SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
----THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
--------------
-----TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______ to_______
Commission file number 1-14762
THE SERVICEMASTER COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-3858106
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One ServiceMaster Way, Downers Grove, Illinois 60515-1700
(Address of principal executive offices) (Zip Code)
630-271-1300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
shares: 305,433,000 shares as of May 12, 2000.
This document consists of 13 pages, including the cover page.
TABLE OF CONTENTS
Page
No.
THE SERVICEMASTER COMPANY (Registrant) -
PART I. FINANCIAL INFORMATION
Consolidated Statements of Income for the
three months ended March 31, 2000 and March 31, 1999 2
Consolidated Statements of Financial Position
as of March 31, 2000 and December 31, 1999 3
Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and March 31, 1999 4
Notes to Consolidated Financial Statements 5
Management Discussion and Analysis of Financial Position
and Results of Operations 7
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 11
Item 6(a): Exhibits 12
Signature
1
PART I. FINANCIAL INFORMATION
THE SERVICEMASTER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31,
2000 1999
----------- --------
OPERATING REVENUE.............................................. $ 1,346,505 $ 1,115,062
OPERATING COSTS AND EXPENSES:
Cost of services rendered
and products sold.............................................. 1,085,416 899,815
Selling and administrative expenses............................ 166,386 136,619
----------- -----------
Total operating costs and expenses............................. 1,251,802 1,036,434
----------- -----------
OPERATING INCOME............................................... 94,703 78,628
NON-OPERATING EXPENSE (INCOME):
Interest expense............................................... 31,865 21,948
Interest and investment income................................. (4,023) (3,621)
----------- -----------
INCOME BEFORE INCOME TAXES..................................... 66,861 60,301
Provision for income taxes..................................... 27,850 24,692
----------- -----------
NET INCOME..................................................... $ 39,011 $ 35,609
=========== ===========
PER SHARE: (1)
BASIC.......................................................... $ .13 $ .12
===== =====
DILUTED........................................................ $ .13 $ .12
===== =====
DIVIDENDS...................................................... $ .09 $ .09
===== =====
(1)Basic earnings per share are calculated based on 305,668 shares in 2000 and
299,602 shares in 1999 while diluted earnings per share are calculated based
on 310,138 shares in 2000 and 307,959 shares in 1999.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
THE SERVICEMASTER COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS)
As of
March 31, December 31,
2000 1999
------------ ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 43,330 $ 59,834
Marketable securities................................................ 53,213 54,376
Receivables, less allowances of $36,648
and $39,011, respectively......................................... 552,854 558,842
Inventories.......................................................... 95,212 82,861
Prepaid expenses and other assets.................................... 271,782 203,325
------------ -------------
Total current assets............................................. 1,016,391 959,238
------------ -------------
PROPERTY AND EQUIPMENT:
At cost........................................................... 669,667 659,810
Less: accumulated depreciation................................... 346,370 341,712
------------ -------------
Net property and equipment....................................... 323,297 318,098
------------ -------------
INTANGIBLE ASSETS, PRIMARILY TRADE NAMES AND GOODWILL,
net of accumulated amortization of $361,187
and $343,316, respectively........................................ 2,494,986 2,461,389
NOTES RECEIVABLE, LONG-TERM SECURITIES, AND OTHER ASSETS............. 153,712 131,490
------------ -------------
Total assets.....................................................$ 3,988,386 $ 3,870,215
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.....................................................$ 137,472 $ 145,237
Income taxes payable................................................. 30,651 6,479
Accrued liabilities.................................................. 323,951 364,851
Deferred revenues.................................................... 305,394 257,521
Current portion of long-term obligations............................. 66,577 71,716
------------ -------------
Total current liabilities........................................ 864,045 845,804
------------ -------------
LONG-TERM DEBT....................................................... 1,804,962 1,697,582
OTHER LONG-TERM OBLIGATIONS.......................................... 120,982 121,113
COMMITMENTS AND CONTINGENCIES .......................................
SHAREHOLDERS' EQUITY:
Common stock $0.01 par value, authorized 1 billion shares; issued
and outstanding 305,286 and 307,530 shares, respectively......... 3,053 3,075
Additional paid-in capital........................................... 1,036,023 1,033,568
Retained earnings.................................................... 252,899 241,701
Accumulated other comprehensive income............................... 5,833 (1,821)
Restricted stock..................................................... (2,390) (2,577)
Treasury stock....................................................... (97,021) (68,230)
------------- --------------
Total shareholders' equity....................................... 1,198,397 1,205,716
------------ -------------
Total liabilities and shareholders' equity.......................$ 3,988,386 $ 3,870,215
============ =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
THE SERVICEMASTER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended
March 31,
2000 1999
------------ --------
CASH AND CASH EQUIVALENTS AT JANUARY 1................................ $ 59,834 $ 66,400
CASH FLOWS FROM OPERATIONS:
NET INCOME............................................................ 39,011 35,609
Adjustments to reconcile net income
to net cash flows from operations:
Depreciation................................................... 18,086 14,893
Amortization................................................... 17,871 14,680
Deferred 1998 tax payment...................................... - (78,500)
Tax refund from 1999 payments.................................. 22,000 -
Deferred income taxes.......................................... 25,411 23,884
Change in working capital, net of acquisitions:
Receivables.................................................. 6,930 (13,462)
Inventories and other current assets......................... (96,275) (92,536)
Accounts payable............................................. (8,879) (2,137)
Deferred revenues............................................ 46,889 40,500
Accrued liabilities.......................................... (49,835) (41,887)
Other, net................................................... (597) (564)
-------------- -------------
NET CASH PROVIDED FROM (USED FOR) OPERATIONS.......................... 20,612 (99,520)
-------------- -------------
NET CASH USED FOR OPERATIONS EXCLUDING UNUSUAL TAX ITEMS.............. (1,388) (21,020)
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired...................... (36,424) (172,445)
Property additions............................................. (19,238) (24,731)
Sale of equipment and other assets ........................... 424 2,821
Proceeds from sale of minority interests......................... 12,259 -
Net purchases of investment securities........................... (1,469) (4,431)
Notes receivable and financial investments....................... (1,662) (2,105)
Payments to sellers of acquired businesses....................... (9,147) (3,525)
-------------- -------------
NET CASH USED FOR INVESTING ACTIVITIES................................ (55,257) (204,416)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings, net................................................... 117,546 415,991
Payment of borrowings and other obligations....................... (23,834) (122,444)
Shareholders' dividends........................................... (27,813) (25,705)
Purchase of ServiceMaster stock................................. (51,412) (4,341)
Proceeds from employee share plans.............................. 3,741 5,023
Other............................................................. (87) 500
-------- ---------
NET CASH PROVIDED FROM FINANCING ACTIVITIES........................... 18,141 269,024
------------- ------------
CASH DECREASE DURING THE PERIOD....................................... (16,504) (34,912)
------------- ------------
CASH AND CASH EQUIVALENTS AT MARCH 31................................. $ 43,330 $ 31,488
============= ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
THE SERVICEMASTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: The consolidated financial statements include the accounts of
ServiceMaster and its significant subsidiaries, collectively referred to as "the
Company". Intercompany transactions and balances have been eliminated in
consolidation.
Note 2: The consolidated financial statements included herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest Annual Report
to shareholders and the Annual Report to the Securities and Exchange Commission
on Form 10-K for the year ended December 31, 1999. In the opinion of the
Company, all adjustments, consisting only of normal and recurring adjustments,
necessary to present fairly the financial position of The ServiceMaster Company
as of March 31, 2000 and December 31, 1999, and the results of operations and
cash flows for the three months ended March 31, 2000 and 1999, have been
included. The preparation of the financial statements requires management to
make certain estimates and assumptions required under generally accepted
accounting principles which may differ from the actual results. The results of
operations for any interim period are not necessarily indicative of the results
which might be obtained for a full year.
Note 3: For interim accounting purposes, certain costs directly associated with
the generation of lawn care revenues are initially deferred and recognized as
expense as the related revenues are recognized. All such costs are fully
recognized within the fiscal year in which they are incurred.
Note 4: Basic earnings per share includes no dilution from options, debentures
or other financial instruments and is computed by dividing income available to
common stockholders by the weighted average number of shares outstanding.
Diluted earnings per share reflects the potential dilution of options to
purchase common stock. The following chart reconciles both the numerator and the
denominator of the basic earnings per share computation to the numerator and
denominator of the diluted earnings per share computation.
Three months Three months
ended March 31, 2000 ended March 31, 1999
------------------------------- ------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) Income Shares EPS Income Shares EPS
------ ------ --- ------ ------ ---
Basic earnings per share $39,011 305,668 $0.13 $35,609 299,602 $0.12
====== ======
Effect of dilutive securities (options) - 4,470 - 8,357
---------- ---------- ---------- ---------
Diluted earnings per share $39,011 310,138 $0.13 $35,609 307,959 $0.12
========== ========== ====== ========== ========= ======
5
Note 5: In the Consolidated Statements of Cash Flows, the caption Cash and Cash
Equivalents includes investments in short-term, highly-liquid securities having
a maturity of three months or less. Supplemental information relating to the
Consolidated Statements of Cash Flows for the three months ended March 31, 2000
and 1999 is presented in the following table. The increase in interest paid in
2000 is primarily due to higher levels of debt outstanding and the timing of
payments. In 2000, the Company received an income tax refund relating to 1999
overpayments. In 1999, the Company made the payment of the 1998 federal tax
obligation.
(IN THOUSANDS)
2000 1999
------ ------
CASH PAID OR (RECEIVED FOR):
Interest expense................................ $ 49,891 $ 33,551
Interest and dividend income.................... $ (2,250) $ (2,104)
Income taxes.................................... $ (19,771) $ 79,549
Note 6: Total comprehensive income for the three months ended March 31, 2000 and
1999 was $46.7 million and $31.6 million, respectively, which included primarily
net income, changes in unrealized gains on marketable securities and translation
balances.
Note 7: The business of the Company is primarily conducted through the
ServiceMaster Consumer and Commercial Services and ServiceMaster Management
Services operating units. The Consumer and Commercial Services unit provides a
variety of specialty services to residential and commercial customers. The
Management Services unit provides a variety of supportive management services to
health care, education, and commercial accounts. The Company derives
substantially all of its revenues from customers in the United States with less
than five percent generated in foreign markets.
The Other Operations group includes primarily ServiceMaster Employer Services, a
professional employer organization that provides clients with administrative
processing of payroll, insurance, and other employee benefit programs,
Diversified Health Services which provides services and products to the
long-term care industry, the Company's headquarters operation, and certain
businesses the Company sold in the second quarter of 1999. Segment information
as of and for the three months ended March 31 are as follows:
(IN THOUSANDS) CONSUMER & COMMERCIAL MANAGEMENT OTHER
2000 SERVICES SERVICES OPERATIONS CONSOLIDATED
- ------------------------- --------------- ------------- ---------- ------------
Operating Revenue $ 743,073 $ 469,904 $ 133,528 $ 1,346,505
Operating Income $ 86,967 $ 16,646 $ (8,910) $ 94,703
Total Assets $ 3,465,895 $ 231,453 $ 291,038 $ 3,988,386
1999
- -------------------------
Operating Revenue $ 461,722 $ 457,625 $ 195,715 $ 1,115,062
Operating Income $ 67,390 $ 18,861 $ (7,623) $ 78,628
Total Assets $ 2,819,610 $ 203,187 $ 423,012 $ 3,445,809
Note 8: In June 1998, the Financial Accounting Standards Board issued a
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement was subsequently amended to
defer its effective date. The Company intends to adopt this statement in January
2001 as required by the amended Statement. Adoption of this Statement is not
expected to have a material impact on the Company's financial statements.
6
THE SERVICEMASTER COMPANY
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999
Revenues increased 21 percent to $1.3 billion in the first quarter of 2000
through a combination of acquisitions and good base business growth.
Approximately five percent of the revenue increase resulted from internal growth
and small roll-up acquisitions in established businesses; while the newer
initiatives in; landscaping, heating, ventilation and air conditioning (HVAC),
and plumbing provided 23 percent of the growth. This growth was partially offset
by the sale of Premier and ServiceMaster Energy Management and the wind-down of
certain long-term care businesses. Operating income increased 20 percent to
$94.7 million. Operating margins decreased to 7.0 percent of revenue from 7.1
percent as the initiatives in landscaping, HVAC and plumbing, which are highly
seasonal, reported margins below the Company average. Operating margins
excluding these businesses increased 140 basis points reflecting both improved
margins in the individual business lines and faster growth in the Company's
higher margin businesses. Diluted earnings per share increased eight percent to
$.13 compared to $.12 last year. Net income grew 10 percent to $39.0 million, a
faster rate than earnings per share due to an increase in shares outstanding
resulting from the impact of shares issued for acquisitions. Cash income
(defined by the Company as net income with amortization expense added back)
increased 13%, with cash income per share of $.18 compared to $.16 in the prior
year.
The Consumer and Commercial Services business unit reported revenue of $743
million, an increase of 61 percent, and operating income of $87.0 million, 29
percent higher than last year. The segment's revenue growth reflected the
inclusion of LandCare USA (which was acquired on March 18, 1999) and American
Residential Services (which was acquired on April 27, 1999) for the entire
quarter. The revenue increase also reflected internal growth of approximately
eight percent and smaller rollup acquisitions. TruGreen ChemLawn, the Company's
lawn care operations, achieved strong revenue and profit growth with improved
margins, reflecting accelerated production due to favorable weather and the
benefits of modest price increases. Customer counts were slightly below last
year's level, partially reflecting a shift in focus from telemarketing to
television and direct mail, which are more effective as later spring campaigns,
as well as the impacts from the prior year drought conditions. TruGreen
LandCare, the Company's commercial landscape business, reported a significant
increase in revenue resulting from the LandCare USA acquisition and double-digit
growth from internal sources. Continued progress on integrating the LandCare USA
acquisition and increased seasonal production are expected to positively impact
operating income in future quarters. Terminix reported double-digit growth in
revenues and profits with improved margins, reflecting strong growth in initial
termite completions and renewals resulting from continued favorable reception to
new termite baiting systems. American Home Shield reported strong increases in
both revenues and profits, reflecting strong growth in higher margin customer
renewals and excellent growth in direct-to-consumer sales, partially offset by a
softness in real estate sales due to a decline in home resales. The combined
American Residential Services (ARS)/Rescue Rooter
7
operations reported a substantial increase in revenue as a result of the ARS
acquisition and strong internal growth. These operations have benefited from the
implementation of programs focused on improving pricing, project management and
efficiency levels. In addition, management has turned around several of the
largest branch locations that were having problems prior to the acquisition. The
franchise operations, ServiceMaster Clean and Merry Maids, reported strong
growth in revenues and profits due to increased license sales and strong growth
in the franchise base and in the company owned operations.
The Management Services business unit reported a three percent increase in
revenues to $470 million and a twelve percent decrease in operating income to
$16.6 million. The business was affected by large terminations which resulted in
a revenue run rate that was 2% below the 1999 year end level. The decrease in
profits reflects the temporary costs to unwind these contracts as well as
startup costs from a large new contract with a for-profit hospital chain. The
unit also incurred investments in expanding new outsourcing initiatives.
The Company launched WeServeHomes.com in Dallas at the end of the quarter and is
currently offering all of its residential services over the Internet to
customers in the area. In the following quarters, it is expected that the
Company will: (i) expand the functionality of the technology, (ii) pursue
additional target markets, and (iii) expand its relationships with third party
providers.
Cost of services rendered and products sold increased 21 percent, due primarily
to general business growth and acquisitions, but decreased as a percentage of
revenue to 80.6 percent from 80.7 percent in 1999. The landscaping, HVAC and
plumbing initiatives have significantly affected this comparison because their
cost of services as a percentage of revenue is higher than the average for the
enterprise. Excluding these initiatives, cost of services rendered and products
sold decreased as a percentage of revenue to 79.4 percent from 80.3 percent in
1999. This decrease primarily reflects the changing mix of the business, as
TruGreen ChemLawn and Terminix increase in size in relationship to the overall
business of the Company. The TruGreen ChemLawn and Terminix businesses generally
operate at higher gross margin levels than the rest of the business, but also
incur somewhat higher selling and administrative expenses as a percentage of
revenues.
Selling and administrative expenses increased 22 percent, due to general
business growth and acquisitions, and increased as a percentage of revenue to
12.4 percent from 12.3 percent in 1999. The platform initiatives noted above
have lower selling and administrative expenses, as a percentage of revenue, than
the Company average.
Interest expense increased from the prior year, primarily due to increased debt
levels associated with acquisitions. The tax provision reflects a higher
effective tax rate compared to last year, primarily due to the non-deductibility
of goodwill from acquisitions completed in 1999.
8
FINANCIAL POSITION
Net cash provided from operations of $21 million was significantly higher than
the first quarter level in 1999. There are two unusual tax items in the cash
flow statements: (i) a $22 million tax refund realized in the first quarter of
2000 and (ii) the payment of 1998 taxes in the first quarter of 1999.
Eliminating these items, cash used for operations was $1 million, an improvement
of $20 million over last year reflecting higher levels of cash income and lower
working capital usage. The cash flows reflect improving receivables management
in both TruGreen LandCare and ARS, as well as higher prepayments in TruGreen
ChemLawn. Due to the seasonality of the lawn care, landscape and pest control
operating cycles, the Company's working capital needs are the highest during the
first quarter. Management believes that funds generated from operations and
other existing resources will continue to be adequate to satisfy ongoing working
capital needs of the Company.
Accounts and notes receivable decreased from year end levels, reflecting good
collections and improved days sales outstanding at several companies.
Inventories increased over year end levels as a result of normal seasonal
build-ups in the lawn care business.
Prepaids and other assets have increased from year end reflecting the
seasonality in the lawn care business and the increased volume of warranty
contracts written at American Home Shield. The lawn care operation defers
certain marketing costs that are incurred during the first quarter, but are
directly associated with revenues realized in subsequent quarters of the current
year. These costs are then amortized over the balance of the current lawn care
production season, as the related revenues are recognized. Deferred revenues
also grew significantly, reflecting increases in customer prepayments for lawn
care services.
Property and equipment increased over year end due to general business growth.
Capital expenditures grew, reflecting general business growth and recurring
capital needs. The Company has no material capital commitments at this time.
Intangible assets increased $34 million from year end, reflecting the effect of
acquisitions, primarily in the lawn care, landscape and pest control businesses.
Accrued liabilities decreased from year end, primarily due to the timing of
interest payments and certain other payables. Debt levels increased due to the
seasonal nature of the Company's operating cash flows combined with the effects
of acquisitions, property additions, dividends and share repurchases. The
Company is party to a number of long-term debt agreements which require it to
maintain compliance with certain financial covenants, including limitations on
indebtedness, restricted payments, fixed charge coverage ratios, and net worth.
The Company is in compliance with the covenants related to these debt
agreements.
In April 2000, the Company completed a senior unsecured debt offering of $250
million, 8.45 percent notes priced to yield 8.505 percent due April 15, 2005.
The net proceeds were used to repay a portion of the Company's borrowings under
its revolving bank credit facility, thereby, reducing the Company's exposure to
short term interest rate fluctuations.
9
Total shareholders' equity was $1.2 billion at March 31, 2000 and December 31,
1999, reflecting good earnings growth offset by cash dividends and treasury
share repurchases. Cash dividends paid directly to shareholders totaled $28
million or $.09 per share. In the quarter, the Company repurchased $51 million
of shares under the repurchase program announced last year. The Board of
Directors approved $150 million of share repurchases in 2000.
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 AND COMMERCIAL
SERVICES BUSINESSES, LABOR SHORTAGES, THE ENTRY OF ADDITIONAL COMPETITORS IN ANY
OF THE MARKETS SERVED BY THE COMPANY, CONSOLIDATION OF HOSPITALS IN THE
HEALTHCARE MARKET, THE CONDITION OF THE U.S. ECONOMY, AND OTHER FACTORS LISTED
FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
10
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In the ordinary course of conducting its business activities, ServiceMaster
becomes involved in judicial and administrative proceedings which involve both
private parties and governmental authorities.
RAY D. MARTIN V. SERVICEMASTER. In June 1996, Ray D. Martin, a former salesman
employed by ServiceMaster's Management Services unit, filed a lawsuit in the
State Court of Fulton County, Georgia (Civ. Action File No. 96VS114677J), which
as originally filed contended that the Company had not paid him the full amount
of commission due to him on a sale in which he was involved. In the course of
the pre-trial proceedings, the trial court entered a default judgement against
the Company (thereby leaving under the court's orders only the question of
damages to be considered at the trial). On September 13, 1999, the jury awarded
the plaintiff compensatory damages of approximately $1 million and on September
14, 1999, a jury awarded the plaintiff punitive damages and fees of $135
million. On September 29, 1999, the trial court entered final judgement for the
plaintiff on the basis of these verdicts in a total amount of $136,259,418. On
October 14, 1999, the Company filed a motion for judgement notwithstanding the
verdict or, in the alternative, for a new trial. A hearing on this motion was
held on March 9, 2000. On May 11, 2000, the trial court conditionally reduced
compensatory damages to $461,440 and the punitive damage award to $45 million.
Mr. Martin has 15 days to decide whether to accept or reject the reduction. If
he rejects the reduction, the court will hold a new trial on damages. If Mr.
Martin accepts the reduced award, ServiceMaster believes that the award of $45
million in punitive damages is not supportable by the facts of the case or by
applicable state law and that the judgement will be reversed by an appellate
court. Under Georgia law, a judgement accrues interest at the rate of 12% per
annum. The Company continues to not be able to reasonably estimate the ultimate
outcome of this case, and accordingly, minimal expense has been recorded. In the
event that the adverse judgement is sustained after all appeals (which is not
anticipated by the Company), it would be likely that the Company's results of
operations for a particular year may be materially adversely affected. However,
the Company believes, based on advice from legal counsel, that the ultimate
outcome of this litigation is not expected to have a material adverse effect on
the Company's financial condition or results of operations.
11
ITEM 6(A): EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------
1 Distribution Agreement dated April 18, 2000
for Medium- Term Notes, Series A.
4.1 Form of 8.45% Note due April 15, 2005
with principal sum of $250 million.
4.2 First Supplemental Indenture dated as of April 4,
2000 among The ServiceMaster Company and the Harris
Trust and Savings Bank as Trustee.
23 Consent of Arthur Andersen LLP
12