in this Annual Report on Form 10-K that
look forward in time, which include everything other than historical
information, involve risks and uncertainties that may affect the Company's
actual results of operations. Factors that could cause actual results to differ
materially from the Company's plans or expectations include the following (among
others): weather conditions adverse to certain of the Company's businesses, the
entry of additional competitors in any of the markets served by the Company,
labor shortages, consolidation of hospitals in the healthcare market, changes in
Medicare reimbursement regulations, the condition of the United States economy,
and other factors listed from time to time in the Company's filings with the
Securities and Exchange Commission.
The Company; Principal Business Groups
The Company itself is a holding company whose shares of common stock
are traded on the New York Stock Exchange. Through its subsidiaries, the Company
is engaged in providing a variety of specialty services to homeowners and
commercial facilities and supportive management services in several markets,
including the healthcare market, the education market and certain segments of
the business and industry market.
The Company is organized into three principal operating groups:
Consumer Services, Management Services, and Employer Services. Each of these
operating groups is headed by a limited partnership or a corporation which has
its own group of operating subsidiaries. The parent companies for the operating
groups are ServiceMaster Consumer Services Limited Partnership, which was formed
in the summer of 1990; ServiceMaster Management Services Limited Partnership,
which was formed in December 1991; and ServiceMaster Employer Services, Inc.
which was formed in August 1997. All of the parent companies for the operating
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groups are wholly owned by the Company. All subsidiaries of the operating group
parent companies are wholly owned. Reference is made to the information under
the caption "Business Unit Reporting" on page 34 of the ServiceMaster Annual
Report to Shareholders for 1997 (the "1997 Annual Report") for detailed
financial information on these three groups.
Trademarks and Service Marks; Franchises
The Company's trademarks and service marks are important for all
elements of the Company's business, although such marks are particularly
important in the advertising and franchising activities conducted by the
operating subsidiaries of ServiceMaster Consumer Services L.P. Such marks are
registered and are renewed at each registration expiration date.
Within ServiceMaster Consumer Services, franchises are important for
the TruGreen-ChemLawn, Terminix, ServiceMaster Residential/Commercial, Merry
Maids, AmeriSpec and Furniture Medic businesses. Nevertheless, revenues and
profits derived from franchise-related activities constitute less than 10% of
the revenue and profits of the consolidated ServiceMaster enterprise. Franchise
agreements made in the course of these businesses are generally for a term of
five years. ServiceMaster's renewal history is that most of the franchise
agreements which expire in any given year are renewed.
ServiceMaster Consumer Services
ServiceMaster Consumer Services provides specialty services to homeowners
and commercial facilities through eight companies: TruGreen L.P.
("TruGreen-ChemLawn"); The Terminix International Company L.P. ("Terminix");
ServiceMaster Residential/Commercial Services L.P. ("Res/Com"); Merry Maids L.P.
("Merry Maids"); American Home Shield Corporation ("American Home Shield" or
"AHS"); AmeriSpec, Inc. ("AmeriSpec"); Furniture Medic L.P. ("Furniture Medic");
and Rescue Rooter L.L.C. ("Rescue Rooter"). Rescue Rooter was acquired by
ServiceMaster Consumer Services on January 1, 1998. The services provided by
these companies include: lawn care, tree and shrub services and indoor plant
maintenance services under the "TruGreen", "ChemLawn" and "Barefoot" service
marks; termite and pest control services under the "Terminix" service mark;
residential and commercial cleaning and disaster restoration services under the
"ServiceMaster" service mark; domestic housekeeping services under the "Merry
Maids" service mark; home systems and appliance warranty contracts under the
"American Home Shield" service mark; home inspection services under the
"AmeriSpec" service mark; on-site furniture repair and restoration under the
"Furniture Medic" service mark; and plumbing and drain cleaning services under
the "Rescue Rooter" service mark.
The services provided by the eight Consumer Services companies are part
of the ServiceMaster "Quality Service Network" and are accessed by calling a
single toll-free telephone number: 1-800-WE SERVE. ServiceMaster focuses on
establishing relationships to provide one or more of these services on a
repetitive basis to customers. Since 1986, the number of customers served by
ServiceMaster Consumer Services has increased from fewer than one million
domestic customers to more than 9.6 million worldwide customers.
For most of 1997, the first-tier subsidiary of the ServiceMaster parent
entity was primarily responsible for overseeing the Consumer Services businesses
which were conducted in foreign markets. However, at the end of 1997,
responsibility for such businesses was transferred to the appropriate subsidiary
of ServiceMaster Consumer Services L.P.
TruGreen-ChemLawn. TruGreen-ChemLawn is a wholly owned subsidiary of
ServiceMaster Consumer Services L.P. As of December 31, 1997, TruGreen-ChemLawn
had 206 company-owned branches and 84 franchised branches. With over 3 million
residential and commercial customers, TruGreen-ChemLawn is the leading provider
of lawn care services in the United States. TruGreen-ChemLawn provides lawn,
tree and shrub care services in Saudi Arabia and Turkey through licensing
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arrangements and in Canada through a subsidiary. TruGreen-ChemLawn also provides
interior plantscape services to commercial customers. The TruGreen-ChemLawn
businesses are seasonal in nature.
On February 24, 1997, the Company's predecessor, for the benefit of
TruGreen-ChemLawn, completed the acquisition of 99.38% of the outstanding stock
of Barefoot Inc. ("Barefoot") through a tender offer. On February 26, 1997, the
remaining 0.62% of the Barefoot stock was acquired through a statutory merger.
In these transactions, Barefoot stockholders collectively received approximately
$84,800,000 in cash and 8,621,055 limited partner shares (post-June 1997 3-for-2
share split) of the Company's predecessor. For purposes of these transactions,
the Barefoot stock was valued at $16.00 per share and the Company's shares were
valued at $16.9389 per share (post-June 1997 3-for-2 share split). The aggregate
value of the Barefoot transaction (including the amount paid in redemption of
the Barefoot shareholders rights plan and transaction expenses) was
approximately $237,000,000. At the time of the transaction, Barefoot was the
second largest provider of professional lawn care services in the United States.
Subsequent to the completion of this acquisition, a portion of the Barefoot
operations were transferred to TruGreen-ChemLawn; the balance of the Barefoot
operations were placed in a new subsidiary corporation of ServiceMaster Consumer
Services with headquarters in Columbus, Ohio, from which support has been
provided to certain holders of franchises granted by Barefoot.
Terminix. Terminix is a wholly owned subsidiary of ServiceMaster
Consumer Services L.P. With over 3 million residential and commercial customers,
Terminix, through its company-owned branches and through franchisees, is the
leading provider of termite and pest control services in the United States. As
of December 31, 1997, Terminix was providing these services through 290
company-owned branches in 45 states and Mexico and through 241 franchised
branches in 28 states. Terminix also manages the following European pest control
companies, all of which are subsidiaries of TMX-Europe B.V., a wholly owned
subsidiary of the Registrant: Terminix Peter Cox Ltd., a leading pest control
and wood preservation company in the United Kingdom and Ireland; Terminix
Protekta B.V. and Riwa B.V., each a leading pest control company in the
Netherlands and Belgium; Anticimex Development B.V., a holding company for the
leading pest control company in Sweden and which also operates in Norway; and
the Stenglein Group, a group of pest control companies in Germany. Terminix also
provides termite and pest control services through licensing arrangements with
local service providers in seven other countries. The Terminix business is
seasonal in nature.
Res/Com. Res/Com is a wholly owned subsidiary of ServiceMaster Consumer
Services L.P. ServiceMaster, through Res/Com, is the leading franchisor in the
United States in the residential and commercial cleaning field. Res/Com provides
carpet and upholstery cleaning and janitorial services, disaster restoration
services and window cleaning services. As of December 31, 1997, these services
were provided to approximately 1.7 million residential and commercial customers
worldwide through a network of over 4,500 independent franchisees. Res/Com
provides its services through subsidiaries in Canada, Germany, Ireland and the
United Kingdom, and through licensing arrangements with local service providers
in six other countries.
Merry Maids. Merry Maids is a wholly owned subsidiary of ServiceMaster
Consumer Services L. P. Merry Maids is the organization through which
ServiceMaster provides domestic house cleaning services. With approximately
352,000 worldwide customers, Merry Maids is the leading provider of domestic
house cleaning services in the United States. As of December 31, 1997, these
services were provided through 27 company-owned branches in 19 states and
through 797 licensees operating in all 50 states. Merry Maids also provides
domestic house cleaning services through subsidiaries in Canada and the United
Kingdom and through licensing arrangements with local service providers in three
other countries.
American Home Shield. AHS is a wholly owned subsidiary of ServiceMaster
Consumer Services L.P. AHS is a leading provider of home systems and appliance
warranty contracts ("warranty contracts") in the United States, providing
homeowners with contracts covering the repair or replacement of built-in
appliances, hot water heaters and electrical, plumbing, central heating, and
central air conditioning systems which malfunction by reason of normal wear and
tear. Warranty contracts are sold through participating real estate brokerage
Page 3
offices in conjunction with resales of single-family residences to homeowners.
AHS also sells warranty contracts directly to non-moving homeowners by renewing
existing contracts and through various other distribution channels which are
currently being expanded. As of December 31, 1997, AHS warranty contracts
provided for services to approximately 568,000 homes through approximately
13,000 independent repair maintenance contractors in 49 states and the District
of Columbia, with operations in California, Texas and Arizona accounting for
27%, 18% and 6%, respectively, of gross contracts written by AHS. AHS also
provides home service warranty contracts through licensing arrangements with
local service providers in three other countries.
AmeriSpec. AmeriSpec is a wholly owned subsidiary of AHS. AmeriSpec is
a leading provider of home inspection services in the United States. During
1997, AmeriSpec conducted approximately 100,000 home inspections in 42 states
and Canada, with operations in California, New York and Illinois accounting for
23%, 6%, and 5%, respectively, of the gross number of inspections conducted
through AmeriSpec.
Furniture Medic. Furniture Medic is a wholly owned subsidiary of
ServiceMaster Consumer Services L.P. Furniture Medic provides on-site furniture
repair and restoration services in 47 states. As of December 31, 1997, these
services were provided through 513 licensees. Furniture Medic also provides its
services through subsidiaries in Canada and the United Kingdom and through
licensing arrangements with local service providers in two other countries.
Rescue Rooter. Rescue Rooter is a wholly-owned subsidiary of
ServiceMaster Consumer Services L.P. Rescue Rooter acquired the business and
assets of Rescue Industries, Inc. on January 1, 1998. Rescue Rooter provides
plumbing and drain cleaning services in ten states through 20 company-owned
branches and one franchise location. In 1997, Rescue Rooter's predecessor
performed services for approximately 400,000 customers. ServiceMaster expects to
put into place in the Spring of 1998 a plan under which certain key employees of
Rescue Rooter will be afforded the opportunity to collectively purchase up to a
10% equity interest in Rescue Rooter pursuant to a management equity plan. Such
interest will be subject to reciprocal put and call rights which will become
exercisable on January 1, 2003 and which will be consummated on the basis of the
then fair market value.
ServiceMaster Management Services
ServiceMaster pioneered the providing of supportive management services
to health care facilities by instituting housekeeping management services in
1962. Since then, ServiceMaster has expanded its management services business
such that it now provides a variety of supportive management services to health
care, education and business and industrial customers (including the management
of housekeeping, plant operations and maintenance, laundry and linen, grounds
and landscaping, clinical equipment maintenance, food service, energy
management, and total facility management). ServiceMaster's general programs and
systems free the customer to focus on its core business activity with confidence
that the support services are being managed and performed in an efficient
manner.
Management Services L.P. is organized into three divisions, each of which
provides service on a nationwide basis within its market. These markets are:
Healthcare Management Services; Education Management Services; and Business and
Industry Management Services.
For most of 1997, the first-tier subsidiary of the ServiceMaster parent
entity was primarily responsible for overseeing the Management Services
businesses which were conducted in foreign markets. However, at the end of 1997,
responsibility for such businesses was transferred to ServiceMaster Management
Services L.P.
As of December 31, 1997, ServiceMaster was providing supportive
management services to approximately 1,568 health care customers and to
approximately 375 educational and commercial customers. These services were
being provided in all 50 states and the District of Columbia. Outside of the
United States, ServiceMaster was providing management services through
subsidiaries in Canada and Japan, through an affiliated company in Mexico, and
through licensing arrangements with local service providers in nineteen other
countries.
Page 4
ServiceMaster Healthcare Management Services. The ServiceMaster
Healthcare Services division of ServiceMaster Management Services L. P. combines
the resources of the healthcare segment of ServiceMaster Management Services
L.P., Diversified Health Services, and their respective subsidiaries to form a
comprehensive health services organization which provides management services to
acute care and long-term care facilities; freestanding, hospital-based, and
government-owned nursing homes; skilled nursing facilities; assisted living
facilities; and hospital-based home health care agencies (as well as the direct
operation of freestanding home health care agencies). Various other healthcare
related services are provided by operating units within the Healthcare Services
division. As of December 31, 1997, the ServiceMaster Healthcare Services
companies had management services contracts with 1,568 customers in all 50
states.
ServiceMaster Education Management Services. The Education division of
ServiceMaster Management Services L.P. is a leading provider to the education
market of maintenance, custodial and grounds services. The facilities which
comprise the education market include primary schools, secondary schools and
school districts, private specialty schools and colleges and universities. As of
December 31, 1997, ServiceMaster was serving 273 educational customers.
ServiceMaster believes there is potential for expansion in the education market
due to its current relatively low penetration of that market and the trend of
educational facilities to consider outsourcing more of their service
requirements. However, a majority of the educational facilities continue to
assume direct responsibility for managing their support functions.
ServiceMaster Business & Industry Management Services. The Business &
Industry division of ServiceMaster Management Services L.P. is a leading
provider of plant operations and maintenance, custodial and grounds management
services to business and industrial customers in selected markets. Such markets
include the food processing, transportation, healthcare products and automotive
markets. ServiceMaster believes that there is potential for expansion in these
business and industrial markets due to ServiceMaster's current low penetration
of those markets, the trend of businesses to consider outsourcing more of their
service requirements and the trend of governmental units to privatize parts of
their operations. As of December 31, 1997, ServiceMaster was serving in
approximately 100 business or industrial customers.
ServiceMaster Employer Services
ServiceMaster Employer Services, through its subsidiary, Certified
Systems, Inc., is one of the nation's largest professional employer
organizations. It provides more than 790 clients with administrative processing
of payroll, worker's compensation insurance, health insurance, unemployment
insurance and other employee benefits.
International Operations
Supportive management services and consumer services in international
markets are provided through licensing arrangements with local service providers
and ownership of foreign operating companies. Except as noted below, these
activities in Europe, Latin America and the Middle East are administered as part
of the operations of ServiceMaster Management Services L.P. and ServiceMaster
Consumer Services L.P., respectively. Operating arrangements and market
expansion efforts in the Pacific Rim are administered by the parent company.
In 1997, ServiceMaster disposed of its interests in the
Tarmac/ServiceMaster management services joint venture in England and the Raab
Karcher/ServiceMaster management services joint venture in Germany. These
dispositions resulted in a small profit on the Company's investment.
Page 5
Other Activities
Supporting Departments. The Company has various departments responsible
for technical, engineering, management information, planning and market
services, and product and process development activities. Various administrative
support departments provide personnel, public relations, administrative,
education, accounting, financial and legal services.
Manufacturing Division. ServiceMaster has a manufacturing division
which formulates, combines and distributes supplies, products and equipment that
are used internally in providing management services to customers and which are
sold to licensees for use in the operation of their businesses. ServiceMaster
has a small share of the market for the manufacture and distribution of cleaning
equipment, chemicals and supplies.
Venture Fund. ServiceMaster Venture Fund L.L.C., a subsidiary of the
parent company (the "Venture Fund"), invests in emerging growth companies which
show an ability to provide innovative service technologies to ServiceMaster's
current and new customers. The Venture Fund is managed so as not to be intrusive
to the ongoing operations of the Company's operating units.
Industry Position, Competition and Customers
The following information is based solely upon estimates made by the
management of ServiceMaster and cannot be verified. In considering
ServiceMaster's industry and competitive positions, it should be recognized that
ServiceMaster competes with many other companies in the sale of its services,
franchises and products and that some of these competitors are larger or have
greater financial and marketing strength than ServiceMaster.
The principal methods of competition employed by ServiceMaster in the
Consumer Services business are name recognition, assurance of customer
satisfaction and a history of providing quality services to homeowners. The
principal methods of competition employed by ServiceMaster in each of the
operating units in the Management Services business are price, quality of
service and experience in providing management services. The principal methods
of competition employed by ServiceMaster in the Employer Services business are
name recognition, assurance of customer satisfaction and financial strength.
Consumer Services
Subsidiaries of Consumer Services provide a variety of residential and
commercial services under their respective names on the basis of their and
ServiceMaster's reputation, the strength of their service marks, their size and
financial capability, and their training and technical support services. The
markets served by Terminix and TruGreen-ChemLawn are seasonal in nature.
Lawn Care Services. TruGreen-ChemLawn, both directly and through
franchisees, provides lawn care services to residential and commercial
customers. Competition within the lawn care market is strong, coming mainly from
regional and local, independently owned firms and from homeowners who elect to
care for their lawns through their own personal efforts. TruGreen-ChemLawn is
the leading national lawn care company within this market. TruGreen-ChemLawn
also provides indoor plant maintenance to commercial customers.
Lawn care services are regulated by law in most of the states in which
TruGreen-ChemLawn provides such services. These laws require licensing which is
conditional on a showing of technical competence and adequate bonding and
insurance. The lawn care industry is regulated at the federal level under the
Federal Insecticide, Fungicide and Rodenticide Act, and lawn care companies
(such as TruGreen-ChemLawn) which apply herbicides and pesticides are regulated
under the Federal Environmental Pesticide Control Act of 1972. Such laws,
together with a variety of state and local laws and regulations, may limit or
prohibit the use of certain herbicides and pesticides, and such restrictions may
adversely affect the business of TruGreen-ChemLawn.
Page 6
Termite and Pest Control Services. The market for termite and pest
control services to commercial and residential customers includes many
competitors. Terminix is the leading national termite and pest control company
within this market. Competition within the termite and pest control market is
strong, coming mainly from regional and local, independently owned firms
throughout the United States and from one other large company which operates on
a national basis.
Termite and pest control services are regulated by law in most of the
states in which Terminix provides such services. These laws require licensing
which is conditional on a showing of technical competence and adequate bonding
and insurance. The extermination industry is regulated at the federal level
under the Federal Insecticide, Fungicide and Rodenticide Act, and pesticide
applicators (such as Terminix) are regulated under the Federal Environmental
Pesticide Control Act of 1972. Such laws, together with a variety of state and
local laws and regulations, may limit or prohibit the use of certain pesticides,
and such restrictions may adversely affect the business of Terminix.
House Cleaning Services. The market for domestic house cleaning
services is highly competitive. In urban areas the market involves numerous
local companies and a few national companies. ServiceMaster believes that its
share of the total potential market for such services is small and that there is
significant potential for further expansion of its housecleaning business
through continued internal expansion and greater penetration of the
housecleaning market. Through its company-owned branches and its franchisees,
ServiceMaster has a small share of the market for the cleaning of residential
and commercial buildings.
Home Systems and Appliance Warranty Contracts. The market for home
systems and appliance warranty contracts is relatively new. ServiceMaster
believes that AHS maintains a favorable position in its industry due to the
system developed and used by AHS for accepting, dispatching and fulfilling
service calls from homeowners through a nationwide network of independent
contractors. AHS also has a computerized information system developed and owned
by AHS, and an electronic digital voice communication system through which AHS
handled more than 7.5 million calls in 1997.
Home Inspection Services. AmeriSpec is a leading provider of home
inspection services in the United States. Competition within this market is
strong, coming mainly from regional and local, independently owned firms.
Furniture Repair Services. The market for on-site furniture repair
services is relatively new. ServiceMaster believes that Furniture Medic
maintains a favorable position in its industry due to its patented
environmentally sensitive procedure for repairing furniture in the customer's
home.
Plumbing and Drain Cleaning Services. The market for plumbing and drain
cleaning services is highly competitive in both the residential and commercial
sectors. Rescue Rooter believes that its share of the total potential market for
such services is small and that there is significant potential for future
expansion and penetration. Plumbing is regulated by most states in which Rescue
Rooter provides such services. The level of licensing varies from state to
state. There are no state or federal guidelines regulating drain cleaning
services.
Management Services
Health Care. Within the market consisting of general health care
facilities having 50 or more beds, ServiceMaster is the leading supplier of
plant operations and maintenance, housekeeping, clinical equipment maintenance,
and laundry and linen management services. As of December 31, 1997,
ServiceMaster was serving approximately 1,568 customers and managing
approximately 1,900 health care facilities. The majority of health care
facilities within this market not currently served by ServiceMaster assume
direct responsibility for managing their own non-medical support functions.
Page 7
ServiceMaster believes that its management services for health care
facilities may expand by the addition of facilities not presently served, by
initiating additional services at facilities which use only a portion of the
services now offered, by the development of new services and by growth in the
size of facilities served. At the same time, industry consolidation, changes in
use and methods of health care delivery and payment for services (including in
particular changes in Medicare reimbursement regulations) continue to affect the
health care environment.
Education. ServiceMaster is a leading provider to the education market
of maintenance, custodial and grounds services. The facilities which comprise
the education market served by ServiceMaster include primary schools, secondary
schools and school districts, private specialty schools and colleges and
universities. As of December 31, 1997, ServiceMaster was serving approximately
273 customers and managing approximately 5,362 facilities. ServiceMaster
believes there is potential for expansion in the education market due to its
current relatively low penetration of that market and the trend of educational
facilities to consider outsourcing more of their service requirements. However,
a majority of the educational facilities continue to assume direct
responsibility for managing their support functions.
Business and Industry. ServiceMaster is a leading provider of plant
operations and maintenance, custodial and grounds management services to
business and industrial customers in selected markets. ServiceMaster believes
that there is potential for expansion in those business and industrial markets
which ServiceMaster has elected to emphasize due to ServiceMaster's low current
penetration of those markets, the trend of businesses to consider outsourcing
more of their service requirements and the trend of governmental units to
privatize parts of their operations. The emphasized markets include the food
processing, transportation, healthcare products, and automotive markets. As of
December 31, 1997, ServiceMaster was serving approximately 100 customers and
managing approximately 530 business or industrial facilities.
Major Customers
ServiceMaster has no single customer which accounts for more than 10%
of its total revenues. No part of the Company's business is dependent on a
single customer or a few customers, the loss of which would have a material
adverse effect on the Company as a whole. Revenues from governmental sources are
not material.
Employees
On December 31, 1997, ServiceMaster had a total of approximately 45,825
employees.
ServiceMaster provides its employees with annual vacation, medical,
hospital and life insurance benefits and the right to participate in additional
benefit plans which are described in the Notes to Financial Statements included
in the 1997 Annual Report.
Year 2000 Computer Program Compliance
Certain computer programs use two digits rather than four to define the
applicable year and consequently many systems may not function properly beyond
the year 1999 unless they are remediated. In addition, certain computer programs
are unable to recognize the year 2000 as a leap year. ServiceMaster has
conducted a review of its computer systems to identify systems that could be
affected by the year 2000 problem and has determined that the Company will need
to replace or remediate many of its systems to facilitate their continuing
reliable operation. The Company currently believes that expenses directly
related to this effort will not have a material impact on the results of its
operations.
Although the Company believes that critical remediation efforts will be
completed prior to the year 2000, the untimely completion of these efforts
could, in certain circumstances, have a material adverse effect on the
operations of the Company.
Page 8
In addition, the Company is in the process of determining whether the
external parties and systems with which the Company interacts and external
systems for which the Company has certain maintenance responsibilities are in
compliance and whether non-compliance of these systems could have a material
adverse impact on the Company.
Item 2. Properties
The headquarters facility of ServiceMaster, which also serves as
headquarters for ServiceMaster Management Services, is owned by The
ServiceMaster Company and is located on a ten-acre tract at One ServiceMaster
Way, Downers Grove, Illinois. The initial structure was built in 1963, and two
additions were completed in 1968 and 1976. In early 1988, ServiceMaster
completed construction of a two-story 15,000 square foot addition for office
space, food service demonstrations and dining facilities. The building contains
approximately 118,900 square feet of air conditioned office space and 2,100
square feet of laboratory space. In the Spring of 1992, ServiceMaster completed
the conversion of approximately 30,000 square feet of space formerly used as a
warehouse to offices for Management Services and for The Kenneth and Norma
Wessner Training Center.
ServiceMaster owns a seven-acre, improved tract at 2500 Warrenville
Road, Downers Grove, Illinois, which is adjacent to its headquarters facility.
In 1993, ServiceMaster substantially remodeled the building and thereafter
leased approximately half the space (50,000 square feet) to a commercial tenant.
The balance of the space is utilized by ServiceMaster personnel.
ServiceMaster leases a 50,000 square foot facility near Aurora,
Illinois which is used by ServiceMaster as a warehouse/distribution center.
ServiceMaster believes that the facilities described in the preceding
three paragraphs will satisfy the Company's needs for administrative and
warehouse space in the Chicago area for the immediate future.
ServiceMaster owns four properties in Cairo, Illinois, consisting of a
36,000 square foot, three-story building used for manufacturing and warehousing
equipment, supplies and products used in the business; a warehouse and package
facility comprising 30,000 square feet; a three-story warehouse and
manufacturing building consisting of 43,000 square feet; and a 2,500 square foot
building used for a machine shop. ServiceMaster leases a 44,000 square foot
manufacturing facility in Lancaster, Pennsylvania, which is used to provide
products and equipment primarily to customers of Management Services in the
eastern part of the United States. Management believes that the foregoing
manufacturing and warehouse facilities are adequate to support the current needs
of ServiceMaster.
The headquarters for ServiceMaster Consumer Services L.P. are located
in leased premises at 860 Ridge Lake Boulevard, Memphis, Tennessee. The 860
Ridge Lake Boulevard facility also serves as the headquarters for
TruGreen-ChemLawn, Terminix, Res/Com, Merry Maids, American Home Shield,
AmeriSpec and Furniture Medic. The headquarters for Rescue Rooter are located in
leased premises at 4850 Pacific Highway, San Diego, California.
TruGreen-ChemLawn owns 5 buildings which are used as branch sites for
lawn care services. These facilities are located in Texas (2 properties),
Colorado (1 property), Ohio (1 property), and Georgia (1 property).
Terminix owns 20 buildings which are used as branch sites for termite
and pest control services. These properties are all one-story buildings that
contain both office and storage space. These properties are located in New
Jersey (2 properties), California (2 properties), Florida (10 properties),
Georgia (1 property), Illinois (1 property) and Texas (4 properties).
Page 9
American Home Shield has retained some leased space in the building at
90 South E Street, Santa Rosa, California, for administrative and sales
operations. Certain of American Home Shield's service and data processing
departments are located in premises owned by the company in Carroll, Iowa. This
facility consists of a 43,000 square foot building on a seven-acre site.
American Home Shield owns approximately 56 acres of land in Santa Rosa,
California of which 39 acres are under contracts for sales to occur in mid to
late 1998. This land is held for investment purposes and has been and will
continue to be offered for sale, with the timing of sales being affected by,
among other things, market demand, zoning regulations, and the availability of
financing to purchasers.
Rescue Rooter owns two buildings which are used for branch operations
to provide plumbing and drain cleaning services. These facilities are located,
respectively in Phoenix, Arizona and St. Louis, Missouri.
In 1997, Diversified Health Services completed the construction of a
new headquarters facility at 3839 Forest Hill-Irene Road, Memphis, Tennessee.
This facility also serves as the headquarters of ServiceMaster Employer
Services. DHS leases other administrative facilities in St. Augustine, Florida;
Atlanta, Georgia; Minneapolis, Minnesota; Plymouth Meeting, Pennsylvania;
Memphis, Tennessee; and Dallas, Texas. As of December 31, 1997, DHS had an
ownership interest in a nursing home facility through a joint venture
arrangement in which DHS has a 50% interest.
The headquarters for ServiceMaster Employer Services are located at
3839 Forest Hill-Irene Road, Memphis, Tennessee. The company leases other
administrative facilities in Little Rock, Arkansas and Memphis, Tennessee. Its
subsidiary, Certified Systems, Inc., leases administrative facilities in
Mesquite, Texas.
Item 3. Legal Proceedings
In the ordinary course of conducting its business activities,
ServiceMaster becomes involved in judicial and administrative proceedings which
involve both private parties and governmental authorities. As of March 6, 1998,
these proceedings included a number of general liability actions and
employment-related proceedings.
Environmental Matters. Terminix was one of several defendants named in
a suit filed by the United States Environmental Protection Agency (the "EPA") on
November 3, 1986 in the United States District Court for the Western District of
Tennessee, to recover the costs of remediation at two sites in Tennessee which
had been designated by the EPA as "Superfund sites" under the Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA"). In January
1992, the EPA issued a Unilateral Administrative Order for Remedial Design and
Remedial Action which required Terminix and other initial defendants and third
party defendants to clean up one of these sites. Terminix agreed, on an interim
basis, to a 10% allocation of the cost of the remediation work. The parties to
the interim allocation agreement remained in disagreement with the EPA over the
most appropriate remediation procedures to be followed at the site and they were
in disagreement among themselves regarding the final allocations of
responsibility. With respect to the second site, the companies cited by the EPA
all disclaimed responsibility. Two of the defendant parties settled their
disagreement with the EPA but, until March 20, 1997, Terminix had not resolved
its disagreement with the other two defendant parties as to Terminix's proper
participation. However, on March 20, 1997, Terminix settled this matter with the
other two parties as to all past costs and agreed to arbitrate any disagreement
over the allocation of future costs. On October 22, 1997, the time expired in
which a demand for arbitration could be filed. Accordingly, Terminix's share of
future remediation costs was established at 10%. The aggregate financial
commitment of Terminix is well within the parameters set forth in the
discussions of this matter in previous Form 10-K reports and is not material to
Terminix's business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.
Page 10
PART II
Item 5. Market for Registrant's Shares and Related Shareholder Matters
Except for the information set forth in the second and third sentences
of this Item 5, the portions of the ServiceMaster Annual Report to Shareholders
for 1997 under the captions "Statements of Shareholders' Equity" (page 33) and
"Cash Distributions Per Share" and "Price Per Share" in the Quarterly Operating
Results table (page 41) supply the information required by this item and such
portions are hereby incorporated herein by reference. The Registrant's shares of
common stock are listed and traded on the New York Stock Exchange under the
symbol "SVM". At March 6, 1998, the Registrant's shares of common stock were
held of record by approximately 71,000 persons.
Item 6. Selected Financial Data
The portion of the ServiceMaster Annual Report to Shareholders for 1997
in the Financial Statements and Management Discussion section ("FSMD Section")
under the caption "Eleven Year Financial Summary" (pages 26-27) supplies the
information required by this item and such portion is hereby incorporated herein
by reference.
Item 7. Management Discussion and Analysis of Financial Condition and Results
of Operations
Management Discussion and Analysis of Financial Condition and Results
of Operations for the three years ended December 31, 1997, is contained in the
FSMD Section of the ServiceMaster Annual Report to Shareholders for 1997 on
pages 21-25 and is hereby incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated statements of financial position of ServiceMaster as
of December 31, 1997 and 1996, and the consolidated statements of income, cash
flows and shareholders' equity for the years ended December 31, 1997, 1996, and
1995 and notes to the consolidated financial statements are contained in the
FSMD Section of the ServiceMaster Annual Report to Shareholders for 1997 on
pages 28-41 are incorporated herein by reference. The report of Arthur Andersen
LLP thereon dated January 26, 1998, and the summary of significant accounting
policies are contained in the FSMD Section of the ServiceMaster Annual Report to
Shareholders for 1997 on pages 28-29 and are hereby incorporated herein by
reference.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
Page 11
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
The information contained under the heading "Election of Directors" in
the definitive proxy statement for the Company's May 1, 1998 Annual Meeting of
Stockholders is incorporated herein by reference.
Senior Management Advisers
The Bylaws of the Company provide that the Board of Directors may
appoint officers of the Company or a subsidiary and other persons having a
special relationship to ServiceMaster to serve as Senior Management Advisers.
Senior Management Advisers attend the meetings of the Board and advise the Board
but do not have the power to vote. The Board has determined that providing a
greater number of officers the opportunity to advise and interact with the Board
is in the best interest of ServiceMaster as well as the individual officers. The
Senior Management Advisers receive no special compensation for their services in
this capacity.
The Board of Directors has appointed the persons listed below as Senior
Management Advisers effective as of the 1997 annual meeting of the shareholders
of ServiceMaster Management Corporation to serve in such capacity until the
annual meeting of stockholders of the Company in 1998 or until otherwise
determined by the Board of Directors.
Robert D. Erickson, age 54, is an Executive Vice President. Mr.
Erickson was a director of ServiceMaster from May 1987 to May 1993. He
previously served as a director of ServiceMaster from May 1981 to June 1984. He
served as the President and Chief Operating Officer of ServiceMaster's
International business unit from October 1993 to December 1997, Executive Vice
President and Chief Operating Officer of the International division of
ServiceMaster from November 1992 to October 1993 and as Executive Vice President
and Chief Operating Officer, People Services, from January 1990 to October 1992.
Donald K. Karnes, age 47, is Group President of TruGreen-ChemLawn and
Terminix. He served as President and Chief Operating Officer of
TruGreen-ChemLawn from January 1992 to December 1995. From January 1, 1990 to
December 31, 1991, he was Senior Vice President, TruGreen Limited Partnership.
Robert F. Keith, age 41, is President and Chief Operating Officer,
ServiceMaster Management Services. He served as President and Chief Operating
Officer, ServiceMaster Consumer Services from July 1994 to December 31, 1996 and
as Group President, ServiceMaster Consumer Services, from November 1992 to July
1994. He was Vice President, Treasurer and Chief Financial Officer of The
ServiceMaster Company L. P. from November 1989 to October 1992.
Jerry D. Mooney, age 44, is President and Chief Operating Officer,
ServiceMaster Employer Services. Previously, he was President, Health Care New
Business Initiatives, and President and Chief Executive Officer of ServiceMaster
Diversified Health Services, Inc. He is also a director, chairman of the audit
committee and member of the compensation committee of Concord EFS, Inc.,
Memphis, Tennessee, involved primarily in the electronic processing of debit and
credit card transactions. He also serves on an Advisory Board for SouthTrust
Corporation.
Page 12
Ernest J. Mrozek, age 44, is President and Chief Operating Officer,
ServiceMaster Consumer Services. He served as Senior Vice President and Chief
Financial Officer of the Registrant from January 1, 1995 to December 31, 1996.
He served as Vice President and Chief Financial Officer of the Registrant from
May 1994 to December 1994, as Vice President, Treasurer and Chief Financial
Officer from November 1, 1992 to April 30, 1994, and as Vice President and Chief
Accounting Officer, from January 1, 1990 to October 31, 1992.
Brian D. Oxley, age 47, is Executive Vice President, New Business
Initiatives. He served as President and Chief Operating Officer of ServiceMaster
Management Services and ServiceMaster Healthcare Services from January 1994 to
December 31, 1996. From November 1992 to December 31, 1993, he served as the
President and Chief Executive Officer of the International and New Business
Development Group. He served as Executive Vice President, New Business
Development from January 1991 to November 11, 1992 and as President of
International Services from January 1, 1988 to November 11, 1992.
Steven C. Preston, age 37, has served as Senior Vice President and
Chief Financial Officer since April 1, 1997. From August 1993 to March 1997, he
was Senior Vice President and Corporate Treasurer for First Data Corporation,
Atlanta, Georgia. From October 1985 to August 1993, he served as an investment
banker at Lehman Brothers, New York, New York.
Page 13
Executive Officers of ServiceMaster
The following table shows: (i) the names and ages (as of March 6, 1998)
of the present executive officers of the Company; (ii) all positions presently
held by each officer; and (iii) the year each person became an officer. Each
person named has served as an officer of the Company and its predecessor company
continuously since the year shown. There are no arrangements or understandings
between any executive officer and any other person pursuant to which the officer
was or is to be selected as an officer.
First Became
Name Age Present Position An Officer
C. William Pollard 59 Chairman and Director 1977
Carlos H. Cantu 64 President and Chief Executive Officer and Director 1986
Charles W. Stair 57 Vice Chairman and Director 1973
Phillip B. Rooney 53 Vice Chairman and Director 1997
Ernest J. Mrozek 44 President and Chief Operating Officer, Consumer Services, and a
Senior Management Adviser 1987
Robert F. Keith 41 President and Chief Operating Officer, Management Services, and 1986
a Senior Management Adviser
Robert D. Erickson 54 Executive Vice President and a Senior Management Adviser 1976
Brian D. Oxley 47 Executive Vice President and a Senior Management Adviser 1983
Vernon T. Squires 63 Senior Vice President and General Counsel 1987
Steven C. Preston 37 Senior Vice President and Chief Financial Officer 1997
Eric R. Zarnikow 38 Vice President and Treasurer 1994
Deborah A. O'Connor 35 Vice President and Controller 1993
Messrs. Pollard, Cantu, Stair and Rooney are also Directors of the Company.
See "Election of Directors" in the definitive proxy statement for the Company's
1998 Annual Meeting of Stockholders for biographical information with respect to
these persons. Messrs. Mrozek, Keith, Erickson, Oxley and Preston are Senior
Management Advisers. See pages 12-13 for biographical information with respect
to these persons.
Vernon T. Squires, age 63, has served as Senior Vice President and
General Counsel since January 1, 1988. He served as Vice President and General
Counsel from April 1, 1987 until December 31, 1987. He was an associate and
partner with the law firm of Wilson & McIlvaine in Chicago, specializing in
corporate and tax law, from 1960 to April 1, 1987. He is presently of counsel to
that firm.
Eric R. Zarnikow, age 38, has served as Vice President and Treasurer
since May 1, 1994. From August 1991 to April 1994, he served as Vice President
and Treasurer of Gaylord Container Corporation.
Page 14
Deborah A. O'Connor, age 35, has served as Vice President and
Controller since January 1, 1993. From July 1991 to December 1992, she was
Manager of Financial Projects. She previously had practiced public accounting
with Arthur Andersen LLP since 1984.
Compliance With Section 16(a) of The Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
ServiceMaster's shares, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission (the "Commission") and the New York
Stock Exchange. The Commission's regulations require certain officers, directors
and greater-than-ten-percent shareholders to furnish to the Company copies of
all Section 16(a) forms that they file. During 1997, the Company's predecessor
received Section 16(a) forms from such officers and directors. As of January 1,
1998, the Company did not have any shareholders with an interest greater than
ten percent.
Based solely on a review of the copies of Section 16(a) forms received
by the Company and its predecessor or on written representations from certain
reporting persons that no Form 5 was required for those persons, the Company
believes that during 1997 the officers and directors of the Company and its
predecessor complied with applicable filing requirements, except that one report
covering one February 1997 transaction for 943 shares was filed late by Mr.
Mrozek and one report covering one December 1997 transaction for 3,194,609
shares was filed late by Mr. Peterson.
Item 11. Executive Compensation
The information contained under the heading "Executive Compensation"
(except those portions relating to Item 13 below) in the definitive proxy
statement for the Company's May 1, 1998 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Principal Stockholders"
and "Management Ownership" in the definitive proxy statement for the Company's
May 1, 1998 Annual Meeting of Stockholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Miscellaneous Transactions
The information contained under the heading "Executive Compensation"
(except those portions relating to Item 11 above) and the subheadings
"Compensation of Directors" and "Ownership Information" in the definitive proxy
statement for the Company's May 1, 1998 Annual Meeting of Stockholders is
incorporated herein by reference.
Page 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Schedules and Exhibits
1. Financial Statements
The documents shown below are contained in the Financial
Statements and Management Discussion and Analysis section of
the ServiceMaster Annual Report to Shareholders for 1997, on
pages 21 - 41 and are incorporated herein by reference:
Summary of Significant Accounting Policies
Report of Independent Public Accountants
Consolidated Statements of Income for the three years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Financial Position as of
December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the three
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for
the three years ended December 31, 1997, 1996 and
1995
Notes to the Consolidated Financial Statements
2. Financial Statements Schedules
Schedule IV--Amounts Receivable from Related Parties and
Underwriters, Promoters, and Employees other than Related
Parties. The items required by this Schedule are incorporated
into the information relating to Share Grants on page 29 of
the definitive proxy statement for the Company's May 1, 1998
Annual Meeting of Stockholders.
Included in Part IV of this Report:
Schedule VIII--Valuation and Qualifying Accounts
Report of Independent Public Accountants on Schedules
Exhibit 23 -- Consent of Independent Public Accountants
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is presented in the
financial statements or notes thereto.
Page 16
3. Exhibits
The exhibits filed with this report are listed on pages 24 -
28 herein (the "Exhibit Index").
The following entries in the Exhibit Index are management
contracts or compensatory plans in which a director or any of
the named executive officers of the Registrant does or may
participate. Reference is made to the Exhibit Index for the
filings with the Commission which contain such contracts or
plans.
Exhibit Contract or Plan
------- ----------------------------------------------------------------------
10.2 Deferred Directors Fee Agreement.
10.3 Incentive Reward Compensation Plan.
10.4 ServiceMaster Profit Sharing, Savings & Retirement Plan as amended and
restated effective January 1, 1987.
10.6 ServiceMaster 10-Plus Plan. See also Item 10.11. *
10.8 Directors Deferred Fees Plan (ServiceMaster Shares Alternative).
10.11 ServiceMaster 10-Plus Plan as amended September 3, 1991. *
10.13 ServiceMaster 1994 Non-Employee Directors Share Option Plan.**
10.15 ServiceMaster 1997 Share Option Plan. *
10.17 ServiceMaster 1998 Equity Incentive Plan (subject to shareholder approval).
10.20 ServiceMaster 1998 Non-Employee Directors
Discounted Stock Option Plan (subject to
shareholder approval).
10.21 ServiceMaster 1998 Long-Term Performance Award Plan (subject to
shareholder approval).
---------
* To be superceded by Item 10.17
** To be superceded by Item 10.20
Page 17
(b) Reports on Form 8-K filed during the last quarter of 1997
1. Current Report on Form 8-K filed by ServiceMaster Limited
Partnership on December 27, 1997.
Announcement of (i) the adoption by The ServiceMaster Company
of an Amended and Restated Certificate of Incorporation and
the filing thereof with the Secretary of State of the State of
Delaware; (ii) adoption by The ServiceMaster Company of
Bylaws, a Shareholders Rights Plan and an Agreement of Merger
and Reorganization as amended and restated as of October 3,
1997; and (iii) the filing by ServiceMaster Limited
Partnership of a certificate of merger with the Secretary of
State of the State of Delaware.
Financial Statements: none
2. Current Report on Form 8-K filed by ServiceMaster Limited
Partnership on December 29, 1997 on behalf of The
ServiceMaster Company.
Announcement that The ServiceMaster Company had become the
parent entity in the ServiceMaster enterprise effective
December 26, 1997 at 11:59 P.M., Eastern Standard Time, that
limited partner units of ServiceMaster Limited Partnership had
converted to shares of common stock of The ServiceMaster
Company on a one-for-one basis, and that no exchange of
certificates for partnership units for certificates for shares
of common stock is required.
Financial Statements: none
Certain Undertakings With Respect To Registration Statements on Form S-8
For the purpose of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
Registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into each of the Registrant's Registration Statements on Form S-8,
including No. 33-19763 and No. 2-75851:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person
of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Page 18
SCHEDULE VIII
THE SERVICEMASTER COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions Deductions
Balance at Charged to Write-offs of
Beginning of Costs and Uncollectible Balance at
Description Period Expenses Accounts End of Period
AS OF DECEMBER 31, 1997:
Allowance for doubtful accounts--
Accounts receivable (current) $24,117 20,183 16,756 $27,544
------- ------- ------- -------
Notes receivable (current) $ 2,170 2,507 0 $ 4,677
------- ------- ------- --------
AS OF DECEMBER 31, 1996:
Allowance for doubtful accounts--
Accounts receivable (current) $18,029 20,517 14,429 $24,117
------- ------ ------ -------
Notes receivable (current) $ 2,439 59 328 $ 2,170
------- ------- ------ --------
AS OF DECEMBER 31, 1995
Allowance for doubtful accounts--
Accounts receivable (current) $17,610 16,878 16,459 $18,029
------- ------- ------ -------
Notes receivable (current) $ 2,504 350 415 $ 2,439
------- ------- ------ -------
Page 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of ServiceMaster Limited Partnership:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in The ServiceMaster Company's annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated January 26, 1998. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedules included
in Part IV in the Form 10-K are the responsibility of the Company's management
and are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
supporting schedules have been subjected to the auditing procedures applied in
the audit of the basic financial statements and, in our opinion, fairly state in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
January 26, 1998
Page 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
THE SERVICEMASTER COMPANY
Registrant
Date: March 20, 1998 By /s/ C. WILLIAM POLLARD
-----------------------
C. William Pollard
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in their capacities and on the date indicated.
Signature Title Date
/s/ C. WILLIAM POLLARD Chairman and Director March 20, 1998
- ---------------------------
C. William Pollard
/s/ CARLOS H. CANTU President and Chief Executive March 20, 1998
- ---------------------------
Carlos H. Cantu Officer and Director
/s/ CHARLES W. STAIR Vice Chairman and Director March 20, 1998
- ---------------------------
Charles W. Stair
/s/ STEVEN C. PRESTON Senior Vice President and March 20, 1998
- ---------------------------
Steven C. Preston Chief Financial Officer (Principal
Financial Officer)
/s/ DEBORAH A. O'CONNOR Vice President and March 20, 1998
- -----------------------
Deborah A. O'Connor Controller (Principal
Accounting Officer)
/s/ PAUL W. BEREZNY, JR. Director March 20, 1998
Paul W. Berezny, Jr.
Page 21
/s/ HENRY O. BOSWELL Director March 20, 1998
- ----------------------
Henry O. Boswell
/s/ BRIAN GRIFFITHS Director March 20, 1998
Brian Griffiths
/s/SIDNEY E. HARRIS Director March 20, 1998
Sidney E. Harris
/s/ HERBERT P. HESS Director March 20, 1998
- ---------------------------
Herbert P. Hess
/s/ MICHELE M. HUNT Director March 20, 1998
- ---------------------------
Michele M. Hunt
/s/ GUNTHER H. KNOEDLER Director March 20, 1998
- -----------------------
Gunther H. Knoedler
/s/ JAMES D. McLENNAN Director March 20, 1998
- ----------------------
James D. McLennan
/s/ VINCENT C. NELSON Director March 20, 1998
- ----------------------
Vincent C. Nelson
/s/ DALLEN W. PETERSON Director March 20, 1998
- ---------------------------
Dallen W. Peterson
Page 22
/s/ STEVEN S REINEMUND Director March 20, 1998
- --------------------------------
Steven S Reinemund
/s/ PHILLIP B. ROONEY Vice Chairman and Director March 20, 1998
- -------------------------------
Phillip B. Rooney
/s/ BURTON E. SORENSEN Director March 20, 1998
- ------------------------------------
Burton E. Sorensen
/s/ DAVID K. WESSNER Director March 20, 1998
- -------------------------------
David K. Wessner
Page 23
EXHIBIT INDEX
Exhibit No. Description of
Exhibit
1.1 Underwriting Agreement dated as of August 6, 1997 among The
ServiceMaster Company and J.P. Morgan Securities Inc., is
incorporated by reference to Exhibit 1.1 to the ServiceMaster
Limited Partnership, The ServiceMaster Company Limited Partnership
and ServiceMaster Incorporated of Delaware Registration Statement
on Form S-3 filed with the Securities and Exchange Commission on
July 28, 1997 (the "July 28, 1997 Registration Statement").
1.2 Underwriting Agreement dated as of February 25, 1998 among The
ServiceMaster Company and J.P. Morgan Securities Inc., Goldman,
Sachs & Co., BancAmerica Robertson Stephens, First Chicago Capital
Markets, Inc. and NationsBanc Mongtomgery Securities L.L.C. is
incorporated by reference to Exhibit 1 to the Current Report on
Form 8-K as filed by The ServiceMaster Company on February 27, 1998
(the "Company February 27, 1998 8-K").
2.1 Acquisition Agreement dated December 5, 1996 by and among
ServiceMaster Limited Partnership, ServiceMaster Acquisition
Corporation and Barefoot Inc. is incorporated by reference to
Annex A-1 to the Offering Circular/Prospectus included as part of
the Registration Statement on Form S-4 as filed by ServiceMaster
Limited Partnership on January 17, 1997 (SEC Registration No.
333-17759).
2.2 Plan and Agreement of Merger dated December 5, 1996 by and among
ServiceMaster Limited Partnership, ServiceMaster Acquisition
Corporation and Barefoot Inc. is incorporated by reference to
Annex A-2 to the Offering Circular/Prospectus included as part of
the Registration Statement on Form S-4 as filed by ServiceMaster
Limited Partnership on January 17, 1997 (SEC Registration No.
333-17759).
2.3 Merger and Reorganization Agreement as amended and restated on
October 3, 1997 is incorporated by reference to Exhibit 5 to the
Current Report on Form 8-K as filed by ServiceMaster Limited
Partnership on December 29, 1997 (the "SMLP December 29, 1997
8-K") and to Exhibit 5 to the Current Report on Form 8-K as filed
by The ServiceMaster Company on Form 8-K on February 26, 1998
second of three 8-K reports filed on that date (the "Company
February 26, 1998 8-K, No. 2").
2.4 Certificate of Merger of NewSub B, Inc. into ServiceMaster Limited
Partnership in accordance with Section 17-211 of the Delaware
Revised Uniform Limited Partnership Act (the "Reincorporating
Merger"), the filing of which was certified by the Secretary of
State of the State of Delaware on December 17, 1997 and the
effective date and time of which was December 26, 1997 at 11:59
P.M., Eastern Standard Time.
2.5 Certificate of Merger of ServiceMaster Limited Partnership and The
ServiceMaster Company Limited Partnership with and into The
ServiceMaster Company, a Delaware corporation, in accordance with
the General Corporation Law of the State of Delaware, the filing
of which was certified by the Secretary of State of the State of
Delaware on December 18, 1997 and the effective date and time of
which was January 1, 1998 at 12:01 A.M., Eastern Standard Time.
3.1 Amended and Restated Certificate of Incorporation of The
ServiceMaster Company, a Delaware corporation, as filed with the
Secretary of State, State of Delaware, on November 6, 1997 is
incorporated by reference to Exhibit 1 to the SMLP December 29,
1997 8-K and to Exhibit 1 to the Company February 26, 1998 8-K,
No. 2.
Page 24
3.2 Bylaws of The ServiceMaster Company as adopted on November 3, 1997
are incorporated by reference to Exhibit 2 to the SMLP December
29, 1997 8-K and to Exhibit 2 to the Company February 26, 1998
8-K, No. 2.
4.1 Shareholder Rights Agreement between The ServiceMaster Company and
the Harris Trust and Savings Bank as adopted on December 12,1997
is incorporated by reference to Exhibit 3 to the SMLP December 29,
1997 8-K and to Exhibit 3 to the Company February 26, 1998 8-K,
No. 2.
4.2 The ServiceMaster Company: Certificate of Designation, Preferences
and Rights of Junior Participating Preferred Stock, Series A, is
incorporated by reference to Exhibit 4 to the SMLP December 29,
1997 8-K and to Exhibit 4 to the Company February 26, 1998 8-K,
No. 2.
4.3 Indenture dated as of August 15, 1997 among The ServiceMaster
Company (as successor to ServiceMaster Limited Partnership and The
ServiceMaster Company Limited Partnership) and the Harris Trust and
Savings Bank as trustee is incorporated by reference to Exhibit 4.1
to the July 28, 1997 Registration Statement.
4.4 First Supplemental Indenture dated as of August 15, 1997 among The
ServiceMaster Company (as successor to ServiceMaster Limited
Partnership and The ServiceMaster Company Limited Partnership) and
the Harris Trust and Savings Bank as trustee.
4.5 Second Supplemental Indenture dated as of January 1, 1998 among
The ServiceMaster Company (as successor to ServiceMaster Limited
Partnership and The ServiceMaster Company Limited Partnership) and
the Harris Trust and Savings Bank as trustee is incorporated by
reference to Exhibit 2 to the Current Report on Form 8-K as filed
by The ServiceMaster Company on Form 8-K on February 26, 1998
first of three 8-K reports filed on that date (the "Company
February 26, 1998 8-K, No. 1").
4.6 Third Supplemental Indenture dated as of March 2, 1998 among The
ServiceMaster Company and the Harris Trust and Savings Bank as
trustee is incorporated by reference to Exhibit 4.3 to the Current
Report on Form 8-K as filed by The ServiceMaster Company on
February 27, 1998 (the "Company February 27, 1998 8-K").
4.7 Form of 6.95% Note due August 14, 2007 is incorporated by reference to
Exhibit 4.1 to the July 28, 1997 Registration Statement.
4.8 Form of 7.45% Note due August 14, 2027 is incorporated by reference to
Exhibit 4.2 to the July 28, 1997 Registration Statement.
4.9 Form of 7.10% Note due March 1, 2018 is incorporated by reference to
Exhibit 4.1 to the Company February 27, 1998 8-K.
4.10 Form of 7.25% Note due March 1, 2038 is incorporated by reference to
Exhibit 4.2 to the Company February 27, 1998 8-K.
Page 25
10.1 $300,000,000 Credit Agreement between ServiceMaster and certain
Lenders dated August 31, 1995 and amendment thereto dated October
15, 1996 is incorporated by reference to Exhibit 10.33 to the
Registration Statement on Form S-4 as filed by ServiceMaster
Limited Partnership on January 17, 1997 (SEC Registration No.
333-17759).
10.2 $750,000,000 Five-Year Credit Agreement dated as of April 1, 1997
among The ServiceMaster Company Limited Partnership, the First
National Bank of Chicago and Morgan Guaranty Trust Company.
10.3 $250,000,000 364-Day Credit Agreement dated as of April 1, 1997
among The ServiceMaster Company Limited Partnership, the First
National Bank of Chicago and Morgan Guaranty Trust Company.
10.4 Form of Deferred Directors Fee Agreement as assumed by The ServiceMaster
Company in the Reincorporating Merger is incorporated by reference to
Exhibit 10(c)(4) to the Annual Report on Form 10-K for the year ended
December 31, 1980 as filed by ServiceMaster Limited Partnership (the "1980
10-K").
10.5 Incentive Reward Compensation Plan as assumed by The ServiceMaster
Company in the Reincorporating Merger is incorporated by reference
to Exhibit 10(c)(6) to the 1980 10-K.
10.6 ServiceMaster Profit Sharing, Savings and Retirement Plan as
assumed by The ServiceMaster Company in the Reincorporating Merger
amended and restated effective January 1, 1987 is incorporated by
reference to the exhibit so captioned to the Annual Report on Form
10-K for the year ended December 31, 1987 as filed by
ServiceMaster Limited Partnership (the "1987 10-K").
10.7 The Terminix International Company L.P. Profit Sharing Retirement
Plan (previously known as Cook International, Inc. Profit Sharing
Retirement Plan) effective January 1, 1984; Amendment No. One to
The Terminix International Company L.P. Profit Sharing Retirement
Plan effective January 1, 1986 and April 1, 1986; Amendment No.
Two, effective April 1, 1986; Amendment No. Three, effective
January 1, 1987 and January 1, 1988; The Terminix International
Company L.P. Profit Sharing Retirement Trust, all of which are
incorporated by reference to Exhibit 10.15 to the 1987 10-K.
10.8 ServiceMaster 10-Plus Plan as assumed by The ServiceMaster Company
in the Reincorporating Merger is incorporated by reference to
Exhibit 4.2 to the ServiceMaster Limited Partnership Registration
Statement on Form S-8 (No. 33-39148) filed with the SEC on February
26, 1991 (the "10-Plus Registration Statement").
10.9 Form of Option Agreement for the ServiceMaster 10-Plus Plan is
incorporated by reference to Exhibit 4.3 to the 10-Plus
Registration Statement.
10.10 Form of Directors Deferred Fees Plan (ServiceMaster Shares
Alternative) as assumed by The ServiceMaster Company in the
Reincorporating Merger is incorporated by reference to Exhibit
10.18 to the Annual Report on Form 10-K for the year ended December
31, 1990 (the "1990 10-K")
10.11 Form of Directors Deferred Fees Agreement (ServiceMaster Shares
Alternative) as assumed by The ServiceMaster Company in the
Reincorporating Merger is incorporated by reference to Exhibit
10.19 of the 1990 10-K.
Page 26
10.12Form of ServiceMaster Deferred Fees Plan Trust is incorporated by reference
to Exhibit 10.20 of the 1990 10-K.
10.13 ServiceMaster 10-Plus Plan as amended September 3, 1991 and as
assumed by The ServiceMaster Company in the Reincorporating Merger
is incorporated by reference to Exhibit 10.21 to the Annual Report
on Form 10-K for the year ended December 31, 1991 (the "1991
10-K").
10.14Form of Option Agreement for the ServiceMaster 10-Plus Plan as amended
September 3, 1991 is incorporated by reference to Exhibit 10.22 to the 1991
10-K.
10.15 ServiceMaster 1994 Non-Employee Directors Share Option Plan as
assumed by The ServiceMaster Company in the Reincorporating Merger
is incorporated by reference to Exhibit 4.2 to the ServiceMaster
Limited Partnership Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on October 5, 1994 (the
"Directors Share Plan Registration Statement").
10.16 Form of Option Agreement for the ServiceMaster 1994 Non-Employee
Director Share Option Plan is incorporated by reference to Exhibit
4.3 to the Directors Share Plan Registration Statement.
10.17 ServiceMaster 1997 Share Option Plan as assumed by The
ServiceMaster Company in the Reincorporating Merger is
incorporated by reference to Exhibit 10.28 to the Annual Report on
Form 10-K for the year ended December 31,1996 as filed by
ServiceMaster Limited Partnership (the "1996 10-K").
10.18Form of Option Agreement for the ServiceMaster 1997 Share Option Plan is
incorporated by reference to Exhibit 10.29 to the 1996 10-K.
10.19 ServiceMaster 1998 Equity Incentive Plan as adopted on December
11, 1997 (subject to shareholder approval) is incorporated by
reference to Exhibit A to the Definitive Proxy Statement for the
Registrant's May 1, 1998 Annual Meeting of Stockholders (the "1998
Proxy Statement").
10.20Form of Option Agreement for the ServiceMaster 1998 Equity Incentive Plan
(Non-Qualifying Stock Options)
10.21Form of Option Agreement for the ServiceMaster 1998 Equity Incentive Plan
(Incentive Stock Options)
10.22 ServiceMaster 1998 Non-Employee Directors Discounted Stock Option
Plan as adopted on December 11, 1997 (subject to shareholder
approval) is incorporated by reference to Exhibit B to the 1998
Proxy Statement.
10.23 ServiceMaster 1998 Long-Term Performance Award Plan as adopted on
December 11, 1997 (subject to shareholder approval) is
incorporated by reference to Exhibit C to the 1998 Proxy
Statement.
11 Exhibit regarding detail of income per share computation for each of the
three years ended December 31, 1997, 1996 and 1995 is incorporated by
reference to the footnote on page 39 of the 1997 Annual Report (defined in
Ex. 13).
13 The ServiceMaster Annual Report to Shareholders for the year ended
December 31, 1997 (the "1997 Annual Report"). The parts of the 1997
Annual Report which are expressly incorporated into this report by
reference shall be deemed filed with this report. All other parts
of the 1997 Annual Report are furnished for the information of the
Commission and are not filed with this report.
Page 27
21 Subsidiaries of Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule (EDGAR filing only)
99.1 Amended and Restated Agreement of Limited Partnership for
ServiceMaster Consumer Services Limited Partnership dated November
8, 1990 is incorporated by reference to Exhibit 4.4 to the Current
Report on Form 8-K as filed by ServiceMaster Limited Partnership on
November 21, 1990.
99.2 Amended and Restated Agreement of Limited Partnership of
ServiceMaster Management Services Limited Partnership dated
December 1991 is incorporated by reference to Exhibit 28.10 to the
1991 10-K.
99.3 Amended and Restated Agreement of Limited Partnership of
ServiceMaster Consumer Services Limited Partnership effective June
30, 1992 is incorporated by reference to Exhibit 28.12 to the
Annual Report on Form 10-K for the year ended December 31,1992 as
filed by ServiceMaster Limited Partnership.
Page 28
Graphics Appendix
This appendix describes the graphics which could not be put into
electronic format and which have been filed with the Securities and Exchange
Commission as a paper filing.
A Performance Graph is set forth on page 28 of the Company's definitive
proxy statement for the Annual Meeting of Stockholders to be held on May 1, 1998
which consists of a line graph which compares the yearly percentage change in
ServiceMaster's cumulative total shareholder return on its limited partner
shares (computed in accordance with the Item 302(d) of Reg. S-K) with the
cumulative return on the stocks of the companies within the S&P 500 Index and
with the Dow Jones Consumer Services Index over the five year period from
January 1, 1993 to December 31, 1997. The chart shows that ServiceMaster
outperformed both indices in 1993, 1994, 1995, 1996 and 1997 by wide margins
over the last four years.
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