FINANCIAL HIGHLIGHTS
For 31,years ended December 31,
(In thousands, except per share data) 2000 1999 Change
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
OPERATING RESULTS:
Customer level revenue (1)........................................ $ 7,677,000 $7,335,000 + 5%
Operating revenue ................................................ 5,970,615 5,703,535 + 5%
Operating income ................................................. 416,899 383,174 + 9%
OPERATING INCOME BEFORE NET NON-RECURRING ITEMS(3)................ 416,899 468,674 - 11%
Net income ....................................................... 173,827 173,563 --
PROFORMA NET INCOME BEFORE NET NON-RECURRING
items and assuming the change in accounting
principle is applied retroactively(2),(3)........................ 184,988 219,637 - 16%
Per share: (4)
Diluted as reported........................................ $ 0.57 $ 0.55 + 4%
PRO FORMA DILUTED BEFORE NET NON-RECURRING ITEMS AND
assuming the change in accounting principle is applied
retroactively(2),(3)..................................... $ 0.61 $ 0.70 - 13%
Cash dividends per share ................................ $ 0.38 $ 0.36 + 6%
FINANCIAL POSITION:
Total assets ..................................................... $ 3,967,668 $3,870,215
Long-term debt ................................................... 1,756,757 1,697,582
Shareholders' equity.............................................. 1,161,588 1,205,716
SHARE PRICE RANGE :
(Traded on the New York Stock Exchange under the symbol SVM)
High price........................................................ $ 14.94 $ 22.00
Low price......................................................... $ 8.25 $ 10.13
Closing price..................................................... $ 11.50 $ 12.31
(1) Customer level revenue represents the combined revenues of the Company's
direct operations and the estimated revenues of its various independently
licensed franchisees.
(2) In 2000, the Company changed its method of accounting for revenue from its
termite baiting contracts. The cumulative effect of this accounting change
as of January 1, 2000, was $11.1 million ($18.9 million pretax). The impact
of adopting the new accounting method compared to the previous methodology
was not material in 2000. The pro forma impact in 1999 was a reduction of
$0.02 per diluted share.
(3) In 1999, the Company realized an after-tax gain of $30 million ($50.1
million pretax) relating to the sales of its Premier automotive business
and its remaining 15 percent interest in ServiceMaster Energy Management,
and recorded a one-time after-tax charge of $81 million ($135.6 million
pretax) relating to its Diversified Health Services business.
(4) Diluted earnings per share are calculated based on 305,518 shares in
2000 and 314,406 shares in 1999.
1
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(ALL SHARE AND PER SHARE DATA REFLECT THE THREE-FOR-TWO
SHARE SPLIT IN AUGUST 1998)
2000 COMPARED WITH 1999
Revenues in 2000 exceeded $6 billion, an increase of 6%. Revenue from
continuing operations, excluding the impact from sold or discontinued
operations, increased 10%. This growth reflects tuck-in acquisitions, the full
year impact of the LandCare and American Residential Services acquisitions, and
to a lesser extent internal growth. Operating income before the non-recurring
unusual items recorded in the prior year remained relatively flat at $467
million. Operating income margins decreased to 7.7 percent of revenues from 8.2
percent in 1999. The costs related to the WeServeHomes.com internet initiative
reduced the growth in operating income by three percent and accounted for about
20 basis points of the decrease in operating margins. These costs have been
allocated to the Company's partner, Kleiner Perkins, and are included in net
minority interest income below the operating income line. The remaining 20 basis
point decrease in operating margins primarily reflects the impact of
significantly lower operating margins at TruGreen LandCare, the commercial
landscape operations. Diluted earnings per share before non-recurring items
decreased 6 percent to $.68, compared to $.72 last year. Net income on this same
basis decreased 8% to $207 million from $225 million in 1999.
In the second quarter of 1999, the Company realized an after-tax gain of $30
million relating to the sale of certain non-core businesses and the Company
recorded a one-time after-tax charge of $81 million relating to its Diversified
Health Services business. These items reduced net income from ongoing operations
by $51 million ($85.5 million pre tax), as a result, the Company reported net
income of $174 million, with diluted earnings per share of $.55 for 1999.
The Consumer and Commercial Services business unit reported revenue of $3.7
billion, an increase of 18 percent. Net income decreased one percent to $187
million reflecting double-digit profit increases at most of the companies offset
by lower profits at TruGreen LandCare. TruGreen LandCare reported strong
double-digit growth in revenue reflecting solid internal growth, one additional
quarter of revenue from the LandCare USA acquisition completed in March last
year, and smaller regional acquisitions. Profits, however declined significantly
due to the slower than anticipated integration of the landscape platform
initiative and higher labor and other costs. Although significant progress has
been made installing new financial and management system, the process of
bringing over 100 separate business units into one company has taken longer than
anticipated. This unit has experienced operational issues in five of the fifteen
regions it serves and has addressed these issues by strengthening the management
infrastructure in these regions. TruGreen ChemLawn, the Company's lawn care
operations, reported good revenue and profit growth, reflecting the benefits of
price increases and acquisitions, partially offset by other volume challenges.
Terminix achieved solid revenue growth and a double-digit increase in profit,
reflecting solid increases in new termite contracts, strong growth in contract
renewals, productivity improvements and strong overhead controls. American Home
Shield reported solid revenue and profit growth, reflecting strong growth in
higher margin customer renewals and direct-to-consumer sales. The combined
American Residential Services (ARS)/Rescue Rooter operations reported
significant increases in revenues and profits, reflecting internal growth in
Rescue Rooter and an additional four months of operations from the ARS
acquisition (which closed in late April last year). The integration of ARS has
continued in line with expectations and management has made significant progress
in improving the financial condition, controls and employee morale at many of
the ARS branch locations that were performing poorly at the time of the
acquisition. Progress continues to be made in fulfilling the service needs of
American Home Shield customers through ARS, with a threefold increase in
completed service transactions during 2000. The franchise operations,
ServiceMaster Clean and Merry Maids, achieved solid revenue increases and strong
profit growth, reflecting strong growth in company-owned operations and
productivity improvements.
The Management Services business unit reported revenue growth of one percent
to over $1.9 billion and two percent decrease in net income to $49 million.
Included in this segment's results is a $3.5 million (after-tax) non-recurring
benefit from the resolution of a foreign license agreement. The decrease in
profits reflects the loss of contracts, costs to unwind these contracts as well
as start-up costs from a large new contract with a for-profit hospital. The
Company also continues to invest in the Site Services outsourcing initiative and
is encouraged by its progress.
Other Operations include primarily Employer Services, the professional
employee organization; WeServeHomes.com, the Company's internet initiative; the
Company's headquarters operations; and certain non-core businesses that have
been sold or discontinued. Net profits before non-recurring items decreased from
1999, reflecting increased interest costs and higher parent level expenses.
On a consolidated basis, costs of services rendered and products sold
increased 5 percent, primarily due to general business growth and acquisitions.
Cost of services decreased as a percentage of revenue to 77.8 percent from 78.2
percent in 1999. This decrease primarily reflects the changing mix of the
businesses as TruGreen ChemLawn and Terminix continue to 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 13 percent due to general
business growth and acquisitions, and increased as a percentage of revenue to
14.5 percent from 13.6 percent in 1999. This increase as a percentage of revenue
is attributable to the changing mix of the Company noted above.
Interest expense increased from the prior year, primarily due to increased
debt levels associated with acquisitions and share repurchases. Minority
interest income includes $15 million of costs related to the Company's
WeServeHomes.com internet initiative which have been allocated to the Company's
partner,
2
Kleiner Perkins Caufield & Byers. The tax provision, before non-recurring items,
reflects a higher effective tax rate compared to 1999, primarily due to the
non-deductibility of goodwill from acquisitions completed in 1999.
In January 2000, the Company announced the formation and initial funding of
WeServeHomes.com, a separate Internet company that offers comprehensive on-line
solutions for the consumer market by providing home services, products, and
information. ServiceMaster owns 84 percent of WeServeHomes.com through the
contribution of its 1-800-WE-SERVE call center and the assets of its Internet
business. In addition, ServiceMaster supports the new company through intensive
co-branding efforts, access to its customer base and third-party contractor
relationships, fulfillment support, and licensing the use of certain trademarks.
Kleiner Perkins Caufield & Byers (Kleiner Perkins), one of the nation's most
respected and successful venture capital firms, contributed $15 million and
holds a 16 percent ownership interest with warrants to purchase an additional
$11.5 million in stock at the same price. The initial investment by Kleiner
Perkins is helping fund site design and development, infrastructure support and
promotional expenditures. In addition, expenses in 2000 associated with
WeServeHomes.com were allocated to Kleiner Perkins up to the amount of their
investment.
As more fully described in the notes to the consolidated financial statements,
a lawsuit is currently pending in Atlanta, Georgia wherein the plaintiff, a
former salesman, claimed that the Company had not paid him the full amount of
commission due to him on a sale in which he was involved. In September 1999, the
jury awarded the plaintiff compensatory damages and fees of approximately $1
million and punitive damages of $135 million. In October 1999, the Company filed
a motion for judgement notwithstanding the verdict or in the alternative, for a
new trial. On June 1, 2000 the trial court entered a new judgement in the amount
of $461,440 in compensatory damages and $45 million in punitive damages, as well
as amounts for attorney fees an interest. The Company filed a notice of appeal
that same day. On June 13, 2000, Mr. Martin filed a notice of cross-appeal.
Because the trial court clerk is still in the process of preparing the record,
the appeal has not yet been docketed in the court of appeals, and the clerk does
not expect to finish preparation of the record before January or February of
2001. Accordingly, it is unlikely that the appeal will be fully briefed and
argued in the court of appeals before the summer of 2001. ServiceMaster believes
that the award of $45 million in punitive damages is not supported 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 existing judgment is sustained, or the
original judgment is reinstated (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.
1999 COMPARED WITH 1998
Revenues increased 21 percent to $5.7 billion, reflecting strong growth from
acquisitions and increases in base operations. Approximately six percent of the
revenue increase resulted from internal growth and small tuck-in acquisitions in
established businesses, while the newer initiatives, including landscaping,
plumbing, and heating/air conditioning services, provided 21 percent of the
growth. This growth was partially offset by the sale of Premier and
ServiceMaster Energy Management and the wind-down of the Home Health Care
business. Operating income before non-recurring items increased 18 percent over
the prior year. Margins decreased to 8.2 percent of revenue from 8.4 percent in
1998, resulting from a shift in business mix as the new initiatives in
landscaping, heating/air conditioning, and plumbing represented a higher portion
of revenue. The Company expects to realize significant margin improvements in
these businesses as they become integrated. Operating margins excluding these
operations increased 10 basis points even though a severe drought in the
Mid-Atlantic and Northeast regions of the country in 1999 reduced margins in
TruGreen ChemLawn, the Company's largest operating unit. Diluted earnings per
share before non-recurring items increased 13 percent to $.72, compared with
$.64 last year. Net income on this same basis grew 18% to $225 million from $190
million in 1998. Net income grew at a faster rate than earnings per share due to
an increase in shares outstanding, resulting from shares issued for acquisitions
and the Company's equity offering in May 1998.
The Consumer and Commercial Services business unit achieved a 53 percent
increase in revenues to $3.1 billion, reflecting solid growth in established
businesses, as well as contributions from the Company's landscaping, heating/air
conditioning, and plumbing initiatives. Net income increased nine percent to
$188 million, reflecting profit increases at all of the companies except
TruGreen. TruGreen reported a substantial increase in revenues and profits
comparable to last year, reflecting the impact of severe weather conditions on
the lawn care operations partially offset by increases from the landscape
initiative. TruGreen ChemLawn, the Company's lawn care operations, reported
modest revenue growth but lower profits due to the effects of the extreme
drought in the Northeast and the Mid-Atlantic regions of the country. Solid
revenue growth in commercial accounts helped support the weaker growth in
residential lawn care services resulting from the unfavorable summer weather
conditions over the last two years. Through the acquisitions of LandCare USA and
other smaller businesses, the Company has become the largest provider of
commercial landscape services in the country. Over 20 percent of the Consumer
and Commercial Services segment's revenue growth came from this new initiative.
TruGreen LandCare, the Company's landscape operations, achieved significant
increases through acquisitions but also realized strong double-digit internal
growth. Terminix achieved strong growth in revenues and profits, resulting from
increases in termite completions and renewals, improved branch efficiencies, and
the successful integration of acquisitions. Growth in new termite customers
reflects a continued strong demand for termite baiting systems. American Home
Shield achieved double-digit growth in revenues and profits, reflecting
increases in warranty contracts sold through all distribution channels. In
addition, a greater percentage of its revenues was derived from customer
renewals, which carry higher margins
3
and retention rates. The combined Rescue Rooter and American Residential
Services operations reported strong growth in revenues and profits. American
Residential Services, which was acquired in April 1999, provides comprehensive
maintenance, repair and replacement services for heating, ventilation and air
conditioning (HVAC), plumbing, electrical and other systems, and major
appliances in homes and commercial buildings. This acquisition establishes the
Company as one of the country's leading providers of these services and also
complements the Company's established plumbing business. In addition, it
significantly expands the Company's service offerings on a nationwide basis and
provides added support for American Home Shield. Both the HVAC and plumbing
operations achieved good internal growth and productivity gains. The franchise
operations, ServiceMaster Clean and Merry Maids, achieved solid increases in
revenues and profits despite an extremely tight labor market, with continued
growth of Company-owned operations, increased license sales, and productivity
improvements.
The traditional Management Services business reported revenues of $1.9 billion
and net income of $50 million. Revenues and net income both increased three
percent, reflecting the benefit of overhead efficiency gains realized throughout
the business units. The traditional Healthcare market reported a modest decrease
in revenues and profits consistent with last year. The Company achieved solid
revenue and profit increases in both the Business & Industry and Education
markets, reflecting increased volume and lower overhead spending. The base of
annualized revenue from continuing operations grew two percent for the year,
which reflected a strong sales year and an increased number of contracts served.
Net income before non-recurring items in Other Operations improved from 1998,
reflecting favorable interest allocations and gains on financial investments
partially offset by reduced profitability in the Diversified Health Services
operations.
On a consolidated basis, cost of services rendered and products sold increased
21 percent, primarily due to acquisitions and general business growth. Cost of
services rendered and products sold increased as a percentage of revenues to
78.2 percent in 1999 from 77.9 percent in 1998. The landscaping, heating/air
conditioning and plumbing acquisitions have significantly affected this
comparison because their cost of services as a percentage of revenues is higher
than the average for the enterprise. Excluding these platforms, cost of services
rendered and products sold decreased as a percentage of revenues to 76.0 percent
from 77.7 percent in 1998. 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.
Consolidated selling and administrative expenses increased 20 percent over 1998
and, as a percentage of revenues, decreased to 13.6 percent in 1999 from 13.7
percent in 1998. The platform initiatives noted above have lower selling and
administrative expenses, as a percentage of revenues, than the Company average.
Interest expense increased over 1998, primarily due to increased debt levels
associated with acquisitions. The increase in interest and investment income
primarily resulted from additional gains realized on financial investments. The
tax provision reflects a higher effective tax rate compared with 1998, primarily
due to the non-deductibility of goodwill related to several large acquisitions
completed in 1999.
2000 FINANCIAL POSITION
Net cash provided from operations of $413 million was significantly higher
than last year. There are two unusual tax timing items in the cash flow
statements: (i) a $39 million tax refund realized in 2000 and (ii) the payment
of 1998 taxes in the first quarter of 1999. Excluding these unusual tax items
cash from operations increased 12 percent to $374 million reflecting higher
levels of cash income and lower working capital needs, especially in the
platform initiatives.
Cash and marketable securities totaled approximately $120 million at December
31, 2000. Debt levels increased, reflecting a significant amount of share
repurchases combined with the effects of acquisitions, capital spending, and
dividends. The Company is a 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 is in compliance with the covenants related to these debt
agreements. Management believes that funds generated from operations and other
existing financial resources will continue to be adequate to satisfy the ongoing
operating needs of the Company. In addition, the Company had $XXX million of
unused commitment on its revolving bank facility at December 31, 2000.
In April 2000, the Company completed a senior unsecured debt offering of $250
million, 8.45 percent notes priced to yield 8.505 percent and 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.
Accounts receivable increased reflecting general business growth and
acquisitions. Property and equipment remained at approximately the same level as
last year reflecting general business growth and a reduced level of technology
projects. The Company does not have any material capital commitments at this
time.
The Company completed a number of acquisitions in 2000, which included
primarily lawn care, HVAC/plumbing and pest control companies. Total
acquisitions were approximately $235 million and were primarily financed through
cash payments and seller financial debt.
Accounts payable and other accrued liabilities decreased due to the timing of
various payments and amounts relating to wind-down transaction accruals.
Deferred revenues increased primarily as a result of strong growth in warranty
contracts written at American Home Shield and increases in customer prepayments
for pest control services.
Total shareholders' equity decreased slightly to $1.2 billion, reflecting
shareholders dividends and share repurchases, partially offset by current year
net income. In July 2000, the Company announced that its Board of Directors
authorized the repurchase of $350 million in shares over time in the open market
or in privately negotiated transactions. This authorization replaces the
Company's previous authorization of $150 million announced in October 1999.
Approximately $173 million in shares were repurchased in 2000.
4
Cash dividends paid directly to shareholders totaled $116 million, or $.38 per
share, a six percent per share increase over the prior year. The total amount of
cash distributions increased three percent from the prior year, reflecting this
per share increase offset by a reduced level of shares outstanding resulting
from shares repurchased.
While the Company has historically increased its dividend payment, the timing
and amount of future dividend increases will be at the discretion of the Board
of Directors and will depend on, among other things, the Company's corporate
finance objectives and cash requirements. The Company has announced its intended
cash dividends for 2001 of $.XX per share.
Earnings before interest, taxes, depreciation and amortization (EBITDA) is a
commonly-used supplemental measurement of a company's ability to generate cash
flow and is used by many of the Company's investors and lenders. Management
believes that EBITDA is another measure that demonstrates the exceptional
cash-generating abilities of the Company's businesses. EBITDA in 2000 of $661
million, grew 5 percent and exceeded net income by over $450 million or 180%.
EBITDA should not be considered an alternative to net income in measuring the
Company's performance or be used as an exclusive measure of cash flow, because
it does not consider the impact of working capital growth, capital expenditures,
debt principal reductions or other sources and uses of cash which are disclosed
in the Consolidated Statements of Cash Flows.
THE COMPANY NOTES THAT STATEMENTS THAT LOOK FORWARD IN TIME, WHICH INCLUDE
EVERYTHING OTHER THAN HISTORICAL INFORMATION, INVOLVE RISKS AND UNCERTAINTIES
THAT AFFECT THE COMPANY'S RESULTS OF OPERATIONS. FACTORS WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN A
FORWARD-LOOKING STATEMENT INCLUDE THE FOLLOWING (AMONG OTHERS): WEATHER
CONDITIONS ADVERSE TO CERTAIN OF THE COMPANY'S CONSUMER AND COMMERCIAL 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 COST AND LENGTH OF TIME TO INTEGRATE ACQUIRED BUSINESSES; UNEXPECTED
CHANGES IN OPERATING COSTS; 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.
5
ELEVEN YEAR FINANCIAL SUMMARY
All share and per share data reflect the three-for-two share splits in 1998,
1997, 1996, 1993 and 1992.
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
OPERATING RESULTS
Operating revenue ............................................ $ 5,970,615 $ 5,703,535 $.4,724,119
Cost of services rendered and products sold................... 4,696,467 4,459,035 3,679,612
Selling and administrative expenses .......................... 857,249 775,826 648,085
Other, net (2) .............................................. - 85,500 -
----------- ----------- -----------
Operating income ............................................ 416,899 383,174 396,422
----------- ----------- -----------
OPERATING INCOME BEFORE NET NON-RECURRING ITEMS(2)............ 416,899 468,674 396,422
Percentage of operating revenue .......................... 7.0% 8.2% 8.4%
Non-operating expense (income)............................... 98,592 86,981 77,644
Provision for income taxes (3) ............................... 133,319 122,630 128,786
Cumulative effect of change in accounting principle, net(1)... 11,161 - -
----------- ----------- -----------
Net income (pro forma corporate form prior to 1998)(3) ....... $ 173,827 $ 173,563 $ 189,992
=========== =========== ===========
PRO FORMA NET INCOME BEFORE NET NON-RECURRING ITEMS
and assuming the change in accounting principle is
applied retroactively(1),(2)................................ $ 184,988 $ 219,637 $ 186,021
=========== =========== ===========
Percentage of operating revenue ......................... 3.1% 3.9% 3.9%
Earnings per share (pro forma corporate form prior to 1998):(3)
Basic...................................................... $ 0.57 $ 0.56 $ 0.66
Diluted as REPORTED........................................ $ 0.57 $ 0.55 $ 0.64
PRO FORMA DILUTED BEFORE NET NON-RECURRING ITEMS AND
assuming the change in accounting principle is
applied retroactively (1),(2)............................ $ 0.61 $ 0.70 $ 0.63
Shares used to compute basic net income per share.............. 302,487 307,637 289,315
Shares used to compute diluted net income per share............ 305,518 314,406 298,887
Shares outstanding, net of treasury shares..................... 298,474 307,530 298,030
Cash distributions per share................................... $ 0.38 $ 0.36 $ 0.33
Share price range:
High price................................................. $ 14.94 $ 22.00 $ 25.50
Low price.................................................. $ 8.25 $ 10.13 $ 16.00
FINANCIAL POSITION (at year end):
Current assets................................................. $ 984,759 $ 959,238 $ 670,202
Current liabilities............................................ 833,414 845,804 753,697
Working capital................................................ 151,345 113,434 (83,495)
(1) In the above presentation, the operating results in 1999 and 1990 through
1993 have been stated to exclude the impact of non-recurring items. In 1999, the
Company realized an after-tax gain of $30 million ($50.1 million pretax)
relating to the sale of its Premier automotive business and its remaining 15
percent interest in ServiceMaster Energy Management, and recorded a one-time
after-tax charge of $81 million ($135.6 million pretax) relating to its
Diversified Health Services business. In the years 1990 through 1993, the
Company recorded gains on issuance of subsidiary shares, restructuring charges,
and a change in accounting for post-retirement benefits.
6
ELEVEN YEAR FINANCIAL SUMMARY
1997 1996 1995 1994
----------------------------------------------------------
OPERATING RESULTS
Operating revenue $ 3,961,502 $ 3,458,328 $ 3,202,504 $ 2,985,207
Cost of services rendered and products sold 3,058,160 2,681,008 2,499,700 2,356,435
Selling and administrative expenses 559,409 482,102 450,937 414,746
Other, net (2) -- -- -- --
----------- ----------- ----------- -----------
Operating income 343,933 295,218 251,867 214,026
----------- ----------- ----------- -----------
OPERATING INCOME BEFORE NET NON-RECURRING ITEMS(2) 343,933 295,218 251,867 214,026
Percentage of operating revenue 8.7% 8.5% 7.9% 7.2%
Non-operating expense (income) 69,654 42,821 74,260 71,388
Provision for income taxes (3) 110,809 101,968 71,753 57,626
Cumulative effect of change in accounting principle net(1) -- -- -- --
----------- ----------- ----------- -----------
Net income (pro forma corporate form prior to 1998)(3) . $ 163,470 $ 150,429 $ 105,854 $ 85,012
=========== =========== =========== ===========
PRO FORMA NET INCOME BEFORE NET NON-RECURRING ITEMS
AND ASSUMING THE CHANGE IN ACCOUNTING PRINCIPLE IS
APPLIED RETROACTIVELY(1),(2) $ 161,506 $ 150,429 $ 105,854 $ 85,012
=========== =========== =========== ===========
Percentage of operating revenue 4.1% 4.3% 3.3% 2.8%
Earnings per share (pro forma corporate form prior to 1998):(3)
Basic $ 0.57 $ 0.47 $ 0.41 $ 0.33
Diluted as REPORTED $ 0.55 $ 0.46 $ 0.39 $ 0.32
PRO FORMA DILUTED BEFORE NET NON-RECURRING ITEMS
and assuming the change in accounting principle is
applied retroactively (1),(2) $ 0.54 $ 0.46 $ 0.39 $ 0.32
Shares used to compute basic net income per share 285,944 317,381 260,382 255,650
Shares used to compute diluted net income per share 299,640 330,429 273,203 266,892
Shares outstanding, net of treasury shares 279,944 320,396 321,341 256,419
Cash distributions per share $ 0.31 $ 0.29 $ 0.28 $ 0.27
Share price range:
High price $ 19.67 $ 11.83 $ 9.00 $ 8.41
Low price $ 10.92 $ 8.61 $ 6.37 $ 6.37
FINANCIAL POSITION (at year end):
Current assets $ 594,084 $ 499,334 $ 393,239 $ 331,045
Current liabilities 558,177 425,552 372,930 304,395
Working capital 35,907 73,782 20,309 26,650
1993 1992 1991 1990
-----------------------------------------------------------
OPERATING RESULTS
Operating revenue $ 2,758,859 $ 2,488,854 $ 2,109,941 $ 1,825,750
Cost of services rendered and products sold 2,192,684 2,021,010 1,762,700 1,545,527
Selling and administrative expenses 393,131 326,477 225,814 177,941
Other, net (2) -- 78,935 -- 6,500
----------- ----------- ----------- -----------
Operating income 173,044 62,432 121,427 95,782
----------- ----------- ----------- -----------
OPERATING INCOME BEFORE NET NON-RECURRING ITEMS(2) 173,044 141,367 121,427 102,282
Percentage of operating revenue 6.3% 5.7% 5.8% 5.6%
Non-operating expense (income) 24,952 (68,367) 34,020 10,398
Provision for income taxes (3) 58,829 52,843 35,312 34,495
Cumulative effect of change in accounting principle net(1) 4,470 -- -- --
----------- ----------- ----------- -----------
Net income (pro forma corporate form prior to 1998)(3) . $ 88,263 $ 73,486 $ 52,095 $ 50,889
=========== =========== =========== ===========
PRO FORMA NET INCOME BEFORE NET NON-RECURRING ITEMS
AND ASSUMING THE CHANGE IN ACCOUNTING PRINCIPLE IS
APPLIED RETROACTIVELY(1),(2) $ 70,264 $ 56,994 $ 48,614 $ 42,843
=========== =========== =========== ===========
Percentage of operating revenue 2.5% 2.3% 2.3% 2.3%
Earnings per share (pro forma corporate form prior to 1998):(3)
Basic $ 0.35 $ 0.29 $ 0.22 $ 0.21
Diluted as REPORTED $ 0.34 $ 0.28 $ 0.21 $ 0.21
PRO FORMA DILUTED BEFORE NET NON-RECURRING ITEMS
and assuming the change in accounting principle is
applied retroactively (1),(2) $ 0.27 $ 0.22 $ 0.20 $ 0.18
Shares used to compute basic net income per share 253,919 249,828 240,276 239,730
Shares used to compute diluted net income per share 266,231 262,941 252,579 243,038
Shares outstanding, net of treasury shares 257,901 255,386 243,527 242,939
Cash distributions per share $ 0.26 $ 0.26 $ 0.25 $ 0.24
Share price range:
High price $ 9.19 $ 5.90 $ 5.13 $ 3.13
Low price $ 5.22 $ 4.35 $ 2.89 $ 2.60
FINANCIAL POSITION (at year end):
Current assets $ 291,325 $ 257,542 $ 217,517 $ 237,262
Current liabilities 244,552 206,755 157,458 158,046
Working capital 46,773 50,787 60,059 79,216
(2) 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 Partnership's partners. 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 before 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 that year.
The pro forma provision for income taxes has been calculated assuming that the
Company's effective tax rate had been approximately 40 percent of pretax
earnings. Actual historical net income per share as a partnership for the three
prior periods was as follows:
1997 (a) 1996 1995
-------- -------- --------
Net Income $264,076 $245,140 $172,019
EPS: Basic $.92 $.77 $.66
Diluted $.89 $.75 $.64
(a) Including the one-time tax gain related to reincorporation, net income was
$329,076 and basic and diluted earnings per share were $1.15 and $1.10,
respectively.
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION: The consolidated financial statements include the
accounts of ServiceMaster and its majority-owned subsidiary partnerships and
corporations, collectively referred to as the Company. Intercompany transactions
and balances have been eliminated in consolidation. Certain immaterial 1999 and
1998 amounts have been reclassified to conform with the 2000 presentation.
The preparation of the consolidated financial statements requires management
to make certain estimates and assumptions required under generally accepted
accounting principles which may differ from the actual results. The more
significant areas requiring the use of management estimates relate to the
allowance for receivables, accruals for self-insured retention limits related to
medical, workers compensation, auto and general liability insurance, the
possible outcomes of outstanding litigation, and the useful lives for
depreciation and amortization expense.
REVENUES: Revenues from lawn care, pest control, heating/air conditioning and
plumbing services are recognized as the services are provided. Revenues from
landscaping services are recognized based upon agreed monthly contract payments
or when services are performed for non-contractual arrangements. Revenues from
the Company's commercial installation contracts, primarily relating to HVAC and
landscape, are recognized on the percentage of completion method in the ratio
that total incurred costs bear to total estimated costs.
Fees from home warranty and termite baiting contracts are recognized as
revenues over the life of the contract while the service costs are expensed as
incurred. Franchised services revenues (which in aggregate represent less than
two percent of consolidated totals) consist of initial franchise fees received
from the sales of licenses, sales of products to franchisees, and continuing
monthly fees based upon franchise revenue.
Revenues from management services are recognized as services are rendered and
consist of contract fees, which reflect the total price of such services. Where
the Company act as principal and manages people who are employees of the
facility, the contract fee is recognized as revenue by the Company and payroll
costs for such employees are included in "Cost of services rendered and products
sold" in the Consolidated Statements of Income. Receivables from the facilities
are reflected in the Consolidated Statements of Financial Position at the net
amount due, after deducting from the contract price all amounts chargeable to
the Company.
Revenues from the professional employer organization are recognized as the
services are rendered. Consistent with industry practice, revenues include the
gross amount billed to clients, which includes payroll and other direct costs.
INVENTORY VALUATION: Inventories are valued at the lower of cost (first-in,
first-out basis) or market. Inventory costs include material, labor, factory
overhead and related handling costs. Raw materials represent less than three
percent of the inventory value at December 31, 2000. The remaining inventory is
finished goods to be used on the customers' premises or sold to franchisees.
DEPRECIATION AND AMORTIZATION: Buildings and equipment used in the business are
stated at cost and depreciated over their estimated useful lives using the
straight-line method for financial reporting purposes. The estimated useful
lives for building and improvements range from 10 to 40 years, while the
estimated useful lives for equipment range from three to 10 years. Intangible
assets consist primarily of trade names ($250 million) and goodwill ($2.3
billion). These assets are amortized on a straight-line basis over their
estimated useful lives, which are predominately 40 years. Long-lived assets,
including fixed assets and intangible assets, are periodically reviewed to
determine recoverability by comparing their carrying values to the undiscounted
future cash flows expected to be realized from their use. No recovery problems
have been indicated by these comparisons. Based on the reviews, when the
undiscounted future cash flows are less than the carrying amount of the asset,
an impairment loss is recognized based on the asset's fair value, and the
carrying amount of the asset is reduced accordingly.
INCOME TAXES: The Company accounts for income taxes under the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
Statement uses an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. Deferred income taxes are provided to reflect the differences between
the tax bases of assets and liabilities and their reported amounts in the
financial statements.
EARNINGS PER SHARE: Basic earnings per share is based on the weighted-average
number of common shares outstanding during the year. Shares potentially issuable
under options have been considered outstanding for purposes of the diluted
earnings per share calculation.
CHANGE IN ACCOUNTING PRINCIPLE: In December 1999, the Staff of the Securities
and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101 "Revenue
Recognition," which provides additional guidance in applying generally accepted
accounting principles for revenue recognition in financial statements. The
Company's interpretation of the requirements of SAB No. 101 resulted in changes
to the Company's accounting policies for revenue recognition on sales of its
termite baiting contracts. Prior to the adoption of SAB No. 101, the Company
recognized approximately 80% of the termite baiting revenue at the time of the
sale and installation of the baiting station, while the remaining 20% of the
revenue was recognized over the life of the contract as follow-up inspections of
the stations were performed. As a result of SAB No. 101, the Company's policy is
to recognize revenue over the life of the contract. In addition, sales
commissions and other direct contract acquisition costs are deferred and
amortized on a straight-line basis over the life of the contract.
8
The change in method of accounting for termite baiting contracts is effective
January 1, 2000. The cumulative effect of the accounting change, as of January
1, 2000, resulted in a non-cash charge that reduced net income for the year
ended December 31, 2000 by $11.1 million, ($18.9 million pretax). The cumulative
after-tax effect on both basic and diluted earnings per share was a reduction of
$.04. The impact of adopting the new accounting method compared to the previous
methodology was not material in 2000. The pro forma impact in 1999 and 1998 of
this change was to reduce diluted earnings per share by $0.02 and $0.01,
respectively.
NEWLY ISSUED ACCOUNTING STATEMENTS AND POSITIONS: In 1998, the Financial
Accounting Standards Board issued 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
adopted this Statement in January 2001 as required by the amended Statement.
Adoption of this Statement did not have a material impact on the Company's
financial statements.
9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF
THE SERVICEMASTER COMPANY
We have audited the accompanying consolidated statements of financial position
of THE SERVICEMASTER COMPANY (organized under the laws of the State of Delaware,
formerly ServiceMaster Limited Partnership) AND SUBSIDIARIES, as of December 31,
2000 and 1999, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
ServiceMaster Company and Subsidiaries as of December 31, 2000 and 1999, and the
consolidated results of operations and cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
As explained in the Summary of Significant Accounting Policies section of the
Notes to the Consolidated Financial Statements, effective January 1, 2000, the
Company changed certain of its accounting principles for revenue recognition as
a result of the adoption of Staff Accounting Bulletin No. 101 "Revenue
Recognition."
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 23, 2001
10
STATEMENTS OF INCOME
(In thousands, except per share data)
Years Ended December 31,
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
OPERATING Revenue............................................. $ 5,970,615 $ 5,703,535 $ 4,724,119
OPERATING COSTS AND EXPENSES:
Cost of services rendered and products sold................... 4,696,467 4,459,035 3,679,612
Selling and administrative expenses........................... 857,249 775,826 648,085
Other, net (1)................................................ - 85,500 --
------------ ------------ ------------
Total operating costs and expenses............................ 5,553,716 5,320,361 4,327,697
----------- ------------ ------------
OPERATING Income.............................................. 416,899 383,174 396,422
NON-OPERATING EXPENSE (INCOME):
Interest expense.............................................. 136,831 108,955 92,945
Interest and investment income................................ (25,002) (21,974) (15,301)
Minority interest income...................................... (13,237) - -
----------- ----------- ------------
INCOME BEFORE INCOME Taxes.................................... 318,307 296,193 318,778
Provision for income taxes ................................... 133,319 122,630 128,786
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING Principle............................. 184,988 173,563 189,992
Cumulative effect of change in accounting
for revenue recognition on termite baiting contracts (1).. 11,161 - -
------------ ------------- ------------
NET INCOME (1)................................................ $ 173,827 $ 173,563 $ 189,992
============ ============= ============
PER SHARE (1), (2)
Basic earnings per share, before cumulative effect of
change in accounting principle...................... $ 0.61 $ 0.56 $ 0.66
Cumulative effect of changing revenue recognition on
termite baiting contracts (0.04) - -
------------ ------------ ------------
BASIC EARNINGS PER share................................... $ 0.57 $ 0.56 $ 0.66
============ ============ ============
Diluted earnings per share, before cumulative effect of
change in accounting principle......................... $ 0.61 $ 0.55 $ 0.64
Cumulative effect of changing revenue recognition on
termite baiting contracts (0.04) - -
------------ ------------ ------------
DILUTED EARNINGS PER share................................. $ 0.57 $ 0.55 $ 0.64
============ ============ ============
(1) In 2000, the Company changed its method of accounting for revenue from
its termite baiting contracts. The cumulative effect of this accounting
change as of January 1, 2000, was $11.1 million, ($18.9 million pretax).
The impact of adopting the new accounting method compared to the previous
methodology was not material in 2000. The pro forma impact in 1999 and 1998
of this change was to reduce diluted earnings per share by $0.02 and $0.01,
respectively.
In 1999, the Company realized an after-tax gain of $30 million ($50.1
million pretax) relating to the sales of its Premier automotive business
and its remaining 15 percent interest in ServiceMaster Energy Management,
and recorded a one-time after-tax charge of $81 million ($135.6 million
pretax) relating to its Diversified Health Services business. Excluding the
impact of the above items, net income and earnings per share were as
follows:
2000 1999 1998
--------------- -------------- -----------
Pro forma net income before net non-recurring items and
assuming the change in accounting principle is applied
retroactively............................................... $ 184,988 $ 219,637 $ 186,021
Pro forma diluted earnings per share before net non-recurring items and
assuming the change in accounting principle is applied
retroactively............................................... $ 0.61 $ 0.70 $ 0 .63
========= ========= =========
(2) Basic earnings per share is calculated based on 302,487 shares in 2000,
307,637 shares in 1999, and 289,315 shares in 1998, while diluted earnings
per share is calculated based on 305,518 shares in 2000, and 314,406 shares
in 1999 and 298,887 shares in 1998. All share and per share data reflect
the three-for-two share split in August 1998.
See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statements.
11
STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS)
As of December 31,
2000 1999
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 44,386 $ 59,834
Marketable securities ..................................................... 56,531 54,376
Receivables, less allowances of $37,970 in 2000 and $39,011 in 1999 556,941 558,842
Inventories................................................................ 88,152 82,861
Prepaid expenses and other assets......................................... 168,403 140,690
Deferred taxes and tax receivables......................................... 70,346 62,635
--------- ---------
Total current assets................................................... 984,759 959,238
--------- ---------
PROPERTY, PLANT, AND EQUIPMENT, AT COST:
Land and buildings......................................................... 73,248 71,972
Equipment................................................................. 608,321 587,838
--------- ---------
681,569 659,810
Less: accumulated depreciation........................................... 375,585 341,712
--------- ---------
Net property, plant, and equipment....................................... 305,984 318,098
--------- ---------
OTHER ASSETS:
Intangible assets, primarily trade names and goodwill,
less accumulated amortization of $422,899 in 2000 and $343,316 in 1999 2,521,633 2,461,389
Notes receivable, long-term securities, and other assets.................. 155,292 131,490
---------- ----------
Total Assets........................................................ $ 3,967,668 $ 3,870,215
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable......................................................... $ 147,788 $ 160,237
Accrued liabilities:
Payroll and related expenses............................................ 100,651 99,910
Insurance and related expenses.......................................... 54,990 53,412
Income taxes payable.................................................... 1,235 6,479
Other................................................................... 142,144 196,529
Deferred revenues.......................................................... 325,246 257,521
Current portion of long-term debt.......................................... 61,360 71,716
---------- -----------
Total current liabilities.............................................. 833,414 845,804
---------- -----------
LONG-TERM Debt........................................................... 1,756,757 1,697,582
DEFERRED TAX Liability..................................................... 115,150 19,800
OTHER LONG-TERM Obligations................................................ 100,759 101,313
COMMITMENTS AND CONTINGENCIES (see Notes)
SHAREHOLDERS' EQUITY:
Common stock $0.01 par value, authorized 1 billion shares; issued and
outstanding of 298,474 shares in 2000 and 307,530 shares in 1999....... 2,985 3,075
Additional paid-in capital............................................... 1,030,399 1,033,568
Retained earnings.......................................................... 301,207 241,701
Accumulated other comprehensive income .................................... (2,832) (1,821)
Restricted stock........................................................... (1,829) (2,577)
Treasury stock, at cost................................................... (168,342) (68,230)
---------- ----------
Total shareholders' equity........................................... 1,161,588 1,205,716
----------- ----------
Total Liabilities and Shareholders' Equity............................. $ 3,967,668 $ 3,870,215
=========== ============
12
STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT JANUARY 1................................... $ 59,834 $ 66,400 $ 64,876
CASH FLOWS FROM OPERATIONS:
NET Income............................................................... 173,827 173,563 189,992
Adjustments to reconcile net income to
net cash provided from operations:
Cumulative effect of accounting change............................. 11,161 - -
Depreciation ...................................................... 78,108 67,382 50,644
Amortization....................................................... 79,583 71,062 53,961
Non-recurring items, net........................................... - 85,500 -
Deferred 1998 tax payment.......................................... - (78,500) 78,500
Tax refund from 1999 payments...................................... 39,000 - -
Deferred income tax expense........................................ 54,218 20,300 36,400
Change in working capital, net of acquisitions:
Receivables........................................................ (14,210) (49,130) (46,205)
Inventories and other current assets............................... (4,754) (32,368) (2,360)
Accounts payable................................................... (13,241) (2,703) 18,475
Deferred revenues.................................................. 19,140 28,026 22,033
Accrued liabilities................................................ (20,564) (25,022) 2,472
Other, net........................................................... (1,244) (1,535) 1,627
---------- ---------- ----------
NET CASH PROVIDED FROM Operations........................................ 401,024 256,575 405,539
------- ------- -------
MEMO: NET CASH PROVIDED FROM OPERATIONS EXCLUDING UNUSUAL TAX ITEMS 362,024 335,075 327,039
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions................................................... (76,603) (88,754) (75,297)
Sale of equipment and other assets................................... 14,720 8,021 6,941
Business acquisitions, net of cash acquired.......................... (152,306) (510,512) (222,452)
Proceeds from sale of businesses..................................... 44,784 70,344 45,893
Net purchases of investment securities............................... (6,940) (12,474) 11,011)
Notes receivable and financial investments........................... (5,401) (19,357) (10,645)
Payments to sellers of acquired businesses........................... (21,546) (12,664) (10,271)
-------- -------- --------
NET CASH USED FOR INVESTING Activities................................... (203,292) (565,396) (276,842)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings, net...................................................... 571,339 1,263,427 310,190
Payment of borrowings and other obligations.......................... (547,247) (776,183) (564,448)
Proceeds from stock offering......................................... - - 208,561
Shareholders' dividends.............................................. (114,321) (111,702) (75,152)
Purchase of ServiceMaster stock...................................... (135,633) (93,046) (18,310)
Proceeds from employee share plans................................... 12,730 19,259 12,638
Other................................................................ (48) 500 (652)
---------- ---------- ----------
NET CASH PROVIDED FROM (USED FOR) FINANCING Activities................... (213,180) 302,255 (127,173)
---------- ---------- ----------
CASH INCREASE (DECREASE) DURING THE Year................................. (15,448) (6,566) 1,524
CASH AND CASH EQUIVALENTS AT DECEMBER 31................................. $ 44,386 $ 59,834 $ 66,400
========== =========== ==========
See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial
Statements.
13
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
ADDITIONAL ACCUMULATED
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 .......................... $ 2,799 $ 513,148 $ 65,000 $ 5,343
============================================================
Net income 1998 ..................................... 189,992
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment ................ (485)
Foreign currency translation ($640 tax expense) .. (947)
------------------------------------------------------------
Total comprehensive income .......................... 189,992 (1,432)
Shareholder dividends ............................... (75,152)
Shares issued in public offering (11,400 shares) .... 114 208,447
Shares issued under option, debentures,
grant plans and other (2,514 shares) ............. 25 9,403 13,507 887
Treasury shares purchased and related costs
(888 shares) ..................................... (9)
Shares issued for acquisitions (5,059 shares) ...... 51 57,126
------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 .......................... $ 2,980 $ 788,124 $ 179,840 $ 3,911
============================================================
Net income 1999 ..................................... 173,563
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment ................ (3,730)
Foreign currency translation ($1,424 tax expense) (2,002)
-------------------------------------------------------------
Total comprehensive income .......................... 173,563 (5,732) 167,831
Shareholder dividends ............................... (111,702) (111,702)
Shares issued under option, debentures,
grant plans and other (1,979 shares) ............. 20 5,076 13,630 806
Treasury shares purchased and related costs
(7,049 shares) ................................... (70) (92,976) (93,046)
Shares issued for acquisitions (14,570 shares) ..... 145 240,368 26,102 266,615
BALANCE, DECEMBER 31, 1999 .......................... $ 3,075 $ 1,033,568 $ 241,701 $ (1,821)
Net income 2000 ..................................... 173,827 173,827
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment ................ 2,845 2,845
Foreign currency translation ($2,741 tax expense) (3,856) (3,856)
Total comprehensive income .......................... 173,827 (1,011) 172,816
Shareholder dividends ............................... (114,321) (114,321)
Shares issued under option, debentures,
grant plans and other (2,099 shares) ............. 21 (1,655) 18,866 748
Treasury shares purchased and related costs
(12,637 shares) .................................. (126) (135,507) (135,633)
Shares issued for acquisitions (1,482 shares) ...... 15 (1,514) 16,529 15,030
BALANCE, DECEMBER 31, 2000 .......................... $ 2,985 $ 1,030,399 $ 301,207 $ (2,832)
TREASURY RESTRICTED TOTAL
STOCK STOCK EQUITY
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 .......................... ($ 57,582) ($ 4,270) $ 524,438
==========================================
Net income 1998 ..................................... 189,992
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment ................ (485)
Foreign currency translation ($640 tax expense) .. (947)
------------------------------------------
Total comprehensive income .......................... 188,560
Shareholder dividends ............................... (75,152)
Shares issued in public offering (11,400 shares) .... 208,561
Shares issued under option, debentures,
grant plans and other (2,514 shares) ............. 23,822
Treasury shares purchased and related costs
(888 shares) ..................................... (18,301) (18,310)
Shares issued for acquisitions (5,059 shares) ...... 47,390 104,567
------------------------------------------
BALANCE, DECEMBER 31, 1998 .......................... ($ 14,986) ($ 3,383) $ 956,486
==========================================
Net income 1999 ..................................... 173,563
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment ................ (3,730)
Foreign currency translation ($1,424 tax expense) (2,002)
------------------------------------------
Total comprehensive income ..........................
Shareholder dividends ...............................
Shares issued under option, debentures,
grant plans and other (1,979 shares) ............. 19,532
Treasury shares purchased and related costs
(7,049 shares) ...................................
Shares issued for acquisitions (14,570 shares) .....
-----------
BALANCE, DECEMBER 31, 1999 .......................... $ (68,230) $ (2,577) $ 1,205,716
===========
Net income 2000 .....................................
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment ................
Foreign currency translation ($2,741 tax expense)
-----------
Total comprehensive income ..........................
Shareholder dividends ...............................
Shares issued under option, debentures,
grant plans and other (2,099 shares) ............. 17,980
Treasury shares purchased and related costs
(12,637 shares) ..................................
Shares issued for acquisitions (1,482 shares) ......
-----------
BALANCE, DECEMBER 31, 2000 .......................... $ (168,342) $ (1,829) $ 1,161,588
===========
All share data reflect the three-for-two share split in August 1998.
Disclosure of reclassification amounts (net of tax) relating to comprehensive
income (loss):
2000 1999 1998
---- ---- ----
Unrealized holding gains arising in $ 12,100 $ $ 3,295
period 555
Less: gains realized (9,255)
------
(4,285) (3,780)
Net unrealized gains (losses) on $ $ $
==== === =
securities 2,845 (3,730) (485)
===== ======= =====
See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statement
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS UNIT REPORTING
The business of the Company is primarily conducted through four operating
segments: TruGreen, Terminix, Home Maintenance and Improvement, and Management
Services. In accordance with Statement of Financial Accounting Standards No. 131
(SFAS 131), the Company's reportable segments are strategic business units that
offer different services. The TruGreen unit provides residential and commercial
lawn care and landscaping services through the TruGreen ChemLawn and TruGreen
LandCare companies. The Terminix unit provides domestic termite and pest control
services to residential and commercial customers. The Home Maintenance and
Improvement unit includes American Residential Services, American Home Shield,
ServiceMaster Clean and Merry Maids. This unit provides heating, ventilation and
air conditioning, plumbing, and cleaning services to residential and commercial
customers as well as home warranties to consumers. The Management Services unit
provides a variety of supportive management services to health care, education
and commercial accounts.
The Other Operations unit includes entities that are managed separately from
the four major units and aggregated together in accordance with SFAS 131 due to
their size or developmental nature. This unit includes the Company's European
pest control operations; 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; WeServeHomes.com, a joint venture
offering home services through the Internet; the Company's headquarters
operations; and certain non-core businesses that have been sold or discontinued.
Information regarding the accounting policies used by the Company is described
in the Summary of Significant Accounting Policies. The Company derives
substantially all of its revenues from customers in the United States with less
than five percent generated in foreign markets. Operating expenses of the
business units consist primarily of direct costs.
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.
15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
% %
2000 Change 1999 Change 1998
-----------------------------------------------------------------------------
Operating Revenue:
TruGreen $ 1,563,704 12% $ 1,393,917 56% $ 892,639
Terminix 733,654 9% 675,813 11% 607,583
Home Maintenance and Improvement 1,211,674 34% 903,970 115% 419,658
Management Services 1,906,138 0% 1,897,299 3% 1,838,268
Other Operations 555,445 N/A 832,536 N/A 965,971
---------------- ------------- ------------- -------------- --------------
TOTAL OPERATING REVENUE $ 5,970,615 5% $ 5,703,535 21% $ 4,724,119
================ ============= ============= ============== ==============
OPERATING INCOME:
TruGreen $ 172,615 -25% $ 228,665 19% $ 192,548
Terminix 90,594 12% 80,933 16% 69,809
Home Maintenance and Improvement 105,588 19% 88,393 66% 53,131
Management Services 66,806 -15% 78,178 3% 75,583
Other Operations (18,704) N/A (92,995) N/A 5,351
OTHER OPERATIONS EXCLUDING NON-RECURRING ITEMS(1) (18,704) N/A (7,495) N/A 5,351
---------------- ------------- ------------- -------------- --------------
TOTAL OPERATING INCOME $ 416,899 9% $ 383,174 -3% $ 396,422
================ ============= ============= ============== ==============
TOTAL OPERATING INCOME, EXCLUDING
NON-RECURRING ITEMS(1) $ 416,899 -11% $ 468,674 18% $ 396,422
CAPITAL EMPLOYED:
TruGreen $ 1,475,655 3% $ 1,430,255 67% $ 857,311
Terminix 525,913 -1% 532,476 12% 477,389
Home Maintenance and Improvement 624,421 6% 590,303 123% 264,968
Management Services 98,829 -19% 121,978 -2% 123,946
Other Operations 254,887 -15% 300,002 -17% 360,654
---------------- ------------- ------------- -------------- --------------
TOTAL CAPITAL EMPLOYED $ 2,979,705 0% $ 2,975,014 43% $ 2,084,268
================ ============= ============= ============== ==============
IDENTIFIABLE ASSETS:
TruGreen $ 1,581,523 0% $ 1,584,460 63% $ 974,921
Terminix 694,968 6% 655,790 11% 588,523
Home Maintenance and Improvement 980,861 10% 891,971 84% 484,393
Management Services 222,117 -1% 224,694 -6% 237,924
Other Operations 488,199 -5% 513,300 -18% 629,090
---------------- ------------- ------------- -------------- --------------
TOTAL IDENTIFIABLE ASSETS $ 3,967,668 3% $ 3,870,215 33% $ 2,914,851
================ ============= ============= ============== ==============
DEPRECIATION AND AMORTIZATION EXPENSE:
TruGreen $ 64,505 26% $ 51,222 65% $ 30,954
Terminix 28,392 5% 27,045 17% 23,037
Home Maintenance and Improvement 29,116 27% 22,867 108% 10,979
Management Services 21,222 9% 19,424 -12% 22,023
Other Operations 14,456 -19% 17,886 2% 17,612
---------------- ------------- ------------- -------------- --------------
TOTAL DEPRECIATION AND AMORTIZATION EXPENSE $ 157,691 14% $ 138,444 32% $ 104,605
================ ============= ============= ============== ==============
CAPITAL EXPENDITURES:
TruGreen $ 28,056 18% $ 23,732 88% $ 12,608
Terminix 7,084 9% 6,483 -2% 6,607
Home Maintenance and Improvement 14,522 -9% 15,993 3% 15,551
Management Services 15,345 -49% 30,370 2% 29,757
Other Operations 11,596 -5% 12,176 13% 10,774
---------------- ------------- ------------- -------------- --------------
TOTAL CAPITAL EXPENDITURES $ 76,603 -14% $ 88,754 18% $ 75,297
================ ============= ============= ============== ==============
(1) In 1999, the Other Operations segment included the $50 million pretax gain
related to the sales of the Premier automotive business and the Company's
remaining 15 percent interest in ServiceMaster Energy Management, and the
$136 million pretax charge related to the Diversified Health Services
operation, which included write-downs for the impairment of assets. In
1998, the Other Operations segment included a $38 million pretax gain
related to the formation of a strategic venture which acquired 85% of the
assets of ServiceMaster Energy Management and pretax charges totaling $38
million 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.
16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 a federal corporate tax on ServiceMaster operations beginning
in 1998. In anticipation of this change, the shareholders approved a tax-free
plan of reorganization to return to corporate form. The ServiceMaster Company
was created as part of this plan and it became the successor entity through
which the public invests in ServiceMaster. At the time of reincorporation, each
outstanding limited partnership share was converted into one share of
ServiceMaster par value common stock. No federal income taxes were imposed on
the shareholders as a result of the reincorporation.
INCOME TAXES
The reconciliation of income tax computed at the U.S. federal statutory tax rate
to the Company's effective income tax rate is as follows:
2000 1999 1998
---- ---- ----
Tax at U.S. federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes,
net of U.S. federal benefit 4.2% 4.2% 4.4%
Non-deductible amortization 1.9% 1.5% -
Other 0.8% 0.7% 1.0%
----- ----- -----
Effective rate 41.9% 41.4% 40.4%
===== ===== =====
Income tax expense is as follows:
2000
--------------------------------------
(In thousands) CURRENT DEFERRED TOTAL
--------- ---------- ---------
U.S. federal $ 42,300 $64,200 $106,500
State and local 6,800 12,200 19,000
-------- -------- --------
$ 49,100 $76,400 $125,500
======== ======= ========
1999
--------------------------------------
(In thousands) CURRENT DEFERRED TOTAL
------- -------- -----
U.S. federal $ 76,830 $26,400 $103,230
State and local 14,000 5,400 19,400
--------- --------- --------
$ 90,830 $31,800 $122,630
======== ======= ========
1998
--------------------------------------
(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 results from timing differences in the recognition
of income and expense for income tax and financial reporting purposes. Deferred
income tax balances reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting and
income tax purposes. As a result of the reincorporation at the end of 1997, the
Company recognized a step-up in the tax basis of its intangible assets. These
assets are amortized over 15 years with the associated book assets assuming a 40
year life. Management believes that, based upon its lengthy and consistent
history of profitable operations, it is probable that its deferred tax assets
will be realized on future tax returns, primarily from the generation of future
taxable returns, primarily from the operation of future taxable income.
Significant components of the Company's deferred tax balances are as follows:
2000 1999
---- ----
(In thousands)
Deferred tax assets (liabilities):
Current:
Prepaid expenses and other $ (21,500) $ (26,700)
Accounts receivable allowance 15,100 12,900
Accrued insurance and
related expenses 22,000 24,900
Other accrued expenses (250) 33,600
---------- -----------
Total current asset 15,350 44,700
Long-Term:
Long-term assets (130,800) (43,100)
Insurance expenses 32,600 32,300
Other long-term obligations (16,950) (9,000)
---------- -----------
Total long term (liability) (115,150) (19,800)
---------- -----------
Net deferred tax asset (liability) $ (99,800) $ 24,900
========= =========
Total tax payments in 2000, net of refunds, were $38 million. In 1999 there were
$177 million of tax payments, which included $79 million for the 1998 federal
taxes that were deferred into 1999. Total tax payments in 1998 were $8 million.
17
ACQUISITIONS
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.
CURRENT YEAR
During 2000, the Company acquired many small companies, primarily in the lawn
care, heating/air conditioning and plumbing, pest control and landscaping
businesses. The aggregate fair market value of the net assets acquired was $214
million, with approximately $162 million of goodwill.
In January 2001, the Company acquired the Allied Bruce Terminix companies, the
Company's largest Terminix franchise and the fourth largest pest control company
in the United States. The total consideration consisted of an equity interest in
the Terminix subsidiary, which is exchangeable into eight million ServiceMaster
common shares and longer-term cash payments due over nine years totaling $25
million. This transaction is not expected to have a material impact on the
Company's 2001 earnings per share. PRIOR YEARS
During 1999, the Company completed two significant acquisitions. In March 1999,
the Company acquired LandCare USA (LandCare) which, when combined with the
existing landscape operations of the Company, created the largest commercial
landscaping company in the United States. In April 1999, the Company acquired
American Residential Services (ARS), establishing the Company as one of the
nation's leading providers of heating, ventilation, and air conditioning
services. The fair market values of the assets acquired less liabilities assumed
for LandCare and ARS acquisitions were $331 million and $292 million,
respectively. The excess of the consideration paid over the fair value of the
tangible assets relating to LandCare and ARS businesses was $251 million and
$225 million, respectively, which was recorded as goodwill and trade names that
are being amortized over 40 years.
As of the acquisition dates, certain members of management acquired, at fair
market value, equity interests in the landscaping operations and the heating/air
conditioning and plumbing operations. As a result of the decision to integrate
the landscape and lawn care operations, the equity interests in the landscaping
operations were repurchased in 2000 at fair market value. In early 2001, equity
interests in the combined TruGreen segment were offered for sale at fair market
value to management investors. The Company and the holders of minority interests
in the combined TruGreen business unit and in heating/air conditioning and
plumbing operations have respective options to acquire or sell the minority
interests in the future at a price to be determined based on fair market value.
The future acquisition of these minority interests will be recorded as
additional purchase cost at the time of payment.
Also during 1999, the Company acquired many smaller companies, primarily in
the landscaping, lawn care and pest control businesses. The aggregate fair
market value of the assets acquired less liabilities assumed for these purchases
was $315 million, including approximately $278 million of goodwill.
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, was one of the largest
plumbing and drain cleaning companies in America. Ruppert was one of the
Mid-Atlantic's largest commercial landscape companies. National Britannia was
the third largest pest control company in the United Kingdom. The aggregate fair
market value of the assets acquired less liabilities assumed for these
acquisitions was $143 million, which consisted almost entirely of goodwill.
During 1998, the Company acquired a number of smaller companies, primarily in
the lawn care, landscaping and pest control businesses. The aggregate fair
market value of the net assets acquired was $293 million, including
approximately $249 million of goodwill.
Supplemental cash flow information regarding the Company's acquisitions is as
follows:
(In thousands) 2000 1999 1998
---- ---- ----
Fair value of assets acquired $ 253,669 $ 1,078,105 $ 459,400
Less liabilities assumed (40,149) (140,477) (23,167)
------------ ----------- -----------
Net assets acquired $ 213,520 $ 937,628 $ 436,233
Net cash paid for acquisitions $ 152,306 $ 510,512 $ 222,452
Shares issued 15,030 $ 266,615 $ 104,567
Seller financed and assumed debt 46,184 160,501 $ 109,214
----------- ----------- ------------
Payment for acquisitions $ 213,520 $ 937,628 $ 436,233
18
DISPOSITIONS
CURRENT YEAR
In September 2000, the Company sold its interior plant care business for $44
million in cash. The transaction did not materially impact the Company's
operating results for the year. This sale represents the Company's continued
focus on the growth and investment in its core businesses.
Also in September 2000, the Company announced the sale of Diversified Health
Services, a company that manages long-term care facilities, to a company which
is owned and operated by a group of former senior managers of Diversified Health
Services. ServiceMaster has retained its ownership interest in five assisted
living facilities; however, these facilities will be operated by the new owners
of the Diversified Health Services business. The sale of Diversified Health
Services is consistent with the Company's previously announced strategy to
reduce its operational involvement in the long-term care industry. Last year,
the Company completed a strategic review and assessment of the services that
comprised the Diversified Health Services operation, considering the changes in
reimbursement and compliance policies as well as the resulting financial
difficulties of a number of its customers. Based on the review of the business
and the credit risks involved, the Company substantially reduced the scope of
the services it offered. As a result of this review, the Company recorded an
after-tax charge of $81 million in the second quarter of 1999 relating to
Diversified Health Services. The following summarizes the components of the
charge:
(AFTERTAX, IN MILLIONS)
Write-down of impaired assets,
primarily goodwill $ 51
Write-down of receivables,
loans, and investments in nursing homes 19
Provisions for losses on contractual requirements
and exit costs of certain ancillary services 11
----
Total $ 81
====
Substantially all of the reserves that were in 1999 were appropriately used in
2000 and were deemed to have been adequate. No gain or loss was realized from
the final sale transaction in 2000. The results of operations of the Diversified
Health Services business were not material to the Company's financial statements
for the periods presented.
PRIOR YEARS
On April 21, 1999, the Company sold its Premier business unit to Durr AG of
Germany for $76 million. Premier provides cleaning services for paint booths and
other related maintenance services in the automotive industry. The Company
believes that alliances or significant incremental investments would have been
required to remain competitive in this industry. The sale of Premier allowed
ServiceMaster to realize the significant appreciation in its investment and to
reinvest the proceeds in initiatives more central to the Company's core
strategies. The sale resulted in an after-tax gain of approximately $25 million
($42 million pretax).
In 1998, the Company formed a strategic venture with Texas Utilities Company for
the ownership and operation of the ServiceMaster Energy Management business. The
venture acquired all of the assets of ServiceMaster Energy Management and was
owned 85 percent by Texas Utilities and 15 percent by ServiceMaster. This
transaction resulted in a pretax gain of $38 million. During 1999, the Company
sold its remaining 15% interest in the venture, which resulted in and after-tax
gain of $5 million ($8 million pretax).
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. Consequently, in late 1998, the Company determined to
discontinue its activities in the Home Health Care business and recognized
certain impairment losses and wrote off certain accounts receivable. At the
time, the Company also established after-tax reserves of $5 million related to
the costs associated with exiting certain customer arrangements. The Company
substantially completed the exit of direct Home Health Care operations in the
first quarter of 1999, and determined that the reserve was adequate and
appropriate. The results of operations of the Home Health Care business were not
material to the Company's financial results for the periods presented.
COMMITMENTS AND CONTINGENCIES
The Company carries insurance policies on insurable risks which it believes to
be appropriate. The Company generally has self-insured retention limits and has
obtained fully insured layers of coverage above such self-insured retention
limits. Accruals for self insurance losses are made based on the Company's
claims experience and actuarial assumptions. The Company has certain liabilities
with respect to existing or potential claims, lawsuits, and other proceedings.
The Company accrues for these liabilities when it is probable that future costs
will be incurred and such costs can be reasonably estimated.
19
In June 1996, Ray D. Martin, a former salesman employed by ServiceMaster
Management Services, filed a lawsuit in the State Court of Fulton County,
Georgia. The complaint as originally filed, contended that the Company had not
paid him the full amount of commissions due to him. In the course of the
pre-trial proceedings, the trial court entered a default judgment against the
Company, leaving the question of damages to be considered at the trial. In
September 1999, the jury awarded the plaintiff compensatory damages and fees of
approximately $1 million and punitive damages of $135 million. In October 1999,
the Company filed a motion for judgment notwithstanding the verdict or, in the
alternative, for a new trial. On June 1, 2000, the trial court entered a new
judgment in the amount of $461,440 in compensatory damages and $45 million in
punitive damages, as well as amounts for attorney fees and interest. The Company
filed a notice of appeal that same day. On June 13, 2000, Mr. Martin filed a
notice of cross-appeal. The Company expects that the appeal will be fully
briefed and argued in the court of appeals in May of 2001. The Company believes
that the award of $45 million in punitive damages is not supported by the facts
of the case or by applicable state law and that the judgment will be reversed by
the court of appeals. Under Georgia law, a judgment accrues interest at the rate
of 12 percent per annum. The Company continues to be unable to reasonably
estimate the ultimate outcome of this case, and accordingly, minimal expense has
been recorded. In the event that the existing judgment is sustained, or the
original judgment is reinstated 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.
EMPLOYEE BENEFIT PLANS
Contributions to qualified profit sharing plans were made in the amount of
$11.7 million in 2000, $11.6 million in 1999 and $9.9 million in 1998. Under the
Employee Share Purchase Plan, the Company contributed $1.2 million in 2000, $1.3
million in 1999 and $1.2 million in 1998. These funds defrayed part of the cost
of the shares purchased by employees.
20
LONG-TERM DEBT
Long-term debt includes the following:
(In thousands) 2000 1999
--------------------------------------------------------------------------------------------------
Notes Payable:
10.57%, maturing in 2000..................................$ -- $ 9,000
8.38%, maturing in 2001.................................. 10,000 20,000
10.81%, maturing in 2001 - 2002........................... 36,700 55,000
6.65%, maturing in 2002 - 2004........................... 70,000 70,000
8.45%, maturing in 2005................................. 250,000 -
7.40%, maturing in 2006.................................. 125,000 125,000
6.95%, maturing in 2007.................................. 100,000 100,000
7.88%, maturing in 2009.................................. 250,000 250,000
7.10%, maturing in 2018.................................. 149,000 150,000
7.45%, maturing in 2027.................................. 200,000 200,000
7.25%, maturing in 2038.................................. 150,000 150,000
Revolving credit facilities ................................ 248,615 382,500
International borrowings.................................... 90,979 93,048
Other....................................................... 137,823 164,750
Less current portion......................................... (61,360) (71,716)
------------- --------------
Total long-term debt........................................$ 1,756,757 $ 1,697,582
============ =============
The Company is party to a number of long-term debt agreements that 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.
Since August 1997, ServiceMaster has issued $1.1 billion of senior unsecured
debt securities pursuant to registration statements filed with the Securities
and Exchange Commission.
As of year-end, ServiceMaster had $550 million of senior unsecured debt
securities and equity interests available for issuance under an effective shelf
registration statement.
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 $520 million of unused commitment as of
December 31, 2000.
The Company is exposed to interest rate fluctuations on its floating rate
debt. As of year-end, the Company had approximately $215 million in floating
rate borrowings after considering swap agreements. 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. In May 1999,
the Company entered into a three-year interest rate swap agreement to fix the
interest rate on $175 million of floating rate bank borrowings at an average
rate of 5.88 percent. As of December 2000, $50 million of this swap was unwound,
leaving the remaining $125 million at an average rate of 5.97 percent.
Cash interest payments were $131 million in 2000, $97 million in 1999, and $88
million in 1998. Average rates paid on the revolving credit facility were 6.6
percent in 2000, 5.5 percent in 1999, and 5.9 percent in 1998. Future scheduled
long-term debt payments are $61.4 million in 2001 (average rate of 5.4 percent),
$62.6 million in 2002 (average rate of 6.1 percent), $51.9 million in 2003
(average rate of 4.8 percent), $47.0 million in 2004 (average rate of 5.3
percent) and $259.5 million in 2005 (average rate of 8.3 percent). The $248.6
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 2005.
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 $1.5 billion.
Future long-term noncancelable operating lease payments are $59.8 million in
2001, $49.6 million in 2002, $41.0 million in 2003, $32.3 million in 2004, $22.8
million in 2005 and $60.8 million thereafter. Rental expense for 2000, 1999, and
1998 was $160.3 million, $137.9 million, and $103.8 million, respectively.
The Company maintains operating lease facilities with banks totaling $95
million which provide 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, 2000, approximately $79 million was
funded under these facilities.
CASH AND MARKETABLE SECURITIES
Marketable securities held at December 31, 2000 and 1999, with maturities 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. The
Company's investments consist primarily of publicly-traded debt and common
equity securities.
21
As of December 31, 2000, the aggregate market value of the Company's short- and
long-term investments in debt and equity securities was $126.4 million and the
aggregate cost basis was $114.8 million.
Interest and dividend income received on cash and marketable securities was
$10.0 million, $9.0 million and $8.9 million, in 2000, 1999, and 1998,
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 reports all changes in equity during a period, except those
resulting from investment by owners and distribution to owners. Comprehensive
Income, which encompasses net income, unrealized gains on marketable securities
and the effect of foreign currency translation, is disclosed in the Statement of
Shareholders' Equity.
(in thousands) 2000 1999 1998
---- ---- ----
Unrealized holding gains
arising in period $20,578 $1,026 $5,529
Tax expense 8,478 471 2,234
----- ------ ------
Net of tax amount $12,100 $ 555 $3,295
======= ====== ======
Gains realized $15,713 $7,239 $6,342
Tax expense 6,458 2,954 2,562
------- ------ ------
Net of tax amount $9,255 $4,285 $3,780
======= ====== ======
Accumulated comprehensive income (loss) included the following components as of
December 31:
(in thousands) 2000 1999 1998
---- ---- ----
Unrealized gain on
securities $ 6,868 $ 4,023 $7,753
Foreign currency
translation (9,700) (5,844) (3,842)
------------ -------- --------
Total $ (2,832) $ (1,821) $3,911
=========== =========== ========
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 are 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. The shares
underlying the obligations and rights relating to the employee option plans also
were converted from partnership shares to corporate stock on a one-for-one
basis.
The Company has an effective shelf registration statement to issue shares of
common stock in connection with future, unidentified acquisitions. This filing
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 small strategic acquisitions. There were
approximately 4.7 million shares available at year end.
As of December 31, 2000, there were 39.9 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. 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.
22
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 2000 1999 1998
---- ---- ----
data)
Net Income:
As reported $173,827 $173,563 $189,992
SFAS 123 pro forma $165,657 $166,601 $185,555
Net Income Per Share:
Basic: As reported $.57 $.56 $.66
SFAS 123 pro forma $.55 $.54 $.64
Diluted: As reported $.57 $.55 $.64
SFAS 123 pro forma $.54 $.53 $.62
The SFAS 123 pro forma net income reflects options granted in 2000, 1999 and
1998. Had awards been granted in earlier years that carried similar vesting
requirements as the current options, then the pro forma compensation expense
presented would have been higher. Consequently, the pro forma disclosure is not
indicative of pro forma results which may be expected in future years.
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 2000, 1999, and 1998: risk-free interest rates of 6.1 percent,
5.4 percent and 5.6 percent, respectively; volatility rates of 29 percent, 25
percent and 22 percent, respectively; distribution yields of 4.1 percent, 2.5
percent and 1.9 percent, respectively; and average expected lives of six to
seven years. The options granted to employees in 2000, 1999 and 1998 have
weighted-average fair values of $2.19, $4.15, and $5.17, 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.
23
Option and grant transactions during the last three years are summarized below:
Share Price Weighted Average Share Price
Options Range Exercise Price Grants Range
===================================================================================================================================
===================================================================================================================================
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
TRANSACTIONS DURING 1999
Granted to employees 6,599,732 $ 11.50 - 21.16 $ 15.55 -- --
Assumed in acquisitions 1,779,395 $ 6.48 - 45.79 $ 19.02 -- --
Exercised, paid, or vested (1,355,345) $ 0.73 - 18.26 $ 7.61 (248,900) $ 2.86 - 7.96
Terminated or resigned (435,069) $ 0.73 - 45.79 $ 19.32 -- --
Total exercisable, December 31, 1999 10,006,644 $ 2.24 - 45.79 $ 10.37 -- --
Total outstanding, December 31, 1999 23,501,439 $ 2.24 - 45.79 $ 12.85 713,830 $ 2.86 - 7.96
TRANSACTIONS DURING 2000
Granted to employees 4,326,164 $ 8.48 - 12.55 $ 9.71 -- --
Exercised, paid, or vested (591,517) $ 2.24 - 14.55 $ 9.31 (231,474) $ 2.86 - 7.96
Terminated or resigned (966,857) $ 2.25 - 37.61 $ 12.86 -- --
Total exercisable, December 31, 2000 11,985,121 $ 2.24 - 45.79 $ 11.57 -- --
Total outstanding, December 31, 2000 26,269,229 $ 2.24 - 45.79 $ 12.43 482,356 $ 2.86 - 7.96
===================================================================================================================================
===================================================================================================================================
Options outstanding at December 31, 2000:
Number
Range of Outstanding Remaining Weighted Average Number Exercisable Weighted Average
Exercise Prices at 12/31/00 Life Exercise Price at 12/31/00 Exercise Price
===================================================================================================================================
===================================================================================================================================
$ 2.24 - 6.44 2,052,204 3.0 years $ 5.59 2,052,204 $ 5.59
6.48 - 10.78 7,584,324 5.0 years 8.93 3,565,686 8.83
11.22 - 15.94 9,200,850 8.0 years 11.68 3,823,012 12.00
16.12 - 22.77 7,121,916 8.0 years 18.19 2,298,520 18.27
27.20 - 45.79 309,935 6.0 years 32.99 245,699 31.58
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
$ 2.24 - 45.79 26,269,229 7.0 years $ 12.43 11,985,121 $ 11.57
===================================================================================================================================
===================================================================================================================================
24
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 2000 For year ended 1999 For year ended 1998
---------------------------------------------------------- -------------------------
(In thousands, except per share data) Income Shares EPS Income Shares EPS Income Shares EPS
---------- ---------- ---------- ------------------------- ------------------ ------
BASIC EPS $ 173,827 302,487 $ 0.57 $ 173,563 307,637 $ 0.56 $ 189,992 289,315 $ 0.66
EFFECT OF DILUTIVE SECURITIES, NET OF TAX:
Options 3,031 6,769 9,391
Convertible debentures - - - - 32 181
---------- ---------- ---------- -------- ---------- --------
DILUTED EPS $ 173,827 305,518 $ 0.57 $ 173,563 314,406 $ 0.55 $ 190,024 298,887 $ 0.64
========== ========== ======= ========== ======= ====== ========= ======= ======
25
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. 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. As discussed in the "Change in Accounting Principle"
note,
the Company adopted SAB 101 effective January 1, 2000. The impact of this
accounting change on 2000 is below.
AS PREVIOUSLY REPORTED ADJUSTED TO RETROACTIVELY APPLY SAB 101
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
(Unaudited, in thousands, except per share data) 2000 1999 1998 2000 1999 1998
- -------------------------------------------------------------- ---------------------------------------------------------------------
- -------------------------------------------------------------- ---------------------------------------------------------------------
OPERATING REVENUE:
First Quarter $ 1,346,505 $ 1,115,062 $ 981,788 $ 1,340,884 $ 1,109,491 $ 976,620
Second Quarter 1,626,359 1,537,074 1,244,627 1,614,695 1,520,352 1,231,953
Third Quarter 1,586,260 1,584,225 1,273,093 1,591,484 1,588,798 1,275,026
Fourth Quarter N/A 1,467,174 1,224,611 1,423,552 1,475,157 1,230,559
---------- ---------- ---------- ---------- ---------
$ 5,703,535 $4,724,119 $ 5,970,615 $ 5,693,798 $ 4,714,158
GROSS PROFIT:
First Quarter $ 261,089 $ 215,247 $ 186,991 $ 256,068 $ 209,140 $ 182,086
Second Quarter 394,841 368,237 293,261 389,652 355,423 284,031
Third Quarter 348,407 359,885 316,718 354,013 364,818 319,371
Fourth Quarter N/A 301,131 247,537 274,415 307,742 252,355
-------- -------- -------- -------- -------
$ 1,244,500 $1,044,507 $ 1,274,148 $ 1,237,123 $ 1,037,843
NET INCOME:
First Quarter $ 39,011 $ 35,609 $ 29,270 $ 36,054 $ 31,994 $ 26,347
Second Quarter 69,371 18,035 56,404 66,315 10,449 50,904
BEFORE NON-RECURRING ITEMS 69,371 69,335 56,404 66,315 61,749 50,904
Third Quarter 47,484 66,637 56,352 50,786 69,557 57,933
Fourth Quarter N/A 53,282 47,966 31,833 56,337 50,837
------- ------- ------- ------- ------
Net income $ 173,563 $ 189,992 $ 184,988 $ 168,337 $ 186,021
BEFORE NET NON-RECURRING ITEMS $ 224,863 $189,992 $ 184,988 $ 219,637 $ 186,021
BASIC NET INCOME PER SHARE:
First Quarter $ 0.13 $ 0.12 $ 0.11 $ 0.12 $ 0.11 $ 0.10
Second Quarter 0.23 0.06 0.20 0.22 0.03 0.18
BEFORE NON-RECURRING ITEMS 0.23 0.22 0.20 0.22 0.19 0.18
Third Quarter 0.16 0.21 0.19 0.17 0.22 0.20
Fourth Quarter N/A 0.17 0.16 0.11 0.18 0.17
----- ----- ----- ----- ----
Basic net income per share $ 0.56 $ 0.66 $ 0.62 $ 0.54 $ 0.65
BEFORE NET NON-RECURRING ITEMS $ 0.73 $ 0.66 $ 0.62 $ 0.71 $ 0.65
DILUTED NET INCOME PER SHARE:
First Quarter $ 0.13 $ 0.12 $ 0.10 $ 0.12 $ 0.11 $ 0.09
Second Quarter 0.22 0.06 0.19 0.21 0.03 0.17
BEFORE NON-RECURRING ITEMS 0.22 0.22 0.19 0.21 0.19 0.17
Third Quarter 0.16 0.21 0.19 0.17 0.22 0.20
Fourth Quarter N/A 0.17 0.16 0.11 0.18 0.17
----- ----- ----- ----- ----
Diluted net income per share $ 0.55 $ 0.64 $ 0.61 $ 0.53 $ 0.63
BEFORE NET NON-RECURRING ITEMS $ 0.72 $ 0.64 $ 0.61 $ 0.70 $ 0.63
CASH DIVIDENDS PER SHARE:
First Quarter $ 0.09 $ 0.09 $ 0.08
Second Quarter 0.09 0.09 0.08
Third Quarter 0.10 0.09 0.08
Fourth Quarter 0.10 0.09 0.09
----- ----- ----
$ 0.38 $ 0.36 $ 0.33
PRICE PER SHARE:
First Quarter $14.94 - 10.69 $ 22.00 - 17.50 $ 19.63 - 16.50
Second Quarter 13.75 - 10.63 20.94 - 17.31 25.50 - 17.92
Third Quarter 11.50 - 8.38 11.50 - 8.38 24.75.- 19.75
Fourth Quarter 11.50 - 8.25 11.50 - 8.25 23.816- 16.00
All share and per share data reflect the three-for-two share split in August
1998.
26