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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, 1998. Commission File number 1-14762
THE SERVICEMASTER COMPANY
(Exact Name of Registrant as Specified in its Certificate)
(Successor to ServiceMaster Limited Partnership)
Delaware 36-3858106
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One ServiceMaster Way, Downers Grove, Illinois 60515-1700
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (630) 271-1300
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- -----------------------
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 No
The Aggregate Market Value of Shares Held by Non-Affiliates of the
Registrant As of March 22, 1999 was $5,830,705,378. The Number of Shares
Outstanding of the Registrant's Common Stock as of March 22, 1999 was
309,315,048.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Registrant's Annual Report to Stockholders for the
year ended December 31, 1998 are incorporated into Part I, Part II and Part IV
of this Form 10-K.
Certain parts of the Registrant's Definitive Proxy Statement for the
April 30, 1999 Annual Meeting of Stockholders is incorporated into Part III of
this Form 10-K.
PART I
Item 1. Business
This annual report on Form 10-K is filed by The ServiceMaster Company,
a Delaware corporation (hereinafter sometimes referred to as the "Registrant").
The Registrant and its affiliated entities are referred to as "ServiceMaster" or
the "Company" or the "ServiceMaster enterprise." The Registrant is the successor
to ServiceMaster Limited Partnership, a Delaware limited partnership. On
December 26, 1997, by means of a statutory merger, the Registrant succeeded to
and became substituted for ServiceMaster Limited Partnership as the publicly
traded parent entity in the ServiceMaster enterprise.
Forward-Looking Statements
In accordance with the Private Securities Litigation Reform Act of
1995, the Registrant notes that statements set forth or incorporated by
reference 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 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, 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 (including, but not limited to, its Year 2000 readiness disclosures).
Principal Business Groups
The Registrant is a holding company whose shares of common stock are
traded on the NYSE. Through its subsidiaries, the Company is engaged in
providing a variety of specialty services to homeowners and commercial
facilities and supportive management services in several markets, including the
healthcare market, the education market and certain segments of the business and
industry market.
The Company is organized into two principal operating groups:
ServiceMaster Consumer Services and ServiceMaster Management Services. The
Company also has a third operating group: ServiceMaster Employer Services. Each
of these operating groups is headed by a limited partnership or a corporation
which has its own group of operating subsidiaries. The parent companies for the
principal operating groups are ServiceMaster Consumer Services Limited
Partnership, which was formed in the summer of 1990, and ServiceMaster
Management Services Limited Partnership, which was formed in December 1991. The
parent companies for the principal operating groups are wholly owned by the
Company. All subsidiaries of the operating group parent companies are wholly
owned, except for Rescue Rooter L.L.C., a subsidiary of ServiceMaster Consumer
Services in which senior Rescue Rooter management have acquired equity interests
of not more than 10 percent in total and which are subject to certain put and
call rights.
Trademarks and Service Marks; Franchises
The Company's trademarks and service marks are important for all
elements of the Company's business, although such marks are particularly
important in the advertising and franchising activities conducted by the
operating subsidiaries of ServiceMaster Consumer Services L.P. Such marks are
registered and are renewed at each registration expiration date.
Within ServiceMaster Consumer Services, franchises are important for
the TruGreen-ChemLawn, Terminix, ServiceMaster Residential/Commercial, Merry
Maids, AmeriSpec and Furniture Medic businesses. Nevertheless, revenues and
profits derived from franchise-related activities constitute less than 10% of
the revenue and profits of the consolidated ServiceMaster enterprise. Franchise
agreements made in the course of these businesses are generally for a term of
five years. ServiceMaster's renewal history is that most of the franchise
agreements which expire in any given year are renewed.
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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 10.5 million worldwide customers.
Oversight responsibility for the ServiceMaster Consumer Services
businesses which are conducted in foreign markets is in the appropriate
subsidiary of ServiceMaster Consumer Services L.P.
TruGreen-ChemLawn. TruGreen-ChemLawn is a wholly-owned subsidiary of
ServiceMaster Consumer Services L.P. As of December 31, 1998, TruGreen-ChemLawn
had 230 company-owned branches and 82 franchised branches. With over 3 million
residential and commercial customers, TruGreen-ChemLawn is the leading provider
of lawn care services in the United States and a leading provider of commercial
landscaping services. TruGreen-ChemLawn provides lawn, tree and shrub care
services in Egypt, Japan, Saudi Arabia, and Turkey through licensing
arrangements and in Canada through a subsidiary. TruGreen-ChemLawn also provides
interior plantscape services to commercial customers. The TruGreen-ChemLawn
businesses are seasonal in nature. On March 18, 1999, ServiceMaster completed
the acquisition of LandCare USA, Inc., a leading provider of commercial
landscaping services and tree services (including line clearing and tree care.
ServiceMaster thereafter combined the LandCare USA business with the commercial
landscaping business of TruGreen-ChemLawn.
Terminix. Terminix is a wholly-owned subsidiary of ServiceMaster
Consumer Services L.P. With over 2.5 million residential and commercial
customers, Terminix, through its company-owned branches and through franchisees,
is the leading provider of termite and pest control services in the United
States. As of December 31, 1998, Terminix was providing these services through
256 company-owned branches in 40 states and through 240 franchised branches in
28 states. Terminix also manages the following European pest control companies,
all of which are subsidiaries of TMX-Europe B.V., a wholly-owned subsidiary of
the Company: Terminix Peter Cox Ltd., a leading pest control and wood
preservation company in the United Kingdom and Ireland; Terminix Protekta B.V.
and Riwa B.V., each a leading pest control company in the Netherlands and
Belgium; Anticimex Development A.B., a holding company for the leading pest
control company in Sweden and which also operates in Norway; and the Stenglein
Group, a group of pest control companies in Germany. Terminix also provides
termite and pest control services through licensing arrangements with local
service providers in twenty-seven other countries and through subsidiaries in
eight other countries. The Terminix business is seasonal in nature.
Res/Com. Res/Com is a wholly-owned subsidiary of ServiceMaster Consumer
Services L.P. ServiceMaster, through Res/Com, is the leading franchisor in the
United States in the residential and commercial cleaning field. Res/Com provides
carpet and upholstery cleaning and janitorial services, disaster restoration
services and window cleaning services. As of December 31, 1998, these services
were provided to approximately 1.6 million residential and commercial customers
worldwide through a network of over 4,200 independent franchisees. Res/Com
provides
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its services through subsidiaries in Canada, Germany, Ireland and the
United Kingdom, and through licensing arrangements with local service providers
in 17 other countries.
Merry Maids. Merry Maids is a wholly-owned subsidiary of ServiceMaster
Consumer Services L. P. Merry Maids is the organization through which
ServiceMaster provides domestic house cleaning services. With approximately
338,000 worldwide customers, Merry Maids is the leading provider of domestic
house cleaning services in the United States. As of December 31, 1998, these
services were provided through 27 company-owned branches in 19 states and
through 829 licensees operating in all 50 states. Merry Maids also provides
domestic house cleaning services through subsidiaries in Canada and the United
Kingdom and through licensing arrangements with local service providers in eight
other countries.
American Home Shield. AHS is a wholly-owned subsidiary of ServiceMaster
Consumer Services L.P. AHS is a leading provider of home systems and appliance
warranty contracts ("warranty contracts") in the United States, providing
homeowners with contracts covering the repair or replacement of built-in
appliances, hot water heaters and electrical, plumbing, central heating and
central air conditioning systems which malfunction by reason of normal wear and
tear. Warranty contracts are sold through participating real estate brokerage
offices in conjunction with resales of single-family residences to homeowners.
AHS also sells warranty contracts directly to non-moving homeowners by renewing
existing contracts and through various other distribution channels which are
currently being expanded. As of December 31, 1998, AHS warranty contracts
provided for services to approximately 700,000 homes through approximately
12,250 independent repair maintenance contractors in 50 states and the District
of Columbia, with operations in California, Texas and Arizona accounting for
32%, 26% and 8%, respectively, of gross contracts written by AHS. AHS also
provides home service warranty contracts through licensing arrangements with
local service providers in three other countries.
AmeriSpec. AmeriSpec is a wholly-owned subsidiary of AHS. AmeriSpec is
a leading provider of home inspection services in the United States. During
1998, AmeriSpec conducted approximately 135,000 home inspections in 45 states
and Canada, with operations in California, New York and Illinois accounting for
27%, 5% and 4%, respectively, of the gross number of inspections conducted
through AmeriSpec.
Furniture Medic. Furniture Medic is a wholly-owned subsidiary of
ServiceMaster Consumer Services L.P. Furniture Medic provides on-site furniture
repair and restoration services in 46 states. As of December 31, 1998, these
services were provided through 530 licensees. Furniture Medic also provides its
services through subsidiaries in Canada and the United Kingdom and through
licensing arrangements with local service providers in two other countries.
Rescue Rooter. Rescue Rooter is a subsidiary of ServiceMaster Consumer
Services L.P. Rescue Rooter acquired the business and assets of Rescue
Industries, Inc. on January 1, 1998. Rescue Rooter provides plumbing and drain
cleaning services, and heating and air conditioning services, in 12 states
through 25 company-owned branches and one franchise location. In 1998, Rescue
Rooter performed services for approximately 410,000 customers. As of March 1,
1999 certain key employees of Rescue Rooter had purchased an aggregate 8.35% out
of a potential 10% equity interest in Rescue Rooter pursuant to a management
equity plan. Such interest is subject to reciprocal put and call rights which
will become exercisable on January 1, 2003 and which will be consummated on the
basis of the then fair market value of the interest. On March 23, 1999, the
Registrant announced an intention to make a cash tender offer for all of the
outstanding shares of American Residential Services, Inc., a leading provider of
heating, ventilation and air condition services ("ARS"). See Exhibit 99.4. If
ARS is acquired by ServiceMaster, its business and operations will be integrated
with the business and operations of Rescue Rooter.
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
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maintenance, laundry and linen, grounds
and landscaping, clinical equipment maintenance, food service, energy
management, and total facility management). ServiceMaster's general programs and
systems free the customer to focus on its core business activity with confidence
that the support services are being managed and performed in an efficient
manner.
ServiceMaster Management Services L.P. is organized into three
divisions, each of which provides service on a nationwide basis within its
market. These markets are: Healthcare Management Services; Education Management
Services; and Business & Industry Management Services. The responsibility for
overseeing the Management Services businesses which are conducted in foreign
markets lies with ServiceMaster Management Services L.P.
As of December 31, 1998, ServiceMaster was providing supportive
management services to approximately 1,633 health care customers and to
approximately 498 educational and commercial customers. These services were
being provided in all 50 states and the District of Columbia. Outside of the
United States, ServiceMaster was providing management services through
subsidiaries in Canada and Japan, through an affiliated company in Mexico, and
through licensing arrangements with local service providers in twenty-five other
countries.
ServiceMaster Healthcare Management Services. The Healthcare division
of ServiceMaster Management Services L.P. is a leading provider to the health
care market of supportive management services, including the management of
housekeeping, plant operations and maintenance, laundry and linen, grounds and
landscaping, clinical equipment maintenance, food services and total facility
management. As of December 31, 1998, the Healthcare division was serving in
approximately 1,877 healthcare facilities. Although the healthcare market has
undergone significant consolidation in recent years, ServiceMaster believes that
there continues to be potential for expansion in the healthcare market due to
the trend of healthcare facilities to outsource more of their service
requirements.
ServiceMaster Education Management Services. The Education division of
ServiceMaster Management Services L.P. is a leading provider to the education
market of maintenance, custodial and grounds services. The facilities which
comprise the education market include primary schools, secondary schools and
school districts, private specialty schools and colleges and universities. As of
December 31, 1998, ServiceMaster was serving 281 educational customers.
ServiceMaster believes there is potential for expansion in the education market
due to its current relatively low penetration of that market and the trend of
educational facilities to consider outsourcing more of their service
requirements. However, a majority of the educational facilities continue to
assume direct responsibility for managing their support functions.
ServiceMaster Business & Industry Management Services. The Business &
Industry division of ServiceMaster Management Services L.P. is a leading
provider of plant operations and maintenance, custodial and grounds management
services to business and industrial customers in selected markets. Such markets
include the food processing, transportation, healthcare products and automotive
markets. ServiceMaster believes that there is potential for expansion in these
business and industrial markets due to ServiceMaster's current low penetration
of those markets, the trend of businesses to consider outsourcing more of their
service requirements and the trend of governmental units to privatize parts of
their operations. As of December 31, 1998, ServiceMaster was serving
approximately 217 business or industrial customers.
The Business and Industry division includes Premier Manufacturing
Support Services Limited Partnership. Premier is a leading provider of facility
management services in the automotive industry, specializing in paint booth
cleaning services. As of December 31, 1998, Premier was serving 77 customer
locations in ten countries.
Other Businesses
ServiceMaster Diversified Health Services. In 1998, ServiceMaster
Diversified Health Services ("DHS") provided management services to
freestanding, hospital-based and government-owned nursing homes, skilled nursing
facilities, and assisted living facilities; design, development, refurbishing
and construction consulting services to long-term care facilities;
rehabilitation services; the sale of various medical produces and supplies; and
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pharmacy management. In January 1999, DHS sold its hospice business in
connection with the ServiceMaster Home Health Care sale described below.
ServiceMaster Home Health Care. During the year 1998, ServiceMaster
Home Health Care Services Inc., a wholly owned subsidiary of the Company,
provided management services to hospital-based home health care agencies (as
well as the direct operation of freestanding home health care agencies). On
January 4, 1999, the Company announced the completion of its strategic review of
its home health care business and the decision to sell its direct operations of
home health care agencies and certain support operations and to discontinue its
outsource and operation of home health care agencies. ServiceMaster Home Health
Care Services will continue to provide consulting services to hospitals and
other providers of home health care.
ServiceMaster Employer Services. ServiceMaster Employer Services is one
of the nation's larger professional employer organizations. It provides more
than 950 clients with administrative processing of payroll, workers compensation
insurance, health insurance, unemployment insurance and other employee benefits.
Energy Management. During the year 1998, the Company provided energy
management services through Energy Management Services, a division of
ServiceMaster Management Services L.P. On January 4, 1999, the Company announced
the formation of a strategic venture with Texas Utilities Company for the
ownership and operation of the energy management business. The new venture
acquired all the assets of ServiceMaster Energy Management and is owned 85% by
Texas Utilities Company and 15% by the Company.
International Operations. Consumer services and supportive management
services in international markets are provided through licensing arrangements
and ownership of foreign operating companies acquired by ServiceMaster. Except
as noted below, these activities in Europe, Latin America and the Middle East
are administered as part of the operations of ServiceMaster Management Services
L.P. and ServiceMaster Consumer Services L.P., respectively. Operating
arrangements and market expansion efforts in the Pacific Rim are administered by
the parent company.
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.
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The principal methods of competition employed by ServiceMaster in each of the
operating units in the Management Services business are price, quality of
service and experience in providing management services. The principal methods
of competition employed by ServiceMaster in the Employer Services business are
name recognition, assurance of customer satisfaction and financial strength.
Consumer Services
Subsidiaries of Consumer Services provide a variety of residential and
commercial services under their respective names on the basis of their and
ServiceMaster's reputation, the strength of their service marks, their size and
financial capability, and their training and technical support services. The
markets served by Terminix and TruGreen-ChemLawn are seasonal in nature.
Lawn Care Services. TruGreen-ChemLawn, both directly and through
franchisees, provides lawn care services to residential and commercial
customers. Competition within the lawn care market is strong, coming mainly from
regional and local, independently-owned firms and from homeowners who elect to
care for their lawns through their own personal efforts. TruGreen-ChemLawn is
the leading national lawn care company within this market. TruGreen-ChemLawn
also provides indoor plant maintenance to commercial customers.
Lawn care services are regulated by law in most of the states in which
TruGreen-ChemLawn provides such services. These laws require licensing which is
conditional on a showing of technical competence and adequate bonding and
insurance. The lawn care industry is regulated at the federal level under the
Federal Insecticide, Fungicide and Rodenticide Act, and lawn care companies
(such as TruGreen-ChemLawn) which apply herbicides and pesticides are regulated
under the Federal Environmental Pesticide Control Act of 1972. Such laws,
together with a variety of state and local laws and regulations, may limit or
prohibit the use of certain herbicides and pesticides, and such restrictions may
adversely affect the business of TruGreen-ChemLawn.
Landscaping and Tree Services. TruGreen-ChemLawn provides landscaping
and tree services to commercial customers. (See page 2 for a discussion of the
acquisition of LandCare USA, Inc.). The landscape and tree services industry is
highly competitive. Most of TruGreen-ChemLawn's landscape services competitors
are small, owner-operated companies operating in a limited geographic market but
there are a few large companies operating in multiple markets. Competition in
the line clearing market is characterized by a small number of large companies.
The commercial tree services market is characterized by a large group of small
competitors, most of which are owner-operated businesses operating in limited
geographic areas and a few larger companies operating in one or more regions.
Termite and Pest Control Services. The market for termite and pest
control services to commercial and residential customers includes many
competitors. Terminix is the leading national termite and pest control company
within this market. Competition within the termite and pest control market is
strong, coming mainly from regional and local, independently-owned firms
throughout the United States and from one other large company which operates on
a national basis.
Termite and pest control services are regulated by law in most of the
states in which Terminix provides such services. These laws require licensing
which is conditional on a showing of technical competence and adequate bonding
and insurance. The extermination industry is regulated at the federal level
under the Federal Insecticide, Fungicide and Rodenticide Act, and pesticide
applicators (such as Terminix) are regulated under the Federal Environmental
Pesticide Control Act of 1972. Such laws, together with a variety of state and
local laws and regulations, may limit or prohibit the use of certain pesticides,
and such restrictions may adversely affect the business of Terminix.
House Cleaning Services. The market for domestic house cleaning
services is highly competitive. In urban areas the market involves numerous
local companies and a few national companies. ServiceMaster believes that its
share of the total potential market for such services is small and that there is
significant potential for further expansion of its housecleaning business
through continued internal expansion and greater penetration of the
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housecleaning market. Through its company-owned branches and its franchisees,
ServiceMaster has a small share of the market for the cleaning of residential
and commercial buildings.
Home Systems and Appliance Warranty Contracts. The market for home
systems and appliance warranty contracts is relatively new. ServiceMaster
believes that AHS maintains a favorable position in its industry due to the
system developed and used by AHS for accepting, dispatching and fulfilling
service calls from homeowners through a nationwide network of independent
contractors. AHS also has a computerized information system developed and owned
by AHS, and an electronic digital voice communication system through which AHS
handled more than 4.9 million calls in 1998.
Home Inspection Services. AmeriSpec is a leading provider of home
inspection services in the United States. Competition within this market is
strong, coming mainly from regional and local, independently-owned firms.
Furniture Repair Services. The market for on-site furniture repair
services is relatively new. ServiceMaster believes that Furniture Medic
maintains a favorable position in its industry due to its patented
environmentally sensitive procedure for repairing furniture in the customer's
home.
Plumbing and Drain Cleaning Services. The market for plumbing and drain
cleaning services is highly competitive in both the residential and commercial
sectors. Rescue Rooter believes that its share of the total potential market for
such services is small and that there is significant potential for future
expansion and penetration. Plumbing is regulated by most states in which Rescue
Rooter provides such services. The level of licensing varies from state to
state. There are no state or federal guidelines regulating drain cleaning
services.
Management Services
Health Care. Within the market consisting of general health care
facilities having 50 or more beds, ServiceMaster is the leading supplier of
plant operations and maintenance, housekeeping, clinical equipment maintenance,
and laundry and linen management services. As of December 31, 1998,
ServiceMaster was serving approximately 1,633 customers and managing
approximately 1,877 health care facilities. The majority of health care
facilities within this market not currently served by ServiceMaster assume
direct responsibility for managing their own non-medical support functions.
ServiceMaster believes that its management services for health care
facilities may expand by the addition of facilities not presently served, by
initiating additional services at facilities which use only a portion of the
services now offered, by the development of new services and by growth in the
size of facilities served. At the same time, industry consolidation, changes in
use and methods of health care delivery and payment for services (including in
particular changes in Medicare reimbursement regulations) continue to affect the
health care environment.
Education. ServiceMaster is a leading provider to the education market
of maintenance, custodial and grounds services. The facilities which comprise
the education market served by ServiceMaster include primary schools, secondary
schools and school districts, private specialty schools and colleges and
universities. As of December 31, 1998, ServiceMaster was serving approximately
281 customers and managing approximately 5,700 facilities. ServiceMaster
believes there is potential for expansion in the education market due to its
current relatively low penetration of that market and the trend of educational
facilities to consider outsourcing more of their service requirements. However,
a majority of the educational facilities continue to assume direct
responsibility for managing their support functions.
Business and Industry. ServiceMaster is a leading provider of plant
operations and maintenance, custodial and grounds management services to
business and industrial customers in selected markets. ServiceMaster believes
that there is potential for expansion in those business and industrial markets
which ServiceMaster has elected to emphasize due to ServiceMaster's low current
penetration of those markets, the trend of businesses to consider outsourcing
more of their service requirements and the trend of governmental units to
privatize parts of their
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operations. The emphasized markets include the food
processing, transportation, healthcare products, and automotive markets. As of
December 31, 1998, ServiceMaster was serving approximately 217 customers and
managing approximately 817 business or industrial facilities.
Major Customers
ServiceMaster has no single customer which accounts for more than 10%
of its total revenues. No part of the Company's business is dependent on a
single customer or a few customers, the loss of which would have a material
adverse effect on the Company as a whole. Revenues from governmental sources are
not material.
Employees
On December 31, 1998, ServiceMaster had a total of approximately 51,740
employees.
ServiceMaster provides its employees with annual vacation, medical,
hospital and life insurance benefits and the right to participate in additional
benefit plans which are described in the Notes to Financial Statements included
in the Company's Annual Report to Stockholders for the Year Ended December 31,
1998.
Year 2000 Computer Program Compliance
Year 2000 Compliance. Certain computer programs use two digits rather
than four to define the applicable year and consequently may not function
properly beyond the year 1999 unless they are remediated. In addition, some
computer programs are unable to recognize the year 2000 as a leap year. These
problems may also exist in chips embedded in various types of equipment. The
Company has long been aware of this Year 2000 (Y2K) problem. The Company is
dealing with the Y2K problem in part through system upgrades, which were planned
to occur in the normal course of business. In other cases, the Company has put
programs into place which the Company believes will result in the completion of
necessary remediation efforts prior to the year 2000.
State of Readiness. The Company has initiated a program (the "Y2K
program") to address Y2K issues as they affect the Company's information
technology (IT) systems, electronic data interfaces and its non-IT hardware. The
Y2K program was set up to use the following steps as appropriate: inventory
assessment - planning -renovation - testing - implementation. In addition, the
program calls for inquiries of the Company's major suppliers of goods and
services to determine their Y2K status and a review of the Company's
relationships with its customers to determine if the Company has any
responsibility for the status of the customers' IT and/or non-IT systems and
hardware.
In 1998, the Company began to monitor its progress on the Y2K program
on a consolidated basis and completed an inventory which covered both IT and
non-IT items for all operating companies and administrative units within the
ServiceMaster enterprise. All items in the inventory were placed in one of four
categories: mission critical, critical, important and ordinary within the
context of the operating company or administrative unit involved. (A "mission
critical" or "critical" designation for an item within an operating company or
administrative unit does not necessarily hold the same level of criticality from
the perspective of the entire ServiceMaster enterprise).
Remediation plans have been developed for the mission critical and
critical matters, with milestones established for each plan which enable
management to measure the progress made in respect of a plan against the work
schedule established for that plan. Although these plans encompass many
separately identifiable items, from a ServiceMaster enterprise standpoint, there
are nine projects (the "Key Projects") which management has identified as either
mission critical or critical and which will require a measurable amount of
attention to remediate. Although all of the Key Projects are scheduled for
completion before the end of the year 1999, most of the Key Projects are
scheduled for completion by June 30, 1999. As of February 28, 1999, work on each
of the Key Projects was on schedule and the Company believes that all Key
Projects will be completed in accordance with their scheduled completion dates.
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The Company has utilized the services of an outside consultant for the
Y2K program to help identify Y2K issues and to develop a system to closely
monitor remediation work. In early 1998, the Company established a Y2K committee
in the parent unit with responsibility for monitoring the Y2K program in each of
the Company's operating units and for providing status reports to the Board of
Directors.
Year 2000 Costs. Several of the Key Projects are upgrades of systems
which the Company would have undertaken irrespective of the Y2K problem. In some
cases, including a new accounting and financial reporting system for the parent
company and its Management Services subsidiary, work on these systems has been
accelerated in view of Y2K issues. Other upgrades or new systems were already
scheduled for completion prior to the year 2000, such as a new support system
for the Company's American Home Shield subsidiary and a new accounting and
billing system for the recently developed commercial landscape business within
the Company's TruGreen-ChemLawn subsidiary. References to "Year 2000 costs" in
this report do not include the costs of projects for which no acceleration is
occurring due to Y2K issues.
The Company's Year 2000 costs to date are not material to the Company's
results of operations or financial position and the Company does not expect its
future Year 2000 costs to be material to the Company's results of operations or
financial position. All Year 2000 costs (as well as the costs of installing the
system upgrades referred to above) have been, and are expected to continue to
be, funded with cash from operations.
Year 2000 Risks. The Company believes that its greatest Year 2000
compliance risk, in terms of magnitude of risk, is that key third party
suppliers of goods or services may fail to complete their own remediation
efforts in a timely manner and thereby provoke an interruption in the ability of
one or more of the operating segments of the Company to provide uninterrupted
services to their customers. Utility services (electrical, water and gas),
telephone service, banking services and, to a much lesser degree, the delivery
of chemical products are the critical items in this regard. Based on the
Company's inquiries to its providers of goods and services and on the basis of
the Company's general knowledge of the state of readiness of the utility
companies and banks with which it does business, the Company does not expect to
suffer any material interruption in the services on which the Company depends.
The Company has reviewed its agreements with its customers, including
particularly the customers of its Management Services units for whom such units
provide facility management services. The Company is satisfied that it is not
responsible, contractually or otherwise, for the Y2K readiness of the customer's
IT and non-IT systems and hardware, and the Company is in the process of
notifying all of its customers to this effect where, in the Company's judgment,
the nature of the customers' business or facility warranted such notices.
Where the Company uses its own software in the course of providing
management services, the Company is responsible to make such software Y2K ready.
The Company is confident that such software is already, or soon will be, Y2K
ready. For those units of the Company which sell franchises and which provide
software to the franchisees, such software is already, or soon will be, fully
Y2K ready or, alternatively, provision has been made for making available to
franchisees software from third-party developers from whom appropriate Y2K
compliance assurances have been or will be received.
Contingency Plans. At this time, the Company fully expects all of its
internal key IT and non-IT systems to be Y2K ready well in advance of the end of
the year 1999. If it appears that timely delivery of any Key Projects becomes
questionable, the Company will immediately develop appropriate contingency
plans.
The Company presently expects that its significant providers of goods
and services are or will be Y2K ready by the end of the year 1999. The Company
will continue to make inquires of its key suppliers for the purpose of testing
this expectation. Insofar as the Company is exposed to risks originating in Y2K
problems at key suppliers, the Company will utilize short-term solutions, but no
practical long-term contingency plans for these external Y2K problems are
possible.
9
Although the Company believes that critical remediation efforts will be
completed prior to the Year 2000, the untimely completion of these efforts
could, in certain circumstances, have a material adverse effect on the
operations of the Company.
Definition. As used in this Year 2000 statement, the term "year 2000
ready" or "Y2K ready" when used with reference to a item of software or
equipment means the capability of the software or equipment to process correctly
(including calculating, comparing, sequencing, displaying, or storing),
transmit, or receive date data from, into, and between the 20th and 21st
centuries, and during the years 1999 and 2000, and to make leap year
calculations, provided that all products used with the software or equipment
properly exchange accurate date data with it.
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 owns a 50,000 square foot facility near Aurora, Illinois
which is used by ServiceMaster as a warehouse/distribution center. Ownership of
this facility was acquired on February 11, 1999 by a deed in lieu of foreclosure
from the company with whom ServiceMaster had, on August 2, 1989, entered into a
sale/leaseback arrangement.
ServiceMaster believes that the facilities described in the preceding
three paragraphs will satisfy the Company's needs for administrative and
warehouse space in the Chicago area for the immediate future.
ServiceMaster owns four properties in Cairo, Illinois, consisting of a
36,000 square foot, three-story building used for manufacturing and warehousing
equipment, supplies and products used in the business; a warehouse and package
facility comprising 30,000 square feet; a three-story warehouse and
manufacturing building consisting of 43,000 square feet; and a 2,500 square foot
building used for a machine shop. ServiceMaster also leases two warehouse
properties, one 14,000 square feet and the other 6,000 square feet, in Cairo,
Illinois. Management believes that the foregoing manufacturing and warehouse
facilities are adequate to support the current needs of ServiceMaster.
The headquarters for ServiceMaster Consumer Services L.P. are located
in leased premises at 860 Ridge Lake Boulevard, Memphis, Tennessee. The 860
Ridge Lake Boulevard facility also serves as the headquarters for
TruGreen-ChemLawn, Terminix, Res/Com, Merry Maids, American Home Shield,
AmeriSpec, Furniture Medic and Rescue Rooter.
A new call center is located in leased premises at 6399 Shelby View
Drive, Memphis, Tennessee. The center contains approximately 60,000 square feet
of air conditioned office space from which telephone sales, scheduling services,
and other business functions are conducted.
10
TruGreen-ChemLawn owns 8 buildings which are used as branch sites for
lawn care services. These facilities are located in Colorado (1), Florida (1),
Georgia (1), Michigan (1), Ohio (2), and Texas (2). TruGreen-ChemLawn also
leases 337 facilities used as branch sites.
Terminix owns 22 buildings which are used as branch sites for termite
and pest control services. These properties are all one-story buildings that
contain both office and storage space. These properties are located in
California (3), Florida (10), Georgia (1), Illinois (1), New Jersey (2),
Tennessee (1), and Texas (4).
American Home Shield has retained some leased space in the building at
90 South E Street, Santa Rosa, California, for administrative and sales
operations. Certain of American Home Shield's service and data processing
departments are located in premises owned by the company in Carroll, Iowa. This
facility consists of a 43,000 square foot building on a seven-acre site.
American Home Shield owns approximately 17 acres of land in Santa Rosa,
California of which 11.2 acres are under contracts for sales to occur in the
second quarter of 1999. This land is held for investment purposes and has been
and will continue to be offered for sale, with the timing of sales being
affected by, among other things, market demand, zoning regulations, and the
availability of financing to purchasers.
Rescue Rooter owns three buildings and leases 23 facilities which are
used for branch operations to provide plumbing and drain cleaning services, and
heating and air conditioning services. The owned facilities are located,
respectively, in Phoenix, Arizona; Round Lake, Illinois; and St. Louis,
Missouri. The leased facilities are located in California (11), Colorado (1),
Indiana (2), Ohio (1), Oregon (1), Tennessee (1), Texas (4), Utah (1), and
Washington (1).
The headquarters for Diversified Health Services are located in a leased
facility at 3839 Forest Hill-Irene Road, Memphis, Tennessee. DHS leases other
administrative facilities in St. Augustine, Florida; Minneapolis, Minnesota;
Plymouth Meeting, Pennsylvania; Memphis, Tennessee; and Irving, Texas. As of
March 1, 1999, through a joint venture and subsidiaries, DHS has an ownership
interest in four nursing home facilities, leases one nursing home facility, and
leases five assisted living facilities. These facilities are located in Alabama,
Connecticut, Florida, Michigan, Tennessee, and Texas.
The headquarters for ServiceMaster Employer Services and Certified
Systems, Inc., the principal subsidiary of SES, are located at 3218 Highway 67,
Mesquite, Texas. SES leases other administrative facilities in Little Rock,
Arkansas, and Memphis, Tennessee.
Item 3. Legal Proceedings
In the ordinary course of conducting its business activities,
ServiceMaster becomes involved in judicial and administrative proceedings which
involve both private parties and governmental authorities. As of March 22, 1999,
these proceedings included a number of general liability actions and a very
small number of environmental proceedings.
American Home Shield Class Action. A lawsuit was instituted in November
1997 and is currently pending in the District Court of Harris County, Texas
against ServiceMaster, ServiceMaster's American Home Shield subsidiary ("AHS")
and AHS' Texas subsidiary ("AHS-Texas") in which three plaintiffs, Brian
Carmichael, Penny Carmichael and Tanja Kortz, claim that AHS-Texas violated
certain provisions of two Texas consumer protection statues in the course of
soliciting new and renewal service contracts. (A second lawsuit of a similar
nature was filed in the same court by Edward Thorne III. This case has been
abated pending disposition of the certification issue described below.) The
plaintiffs have requested the court to permit the lawsuit to be maintained as a
class action on behalf of all customers who purchased service contracts since
late 1993. Theoretically, this would place some 300,000 contracts in issue. The
plaintiffs have further claimed that the number of contracts in issue times a
statutory penalty of $1,000 per contract represents the measure of damages.
ServiceMaster believes that AHS-Texas accurately represented the coverage
provided in its service agreements and that the changes in the wording of its
11
renewal contacts were routine updates or clarifications. In this regard, it is
noteworthy that most of the AHS-Texas contract forms were reviewed and approved
by the Texas Real Estate commission before the forms were distributed. In any
and all events, no material actual damages have been suffered by anyone in this
matter. Furthermore, ServiceMaster believes that the lawsuit cannot be sustained
as a class action; the statutes in question were not intended to be applied in
the manner advanced by the plaintiffs (and in fact cannot be so applied under
the federal constitution). Accordingly, ServiceMaster believes that the ultimate
outcome of these cases will not be material to ServiceMaster's financial
condition or results of operations.
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.
12
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 1998 under the captions "Shareholders' Equity" (page 39) and "Cash
Distributions Per Share" and "Price Per Share" in the Quarterly Operating
Results table (page 46) supply the information required by this item and such
portions are hereby incorporated herein by reference. The Registrant's shares of
common stock are listed and traded on the New York Stock Exchange under the
symbol "SVM". At March 1, 1999, the Registrant's shares of common stock were
held of record by approximately 28,000 persons. The Company estimates that
another 53,000 persons held shares of the Registrant's common stock in the names
of nominees.
Item 6. Selected Financial Data
The portion of the ServiceMaster Annual Report to Shareholders for 1998
in the Financial Statements and Management Discussion section ("FSMD Section")
under the caption "Eleven Year Financial Summary" (pages 32 - 33) 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, 1998, is contained in the
FSMD Section of the ServiceMaster Annual Report to Shareholders for 1998 on
pages 25-31 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, 1998 and 1997, and the consolidated statements of income, cash
flows and shareholders' equity for the years ended December 31, 1998, 1997, and
1996 and notes to the consolidated financial statements are contained in the
FSMD Section of the ServiceMaster Annual Report to Shareholders for 1998 on
pages 36-45 are incorporated herein by reference. The report of Arthur Andersen
LLP thereon dated January 25, 1999, and the summary of significant accounting
policies are contained in the FSMD Section of the ServiceMaster Annual Report to
Shareholders for 1998 on pages 34-35 and are hereby incorporated herein by
reference.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
13
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
The information contained under the heading "Election of Directors" in
the definitive proxy statement for the Company's April 30, 1999 Annual Meeting
of the 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 1998 annual meeting of the shareholders
of The ServiceMaster Company to serve in such capacity until the annual meeting
of shareholders of the Company in 1999 or until otherwise determined by the
Board of Directors.
Robert D. Erickson, age 55, is an Executive Vice President. Mr.
Erickson was a director of ServiceMaster from May 1987 to May 1993. He
previously served as a director of ServiceMaster from May 1981 to June 1984. He
served as the President and Chief Operating Officer of ServiceMaster's
International business unit from October 1993 to December 1997.
Donald K. Karnes, age 48, 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.
Robert F. Keith, age 42, is President, Healthcare Management Services.
He served as President and Chief Operating Officer, ServiceMaster Management
Services from January 1, 1997 to October 2, 1998; President and Chief Operating
Officer, ServiceMaster Consumer Services from July 1994 to December 31, 1996 and
as Group President, ServiceMaster Consumer Services, from November 1992 to July
1994.
Ernest J. Mrozek, age 45, is Group President, ServiceMaster Consumer
Services. He served as President and Chief Operating Officer, ServiceMaster
Consumer Services from January 1, 1997 to October 2, 1998; 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.
Steven C. Preston, age 38, has served as Executive Vice President and
Chief Financial Officer since July 1, 1998. He served as Senior Vice President
and Chief Financial Officer from April 1, 1997 to June 30, 1998. From August
1993 to March 7, 1997, he was Senior Vice President and Corporate Treasurer for
First Data Corporation, Atlanta, GA.
David M. Slott, age 40 is President and Chief Operating Officer of
TruGreen Limited Partnership. He served as Executive Vice President and Chief
Operating Officer of Tru-Green Limited Partnership from May 1, 1994 to December
31, 1995.
14
Executive Officers of ServiceMaster
The following table shows: (i) the names and ages (as of March 1, 1999)
of the present executive officers of the Registrant; (ii) all positions
presently held by each officer; and (iii) the year each person became an
officer. Each person named has served as an officer of the Registrant and its
predecessor company continuously since the year shown. There are no arrangements
or understandings between any executive officer and any other person pursuant to
which the officer was or is to be selected as an officer.
First Became
Name Age Present Position An Officer
- -------------------- --- ---------------------------------------------------- ------------
C. William Pollard 60 Chairman and Director 1977
Carlos H. Cantu 65 President and Chief Executive Officer and Director 1986
Phillip B. Rooney 54 Vice Chairman and Director 1997
Charles W. Stair 58 Vice Chairman and Director 1973
Donald K. Karnes 48 Group President, Consumer Services, and a
Senior Management Adviser 1992
Ernest J. Mrozek 45 Group President, Consumer Services, and a
Senior Management Adviser 1987
Robert F. Keith 42 President, Healthcare Management Services, and 1986
a Senior Management Adviser
Robert D. Erickson 55 Executive Vice President and a Senior Management Adviser 1976
Vernon T. Squires 64 Senior Vice President and General Counsel 1987
Steven C. Preston 38 Executive Vice President and Chief Financial Officer, and
a Senior Management Adviser 1997
Eric R. Zarnikow 39 Vice President and Treasurer 1994
Deborah A. O'Connor 36 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
1999 Annual Meeting for biographical information with respect to these persons.
Messrs. Karnes, Mrozek, Keith, Erickson, and Preston are Senior Management
Advisers. See page 14 for biographical information with respect to these
persons.
Vernon T. Squires, age 64, 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.
15
Eric R. Zarnikow, age 39, 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.
Deborah A. O'Connor, age 36, has served as Vice President and
Controller since January 1, 1993.
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 1998, the Company received
Section 16(a) forms from such officers and directors. As of January 1, 1999, the
Company did not have any shareholders with an interest greater than ten percent.
Based solely on a review of the copies of Section 16(a) forms received
by the Company or on written representations from certain reporting persons that
no Form 5 was required for those persons, the Company believes that during 1998
the officers and directors of the Company complied with applicable filing
requirements.
Item 11. Executive Compensation
The information contained under the heading "Executive Compensation"
(except those portions relating to Item 13 below) in the definitive proxy
statement for the Company's April 30, 1999 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
April 30, 1999 Annual Meeting of the 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 April 30, 1999 Annual Meeting of the Stockholders is
incorporated herein by reference.
16
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 1998, on
pages 25 - 45 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, 1998, 1997 and 1996
Consolidated Statements of Financial Position as of
December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the three
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for
the three years ended December 31, 1998, 1997 and 1996
Notes to the Consolidated Financial Statements
2. Financial Statements Schedules
Schedule IV--Amounts Receivable from Related Parties and
Underwriters, Promoters, and Employees other than Related
Parties:
None
Included in Part IV of this Report:
Schedule VIII--Valuation and Qualifying Accounts
Report of Independent Public Accountants on Schedules
Exhibit 11 -- Exhibit Regarding Detail of Income Per
Share Computation
Exhibit 23 -- Consent of Independent Public Accountants
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
financial statements or notes thereto.
17
3. Exhibits
The exhibits filed with this report are listed on pages 25 -
29 herein (the "Exhibits Index").
The following entries in the Exhibits Index are management
contracts or compensatory plans in which a director or any of
the named executive officers of the Registrant does or may
participate. Reference is made to the Exhibits Index for the
filing with the Commission which contains such contract or
plan.
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
10.20 ServiceMaster 1998 Non-Employee Directors Discounted Stock Option Plan
10.21 ServiceMaster 1998 Long-Term Performance Award Plan
---------
* Superseded by Item 10.17
** Superseded by Item 10.20
18
(b) Reports on Form 8-K filed during the last quarter of 1998
None
Certain Undertakings With Respect To Registration Statements on Form S-8
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the Registrant hereby undertakes as follows which undertaking shall be
incorporated by reference into each of the Registrant's Registration Statements
on Form S-8, including No. 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.
19
SCHEDULE VIII
THE SERVICEMASTER COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
-------------------------------------------------- ------------------ ------------- ------------------ -------------
Deductions
Additions
Balance at Charged to Write-offs of Balance at
Beginning of Costs and Uncollectible end of
Description Period Expenses Accounts Period
-------------------------------------------------- -----------------------------------------------------------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
AS OF DECEMBER 31, 1998:
Allowance for doubtful accounts--
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
Accounts receivable (current) $27,544 25,998 19,389 $34,153
------- ------ ------ -------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
Notes receivable (current) $ 4,677 686 528 $ 4,835
------- --- --- -------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
AS OF DECEMBER 31, 1997:
Allowance for doubtful accounts--
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
Accounts receivable (current) $24,117 20,183 16,756 $27,544
------- ------ ------ -------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
Notes receivable (current) $ 2,170 2,507 0 $ 4,677
------- -- ----- --------- - -------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
AS OF DECEMBER 31, 1996:
Allowance for doubtful accounts--
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
Accounts receivable (current) $18,029 20,517 14,429 $24,117
------- ------ ------ -------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
Notes receivable (current) $ 2,439 59 328 $ 2,170
------- ----- -- --------- --- -------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
-------------------------------------------------- ------------------ ------------- ------------------ -------------
20
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 25, 1999. 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 25, 1999
21
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 18, 1999 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 18, 1999
- ---------------------------
C. William Pollard
/s/ CARLOS H. CANTU President and Chief Executive March 18, 1999
- ---------------------------
Carlos H. Cantu Officer and Director
/s/ PHILLIP B. ROONEY Vice Chairman and Director March 18 1999
- ----------------------
Phillip B. Rooney
/s/ CHARLES W. STAIR Vice Chairman and Director March 18, 1999
- ----------------------
Charles W. Stair
/s/ STEVEN C. PRESTON Executive Vice President and March 18, 1999
- ----------------------
Steven C. Preston Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
/s/ PAUL W. BEREZNY, JR. Director March 18, 1999
- ------------------------
Paul W. Berezny, Jr.
22
Signature Title Date
- --------------------------- ------------------------ ----------------
/s/ HENRY O. BOSWELL Director March 18, 1999
- ----------------------
Henry O. Boswell
/s/ BRIAN GRIFFITHS Director March 18, 1999
- ----------------------
Brian Griffiths
/s/SIDNEY E. HARRIS Director March 18, 1999
- ----------------------
Sidney E. Harris
/s/ HERBERT P. HESS Director March 18, 1999
- ----------------------
Herbert P. Hess
/s/ MICHELE M. HUNT Director March 18, 1999
- ---------------------------
Michele M. Hunt
/s/ GUNTHER H. KNOEDLER Director March 18, 1999
- -----------------------
Gunther H. Knoedler
/s/ JAMES D. McLENNAN Director March 18, 1999
- ----------------------
James D. McLennan
/s/ VINCENT C. NELSON Director March 18, 1999
- ----------------------
Vincent C. Nelson
/s/ DALLEN W. PETERSON Director March 18, 1999
- ---------------------------
Dallen W. Peterson
23
Signature Title Date
- --------------------------- ------------------------ ----------------
/s/ STEVEN S REINEMUND Director March 18, 1999
- ------------------------
Steven S Reinemund
/s/ BURTON E. SORENSEN Director March 18, 1999
- ------------------------
Burton E. Sorensen
/s/ DAVID K. WESSNER Director March 18, 1999
- ------------------------
David K. Wessner
24
Exhibits Index
Exhibit No. Description of Exhibit
- ---------- -------------------------------------------------------------------
1.1 Underwriting Agreement dated as of August 6, 1997 among The
ServiceMaster Company and J.P. Morgan, 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 the 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.
2.6 The Plan of Reorganization and Agreement and Plan of Merger dated
as of November 1, 1998 by and among LandCare USA, Inc., The
ServiceMaster Company and SVM Acquisition Corporation is
incorporated by reference to Appendix A to the Proxy
Statement/Prospectus included as part of the Registration Statement
on Form S-4 as filed by The ServiceMaster Company on February 10,
1999 (SEC Registration No. 333-70191).
25
Exhibit No. Description of Exhibit
- ---------- -------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of The
ServiceMaster Company, a Delaware corporation, as filed with the
Secretary of State, State of Delaware, on November 6, 1997 is
incorporated by reference to Exhibit 1 to the SMLP December 29,
1997 8-K and to Exhibit 1 to the Company February 26, 1998 8-K, No.
2.
3.2 Bylaws of The ServiceMaster Company as adopted on November 3, 1997
are incorporated by reference to Exhibit 2 to the SMLP December 29,
1997 8-K and to Exhibit 2 to the Company February 26, 1998 8-K, No.
2.
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 is incorporated by
reference to Exhibit 4.4 to the Annual Report on Form 10-K for the
year ended December 31, 1997 as filed by The ServiceMaster Company
(the "1997 10-K").
4.5 Second Supplemental Indenture dated as of January 1, 1998 among The
ServiceMaster Company (as successor to ServiceMaster Limited
Partnership and The ServiceMaster Company Limited Partnership) and
the Harris Trust and Savings Bank as trustee is incorporated by
reference to Exhibit 2 to the Current Report on Form 8-K as filed
by The ServiceMaster Company on Form 8-K on February 26, 1998 -
first of three 8-K reports filed on that date (the "Company
February 26, 1998 8-K, No. 1").
4.6 Third Supplemental Indenture dated as of March 2, 1998 among The
ServiceMaster Company and the Harris Trust and Savings Bank as
trustee is incorporated by reference to Exhibit 4.3 to the Current
Report on Form 8-K as filed by The ServiceMaster Company on
February 27, 1998 (the "Company February 27, 1998 8-K").
4.7 Form of 6.95% Note due August 14, 2007 is incorporated by reference
to Exhibit 4.2 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.
26
Exhibit No. Description of Exhibit
- ---------- -------------------------------------------------------------------
10.1 $750,000,000 Credit Agreement between The ServiceMaster Company
Limited Partnership, First National Bank of Chicago and Morgan
Guaranty Trust Company dated as of April 1, 1997 is incorporated
by reference to Exhibit 10.2 to the 1997 10-K.
10.2 Form of Deferred Directors Fee Agreement as assumed by The
ServiceMaster Company in the Reincorporating Merger is incorporated
by reference to Exhibit 10(c)(4) to the Annual Report on Form 10-K
for the year ended December 31, 1980 as filed by ServiceMaster
Limited Partnership (the "1980 10-K").
10.3 Incentive Reward Compensation Plan as assumed by The ServiceMaster
Company in the Reincorporating Merger is incorporated by reference
to Exhibit 10(c)(6) to the 1980 10-K.
10.4 ServiceMaster Profit Sharing, Savings and Retirement Plan as
assumed by The ServiceMaster Company in the Reincorporating Merger
amended and restated effective January 1, 1987 is incorporated by
reference to the exhibit so captioned to the Annual Report on Form
10-K for the year ended December 31, 1987 as filed by ServiceMaster
Limited Partnership (the "1987 10-K").
10.5 The Terminix International Company LP Profit Sharing Retirement
Plan (previously known as Cook International, Inc. Profit Sharing
Retirement Plan) effective January 1, 1984; Amendment No. One to
The Terminix International Company L.P. Profit Sharing Retirement
Plan effective January 1, 1986 and April 1, 1986; Amendment No.
Two, effective April 1, 1986; Amendment No. Three, effective
January 1, 1987 and January 1, 1988; The Terminix International
Company L.P. Profit Sharing Retirement Trust, all of which are
incorporated by reference to Exhibit 10.15 to the 1987 10-K.
10.6 ServiceMaster 10-Plus Plan as assumed by The ServiceMaster Company
in the Reincorporating Merger is incorporated by reference to
Exhibit 4.2 to the ServiceMaster Limited Partnership Registration
Statement on Form S-8 (No. 33-39148) filed with the SEC on February
26, 1991 (the "10-Plus Registration Statement").
10.7 Form of Option Agreement for the ServiceMaster 10-Plus Plan is
incorporated by reference to Exhibit 4.3 to the 10-Plus
Registration Statement.
10.8 Form of Directors Deferred Fees Plan (ServiceMaster Shares
Alternative) as assumed by The ServiceMaster Company in the
Reincorporating Merger is incorporated by reference to Exhibit
10.18 to the Annual Report on Form 10-K for the year ended December
31, 1990 (the "1990 10-K").
10.9 Form of Directors Deferred Fees Agreement (ServiceMaster Shares
Alternative) as assumed by The ServiceMaster Company in the
Reincorporating Merger is incorporated by reference to Exhibit
10.19 of the 1990 10-K.
10.10 Form of ServiceMaster Deferred Fees Plan Trust is incorporated by
reference to Exhibit 10.20 of the 1990 10-K.
10.11 ServiceMaster 10-Plus Plan as amended September 3, 1991 and as
assumed by The ServiceMaster Company in the Reincorporating Merger
is incorporated by reference to Exhibit 10.21 to the Annual Report
on Form 10-K for the year ended December 31, 1991 (the "1991
10-K").
10.12 Form of Option Agreement for the ServiceMaster 10-Plus Plan as
amended September 3, 1991 is incorporated by reference to Exhibit
10.22 to the 1991 10-K.
27
Exhibit No. Description of Exhibit
- ---------- -------------------------------------------------------------------
10.13 ServiceMaster 1994 Non-Employee Director Share Option Plan as
assumed by The ServiceMaster Company in the Reincorporating Merger
is incorporated by reference to Exhibit to the ServiceMaster
Limited Partnership Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on October 5, 1994 (the
"Directors Share Plan Registration Statement").
10.14 Form of Option Agreement for the ServiceMaster 1994 Non-Employee
Director Share Option Plan is incorporated by reference to Exhibit
4.3 to the Directors Share Plan Registration Statement.
10.15 ServiceMaster 1997 Share Option Plan as assumed by The
ServiceMaster Company in the Reincorporating Merger is incorporated
by reference to Exhibit 10.28 to the Annual Report on Form 10-K for
the year ended December 31,1996 as filed by ServiceMaster Limited
Partnership (the "1996 10-K").
10.16 Form of Option Agreement for the ServiceMaster 1997 Share Option
Plan is incorporated by reference to Exhibit 10.29 to the 1996
10-K.
10.17 ServiceMaster 1998 Equity Incentive Plan as adopted on December 17,
1997 and approved by the stockholders on May 1, 1998 is
incorporated by reference to Exhibit 10.15 to the 1997 10-K.
10.18 Form of Option Agreement for the ServiceMaster 1998 Equity
Incentive Plan (Non-Qualifying Stock Options) as incorporated by
reference to Exhibit 10.20 to the 1997 10-K.
10.19 Form of Option Agreement for the ServiceMaster 1998 Equity
Incentive Plan (Incentive Stock Options) as incorporated by
reference to Exhibit 10.21 to the 1997 10-K.
10.20 ServiceMaster 1998 Non-Employee Directors Discounted Stock Option
Plan as incorporated by reference to Exhibit 10.21 to the 1997
10-K.
10.21 ServiceMaster 1998 Long-Term Performance Award Plan as incorporated
by reference to Exhibit 10.22 to the 1997 10-K.
11 Exhibit regarding detail of income per share computation for each
of the three years ended December 31, 1998, 1997 and 1996 is
incorporated by reference to the footnote on page 44 of the 1998
Annual Report (defined in Exhibit B).
13 The ServiceMaster Annual Report to Shareholders for the year ended
December 31, 1998 (the "1998 Annual Report"). The parts of the 1998
Annual Report which are expressly incorporated into this report by
reference shall be deemed filed with this report. All other parts
of the 1998 Annual Report are furnished for the information of the
Commission and are not filed with this report.
21 Subsidiaries of Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
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.
28
Exhibit No. Description of Exhibit
- ---------- -------------------------------------------------------------------
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.
99.4 News release dated March 23, 1999 regarding the announcement of a
cash tender offer by the Registrant for all of the outstanding
shares of American Residential Services, Inc.
29
Graphics Appendix
This appendix describes the graphics which will be filed separately
with the Securities and Exchange Commission as an electronic filing.
A Performance Graph is set forth on page 18 of the Company's proxy
statement for the Annual Meeting of the Stockholders to be held on April 30,
1999 which consists of a line graph which compares the yearly percentage change
in ServiceMaster's cumulative total shareholder return on its shares (computed
in accordance with the Item 402(l) 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, 1994 to
December 31, 1998. The chart shows that ServiceMaster outperformed the S&P 500
Index in 1997 and 1998 and the Dow Jones Consumer Services Index in 1996 and
1997.