|
SERVICEMASTER CO - 10-K - 19990329 - INCOME_STATEMENT
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 25, 1999
35
Statements of Income
Years Ended December 31,
(In thousands, except per share data)
1998 1997 1996
Operating Revenue . . . . . $4,724,119 $3,961,502 $3,458,328
Operating Costs and Expenses:
Cost of services rendered
and products sold . . . 3,679,612 3,058,160 2,681,008
Selling and administrative
expenses . . . . . . . 648,085 559,409 482,102
Total operating costs and
expenses . . . . . . . 4,327,697 3,617,569 3,163,110
Operating Income . . . . . 396,422 343,933 295,218
Non-operating Expense (Income):
Interest expense . . . . . 92,945 76,447 38,298
Interest and investment
income . . . . . . . . (15,301) (14,304) (10,183)
Minority interest . . . . . --- 7,511 14,706
Income before Income
Taxes . . . . . . . . . 318,778 274,279 252,397
Provision for income taxes
(pro forma corporate
form in 1997 and 1996)(1) . 128,786 110,809 101,968
Net Income (pro forma
corporate form in 1997
and 1996)(1) . . . . . $189,992 $163,470 $150,429
Per Share (pro forma
corporate form in 1997
and 1996):(1), (2)
Basic . . . . . . . . . . $0.66 $0.57 $0.47
Diluted . . . . . . . . . $0.64 $0.55 $0.46
|
(1) The Company converted from partnership to corporate form in a tax-free
exchange for shareholders on December 26, 1997. Prior to the conversion, the
Partnership was not subject to federal income taxes as its taxable income was
allocated to the Company's shareholders. As a result of the conversion, the
Company is a taxable entity and is responsible for such payments. The results
shown above for the years ended December 31, 1997 and 1996 have been restated
to adjust the actual historical partnership information to a pro forma basis
that assumes that reincorporation had occurred as of the beginning of the
year. Upon reincorporation, the Company recognized a significant increase in
the tax basis of certain assets and recorded a $65 million tax gain related
to reincorporation, which represented the difference between the tax basis
and book value of its assets. The Company's historical net income and net
income per share as a partnership were as follows:
Before One-Time
--------------------
Tax Benefit Actual
-------------------- --------------------
Partnership Information as Recorded: 1997 1996 Earnings Per 1997 1996 1997 1996
Share:
----------- ----------- --------- --------- --------- ---------
Income before income $ 274,279 $252,397 Basic $.92 $.77 $1.15 $.77
taxes..........................
Partnership tax 10,203 7,257 Diluted $.89 $.75 $1.10 $.75
provision......................
Tax benefit relating to change in tax
status 65,000 -
=========== ===========
Net $ 329,076 $245,140
income.........................
=========== ===========
|
(2) Basic earnings per share are calculated based on 289,315 shares in
1998, 285,944 shares in 1997, and 317,381 shares in 1996, while diluted
earnings per share are calculated based on 298,887 shares in 1998, 299,640
shares in 1997, and 330,429 shares in 1996. All share and per share data
reflect the three-for-two share splits in August 1998, June 1997 and June
1996.
See accompanying Summary of Significant Accounting Policies and Notes
to the Consolidated Financial Statements.
36
Statements of Financial Position
As of December 31,
(In thousands)
1998 1997
Assets:
Current Assets:
Cash and cash equivalents . . . . . $ 66,400 $ 64,876
Marketable securities . . . . . . . 54,022 59,248
Receivables, less allowances of
$38,988 in 1998 and $32,22
in 1997 . . . . . . . . . . . . 372,375 299,138
Inventories . . . . . . . . . . . . 49,770 48,157
Prepaid expenses and other assets . 127,635 122,665
Total current assets . . . . . . . 670,202 594,084
Property, Plant, and Equipment, at Cost:
Land and buildings . . . . . . . . 53,068 46,632
Equipment . . . . . . . . . . . . . 388,141 316,021
441,209 362,653
Less: accumulated depreciation . . 229,049 204,383
Net property, plant, and equipment. 212,160 158,270
|
Other Assets:
Intangible assets, primarily trade names and goodwill, less accumulated
amortization of $272,254 in 1998 and $218,293
in 1997 . . . . . . . . . . . 1,884,002 1,563,309
Notes receivable, long-term
securities, and other assets . 148,487 159,561
Total Assets . . . . . . . . . . . $ 2,914,851 $2,475,224
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts payable . . . . . . . . . $ 110,523 $ 84,673
Accrued liabilities:
Payroll and related expenses . . 96,199 85,315
Insurance and related expenses . 56,748 55,909
Income taxes payable . . . . . . 84,165 8,423
Other . . . . . . . . . . . . . . 149,477 121,020
Deferred revenues . . . . . . . . . 204,969 181,298
Current portion of long-term debt . 51,616 21,539
Total current liabilities . . . . . 753,697 558,177
Long-Term Debt . . . . . . . . . . 1,076,167 1,247,845
Other Long-Term Obligations . . . . 128,501 144,764
Commitments and Contingencies (see Notes)
|
Shareholders' Equity:
Common stock $0.01 par value, authorized 1 billion shares; issued and
outstanding of 298,030 shares in 1998 and
279,944 shares in 1997 . . . . . 2,980 2,799
Additional paid-in capital . . . . . 788,124 513,148
Retained earnings . . . . . . . . . 179,840 65,000
Accumulated other comprehensive
income . . . . . . . . . . . . . 3,911 5,343
Restricted stock . . . . . . . . . . (3,383) (4,270)
Treasury stock . . . . . . . . . . . (14,986) (57,582)
Total shareholders' equity . . . . . 956,486 524,438
Total Liabilities and Shareholders'
Equity . . . . . . . . . . . . . $ 2,914,851 $2,475,224
|
See accompanying Summary of Significant Accounting Policies and Notes
to the Consolidated Financial Statements.
37
Statements of Cash Flows
Years Ended December 31,
(In thousands)
1998 1997 1996
Cash and Cash Equivalents
at January 1 . . . . . . $64,876 $72,009 $23,113
Cash Flows from Operations:
Net Income . . . . . . . . . 189,992 329,076 245,140
|
Adjustments to reconcile net income to net cash provided from
operations:
Depreciation . . . . . . 50,644 45,392 41,658
Amortization . . . . . . 53,961 47,670 37,348
Tax asset recorded upon
reincorporation . . --- (65,000) ---
Change in working capital,
net of acquisitions:
Receivables . . . . . . (46,205) (6,853) (19,084)
Inventories and other
current assets . . (2,360) (14,210) (12,666)
Accounts payable . . . . 18,475 5,603 10,302
Deferred revenues . . . 22,033 30,012 17,602
Deferred 1998 tax
payment . . . . . 83,000 --- ---
Deferred income tax
expense . . . . . . 36,400 --- ---
Accrued liabilities . . (2,028) (82) 13,140
Other, net . . . . . . . . 1,627 281 7,946
Net Cash Provided from
Operations . . . . . . . 405,539 371,889 341,386
|
Cash Flows from Investing Activities:
Property additions . . . . (75,297) (46,232) (42,952)
Sale of equipment and
other assets . . . . . . 6,941 4,134 2,664
Business acquisitions, net
of cash acquired . . . . (222,452) (233,689) (58,473)
Proceeds from sale of
businesses . . . . . . . 45,893 --- 4,526
Net purchases of investment
securities . . . . . . . (11,011) (16,753) (20,075)
Notes receivable and
financial investments . (10,645) (3,593) 3,304
Payments to sellers of
acquired businesses . . (10,271) (4,723) (3,742)
Net Cash Used for Investing
Activities . . . . . . . (276,842) (300,856) (114,748)
|
Cash Flows from Financing Activities:
Borrowings, net . . . . . 310,190 888,528 123,732
Payment of borrowings and
other obligations . . . (564,448) (160,155) (82,857)
Proceeds from stock
offering . . . . . . . . 208,561 --- ---
Distributions to
shareholders and
shareholders' trust . . (75,152) (155,883) (146,520)
Purchase of ServiceMaster
stock . . . . . . . . . (18,310) (657,191) (76,556)
Proceeds from employee
share plans . . . . . . 12,638 6,526 6,835
Distributions to holders
of minority interests . --- (542) (3,074)
Other . . . . . . . . . . (652) 551 698
Net Cash Used for Financing
Activities . . . . . . . (127,173) (78,166) (177,742)
Cash Increase (Decrease)
During the Year . . . . 1,524 (7,133) 48,896
Cash and Cash Equivalents at
December 31 . . . . . . $66,400 $64,876 $72,009
|
See accompanying Summary of Significant Accounting Policies and Notes
to the Consolidated Financial Statements.
38
Statements of Shareholders' Equity
Corporate Equity
-----------------------------
Additional Limited Accumulated
Common Paid-in Retained Partners' Comprehensive Treasury Restricted Total
(In thousands) Stock Capital Earnings Equity Income Stock Stock Equity
------------------------------------ -------- --------- -------- -------- ---------- -------- --------- -------
Balance, December 31, 1995 . . $ --- $ --- $ --- $761,710 $5,904 $(13,405) $(7,549) $746,660
Net income 1996 . . . . . . . 245,140 245,140
Other comprehensive income,
net of tax:
Unrealized gains on
securities, net of
reclassification
adjustment . . . . . . . . 1,452 1,452
Foreign currency translation
($678 tax expense) . . . . (999) (999)
Total comprehensive income . . 245,140 453 245,593
Shareholder distributions . . (146,520) (146,520)
Shares issued under option,
subscription, grant plans
and other (3,667 shares) . (7,166) 2,506 1,691 (2,969)
Treasury shares purchased and
related costs (7,825
shares) . . . . . . . . . (76,556) (76,556)
Shares issued for acquisitions
(3,213 shares) . . . . . . 3,104 27,455 30,559
Balance, December 31, 1996 . . $ --- $ --- $ --- $856,268 $6,357 $(60,000) $(5,858) $796,767
Net income 1997 . . . . . . . 65,000 264,076 329,076
Other comprehensive income,
net of tax: Unrealized
gains on securities, net
of reclassification
adjustment . . . . . . . . 4,269 4,269
Foreign currency translation ($3,580 tax expense) (5,283) (5,283)
Total comprehensive income . . 65,000 264,076 (1,014) 328,062
Shareholder distributions . . (155,883) (155,883)
Shares issued under option,
debentures, grant plans
and other (6,552 shares) . 21,165 3,511 1,588 26,264
Treasury shares repurchased from WMX
(61,112 shares) . . . . . (625,978) (625,978)
Treasury shares purchased
and related costs
(2,051 shares) . . . . . . (31,213) (31,213)
Shares issued for the
acquisition of Barefoot
Inc. and other
acquisitions (16,161 shares) 156,299 30,120 186,419
Conversion to corporate form . 2,799 513,148 (515,947)
Balance, December 31, 1997 . . $2,799 $513,148 $65,000 $ --- $5,343 $(57,582) $(4,270) $524,438
Net income 1998 . . . . . . . 189,992 189,992
Other comprehensive income,
net of tax: Unrealized
gains on securities, net
of reclassification
adjustment . . . . . . . . (485) (485)
Foreign currency translation
($640 tax expense) (947) (947)
Total comprehensive income . . 189,992 (1,432) 188,560
Shareholder distributions . . (75,152) (75,152)
Shares issued in public
offering (11,400 shares) . 114 208,447 208,561
Shares issued under option,
debentures, grant plans
and other (2,514 shares) . 25 9,403 13,507 887 23,822
Treasury shares purchased and
related costs (888 shares) (9) (18,301) (18,310)
Shares issued for acquisitions
(5,059 shares) 51 57,126 47,390 104,567
Balance, December 31, 1998 . . $2,980 $788,124 $179,840 $ --- $3,911 $(14,986) $(3,383) $956,486
|
All share data reflect the three-for-two share splits in August 1998, June
1997 and June 1996.
Disclosure of reclassification amounts (net of tax) relating to
comprehensive income:
1998 1997 1996
Unrealized holding gains
arising in period . . . $ 3,295 $ 5,904 $ 2,795
Less: gains realized . . . (3,780) (1,635) (1,343)
Net unrealized gains on
securities . . . . . . $ (485) $ 4,269 $ 1,452
|
See accompanying Summary of Significant Accounting Policies and Notes
to the Consolidated Financial Statements.
39
Notes to the Consolidated Financial Statements
Business Unit Reporting
The business of the Company is primarily conducted through the ServiceMaster
Consumer Services and ServiceMaster Management Services operating units. In
accordance with Statement of Financial Accounting Standards No. 131, the
Company's reportable segments are strategic business segments that offer
different services. They are managed separately because each business requires
different technology and marketing strategies. The Consumer Services unit
provides a variety of specialty services to residential and commercial
customers. The Management Services unit provides a variety of supportive
management services to health care, education and commercial accounts. The
Company derives substantially all of its revenues from customers in the United
States with less than five percent generated in foreign markets.
The other operations group includes primarily ServiceMaster Employer Services, a
professional employer organization that provides clients with administrative
processing of payroll, workers' compensation insurance, health insurance,
unemployment insurance and other employee benefit plans, and Diversified Health
Services, which provides services and products to the long-term care industry.
In the previous year, Diversified Health Services was reflected in the
Management Services operating unit. It is now reflected in the other operations
group for all years. The Company has reclassified Diversified Health Services
into the other operations segment due to the unique nature of the services it
provides and the industry factors which affect its performance. It also operates
in a highly regulated industry and is managed separately from the other service
lines.
Information regarding the accounting policies used by the Company is described
in the Summary of Significant Accounting Policies. Operating expenses of the
business units consist primarily of direct costs and a royalty payable to Parent
based on the revenues or profits of the business unit.
Identifiable assets are those used in carrying out the operations of the
business unit and include intangible assets directly related to its operations.
The Company's headquarters facility and other investments are included in the
identifiable assets of other operations.
The following information prior to 1998 is presented on a pro forma basis as if
the Company had been a taxable corporation in all years and corporate taxes had
been allocated to the segments.
(In thousands)
Consumer Management Other
Services Services Operations Consolidated
------------ ------------- ----------- ------------
1998
Operating revenue . . . . . . . $2,048,185 $2,040,948 $634,986 $4,724,119
Operating income . . . . . . . 305,408 112,919 (21,905) 396,422
Net interest expense (income) . 42,259 (1,882) 37,267 77,644
Income before income taxes . . 263,149 114,801 (59,172) 318,778
Provision for income taxes . . 106,309 46,380 (23,903) 128,786
Net income . . . . . . . . . . $156,840 $68,421 $(35,269) $189,992
Net income, excluding unusual
items (Note) . . . . . . . $156,840 $45,774 $(12,622) $189,992
Identifiable assets . . . . . . $2,244,652 $237,924 $432,275 $2,914,851
Depreciation and amortization
expense . . . . . . . . . $71,369 $22,023 $11,213 $104,605
Capital expenditures . . . . . $36,206 $29,757 $9,334 $75,297
1997
Operating revenue . . . . . . . $1,662,519 $1,905,291 $393,692 $3,961,502
Operating income . . . . . . . 235,064 76,224 32,645 343,933
Net interest and non-operating
expense (income) . . . . . 27,740 (1,264) 43,178 69,654
Income before income taxes . . 207,324 77,488 (10,533) 274,279
Corporate provision for
income taxes . . . . . . . 83,759 31,304 (4,254) 110,809
Net income (pro forma
corporate form) . . . . . $123,565 $46,184 $(6,279) $163,470
Identifiable assets . . . . . . $1,783,186 $212,727 $479,311 $2,475,224
Depreciation and amortization
expense . . . . . . . . . $63,010 $21,315 $8,737 $93,062
Capital expenditures . . . . . $16,778 $21,232 $8,222 $46,232
1996
Operating revenue . . . . . . . $1,461,696 $1,816,953 $179,679 $3,458,328
Operating income . . . . . . . 185,895 75,577 33,746 295,218
Net interest and non-operating
expense . . . . . . . . . 14,233 276 28,312 42,821
Income before income taxes . . 171,662 75,301 5,434 252,397
Corporate provision for
income taxes . . . . . . . 69,352 30,422 2,194 101,968
Net income (pro forma
corporate form) . . . . . $102,310 $44,879 $3,240 $150,429
Identifiable assets . . . . . . $1,394,177 $236,038 $216,626 $1,846,841
Depreciation and amortization
expense. . . . . . . . . . $52,446 $21,304 $5,256 $79,006
Capital expenditures . . . . . $19,915 $17,852 $5,185 $42,952
|
Note: This line excludes the $38 million pretax gain in the Management Services
segment related to the formation of a strategic venture which acquired the
assets of ServiceMaster Energy Management and the pretax charges totaling $38
million in the Other Operations segment related primarily to the home health
care operations, which included a write-down for the impairment of assets and
costs relating to exiting customer arrangements.
40
Reincorporation
Most operations of ServiceMaster and its subsidiary partnerships were conducted
from 1986 through 1997 in partnership form, free of federal corporate income
tax. Had ServiceMaster remained a partnership, the Internal Revenue Code would
have imposed federal corporate tax on ServiceMaster operations beginning in
1998. In January 1992, in anticipation of this change, the Partnership's
shareholders approved a tax-free plan of reorganization to return to corporate
form.
The ServiceMaster Company was created as part of this plan. The reorganization
became effective December 26, 1997, and was structured as a merger in which The
ServiceMaster Company became the successor entity through which the public now
invests in ServiceMaster. (The terms "the Company" and "ServiceMaster" are used
to collectively refer to the Partnership and its successor corporation, The
ServiceMaster Company.) At the time of reincorporation, each outstanding limited
partnership share was converted into one share of $0.01 par value common stock.
No federal income taxes were imposed on the shareholders of the Partnership as a
result of the reincorporation.
Pro forma information has been presented in the accompanying financial
statements in order to compare the continuing results of operations as if the
Company had been a taxable entity in 1997 and 1996. The pro forma tax provision
has been calculated assuming that the Company's effective tax rate had been
approximately 40 percent of pretax earnings.
Prior to December 26, 1997, The ServiceMaster Limited Partnership held as its
only asset a 99 percent interest in the profits, losses and distributions of The
ServiceMaster Company Limited Partnership, which through subsidiaries owned and
operated the ServiceMaster business. The Managing General Partner was
ServiceMaster Management Corporation, which held a one percent interest in the
income of both Partnerships. As a result of the reorganization, The
ServiceMaster Company owns all of the general and limited partnership interests
in the Partnership. No payment or equity issuance was made to the Managing
General Partner in connection with the reorganization except for the payout of
any income allocated to its capital account prior to reincorporation.
Income Taxes
Prior to reincorporation at the end of 1997, most operations conducted by the
Company and its subsidiary partnerships were exempt from federal corporate
income tax since 1986. As a result of the reincorporation, the Company
recognized a step-up in the tax basis of its assets, which is being amortized
against taxable income. The step-up resulted in a reduction of the Company's
cash tax payments in excess of $25 million per annum for the current year and
for the ensuing 14 years.
The reconciliation of income tax for 1998 computed at the U.S. federal statutory
tax rate to the Company's effective income tax rate is as follows:
Tax at U.S. federal statutory rate . . . . . . . . . . . . . . . 35.0%
State and local income taxes,
net of U.S. federal benefit . . . . . . . . . . . . . . . . . 4.4%
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0%
Effective rate . . . . . . . . . . . . . . . . . . . . . . . . . 40.4%
|
Income tax expense for 1998 consists of:
(In thousands) Current Deferred Total
----------------------- ------- -------- -------
U.S. federal. . . . . $76,646 $30,200 $106,846
State and local. . . . 15,740 6,200 21,940
------- -------- --------
$92,386 $36,400 $128,786
|
Deferred income tax expense of $36.4 million for the year ended December 31,
1998 results from timing differences in the recognition of income and expense
for income tax and financial reporting purposes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. Management believes that,
based upon its lengthy and consistent history of profitable operations, it is
probable that the net deferred tax assets will be realized on future tax
returns, primarily from the generation of future taxable income. Significant
components of the Company's deferred tax assets are as follows:
(In thousands) 1998 1997
------------------------------ -------------- ---------------
Deferred tax assets (liabilities):
Current:
Prepaid expenses and other . . . . $(23,400) $(11,500)
Accounts receivable allowance . . . 7,400 12,000
Accrued insurance and
related expenses . . . . . . . . 24,100 18,000
Other accrued expenses . . . . . . 16,700 18,100
Long-Term:
Long-term assets . . . . . . . . . (500) 13,000
Insurance expenses . . . . . . . . 32,500 32,000
Other long-term obligations . . . . (11,600) ---
-------- --------
Net deferred tax assets . . . . . . $ 45,200 $ 81,600
|
There were no federal taxes paid in 1998 and approximately $5 million of state
tax payments were made in the year. In the first year of corporate form, the
Company was able to defer the remaining 1998 tax payments into 1999.
Acquisitions
Current Year -
Acquisitions have been accounted for using the purchase method and, accordingly,
the results of operations of the acquired businesses have been included in the
Company's consolidated financial statements since their dates of acquisition.
The assets and liabilities of these businesses were recorded in the financial
statements at their estimated fair market values as of the acquisition dates.
In 1998, the Company completed a number of acquisitions, including Rescue
Industries, Inc. (Rescue), Ruppert Landscape Company (Ruppert), National
Britannia and other lawn care, landscape and pest control businesses. Rescue,
which operates under the Rescue Rooter trade name, is one of the largest
plumbing and drain cleaning companies in America. Ruppert is one of the
Mid-Atlantic's largest commercial landscape companies. National Britannia, the
third largest pest control company in the United Kingdom, significantly
increases the international presence of Terminix. The aggregate fair market
value of the assets acquired less liabilities assumed for these acquisitions was
$139 million, which consisted almost entirely of intangible assets, primarily
goodwill. During the year, the
41
Company acquired a number of smaller companies primarily in the lawn care,
landscaping and pest control businesses. The aggregate fair market value of the
assets acquired less seller financed notes and liabilities assumed for these
purchases was $194 million, including approximately $249 million of goodwill.
On November 1, 1998, the Company entered into an agreement to acquire LandCare
USA, Inc., one of the leading commercial landscape companies in the country. The
transaction is expected to be consummated in March 1999.
Prior Years -
On February 24, 1997, the Company acquired Barefoot Inc., (Barefoot) the second
largest professional residential lawn care services company in the United
States. The Company paid approximately $237 million by issuing 12.9 million
shares and paying $91 million in cash in exchange for all of the Barefoot stock.
The excess of the consideration paid over the fair value of the Barefoot
business of $254 million was recorded as goodwill, which is being amortized on a
straight-line basis over 40 years.
During 1997, the Company made several smaller acquisitions which included
Certified Systems, Inc. one of the nation's largest professional employer
organizations, Orkin's lawn care and plantscaping division and a number of other
lawn care and pest control businesses. The Company also purchased the minority
interests of Management Services and Diversified Health Services for a
combination of cash and Company shares, totaling approximately $25 million. The
aggregate fair market value of the assets acquired less liabilities assumed for
these smaller acquisitions was $196 million, including approximately $267
million of intangible assets, primarily goodwill.
During 1996, the Company acquired Premier Manufacturing Support Services, a
provider of management services to the automotive industry, and several other
smaller companies, predominately pest control, lawn care and pharmacy management
businesses. The aggregate fair value of assets acquired less liabilities assumed
was $91 million, including approximately $96 million of intangible assets which
are being amortized on a straight-line basis over 40 years.
Supplemental cash flow information regarding the Company's acquisitions is as
follows:
(In thousands)
1998 1997 1996
-------- -------- --------
Fair value of assets acquired . . . . . . $465,380 $590,600 $134,377
Less liabilities assumed . . . . . . . . . (132,381) (157,741) (43,781)
-------- -------- --------
Net assets acquired . . . . . . . . . . . 332,999 432,859 90,596
Less shares issued . . . . . . . . . . . . (104,567) (186,419) (30,559)
Less cash acquired . . . . . . . . . . . . (5,980) (12,751) (1,564)
-------- ------- --------
Business acquisitions,
net of cash acquired . . . . . . . . . $222,452 $233,689 $58,473
|
Other Events
The Company formed a strategic venture with Texas Utilities Company for the
ownership and operation of the ServiceMaster Energy Management business. The new
venture acquired all of the assets of ServiceMaster Energy Management and is
owned 85 percent by Texas Utilities and 15 percent by ServiceMaster. This
transaction resulted in a pretax gain of $38 million.
In late 1998, the Company completed a strategic review of its Home Health Care
operations and concluded that, without significant investment, it could not
profitably provide high quality service in the future and continue to satisfy
all the changes and the requirements of new governmental reimbursement programs.
The Company has decided to sell its direct operations and is discontinuing its
outsourced management operation of home health care agencies. The Company will
continue to provide consulting services to hospitals and other providers of home
health care.
During the course of the Company's strategic review of its Home Health Care
operations, the Company assessed the recoverability of the carrying value of the
intangible assets and fixed assets which resulted in pretax impairment losses of
$13 million and $3 million, respectively. In accordance with Statement of
Financial Accounting Standards No. 121, these losses reflect the amounts by
which the carrying values of these assets exceed their estimated fair values
determined by their future discounted cash flows. In addition, the Company has
recorded a pretax charge of $8 million related to the costs associated with
exiting customer arrangements in the Home Health Care business. In response to
the impact that changes in governmental reimbursement programs have begun to
have on the financial condition of certain customers of the Home Health Care and
Diversified Health Services businesses, the Company increased its reserves for
accounts receivable by $8 million and $6 million, respectively.
Employee Benefit Plans
Contributions to qualified profit sharing plans were made in the amount of $9.9
million in 1998, $8.2 million in 1997, and $6.9 million in 1996. Under the
Employee Share Purchase Plan, the Company contributed $1.2 million in 1998, $1.1
million in 1997, and $1.0 million in 1996. These funds defrayed part of the cost
of the shares purchased by employees.
42
Long-Term Debt
Long-term debt includes the following:
(In thousands, except per share data)
1998 1997
---------- ----------
Notes Payable:
10.57%, maturing in 1999-2000 . . $18,000 $27,000
8.38%, maturing in 1999-2001 . . 30,000 40,000
10.81%, maturing in 2000-2002 . . 55,000 55,000
6.65%, maturing in 2002-2004 . . 70,000 70,000
7.40%, maturing in 2006 . . . . 125,000 125,000
6.95%, maturing in 2007 . . . . 100,000 100,000
7.10%, maturing in 2018 . . . . 150,000 ---
7.45%, maturing in 2027 . . . . 200,000 200,000
7.25%, maturing in 2038 . . . . 150,000 ---
6.00%, subordinated, convertible
at $5.53 per share . . . --- 3,581
Revolving credit facilities . . . . 50,000 550,000
International borrowings . . . . . 48,272 29,856
Other . . . . . . . . . . . . . . . 131,511 68,947
Less current portion . . . . . . . (51,616) (21,539)
Total long-term debt . . . . . . . $1,076,167 $1,247,845
|
The Company is party to a number of long-term debt agreements which require it
to comply with certain financial covenants, including limitations on
indebtedness, restricted payments, fixed charge coverage ratios and net worth.
The Company has been and currently is in compliance with the covenants related
to these debt agreements.
ServiceMaster filed a shelf registration statement with the Securities and
Exchange Commission for the sale of up to $950 million in unsecured senior debt
securities or equity interests in June 1997. As of year end, the Company had
$350 million of securities available for issuance under this shelf registration
statement. The first debt issuance from the shelf occurred in August 1997. It
included two tranches of debt totaling $300 million. The Company completed a
second $300 million dual-tranche offering of unsecured senior notes in February
1998, that consisted of $150 million, 7.10 percent notes due March 1, 2018, and
$150 million, 7.25 percent notes due March 1, 2038. The net proceeds of these
offerings reduced borrowings under bank credit facilities and thereby reduced
exposure to short-term interest rate fluctuations.
In May 1998, the Company filed a Form S-3 registration statement under which
11.4 million newly-issued shares were sold at $19.17 per share. The net proceeds
to the Company were approximately $209 million and were used to reduce
outstanding debt under existing bank credit facilities.
The Company has a committed revolving credit facility for up to $750 million
maturing in April 2002. The facility can be used for general Company purposes.
The revolving credit facility had $700 million of unused commitment as of
December 31, 1998.
The Company is exposed to interest rate fluctuations on its floating rate debt.
As of year end, the Company had approximately $100 million in floating rate
borrowings. The Company has, from time to time, entered into interest rate swap
or similar arrangements to mitigate its exposure to interest rate fluctuations,
and does not, as a matter of policy, enter into hedging contracts for trading or
speculative purposes. As of year end, the Company was not a party to any
interest rate swaps.
Cash interest payments were $88 million in 1998, $63 million in 1997, and $34
million in 1996. Average rates paid on the revolving credit facility were 5.9
percent in 1998, 6.0 percent in 1997 and 5.6 percent in 1996. Future scheduled
long-term debt payments are $51.6 million in 1999 (average rate of 4.2 percent),
$67.7 million in 2000 (average rate of 6.0 percent), $44.3 million in 2001
(average rate of 6.7 percent), $45.9 million in 2002 (average rate of 6.6
percent), and $34.8 million in 2003 (average rate of 5.4 percent). Notes payable
of $19 million due in 1999 are intended to be refinanced by the long term
revolving credit facility in 1999 and therefore are not included in the $51.6
million of current liabilities. The $50 million revolving credit facility
balance as of year end has not been included in the scheduled payments above as
the Company expects to extend the revolving credit facility beyond 2003.
Based upon the borrowing rates currently available to the Company for long-term
borrowings with similar terms and maturities, the fair value of long-term debt
is approximately $1.1 billion.
Future long-term noncancelable operating lease payments are $33.4 million in
1999, $25.5 million in 2000, $17.9 million in 2001, $11.3 million in 2002, $6.6
million in 2003, and $7.4 million thereafter. Rental expense for 1998, 1997, and
1996 was $103.8 million, $83.9 million, and $74.8 million, respectively.
The Company maintains an $80 million operating lease facility with a bank which
provides for the acquisition and development of properties to be leased by the
Company. The Company has guaranteed the residual value of the properties under
the lease up to 82 percent of the fair market value at the commencement of the
lease. The Company does not expect to be required to make residual value
payments and therefore, no amounts have been included in the future payments
above. At December 31, 1998, approximately $38 million was funded under this
facility.
Cash and Marketable Securities
Marketable securities held at December 31, 1998 and 1997, with a maturity of
three months or less, are included in the Statements of Financial Position
caption "Cash and Cash Equivalents." Marketable securities are designated as
available for sale and recorded at current market value, with unrealized gains
and losses reported in a separate component of shareholders' equity. Marketable
securities available for current operations are classified as current assets
while securities held for noncurrent uses are classified as long-term. The
Company's investments consist primarily of publicly-traded debt and common
equity securities. As of December 31, 1998, the aggregate market value of the
Company's short- and long-term investments in debt and equity securities was $97
million and the aggregate cost basis was $84 million. In 1998, the Company
entered into a hedging arrangement in a notional amount of $40 million expiring
November 1999, designed to protect its equity portfolio against a decline in the
equity market. This arrangement, which is
43
linked to the Standard & Poor's 500 Index, provides protection for a market
decline of up to 15 percent, while it caps the potential appreciation at 15
percent. At year end, the fair market value of this arrangement was an
immaterial net liability to the Company. There was no participation in the
trading of derivative securities in 1998 or 1997.
Interest and dividend income received on cash and marketable securities was $8.9
million, $8.3 million and $8.0 million, in 1998, 1997 and 1996, respectively.
Gains and losses on sales of investments, as determined on a specific
identification basis, are included in investment income in the period they are
realized.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," which requires the reporting of all changes in
equity during a period, except those resulting from investment by owners and
distribution to owners. The Company has chosen to disclose Comprehensive Income,
which encompasses net income, unrealized gains on marketable securities, and the
effect of foreign currency translation, in the Statement of Shareholders'
Equity.
1998 1997 1996
--------- -------- --------
Unrealized holding gains
arising in period . . . . . . . . . $5,529 $9,908 $4,690
Tax expense . . . . . . . . . . . . . 2,234 4,004 1,895
Net of tax amount . . . . . . . . . . $3,295 $5,904 $2,795
Gains realized . . . . . . . . . . . $6,342 $2,743 $2,254
Tax expense . . . . . . . . . . . . . 2,562 1,108 911
Net of tax amount . . . . . . . . . . $3,780 $1,635 $1,343
|
Accumulated comprehensive income included the following components as of
December 31:
1998 1997 1996
--------- -------- --------
Unrealized gain on securities $7,753 $8,238 $3,969
Foreign currency translation (3,842) (2,895) 2,388
Total . . . . . . . . . . . . $3,911 $5,343 $6,357
|
Shareholders' Equity
The Company has authorized one billion shares of common stock with a par value
of $.01 and 11 million shares of preferred stock. There were no shares of
preferred stock issued or outstanding. In December 1997, ServiceMaster converted
from a publicly traded limited partnership to a corporation. At the time of
reincorporation, each outstanding limited partnership share was converted into
one share of common stock on a tax-free basis to the shareholders. Upon
reincorporation, all Limited Partners' equity was transferred to common stock
and additional paid-in capital. The shares underlying the obligations and rights
relating to the employee option plans were also converted from partnership
shares to corporate stock on a one-for-one basis.
In 1997, the Company filed a $950 million shelf registration statement with the
Securities and Exchange Commission for the sale of unsecured senior debt
securities and equity interests. On May 15, 1998, the Company filed a Form S-3
registration statement, and 21.2 million Company shares were sold at $19.17 per
share. This included approximately 11.4 million of newly-issued shares from the
Company and 9.8 million shares sold by existing shareholders. The net proceeds
to the Company, after the underwriting discount and offering expenses, were
approximately $209 million and were used to reduce outstanding debt under
existing bank credit facilities.
On July 23, 1998, the Company filed a Form S-1 shelf registration statement to
issue up to 5.3 million shares of common stock in connection with future,
unidentified acquisitions. The S-1 allows the Company to issue registered shares
much more efficiently when acquiring privately-held companies. The Company plans
to use the shares over time in connection with purchases of roll-up acquisitions
and small strategic acquisitions. There were approximately 3.5 million shares
issued at year end.
On April 1, 1997, the Company bought Waste Management, Inc.'s (WMX) entire
ownership interest in ServiceMaster for approximately $626 million. This
transaction resulted in the Company acquiring the 61.1 million Company shares
held by WMX and canceling WMX's option to purchase an additional 4.2 million
Company shares.
As of December 31, 1998, there were 18.1 million Company shares available for
issuance upon the exercise of employee options outstanding and future grants.
Share options are issued at a price not less than the fair market value on the
grant date and expire within ten years of the grant date. Certain options may
permit the holder to pay the option exercise price by tendering Company shares
that have been owned by the holder without restriction for an extended period.
Share grants carry a vesting period and are restricted as to the sale or
transfer of the shares.
The Company accounts for employee share options under Accounting Principles
Board Opinion 25, as permitted under generally accepted accounting principles.
Accordingly, no compensation cost has been recognized in the accompanying
financial statements related to these options. Had compensation cost for these
plans been determined consistent with Statement of Financial Accounting
Standards No. 123 (SFAS 123), which is an accounting alternative that is
permitted, but not required, pro forma net income and net income per share would
reflect the following:
(In thousands, except per share data)
1998 1997 1996
-------- -------- --------
Net Income:
As reported(1) . . . . . . . $189,992 $163,470 $150,429
SFAS 123 pro forma. . . . . . $185,555 $160,966 $149,480
Net Income Per Share:
Basic: As reported(1) $.66 $.57 $.47
SFAS 123 pro forma $.64 $.56 $.47
Diluted: As reported(1) $.64 $.55 $.46
SFAS 123 pro forma $.62 $.54 $.45
|
(1) Pro forma corporate form prior to 1998.
The SFAS 123 pro forma net income reflects options granted in 1998, 1997 and
1996. Since SFAS 123 does not apply to options granted prior to 1995, the pro
forma disclosure is not likely to be indicative of pro forma results which may
be expected in future years. This primarily relates to the fact that options
vest over several years and pro forma compensation cost is recognized as the
options vest. In addition, awards may have been granted in earlier years, which
would have resulted in pro forma compensation cost in 1998.
The fair value of each option is estimated on the date of grant based on the
Black-Scholes option pricing model with the following weighted-average
assumptions in 1998, 1997 and 1996: risk-free interest rates of 5.6 percent, 6.3
percent and 5.6 percent, respectively; volatility rates of 22 percent, 21
percent and 27 percent, respectively; distribution yields of 1.9 percent, 3.2
percent and 3.2 percent, respectively; and average expected lives of seven
years. The options granted to employees in 1998, 1997 and 1996 have
weighted-average fair values of $5.17, $2.81 and $2.40, respectively and vest
ratably over five years. The Company has estimated the value of these options
assuming a single weighted-average expected life for the entire award.
44
A summary of option and grant transactions during the last three years is
summarized below:
Share Price Weighted-Avg. Share Price
Options Range Exercise Price Grants Range
------- ------------- -------------- ---------- -------------
Total exercisable, December 31, 1995 . . . . 14,033,661 $0.73 - 7.63 $ 5.46 --- ---
Total outstanding December 31, 1995 . . . . 18,252,411 $0.73 - 9.78 $6.46 2,205,738 $2.86 - 7.96
Transactions during 1996
Granted to employees . . . . . . . . . . . 4,154,625 $ 9.26 - 10.78 $9.40 --- ---
Exercised, paid, or vested . . . . . . . . (5,470,646) $ 0.73 - 7.63 $5.56 (398,997) $2.86 - 7.96
Terminated or resigned . . . . . . . . . . (360,274) $ 2.79 - 7.63 $3.89 --- ---
Total exercisable, December 31, 1996 . . . . 8,202,741 $ 0.73 - 7.63 $ 5.49 --- ---
Total outstanding, December 31, 1996 . . . . 16,576,116 $ 0.73 - 10.78 $ 7.56 1,806,741 $2.86 - 7.96
Transactions during 1997
Granted to employees . . . . . . . . . . . 5,295,785 $11.23 - 18.42 $11.62 --- ---
Exercised, paid, or vested . . . . . . . . (1,892,034) $ 2.17 - 9.26 $5.17 (430,460) $2.86 - 7.96
Cancelled, related to WMX . . . . . . . . (4,218,750) $ 9.78 $9.78 --- ---
Terminated or resigned . . . . . . . . . . (440,960) $ 1.97 - 11.22 $7.11 (120,175) $2.86 - 7.96
Total exercisable, December 31, 1997 . . . . 6,919,718 $0.73 - 10.78 $ 6.05 --- ---
Total outstanding, December 31, 1997 . . . . 15,320,157 $0.73 - 18.42 $ 8.65 1,256,106 $2.86 - 7.96
Transactions during 1998
Granted to employees . . . . . . . . . . . 3,574,376 $15.74 - 22.77 $18.29 --- ---
Exercised, paid, or vested . . . . . . . . (1,604,784) $ 2.25 - 11.22 $6.29 (293,376) $2.86 - 7.96
Terminated or resigned . . . . . . . . . . (377,023) $ 0.73 - 18.26 $8.57 --- ---
Total exercisable, December 31, 1998 . . . . 7,269,279 $0.73 - 22.33 $ 7.51 --- ---
Total outstanding, December 31, 1998 . . . . 16,912,726 $0.73 - 22.77 $10.89 962,730 $2.86 - 7.96
|
Options outstanding at December 31, 1998:
Range of Number Outstanding Remaining Weighted-Average Number Exercisable Weighted-Average
Exercise Prices at 12/31/98 Life Exercise Price at 12/31/98 Exercise Price
--------------- ------------------ --------- ---------------- ------------------ ----------------
$0.73 - 5.14 1,896,782 3.0 years $3.74 1,896,782 $ 3.74
6.44 - 9.33 6,040,722 6.5 years 8.27 4,048,253 7.78
10.78 - 22.77 8,975,222 8.5 years 14.17 1,428,808 12.50
$0.73 - 22.77 16,912,726 7.0 years $10.89 7,373,843 $7.65
|
Earnings Per Share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of
convertible securities and options to purchase common stock.
The following chart reconciles both the numerator and the denominator of the
basic earnings per share computation to the numerator and the denominator of the
diluted earnings per share computation.
For year ended 1998 For year ended 1997 For year ended 1996
(In thousands, except per share data) Income Shares EPS Income Shares EPS Income Shares EPS
--------- ---------- ----- --------- ---------- ----- --------- ---------- -----
Basic EPS
(pro forma corporate form in
1997 and 1996). . . . . . . . . $189,992 289,315 $0.66 $163,470 285,944 $0.57 $150,429 317,381 $0.47
Effect of Dilutive Securities,
net of tax
Options . . . . . . . . . . . . 9,391 8,333 7,607
Convertible debentures . . . . 32 181 1,114 5,363 1,115 5,441
Diluted EPS
(pro forma corporate form in
1997 and 1996). . . . . . . . . $190,024 298,887 $0.64 $164,584 299,640 $0.55 $151,544 330,429 $0.46
|
45
Quarterly Operating Results
Quarterly operating results and related growth for the last three years in
revenues, gross profit, net income, and basic and diluted net income per share
are shown in the table below. Net income and earnings per share amounts for 1997
and 1996 have been restated to a basis that assumes reincorporation had occurred
as of the beginning of each year. For interim accounting purposes, certain costs
directly associated with the generation of lawn care revenues are initially
deferred and recognized as expense as the related revenues are recognized. Full
year results are not affected.
Certain amounts from prior periods have been reclassified to conform with the
current presentation.
Percent Incr. Percent Incr.
(Unaudited, in thousands, except per share data) 1998 '98-'97 1997 '97-'96 1996
-------- ------------- -------- ------------- --------
Operating Revenue:
First Quarter . . . . . . . . . . . . . $981,788 20% $817,136 10% $740,299
Second Quarter . . . . . . . . . . . . 1,244,627 23 1,010,794 10 916,931
Third Quarter . . . . . . . . . . . . . 1,273,093 17 1,090,114 18 927,227
Fourth Quarter . . . . . . . . . . . . 1,224,611 17 1,043,458 19 873,871
$4,724,119 19% $3,961,502 15% $3,458,328
Gross Profit:
First Quarter . . . . . . . . . . . . . $186,991 17% $159,991 13% $142,116
Second Quarter . . . . . . . . . . . . 293,261 14 257,260 16 221,505
Third Quarter . . . . . . . . . . . . . 316,718 23 257,449 17 219,127
Fourth Quarter . . . . . . . . . . . . 247,537 8 228,642 18 194,572
$1,044,507 16% $903,342 16% $777,320
Net Income:
(pro forma in 1997 and 1996):
First Quarter . . . . . . . . . . . . . $29,270 1% $28,982 15% $25,188
Second Quarter . . . . . . . . . . . . 56,404 21 46,707 8 43,326
Third Quarter . . . . . . . . . . . . . 56,352 20 46,793 11 42,262
Fourth Quarter . . . . . . . . . . . . 47,966 17 40,988 3 39,653
$189,992 16% $163,470 9% $150,429
Basic Net Income Per Share:
(pro forma in 1997 and 1996):
First Quarter . . . . . . . . . . . . . $0.11 22% $0.09 13% $0.08
Second Quarter . . . . . . . . . . . . 0.20 18 0.17 21 0.14
Third Quarter . . . . . . . . . . . . . 0.19 12 0.17 31 0.13
Fourth Quarter . . . . . . . . . . . . 0.16 7 0.15 25 0.12
$0.66 16% $0.57 21% $0.47
Diluted Net Income Per Share:
(pro forma in 1997 and 1996):
First Quarter . . . . . . . . . . . . . $0.10 11% $0.09 13% $0.08
Second Quarter . . . . . . . . . . . . 0.19 19 0.16 23 0.13
Third Quarter . . . . . . . . . . . . . 0.19 19 0.16 23 0.13
Fourth Quarter . . . . . . . . . . . . 0.16 14 0.14 17 0.12
$0.64 16% $0.55 20% $0.46
Cash Distributions Per Share:
First Quarter . . . . . . . . . . . . . $0.08 7% $0.07 1\2 5% $0.07 1\8
Second Quarter . . . . . . . . . . . . 0.08 7 0.07 1\2 5 0.07 1\8
Third Quarter . . . . . . . . . . . . . 0.08 --- 0.08 7 0.07 1\2
Fourth Quarter . . . . . . . . . . . . 0.09 13 0.08 7 0.07 1\2
$0.33 6% $0.31 6% $0.29 1\4
Price Per Share:
First Quarter . . . . . . . . . . . . . $19.63 - 16.50 $12.33 - 10.92 $ 9.93 - 8.61
Second Quarter . . . . . . . . . . . . 25.50 - 17.92 15.92 - 12.09 10.45 - 9.17
Third Quarter . . . . . . . . . . . . . 24.75 - 19.75 19.67 - 15.17 11.00 - 9.55
Fourth Quarter . . . . . . . . . . . . 23.81 - 16.00 19.50 - 14.00 11.83 - 10.55
|
All share and per share data reflect the three-for-two share splits in
August 1998, June 1997 and June 1996.
46
EXHIBIT 21
SUBSIDIARIES OF THE SERVICEMASTER COMPANY
As of March 22, 1999, ServiceMaster had the following subsidiaries:
State or Country
of
Incorporation
Subsidiary or Organization
-------------------------------------------------------- -----------------
ServiceMaster Consumer Services Limited Partnership........................................................Delaware
ServiceMaster Consumer Services, Inc. .....................................................................Delaware
TruGreen Limited Partnership...............................................................................Delaware
TruGreen, Inc..............................................................................................Delaware
Barefoot Inc. .............................................................................................Delaware
Barefoot Grass Lawn Services, Inc. ........................................................................Delaware
Barefoot Services L.L.C. ..................................................................................Delaware
LandCare USA, Inc..........................................................................................Delaware
The Terminix International Company Limited Partnership.....................................................Delaware
Terminix International, Inc................................................................................Delaware
ServiceMaster Residential/Commercial Services Limited Partnership..........................................Delaware
ServiceMaster Residential/Commercial Services Management Corporation.......................................Delaware
ServiceMaster Direct Distributor Company Limited Partnership...............................................Delaware
ServiceMaster DDC, Inc. ...................................................................................Delaware
Merry Maids Limited Partnership............................................................................Delaware
Merry Maids, Inc...........................................................................................Delaware
American Home Shield Corporation 1.........................................................................Delaware
AmeriSpec, Inc. ...........................................................................................Delaware
Furniture Medic Limited Partnership .......................................................................Delaware
Furniture Medic, Inc. .....................................................................................Delaware
Rescue Rooter L.L.C. ......................................................................................Delaware
ServiceMaster Management Services Limited Partnership......................................................Delaware
ServiceMaster Management Services, Inc. ...................................................................Delaware
ServiceMaster Aviation Services Limited Partnership........................................................Delaware
ServiceMaster Aviation Management Corporation..............................................................Delaware
ServiceMaster Aviation L.L.C. .............................................................................Illinois
Premier Manufacturing Support Services Limited Partnership 2...............................................Delaware
CMI Group, Inc. ..........................................................................................Wisconsin
ServiceMaster Employer Services, Inc. 3....................................................................Delaware
The ServiceMaster Acceptance Company Limited Partnership...................................................Delaware
ServiceMaster AM Limited Partnership.......................................................................Delaware
ServiceMaster Acceptance Corporation.......................................................................Delaware
ServiceMaster Holding Corporation..........................................................................Delaware
ServiceMaster Strategic Limited Partnership................................................................Delaware
The ServiceMaster Company Limited Partnership..............................................................Delaware
ServiceMaster Management Corporation.......................................................................Delaware
ServiceMaster Limited................................................................................United Kingdom
ServiceMaster Operations Germany GmbH.......................................................................Germany
ServiceMaster Japan, Inc......................................................................................Japan
TMX-Europe B.V......................................................................................The Netherlands
Terminix Peter Cox Ltd...............................................................................United Kingdom
Terminix Protekta B.V...............................................................................The Netherlands
Riwa B.V............................................................................................The Netherlands
Anticimex Development AB 4...................................................................................Sweden
TMX-Schadlingsbekampfungsgesellschaft mbH 5.................................................................Germany
LTCS Investment Limited Partnership........................................................................Delaware
ServiceMaster Home Health Care Services Inc................................................................Delaware
ServiceMaster Diversified Health Services, Inc. 6..........................................................Delaware
ServiceMaster Diversified Health Services Limited Partnership 7...........................................Tennessee
We Serve America, Inc......................................................................................Delaware
|
1 American Home Shield Corporation has 17 subsidiaries through which it carries
on its business in the various states in which it markets its products.
2 Premier Manufacturing Support Services Limited Partnership has 12 subsidiaries
through which it carries on its business outside of the United States.
3 ServiceMaster Employer Services has 6 subsidiaries.
4 Anticimex Development AB has 5 subsidiaries.
5 The Stenglein group includes 2 subsidiaries.
6 ServiceMaster Diversified Health Services, Inc. has 4 subsidiaries.
7 ServiceMaster Diversified Health Services, L. P. has 32 subsidiaries.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this Form 10-K of our report dated January 25,
1999 The ServiceMaster Company Annual Report to Stockholders for the year ended
December 31, 1998.
Arthur Andersen LLP
Chicago, Illinois
March 22, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
EXHIBIT 27
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS APPEARING IN EXHIBIT 13 TO THIS FORM 10-K AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<CASH> 66,400 64,876 72,009
<SECURITIES> 54,022 59,248 42,404
<RECEIVABLES> 411,363 331,359 296,688
<ALLOWANCES> 38,988 32,221 26,287
<INVENTORY> 49,770 48,157 43,529
<CURRENT-ASSETS> 670,202 594,084 499,334
<PP&E> 441,209 362,653 320,713
<DEPRECIATION> 229,049 204,383 174,313
<TOTAL-ASSETS> 2,914,851 2,475,224 1,846,841
<CURRENT-LIABILITIES> 753,697 558,177 425,552
<BONDS> 1,076,167 1,247,845 482,315
<PREFERRED-MANDATORY> 0 0 0
<PREFERRED> 0 0 0
<COMMON> 2,980 2,799 0
<OTHER-SE> 953,506 521,639 796,767
<TOTAL-LIABILITY-AND-EQUITY> 2,914,851 2,475,224 1,846,841
<SALES> 0 0 0
<TOTAL-REVENUES> 4,724,119 3,961,502 3,458,328
<CGS> 0 0 0
<TOTAL-COSTS> 3,679,612 3,058,160 2,681,008
<OTHER-EXPENSES> 648,085 559,409 482,102
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 92,945 76,447 38,298
<INCOME-PRETAX> 318,778 274,279 252,397
<INCOME-TAX> 128,786 110,809 101,968
<INCOME-CONTINUING> 189,992 163,470 150,429
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 188,992 163,470 150,429
<EPS-PRIMARY> 0.66 0.57 0.47
<EPS-DILUTED> 0.64 0.55 0.46
|
EXHIBIT 99.4
For further information contact:
ServiceMaster
Claire Buchan, VP Comm, (630)271-2150
Bruce Duncan, VP IR, (630)271-2187
Steve Preston, CFO, (630)271-2637
ARS
Jennifer Tweeton, (713)599-9015
FOR IMMEDIATE RELEASE
March 23, 1999
SERVICEMASTER ANNOUNCES TENDER OFFER FOR
AMERICAN RESIDENTIAL SERVICES
DOWNERS GROVE, Illinois -- ServiceMaster (NYSE:SVM) and American
Residential Services (NYSE:ARS) today announced that their Boards of Directors
have approved a definitive agreement under which ServiceMaster will acquire ARS.
Under the terms of the agreement, ServiceMaster will initiate a cash tender
offer for all of the outstanding shares of ARS common stock at a price of $5.75
per share. The total acquisition cost is approximately $92 million in cash and
$180 million of assumed indebtedness.
The acquisition of ARS will establish ServiceMaster as one of the country's
leading providers of heating, ventilation and air conditioning services, and
will complement the Company's Rescue Rooter plumbing business, which is already
among the nation's largest and fastest growing plumbing and drain cleaning
companies.
Houston-based ARS provides comprehensive maintenance, repair and
replacement services for HVAC, plumbing, electrical and other systems and major
appliances in homes and commercial buildings. The company, which had 1998
annualized revenues of approximately $550 million, operates in 59 markets in 17
states and the District of Columbia. ARS also will support the HVAC services
offered to the residential market by ServiceMaster through its American Home
Shield warranty program and its maintenance management service of commercial
HVAC equipment in hospitals and schools.
"The acquisition of ARS continues our strategy of expanding our service
network by acquiring platform companies that are servicing both commercial and
residential customers and are operating in fragmented markets where there is an
opportunity to organize and provide an efficient service system. This strategy
was initiated by ServiceMaster in 1986 with the acquisition of Terminix, and
over the years we have established a proven track record of bringing added
benefits to our customers as we have applied our operating skills and systems to
improve productivity and service delivery. In the last 14 months, with the
acquisition of ARS, the 1998 acquisition of Rescue Rooter, and our entry into
the commercial landscape business with the acquisition of LandCare and other
regional landscape companies, we have added over $1 billion in revenue and
positioned ServiceMaster for an added dimension of growth in expanding new
markets," said ServiceMaster President and Chief Executive Officer Carlos H.
Cantu.
2
Completion of the tender offer is subject to certain conditions, including
the tender of at least 52 percent of the outstanding ARS common shares and the
expiration of the applicable waiting period under the Hart-Scott-Rodino Act.
The offer and withdrawal rights are scheduled to expire on April 26, 1999,
unless the offer is extended.
"This acquisition significantly expands our service offerings on a
nationwide basis and provides added support for our rapidly growing American
Home Shield business," said ServiceMaster Consumer Services Group President
Ernie Mrozek.
"ServiceMaster has an outstanding reputation for people development, a
proven ability to operate service companies successfully, and a strong financial
track record," said ARS President and Chief Executive Officer Thomas Amonett.
"We believe this acquisition will provide opportunities for our people to grow
and develop, as well as the operational resources to grow the business."
ServiceMaster serves more than 10.5 million customers in the United States
and in 41 countries around the world, with annual customer level revenue of $6.4
billion. ServiceMaster is a network of quality service companies with two major
operating segments, ServiceMaster Consumer Services and ServiceMaster Management
Services.
ServiceMaster Consumer Services now includes eight market-leading companies
- TruGreen-ChemLawn, Terminix, American Home Shield, Rescue Rooter,
3
ServiceMaster Residential and Commercial Services, Merry Maids, AmeriSpec and
Furniture Medic-- which operate through the ServiceMaster Quality Service
Network of approximately 5,800 U.S. Company-owned locations and franchised
businesses.
ServiceMaster Management Services is the leading facilities management
company serving health care, education, and business and industrial facilities
with management of plant operations and maintenance, housekeeping, clinical
equipment maintenance, food service, laundry, grounds and energy.
In accordance with the Private Securities Litigation Reform Act of 1995,
the Company notes that statements that look forward in time, which include
everything other than historical information, involve risks and uncertainties
that may affect the Company's actual results of operations. Factors which could
cause actual results to differ materially include the following (among others):
weather conditions adverse to certain of the Company's Consumer Services
businesses, the entry of additional competitors in any of the markets served by
the Company, labor shortages, consolidation of hospitals in the healthcare
market, the condition of the U.S. economy, the inability of key suppliers to
achieve timely Y2K compliance in their delivery systems or the inability of the
Company to make its own systems Y2K compliant, and other factors listed from
time to time in the Company's filings with the Securities and Exchange
Commission.
4
|
|
Next Section
Previous Section