SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998. Commission File number 1-14762 THE SERVICEMASTER COMPANY (Exact Name of Registrant as Specified in its Certificate) (Successor to ServiceMaster Limited Partnership) Delaware 36-3858106 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) One ServiceMaster Way, Downers Grove, Illinois 60515-1700 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (630) 271-1300 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class On Which Registered ------------------- ----------------------- Common Stock New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by Check Mark Whether the Registrant (1) Has Filed All Reports Required to Be Filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 During the Preceding 12 Months (or for such Shorter Period That the Registrant Was Required to File Such Reports), and (2) Has Been Subject to Such Filing Requirements for the Past 90 Days. Yes No The Aggregate Market Value of Shares Held by Non-Affiliates of the Registrant As of March 22, 1999 was $5,830,705,378. The Number of Shares Outstanding of the Registrant's Common Stock as of March 22, 1999 was 309,315,048. DOCUMENTS INCORPORATED BY REFERENCE Certain parts of the Registrant's Annual Report to Stockholders for the year ended December 31, 1998 are incorporated into Part I, Part II and Part IV of this Form 10-K. Certain parts of the Registrant's Definitive Proxy Statement for the April 30, 1999 Annual Meeting of Stockholders is incorporated into Part III of this Form 10-K. PART I Item 1. Business This annual report on Form 10-K is filed by The ServiceMaster Company, a Delaware corporation (hereinafter sometimes referred to as the "Registrant"). The Registrant and its affiliated entities are referred to as "ServiceMaster" or the "Company" or the "ServiceMaster enterprise." The Registrant is the successor to ServiceMaster Limited Partnership, a Delaware limited partnership. On December 26, 1997, by means of a statutory merger, the Registrant succeeded to and became substituted for ServiceMaster Limited Partnership as the publicly traded parent entity in the ServiceMaster enterprise. Forward-Looking Statements In accordance with the Private Securities Litigation Reform Act of 1995, the Registrant notes that statements set forth or incorporated by reference in this Annual Report on Form 10-K that look forward in time, which include everything other than historical information, involve risks and uncertainties that may affect the Company's actual results of operations. Factors that could cause actual results to differ materially include the following (among others): weather conditions adverse to certain of the Company's businesses, the entry of additional competitors in any of the markets served by the Company, labor shortages, consolidation of hospitals in the healthcare market, the condition of the United States economy, and other factors listed from time to time in the Company's filings with the Securities and Exchange Commission (including, but not limited to, its Year 2000 readiness disclosures). Principal Business Groups The Registrant is a holding company whose shares of common stock are traded on the NYSE. Through its subsidiaries, the Company is engaged in providing a variety of specialty services to homeowners and commercial facilities and supportive management services in several markets, including the healthcare market, the education market and certain segments of the business and industry market. The Company is organized into two principal operating groups: ServiceMaster Consumer Services and ServiceMaster Management Services. The Company also has a third operating group: ServiceMaster Employer Services. Each of these operating groups is headed by a limited partnership or a corporation which has its own group of operating subsidiaries. The parent companies for the principal operating groups are ServiceMaster Consumer Services Limited Partnership, which was formed in the summer of 1990, and ServiceMaster Management Services Limited Partnership, which was formed in December 1991. The parent companies for the principal operating groups are wholly owned by the Company. All subsidiaries of the operating group parent companies are wholly owned, except for Rescue Rooter L.L.C., a subsidiary of ServiceMaster Consumer Services in which senior Rescue Rooter management have acquired equity interests of not more than 10 percent in total and which are subject to certain put and call rights. Trademarks and Service Marks; Franchises The Company's trademarks and service marks are important for all elements of the Company's business, although such marks are particularly important in the advertising and franchising activities conducted by the operating subsidiaries of ServiceMaster Consumer Services L.P. Such marks are registered and are renewed at each registration expiration date. Within ServiceMaster Consumer Services, franchises are important for the TruGreen-ChemLawn, Terminix, ServiceMaster Residential/Commercial, Merry Maids, AmeriSpec and Furniture Medic businesses. Nevertheless, revenues and profits derived from franchise-related activities constitute less than 10% of the revenue and profits of the consolidated ServiceMaster enterprise. Franchise agreements made in the course of these businesses are generally for a term of five years. ServiceMaster's renewal history is that most of the franchise agreements which expire in any given year are renewed. 1 ServiceMaster Consumer Services ServiceMaster Consumer Services provides specialty services to homeowners and commercial facilities through eight companies: TruGreen L.P. ("TruGreen-ChemLawn"); The Terminix International Company L.P. ("Terminix"); ServiceMaster Residential/Commercial Services L.P. ("Res/Com"); Merry Maids L.P. ("Merry Maids"); American Home Shield Corporation ("American Home Shield" or "AHS"); AmeriSpec, Inc. ("AmeriSpec"); Furniture Medic L.P. ("Furniture Medic"); and Rescue Rooter L.L.C. ("Rescue Rooter"). Rescue Rooter was acquired by ServiceMaster Consumer Services on January 1, 1998. The services provided by these companies include: lawn care, tree and shrub services and indoor plant maintenance services under the "TruGreen", "ChemLawn" and "Barefoot" service marks; termite and pest control services under the "Terminix" service mark; residential and commercial cleaning and disaster restoration services under the "ServiceMaster" service mark; domestic housekeeping services under the "Merry Maids" service mark; home systems and appliance warranty contracts under the "American Home Shield" service mark; home inspection services under the "AmeriSpec" service mark; on-site furniture repair and restoration under the "Furniture Medic" service mark; and plumbing and drain cleaning services under the "Rescue Rooter" service mark. The services provided by the eight Consumer Services companies are part of the ServiceMaster "Quality Service Network" and are accessed by calling a single toll-free telephone number: 1-800-WE SERVE. ServiceMaster focuses on establishing relationships to provide one or more of these services on a repetitive basis to customers. Since 1986, the number of customers served by ServiceMaster Consumer Services has increased from fewer than one million domestic customers to more than 10.5 million worldwide customers. Oversight responsibility for the ServiceMaster Consumer Services businesses which are conducted in foreign markets is in the appropriate subsidiary of ServiceMaster Consumer Services L.P. TruGreen-ChemLawn. TruGreen-ChemLawn is a wholly-owned subsidiary of ServiceMaster Consumer Services L.P. As of December 31, 1998, TruGreen-ChemLawn had 230 company-owned branches and 82 franchised branches. With over 3 million residential and commercial customers, TruGreen-ChemLawn is the leading provider of lawn care services in the United States and a leading provider of commercial landscaping services. TruGreen-ChemLawn provides lawn, tree and shrub care services in Egypt, Japan, Saudi Arabia, and Turkey through licensing arrangements and in Canada through a subsidiary. TruGreen-ChemLawn also provides interior plantscape services to commercial customers. The TruGreen-ChemLawn businesses are seasonal in nature. On March 18, 1999, ServiceMaster completed the acquisition of LandCare USA, Inc., a leading provider of commercial landscaping services and tree services (including line clearing and tree care. ServiceMaster thereafter combined the LandCare USA business with the commercial landscaping business of TruGreen-ChemLawn. Terminix. Terminix is a wholly-owned subsidiary of ServiceMaster Consumer Services L.P. With over 2.5 million residential and commercial customers, Terminix, through its company-owned branches and through franchisees, is the leading provider of termite and pest control services in the United States. As of December 31, 1998, Terminix was providing these services through 256 company-owned branches in 40 states and through 240 franchised branches in 28 states. Terminix also manages the following European pest control companies, all of which are subsidiaries of TMX-Europe B.V., a wholly-owned subsidiary of the Company: Terminix Peter Cox Ltd., a leading pest control and wood preservation company in the United Kingdom and Ireland; Terminix Protekta B.V. and Riwa B.V., each a leading pest control company in the Netherlands and Belgium; Anticimex Development A.B., a holding company for the leading pest control company in Sweden and which also operates in Norway; and the Stenglein Group, a group of pest control companies in Germany. Terminix also provides termite and pest control services through licensing arrangements with local service providers in twenty-seven other countries and through subsidiaries in eight other countries. The Terminix business is seasonal in nature. Res/Com. Res/Com is a wholly-owned subsidiary of ServiceMaster Consumer Services L.P. ServiceMaster, through Res/Com, is the leading franchisor in the United States in the residential and commercial cleaning field. Res/Com provides carpet and upholstery cleaning and janitorial services, disaster restoration services and window cleaning services. As of December 31, 1998, these services were provided to approximately 1.6 million residential and commercial customers worldwide through a network of over 4,200 independent franchisees. Res/Com provides 2 its services through subsidiaries in Canada, Germany, Ireland and the United Kingdom, and through licensing arrangements with local service providers in 17 other countries. Merry Maids. Merry Maids is a wholly-owned subsidiary of ServiceMaster Consumer Services L. P. Merry Maids is the organization through which ServiceMaster provides domestic house cleaning services. With approximately 338,000 worldwide customers, Merry Maids is the leading provider of domestic house cleaning services in the United States. As of December 31, 1998, these services were provided through 27 company-owned branches in 19 states and through 829 licensees operating in all 50 states. Merry Maids also provides domestic house cleaning services through subsidiaries in Canada and the United Kingdom and through licensing arrangements with local service providers in eight other countries. American Home Shield. AHS is a wholly-owned subsidiary of ServiceMaster Consumer Services L.P. AHS is a leading provider of home systems and appliance warranty contracts ("warranty contracts") in the United States, providing homeowners with contracts covering the repair or replacement of built-in appliances, hot water heaters and electrical, plumbing, central heating and central air conditioning systems which malfunction by reason of normal wear and tear. Warranty contracts are sold through participating real estate brokerage offices in conjunction with resales of single-family residences to homeowners. AHS also sells warranty contracts directly to non-moving homeowners by renewing existing contracts and through various other distribution channels which are currently being expanded. As of December 31, 1998, AHS warranty contracts provided for services to approximately 700,000 homes through approximately 12,250 independent repair maintenance contractors in 50 states and the District of Columbia, with operations in California, Texas and Arizona accounting for 32%, 26% and 8%, respectively, of gross contracts written by AHS. AHS also provides home service warranty contracts through licensing arrangements with local service providers in three other countries. AmeriSpec. AmeriSpec is a wholly-owned subsidiary of AHS. AmeriSpec is a leading provider of home inspection services in the United States. During 1998, AmeriSpec conducted approximately 135,000 home inspections in 45 states and Canada, with operations in California, New York and Illinois accounting for 27%, 5% and 4%, respectively, of the gross number of inspections conducted through AmeriSpec. Furniture Medic. Furniture Medic is a wholly-owned subsidiary of ServiceMaster Consumer Services L.P. Furniture Medic provides on-site furniture repair and restoration services in 46 states. As of December 31, 1998, these services were provided through 530 licensees. Furniture Medic also provides its services through subsidiaries in Canada and the United Kingdom and through licensing arrangements with local service providers in two other countries. Rescue Rooter. Rescue Rooter is a subsidiary of ServiceMaster Consumer Services L.P. Rescue Rooter acquired the business and assets of Rescue Industries, Inc. on January 1, 1998. Rescue Rooter provides plumbing and drain cleaning services, and heating and air conditioning services, in 12 states through 25 company-owned branches and one franchise location. In 1998, Rescue Rooter performed services for approximately 410,000 customers. As of March 1, 1999 certain key employees of Rescue Rooter had purchased an aggregate 8.35% out of a potential 10% equity interest in Rescue Rooter pursuant to a management equity plan. Such interest is subject to reciprocal put and call rights which will become exercisable on January 1, 2003 and which will be consummated on the basis of the then fair market value of the interest. On March 23, 1999, the Registrant announced an intention to make a cash tender offer for all of the outstanding shares of American Residential Services, Inc., a leading provider of heating, ventilation and air condition services ("ARS"). See Exhibit 99.4. If ARS is acquired by ServiceMaster, its business and operations will be integrated with the business and operations of Rescue Rooter. ServiceMaster Management Services ServiceMaster pioneered the providing of supportive management services to health care facilities by instituting housekeeping management services in 1962. Since then, ServiceMaster has expanded its management services business such that it now provides a variety of supportive management services to health care, education and business and industrial customers (including the management of housekeeping, plant operations and 3 maintenance, laundry and linen, grounds and landscaping, clinical equipment maintenance, food service, energy management, and total facility management). ServiceMaster's general programs and systems free the customer to focus on its core business activity with confidence that the support services are being managed and performed in an efficient manner. ServiceMaster Management Services L.P. is organized into three divisions, each of which provides service on a nationwide basis within its market. These markets are: Healthcare Management Services; Education Management Services; and Business & Industry Management Services. The responsibility for overseeing the Management Services businesses which are conducted in foreign markets lies with ServiceMaster Management Services L.P. As of December 31, 1998, ServiceMaster was providing supportive management services to approximately 1,633 health care customers and to approximately 498 educational and commercial customers. These services were being provided in all 50 states and the District of Columbia. Outside of the United States, ServiceMaster was providing management services through subsidiaries in Canada and Japan, through an affiliated company in Mexico, and through licensing arrangements with local service providers in twenty-five other countries. ServiceMaster Healthcare Management Services. The Healthcare division of ServiceMaster Management Services L.P. is a leading provider to the health care market of supportive management services, including the management of housekeeping, plant operations and maintenance, laundry and linen, grounds and landscaping, clinical equipment maintenance, food services and total facility management. As of December 31, 1998, the Healthcare division was serving in approximately 1,877 healthcare facilities. Although the healthcare market has undergone significant consolidation in recent years, ServiceMaster believes that there continues to be potential for expansion in the healthcare market due to the trend of healthcare facilities to outsource more of their service requirements. ServiceMaster Education Management Services. The Education division of ServiceMaster Management Services L.P. is a leading provider to the education market of maintenance, custodial and grounds services. The facilities which comprise the education market include primary schools, secondary schools and school districts, private specialty schools and colleges and universities. As of December 31, 1998, ServiceMaster was serving 281 educational customers. ServiceMaster believes there is potential for expansion in the education market due to its current relatively low penetration of that market and the trend of educational facilities to consider outsourcing more of their service requirements. However, a majority of the educational facilities continue to assume direct responsibility for managing their support functions. ServiceMaster Business & Industry Management Services. The Business & Industry division of ServiceMaster Management Services L.P. is a leading provider of plant operations and maintenance, custodial and grounds management services to business and industrial customers in selected markets. Such markets include the food processing, transportation, healthcare products and automotive markets. ServiceMaster believes that there is potential for expansion in these business and industrial markets due to ServiceMaster's current low penetration of those markets, the trend of businesses to consider outsourcing more of their service requirements and the trend of governmental units to privatize parts of their operations. As of December 31, 1998, ServiceMaster was serving approximately 217 business or industrial customers. The Business and Industry division includes Premier Manufacturing Support Services Limited Partnership. Premier is a leading provider of facility management services in the automotive industry, specializing in paint booth cleaning services. As of December 31, 1998, Premier was serving 77 customer locations in ten countries. Other Businesses ServiceMaster Diversified Health Services. In 1998, ServiceMaster Diversified Health Services ("DHS") provided management services to freestanding, hospital-based and government-owned nursing homes, skilled nursing facilities, and assisted living facilities; design, development, refurbishing and construction consulting services to long-term care facilities; rehabilitation services; the sale of various medical produces and supplies; and 4 pharmacy management. In January 1999, DHS sold its hospice business in connection with the ServiceMaster Home Health Care sale described below. ServiceMaster Home Health Care. During the year 1998, ServiceMaster Home Health Care Services Inc., a wholly owned subsidiary of the Company, provided management services to hospital-based home health care agencies (as well as the direct operation of freestanding home health care agencies). On January 4, 1999, the Company announced the completion of its strategic review of its home health care business and the decision to sell its direct operations of home health care agencies and certain support operations and to discontinue its outsource and operation of home health care agencies. ServiceMaster Home Health Care Services will continue to provide consulting services to hospitals and other providers of home health care. ServiceMaster Employer Services. ServiceMaster Employer Services is one of the nation's larger professional employer organizations. It provides more than 950 clients with administrative processing of payroll, workers compensation insurance, health insurance, unemployment insurance and other employee benefits. Energy Management. During the year 1998, the Company provided energy management services through Energy Management Services, a division of ServiceMaster Management Services L.P. On January 4, 1999, the Company announced the formation of a strategic venture with Texas Utilities Company for the ownership and operation of the energy management business. The new venture acquired all the assets of ServiceMaster Energy Management and is owned 85% by Texas Utilities Company and 15% by the Company. International Operations. Consumer services and supportive management services in international markets are provided through licensing arrangements and ownership of foreign operating companies acquired by ServiceMaster. Except as noted below, these activities in Europe, Latin America and the Middle East are administered as part of the operations of ServiceMaster Management Services L.P. and ServiceMaster Consumer Services L.P., respectively. Operating arrangements and market expansion efforts in the Pacific Rim are administered by the parent company. Other Activities Supporting Departments. The Company has various departments responsible for technical, engineering, management information, planning and market services, and product and process development activities. Various administrative support departments provide personnel, public relations, administrative, education, accounting, financial and legal services. Manufacturing Division. ServiceMaster has a manufacturing division which formulates, combines and distributes supplies, products and equipment that are used internally in providing management services to customers and which are sold to licensees for use in the operation of their businesses. ServiceMaster has a small share of the market for the manufacture and distribution of cleaning equipment, chemicals and supplies. Venture Fund. ServiceMaster Venture Fund L.L.C., a subsidiary of the parent company (the "Venture Fund"), invests in emerging growth companies which show an ability to provide innovative service technologies to ServiceMaster's current and new customers. The Venture Fund is managed so as not to be intrusive to the ongoing operations of the Company's operating units. Industry Position, Competition and Customers The following information is based solely upon estimates made by the management of ServiceMaster and cannot be verified. In considering ServiceMaster's industry and competitive positions, it should be recognized that ServiceMaster competes with many other companies in the sale of its services, franchises and products and that some of these competitors are larger or have greater financial and marketing strength than ServiceMaster. The principal methods of competition employed by ServiceMaster in the Consumer Services business are name recognition, assurance of customer satisfaction and a history of providing quality services to homeowners. 5 The principal methods of competition employed by ServiceMaster in each of the operating units in the Management Services business are price, quality of service and experience in providing management services. The principal methods of competition employed by ServiceMaster in the Employer Services business are name recognition, assurance of customer satisfaction and financial strength. Consumer Services Subsidiaries of Consumer Services provide a variety of residential and commercial services under their respective names on the basis of their and ServiceMaster's reputation, the strength of their service marks, their size and financial capability, and their training and technical support services. The markets served by Terminix and TruGreen-ChemLawn are seasonal in nature. Lawn Care Services. TruGreen-ChemLawn, both directly and through franchisees, provides lawn care services to residential and commercial customers. Competition within the lawn care market is strong, coming mainly from regional and local, independently-owned firms and from homeowners who elect to care for their lawns through their own personal efforts. TruGreen-ChemLawn is the leading national lawn care company within this market. TruGreen-ChemLawn also provides indoor plant maintenance to commercial customers. Lawn care services are regulated by law in most of the states in which TruGreen-ChemLawn provides such services. These laws require licensing which is conditional on a showing of technical competence and adequate bonding and insurance. The lawn care industry is regulated at the federal level under the Federal Insecticide, Fungicide and Rodenticide Act, and lawn care companies (such as TruGreen-ChemLawn) which apply herbicides and pesticides are regulated under the Federal Environmental Pesticide Control Act of 1972. Such laws, together with a variety of state and local laws and regulations, may limit or prohibit the use of certain herbicides and pesticides, and such restrictions may adversely affect the business of TruGreen-ChemLawn. Landscaping and Tree Services. TruGreen-ChemLawn provides landscaping and tree services to commercial customers. (See page 2 for a discussion of the acquisition of LandCare USA, Inc.). The landscape and tree services industry is highly competitive. Most of TruGreen-ChemLawn's landscape services competitors are small, owner-operated companies operating in a limited geographic market but there are a few large companies operating in multiple markets. Competition in the line clearing market is characterized by a small number of large companies. The commercial tree services market is characterized by a large group of small competitors, most of which are owner-operated businesses operating in limited geographic areas and a few larger companies operating in one or more regions. Termite and Pest Control Services. The market for termite and pest control services to commercial and residential customers includes many competitors. Terminix is the leading national termite and pest control company within this market. Competition within the termite and pest control market is strong, coming mainly from regional and local, independently-owned firms throughout the United States and from one other large company which operates on a national basis. Termite and pest control services are regulated by law in most of the states in which Terminix provides such services. These laws require licensing which is conditional on a showing of technical competence and adequate bonding and insurance. The extermination industry is regulated at the federal level under the Federal Insecticide, Fungicide and Rodenticide Act, and pesticide applicators (such as Terminix) are regulated under the Federal Environmental Pesticide Control Act of 1972. Such laws, together with a variety of state and local laws and regulations, may limit or prohibit the use of certain pesticides, and such restrictions may adversely affect the business of Terminix. House Cleaning Services. The market for domestic house cleaning services is highly competitive. In urban areas the market involves numerous local companies and a few national companies. ServiceMaster believes that its share of the total potential market for such services is small and that there is significant potential for further expansion of its housecleaning business through continued internal expansion and greater penetration of the 6 housecleaning market. Through its company-owned branches and its franchisees, ServiceMaster has a small share of the market for the cleaning of residential and commercial buildings. Home Systems and Appliance Warranty Contracts. The market for home systems and appliance warranty contracts is relatively new. ServiceMaster believes that AHS maintains a favorable position in its industry due to the system developed and used by AHS for accepting, dispatching and fulfilling service calls from homeowners through a nationwide network of independent contractors. AHS also has a computerized information system developed and owned by AHS, and an electronic digital voice communication system through which AHS handled more than 4.9 million calls in 1998. Home Inspection Services. AmeriSpec is a leading provider of home inspection services in the United States. Competition within this market is strong, coming mainly from regional and local, independently-owned firms. Furniture Repair Services. The market for on-site furniture repair services is relatively new. ServiceMaster believes that Furniture Medic maintains a favorable position in its industry due to its patented environmentally sensitive procedure for repairing furniture in the customer's home. Plumbing and Drain Cleaning Services. The market for plumbing and drain cleaning services is highly competitive in both the residential and commercial sectors. Rescue Rooter believes that its share of the total potential market for such services is small and that there is significant potential for future expansion and penetration. Plumbing is regulated by most states in which Rescue Rooter provides such services. The level of licensing varies from state to state. There are no state or federal guidelines regulating drain cleaning services. Management Services Health Care. Within the market consisting of general health care facilities having 50 or more beds, ServiceMaster is the leading supplier of plant operations and maintenance, housekeeping, clinical equipment maintenance, and laundry and linen management services. As of December 31, 1998, ServiceMaster was serving approximately 1,633 customers and managing approximately 1,877 health care facilities. The majority of health care facilities within this market not currently served by ServiceMaster assume direct responsibility for managing their own non-medical support functions. ServiceMaster believes that its management services for health care facilities may expand by the addition of facilities not presently served, by initiating additional services at facilities which use only a portion of the services now offered, by the development of new services and by growth in the size of facilities served. At the same time, industry consolidation, changes in use and methods of health care delivery and payment for services (including in particular changes in Medicare reimbursement regulations) continue to affect the health care environment. Education. ServiceMaster is a leading provider to the education market of maintenance, custodial and grounds services. The facilities which comprise the education market served by ServiceMaster include primary schools, secondary schools and school districts, private specialty schools and colleges and universities. As of December 31, 1998, ServiceMaster was serving approximately 281 customers and managing approximately 5,700 facilities. ServiceMaster believes there is potential for expansion in the education market due to its current relatively low penetration of that market and the trend of educational facilities to consider outsourcing more of their service requirements. However, a majority of the educational facilities continue to assume direct responsibility for managing their support functions. Business and Industry. ServiceMaster is a leading provider of plant operations and maintenance, custodial and grounds management services to business and industrial customers in selected markets. ServiceMaster believes that there is potential for expansion in those business and industrial markets which ServiceMaster has elected to emphasize due to ServiceMaster's low current penetration of those markets, the trend of businesses to consider outsourcing more of their service requirements and the trend of governmental units to privatize parts of their 7 operations. The emphasized markets include the food processing, transportation, healthcare products, and automotive markets. As of December 31, 1998, ServiceMaster was serving approximately 217 customers and managing approximately 817 business or industrial facilities. Major Customers ServiceMaster has no single customer which accounts for more than 10% of its total revenues. No part of the Company's business is dependent on a single customer or a few customers, the loss of which would have a material adverse effect on the Company as a whole. Revenues from governmental sources are not material. Employees On December 31, 1998, ServiceMaster had a total of approximately 51,740 employees. ServiceMaster provides its employees with annual vacation, medical, hospital and life insurance benefits and the right to participate in additional benefit plans which are described in the Notes to Financial Statements included in the Company's Annual Report to Stockholders for the Year Ended December 31, 1998. Year 2000 Computer Program Compliance Year 2000 Compliance. Certain computer programs use two digits rather than four to define the applicable year and consequently may not function properly beyond the year 1999 unless they are remediated. In addition, some computer programs are unable to recognize the year 2000 as a leap year. These problems may also exist in chips embedded in various types of equipment. The Company has long been aware of this Year 2000 (Y2K) problem. The Company is dealing with the Y2K problem in part through system upgrades, which were planned to occur in the normal course of business. In other cases, the Company has put programs into place which the Company believes will result in the completion of necessary remediation efforts prior to the year 2000. State of Readiness. The Company has initiated a program (the "Y2K program") to address Y2K issues as they affect the Company's information technology (IT) systems, electronic data interfaces and its non-IT hardware. The Y2K program was set up to use the following steps as appropriate: inventory assessment - planning -renovation - testing - implementation. In addition, the program calls for inquiries of the Company's major suppliers of goods and services to determine their Y2K status and a review of the Company's relationships with its customers to determine if the Company has any responsibility for the status of the customers' IT and/or non-IT systems and hardware. In 1998, the Company began to monitor its progress on the Y2K program on a consolidated basis and completed an inventory which covered both IT and non-IT items for all operating companies and administrative units within the ServiceMaster enterprise. All items in the inventory were placed in one of four categories: mission critical, critical, important and ordinary within the context of the operating company or administrative unit involved. (A "mission critical" or "critical" designation for an item within an operating company or administrative unit does not necessarily hold the same level of criticality from the perspective of the entire ServiceMaster enterprise). Remediation plans have been developed for the mission critical and critical matters, with milestones established for each plan which enable management to measure the progress made in respect of a plan against the work schedule established for that plan. Although these plans encompass many separately identifiable items, from a ServiceMaster enterprise standpoint, there are nine projects (the "Key Projects") which management has identified as either mission critical or critical and which will require a measurable amount of attention to remediate. Although all of the Key Projects are scheduled for completion before the end of the year 1999, most of the Key Projects are scheduled for completion by June 30, 1999. As of February 28, 1999, work on each of the Key Projects was on schedule and the Company believes that all Key Projects will be completed in accordance with their scheduled completion dates. 8 The Company has utilized the services of an outside consultant for the Y2K program to help identify Y2K issues and to develop a system to closely monitor remediation work. In early 1998, the Company established a Y2K committee in the parent unit with responsibility for monitoring the Y2K program in each of the Company's operating units and for providing status reports to the Board of Directors. Year 2000 Costs. Several of the Key Projects are upgrades of systems which the Company would have undertaken irrespective of the Y2K problem. In some cases, including a new accounting and financial reporting system for the parent company and its Management Services subsidiary, work on these systems has been accelerated in view of Y2K issues. Other upgrades or new systems were already scheduled for completion prior to the year 2000, such as a new support system for the Company's American Home Shield subsidiary and a new accounting and billing system for the recently developed commercial landscape business within the Company's TruGreen-ChemLawn subsidiary. References to "Year 2000 costs" in this report do not include the costs of projects for which no acceleration is occurring due to Y2K issues. The Company's Year 2000 costs to date are not material to the Company's results of operations or financial position and the Company does not expect its future Year 2000 costs to be material to the Company's results of operations or financial position. All Year 2000 costs (as well as the costs of installing the system upgrades referred to above) have been, and are expected to continue to be, funded with cash from operations. Year 2000 Risks. The Company believes that its greatest Year 2000 compliance risk, in terms of magnitude of risk, is that key third party suppliers of goods or services may fail to complete their own remediation efforts in a timely manner and thereby provoke an interruption in the ability of one or more of the operating segments of the Company to provide uninterrupted services to their customers. Utility services (electrical, water and gas), telephone service, banking services and, to a much lesser degree, the delivery of chemical products are the critical items in this regard. Based on the Company's inquiries to its providers of goods and services and on the basis of the Company's general knowledge of the state of readiness of the utility companies and banks with which it does business, the Company does not expect to suffer any material interruption in the services on which the Company depends. The Company has reviewed its agreements with its customers, including particularly the customers of its Management Services units for whom such units provide facility management services. The Company is satisfied that it is not responsible, contractually or otherwise, for the Y2K readiness of the customer's IT and non-IT systems and hardware, and the Company is in the process of notifying all of its customers to this effect where, in the Company's judgment, the nature of the customers' business or facility warranted such notices. Where the Company uses its own software in the course of providing management services, the Company is responsible to make such software Y2K ready. The Company is confident that such software is already, or soon will be, Y2K ready. For those units of the Company which sell franchises and which provide software to the franchisees, such software is already, or soon will be, fully Y2K ready or, alternatively, provision has been made for making available to franchisees software from third-party developers from whom appropriate Y2K compliance assurances have been or will be received. Contingency Plans. At this time, the Company fully expects all of its internal key IT and non-IT systems to be Y2K ready well in advance of the end of the year 1999. If it appears that timely delivery of any Key Projects becomes questionable, the Company will immediately develop appropriate contingency plans. The Company presently expects that its significant providers of goods and services are or will be Y2K ready by the end of the year 1999. The Company will continue to make inquires of its key suppliers for the purpose of testing this expectation. Insofar as the Company is exposed to risks originating in Y2K problems at key suppliers, the Company will utilize short-term solutions, but no practical long-term contingency plans for these external Y2K problems are possible. 9 Although the Company believes that critical remediation efforts will be completed prior to the Year 2000, the untimely completion of these efforts could, in certain circumstances, have a material adverse effect on the operations of the Company. Definition. As used in this Year 2000 statement, the term "year 2000 ready" or "Y2K ready" when used with reference to a item of software or equipment means the capability of the software or equipment to process correctly (including calculating, comparing, sequencing, displaying, or storing), transmit, or receive date data from, into, and between the 20th and 21st centuries, and during the years 1999 and 2000, and to make leap year calculations, provided that all products used with the software or equipment properly exchange accurate date data with it. Item 2. Properties The headquarters facility of ServiceMaster, which also serves as headquarters for ServiceMaster Management Services, is owned by The ServiceMaster Company and is located on a ten-acre tract at One ServiceMaster Way, Downers Grove, Illinois. The initial structure was built in 1963, and two additions were completed in 1968 and 1976. In early 1988, ServiceMaster completed construction of a two-story 15,000 square foot addition for office space, food service demonstrations and dining facilities. The building contains approximately 118,900 square feet of air conditioned office space and 2,100 square feet of laboratory space. In the Spring of 1992, ServiceMaster completed the conversion of approximately 30,000 square feet of space formerly used as a warehouse to offices for Management Services and for The Kenneth and Norma Wessner Training Center. ServiceMaster owns a seven-acre, improved tract at 2500 Warrenville Road, Downers Grove, Illinois, which is adjacent to its headquarters facility. In 1993, ServiceMaster substantially remodeled the building and thereafter leased approximately half the space (50,000 square feet) to a commercial tenant. The balance of the space is utilized by ServiceMaster personnel. ServiceMaster owns a 50,000 square foot facility near Aurora, Illinois which is used by ServiceMaster as a warehouse/distribution center. Ownership of this facility was acquired on February 11, 1999 by a deed in lieu of foreclosure from the company with whom ServiceMaster had, on August 2, 1989, entered into a sale/leaseback arrangement. ServiceMaster believes that the facilities described in the preceding three paragraphs will satisfy the Company's needs for administrative and warehouse space in the Chicago area for the immediate future. ServiceMaster owns four properties in Cairo, Illinois, consisting of a 36,000 square foot, three-story building used for manufacturing and warehousing equipment, supplies and products used in the business; a warehouse and package facility comprising 30,000 square feet; a three-story warehouse and manufacturing building consisting of 43,000 square feet; and a 2,500 square foot building used for a machine shop. ServiceMaster also leases two warehouse properties, one 14,000 square feet and the other 6,000 square feet, in Cairo, Illinois. Management believes that the foregoing manufacturing and warehouse facilities are adequate to support the current needs of ServiceMaster. The headquarters for ServiceMaster Consumer Services L.P. are located in leased premises at 860 Ridge Lake Boulevard, Memphis, Tennessee. The 860 Ridge Lake Boulevard facility also serves as the headquarters for TruGreen-ChemLawn, Terminix, Res/Com, Merry Maids, American Home Shield, AmeriSpec, Furniture Medic and Rescue Rooter. A new call center is located in leased premises at 6399 Shelby View Drive, Memphis, Tennessee. The center contains approximately 60,000 square feet of air conditioned office space from which telephone sales, scheduling services, and other business functions are conducted. 10 TruGreen-ChemLawn owns 8 buildings which are used as branch sites for lawn care services. These facilities are located in Colorado (1), Florida (1), Georgia (1), Michigan (1), Ohio (2), and Texas (2). TruGreen-ChemLawn also leases 337 facilities used as branch sites. Terminix owns 22 buildings which are used as branch sites for termite and pest control services. These properties are all one-story buildings that contain both office and storage space. These properties are located in California (3), Florida (10), Georgia (1), Illinois (1), New Jersey (2), Tennessee (1), and Texas (4). American Home Shield has retained some leased space in the building at 90 South E Street, Santa Rosa, California, for administrative and sales operations. Certain of American Home Shield's service and data processing departments are located in premises owned by the company in Carroll, Iowa. This facility consists of a 43,000 square foot building on a seven-acre site. American Home Shield owns approximately 17 acres of land in Santa Rosa, California of which 11.2 acres are under contracts for sales to occur in the second quarter of 1999. This land is held for investment purposes and has been and will continue to be offered for sale, with the timing of sales being affected by, among other things, market demand, zoning regulations, and the availability of financing to purchasers. Rescue Rooter owns three buildings and leases 23 facilities which are used for branch operations to provide plumbing and drain cleaning services, and heating and air conditioning services. The owned facilities are located, respectively, in Phoenix, Arizona; Round Lake, Illinois; and St. Louis, Missouri. The leased facilities are located in California (11), Colorado (1), Indiana (2), Ohio (1), Oregon (1), Tennessee (1), Texas (4), Utah (1), and Washington (1). The headquarters for Diversified Health Services are located in a leased facility at 3839 Forest Hill-Irene Road, Memphis, Tennessee. DHS leases other administrative facilities in St. Augustine, Florida; Minneapolis, Minnesota; Plymouth Meeting, Pennsylvania; Memphis, Tennessee; and Irving, Texas. As of March 1, 1999, through a joint venture and subsidiaries, DHS has an ownership interest in four nursing home facilities, leases one nursing home facility, and leases five assisted living facilities. These facilities are located in Alabama, Connecticut, Florida, Michigan, Tennessee, and Texas. The headquarters for ServiceMaster Employer Services and Certified Systems, Inc., the principal subsidiary of SES, are located at 3218 Highway 67, Mesquite, Texas. SES leases other administrative facilities in Little Rock, Arkansas, and Memphis, Tennessee. Item 3. Legal Proceedings In the ordinary course of conducting its business activities, ServiceMaster becomes involved in judicial and administrative proceedings which involve both private parties and governmental authorities. As of March 22, 1999, these proceedings included a number of general liability actions and a very small number of environmental proceedings. American Home Shield Class Action. A lawsuit was instituted in November 1997 and is currently pending in the District Court of Harris County, Texas against ServiceMaster, ServiceMaster's American Home Shield subsidiary ("AHS") and AHS' Texas subsidiary ("AHS-Texas") in which three plaintiffs, Brian Carmichael, Penny Carmichael and Tanja Kortz, claim that AHS-Texas violated certain provisions of two Texas consumer protection statues in the course of soliciting new and renewal service contracts. (A second lawsuit of a similar nature was filed in the same court by Edward Thorne III. This case has been abated pending disposition of the certification issue described below.) The plaintiffs have requested the court to permit the lawsuit to be maintained as a class action on behalf of all customers who purchased service contracts since late 1993. Theoretically, this would place some 300,000 contracts in issue. The plaintiffs have further claimed that the number of contracts in issue times a statutory penalty of $1,000 per contract represents the measure of damages. ServiceMaster believes that AHS-Texas accurately represented the coverage provided in its service agreements and that the changes in the wording of its 11 renewal contacts were routine updates or clarifications. In this regard, it is noteworthy that most of the AHS-Texas contract forms were reviewed and approved by the Texas Real Estate commission before the forms were distributed. In any and all events, no material actual damages have been suffered by anyone in this matter. Furthermore, ServiceMaster believes that the lawsuit cannot be sustained as a class action; the statutes in question were not intended to be applied in the manner advanced by the plaintiffs (and in fact cannot be so applied under the federal constitution). Accordingly, ServiceMaster believes that the ultimate outcome of these cases will not be material to ServiceMaster's financial condition or results of operations. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders. 12 PART II Item 5. Market for Registrant's Shares and Related Shareholder Matters Except for the information set forth in the second and third sentences of this Item 5, the portions of the ServiceMaster Annual Report to Shareholders for 1998 under the captions "Shareholders' Equity" (page 39) and "Cash Distributions Per Share" and "Price Per Share" in the Quarterly Operating Results table (page 46) supply the information required by this item and such portions are hereby incorporated herein by reference. The Registrant's shares of common stock are listed and traded on the New York Stock Exchange under the symbol "SVM". At March 1, 1999, the Registrant's shares of common stock were held of record by approximately 28,000 persons. The Company estimates that another 53,000 persons held shares of the Registrant's common stock in the names of nominees. Item 6. Selected Financial Data The portion of the ServiceMaster Annual Report to Shareholders for 1998 in the Financial Statements and Management Discussion section ("FSMD Section") under the caption "Eleven Year Financial Summary" (pages 32 - 33) supplies the information required by this item and such portion is hereby incorporated herein by reference. Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations Management Discussion and Analysis of Financial Condition and Results of Operations for the three years ended December 31, 1998, is contained in the FSMD Section of the ServiceMaster Annual Report to Shareholders for 1998 on pages 25-31 and is hereby incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The consolidated statements of financial position of ServiceMaster as of December 31, 1998 and 1997, and the consolidated statements of income, cash flows and shareholders' equity for the years ended December 31, 1998, 1997, and 1996 and notes to the consolidated financial statements are contained in the FSMD Section of the ServiceMaster Annual Report to Shareholders for 1998 on pages 36-45 are incorporated herein by reference. The report of Arthur Andersen LLP thereon dated January 25, 1999, and the summary of significant accounting policies are contained in the FSMD Section of the ServiceMaster Annual Report to Shareholders for 1998 on pages 34-35 and are hereby incorporated herein by reference. Item 9. Disagreements on Accounting and Financial Disclosure None. 13 PART III Item 10. Directors and Executive Officers of the Registrant Directors The information contained under the heading "Election of Directors" in the definitive proxy statement for the Company's April 30, 1999 Annual Meeting of the Stockholders is incorporated herein by reference. Senior Management Advisers The Bylaws of the Company provide that the Board of Directors may appoint officers of the Company or a subsidiary and other persons having a special relationship to ServiceMaster to serve as Senior Management Advisers. Senior Management Advisers attend the meetings of the Board and advise the Board but do not have the power to vote. The Board has determined that providing a greater number of officers the opportunity to advise and interact with the Board is in the best interest of ServiceMaster as well as the individual officers. The Senior Management Advisers receive no special compensation for their services in this capacity. The Board of Directors has appointed the persons listed below as Senior Management Advisers effective as of the 1998 annual meeting of the shareholders of The ServiceMaster Company to serve in such capacity until the annual meeting of shareholders of the Company in 1999 or until otherwise determined by the Board of Directors. Robert D. Erickson, age 55, is an Executive Vice President. Mr. Erickson was a director of ServiceMaster from May 1987 to May 1993. He previously served as a director of ServiceMaster from May 1981 to June 1984. He served as the President and Chief Operating Officer of ServiceMaster's International business unit from October 1993 to December 1997. Donald K. Karnes, age 48, is Group President of TruGreen-ChemLawn and Terminix. He served as President and Chief Operating Officer of TruGreen-ChemLawn from January 1992 to December 1995. Robert F. Keith, age 42, is President, Healthcare Management Services. He served as President and Chief Operating Officer, ServiceMaster Management Services from January 1, 1997 to October 2, 1998; President and Chief Operating Officer, ServiceMaster Consumer Services from July 1994 to December 31, 1996 and as Group President, ServiceMaster Consumer Services, from November 1992 to July 1994. Ernest J. Mrozek, age 45, is Group President, ServiceMaster Consumer Services. He served as President and Chief Operating Officer, ServiceMaster Consumer Services from January 1, 1997 to October 2, 1998; Senior Vice President and Chief Financial Officer of the Registrant from January 1, 1995 to December 31, 1996. He served as Vice President and Chief Financial Officer of the Registrant from May 1994 to December 1994, as Vice President, Treasurer and Chief Financial Officer from November 1, 1992 to April 30, 1994. Steven C. Preston, age 38, has served as Executive Vice President and Chief Financial Officer since July 1, 1998. He served as Senior Vice President and Chief Financial Officer from April 1, 1997 to June 30, 1998. From August 1993 to March 7, 1997, he was Senior Vice President and Corporate Treasurer for First Data Corporation, Atlanta, GA. David M. Slott, age 40 is President and Chief Operating Officer of TruGreen Limited Partnership. He served as Executive Vice President and Chief Operating Officer of Tru-Green Limited Partnership from May 1, 1994 to December 31, 1995. 14 Executive Officers of ServiceMaster The following table shows: (i) the names and ages (as of March 1, 1999) of the present executive officers of the Registrant; (ii) all positions presently held by each officer; and (iii) the year each person became an officer. Each person named has served as an officer of the Registrant and its predecessor company continuously since the year shown. There are no arrangements or understandings between any executive officer and any other person pursuant to which the officer was or is to be selected as an officer. First Became Name Age Present Position An Officer - -------------------- --- ---------------------------------------------------- ------------ C. William Pollard 60 Chairman and Director 1977 Carlos H. Cantu 65 President and Chief Executive Officer and Director 1986 Phillip B. Rooney 54 Vice Chairman and Director 1997 Charles W. Stair 58 Vice Chairman and Director 1973 Donald K. Karnes 48 Group President, Consumer Services, and a Senior Management Adviser 1992 Ernest J. Mrozek 45 Group President, Consumer Services, and a Senior Management Adviser 1987 Robert F. Keith 42 President, Healthcare Management Services, and 1986 a Senior Management Adviser Robert D. Erickson 55 Executive Vice President and a Senior Management Adviser 1976 Vernon T. Squires 64 Senior Vice President and General Counsel 1987 Steven C. Preston 38 Executive Vice President and Chief Financial Officer, and a Senior Management Adviser 1997 Eric R. Zarnikow 39 Vice President and Treasurer 1994 Deborah A. O'Connor 36 Vice President and Controller 1993 Messrs. Pollard, Cantu, Stair and Rooney are also Directors of the Company. See "Election of Directors" in the definitive proxy statement for the Company's 1999 Annual Meeting for biographical information with respect to these persons. Messrs. Karnes, Mrozek, Keith, Erickson, and Preston are Senior Management Advisers. See page 14 for biographical information with respect to these persons. Vernon T. Squires, age 64, has served as Senior Vice President and General Counsel since January 1, 1988. He served as Vice President and General Counsel from April 1, 1987 until December 31, 1987. He was an associate and partner with the law firm of Wilson & McIlvaine in Chicago, specializing in corporate and tax law, from 1960 to April 1, 1987. 15 Eric R. Zarnikow, age 39, has served as Vice President and Treasurer since May 1, 1994. From August 1991 to April 1994, he served as Vice President and Treasurer of Gaylord Container Corporation. Deborah A. O'Connor, age 36, has served as Vice President and Controller since January 1, 1993. Compliance With Section 16(a) of The Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of ServiceMaster's shares, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "Commission") and the New York Stock Exchange. The Commission's regulations require certain officers, directors and greater-than-ten-percent shareholders to furnish to the Company copies of all Section 16(a) forms that they file. During 1998, the Company received Section 16(a) forms from such officers and directors. As of January 1, 1999, the Company did not have any shareholders with an interest greater than ten percent. Based solely on a review of the copies of Section 16(a) forms received by the Company or on written representations from certain reporting persons that no Form 5 was required for those persons, the Company believes that during 1998 the officers and directors of the Company complied with applicable filing requirements. Item 11. Executive Compensation The information contained under the heading "Executive Compensation" (except those portions relating to Item 13 below) in the definitive proxy statement for the Company's April 30, 1999 Annual Meeting of Stockholders is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information contained under the heading "Principal Stockholders" and "Management Ownership" in the definitive proxy statement for the Company's April 30, 1999 Annual Meeting of the Stockholders is incorporated herein by reference. Item 13. Certain Relationships and Related Miscellaneous Transactions The information contained under the heading "Executive Compensation" (except those portions relating to Item 11 above) and the subheadings "Compensation of Directors" and "Ownership Information" in the definitive proxy statement for the Company's April 30, 1999 Annual Meeting of the Stockholders is incorporated herein by reference. 16 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial Statements, Schedules and Exhibits 1. Financial Statements The documents shown below are contained in the Financial Statements and Management Discussion and Analysis section of the ServiceMaster Annual Report to Shareholders for 1998, on pages 25 - 45 and are incorporated herein by reference: Summary of Significant Accounting Policies Report of Independent Public Accountants Consolidated Statements of Income for the three years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Financial Position as of December 31, 1998 and 1997 Consolidated Statements of Cash Flows for the three years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1998, 1997 and 1996 Notes to the Consolidated Financial Statements 2. Financial Statements Schedules Schedule IV--Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees other than Related Parties: None Included in Part IV of this Report: Schedule VIII--Valuation and Qualifying Accounts Report of Independent Public Accountants on Schedules Exhibit 11 -- Exhibit Regarding Detail of Income Per Share Computation Exhibit 23 -- Consent of Independent Public Accountants Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. 17 3. Exhibits The exhibits filed with this report are listed on pages 25 - 29 herein (the "Exhibits Index"). The following entries in the Exhibits Index are management contracts or compensatory plans in which a director or any of the named executive officers of the Registrant does or may participate. Reference is made to the Exhibits Index for the filing with the Commission which contains such contract or plan. Exhibit Contract or Plan 10.2 Deferred Directors Fee Agreement 10.3 Incentive Reward Compensation Plan 10.4 ServiceMaster Profit Sharing, Savings & Retirement Plan as amended and restated effective January 1, 1987 10.6 ServiceMaster 10-Plus Plan. See also Item 10.11 * 10.8 Directors Deferred Fees Plan (ServiceMaster Shares Alternative) 10.11 ServiceMaster 10-Plus Plan as amended September 3, 1991 * 10.13 ServiceMaster 1994 Non-Employee Directors Share Option Plan** 10.15 ServiceMaster 1997 Share Option Plan * 10.17 ServiceMaster 1998 Equity Incentive Plan 10.20 ServiceMaster 1998 Non-Employee Directors Discounted Stock Option Plan 10.21 ServiceMaster 1998 Long-Term Performance Award Plan --------- * Superseded by Item 10.17 ** Superseded by Item 10.20 18 (b) Reports on Form 8-K filed during the last quarter of 1998 None Certain Undertakings With Respect To Registration Statements on Form S-8 For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the Registrant hereby undertakes as follows which undertaking shall be incorporated by reference into each of the Registrant's Registration Statements on Form S-8, including No. 33-19763 and No. 2-75851: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 19 SCHEDULE VIII THE SERVICEMASTER COMPANY VALUATION AND QUALIFYING ACCOUNTS (In thousands) -------------------------------------------------- ------------------ ------------- ------------------ ------------- Deductions Additions Balance at Charged to Write-offs of Balance at Beginning of Costs and Uncollectible end of Description Period Expenses Accounts Period -------------------------------------------------- ----------------------------------------------------------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- AS OF DECEMBER 31, 1998: Allowance for doubtful accounts-- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- Accounts receivable (current) $27,544 25,998 19,389 $34,153 ------- ------ ------ ------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- Notes receivable (current) $ 4,677 686 528 $ 4,835 ------- --- --- ------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- AS OF DECEMBER 31, 1997: Allowance for doubtful accounts-- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- Accounts receivable (current) $24,117 20,183 16,756 $27,544 ------- ------ ------ ------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- Notes receivable (current) $ 2,170 2,507 0 $ 4,677 ------- -- ----- --------- - ------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- AS OF DECEMBER 31, 1996: Allowance for doubtful accounts-- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- Accounts receivable (current) $18,029 20,517 14,429 $24,117 ------- ------ ------ ------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- Notes receivable (current) $ 2,439 59 328 $ 2,170 ------- ----- -- --------- --- ------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- -------------------------------------------------- ------------------ ------------- ------------------ ------------- 20 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of ServiceMaster Limited Partnership: We have audited in accordance with generally accepted auditing standards, the financial statements included in The ServiceMaster Company's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 25, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedules included in Part IV in the Form 10-K are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These supporting schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Chicago, Illinois January 25, 1999 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE SERVICEMASTER COMPANY Registrant Date: March 18, 1999 By: /s/ C. WILLIAM POLLARD ------------------------------- C. William Pollard Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in their capacities and on the date indicated. Signature Title Date - --------------------------- ------------------------ ---------------- /s/ C. WILLIAM POLLARD Chairman and Director March 18, 1999 - --------------------------- C. William Pollard /s/ CARLOS H. CANTU President and Chief Executive March 18, 1999 - --------------------------- Carlos H. Cantu Officer and Director /s/ PHILLIP B. ROONEY Vice Chairman and Director March 18 1999 - ---------------------- Phillip B. Rooney /s/ CHARLES W. STAIR Vice Chairman and Director March 18, 1999 - ---------------------- Charles W. Stair /s/ STEVEN C. PRESTON Executive Vice President and March 18, 1999 - ---------------------- Steven C. Preston Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) /s/ PAUL W. BEREZNY, JR. Director March 18, 1999 - ------------------------ Paul W. Berezny, Jr. 22 Signature Title Date - --------------------------- ------------------------ ---------------- /s/ HENRY O. BOSWELL Director March 18, 1999 - ---------------------- Henry O. Boswell /s/ BRIAN GRIFFITHS Director March 18, 1999 - ---------------------- Brian Griffiths /s/SIDNEY E. HARRIS Director March 18, 1999 - ---------------------- Sidney E. Harris /s/ HERBERT P. HESS Director March 18, 1999 - ---------------------- Herbert P. Hess /s/ MICHELE M. HUNT Director March 18, 1999 - --------------------------- Michele M. Hunt /s/ GUNTHER H. KNOEDLER Director March 18, 1999 - ----------------------- Gunther H. Knoedler /s/ JAMES D. McLENNAN Director March 18, 1999 - ---------------------- James D. McLennan /s/ VINCENT C. NELSON Director March 18, 1999 - ---------------------- Vincent C. Nelson /s/ DALLEN W. PETERSON Director March 18, 1999 - --------------------------- Dallen W. Peterson 23 Signature Title Date - --------------------------- ------------------------ ---------------- /s/ STEVEN S REINEMUND Director March 18, 1999 - ------------------------ Steven S Reinemund /s/ BURTON E. SORENSEN Director March 18, 1999 - ------------------------ Burton E. Sorensen /s/ DAVID K. WESSNER Director March 18, 1999 - ------------------------ David K. Wessner 24 Exhibits Index Exhibit No. Description of Exhibit - ---------- ------------------------------------------------------------------- 1.1 Underwriting Agreement dated as of August 6, 1997 among The ServiceMaster Company and J.P. Morgan, is incorporated by reference to Exhibit 1.1 to the ServiceMaster Limited Partnership, The ServiceMaster Company Limited Partnership and ServiceMaster Incorporated of Delaware Registration Statement on Form S-3 filed with the Securities and Exchange Commission on July 28, 1997 (the "July 28, 1997 Registration Statement"). 1.2 Underwriting Agreement dated as of February 25, 1998 among The ServiceMaster Company and J.P. Morgan Securities, Inc., Goldman, Sachs & Co., BancAmerica Robertson Stephens, First Chicago Capital Markets, Inc. and NationsBanc Mongtomgery Securities L.L.C. is incorporated by reference to the Exhibit 1 to the Current Report on Form 8-K as filed by The ServiceMaster Company on February 27, 1998 (the "Company February 27, 1998 8-K"). 2.1 Acquisition Agreement dated December 5, 1996 by and among ServiceMaster Limited Partnership, ServiceMaster Acquisition Corporation and Barefoot Inc. is incorporated by reference to Annex A-1 to the Offering Circular/Prospectus included as part of the Registration Statement on Form S-4 as filed by ServiceMaster Limited Partnership on January 17, 1997 (SEC Registration No. 333-17759). 2.2 Plan and Agreement of Merger dated December 5, 1996 by and among ServiceMaster Limited Partnership, ServiceMaster Acquisition Corporation and Barefoot Inc. is incorporated by reference to Annex A-2 to the Offering Circular/Prospectus included as part of the Registration Statement on Form S-4 as filed by ServiceMaster Limited Partnership on January 17, 1997 (SEC Registration No. 333-17759). 2.3 Merger and Reorganization Agreement as amended and restated on October 3, 1997 is incorporated by reference to Exhibit 5 to the Current Report on Form 8-K as filed by ServiceMaster Limited Partnership on December 29, 1997 (the "SMLP December 29, 1997 8-K") and to Exhibit 5 to the Current Report on Form 8-K as filed by The ServiceMaster Company on Form 8-K on February 26, 1998 - second of three 8-K reports filed on that date (the "Company February 26, 1998 8-K, No. 2"). 2.4 Certificate of Merger of NewSub B, Inc. into ServiceMaster Limited Partnership in accordance with Section 17-211 of the Delaware Revised Uniform Limited Partnership Act (the "Reincorporating Merger"), the filing of which was certified by the Secretary of State of the State of Delaware on December 17, 1997 and the effective date and time of which was December 26, 1997 at 11:59 P.M., Eastern Standard Time. 2.5 Certificate of Merger of ServiceMaster Limited Partnership and The ServiceMaster Company Limited Partnership with and into The ServiceMaster Company, a Delaware corporation, in accordance with the General Corporation Law of the State of Delaware, the filing of which was certified by the Secretary of State of the State of Delaware on December 18, 1997 and the effective date and time of which was January 1, 1998 at 12:01 A.M., Eastern Standard Time. 2.6 The Plan of Reorganization and Agreement and Plan of Merger dated as of November 1, 1998 by and among LandCare USA, Inc., The ServiceMaster Company and SVM Acquisition Corporation is incorporated by reference to Appendix A to the Proxy Statement/Prospectus included as part of the Registration Statement on Form S-4 as filed by The ServiceMaster Company on February 10, 1999 (SEC Registration No. 333-70191). 25 Exhibit No. Description of Exhibit - ---------- ------------------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation of The ServiceMaster Company, a Delaware corporation, as filed with the Secretary of State, State of Delaware, on November 6, 1997 is incorporated by reference to Exhibit 1 to the SMLP December 29, 1997 8-K and to Exhibit 1 to the Company February 26, 1998 8-K, No. 2. 3.2 Bylaws of The ServiceMaster Company as adopted on November 3, 1997 are incorporated by reference to Exhibit 2 to the SMLP December 29, 1997 8-K and to Exhibit 2 to the Company February 26, 1998 8-K, No. 2. 4.1 Shareholder Rights Agreement between The ServiceMaster Company and the Harris Trust and Savings Bank as adopted on December 12,1997 is incorporated by reference to Exhibit 3 to the SMLP December 29, 1997 8-K and to Exhibit 3 to the Company February 26, 1998 8-K, No. 2. 4.2 The ServiceMaster Company: Certificate of Designation, Preferences and Rights of Junior Participating Preferred Stock, Series A, is incorporated by reference to Exhibit 4 to the SMLP December 29, 1997 8-K and to Exhibit 4 to the Company February 26, 1998 8-K, No. 2. 4.3 Indenture dated as of August 15, 1997 among The ServiceMaster Company (as successor to ServiceMaster Limited Partnership and The ServiceMaster Company Limited Partnership) and the Harris Trust and Savings Bank as trustee is incorporated by reference to Exhibit 4.1 to the July 28, 1997 Registration Statement. 4.4 First Supplemental Indenture dated as of August 15, 1997 among The ServiceMaster Company (as successor to ServiceMaster Limited Partnership and The ServiceMaster Company Limited Partnership) and the Harris Trust and Savings Bank as trustee is incorporated by reference to Exhibit 4.4 to the Annual Report on Form 10-K for the year ended December 31, 1997 as filed by The ServiceMaster Company (the "1997 10-K"). 4.5 Second Supplemental Indenture dated as of January 1, 1998 among The ServiceMaster Company (as successor to ServiceMaster Limited Partnership and The ServiceMaster Company Limited Partnership) and the Harris Trust and Savings Bank as trustee is incorporated by reference to Exhibit 2 to the Current Report on Form 8-K as filed by The ServiceMaster Company on Form 8-K on February 26, 1998 - first of three 8-K reports filed on that date (the "Company February 26, 1998 8-K, No. 1"). 4.6 Third Supplemental Indenture dated as of March 2, 1998 among The ServiceMaster Company and the Harris Trust and Savings Bank as trustee is incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K as filed by The ServiceMaster Company on February 27, 1998 (the "Company February 27, 1998 8-K"). 4.7 Form of 6.95% Note due August 14, 2007 is incorporated by reference to Exhibit 4.2 to the July 28, 1997 Registration Statement. 4.8 Form of 7.45% Note due August 14, 2027 is incorporated by reference to Exhibit 4.2 to the July 28, 1997 Registration Statement. 4.9 Form of 7.10% Note due March 1, 2018 is incorporated by reference to Exhibit 4.1 to the Company February 27, 1998 8-K. 4.10 Form of 7.25% Note due March 1, 2038 is incorporated by reference to Exhibit 4.2 to the Company February 27, 1998 8-K. 26 Exhibit No. Description of Exhibit - ---------- ------------------------------------------------------------------- 10.1 $750,000,000 Credit Agreement between The ServiceMaster Company Limited Partnership, First National Bank of Chicago and Morgan Guaranty Trust Company dated as of April 1, 1997 is incorporated by reference to Exhibit 10.2 to the 1997 10-K. 10.2 Form of Deferred Directors Fee Agreement as assumed by The ServiceMaster Company in the Reincorporating Merger is incorporated by reference to Exhibit 10(c)(4) to the Annual Report on Form 10-K for the year ended December 31, 1980 as filed by ServiceMaster Limited Partnership (the "1980 10-K"). 10.3 Incentive Reward Compensation Plan as assumed by The ServiceMaster Company in the Reincorporating Merger is incorporated by reference to Exhibit 10(c)(6) to the 1980 10-K. 10.4 ServiceMaster Profit Sharing, Savings and Retirement Plan as assumed by The ServiceMaster Company in the Reincorporating Merger amended and restated effective January 1, 1987 is incorporated by reference to the exhibit so captioned to the Annual Report on Form 10-K for the year ended December 31, 1987 as filed by ServiceMaster Limited Partnership (the "1987 10-K"). 10.5 The Terminix International Company LP Profit Sharing Retirement Plan (previously known as Cook International, Inc. Profit Sharing Retirement Plan) effective January 1, 1984; Amendment No. One to The Terminix International Company L.P. Profit Sharing Retirement Plan effective January 1, 1986 and April 1, 1986; Amendment No. Two, effective April 1, 1986; Amendment No. Three, effective January 1, 1987 and January 1, 1988; The Terminix International Company L.P. Profit Sharing Retirement Trust, all of which are incorporated by reference to Exhibit 10.15 to the 1987 10-K. 10.6 ServiceMaster 10-Plus Plan as assumed by The ServiceMaster Company in the Reincorporating Merger is incorporated by reference to Exhibit 4.2 to the ServiceMaster Limited Partnership Registration Statement on Form S-8 (No. 33-39148) filed with the SEC on February 26, 1991 (the "10-Plus Registration Statement"). 10.7 Form of Option Agreement for the ServiceMaster 10-Plus Plan is incorporated by reference to Exhibit 4.3 to the 10-Plus Registration Statement. 10.8 Form of Directors Deferred Fees Plan (ServiceMaster Shares Alternative) as assumed by The ServiceMaster Company in the Reincorporating Merger is incorporated by reference to Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 1990 (the "1990 10-K"). 10.9 Form of Directors Deferred Fees Agreement (ServiceMaster Shares Alternative) as assumed by The ServiceMaster Company in the Reincorporating Merger is incorporated by reference to Exhibit 10.19 of the 1990 10-K. 10.10 Form of ServiceMaster Deferred Fees Plan Trust is incorporated by reference to Exhibit 10.20 of the 1990 10-K. 10.11 ServiceMaster 10-Plus Plan as amended September 3, 1991 and as assumed by The ServiceMaster Company in the Reincorporating Merger is incorporated by reference to Exhibit 10.21 to the Annual Report on Form 10-K for the year ended December 31, 1991 (the "1991 10-K"). 10.12 Form of Option Agreement for the ServiceMaster 10-Plus Plan as amended September 3, 1991 is incorporated by reference to Exhibit 10.22 to the 1991 10-K. 27 Exhibit No. Description of Exhibit - ---------- ------------------------------------------------------------------- 10.13 ServiceMaster 1994 Non-Employee Director Share Option Plan as assumed by The ServiceMaster Company in the Reincorporating Merger is incorporated by reference to Exhibit to the ServiceMaster Limited Partnership Registration Statement on Form S-8 filed with the Securities and Exchange Commission on October 5, 1994 (the "Directors Share Plan Registration Statement"). 10.14 Form of Option Agreement for the ServiceMaster 1994 Non-Employee Director Share Option Plan is incorporated by reference to Exhibit 4.3 to the Directors Share Plan Registration Statement. 10.15 ServiceMaster 1997 Share Option Plan as assumed by The ServiceMaster Company in the Reincorporating Merger is incorporated by reference to Exhibit 10.28 to the Annual Report on Form 10-K for the year ended December 31,1996 as filed by ServiceMaster Limited Partnership (the "1996 10-K"). 10.16 Form of Option Agreement for the ServiceMaster 1997 Share Option Plan is incorporated by reference to Exhibit 10.29 to the 1996 10-K. 10.17 ServiceMaster 1998 Equity Incentive Plan as adopted on December 17, 1997 and approved by the stockholders on May 1, 1998 is incorporated by reference to Exhibit 10.15 to the 1997 10-K. 10.18 Form of Option Agreement for the ServiceMaster 1998 Equity Incentive Plan (Non-Qualifying Stock Options) as incorporated by reference to Exhibit 10.20 to the 1997 10-K. 10.19 Form of Option Agreement for the ServiceMaster 1998 Equity Incentive Plan (Incentive Stock Options) as incorporated by reference to Exhibit 10.21 to the 1997 10-K. 10.20 ServiceMaster 1998 Non-Employee Directors Discounted Stock Option Plan as incorporated by reference to Exhibit 10.21 to the 1997 10-K. 10.21 ServiceMaster 1998 Long-Term Performance Award Plan as incorporated by reference to Exhibit 10.22 to the 1997 10-K. 11 Exhibit regarding detail of income per share computation for each of the three years ended December 31, 1998, 1997 and 1996 is incorporated by reference to the footnote on page 44 of the 1998 Annual Report (defined in Exhibit B). 13 The ServiceMaster Annual Report to Shareholders for the year ended December 31, 1998 (the "1998 Annual Report"). The parts of the 1998 Annual Report which are expressly incorporated into this report by reference shall be deemed filed with this report. All other parts of the 1998 Annual Report are furnished for the information of the Commission and are not filed with this report. 21 Subsidiaries of Registrant 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule 99.1 Amended and Restated Agreement of Limited Partnership for ServiceMaster Consumer Services Limited Partnership dated November 8, 1990 is incorporated by reference to Exhibit 4.4 to the Current Report on Form 8-K as filed by ServiceMaster Limited Partnership on November 21, 1990. 99.2 Amended and Restated Agreement of Limited Partnership of ServiceMaster Management Services Limited Partnership dated December 1991 is incorporated by reference to Exhibit 28.10 to the 1991 10-K. 28 Exhibit No. Description of Exhibit - ---------- ------------------------------------------------------------------- 99.3 Amended and Restated Agreement of Limited Partnership of ServiceMaster Consumer Services Limited Partnership effective June 30, 1992 is incorporated by reference to Exhibit 28.12 to the Annual Report on Form 10-K for the year ended December 31, 1992 as filed by ServiceMaster Limited Partnership. 99.4 News release dated March 23, 1999 regarding the announcement of a cash tender offer by the Registrant for all of the outstanding shares of American Residential Services, Inc. 29 Graphics Appendix This appendix describes the graphics which will be filed separately with the Securities and Exchange Commission as an electronic filing. A Performance Graph is set forth on page 18 of the Company's proxy statement for the Annual Meeting of the Stockholders to be held on April 30, 1999 which consists of a line graph which compares the yearly percentage change in ServiceMaster's cumulative total shareholder return on its shares (computed in accordance with the Item 402(l) of Reg. S-K) with the cumulative return on the stocks of the companies within the S&P 500 Index and with the Dow Jones Consumer Services Index over the five year period from January 1, 1994 to December 31, 1998. The chart shows that ServiceMaster outperformed the S&P 500 Index in 1997 and 1998 and the Dow Jones Consumer Services Index in 1996 and 1997.