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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0001052045-03-000071.txt : 20030331
<SEC-HEADER>0001052045-03-000071.hdr.sgml : 20030331
<ACCEPTANCE-DATETIME>20030331164314
ACCESSION NUMBER: 0001052045-03-000071
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 13
CONFORMED PERIOD OF REPORT: 20021231
FILED AS OF DATE: 20030331
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SERVICEMASTER CO
CENTRAL INDEX KEY: 0001052045
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741]
IRS NUMBER: 363858106
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-14762
FILM NUMBER: 03631450
BUSINESS ADDRESS:
STREET 1: 3250 LACEY ROAD, SUITE 600
CITY: DOWNERS GROVE
STATE: IL
ZIP: 60515
BUSINESS PHONE: 6306632700
MAIL ADDRESS:
STREET 1: 3250 LACEY ROAD, SUITE 600
CITY: DOWNERS GROVE
STATE: IL
ZIP: 60515
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>form10k2002.txt
<DESCRIPTION>THE SERVICEMASTER COMPANY 10-K
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2002.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________.
Commission File Number 1-14762
--------------------------
THE SERVICEMASTER COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-3858106
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3250 Lacey Road, Suite 600, Downers Grove, Illinois, 60515-1700
(Address of Principal Executive Offices, Zip Code)
(630) 663-2000
(Registrant's telephone number, including area code)
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
Preferred Stock Purchase Rights 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 [x] No [ ]
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule12b-2 of the Act).
Yes [x] No [ ]
The aggregate market value of shares of common stock held by non-affiliates
of the registrant as of June 28, 2002 was $3,990,819,969.
The number of shares of the registrant's common stock outstanding as of
March 28, 2003 was 299,221,298.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the registrant's Annual Report to Shareholders for the
year ended December 31, 2002 are incorporated into Part I and Part II of this
Form 10-K.
Certain parts of the registrant's Proxy Statement for the 2003 Annual
Meeting of Shareholders are incorporated into Part III of this Form 10-K.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C>
Item 1. Business.............................................................................. 1
Item 2. Properties............................................................................ 7
Item 3. Legal Proceedings..................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders................................... 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 10
Item 6. Selected Financial Data............................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 10
Item 8. Financial Statements and Supplementary Data........................................... 10
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure11
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 12
Item 11. Executive Compensation................................................................ 13
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters........................................................................ 13
Item 13. Certain Relationships and Related Transactions........................................ 13
Item 14. Controls and Procedures............................................................... 13
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 15
Signatures...................................................................................... 19
Certification of Chief Executive Officer........................................................ 21
Certification of Chief Financial Officer....................................................... 22
Exhibit Index................................................................................... 23
</TABLE>
<PAGE>
FORWARD-LOOKING STATEMENTS
This Form 10-K contains or incorporates by reference statements concerning
future results and other matters that may be deemed to be "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The ServiceMaster Company ("ServiceMaster") intends that these
forward-looking statements, which look forward in time and include everything
other than historical information, be subject to the safe harbors created by
such legislation. ServiceMaster notes that these forward-looking statements
involve risks and uncertainties that could affect its results of operations,
financial condition or cash flows. Factors that could cause actual results to
differ materially from those expressed or implied in a forward-looking statement
include the following, among others:
o extreme weather conditions that affect the demand for ServiceMaster's
services;
o competition in the markets served by ServiceMaster;
o labor shortages or increases in wage rates;
o unexpected increases in operating costs, such as higher insurance,
healthcare or fuel prices;
o increased governmental regulation of telemarketing;
o general economic conditions in the United States, especially as they
may affect home sales or consumer spending levels;
o time and expenses associated with integrating and winding down
businesses; and
o other factors described from time to time in documents filed
by ServiceMaster with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
ServiceMaster is a national service company providing outsourcing services
to both residential and commercial customers. Its core services capabilities
include lawn care and landscape maintenance; termite and pest control; plumbing,
electrical, heating and air conditioning services; home warranty; and cleaning,
disaster restoration and furniture repair. These services are provided through a
network of over 5,400 company-owned and franchised locations operating under the
following leading brands: TruGreen ChemLawn, TruGreen LandCare, Terminix,
American Residential Services, Rescue Rooter, American Mechanical Services,
American Home Shield, AmeriSpec, Merry Maids, ServiceMaster Clean and Furniture
Medic. Incorporated in Delaware in 1991, ServiceMaster is the successor to
various entities dating back to 1947.
ServiceMaster is organized into five principal operating segments:
TruGreen; Terminix; American Home Shield; American Residential Services and
American Mechanical Services; and Other Operations. All subsidiaries of
ServiceMaster are wholly owned, except for The Terminix International Company
L.P., in which Allied Bruce-Terminix Companies, Inc. is a Class B limited
partner. The financial information for each operating segment for 2000, 2001 and
2002 contained in the Notes to the Consolidated Financial Statements included in
ServiceMaster's Annual Report to Shareholders for the year ended December 31,
2002 ("Annual Report to Shareholders for 2002") is incorporated by reference in
this Form 10-K.
CHANGE IN SEGMENT REPORTING
ServiceMaster previously reported its American Home Shield, American
Residential Services, American Mechanical Services, Merry Maids, ServiceMaster
Clean, AmeriSpec and Furniture Medic businesses as a single segment, the Home
Maintenance and Improvement segment. Due to ServiceMaster's sale of its
Management Services business and its exit from other businesses in 2001, certain
operations have become more significant for segment reporting purposes. In
addition, ServiceMaster's management and reporting structure changed during
2002. As a result, ServiceMaster has expanded its business segment reporting
which will allow for better ongoing visibility into the components of the
business. American Home Shield and AmeriSpec will now be reported together as
the American Home Shield segment. The combination of American Residential
Services and American Mechanical Services will now be reported together as the
American Residential Services and American Mechanical Services segment, and the
franchise operations of Merry Maids, ServiceMaster Clean and Furniture Medic
will now be reported
1
<PAGE>
in the Other Operations segment. Previously reported financial information that
is incorporated by reference in this Form 10-K has been reclassified to reflect
the change in segment reporting.
SERVICES
TruGreen Segment
The TruGreen segment provides lawn care services primarily under the
TruGreen ChemLawn brand name and landscape maintenance services primarily under
the TruGreen LandCare brand name to residential and commercial customers.
Revenues derived from the TruGreen segment constituted 40%, 38% and 38% in 2000,
2001 and 2002, respectively, of the revenue from continuing operations of the
consolidated ServiceMaster enterprise. The TruGreen ChemLawn and TruGreen
LandCare businesses are seasonal in nature. Extreme weather conditions, such as
a drought, affect the demand for lawn care and landscape maintenance services
and may result in a decrease in revenues.
TruGreen ChemLawn. TruGreen ChemLawn is a leading provider of lawn care
services in the United States with approximately 3.4 million residential and
commercial customers. As of December 31, 2002, TruGreen ChemLawn provided these
services in 47 states and the District of Columbia through 201 company-owned
locations and 64 franchised locations. TruGreen ChemLawn also provides lawn care
services through a subsidiary in Canada and has entered into licensing
arrangements to provide these services in nine other countries, primarily in the
Middle East.
TruGreen LandCare. TruGreen LandCare is a leading provider of landscape
maintenance services in the United States with approximately 15,000 residential
and commercial customers. As of December 31, 2002, TruGreen LandCare provided
these services in 36 states and the District of Columbia through 132
company-owned locations. TruGreen LandCare has no international operations.
Terminix Segment
The Terminix segment provides termite and pest control services primarily
under the Terminix brand name to residential and commercial customers. Revenues
derived from the Terminix segment constituted 21%, 24% and 26% in 2000, 2001 and
2002, respectively, of the revenue from continuing operations of the
consolidated ServiceMaster enterprise. The Terminix business is seasonal in
nature. The termite swarm season, which generally occurs in early spring but
varies by region depending on climate, has historically increased the demand for
termite control services and resulted in an increase in revenues. Similarly,
increased pest activity in the warmer months has historically increased the
demand for pest control services and resulted in an increase in revenues.
Terminix is a leading provider of termite and pest control services in the
United States with over 2.9 million residential and commercial customers. As of
December 31, 2002, Terminix provided these services in 44 states and the
District of Columbia through 318 company-owned locations and 134 franchised
locations. Terminix also provides termite and pest control services through
subsidiaries in Mexico and the Netherlands and has entered into licensing
arrangements to provide these services in 29 other countries, primarily in Latin
America and the Middle East.
American Home Shield Segment
The American Home Shield segment provides home service contracts for
systems and appliances primarily under the American Home Shield brand name and
home inspection services primarily under the AmeriSpec brand name, in each case,
to residential customers. Revenues derived from the American Home Shield segment
constituted 9%, 11% and 12% in 2000, 2001 and 2002, respectively, of the revenue
from continuing operations of the consolidated ServiceMaster enterprise. The
American Home Shield and AmeriSpec businesses are seasonal in nature. Sales
volume in the American Home Shield segment depends, in part, on the number of
home resale closings which historically has been highest in the spring and
summer months. American Home Shield's costs
2
<PAGE>
related to service call volume is highest in the summer months, especially
during periods of unseasonably warm temperatures.
American Home Shield. American Home Shield is a leading provider of home
service contracts for systems and appliances in the United States with over 1.1
million residential customers. It provides residential customers with contracts
to repair or replace electrical, plumbing, central heating and central air
conditioning systems, hot water heaters and appliances that breakdown due to
normal wear and tear and administers those contracts through independent repair
contractors. As of December 31, 2002, American Home Shield issued and
administered home service contracts in all 50 states and the District of
Columbia. American Home Shield has also entered into a licensing arrangement to
provide these services in Saudi Arabia.
AmeriSpec. AmeriSpec is a leading provider of home inspection services in
the United States with approximately 130,000 residential customers. As of
December 31, 2002, AmeriSpec provided these services in 48 states and the
District of Columbia through three company-owned locations and 223 franchised
locations. AmeriSpec has no international operations.
American Residential Services and American Mechanical Services Segment
The American Residential Services and American Mechanical Services segment
provides electrical, heating, ventilation, air conditioning, plumbing and drain
cleaning services primarily under the American Residential Services, American
Mechanical Services and Rescue Rooter brand names to residential and commercial
customers. Revenues derived from the American Residential Services and American
Mechanical Services segment constituted 23%, 23% and 20% in 2000, 2001 and 2002,
respectively, of the revenue from continuing operations of the consolidated
ServiceMaster enterprise. The American Residential Services and American
Mechanical Services businesses are seasonal in nature, with the greatest
activity occurring in May through August during the peak air conditioning
season.
American Residential Services. American Residential Services, which
includes the business of Rescue Rooter, is a leading provider of electrical,
plumbing, heating, ventilation, air conditioning and drain cleaning services in
the United States with approximately 1.6 million residential customers. As of
December 31, 2002, American Residential Services provided these services in 26
states and the District of Columbia through 70 company-owned locations. American
Residential Services has also entered into a licensing arrangement to provide
plumbing and drain cleaning services under the Rescue Rooter brand name in Saudi
Arabia.
In the fourth quarter of 2002, a subsidiary of ServiceMaster repurchased
the outstanding minority equity interest in American Residential Services held
by management of American Residential Services, making it a wholly owned
ServiceMaster business.
American Mechanical Services. American Mechanical Services, a subsidiary of
American Residential Services, is a leading provider of electrical, heating,
ventilation and air conditioning services in the United States with
approximately 4,000 commercial customers. As of December 31, 2002, American
Mechanical Services provided these services in six states through 15
company-owned locations. American Mechanical Services has no international
operations.
Other Operations Segment
The Other Operations segment provides residential and commercial disaster
restoration and cleaning services primarily under the ServiceMaster and
ServiceMaster Clean brand names, domestic housekeeping services primarily under
the Merry Maids brand name and on-site furniture repair and restoration services
primarily under the Furniture Medic brand name. The Other Operations segment
also includes ServiceMaster's international operations and its headquarters
functions. Revenues derived from the Other Operations segment constituted 7%, 4%
and 4% in 2000, 2001 and 2002, respectively, of the revenue from continuing
operations of the consolidated ServiceMaster enterprise.
3
<PAGE>
ServiceMaster Clean. ServiceMaster Clean is a leading franchisor in the
residential and commercial cleaning field in the United States with over 1
million residential and commercial customers. As of December 31, 2002,
ServiceMaster Clean provided these services in all 50 states through 2,983
franchised locations. ServiceMaster Clean also provides disaster restoration and
cleaning services through subsidiaries in Ireland, the United Kingdom and Spain
and has entered into licensing arrangements to provide these services in 18
other countries, primarily in Asia and the Middle East.
Merry Maids. Merry Maids is a leading provider of domestic house cleaning
services in the United States with approximately 278,000 residential customers.
As of December 31, 2002, these services were provided in 49 states and the
District of Columbia through 58 company-owned locations and 754 franchised
locations. Merry Maids also provides domestic house cleaning services through
subsidiaries in Denmark, Ireland and the United Kingdom and has entered into
licensing arrangements to provide these services in 10 other countries,
primarily in Asia.
Furniture Medic. Furniture Medic is a leading provider of on-site furniture
repair and restoration services in the United States with approximately 140,000
residential customers. As of December 31, 2002, Furniture Medic provided these
services in 46 states and the District of Columbia through 462 franchised
locations. Furniture Medic also provides on-site furniture repair and
restoration services through subsidiaries in France and the United Kingdom and
has entered into licensing arrangements to provide these services in Canada and
Saudi Arabia.
MARKETING AND DISTRIBUTION
ServiceMaster markets its services primarily through telemarketing,
television and radio advertising, yellow pages advertisements, print
advertisements, direct mail and door-to-door solicitation. Additionally,
American Home Shield markets its home service contracts through participating
real estate brokerage offices in conjunction with resales of single-family
residences and through financial institutions and insurance agencies.
HEADQUARTERS FUNCTIONS
Business Support Center. The Business Support Center coordinates
administration of payroll, benefits, risk management and travel services for
ServiceMaster's internal operations. Various administrative support departments
also provide personnel, communications, marketing, government and public
relations, administrative, accounting, financial, tax, human resources,
information technology and legal services. The Business Support Center is
headquartered in Downers Grove, Illinois, and has additional personnel located
in Memphis, Tennessee.
New Channels Development Group. In December 2002, ServiceMaster announced
the integration of ServiceMaster Home Service Center (formerly WeServeHomes.com)
into the enterprise marketing support function of ServiceMaster as the New
Channels Development Group. The New Channels Development Group actively
collaborates with ServiceMaster's marketing officers to identify opportunities
and establish priorities for opening new sales channels and developing
multi-brand marketing programs.
PATENTS, TRADEMARKS AND LICENSES
ServiceMaster holds various service marks, trademarks and trade names that
it deems particularly important to the advertising and franchising activities
conducted by each of its operating segments. These marks are registered in the
United States and over 97 other countries and are renewed at each registration
expiration date. ServiceMaster also holds various patents, trademarks, service
marks, trade names and copyrights, none of which are considered by ServiceMaster
to be material to its financial condition or results of operations, and owns
certain trade secrets, including training manuals, pricing models, customer
information and software source code.
4
<PAGE>
FRANCHISES
Franchises are important to the TruGreen ChemLawn, Terminix, ServiceMaster
Clean, Merry Maids, AmeriSpec and Furniture Medic businesses. Total franchise
fees (initial and recurring) represented 2.5% of consolidated revenue in both
2002 and 2001 and 1.6% and 1.7% of consolidated operating expenses in 2002 and
2001, respectively. Total franchise fee income comprised 11.3% and 10.2% of
consolidated operating income in 2002 and 2001, respectively. Franchise
agreements made in the course of these businesses are generally for a term of
five years. ServiceMaster renews the majority of its franchise agreements prior
to their expiration.
SALE OF REMAINING EUROPEAN PEST CONTROL OPERATIONS
In September 2002, ServiceMaster sold the stock of its remaining Terminix
European pest control and property services subsidiaries to Ecolab Inc. The sale
included operations in the United Kingdom and the Republic of Ireland.
COMPETITION
The following information is based on estimates, which cannot be verified,
made by ServiceMaster's management. ServiceMaster competes with many other
companies in the sale of its services, franchises and products. Some of these
competitors are larger or have greater financial and marketing strength than
ServiceMaster. The principal methods of competition in ServiceMaster's
businesses include quality of service, name recognition, pricing, assurance of
customer satisfaction and reputation.
TruGreen Segment
Lawn Care Services. Competition in the market for lawn care services is
strong, coming mainly from local, independently owned firms and from homeowners
who care for their own lawns.
Landscape Maintenance Services. Competition in the market for landscape
maintenance services is strong, coming mainly from small, owner-operated
companies operating in a limited geographic market and, to a lesser degree, from
a few large companies operating in multiple markets, and from property owners
who perform their own landscaping services.
Terminix Segment
Termite and Pest Control Services. Competition in the market for termite
and pest control services is strong, coming mainly from thousands of regional
and local, independently owned firms, from homeowners who treat their own
termite and pest control problems and from one other large company which
operates on a national basis.
American Home Shield Segment
Home Service Contracts for Systems and Appliances. Competition in the
market for home service contracts for systems and appliances is strong, coming
mainly from regional providers of home warranties. American Home Shield competes
with these companies for access to real estate brokers, financial institutions
and insurance agents that distribute its home service contracts.
Home Inspection Services. Competition in the market for home inspection
services is strong, coming mainly from regional and local, independently owned
firms.
5
<PAGE>
American Residential Services and American Mechanical Services Segment
Electrical, Heating, Ventilation and Air Conditioning Services. Competition
in the market for electrical, heating, ventilation and air conditioning services
is strong, coming mainly from local, independently owned firms throughout the
United States and a few national companies.
Plumbing and Drain Cleaning Services. Competition in the market for
plumbing and drain cleaning services is strong, coming mainly from local,
independently owned firms throughout the United States and one national company.
Other Operations Segment
Disaster Restoration and Cleaning Services. Competition in the market for
disaster restoration and cleaning services is strong, coming mainly from local,
independently owned firms and a few national companies.
House Cleaning Services. Competition in the market for house cleaning
services is strong, coming mainly from local, independently owned firms and a
few national companies.
Furniture Repair Services. Competition in the market for furniture repair
services is strong, coming mainly from local, independent contractors.
MAJOR CUSTOMERS
ServiceMaster has no single customer that accounts for more than 10% of its
operating revenue. Additionally, no operating segment has a single customer that
accounts for more than 10% of its operating revenue. No part of ServiceMaster's
business is dependent on a single customer or a few customers, the loss of which
would have a material adverse effect on ServiceMaster's financial condition or
results of operations.
REGULATORY COMPLIANCE
Government Regulations. ServiceMaster's operating segments are subject to
various federal, state and local laws and regulations, compliance with which
could reduce ServiceMaster's profitability or limit ServiceMaster's growth by
increasing operating costs, limiting or restricting the services provided by
ServiceMaster or the methods by which ServiceMaster sells those services or
conducts its business, or subjecting ServiceMaster to the possibility of
regulatory actions or proceedings.
These federal and state laws include laws relating to consumer protection
matters, permit and license requirements, workers' safety (the Occupational
Safety and Health Act) and employee benefits (the Consolidated Omnibus Budget
Reconciliation Act of 1985 and the Employee Retirement Income Security Act of
1974). Each operating segment must also meet the Department of Transportation
and Federal Motor Carrier Safety Administration requirements with respect to its
fleet of vehicles, and American Home Shield and AmeriSpec are regulated by the
Department of Insurance in certain states. In addition, the Health Insurance
Portability and Accountability Act of 1996, which becomes effective on April 14,
2003, will restrict the manner in which ServiceMaster operates some of its
employee benefit plans.
Consumer Protection and Telemarketing Matters. ServiceMaster is subject to
numerous federal and state laws and regulations designed to protect consumers,
including laws governing consumer privacy, the collection and use of consumer
data and telemarketing. Noncompliance with such laws or regulations can subject
ServiceMaster to fines or various forms of civil or criminal prosecution, any of
which could have an adverse effect on its financial condition and results of
operations.
At the federal level, the Federal Telephone Consumer Protection Act and the
Federal Telemarketing Sales Rule govern ServiceMaster's telephone sales
practices. At the state level, there are numerous statutes and regulations
targeted at direct telephone sales activities. For example, a growing number of
states have created
6
<PAGE>
statewide "do-not-call" registries, which prohibit telephone contact of those
registered with the state. The implementation of do-not-call lists requires
ServiceMaster's operating segments to seek additional channels from which to
market and to solicit new customers.
Franchise Matters. TruGreen ChemLawn, Terminix, ServiceMaster Clean, Merry
Maids, AmeriSpec, and Furniture Medic are subject to various federal and state
franchising laws and regulations governing franchise sales and marketing and
franchise trade practices, including applicable rules and regulations of the
Federal Trade Commission. These laws and regulations generally require
disclosure of business information in connection with the sale of franchises.
Certain state regulations also affect the ability of the franchisor to revoke or
refuse to renew a franchise. ServiceMaster deals with franchisees in good faith
and seeks to comply with regulatory requirements. From time to time,
ServiceMaster and one or more franchisees may become involved in a dispute
regarding the franchise relationship, including, among other things, payment of
royalties, location of stores, advertising, purchase of products by franchisees,
compliance with ServiceMaster standards and franchise renewal criteria. There
can be no assurance that compliance problems will not be encountered from time
to time, or that material disputes with one or more franchisees will not arise.
Environmental Matters. ServiceMaster's businesses are subject to various
federal, state and local laws and regulations regarding environmental matters.
Terminix is regulated under many federal and state environmental laws, including
the Federal Environmental Pesticide Control Act of 1972 and the Federal
Insecticide, Fungicide and Rodenticide Act of 1947. TruGreen ChemLawn and
TruGreen LandCare are also regulated under many federal and state environmental
laws, including the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986,
the Federal Insecticide, Fungicide and Rodenticide Act of 1947, the Resource
Conservation and Recovery Act of 1976 and the Clean Water Act. ServiceMaster
cannot predict the effect on its operations of possible future environmental
legislation or regulations. During 2002, there were no material capital
expenditures for environmental control facilities, and no such material
expenditures are anticipated in 2003.
EMPLOYEES
On December 31, 2002, ServiceMaster had a total of approximately 40,000
employees.
AVAILABLE INFORMATION
ServiceMaster maintains an Internet website at http://www.svm.com that
includes a hyperlink to a website maintained by a third-party where
ServiceMaster's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and all amendments to those reports are available
without charge as soon as reasonably practicable following the time that they
are filed with or furnished to the Securities and Exchange Commission.
ITEM 2. PROPERTIES
BUSINESS SUPPORT CENTER
In December 2002, ServiceMaster relocated its Business Support Center
headquarters to a new location within Downers Grove, Illinois. ServiceMaster
leases approximately 66,000 square feet of office space to accommodate personnel
from the Business Support Center. The lease expires at the end of 2012, but
ServiceMaster has an option to terminate the lease early after five years.
Additionally, ServiceMaster leases warehouse space in Naperville, Illinois.
ServiceMaster believes that this office facility and warehouse are suitable and
adequate to support the Business Support Center's current needs in the
Chicagoland area.
7
<PAGE>
OPERATING SEGMENTS
The headquarters for TruGreen ChemLawn, TruGreen LandCare, Terminix,
American Residential Services and Rescue Rooter are located in leased premises
at 860 Ridge Lake Boulevard, Memphis, Tennessee. The headquarters for
ServiceMaster Clean, Merry Maids, Furniture Medic, American Home Shield and
AmeriSpec are located in leased premises at 889 Ridge Lake Boulevard, Memphis,
Tennessee. The headquarters for American Mechanical Services are located in
leased premises at 8039 Laurel Lake Circle, Laurel, Maryland. In addition,
ServiceMaster leases space for a call center located at 6399 Shelby View Drive,
Memphis, Tennessee, offices located at 850 and 855 Ridge Lake Boulevard,
Memphis, Tennessee, training facilities located at 1650 Shelby Oaks Drive North,
Memphis, Tennessee and 3839 Forest Hill Irene Road, Memphis, Tennessee and a
warehouse located at 1575 Two Place, Memphis, Tennessee. ServiceMaster believes
that these headquarters, call center facility, offices, training facilities and
warehouse are suitable and adequate to support the current needs of its
operating segments in the Memphis and Laurel areas.
ServiceMaster's operating companies own and lease a variety of facilities
throughout the United States for branch operations and for office, storage, call
center and data processing space. The following chart identifies for each
operating company the number of owned facilities, the number of leased
facilities, and the number of states represented by those owned and leased
facilities. ServiceMaster believes that these facilities, when considered with
the headquarters, call center facility, offices, training facilities and
warehouses described above are suitable and adequate to support the current
needs of its business.
<TABLE>
<CAPTION>
Operating Owned Leased No. of
Company Facilities Facilities States
------- ---------- ---------- ------
<S> <C> <C> <C>
TruGreen ChemLawn 8 282 40
TruGreen LandCare 1 144 26
Terminix 20 380 41
American Residential Services 4 88 26
American Mechanical Services 1 15 6
American Home Shield 1 8 5
ServiceMaster Clean 0 6 6
Merry Maids 0 58 25
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of conducting its business activities, ServiceMaster
becomes involved in judicial, administrative and regulatory proceedings
involving both private parties and governmental authorities. As of March 1,
2003, these proceedings included general and commercial liability actions and a
small number of environmental proceedings. ServiceMaster does not expect any of
these proceedings to have a material adverse effect on its financial condition
or results of operations.
In the fourth quarter of 2001, ServiceMaster announced the sale of certain
subsidiaries of its Terminix European pest control and property services
operations. In the fourth quarter of 2002, the purchaser made a claim for a
purchase price adjustment, relating to an alleged breach of certain conditions
in the purchase agreement. In the course of responding to that claim,
ServiceMaster discovered that personnel of the former operations had made
unsupported monthly adjustments to certain accounts. In recognition of these
facts, ServiceMaster agreed to an adjustment to the purchase price consisting of
an $8 million cash payment and the cancellation of a previously reserved note.
On March 14, 2003, ServiceMaster contacted the Securities and Exchange
Commission on its own initiative and has provided the Commission with
information regarding the activities at the former subsidiary.
8
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this Form 10-K, no
matters were submitted to a vote of security holders.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ServiceMaster's common stock is traded on the New York Stock Exchange under
the symbol "SVM." At March 28, 2003, ServiceMaster's common stock was held of
record by approximately 32,000 persons. ServiceMaster estimates that
approximately 35,000 persons held shares of its common stock in the names of
nominees.
The information contained in ServiceMaster's Annual Report to Shareholders
for 2002 under the captions "Statements of Shareholders' Equity" and "Cash
Dividends Per Share" in the Quarterly Operating Results table is incorporated by
reference in this Form 10-K. The following table sets forth the quarterly prices
of ServiceMaster's common stock, as reported on the New York Stock
Exchange-Composite Transactions:
<TABLE>
<CAPTION>
2002 2001 2000
<S> <C> <C> <C> <C> <C> <C>
Price Per Share: High Low High Low High Low
First Quarter $14.50 $13.16 $12.00 $ 9.95 $14.94 $10.69
Second Quarter 15.50 12.70 12.00 9.84 13.75 10.63
Third Quarter 13.63 10.30 12.84 9.95 11.50 8.38
Fourth Quarter 12.15 8.89 14.20 10.06 11.50 8.25
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The information contained in ServiceMaster's Annual Report to Shareholders
for 2002 under the caption "Five Year Financial Summary" in the Financial
Statements section is incorporated by reference in this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in ServiceMaster's Annual Report to Shareholders
for 2002 under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" is incorporated by reference in this Form
10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in ServiceMaster's Annual Report to Shareholders
for 2002 under the caption "Quantitative and Qualitative Disclosures about
Market Risk" is incorporated by reference in this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Statements of Financial Position as of December 31, 2002
and 2001, the Consolidated Statements of Income, Cash Flows and Shareholders'
Equity for the years ended December 31, 2002, 2001 and 2000 and the Notes to the
Consolidated Financial Statements contained in ServiceMaster's Annual Report to
Shareholders for 2002 are incorporated by reference in this Form 10-K. The
report of Deloitte & Touche LLP dated March 26, 2003 on the Consolidated
Financial Statements contained in ServiceMaster's Annual Report to Shareholders
for 2002 are also incorporated by reference in this Form 10-K.
10
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 20, 2002, ServiceMaster, with the approval of the Board of Directors
and its Audit and Finance Committee, dismissed Arthur Andersen LLP as its
independent auditors and engaged Deloitte & Touche LLP as its new independent
auditors. The appointment of Deloitte & Touche became effective on May 22, 2002.
During the two fiscal years ended December 31, 2001 and 2000, and the interim
period subsequent to December 31, 2001, and through May 20, 2002, there were no
disagreements between ServiceMaster and Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which, if not resolved to Arthur Andersen's satisfaction,
would have caused Arthur Andersen to make reference to the subject matter in
connection with its reports on ServiceMaster's consolidated financial statements
for such periods. Arthur Andersen's report on ServiceMaster's consolidated
financial statements for the years ended December 31, 2001 and 2000 did not
contain an adverse opinion or a disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope or accounting principles. During the
years ended December 31, 2001 and 2000, and the interim period from January 1,
2002 through May 20, 2002, there were no reportable events as described under
Item 304(a)(1)(v) of Regulation S-K. During the years ended December 31, 2001
and 2000, and through May 20, 2002, ServiceMaster did not consult with Deloitte
& Touche with respect to the application of accounting principles to a specified
transaction, either completed or proposed, the type of audit opinion that might
be rendered on ServiceMaster's consolidated financial statements, or any matter
that was the subject of a disagreement or a reportable event, as described in
Items 304(a)(2)(i) and (ii) of Regulation S-K.
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information contained in ServiceMaster's Proxy Statement for the 2003
Annual Meeting of Shareholders under the heading "Item 1 - Election of
Directors" is incorporated by reference in this Form 10-K.
EXECUTIVE OFFICERS OF SERVICEMASTER
The following table shows (i) the names and ages (as of March 1, 2003) of
ServiceMaster's executive officers, (ii) all positions presently held by each
executive officer, and (iii) the year each person became an officer of
ServiceMaster. Each person has served as an officer 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.
<TABLE>
<CAPTION>
First Became
Name Age Present Positions an Officer
---- --- ----------------- ----------
<S> <C> <C> <C>
Jonathan P. Ward 48 Chairman and Chief Executive Officer 2001
Ernest J. Mrozek 49 President and Chief Operating Officer 1987
Steven C. Preston 42 Executive Vice President and Chief Financial Officer 1997
Steven B. Bono 50 Senior Vice President, Corporate Communications 2001
Mitchell T. Engel 50 Chief Marketing Officer 2002
James A. Goetz 45 Senior Vice President and Chief Information Officer 2000
Jim L. Kaput 42 Senior Vice President and General Counsel 2000
Elizabeth L. Reeves 49 Senior Vice President for People 2002
</TABLE>
Mr. Ward is also a director of ServiceMaster. For biographical information
with respect to Mr. Ward, see "Item 1 - Election of Directors" in
ServiceMaster's Proxy Statement for the 2003 Annual Meeting of Shareholders.
Ernest J. Mrozek, age 49, is President and Chief Operating Officer. He
served as President of ServiceMaster Consumer and Commercial Services from
November 1998 to April 2002. From January 1997 to October 1998 he served as
President and Chief Operating Officer, ServiceMaster Consumer Services.
Steven C. Preston, age 42, 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 1997 through June 1998. From August 1993 to
March 1997, he was Senior Vice President and Corporate Treasurer for First Data
Corporation, Atlanta, Georgia.
Steven B. Bono, age 50, has served as Senior Vice President, Corporate
Communications since July 2001. He was on sabbatical from May 2000 to July 2001.
Mr. Bono served as Vice President, Communications Strategy of Jack Morton
Worldwide in Chicago, Illinois from September 1997 to May 2000. From January
1997 to August 1997, he served as Vice President, Strategic Executive Engagement
of American Telephone & Telegraph Company in Basking Ridge, New Jersey.
12
<PAGE>
Mitchell T. Engel, age 50, is Chief Marketing Officer. He served as
Principal of Engel Marketing Services from April 1998 to April 2002. From
January 1996 to March 1998 he was President, Corporate Operations & Associated
Communication Companies, True North Communications.
James A. Goetz, age 45, is Senior Vice President and Chief Information
Officer. He served as Chief Information Officer of The ServiceMaster Home
Service Center L.L.C. from September 2000 to January 2002. From January 1999 to
August 2000, he was Director of Internet Services at IBM Global Services. From
May 1996 to December 1998, he was Director of Internet Partnering at IBM Global
Network.
Jim L. Kaput, age 42, is Senior Vice President and General Counsel of
ServiceMaster. From June 1994 until he joined ServiceMaster in April 2000, Mr.
Kaput was a partner at the law firm of Sidley & Austin in Chicago, Illinois.
Elizabeth L. Reeves, age 49, is Senior Vice President for People. She
served as Executive Vice President of Global Human Resources for Bcom3 from
October 2000 to September 2002. From March 1997 to September 2000 she was Group
Vice President, Human Resources for CNA.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The information contained in ServiceMaster's Proxy Statement for the 2003
Annual Meeting of Shareholders under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance" is incorporated by reference in this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in ServiceMaster's Proxy Statement for the 2003
Annual Meeting of Shareholders under the headings "Compensation of Directors,"
"Executive Compensation" and "Agreements with Officers and Directors" is
incorporated by reference in this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained in ServiceMaster's Proxy Statement for the 2003
Annual Meeting of Shareholders under the headings "Ownership of Our Common
Stock" and "Equity Compensation Plan Information" is incorporated by reference
in this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in ServiceMaster's Proxy Statement for the 2003
Annual Meeting of Shareholders under the heading "Certain Transactions" is
incorporated by reference in this Form 10-K.
ITEM 14. CONTROLS AND PROCEDURES
ServiceMaster's Chairman and Chief Executive Officer, Jonathan P. Ward, and
ServiceMaster's Chief Financial Officer, Steven C. Preston, have evaluated
ServiceMaster's disclosure controls and procedures within 90 days of the filing
of this report.
Messrs. Ward and Preston have concluded that ServiceMaster's disclosure
controls and procedures provide reasonable assurance that ServiceMaster can meet
its disclosure obligations. ServiceMaster's disclosure controls and procedures
are based on a roll-up of financial and non-financial reporting that is
consolidated in the principal
13
<PAGE>
executive office of ServiceMaster in Downers Grove, Illinois. The reporting
process is designed to ensure that information required to be disclosed by
ServiceMaster in the reports that it files or submits with the Securities and
Exchange Commission is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
There have been no significant changes in ServiceMaster's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
14
<PAGE>
PART IV
ITEM 15. 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 ServiceMaster's
Annual Report to Shareholders for 2002 and are incorporated by
reference in Part II, Item 8 of this Form 10-K:
Report of Independent Auditors
Consolidated Statements of Income for the three
years ended December 31, 2002, 2001 (as restated)
and 2000 (as restated)
Consolidated Statements of Financial Position as of
December 31, 2002 and 2001 (as restated)
Consolidated Statements of Cash Flows for the three
years ended December 31, 2002, 2001 (as restated)
and 2000 (as restated)
Consolidated Statements of Shareholders' Equity for
the three years ended December 31, 2002, 2001 (as
restated) and 2000 (as restated)
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 Form 10-K:
Schedule II--Valuation and Qualifying Accounts
Independent Auditors' Report on Schedule
Exhibit 23--Independent Auditors' Consent
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
consolidated financial statements or notes thereto.
3. Exhibits
The exhibits filed with this report are listed on pages 23-26 (the
"Exhibits Index"). Entries marked by an asterisk next to the exhibit's number
identify management contracts or compensatory plans, contracts or arrangements
in which a director or any of ServiceMaster's executive officers to be
identified in the summary compensation table included in ServiceMaster's Proxy
Statement for the 2003 Annual Meeting of Shareholders
15
<PAGE>
participates or compensatory plans, contracts or arrangements adopted without
approval of security holders pursuant to which ServiceMaster may award equity
and in which any ServiceMaster employee currently participates.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of the
fiscal year covered by this Form 10-K.
16
<PAGE>
SCHEDULE II
THE SERVICEMASTER COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning of Costs and Balance
Period Expenses Deductions (1) End of Period
-------------- -------------- -------------------------------------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 2002:
Continuing Operations -
Allowance for doubtful accounts
Accounts receivable (current) 26,313 40,560 42,397 24,476
Notes receivable (current) 2,084 1,056 - 3,140
Reserves related to strategic actions in the fourth
quarter of 2001 (2) 36,000 (5,600) 14,900 15,500
Remaining Liabilities from Discontinued Operations (3)
LandCare Construction 34,100 2,600 22,700 14,000
Certified Systems, Inc. 23,800 3,500 13,700 13,600
Management Services 7,400 (4,500) 1,300 1,600
International businesses (4) 19,600 21,900 20,100 21,400
Other 16,100 600 6,300 10,400
AS OF DECEMBER 31, 2001:
Continuing Operations -
Allowance for doubtful accounts
Accounts receivable (current) 29,349 32,523 35,559 26,313
Notes receivable (current) 1,691 516 123 2,084
Reserves related to strategic actions in the fourth
quarter of 2001 (2) - 40,000 4,000 36,000
Remaining Liabilities from Discontinued Operations (3)
LandCare Construction 5,200 32,200 3,300 34,100
Certified Systems, Inc. 12,600 13,000 1,800 23,800
Management Services - 22,700 15,300 7,400
Other 800 15,300 - 16,100
AS OF DECEMBER 31, 2000:
Continuing Operations -
Allowance for doubtful accounts
Accounts receivable (current) 31,457 32,184 34,292 29,349
Notes receivable (current) 1,417 755 481 1,691
</TABLE>
(1) Deductions in the allowance for doubtful accounts and notes receivable
reflect write-offs of uncollectible accounts Deductions for the
remaining items reflect cash payments, except for the items noted in
(4).
(2) Includes accruals for residual value guarantees on leased properties,
severance for former executives and terminated employees, and
transaction and other costs.
(3) The beginning balance represents the liabilities of the discontinued
operations that existed prior to the recording in the fourth quarter of
2001 of the costs related to exiting these operations and the reserves
for items recorded in the fourth quarter of 2001. Additions reflect the
costs recorded related to exiting these operations.
(4) The liabilities of this business assumed by the buyer of the sold
operations totaled $19.6 million. The Company recorded accruals in
connection with the 2002 sold operations and a cash adjustment to the
purchase price of the 2001 disposition.
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of The ServiceMaster Company:
We have audited the consolidated financial statements of The ServiceMaster
Company as of December 31, 2002 and 2001, and for each of the three years in the
period ended December 31, 2002, and have issued our report thereon dated March
26, 2003; such financial statements and report (which report expresses an
unqualified opinion and includes explanatory paragraphs relating to the
restatement of the Company's financial statements and the adoption of Statement
of Financial Accounting Standards No. 142, Goodwill and Other intangible Assets)
are included in The ServiceMaster Company's 2002 Annual Report to Shareholders
and are incorporated herein by reference. Our audits also included the
consolidated financial statement schedule of The ServiceMaster Company, listed
in Item 15. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 31, 2003
18
<PAGE>
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
Date: March 31, 2003 By /s/ JONATHAN P. WARD
-------------------------------
Jonathan P. Ward
Chairman and Chief Executive Officer
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 the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JONATHAN P. WARD Chairman and Chief Executive March 31, 2003
- ---------------------- Officer and Director
Jonathan P. Ward
/s/ STEVEN C. PRESTON Executive Vice President and March 31, 2003
- ---------------------- Chief Financial Officer (Principal
Steven C. Preston Financial Officer and Principal
Accounting Officer)
/s/ PAUL W. BEREZNY, JR. Director March 14, 2003
- ---------------------------
Paul W. Berezny, Jr.
/s/ BRIAN GRIFFITHS Director March 14, 2003
- ---------------------------
Brian Griffiths
/s/ SIDNEY E. HARRIS Director March 14, 2003
- ---------------------------
Sidney E. Harris
/s/ ROBERTO R. HERENCIA Director March 14, 2003
- ---------------------------
Roberto R. Herencia
/s/ HERBERT P. HESS Director March 14, 2003
- ---------------------------
Herbert P. Hess
Director
- ---------------------------
Michelle M. Hunt
19
<PAGE>
/s/ JAMES D. McLENNAN Director March 14, 2003
- ----------------------
James D. McLennan
/s/ DALLEN W. PETERSON Director March 14, 2003
- ---------------------------
Dallen W. Peterson
/s/ BETTY JANE SCHEIHING Director March 14, 2003
- ------------------------
Betty Jane Scheihing
/s/ DONALD G. SODERQUIST Director March 28, 2003
- ------------------------
Donald G. Soderquist
/s/ DAVID K. WESSNER Director March 14, 2003
- ---------------------------
David K. Wessner
</TABLE>
20
<PAGE>
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Jonathan P. Ward, certify that:
1. I have reviewed this annual report on Form 10-K of The ServiceMaster Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Jonathan P. Ward
--------------------
Jonathan P. Ward
Chairman and Chief Executive Officer
21
<PAGE>
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Steven C. Preston, certify that:
1. I have reviewed this annual report on Form 10-K of The ServiceMaster Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Steven C. Preston
---------------------
Steven C. Preston
Executive Vice President and Chief Financial Officer
22
<PAGE>
Exhibits Index
Exhibit No. Description of Exhibit
- ----------------------------------------------------------------------------
3(i) 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 registrant's Current Report on Form 8-K, No. 2 dated
February 26, 1998 (File No. 1-14762) (the "1998 8-K, No. 2").
3(ii) Bylaws of The ServiceMaster Company, as amended through April 26, 2002,
are incorporated by reference to Exhibit 3(ii) to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002
(File No. 1-14762) (the "2002 10-Q").
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 1998 8-K, No.2.
4.2 Certificate of Designation, Preferences and Rights of Junior
Participating Preferred Stock, Series A, is incorporated by reference
to Exhibit 4 to the 1998 8-K, No. 2.
4.3 Indenture dated as of August 15, 1997 between The ServiceMaster Company
and the Harris Trust and Savings Bank, as trustee, is incorporated by
reference to Exhibit 4.1 to the registrant's Registration Statement on
Form S-3 (File No. 333-32167) (the "1997 S-3").
4.4 First Supplemental Indenture dated as of August 15, 1997 between The
ServiceMaster Company and the Harris Trust and Savings Bank, as
trustee, is incorporated by reference to Exhibit 4.4 to the
registrant's Annual Report on Form 10-K for the year ended December 31,
1997 (File No. 1-14762) (the "1997 10-K").
4.5 Second Supplemental Indenture dated as of January 1, 1998 between The
ServiceMaster Company and the Harris Trust and Savings Bank, as
trustee, is incorporated by reference to Exhibit 2 to the registrant's
Current Report on Form 8-K, No. 1 dated February 26, 1998 (File No.
1-14762).
4.6 Third Supplemental Indenture dated as of March 2, 1998 between The
ServiceMaster Company and the Harris Trust and Savings Bank, as
trustee, is incorporated by reference to Exhibit 4.3 to the
registrant's Current Report on Form 8-K, No. 3 dated February 27, 1998
(File No. 1-14762) (the "1998 8-K, No. 3").
4.7 Fourth Supplemental Indenture dated as of August 10, 1999 between The
ServiceMaster Company and the Harris Trust and Savings Bank, as
trustee, is incorporated by reference to Exhibit 3 to the registrant's
Current Report on Form 8-K dated August 16, 1999 (File No. 1-14762)
(the "1999 8-K").
4.8 Indenture dated as of November 18, 1999 between The ServiceMaster
Company and the Harris Trust and Savings Bank, as trustee, is
incorporated by reference to Exhibit 4.16 to the registrant's
Registration Statement on Form S-3 (File No. 333-91381), filed on
November 19, 1999 (the "1999 S-3").
4.9 First Supplemental Indenture dated as of April 4, 2000 between The
ServiceMaster Company and Harris Trust and Savings Bank, as trustee, is
incorporated by reference to Exhibit 4.2 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000 (File No.
1-14762) (the "2000 10-Q").
4.10 Forms of 6.95% Note due August 14, 2007 and 7.45% Note due August 14,
2027 are incorporated by reference to Exhibit 4.2 to the 1997 S-3.
4.11 Form of 7.10% Note due March 1, 2018 is incorporated by reference to
Exhibit 4.1 the 1998 8-K, No. 3.
4.12 Form of 7.25% Note due March 1, 2038 is incorporated by reference to
Exhibit 4.2 to the 1998 8-K, No. 3.
4.13 Form of 7.875% Note due August 15, 2009 is incorporated by reference to
Exhibit 4 to the 1999 8-K.
23
<PAGE>
Exhibits Index
Exhibit No. Description of Exhibit
- ----------------------------------------------------------------------------
4.14 Form of 7.875% Note due August 15, 2009 is incorporated by reference to
Exhibit 5 to the 1999 8-K.
4.15 Form of 8.45% Note due April 15, 2005 is incorporated by reference to
Exhibit 4.1 to the 2000 10-Q.
4.16 $490,000,000 Credit Agreement dated as of December 12, 2001 among The
ServiceMaster Company, the Lenders, JPMorgan Chase Bank, Bank of
America, Bank One N.A., First Union National Bank and SunTrust Bank is
incorporated by reference to Exhibit 4.16 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 2001 (File No.
1-14762) (the "2001 10-K").
10.1* Senior Executive Ownership Election Plan, as approved by the Board of
Directors on December 10, 1999, is incorporated by reference to Exhibit
10.5 to the 1999 10-K.
10.2* 10-Plus Plan, as amended September 3, 1991, is incorporated by
reference to Exhibit 10.21 to the ServiceMaster Limited Partnership
Annual Report on Form 10-K for the year ended December 31, 1991 (File
No. 1-09378) (the "1991 10-K").
10.3* Form of Option Agreement for the 10-Plus Plan, as amended September 3,
1991, is incorporated by reference to Exhibit 10.22 to the 1991 10-K.
10.4* 1994 Non-Employee Directors Share Option Plan is incorporated by
reference to Exhibit 4.2 to the ServiceMaster Limited Partnership
Registration Statement on Form S-8 (File No. 33-55761), filed on
October 4, 1994 (the "1994 S-8").
10.5* Form of Option Agreement for the 1994 Non-Employee Director Share
Option Plan is incorporated by reference to Exhibit 4.3 to the 1994
S-8.
10.6* 1997 Share Option Plan is incorporated by reference to Exhibit 10.28 to
the ServiceMaster Limited Partnership Annual Report on Form 10-K for
the year ended December 31, 1996 (File No. 1-09378) (the "1996 10-K").
10.7* Form of Option Agreement for the 1997 Share Option Plan is incorporated
by reference to Exhibit 10.29 to the 1996 10-K.
10.8* 1998 Equity Incentive Plan is incorporated by reference to Exhibit
10.15 to the 1997 10-K.
10.9* Form of Option Agreement for the 1998 Equity Incentive Plan
(Non-Qualifying Stock Options) is incorporated by reference to Exhibit
10.20 to the 1997 10-K.
10.10* Form of Option Agreement for the 1998 Equity Incentive Plan (Incentive
Stock Options) is incorporated by reference to Exhibit 10.21 to the
1997 10-K.
10.11* 1998 Non-Employee Directors Discounted Stock Option Plan is
incorporated by reference to Exhibit 10.21 to the 1997 10-K.
10.12* 1998 Long-Term Performance Award Plan is incorporated by reference to
Exhibit 10.22 to the 1997 10-K.
10.13* 2000 Equity Incentive Plan is incorporated by reference to Exhibit 4.4
to the registrant's Registration Statement on Form S-8 (File No.
333-42680), filed on July 31, 2000 (the "2000 S-8").
10.14* Form of Option Agreement for the 2000 Equity Incentive Plan is
incorporated by reference to Exhibit 10.17 to the 2001 10-K.
24
<PAGE>
Exhibits Index
Exhibit No. Description of Exhibit
- ----------------------------------------------------------------------------
10.15* Employment Agreement dated as of January 9, 2001 between The
ServiceMaster Company and Jonathan P. Ward is incorporated by reference
to Exhibit 10.19 to the Annual Report on Form 10-K for the year ended
December 31, 2000 (File No. 1-14762) (the "2000 10-K").
10.16* Stock Option Agreement dated as of January 9, 2001 between The
ServiceMaster Company and Jonathan P. Ward is incorporated by reference
to Exhibit 10.20 to the 2000 10-K.
10.17* WeServeHomes.com 2000 Stock Option/Stock Issuance Plan is incorporated
by reference to Exhibit 10.21 to the 2000 10-K.
10.18* Form of Stock Option Agreement for the WeServeHomes.com 2000 Stock
Option/Stock Issuance Plan is incorporated by reference to Exhibit
10.22 to the 2000 10-K.
10.19* Form of Stock Purchase Agreement for the WeServeHomes.com 2000 Stock
Option/Stock Issuance Plan is incorporated by reference to Exhibit
10.23 to the 2000 10-K.
10.20*+ 2001 Directors Stock Plan, as amended and restated effective January
24, 2003.
10.21* Form of Option Agreement for the 2001 Directors Stock Plan is
incorporated by reference to Exhibit 4.4 to the registrant's
Registration Statement on Form S-8 (File No. 333-65520), filed on July
20, 2001.
10.22* Letter Agreement dated as of June 1, 2001 between The ServiceMaster
Company and Carlos Cantu is incorporated by reference to Exhibit 10.1
to the registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001 (File No. 1-14762).
10.23* Letter Agreement dated as of March 21, 2002 between The ServiceMaster
Company and C. William Pollard is incorporated by reference to Exhibit
10.27 to the 2001 10-K.
10.24* Employment Agreement dated as of April 18, 2002 between The
ServiceMaster Company and Phillip B. Rooney is incorporated by
reference to Exhibit 10.1 to the 2002 10-Q.
10.25*+ Employment Agreement dated as of April 1, 2002 between The
ServiceMaster Company and Mitchell T. Engel.
10.26* 2001 Long-Term Performance Award Plan, as amended March 16, 2001, is
incorporated by reference to Exhibit 10.2 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001 (File No.
1-14762).
10.27* Form of Change in Control Severance Agreement is incorporated by
reference to Exhibit 10.30 to the 2001 10-K.
10.28* Form of Restricted Stock Award Agreement for the 2000 Equity Incentive
Plan is incorporated by reference to Exhibit 10.31 to the 2001 10-K.
10.29*+ ServiceMaster Deferred Compensation Plan, as amended and restated
effective October 24, 2002.
10.30* Form of 5.50% Convertible Debenture due January 9, 2011 issued to
Jonathan P. Ward is incorporated by reference to Exhibit 10.33 to the
2001 10-K.
10.31* Form of 5.50% Note due January 9, 2011 issued to Jonathan P. Ward is
incorporated by reference to Exhibit 10.34 to the 2001 10-K.
25
<PAGE>
Exhibits Index
Exhibit No. Description of Exhibit
- ----------------------------------------------------------------------------
10.32* Form of 5.50% Convertible Debenture due May 10, 2011 issued to Jonathan
P. Ward is incorporated by reference to Exhibit 10.35 to the 2001 10-K.
10.33* Form of 5.50% Note due May 10, 2011 issued to Jonathan P. Ward is
incorporated by reference to Exhibit 10.36 to the 2001 10-K.
10.34* ServiceMaster Employee Share Purchase Plan, as amended and restated
effective October 4, 2001, is incorporated by reference to Exhibit
10.37 to the 2001 10-K.
10.35*+ 2002 Directors Deferred Fees Plan effective October 25, 2002.
13+ Annual Report to Shareholders for the year ended December 31, 2002 (the
"2002 Annual Report"). The parts of the 2002 Annual Report which are
expressly incorporated into this report by reference shall be deemed
filed with this report. All other parts of the 2002 Annual Report are
furnished for the information of the Securities and Exchange Commission
and are not filed with this report.
21+ Subsidiaries of ServiceMaster.
23+ Consent of Deloitte & Touche LLP.
99.1+ Certification of Chief Executive Officer.
99.2+ Certification of Chief Financial Officer.
99.3+ Statement on Scope and Organization of the Board of Directors of The
ServiceMaster Company dated March 8, 2002.
99.4+ Charter and Operating Guidelines of the Audit and Finance Committee
(Audit Capacity) dated as of July 19, 2002.
99.5+ Charter and Operating Guidelines of the Audit and Finance Committee
(Finance Capacity) dated as of July 19, 2002.
99.6+ Charter and Operating Guidelines of the Compensation and Leadership
Development Committee dated as of July 19, 2002.
99.7+ Charter and Operating Guidelines of the Governance and Nominating
Committee dated as of July 19, 2002.
- ----------------
* Indicates compensatory plan, contract, or arrangement.
+ Filed herewith.
26
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE SERVICEMASTER COMPANY
As of March 1, 2003, ServiceMaster had the following subsidiaries:
<TABLE>
<CAPTION>
State or Country
of
Incorporation
Subsidiary or Organization
- ---------- ---------------
<S> <C>
ServiceMaster Consumer Services Limited Partnership........................................................Delaware
ServiceMaster Consumer Services, Inc. ....................................................................Delaware
TruGreen Limited Partnership...............................................................................Delaware
TruGreen, Inc. ...........................................................................................Delaware
Barefoot Grass Canada, Inc. ..............................................................................Delaware
TruGreen LandCare L.L.C. 1.................................................................................Delaware
TruGreen Companies L.L.C...................................................................................Delaware
The Terminix International Company Limited Partnership.....................................................Delaware
Terminix International, Inc. .............................................................................Delaware
ServiceMaster Residential/Commercial Services Limited Partnership..........................................Delaware
SM Clean L.L.C.............................................................................................Delaware
Merry Maids Limited Partnership............................................................................Delaware
MM Maids L.L.C.............................................................................................Delaware
American Home Shield Corporation 2.........................................................................Delaware
AmeriSpec, Inc. ..........................................................................................Delaware
Furniture Medic Limited Partnership........................................................................Delaware
FM Medic L.L.C.............................................................................................Delaware
American Residential Services Holding L.L.C. 3.............................................................Delaware
ServiceMaster Aviation L.L.C...............................................................................Illinois
The ServiceMaster Acceptance Company Limited Partnership...................................................Delaware
ServiceMaster Acceptance Corporation.......................................................................Delaware
ServiceMaster Holding Corporation..........................................................................Delaware
ServiceMaster BSC L.L.C....................................................................................Delaware
ServiceMaster Funding Company L.L.C........................................................................Delaware
ServiceMaster Management Corporation.......................................................................Delaware
Steward Insurance Company...................................................................................Vermont
ServiceMaster Limited................................................................................United Kingdom
The ServiceMaster Home Service Center L.L.C................................................................Delaware
</TABLE>
- --------
1 .......TruGreen LandCare L.L.C. has 12 subsidiaries.
2 .......American Home Shield Corporation has 15 subsidiaries, including
AmeriSpec, Inc.
3 .......American Residential Services Holding L.L.C. has 22 subsidiaries.
1
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in registration Statement Nos.
333-81670, 333-73764, 333-65520, 333-53142, 333-50886, 333-42680, 333-33580,
333-78239, 333-74781, 033-55761 on Form S-8 and No. 333-91381 on Form S-3 of The
ServiceMaster Company of our report dated March 26, 2003 (which report expresses
an unqualified opinion and includes explanatory paragraphs relating to the
restatement of the Company's financial statements and adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets),
appearing in and incorporated by reference in this Annual Report on Form 10-K of
The ServiceMaster Company for the year ended December 31, 2002.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 31, 2003
2
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>3
<FILENAME>exhibit991ceo906.txt
<DESCRIPTION>CEO CERTIFICATION
<TEXT>
Exhibit 99.1
Certification of Chief Executive Officer Pursuant to Section 1350 of Chapter 63
-------------------------------------------------------------------------------
of Title 18 Of The United States Code
-------------------------------------
I, Jonathan P. Ward, the Chief Executive Officer of The ServiceMaster Company,
certify that (i) the Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, fully complies with requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and (ii) the information contained in such
Form 10-K fairly presents, in all material respects, the financial condition and
results of operations of The ServiceMaster Company.
/S/ Jonathan P. Ward
---------------------
Jonathan P. Ward
Chief Executive Officer
March 31, 2003
A signed original of this written statement required by Section 906 has been
provided to The ServiceMaster Company and will be retained by The ServiceMaster
Company and furnished to the Securities and Exchange Commission or its staff
upon request.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>4
<FILENAME>exhibit992cfo906.txt
<DESCRIPTION>CFO CERTIFICATION
<TEXT>
Exhibit 99.2
Certification of Chief Financial Officer Pursuant to Section 1350 of Chapter 63
-------------------------------------------------------------------------------
of Title 18 Of The United States Code
-------------------------------------
I, Steven C. Preston, the Chief Financial Officer of The ServiceMaster Company,
certify that (i) the Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, fully complies with requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and (ii) the information contained in such
Form 10-K fairly presents, in all material respects, the financial condition and
results of operations of The ServiceMaster Company.
/S/ Steven C. Preston
----------------------
Steven C. Preston
Chief Financial Officer
March 31, 2003
A signed original of this written statement required by Section 906 has been
provided to The ServiceMaster Company and will be retained by The ServiceMaster
Company and furnished to the Securities and Exchange Commission or its staff
upon request.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>5
<FILENAME>exhibit993brdstmtscope.txt
<DESCRIPTION>BRD STMTS SCOPE
<TEXT>
Exhibit 99.3
STATEMENT ON SCOPE AND ORGANIZATION OF
THE BOARD OF DIRECTORS
OF THE SERVICEMASTER COMPANY
Revised March 8, 2002
I. PREAMBLE
From time to time the Board of Directors of ServiceMaster has reviewed
its organization, composition and overall effectiveness. As a result
of such reviews, it has changed and revised this Statement on Scope
and Organization of the Board. During the past two years, the Board
has conducted another such review and has considered various subjects
including its size and composition, the combination of the role of
Chairman and Chief Executive Officer ("CEO"), the function and
designation of standing committees, the participation of management as
senior advisors, and the continuing role and emphasis of the Company's
four objectives. In the process, the Board also has developed certain
guiding principles for its continued and future effectiveness. This
statement incorporates certain changes and revisions as a result of
this review and confirms the commitment of the Board to provide
responsible governance and exercise of authority on behalf of
shareholders, employees and customers.
II. PURPOSE
Delaware law provides that "the business and affairs of every
corporation... shall be managed... by or under the direction of the
Board of Directors." The purpose of this statement is to describe the
manner in which ServiceMaster will be managed by or under the
direction of its Board of Directors within the framework of its
corporate objectives To Honor God In All We Do, To Help People
Develop, To Pursue Excellence, and To Grow Profitably and for the
benefit of its stakeholders.
This statement is intended as a guide. It does not supersede or
replace ServiceMaster's Amended and Restated Certificate of
Incorporation ("Charter") or By-Laws, nor is it intended to govern or
limit the enforceability or validity of any action taken by
ServiceMaster, its Board, or any committee of the Board. This
statement does not impose or impute a higher duty or standard of care
for the Board or any individual director than would otherwise be
required by law.
III. SCOPE
Except in the case of the appointment or removal of the CEO or in
other situations where initiation of the Board is required, the Board
performs its management functions through the CEO by (1) approving or
disapproving policies, plans, decisions, or appointments initiated by
the CEO and (2) conducting periodic reviews
<PAGE>
of performance, compliance, reporting and disclosure, leadership
development, and succession planning by the CEO.
IV. GUIDING PRINCIPLES & METHODOLOGY
In meeting its responsibilities, the Board acts as a whole or through
one or more of its committees. The Board conducts its work through
regularly scheduled and special meetings. For the Board to be
effective it should: (1) be comprised of strong, experienced
individuals with clearly defined skills and understanding of the
business and the public requirements of the Company and with a
diversity of gender, ethnicity, culture and race, (2) empower its
standing committees to accomplish their specialized functions, (3)
require of management appropriate reviews and disclosures to assure a
process of accountability in the exercise of governance and the
delegation of authority, (4) maintain a continuity with the heritage
of the past, (5) foster a continued understanding and implementation
of ServiceMaster's four objectives and (6) be willing always to change
its composition and method of operation in order to realize the
opportunities of the future and create value for the shareholders.
At least annually, or as the Board deems appropriate, the Board
reviews and considers:
1. Agenda Planning:
The Board through its Chairman determines the agenda of
its meetings. Agendas are planned for a period of at
least 18 months in advance with the objective of having
the Board and its committees informed with respect to
material and relevant matters relating to the operation
and future direction of the Company. Any director may
request an item to be added to an agenda.
2. Review of the CEO's Goals and Performance Objectives:
The CEO reviews with the Board his or her goals and
performance objectives for the ensuing period. The
purpose of this review is to accomplish a common
understanding between the Board and CEO of the focus and
direction of management and the allocation and
application of resources of the Company for the defined
period.
3. Financial Reporting and Budgets:
At regularly scheduled meetings of the Board, the CEO
provides a review of the financial condition and results
of operation of the Company and outlook for the future.
At least annually the CEO submits an operating and
capital budget for the ensuing three-year period.
<PAGE>
4. Compensation:
The compensation of the CEO is determined by the Board
acting through its Compensation and Leadership
Development Committee. The compensation of a select
group of other senior officers of the firm is determined
in a like manner after initiation and recommendation by
the CEO. The compensation of the five highest paid
officers is reported to the Board at least annually.
5. Planning:
The CEO organizes and carries on the strategic planning
function of the Company, and the Board participates in
this process as the CEO deems appropriate. The CEO
should keep the Board apprised of changing trends and
developments. A strategic plan with growth goals is
submitted for approval at least every three years.
6. Organization:
Organizational planning and changes in senior management
assignments are reported from time to time by the CEO.
The Board approves the selection by the CEO of members
of senior management. The Board periodically reviews
with the CEO planning for CEO succession within the
Company. The Board acting through its Compensation and
Leadership Development Committee also periodically
reviews with the CEO planning for leadership succession
(other than the CEO) within the Company.
7. Commitment Authority:
The Commitment Authority Policy is determined by the
Board acting through its Audit and Finance Committee.
The Policy should be reviewed by the Board every three
years.
8. Financial Reporting Requirements and Review of Auditors:
Public financial reporting requirements, Annual Reports,
and management outlooks projecting for the public future
financial condition and results of operations should be
reviewed and determined by the Board acting through its
Audit and Finance Committee. All such reports are
available for Board members' review and comment.
Communication with and review of the work of outside
auditors also are determined by the Board through its
Audit and Finance Committee.
<PAGE>
9. The Conduct and Responsibility of Board Members:
The conduct and actions of the Board and its members
should be reviewed periodically by the Governance and
Nominating Committee. The Board and each director has an
obligation to perform in good faith, in a manner
believed to be in the best interests of the Company and
consistent with the Company's four corporate objectives.
"Performing in good faith" means performing diligently,
in an honest manner, in accordance with the Company's
policy of "Do the Right Thing", with no undisclosed
conflict of interest, and with recognition of the
confidentiality concerning matters involving the
Company. There shall be no disclosure by a director of
any matter discussed at a meeting of the Board except as
to a matter specifically designated for public
disclosure. The "best interests of the Company" means
performing with a view to long-term value creation for
the benefit of shareholders, quality service for the
benefit of customers and growth opportunities for
employees of the Company. As these stakeholders are
satisfied, the best interests of the Company are
accomplished.
10. Succession Planning for CEO:
The Board and the CEO should periodically conduct a
review of succession planning for the CEO.
V. REPRESENTATION:
The fundamental responsibility of the Board is to represent the
interest of the stakeholders of the Company with a primary emphasis on
the interests of shareholders. No member of the Board is to be
representative of any special interest or ownership group. Varying
social, political, environmental and economic areas of interest
touched or influenced by the operations of the Company are regularly
reviewed by the Board and considered in its decision making.
VI. COMMUNICATIONS:
For the Board to meet its responsibility, there must be an effective
flow of information between management and the Board. This information
flow takes place in a number of different ways including the
presentation of financial and other reports that are meaningful and
comprehensible; direct personal reporting by the CEO and other members
of the management; a free exchange of information among staff, the
CEO, and individual directors; visits by the Board to various sites of
operation; participation by various Board members in special meetings
or functions of the Company and actual participation by management at
Board or Committee meetings. The CEO should
<PAGE>
establish a meeting schedule to provide directors regular
opportunities to meet with senior management. Directors may, after
consultation with the CEO, make inquiry of anyone within the Company
and consult directly with the Company's principal outside advisers,
including the Company's independent public accountants and outside
legal counsel. In the process of making inquiry, the director should
not disclose confidential information and should not be involved in
any direction or management of the employees involved and should
report back to the CEO any relevant conclusions or findings. A
director should notify the Chairman before accepting another board
membership of a public company and no employee member of the Board
should accept membership on a public board without approval of the
Board.
VII. ORGANIZATION:
Composition
The Board shall have the objective of having ten to twelve members
with not more than two members from management. The majority of the
Board's members shall satisfy the independence requirement of the
Charter. The differences in experience and skills of the directors
should reflect the business, technology, financial, accounting,
marketing and people needs and public requirements of the Company. The
Board should have a diversity of gender, ethnicity, culture and race.
Each director should agree to support the four objectives of the
Company. No Board member shall be employed by or financially related
to any major supplier. No Board member shall have a relation to or
connection with a competitor of the Company. Each director must be
younger than age 70 at the date he or she is elected. The performance
and contribution of each director completing his or her term is
reviewed with each director by the Chairman of the Governance and
Nominating Committee and the Chairman of the Board prior to his or her
nomination for re-election. The results of these assessments are
reviewed with the Board.
A member of management other than the CEO normally does not serve as a
director. A former member of management may serve as a director where
the Board has determined that such service is needed for continuity or
expertise.
Chairman
The Board shall elect from among its members a Chairman who
also may be the CEO of the Company. The Chairman schedules and
calls Board meetings, prepares the agenda for Board meetings,
chairs and moderates Board meetings, leads the Board and
serves Board committees. The Chairman is an officer and
employee of the Company.
Chairman of the Executive Committee
<PAGE>
The Board may from time to time elect from one of its members
a Chairman of its Executive Committee. In addition to chairing
and moderating Executive Committee meetings, the Chairman of
the Executive Committee performs such other duties as the
Board and its Chairman may from time to time determine. At the
request of the Chairman of the Board, the Chairman of the
Executive Committee, if different than the Chairman of the
Board, assists in agenda planning, participates in periodic
reviews of the business with the Chairman and CEO, and is
available to the Chairman and CEO for advice and counsel.
Meetings
The Board meets four or more times per year and holds its
meetings at such locations as the Board or its Chairman shall
from time to time determine. A special meeting of the Board
may be called by or at the request of the Chairman or a
majority of the Board.
Each Board meeting is opened with a devotional thought
relating to the recognition and application of the first
objective of the Company to the operation of the business.
Minutes are taken of every meeting and distributed to Board
members before the next meeting. Each director should have
full opportunity to present views, ask questions, and discuss
with other members of the Board the business at hand. Those
matters involving resolutions shall be voted on and the vote
appropriately recorded. While it is recognized that most
actions are taken during regular meetings, it is also
recognized that telephone conference-call meetings or actions
by written consent may be required from time to time. All
meetings of the Board and meetings of the committees of the
Board are confidential sessions, except when others are
invited to attend or as otherwise may be provided by the
Board.
Agenda
The Chairman shall have the primary responsibility for
determining the agenda, and the CEO shall have the
responsibility of preparing full and adequate information on
agenda items. The agenda proposed for meetings of the Board
shall be circulated to all members of the Board for the
addition of items or the amplification of items as proposed.
The proposed agenda and, to the extent feasible and
appropriate, supporting information and data for matters to be
considered are distributed to Board members in advance of the
meeting to allow study and consideration.
Committees
The Board shall establish committees to perform certain
functions. The number of committees and their special
assignments may vary from time to time. After initiation by
the Chairman, the Governance and Nominating Committee
<PAGE>
recommends to the Board for its consideration and appointment
the membership of each Committee. The standing committees of
the Board are: the Executive Committee; the Audit and Finance
Committee; the Compensation and Leadership Development
Committee; and the Governance and Nominating Committee. No
member of the present or former management of the Company may
serve on any standing Committee of the Board except the
Executive Committee. The Audit and Finance Committee shall
approve and recommend for approval by the Board a charter
setting forth such Committee's authority and responsibilities
with respect to the audit function of the Committee as
required by law or regulation. The Audit & Finance Committee,
with respect to its finance function, and the Compensation and
Leadership Development Committee and the Governance and
Nominating Committee may each approve and recommend for
approval by the Board a charter setting forth such Committee's
authority and responsibilities. A report on each Committee
meeting is made to the full Board. The Chairman of the Board
or the respective Chairman of each of the Audit and Finance
Committee, Compensation and Leadership Development Committee,
and Governance and Nominating Committee may call a special
meeting of that Committee at any time if deemed advisable.
Executive Committee
The Executive Committee is made up of the Chairman, CEO,
chairman of the other standing committees and the Chairman of
the Executive Committee if so elected. The Chairman of the
Board may initiate changes in the membership of this Committee
through recommendations to the Governance and Nominating
Committee as set forth in the preceding paragraph. This
Committee meets with the CEO and others, as designated, at
special meetings called by the Chairman of the Board, or a
majority of the Board or this Committee. The Executive
Committee may act on behalf of the Board between regularly
scheduled Board meetings. It also may be convened from time to
time by the CEO for advice and counsel relating to matters not
ready for Board action.
Audit and Finance Committee
The Audit and Finance Committee shall be made up of at least
three members of the Board who are "independent" within the
meaning of the rules of the New York Stock Exchange. The Audit
Committee has the responsibility of assisting the Board by
giving specific attention to the published financial reports
of the Company including the Annual Report to Shareholders,
the Annual and Quarterly reports filed with the Securities and
Exchange Commission and proxy material. The Audit Committee
reviews these statements, the underlying financial principles,
and the accounting controls used in their preparation provide
adequate and fair disclosure and that these statements
reasonably present the financial position of the Company,
including any of its contingent liabilities.
<PAGE>
The Audit Committee each year initiates the selection of the
independent auditors to be retained to audit the books and
records of the Company for the ensuing fiscal year and
recommends the selected independent auditors to the Board. The
Audit Committee's work includes the review of the content and
adequacy of the work of the independent auditors and their
reports and the review of the content and adequacy of the work
of the Internal Audit Staff of the Company and their reports.
The Committee also acts as the Finance Committee of the Board.
In that capacity, it acts on behalf of the Board to review
from time to time matters relating to stock repurchases,
acquisitions, financing, and venture fund investments.
Governance and Nominating Committee
The Governance and Nominating Committee shall be made up of at
least three members of the Board who are not employees of the
Company. The Committee, with concurrence of the Chairman and
CEO, recommends to the full Board for their approval the
nominees to be elected by the shareholders at the annual
meeting of shareholders. This Committee also recommends to the
full Board the persons to fill vacancies caused by death,
resignation, or retirement of an existing director, or to fill
new directorships if established. The Committee considers
individuals recommended by shareholders for election to the
Board. The Committee also acts in conjunction with the
Chairman on appointments to Board Committees. The Chairman of
the Committee works with the Chairman of the Board in the
process of conducting performance reviews of the Board, its
Committees and directors and is responsible from time to time
for such other matters as the Board determines.
Compensation and Leadership Development Committee
The Compensation and Leadership Development Committee shall be
made up of at least three members of the Board who are
"outside directors" within the meaning of Internal Revenue
Service regulations and "non-employee directors" within the
meaning of Rule 16b-3 under the Securities Exchange Act of
1934. The primary function of this Committee is to establish
compensation policies with respect to senior management and
review and recommend the compensation of the CEO and also to
review the CEO's recommendations with regard to the
compensation of senior management and other compensation
matters. The Committee also conducts performance and
development reviews of the CEO and such other reviews of
leadership, people development and succession as the CEO and
Committee from time to time determine.
* * * *
Board/Scope&OrganRevised2-27-02
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>6
<FILENAME>exhibit994afcaudit.txt
<DESCRIPTION>AFC AUDIT
<TEXT>
Exhibit 99.4
CHARTER AND OPERATING GUIDELINES
Audit and Finance Committee (Audit Capacity)
The ServiceMaster Company
(July 19, 2002)
The Board of Directors of the Company has developed and approved this Charter
and Operating Guidelines to articulate its understanding of the important role
of the Committee in its capacity as an audit committee of the Board. Through it,
the Board has sought to develop a clear mission and to establish practices and
policies for the Committee.
The primary purpose of the Committee is to assist the Board in its oversight
responsibilities to the shareholders, to potential shareholders and to the
investment community regarding the quality and integrity of the financial
reports and the underlying control structure of the Company. The authority,
responsibilities and membership of the Committee are set forth in the bylaws of
the Company. It is the intent of this Charter to clarify the relationship of the
Committee to: the Board of Directors, management (including the Internal
Auditor), and the Company's Independent Auditor. These matters are presented in
the context of "Expectations" from and to each of these entities.
While the Committee has the responsibilities set forth in this Charter, it is
not the duty of the Committee to plan or conduct audits or to determine that the
Company's financial statements are complete and accurate and in accordance with
generally accepted accounting principles. This is the responsibility of
management and the Independent Auditor. Nor is it the duty of the Committee to
conduct investigations, resolve disagreements, if any, between management and
the Independent Auditor or to assure compliance with laws and regulations and
the Company's business guidelines.
I. BOARD EXPECTATIONS OF THE AUDIT COMMITTEE
A. General
-------
The Board delegates certain responsibilities and duties to the Committee to
assist the Board in fulfilling its oversight responsibilities. The Committee
will:
a. annually recommend to the Board the selection of the
Independent Auditor to audit the books, records and accounts
of the Company and its subsidiaries;
b. review with the Independent Auditor in advance the scope of
its annual audit;
c. periodically review with the Independent Auditor and
management the accounting principles, policies and practices
of the Company and the
<PAGE>
Company's reporting policies and practices;
d. review with the Independent Auditor the results of its annual
audit;
e. periodically review with the Independent Auditor and the
Company's management the adequacy of the Company's accounting,
financial and operating controls;
f. review and discuss with the Independent Auditor and management
the annual audited financial statements before they are filed
with the Securities and Exchange Commission; on a quarterly
basis, this review and discussion will be completed with the
Audit Committee Chairman, who then will report to the
Committee on whether material modifications should be made to
the financial statements based on the Independent Auditor's
assessment;
g. review and discuss with the Independent Auditor or management
the matters required to be communicated to the Committee in
accordance with American Institute of Certified Public
Accountants (AICPA) Statements of Auditing Standards (SAS) 61;
h. receive the required written disclosures and a letter from the
Independent Auditor regarding the Independent Auditor's
independence; review and discuss the Independent Auditors
independence, including all significant consulting and other
relationships with the Company that could impair the
Independent Auditor's independence;
i. approve the fees and other significant compensation to be paid
to the Independent Auditor;
j. recommend to the Board, based on the reviews and discussions
of the annual audited financial statements, the matters
required to be communicated in accordance with AICPA SAS 61
and the Independent Auditor's independence, that the annual
audited financial statements be included in the Company's
Annual Report on Form 10-K;
k. prepare a report that discloses to shareholders certain
required actions taken by the Committee as required by the
Securities and Exchange Commission;
l. review the adequacy of this Charter on at least an annual
basis and submit this Charter to the Board for its approval
and, thereafter, include this Charter in the Company's proxy
statement as required by the rules of the Securities and
Exchange Commission; and
2
<PAGE>
m. carry out such other responsibilities as are assigned
to the Committee by the Board.
The Committee will serve as an independent and objective party to monitor that
the Company is effectively and responsibly reporting its financial results and
assure the adequacy of internal control systems. The Committee will review and
appraise the performance of the Independent Auditor and Internal Audit
Department.
The Committee will:
a. oversee management's process of identifying and measuring the
Company's business risks;
b. monitor and review the establishment and maintenance of the
Company's Code of Conduct and seek to ensure that management
has established a compliance system to enforce the Code of
Conduct;
c. review significant cases of conflict of interest, misconduct
or fraud;
d. monitor and review the work of the Environmental Stewardship
Department, the development and maintenance of environmental
stewardship standards and practices, the Company's compliance
systems and controls to enforce these standards, and
significant cases of variance from these standards;
e. monitor and review the organizational structure and
qualifications of the Internal Audit Department and seek to
ensure the effectiveness and independence of this department;
f. monitor and review, with the Company's General Counsel, legal
compliance matters, including securities trading practices and
policies;
g. regularly review any significant current or pending litigation
matters or problems with regulatory agencies that could have a
significant impact on the Company's financial statements; and
h. perform any other activities consistent with this Charter, the
Company's bylaws, and applicable laws as the Committee or the
Board deems necessary or appropriate.
B. Composition
-----------
The members of the Committee will be appointed as provided in the bylaws. The
3
<PAGE>
Committee shall be comprised of at least three independent directors as
determined by the Board. An independent director is defined as one who has no
relationship to the Company that may interfere with the exercise of their
independence from management and the Company. Members of the Committee shall
have a basic understanding of finance and accounting, be able to read and
understand fundamental financial statements and at least one member of the
Committee shall have accounting or related financial management expertise. The
Committee shall be chaired by the person designated as Chairman of the Committee
(the "Chairman").
C. Meetings
--------
The Committee will meet at least three times annually, or more frequently as
circumstances may warrant. Generally, and as appropriate, the Committee will
meet with, and receive reports from management, the Internal Audit Department,
the Company's General Counsel and the Independent Auditor. The Chairman, in lieu
of the Committee, may review and discuss the quarterly financial statements with
the Independent Auditor. The Committee will hold executive sessions to discuss
any matters that the Committee or any of these groups believe should be
discussed privately.
II. AUDIT COMMITTEE EXPECTATIONS OF MANAGEMENT
The Committee may call upon the resources of the Independent Auditor and the
Company's management, including its Chairman of the Board and Chief Executive
Officer, President and Chief Operating Officer, Chief Financial Officer and
financial staff, Chief Information Officer, Internal Auditor, General Counsel,
environmental, compliance and quality management and others, as necessary, to
investigate and resolve practices or transactions which are, or have the
appearance of being questionable, illegal or improper should these activities
occur. The Committee may meet with any of these persons separately where it
believes discussion might otherwise be inhibited.
Management will apprise the Committee of the overall business environment and
risks, and the Company's systems for internal controls. Management will discuss
the Company's financial statements with the Committee. Specifically, management
will:
a. review and discuss with the Committee the annual audited
financial statements and related disclosures prior to filing
with the Securities and Exchange Commission;
b. review and discuss with the Chairman the quarterly financial
statements and related disclosures prior to filing with the
Securities and Exchange Commission;
c. make presentations concerning any changes in accounting
principles or financial reporting policies from the prior year,
the accounting treatment accorded significant and/or unusual
transactions, and any significant variations between budgeted
and actual numbers in a specific business unit;
4
<PAGE>
d. inform the Committee of material consultations made by
management with outside accountants (other than the Independent
Auditor) with respect to the financial and/or tax accounting
treatment of a particular event or completed transaction;
e. provide the Committee with management's response to assessments
provided by the Internal Auditor or the Independent Auditor;
f. inform the Committee of the emergence or elimination of high
risk areas;
g. provide the Committee with significant estimates or judgments
used in the preparation of financial statements;
h. review with the Committee the status and material activity
related to significant judgmental reserves and accruals;
i. inform the Committee of the effect of any significant external
environmental factors (economic, or otherwise) on financial
condition or reporting;
j. inform the Committee of significant issues related to tax
accounting, reporting or payment; and
k. inform the Committee of significant issues related to operation,
development and implementation of information systems.
The Committee will be provided, and have access to, any and all
corporate information, reports and data so as to enable it to carry out
its responsibilities. In any areas of sensitivity or privacy, the
Chairman will review the need for such information with the Chairman of
the Board and Chief Executive Officer.
III. AUDIT COMMITTEE EXPECTATIONS OF INDEPENDENT AUDITOR
The Board is the client of the Independent Auditor. The Independent Auditor,
through the Committee, is responsible to the Board. The Committee will evaluate
the performance of the Independent Auditor, annually recommend to the Board the
selection of the Independent Auditor and, if circumstances warrant, recommend to
the Board the discharge of the Independent Auditor. From time to time, formal
bids from national accounting firms (including the firm then serving as the
outside auditor) may be solicited. Formal presentations of capability, scope of
services and fees will be considered.
In general, the Independent Auditor is expected to perform an effective and
efficient audit, report to the Committee the results of its audit and report on
the Company's internal control structure and processes to understand and manage
business risks.
Specifically, the Committee expects the Independent Auditor to:
5
<PAGE>
a. Deliver the required written disclosures and a letter regarding
the independence of the Independent Auditor; review and discuss
the Independent Auditor's independence, including all
significant consulting and other relationships with the Company
that could impair such objectivity and independence;
b. Discuss the scope, approach, and results of the annual audit in
order to assist the Committee in overseeing the financial
reporting and disclosure process;
c. Review and discuss the Company's quarterly financial statements
before they are filed with the Securities and Exchange
Commission and, based on inquiries with management and various
analytical procedures, report to the Chairman on whether
material modifications should be made to the interim financial
statements
d. Discuss the Independent Auditor's judgment about the quality,
not just the acceptability, of the financial statements,
including the appropriateness and consistency of accounting
policies and their application, and the clarity and completeness
of the financial statements and disclosures;
e. Review the selection of new or changes to accounting policies,
review estimates, judgments and uncertainties inherent in the
financial statements, and review unusual transactions and
significant financial statement items; and
f. Review important risks and issues and give opinions as to how
these are being addressed by management.
Provide a forthright, qualitative appraisal of the overall control environment,
including risks and potential risks that could have a significant future impact
on the Company's financial statements, as well as an assessment as to how these
are being or will be handled by management;
6
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>7
<FILENAME>exhibit995afcfinance.txt
<DESCRIPTION>AFC FINANCE
<TEXT>
Exhibit 99.5
Charter and Operating Guidelines
Audit and Finance Committee (Finance Capacity)
The ServiceMaster Company
(as adopted by the Board of Directors on July 19, 2002)
The Board of Directors of the Company (the "Board") has developed and approved
this Charter and Operating Guidelines to set forth a clear mission of the Audit
and Finance Committee in its capacity as a finance committee of the Board (the
"Committee"). Through it, the Board has sought to establish practices and
policies for the Committee.
The primary function of the Committee is to serve as a committee of special
expertise on financial matters affecting the Company.
The authority, responsibilities and membership of the Committee are set forth in
the Bylaws of the Company. It is the intent of this Charter and Operating
Guidelines to clarify the relationship of the Committee to the Board and
management.
Composition
The members of the Committee are appointed as provided in the Bylaws. The
Committee shall be comprised of at least three directors as determined by the
Board, all of whom shall be independent. An independent director is defined as
one who has no relationship to the Company that may interfere with the exercise
of their independence from management and the Company. Members of the Committee
shall have a basic understanding of finance and accounting, be able to read and
understand fundamental financial statements and at least one member of the
Committee shall have accounting or related financial management expertise. In
addition, no former member of management can serve on the Committee. The
Committee shall be chaired by the person designated as Chairman of the
Committee.
Meetings
The Committee will meet at least three times annually, or more frequently as
circumstances may warrant. Generally, and as appropriate, the Committee will
meet with and receive reports from the Company's Chairman and Chief Executive
Officer, President and Chief Operating Officer, Chief Financial Officer,
Controller, Treasurer and other members of management. The Committee may hold
executive sessions to discuss any matters that the Committee believes should be
discussed privately.
Authority and Responsibilities
The Board delegates certain responsibilities and duties to the Committee to
assist the Board in fulfilling its oversight responsibilities. The Committee
shall have the authority to:
1. review financial reports and analyses and shall make recommendations
on financial matters to the Board or the Executive Committee;
<PAGE>
2. periodically review the Company's Commitment Authority Policy and make
recommendations to the Board with respect thereto;
3. review the Company's dividend policy and make recommendations to the
Board with respect thereto;
4. review management's requests for new financing arrangements, whether
debt or equity, and make determinations or recommendations to the
Board with respect thereto in accordance with the Company's Commitment
Authority Policy;
5. review management's recommendations concerning significant
acquisitions, dispositions, capital investments, venture fund
investments and other significant financial commitments and make
determinations or recommendations to the Board with respect thereto in
accordance with the Company's Commitment Authority Policy;
6. review proposed major contracts or programs and make determinations or
recommendations to the Board with respect thereto in accordance with
the Company's Commitment Authority Policy;
7. review matters relating to the repurchase of stock or the repurchase
or redemption of debt and make recommendations to the Board with
respect thereto in accordance with the Company's Commitment Authority
Policy;
8. review financial transactions or arrangements between the Company and
one or more directors or corporate officers, other than compensation
decisions, and make recommendations to the Board with respect thereto
in accordance with the Company's Commitment Authority Policy;
9. determine through its Chairman the agenda of its meetings; and
10. exercise such other authority which shall be delegated to the
Committee by the Board, including pursuant to the Company's Commitment
Authority Policy, or which the Committee shall deem reasonably related
to any authority delegated to the Committee in or pursuant to the
Bylaws.
In fulfilling its oversight responsibilities, the Committee may, in the name and
on behalf of the Company, retain a firm to act as a financial advisor (and in
that capacity to provide customary reports and opinions) in accordance with the
Company's Commitment Authority Policy.
2
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>8
<FILENAME>exhibit996cldc.txt
<DESCRIPTION>CLDC
<TEXT>
Exhibit 99.6
Charter and Operating Guidelines
Compensation and Leadership Development Committee
The ServiceMaster Company
(as adopted by the Board of Directors on July 19, 2002)
The Board of Directors of the Company (the "Board") has developed and approved
this Charter and Operating Guidelines to set forth a clear mission of the
Compensation and Leadership Development Committee (the "Committee"). Through it,
the Board has sought to establish practices and policies for the Committee.
The primary functions of the Committee are to establish compensation policies
for the Company; to review existing and proposed compensation programs; to
establish the compensation of the Chief Executive Officer (the "CEO") and
provide a report to the Board in respect thereto; and, after considering the
recommendations of the CEO, to establish the compensation of the other executive
officers and provide a report to the Board in respect thereto. The Committee
also conducts performance and development reviews of the CEO and such other
reviews of leadership development strategy, people development strategy and
succession as the CEO and Committee from time to time determine. This will
include regularly scheduled reviews of senior leadership, high potential
individuals and the diversity of the management team. In all their actions, the
Committee should also play a major role in supporting the second corporate
objective--To help people develop.
The authority, responsibilities and membership of the Committee are set forth in
the Bylaws of the Company. It is the intent of this Charter and Operating
Guidelines to clarify the relationship of the Committee to the Board and
management.
Composition
The members of the Committee are appointed as provided in the Bylaws. The
Committee shall be made up of at least three members of the Board who are
"outside directors" within the meaning of Internal Revenue Service regulations
and "non-employee directors" within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934. In addition, no former member of management can
serve on the Committee. The Committee shall be chaired by the person designated
as the Chairman of the Committee.
Meetings
The Committee will meet at least three times annually, or more frequently as
circumstances may warrant. Generally, and as appropriate, the Committee will
meet with and receive reports from the Company's Chairman and Chief Executive
Officer, President and Chief Operating Officer, Vice President - Compensation
and other members of management. The Committee may hold executive sessions to
discuss any matters that the Committee believes should be discussed privately.
<PAGE>
Authority and Responsibilities
The Board delegates certain responsibilities and duties to the Committee to
assist the Board in fulfilling its oversight responsibilities. The Committee
shall have the authority to:
1. establish compensation policies for the Company;
2. review existing and proposed compensation programs, including equity
based benefit plans;
3. establish the annual and long-term compensation of the CEO, including
base compensation, annual bonus, stock options and other long-term
compensation arrangements ("Compensation") and provide a report to the
Board in respect thereto;
4. after considering the recommendations of the CEO, establish the
Compensation of each of the executive officers other than the CEO, and
provide a report to the Board in respect thereto;
5. recommend to the Board compensation policies and programs for the
compensation of members of the Board who are not employees of the
Company;
6. conduct the performance and development review of the CEO and report
to the Board for final approval;
7. conduct such other reviews of leadership development strategy, people
development strategy and succession plans as the CEO and the Committee
from time to time determine;
8. conduct regular reviews of high potential individuals, succession
planning and the diversity of our management team;
9. periodically review presentations of business unit management on their
senior management team;
10. after considering the recommendations of the CEO, recommend to the
Board the appointment of corporate officers other than the CEO;
11. adopt rules and guidelines and otherwise administer the Company's
compensation programs, including, without limitation, its annual
incentive bonus plan, long-term performance award plan, stock option
plans, employee stock purchase plans, 401(k) plan and deferred
compensation plans;
12. prepare a report addressing applicable requirements under United
States federal securities laws for inclusion in the Company's proxy
statement;
13. determine through its Chairman the agenda of its meetings; and
14. exercise such other authority which shall be delegated to the
Committee by the Board, including pursuant to the Company's Commitment
Authority Policy, or which the
2
<PAGE>
Committee shall deem reasonably related to any authority delegated to
the Committee in or pursuant to the Bylaws.
In fulfilling its oversight responsibilities, the Committee may, in the name and
on behalf of the Company, retain a firm specializing in executive compensation
consulting in accordance with the Company's Commitment Authority Policy.
3
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>9
<FILENAME>exhibit997gnc.txt
<DESCRIPTION>GNC
<TEXT>
Exhibit 99.7
Charter and Operating Guidelines
Governance and Nominating Committee
The ServiceMaster Company
(as adopted by the Board of Directors on July 19, 2002)
The Board of Directors of the Company (the "Board") has developed and approved
this Charter and Operating Guidelines to set forth a clear mission of the
Governance and Nominating Committee (the "Committee"). Through it, the Board has
sought to establish practices and policies for the Committee.
The primary functions of the Committee are to recommend to the Board persons to
serve as members of the Board; to assist the Chairman of the Board in evaluating
the performance of the Board; and to review and make recommendations to the
Board on corporate governance and similar matters relevant to the Company.
The authority, responsibilities and membership of the Committee are set forth in
the Bylaws of the Company. It is the intent of this Charter and Operating
Guidelines to clarify the relationship of the Committee to the Board and
management.
Composition
The members of the Committee are appointed as provided in the Bylaws. The
Committee shall be made up of at least three members of the Board who are
neither current nor former members of management of the Company. The Committee
shall be chaired by the person designated as the Chairman of the Committee.
Meetings
The Committee will meet at least three times annually, or more frequently as
circumstances may warrant. Generally, and as appropriate, the Committee will
meet with and receive reports from the Company's Chairman and Chief Executive
Officer, President and Chief Operating Officer and General Counsel and other
members of management. The Committee may hold executive sessions to discuss any
matters that the Committee believes should be discussed privately.
Authority and Responsibilities
The Board delegates certain responsibilities and duties to the Committee to
assist the Board in fulfilling its oversight responsibilities. The Committee
shall have the authority to:
1. review the qualifications of, and recommend to the Board, (i) persons
to be nominated by the Board for election to the Board by stockholders
at each annual meeting of stockholders and (ii) the persons to be
elected to any vacancy on the Board which shall occur for any reason;
<PAGE>
2. in connection with its recommendations on director nominees, accept
nomination of candidates to fill the Board from the stockholders of
the Company if such nominations are submitted within the time limits
and in the manner prescribed in the Bylaws;
3. after initiation by the Chairman of the Board, recommend appointments
to committees of the Board;
4. periodically review the size, composition and organization of the
Board and its committees and recommend policies, changes or other
action it deems advisable, including recommendations to the Board,
when appropriate or necessary, regarding retirement age, resignation
or removal of a director, stock ownership guidelines, independence
requirements, frequency of Board meetings and terms of directors;
5. develop and recommend to the Board guidelines and criteria to
determine the qualifications to serve and continue to serve as a
director;
6. recommend to the Board a methodology for evaluating the performance of
the Board and of members of the Board who are not employees of the
Company;
7. review transactions or arrangements (financial or otherwise) between
the Company and one or more directors or corporate officers, other
than compensation decisions, and make recommendations to the Board
with respect thereto in accordance with the Company's Commitment
Authority Policy;
8. review other corporate governance and similar matters relevant to the
Company, including, without limitation, the Statement on Scope and
Organization of the Board of Directors of The ServiceMaster Company,
this Charter and Operating Guidelines and affiliations of all
directors, and recommend policies, changes or other action it deems
advisable;
9. determine through its Chairman the agenda of its meetings; and
10. exercise such other authority which shall be delegated to the
Committee by the Board, including pursuant to the Company's Commitment
Authority Policy, or which the Committee shall deem reasonably related
to any authority delegated to the Committee in or pursuant to the
Bylaws.
In addition, the Chairman of the Governance and Nominating Committee serves with
the Chairman of the Board in the process of conducting performance reviews of
the Board, its committees and directors.
In fulfilling its oversight responsibilities, the Committee may, in the name and
on behalf of the Company, retain a firm specializing in the recruitment of board
members in accordance with the Company's Commitment Authority Policy.
2
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>10
<FILENAME>exhibit1025.txt
<DESCRIPTION>TERMS OF EMPLOYMENT
<TEXT>
April 1, 2002
Mr. Mitchell T. Engel
525 Circle Lane
Lake Forest, Illinois 60045
Re: Terms for Employment
Dear Mitch:
It is my pleasure to extend to you an offer of employment with The ServiceMaster
Company upon the terms set forth in the attached term sheet. Please signify
your acceptance of such employment by signing as indicated below. This letter
agreement may be executed in counterparts.
THE SERVICEMASTER COMPANY
\s\ Jonathan P. Ward
--------------------
Jonathan P. Ward
President and Chief Executive Officer
ACCEPTED AND AGREED:
\s\ Mitchell T. Engel 4/1/02
- ----------------------------- ---------------------
Mitchell T. Engel
<PAGE>
Exhibit 10.25
Principal Terms For Employment of
Mitchell T. Engel ("Executive") By
The ServiceMaster Company ("Company")
1. Position: Chief Marketing Officer reporting to the President and
--------
Chief Executive Officer. Executive shall serve as a member of the President and
Chief Executive Officer's Executive Committee (the "Executive Committee").
2. Term: April 1, 2002 through March 31, 2004.
----
3. Base Annual Salary: Annual rate equal to $325,000 for 2002, subject
------------------
to increase but not decrease thereafter.
4. Bonuses:
-------
(a) Annual target bonus ("APC") based upon the terms and
conditions of the Company's APC plan, with target at 100% of base annual salary.
Unless Executive's employment is terminated for Cause or the Executive
terminates employment without Good Reason prior to the normal bonus payment
date, the minimum bonus paid for 2002 will be at 100% of target, without
proration. "Cause" and "Good Reason" are defined in the attached Appendix A.
(b) Additional bonuses as awarded in the discretion of the
President and Chief ExecutiveOfficer.
5. Long-Term Performance Award: The President and Chief Executive
---------------------------
Officer shall recommend to the Company's Compensation Committee that Executive
be granted three hundred and twenty-five (325) participation units under the
Company's 2002 Long-Term Performance Award Plan for the performance period
beginning January 1, 2002, at a target value of $700 per participating unit. Any
amount earned for 2002 shall not be prorated.
6. Group/Executive Benefits: Participation by Executive and his family,
------------------------
on terms no less favorable to Executive than the terms offered to other senior
executives of the Company, in any group and/or executive life, hospitalization
or disability insurance plan, health program (with COBRA equivalent premiums
paid during any waiting period), profit sharing, 401(k) and similar benefit
plans (qualified, non-qualified and supplemental) or other fringe benefits of
the Company, including automobile allowance with a value up to $50,000 and
similar programs as in effect from time to time (collectively referred to as the
"Benefits").
7. Equity-Based Incentive Compensation:
-----------------------------------
(a) Subject to Compensation Committee approval, initial grant
of seven-year options with respect to 200,000 shares to become exercisable
ratably over five years, commencing on the one-year anniversary of the grant
date. The exercise price for such options will be equal to the average closing
NYSE price for the five trading days immediately preceding the grant date.
Page 1 of 5
<PAGE>
(b) Beginning in 2003 and each year of his employment with the
Company thereafter, Executive will be eligible to receive grants under the
Company's stock incentive programs consistent with performance and competitive
pay practices generally, with a target annual grant level of 75,000-90,000
shares. Each such grant shall have terms and conditions no less favorable than
as generally applicable for grants to members of the Executive Committee at the
time of such grant.
(c) All equity-based awards will become fully exercisable
and/or unrestricted upon a Change-in-Control (as defined in the Company's 2000
Equity Incentive Plan).
8. Separation Payments:
-------------------
(a) In the event that the Executive's employment with the
Company is terminated on or prior to March 31, 2004, by the Company without
Cause or by the Executive for Good Reason, in addition to any other pay and/or
benefits which have accrued to Executive, Executive shall receive separation
payments and benefits as follows:
(1) continuation of Executive's then-effective base
annual salary for the longer of: (i) the period commencing on the
effective date of the Executive's termination of employment (the
"Termination Date") and ending on March 31, 2004; and (ii) the period
commencing on the Termination Date and ending on the one- year
anniversary of the Termination Date; such salary continuation to be
paid on a semi-monthly basis in arrears for the appropriate period;
plus
(2) an amount equal to two times Executive's target
APC for the year in which Executive's employment is terminated, minus
any amount of APC paid or payable to Executive for any period on or
prior to March 31, 2004. The APC shall be payable to the Executive on
the dates of APC payment to other executives of the Company; it being
understood that the Executive does not need to be employed by the
Company on any date of payment in order to receive the APC set forth in
this subparagraph 8(a)(2) or in order to receive the APC earned in the
year immediately preceding the year in which Executive's employment is
terminated; plus
(3) continued vesting of all equity awards through
March 31, 2004 (with stock options being exercisable in accordance with
the terms of stock options granted generally to executives of the
Company, but the date of termination of employment being deemed March
31, 2004); plus
(4) full vesting of his deferred compensation benefit; plus
(5) continuation of the Benefits through March 31, 2004.
(b) Without regard to the end of the term under 2 above, in the
event that the Executive's employment with the Company is terminated on or after
April 1, 2004, by the Company without Cause, in addition to any other pay and/or
benefits which have accrued to Executive, Executive shall receive separation
payments and benefits as follows:
Page 2 of 5
<PAGE>
(1) continuation of Executive's then-effective base
annual salary for the period commencing on the Termination Date and
ending on the one-year anniversary of the Termination Date, paid on a
semi-monthly basis in arrears; plus
(2) one times Executive's target APC for the year in
which Executive's employment is terminated. APC shall be payable to the
Executive on the dates of APC payment to other executives of the
Company; it being understood that the Executive does not need to be
employed by the Company on any date of payment in order to receive the
APC set forth in this subparagraph 8(b)(2) or in order to receive the
APC earned in the year immediately preceding the year in which
Executive's employment is terminated; plus
(3) continued vesting of all equity awards through
the one-year anniversary of the Termination Date (with stock options
being exercisable in accordance with the terms of stock options granted
generally to executives of the Company, but the date of termination of
employment being deemed the one-year anniversary of the Termination
Date); plus
(4) full vesting of his deferred compensation benefit; plus
(5) continuation of the Benefits through the one-year
anniversary of the Termination Date.
(c) If Executive becomes reemployed with the Company prior to
the end of the period during which he receives salary continuation pursuant to
8(a) or 8(b) above, the payments set forth in subparagraphs 8(a) or 8(b) shall
cease immediately and irrevocably and Executive shall receive only remuneration
from the Company in connection with Executive's new position.
9. Deductions: Any amounts paid or payable to Executive under these
----------
Principal Terms for Employment ("Principal Terms"), shall be subject to all
deductions required by federal and state law and any applicable benefit program
contributions.
10.Use and Ownership of Proprietary Information: Except to the extent
--------------------------------------------
authorized by the Company, Executive will not at any time, from and after his
commencement of employment with the Company, make use of or disclose, directly
or indirectly, any (i) trade secret or other confidential or secret information
of the Company or any subsidiary of the Company or (ii) other technical,
business, proprietary or financial information of the Company or any subsidiary
of the Company not available to the public generally or to the competitors of
the Company or any subsidiary of the Company ("Confidential Information"),
------------------------
except as needed to perform his duties for the Company and to the extent that
such Confidential Information (a) becomes a matter of public record or is
published in a newspaper, magazine or other periodical available to the general
public, other than as a result of any act or omission of Executive or (b) is
required to be disclosed by any law, regulation or order of any court or
regulatory commission, department or agency. Executive acknowledges that said
Confidential Information, whether in written or other physical form (including
computer materials), is the sole and exclusive property of the Company, and
Executive agrees to return to the Company all such confidential and
Page 3 of 5
<PAGE>
proprietary information and all copies thereof prior to termination of his
employment.
11.Certain Covenants:
-----------------
(a) Executive agrees that during the term of his employment
with the Company, and for twenty-four (24) months thereafter (the
"Non-Competition Period"), he will not in any manner, directly or indirectly
(whether as owner, stockholder, director, officer, employee, principal, agent,
consultant, independent contractor, partner or otherwise), in any geographic
area in which the Company or any of the Company's subsidiaries is then
conducting business, own, manage, operate, control, participate in, perform
services for, or otherwise carry on, a business similar to or competitive with
the business conducted by the Company or any subsidiary of the Company as of the
Executive's effective termination date.
(b) Executive further agrees that during the Non-Competition
Period, he shall not (i) in any manner, directly or indirectly, induce or
attempt to induce any employee of the Company or any subsidiary of the Company
to terminate or abandon his or her employment for any purpose whatsoever, (ii)
directly or indirectly, employ or hire any employee of the Company or any
subsidiary of the Company, or (iii) in connection with any business to which
paragraph 11(a) applies, call on, service, solicit or otherwise do business with
any current or prospective customer of the Company or any subsidiary of the
Company.
(c) Nothing in this paragraph 11 prohibits Executive from
being (i) a stockholder in a mutual fund or a diversified investment company or
(ii) a passive owner of not more than one percent (1%) of the outstanding equity
of any class of a corporation, limited partnership, limited liability company or
other entity, any securities or equity of which are publicly traded, so long as
Executive has no active participation in the business of such entity.
(d) If, at any time of enforcement of this paragraph 11, a
court or an arbitrator holds that the restrictions stated in this paragraph 11
are unreasonable under circumstances then existing, Executive and the Company
agree that the maximum period, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area and that
the court or arbitrator shall be allowed to revise the restrictions contained in
this paragraph 11 to cover the maximum period, scope and area permitted by law.
12.Remedies: Executive acknowledges that the Company would be
--------
irreparably injured by a violation of paragraph 10 or paragraph 11 of these
Principal Terms, and Executive agrees that the Company shall be entitled to an
injunction restraining Executive from any actual or threatened breach of
paragraph 10 or paragraph 11 or to any other appropriate equitable remedy
without any bond or other security being required.
13.Successor and Coordination: The Company will be required to have
--------------------------
any successor to all or substantially all of its business and/or assets
expressly assume and agree to fulfill the terms of Executive's employment in the
same manner and to the same extent that the Company would be required to do so
if no such succession had taken place. These Principal Terms shall supersede any
inconsistent terms of any Company plan, document, or award agreement.
Page 4 of 5
<PAGE>
14.Notices: All notices and other communications required or permitted
-------
under these Principal Terms shall be in writing and shall be deemed to have been
duly given when delivered or five days after deposit in the United States mail,
postage prepaid, addressed (a) if to Executive, to Mitchell T. Engel, 525 Circle
Lane, Lake Forest, Illinois 60045, and if to ServiceMaster, to The ServiceMaster
Company, One ServiceMaster Way, Downers Grove, IL 60515, Attention: General
Counsel, or (b) to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
15.Governing Law; Validity: The interpretation, construction and
-----------------------
performance of these Principal Terms shall be governed by and construed and
enforced in accordance with the internal laws of the State of Illinois without
regard to the principle of conflicts of laws. The invalidity or unenforceability
of any provision of these Principal Terms shall not affect the validity or
enforceability of any other provisions, which shall remain in full force and
effect.
16.Modification or Waiver: No provision of these Principal Terms may
----------------------
be modified or waived unless such modification or waiver is agreed to in writing
and signed by Executive and by any of the Chairman, President and CEO, the Chief
Financial Officer, the General Counsel or the Treasurer of the Company. No
waiver by either party hereto at any time of any breach by the other party
hereto of, or compliance with, any condition or provision of these Principal
Terms to be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. Failure by Executive or the Company to insist upon strict compliance with
any provision of these Principal Terms or to assert any right which Executive or
the Company may have hereunder shall not be deemed to be a waiver of such
provision or right or any other provision or right of these Principal Terms.
17.Entire Agreement: Except as otherwise specified herein, these
----------------
Principal Terms constitute the entire agreement and understanding between the
parties with respect to the subject matter hereof and supersede and preempt any
prior understandings, agreements or representations by or between the parties,
written or oral, which may have related in any manner to the subject matter
hereof.
18.Nonalienation: Except as required by law or court order, benefits
-------------
payable under these Principal Terms shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
charge, garnishment, execution or levy of any kind, either voluntary or
involuntary, prior to actually being received by Executive, his estate or a
beneficiary, as applicable, and any such attempt to dispose of any right to
benefits payable hereunder shall be void.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
Page 5 of 5
<PAGE>
Appendix A
As used in these Principal Terms for Employment, the following terms shall have
the meanings set forth below:
Termination for "Cause" means a termination by the Company, within one
----------------------
hundred twenty (120) days of the Chief Executive Officer becoming aware of the
event, resulting from:
(1) a material breach by Executive of his duties and
responsibilities (other than as a result of incapacity due to physical or mental
illness) which is demonstrably willful and deliberate on Executive's part, which
is committed in bad faith or without reasonable belief that such breach is in
the best interests of the Company and which is not remedied within 30 days after
receipt of written notice from the Company specifying such breach; or
(2) conviction (including a plea of guilty or nolo contendere) of
any felony of any kind (other than Limited Vicarious Liability or a routine
traffic infraction) or any other crime (whether it is a felony or not) involving
securities fraud or theft of substantial assets of the Company,
(3) willful misconduct with regard to the Company, or gross neglect
or dereliction of duty resulting in either case in material economic harm to the
Company or significant damage to the Company's reputation;
(4) failure to follow in good faith the reasonable lawful direction
of the Chief Executive Officer despite written instruction to do so, or
(5) a violation of his statutory or common law duty of loyalty to
the Company.
"Limited Vicarious Liability", as used above, shall mean any
-----------------------------
liability which is (x) based on acts of the Company for which Executive is
charged solely as a result of his offices with the Company and (y) provided that
(1) he was not directly involved in such activities and either had no prior
knowledge of such intended action or promptly acted reasonably and in good faith
to attempt to prevent the acts causing such liability or (2) he did not have a
reasonable basis to believe that the law was being violated by such acts.
Notwithstanding the foregoing, Executive shall not be deemed to have
been terminated for Cause unless he has (i) had ten (10) days' written notice
setting forth the reasons for the Company's intention to terminate for Cause,
and (ii) had an opportunity to meet with the Chief Executive Officer to discuss
such reasons.
"Good Reason" means: (i) diminution in Executive's titles, (ii) the
-----------
assignment of duties to Executive that are materially and adversely inconsistent
with Executive's positions, (iii) any material diminution in Executive's
authority, responsibility or reporting lines, including, but not limited to,
maintaining Executive's then positions in the Company and the Company becoming
- 1 of 2 -
<PAGE>
more than fifty percent (50%) owned by another entity and Executive not having
the same titles, responsibilities and duties in the parent entity, (iv)
reduction in Executive's annual salary, (v) removal from, or failure to
reappoint Executive to the President and Chief Executive Officer's Executive
Committee, or (vi) a Change-in-Control (as defined in the Company's 2000 Equity
Incentive Plan). If Executive determines that Good Reason exists, Executive must
notify the Company in writing, within one hundred eighty (180) days following
Executive's knowledge of the first event which Executive determines constitutes
Good Reason, or such event shall not constitute Good Reason under the terms of
Executive's employment. If the Company remedies such event within thirty (30)
days following receipt of such notice, the Executive may not terminate
employment for Good Reason as a result of such event.
- 2 of 2 -
- 2 of 2 -
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>11
<FILENAME>exhibit1029.txt
<DESCRIPTION>DEF COMP PLAN
<TEXT>
Exhibit 10.29
SERVICEMASTER DEFERRED COMPENSATION PLAN
(As Amended and Restated Effective October 24, 2002)
<PAGE>
SERVICEMASTER DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I Introduction..................................................................................1
Section 1.1. Name....................................................................................1
Section 1.2. Purpose.................................................................................1
Section 1.3. Administration of the Plan..............................................................1
ARTICLE II Definitions..................................................................................2
ARTICLE III Plan Participation..........................................................................4
Section 3.1. Eligibility.............................................................................4
Section 3.2. Participation...........................................................................4
ARTICLE IV Deferral Elections...........................................................................4
Section 4.1. Compensation Eligible for Deferral......................................................4
Section 4.2. Timing of Deferral Election.............................................................4
Section 4.3. Changes in Deferral Election............................................................5
Section 4.4. Effect of Deferral Election.............................................................5
Section 4.5. Vesting of Deferral Account.............................................................5
ARTICLE V Employer Matching Contributions...............................................................5
Section 5.1. Crediting of Employer Matching Contributions............................................5
Section 5.2. Vesting of Employer Matching Contributions Account......................................5
ARTICLE VI Earnings on Account Balances.................................................................6
Section 6.1. Permitted Investments...................................................................6
Section 6.2. Earnings................................................................................6
Section 6.3. Committee May Disapprove Permitted Investments..........................................6
Section 6.4. Elections...............................................................................7
Section 6.5. Actual Investment Not Required..........................................................7
Section 6.6. Investment Notices......................................................................7
Section 6.7. Crediting of Deferrals, Contributions and Earnings......................................7
ARTICLE VII Establishment of Trust......................................................................8
Section 7.1. Establishment of Trust..................................................................8
Section 7.2. Status of Trust.........................................................................8
(i)
<PAGE>
ARTICLE VIII Distribution of Account Balances...........................................................8
Section 8.1. Timing..................................................................................8
Section 8.2. Manner of Payment.......................................................................9
Section 8.3. Hardship Payments.......................................................................9
Section 8.4. Accelerated Payments...................................................................10
Section 8.5. Distributions to Minor and Incompetent Persons.........................................10
Section 8.6. Involuntary Distributions..............................................................11
Section 8.7. Designation of Beneficiaries...........................................................11
Section 8.8. Inability to Locate Participant or Beneficiary.........................................11
Section 8.9. Claims Procedure.......................................................................11
ARTICLE IX Amendment or Termination....................................................................12
Section 9.1. Amendment..............................................................................12
Section 9.2. Plan Termination.......................................................................13
ARTICLE X General Provisions...........................................................................13
Section 10.1. Applicable Law........................................................................13
Section 10.2. Assumption of Company Liability.......................................................13
Section 10.3. Number and Headings...................................................................13
Section 10.4. Immunity of Board and Committee Members...............................................13
Section 10.5. Non-alienation of Benefits............................................................13
Section 10.6. Notices...............................................................................14
Section 10.7. Plan Not to Affect Employment Relationship............................................14
Section 10.8. Severability..........................................................................14
Section 10.9. Successors and Assigns................................................................14
Section 10.10. Withholding for Taxes................................................................14
</TABLE>
(ii)
<PAGE>
SERVICEMASTER DEFERRED COMPENSATION PLAN
(As Amended and Restated Effective October 24, 2002)
ARTICLE I
Introduction
------------
Section 1.1. Name. The name of the Plan shall be the "ServiceMaster
----
Deferred Compensation Plan."
Section 1.2. Purpose. The Plan, as amended and restated effective October
-------
24, 2002, shall constitute an unfunded arrangement established and
maintained for the purpose of providing deferred compensation to a select group
of management or highly compensated employees (as such phrase is defined for
purposes of Title I of ERISA). The Plan shall further constitute an amendment
and restatement of the ServiceMaster Deferred Compensation Plan, effective March
16, 2001.
Section 1.3. Administration of the Plan. The Plan shall be administered by
--------------------------
the Board and the Committee, as set forth herein.
(a) The Board's duties and authority under the Plan shall include (i)
determining the amount of Employer Matching Contributions pursuant to Section
5.1, (ii) authorizing contributions to a grantor trust pursuant to Section 7.1
and (iii) amending and terminating the Plan pursuant to Sections 9.1 and 9.2.
(b) The Committee's duties and authority under the Plan shall include
(i) the interpretation of the provisions of the Plan, (ii) the adoption of any
rules and regulations which may become necessary or advisable in the operation
of the Plan, (iii) the making of such determinations as may be permitted or
required pursuant to the Plan, (iv) the taking of such other action as may be
required for the proper administration of the Plan in accordance with its terms
and (v) the amendment of the Plan, to the extent authorized under Section 9.1.
Any decision of the Committee with respect to any matter within the authority of
the Committee shall be final, binding and conclusive upon the Employers and each
Participant, former Participant, designated Beneficiary, and each person
claiming under or through any Participant or designated Beneficiary, and no
additional authorization or ratification by the Board or stockholders of
ServiceMaster shall be required. Any action by the Committee with respect to any
one or more Participants shall not be binding on the Committee as to any action
to be taken with respect to any other Participant. Each determination required
or permitted under the Plan shall be made by the Committee in the sole and
absolute discretion of the Committee. The Committee may delegate to any
Employer, committee, person (whether or not an employee of an Employer) or
entity any of its responsibilities or duties hereunder.
1
<PAGE>
ARTICLE II
Definitions
-----------
"Account" shall mean the aggregate of the bookkeeping accounts
maintained by ServiceMaster for each Participant.
"Account Balance" shall mean the value, as of the specified date, of
the Participant's Account.
"Beneficiary" shall mean the person, persons or legal entity entitled
to receive benefits under the Plan which become payable in the event of the
Participant's death.
"Board" shall mean the Board of Directors of ServiceMaster or a
committee of the Board that is authorized to act on behalf of the Board with
respect to the Plan.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
includes any regulations thereunder.
"Committee" shall mean ServiceMaster's Equity Plans Administrative
Committee or such other committee designated by the Board to administer the
Plan. References to the Committee in the Plan shall include any Employer,
committee, person or entity to which the Committee has further delegated any of
its duties or responsibilities in accordance with Section 1.3.
"Compensation" shall mean (i) the Regular Compensation payable to a
Participant in the applicable Plan Year and (ii) amounts payable pursuant to
ServiceMaster's Long Term Performance Award Plan with respect to the applicable
Plan Year.
"Deferral" shall mean the amount of Compensation that a Participant
elects to defer pursuant to procedures prescribed by the Committee.
"Deferral Account" shall mean the bookkeeping account maintained by
ServiceMaster pursuant to Article IV of the Plan in the name of and for a
Participant.
"Disability" shall mean the inability of a Participant to perform
substantially his or her duties and responsibilities due to physical or mental
impairment for a continuous period of at least six months, as determined solely
by the Committee.
"Effective Date" shall mean October 24, 2002 with respect to the terms
of the Plan as set forth herein.
"Eligible Employee" shall mean, with respect to a Plan Year, a
management or highly compensated employee of an Employer who is notified by the
Committee in writing that he or she is eligible to participate in the Plan for
such Plan Year.
"Employer Matching Contribution" shall mean the amount credited to a
Participant's Account pursuant to Article V.
2
<PAGE>
"Employer Matching Contributions Account" shall mean the bookkeeping
account maintained by ServiceMaster pursuant to Article V of the Plan in the
name of and for a Participant.
"Employers" shall mean ServiceMaster and its subsidiaries that, with
the approval of the Committee, adopt the Plan for the benefit of their Eligible
Employees.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended, and any regulations thereunder.
"Gross Misconduct" shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Participant, any unauthorized use or
disclosure by the Participant of confidential information or trade secrets of
the ServiceMaster Companies, or any other intentional misconduct by the
Participant adversely affecting the business or affairs of the ServiceMaster
Companies in a material manner.
"Participant" shall mean any Eligible Employee who commences
participation in the Plan pursuant to Article III.
"Permitted Investment" shall mean such funds or types of investment as
may be approved by the Committee from time to time, which may include shares of
ServiceMaster common stock.
"Plan" shall mean this ServiceMaster Deferred Compensation Plan, as
amended from time to time.
"Plan Year" shall mean the twelve consecutive month period ending
December 31st.
"Qualified Retirement" shall mean a Participant's termination of
employment with his or her Employer and all other ServiceMaster Companies by
reason of retirement (i) on or after age 55 and after completing 10 years of
service, determined in a manner consistent with the ServiceMaster Profit Sharing
and Retirement Plan, or (ii) on or after age 65; provided, however, that a
Qualified Retirement shall not include a termination of a Participant's
employment for Gross Misconduct.
"Regular Compensation" shall mean an Eligible Employee's base pay,
bonuses payable under the ServiceMaster Additional Provisional Compensation Plan
(or any other routine bonus plan or arrangement), commissions and overtime pay.
"ServiceMaster" shall mean The ServiceMaster Company, a Delaware
corporation, and its successors or assigns under the Plan.
"ServiceMaster Companies" shall mean ServiceMaster and its
subsidiaries.
"Valuation Date" shall mean June 30 and December 31 of each Plan Year
and such other dates as may be designated by the Committee from time to time.
3
<PAGE>
ARTICLE III
Plan Participation
------------------
Section 3.1. Eligibility. An employee of an Employer shall become
-----------
eligible to participate in the Plan upon receipt of written notice of such
eligibility from the Committee.
Section 3.2. Participation. Each Eligible Employee may participate in the
-------------
Plan in a Plan Year by submitting an election to the Committee
prior to the beginning of such Plan Year and within the election period
prescribed by the Committee, and by specifying in such election the respective
percentages or dollar amounts of (i) the Eligible Employee's Regular
Compensation otherwise payable to the Eligible Employee by an Employer in such
Plan Year and (ii) the amounts earned by such Eligible Employee with respect to
such Plan Year under the ServiceMaster Long Term Performance Award Plan, which
in each case shall be deducted from such Compensation and deferred for payment
at a later date pursuant to the Plan. The Committee shall establish rules
prescribing the time and manner in which elections shall be submitted to the
Committee, which may include submission of elections by telephonic or electronic
media. An individual who becomes an Eligible Employee after the first day of a
Plan Year may participate in the Plan for such Plan Year by submitting an
election to the Committee within the election period designated by the Committee
following the date such individual is notified of his or her eligibility to
participate in the Plan.
ARTICLE IV
Deferral Elections
------------------
Section 4.1. Compensation Eligible for Deferral. A Participant may elect in
----------------------------------
the time and manner designated by the Committee to defer the receipt of (i) not
less than 2% and not more than 75% of the Participant's Regular Compensation
payable in the applicable Plan Year and/or (ii) not less than 2% and not more
than 90% of any amount payable to the Participant under ServiceMaster's Long
Term Performance Award Plan, or any successor thereto, with respect to the
applicable Plan Year. Deferral elections shall be expressed either as a
percentage of a Participant's Compensation, or as a fixed dollar amount.
Section 4.2. Timing of Deferral Election. Except as set forth in Section
---------------------------
3.2, an election form must be submitted within the election period prescribed by
the Committee and occurring prior to the Plan Year for which the election is to
be effective, and in accordance with such other rules prescribed by the
Committee. In order to participate in the Plan for any subsequent Plan Year, an
Eligible Employee must submit a new election form within the designated election
period occurring prior to the Plan Year for which the election is to be
effective. In no event shall an election under the Plan apply to Compensation
payable prior to the date on which such election is received by the Committee.
4
<PAGE>
Section 4.3. Changes in Deferral Election. A Participant may elect to
----------------------------
suspend all future Deferrals under the Plan at any time in accordance with
procedures prescribed by the Committee, provided that a Participant who makes
such an election shall not be permitted to resume Deferrals under the Plan prior
to the first day of the following Plan Year. No other changes may be made during
a Plan Year to the percentage or amount of Compensation subject to a
Participant's Deferral election.
Section 4.4. Effect of Deferral Election. The submission of an election
---------------------------
form pursuant to Section 4.2 shall evidence the Participant's authorization of
his or her Employer to defer the payment of such Participant's Compensation with
respect to the amount specified in such election. Completion of such election
form shall further evidence the Participant's election of the timing and form of
distribution of the Deferrals subject to such election, any Employer Matching
Contribution thereon, and any earnings or losses credited to the Participant's
Account with respect to such Deferrals and Employer Matching Contribution.
Section 4.5. Vesting of Deferral Account. A Participant shall at all times
---------------------------
be fully vested in his or her Deferral Account.
ARTICLE V
Employer Matching Contributions
-------------------------------
Section 5.1. Crediting of Employer Matching Contributions. As soon as
--------------------------------------------
practicable after the end of each Plan Year, ServiceMaster may, in its sole
discretion by action of the Board, credit an Employer Matching Contribution to
the Employer Matching Contributions Account of each Participant who is an
Eligible Employee as of the last day of such Plan Year (including an employee
who is on a leave of absence approved by his or her Employer) or who ceased
employment with an Employer during such Plan Year on account of death,
Disability, Qualified Retirement, or due to a transfer to, and continued
employment for the remainder of the Plan Year by, another ServiceMaster Company,
whether or not an Employer, or a ServiceMaster Company franchisee. An Employer
Matching Contribution with respect to a Plan Year shall be in an amount
determined by the Board, and shall be stated as a percentage of some or all of
the Deferrals elected by the Participant for such Plan Year. The Compensation of
a Participant shall not be reduced by any Employer Matching Contributions
credited to such Participant's Account.
Section 5.2. Vesting of Employer Matching Contributions Account. A
--------------------------------------------------
Participant's Employer Matching Contributions Account shall become vested based
on the number of the Participant's aggregate years of service with the
ServiceMaster Companies, in accordance with the following schedule:
5
<PAGE>
<TABLE>
<CAPTION>
Vested
Years of Service Percentage
---------------- ----------
<S> <C>
less than 2 years of service 0%
2 years of service but less than 3 25%
3 years of service but less than 4 50%
4 years of service but less than 5 75%
5 years of service or more 100%
</TABLE>
The unvested portion of a Participant's Employer Matching Contributions Account
shall be immediately forfeited upon the termination of such Participant's
employment for any reason, and shall not thereafter be reallocated to the
Accounts of any other Participants.
ARTICLE VI
Earnings on Account Balances
----------------------------
Section 6.1. Permitted Investments. Upon his or her election to participate
---------------------
in the Plan, each Participant shall designate, in such manner as may be
prescribed by the Committee, the Permitted Investments in which such
Participant's Account shall be deemed to be invested. Such Participant's Account
shall be deemed to be invested as specified by the Participant either (a) on the
day following the later of (i) the date such Participant makes such designation,
or (ii) the date such credit is made to such Participant's Account, or (b) on
such other dates as may be reasonably determined by the Committee. A Participant
may elect to change his or her deemed investment election as frequently as may
be permitted by the Committee, and in any event at least once each Plan Year;
provided, however, that a Participant shall not be permitted to change a deemed
investment election with respect to any portion of his or her Account deemed
invested in shares of ServiceMaster common stock.
Section 6.2. Earnings. Each Participant's Account shall be credited with
--------
deemed earnings, or reduced by deemed losses, equal to the earnings or losses
that would have been realized or paid if assets in an amount equal to the
balance of such Account were actually invested among the Permitted Investments
selected by the Participant in accordance with Section 6.1. Although
ServiceMaster or an Employer might actually invest its assets according to the
Participant's election, it is not required to do so nor to even set aside any
assets to provide for payments hereunder. ServiceMaster may promulgate separate
accounting and administrative rules to facilitate the deemed investment in a
Permitted Investment.
Section 6.3. Committee May Disapprove Permitted Investments.
----------------------------------------------
Notwithstanding the foregoing, the Committee may disapprove any Permitted
Investment designated by a Participant or deemed to be held in such
Participant's Account. If the disapproved Permitted Investment has been
designated by the Participant but is not then deemed to be held in such
Participant's Account, the Committee shall promptly notify the Participant in
writing of the decision to disapprove the Permitted Investment and shall afford
the Participant an opportunity to designate one or more substitute Permitted
6
<PAGE>
Investments satisfactory to the Committee. If the disapproved Permitted
Investment is deemed to be held in the Participant's Account, the Committee
shall promptly notify the Participant in writing of the decision to disapprove
the Permitted Investment and shall afford the Participant an opportunity to
dispose of the disapproved Permitted Investment and to reinvest the deemed
proceeds therefrom in one or more substitute Permitted Investments satisfactory
to the Committee. If the Participant does not submit an election to dispose of
the disapproved Permitted Investment within ten days after notice of disapproval
by the Committee, the Committee may thereafter treat the disapproved Permitted
Investment as having been sold on a date selected by the Committee and shall
make appropriate charges and credits to the Account. Neither the Committee nor
the Employer shall have any liability to the Participant for losses or expenses
allocated to such Account by reason of a decision by the Committee to disapprove
a Permitted Investment.
Section 6.4. Elections. All elections to be made by a Participant pursuant
---------
to this Article VI shall be made only by such Participant, provided that if such
Participant dies before such Participant's entire Account Balance is
distributed, or if the Committee determines that such Participant is legally
incompetent or otherwise incapable of managing such Participant's own affairs,
the Committee shall have the authority to (a) itself make the elections pursuant
to Section 6.1 on behalf of such Participant, or (b) designate such
Participant's designated Beneficiary, legal representative or some near relative
of such Participant to make the elections pursuant to Section 6.1 on behalf of
such Participant.
Section 6.5. Actual Investment Not Required. An Employer need not actually
------------------------------
make any Permitted Investment. If an Employer should from time to time make any
investment similar to a Permitted Investment, such investment shall be solely
for the Employer's own account and the Participant shall have no right, title or
interest therein. Accordingly, each Participant is solely an unsecured creditor
of the Employer with respect to his or her Account.
Section 6.6. Investment Notices. Statements describing the performance of
------------------
the Permitted Investments will be provided to the Participants no less
frequently than semi-annually.
Section 6.7. Crediting of Deferrals, Contributions and Earnings. The
--------------------------------------------------
Committee shall credit all Deferrals to a Participant's Account as soon as
administratively practicable after the date on which the Deferrals would have
been paid to the Participant if the Participant had not made a Deferral election
under Article IV of the Plan. Employer Matching Contributions shall be credited
to a Participant's Account on the date specified by the Board. Earnings and
losses shall be credited to the Participant's Account in accordance with Section
6.2.
7
<PAGE>
ARTICLE VII
Establishment of Trust
----------------------
Section 7.1. Establishment of Trust. The Board may, in its sole discretion,
----------------------
establish a grantor trust, as described under Section 671 of the Code, which is
subject to the claims of the general creditors of ServiceMaster, for the purpose
of accumulating assets to provide for the obligations hereunder. The
establishment of such a trust shall not affect each Employer's liability to pay
benefits hereunder except that the Employer's liability shall be offset by any
payments actually made to a Participant under such a trust. In the event such a
trust is established, the amount to be contributed shall be determined by the
Board and the investment of such assets shall be in accordance with the trust
document.
Section 7.2. Status of Trust. Participants shall have no direct or secured
---------------
claim in any asset of the trust or in specific assets of the Employer or the
ServiceMaster Companies and will have the status of general unsecured creditors
of the Employer for any amounts due under the Plan. Trust assets and income
shall be subject to the claims of ServiceMaster's creditors.
ARTICLE VIII
Distribution of Account Balances
--------------------------------
Section 8.1. Timing. (a) Payment of Deferral Accounts. Except as otherwise
------
specifically provided herein, the Deferrals credited to a Participant's Deferral
Account for a Plan Year, adjusted by any earnings or losses thereon, shall be
paid, or shall commence to be paid, to such Participant as soon as
administratively practicable after the Valuation Date coincident with, or next
following, the payment date elected by the Participant on such Participant's
Deferral election form submitted to the Committee for such year. The payment
date elected by the Participant may be (i) the date the Participant's employment
with the ServiceMaster Companies terminates or (ii) any other date elected by
the Participant which is more than three years after the last day of the Plan
Year for which the Deferrals are credited to the Participant's Deferral Account
and not later than the date on which the Participant will attain age 70 1/2. The
Participant must submit to the Committee a separate election described in
Section 3.2 for each Plan Year which specifies a deferral amount and payment
date for all amounts credited to such Participant's Deferral Account for such
Plan Year.
(b) Payment of Employer Matching Contribution Accounts. Except
as otherwise specifically provided herein, the vested portion of the Employer
Matching Contributions credited to a Participant's Employer Matching
Contributions Account for a Plan Year, adjusted by any earnings or losses
thereon, shall be paid, or shall commence to be paid, to such Participant on or
as soon as administratively practicable after the later to occur of (i) the date
on which the Deferrals credited to the Participant's Account for the same Plan
Year are paid or commence to be paid or (ii) the Valuation Date coincident with
or next following the termination of such Participant's employment with the
8
<PAGE>
ServiceMaster Companies. Any amount credited to a Participant's Employer
Matching Contributions Account that is not vested as of the date of such
Participant's termination of employment with the ServiceMaster Companies shall
thereupon be forfeited, and shall not thereafter be reallocated to the Accounts
of any other Participants.
(c) Cash-Out of Small Accounts. Notwithstanding the payment
date elected by a Participant, the vested balance of such Participant's Account
shall be paid to such Participant in a lump sum as soon as administratively
practicable after the Valuation Date coincident with, or next following, the
termination of such Participant's employment with the ServiceMaster Companies if
the amount of such vested Account Balance as of such Valuation Date (A) is less
than $25,000 and such Participant's employment terminated prior to January 1,
2003, or (B) is less than $50,000 and such Participant's employment terminated
on or after January 1, 2003. If the vested balance of a Participant's Account
shall be less than $10,000 as of any Valuation Date following the termination of
such Participant's employment with the ServiceMaster Companies, such Account
shall be paid to such Participant in a lump sum as soon as administratively
practicable after such Valuation Date.
(d) Delayed Payment Date. Notwithstanding any payment date
elected by a Participant, the Committee may, in its sole discretion, defer the
payment of all or any portion of a Participant's Account to the extent the
Committee determines that the payment of such amount at the time elected by the
Participant would cause the Participant's Employer to be unable to deduct any
portion of the Participant's Compensation as a result of the limitations
prescribed by Section 162(m) of the Code.
Section 8.2. Manner of Payment. Except as provided in Section 8.1(c), each
-----------------
Participant or Beneficiary shall receive payment of the amount credited to the
Participant's Account either in a single lump sum or in annual installments over
a period of not less than two and not more than ten years, as elected by the
Participant upon his or her commencement of participation in the Plan. A
Participant may change a previously elected method of payment by filing a new
election form with the Committee at least one year prior to the date on which
payments are scheduled to be made or to commence. The distribution of a
Participant's Account shall be paid in cash by the Employer of the Participant
or, to the extent the Participant has elected that all or a portion of the
credits to his or her Account be deemed invested in shares of ServiceMaster
common stock, the Participant shall receive such distribution in shares of
ServiceMaster common stock.
Section 8.3. Hardship Payments. In the event of a Financial Hardship, as
-----------------
hereinafter defined, the Participant may file a written request with the
Committee to receive all or any portion of the vested balance of such
Participant's Account in an immediate lump sum payment. A Participant's written
request for such a payment shall describe the circumstances which the
Participant believes justify the payment and an estimate of the amount necessary
to eliminate the Financial Hardship. The Committee will have discretion to grant
or deny any such request. A payment shall be considered on account of "Financial
Hardship" if it is necessary in light of the Participant's immediate and heavy
financial need as described in (A) below and it is necessary to satisfy such
financial need, as described in (B) below.
9
<PAGE>
(A) A payment will be on account of immediate and heavy
financial need only if it is on account of (i) medical expenses
described in Section 213(d) of the Code incurred by the Participant or
the Participant's spouse or dependents; (ii) purchase (excluding
mortgage payments) of a principal residence for the Participant; (iii)
payment of tuition and related educational fees for the next twelve
months of post-secondary education for the Participant or the
Participant's spouse, children or dependents; or (iv) the need to
prevent the eviction of the Participant from the Participant's
principal residence or the foreclosure on the mortgage of the
Participant's principal residence.
(B) A payment will be necessary to satisfy the financial need
described in (A) above only if (i) the payment does not exceed the
amount necessary to meet such financial need (including amounts
necessary to pay any federal, state or local income taxes or penalties
reasonably anticipated to result from the payment); and (ii) the
Participant has obtained all distributions, other than hardship
withdrawals, and all nontaxable loans available under all other plans
maintained by the ServiceMaster Companies.
Any payment from a Participant's Account on account of Financial Hardship shall
be deemed to cancel any Deferral election of the Participant then in effect and,
unless otherwise determined by the Committee, the Participant shall be suspended
from making further Deferral elections under the Plan during the remainder of
the Plan Year in which such payment is made and the Plan Year immediately
thereafter.
Section 8.4. Accelerated Payments. A Participant may at any time, but not
--------------------
more than once during any five-year period, elect to receive an immediate lump
sum payment equal to the vested amount or amounts credited to such Participant's
Account for one or more Plan Years, adjusted by earnings or losses thereon,
reduced by a penalty equal to 10% of the amount paid pursuant to such election;
provided, however, that amounts credited to a Participant's Employer Matching
Contributions Account shall not be payable pursuant to any such election made
prior to the termination of the Participant's employment with the ServiceMaster
Companies. The penalty described herein shall be permanently forfeited and shall
not be paid to, or in respect of, the Participant or his or her Beneficiary or
be reallocated to the Accounts of any other Participants. An election to receive
an immediate lump sum payment pursuant to this Section 8.4 shall be deemed to
cancel any Deferral election of the Participant then in effect and, unless
otherwise determined by the Committee, the Participant shall be suspended from
making further Deferral elections under the Plan during the remainder of the
Plan Year in which such payment is made and the Plan Year immediately
thereafter.
Section 8.5. Distributions to Minor and Incompetent Persons. If a payment
----------------------------------------------
is to be made to a minor or to an individual who, in the opinion of the
Committee, is unable to manage his or her financial affairs by reason of illness
or mental incompetency, such distribution may be made to or for the benefit of
any such individual in such of the following ways as the Committee shall direct:
(a) directly to any such minor individual if, in the opinion of the Committee,
he or she is able to manage his or her financial affairs, (b) to the legal
representative of any such individual, (c) to a custodian under a
10
<PAGE>
Uniform Gifts to Minors Act for any such minor individual, or (d) to some near
relative of any such individual to be used for the latter's benefit. Neither the
Committee nor any Employer shall be required to see to the application by any
third party of any payment made to or for the benefit of a Participant or
Beneficiary pursuant to this Section.
Section 8.6. Involuntary Distributions. Notwithstanding the foregoing
-------------------------
provisions of this Article VIII, the Committee may on its own initiative
authorize an Employer to distribute to any Participant (or to a designated
Beneficiary in the event of the Participant's death) all or any portion of the
Participant's Account Balance in the event (i) there is a change in tax law, a
published ruling or similar announcement issued by the Internal Revenue Service,
a regulation issued by the Secretary of Treasury, a decision by a court of
competent jurisdiction involving a Participant or a Beneficiary, or a closing
agreement made under Section 7121 of the Code that is approved by the Internal
Revenue Service and involves a Participant, and the Committee determines that a
Participant has or will recognize income for Federal income tax purposes with
respect to amounts deferred under the Plan prior to the time such amounts would
otherwise be paid to the Participant or (ii) the corporation, entity or division
with which the Participant is employed is sold, divested or liquidated.
Section 8.7. Designation of Beneficiaries. Each Participant may name any
----------------------------
person (who may be named concurrently, contingently or successively) to whom the
Participant's Account Balance under the Plan is to be paid if the Participant
dies before the Account Balance is fully distributed. Each such Beneficiary
designation will revoke all prior designations by the Participant, shall not
require the consent of any previously named Beneficiary, shall be in a form
prescribed by the Committee and will be effective only when filed with the
Committee during the Participant's lifetime. If a Participant fails to designate
a Beneficiary before such Participant's death, as provided above, or if the
Beneficiary designated by a Participant dies before the date of the
Participant's death or before complete payment of the Participant's Account
Balance, the Committee shall pay the Participant's Account Balance to the
Participant's estate in one lump sum.
Section 8.8. Inability to Locate Participant or Beneficiary. If the
----------------------------------------------
Committee is unable to make payment of a Participant's Account to such
Participant or his or her Beneficiary because the identity and/or whereabouts of
such person cannot be ascertained notwithstanding the mailing of notice to any
last known address or addresses, then such Participant's Account shall be
forfeited. If the Participant or Beneficiary later makes a claim for a benefit
under the Plan, and that claim for benefit is granted, the amount in the
Participant's Account that was treated as a forfeiture shall be paid to the
Participant or Beneficiary without regard to any subsequent gain or loss.
Section 8.9. Claims Procedure. (a) Filing of Claim. If any Participant or
----------------
Beneficiary believes he or she is entitled to benefits under the Plan in an
amount greater than those which he or she is receiving or has received, the
Participant or Beneficiary (or his or her duly authorized representative) may
file a claim with a subcommittee designated by the Committee (the "Claim Review
Subcommittee"). Such a claim shall be in writing and state the nature of the
claim, the facts supporting the claim, the amount claimed and the address of the
claimant.
11
<PAGE>
(b) Initial Review of Claim. The Claim Review Subcommittee
shall review the claim and, unless special circumstances require an extension of
time, within 90 days after receipt of the claim give written or electronic
notice to the claimant of its decision with respect to the claim. If special
circumstances require an extension of time, the claimant shall be so advised in
writing within the initial 90-day period and in no event shall such an extension
exceed 90 days. The notice of the decision of the Claim Review Subcommittee with
respect to the claim shall be written in a manner calculated to be understood by
the claimant and, if the claim is wholly or partially denied, shall set forth
the specific reasons for the denial, specific references to the pertinent Plan
provisions on which the denial is based, a description of any additional
material or information necessary for the claimant to perfect the claim and an
explanation of why such material or information is necessary, and an explanation
of the appeals procedure under the Plan and the time limits applicable to such
procedure (including a statement of the claimant's right to bring a civil action
under Section 502(a) of ERISA following the final first denial of a claim).
(c) Appeal of Claim Denial. The claimant (or his or her duly
authorized representative) may request a review of the denial by filing with the
full Committee a written request for such review within 60 days after notice of
the denial has been received by the claimant. Within the same 60-day period, the
claimant may submit to the Committee written comments, documents, records and
other information relating to the claim. Upon request and free of charge, the
claimant also may have reasonable access to, and copies of, documents, records
and other information relevant to the claim.
(d) Review of Claim Denial. If a request for review is so
filed, review of the denial shall be made by the Committee and the claimant
shall be given written or electronic notice of the Committee's final decision
within 60 days after receipt of such request, unless special circumstances
require an extension of time.
If special circumstances require an extension of time, the claimant shall be
so advised in writing within the initial 60-day period and in no event shall
such an extension exceed 60 days. If the appeal of the claim is wholly or
partially denied, the notice of the Committee's final decision shall include
specific reasons for the decision, specific references to the pertinent Plan
provisions on which the decision is based and a statement that the claimant is
entitled to receive, upon request and free of charge, reasonable access to, and
copies of, all relevant documents, records and information. The notice shall be
written in a manner calculated to be understood by the claimant and shall notify
the claimant of his or her right to bring a civil action under Section 502(a) of
ERISA.
ARTICLE IX
Amendment or Termination
------------------------
Section 9.1. Amendment. ServiceMaster shall have the right to amend the
---------
Plan from time to time, provided that no such amendment shall reduce the amount
credited to a Participant's Account without the consent of the Participant or,
if the Participant is deceased, his or her Beneficiary. The Plan shall be
amended by resolutions duly adopted by the Board or, to the extent the amendment
(i) is required or deemed advisable as a
12
<PAGE>
result of legislation, regulation, or other actions, (ii) concerns routine
or administrative matters or (iii) does not materially affect the cost of the
Plan to any Employer, by either the Board or the Committee.
Section 9.2. Plan Termination. The Board may, in its discretion, terminate
----------------
the Plan at any time, provided, however, that no termination shall reduce the
amount credited to a Participant's Account without the consent of the
Participant or, if the Participant is deceased, his or her Beneficiary.
ARTICLE X
General Provisions
------------------
Section 10.1. Applicable Law. The Plan shall be construed in accordance
--------------
with the internal laws of the State of Illinois.
Section 10.2. Assumption of Company Liability. ServiceMaster's obligations
-------------------------------
under the Plan may be assumed by any subsidiary of ServiceMaster, in which case
such subsidiary shall be obligated to satisfy all of ServiceMaster's obligations
under the Plan and ServiceMaster shall be released from any continuing
obligation under the Plan. At ServiceMaster's request, each Participant or
designated Beneficiary shall sign such documents as ServiceMaster may require in
order to effect the purposes of this subsection.
Section 10.3. Number and Headings. Wherever any words are used herein in
-------------------
the singular form they shall be construed as though they were also used in the
plural form in all cases where they would so apply. Headings of sections and
subsections of the Plan are inserted for convenience of reference and are not
part of the Plan and are not to be considered in the construction thereof.
Section 10.4. Immunity of Board and Committee Members. The members of the
---------------------------------------
Board and the Committee may rely upon any information, report or opinion
supplied to them by an officer of ServiceMaster or any legal counsel,
independent public accountant or actuary, and shall be fully protected in
relying upon any such information, report or opinion. No member of the Board or
the Committee shall have any liability to the ServiceMaster Companies or any
Participant, former Participant, designated Beneficiary, person claiming under
or through any Participant or designated Beneficiary or other person interested
or concerned in connection with any decision made by such member pursuant to the
Plan which was based upon any such information, report or opinion if such member
reasonably relied thereon in good faith.
Section 10.5. Non-alienation of Benefits. A Participant's rights to the
--------------------------
amount credited to his or her Account under the Plan shall not be grantable,
transferable, pledgeable or otherwise assignable, in whole or in part, by the
voluntary or involuntary acts of any person, or by operation of law, and shall
not be liable or taken for any obligation of such person. Any such attempted
grant, transfer, pledge or assignment shall be null and void and without any
legal effect.
13
<PAGE>
Section 10.6. Notices. Any notice required to be given by the Employers or
-------
the Committee hereunder shall be in writing and shall be delivered in person or
by U.S. mail, interoffice mail, express courier service or electronic mail.
Section 10.7. Plan Not to Affect Employment Relationship. Neither the
------------------------------------------
adoption of the Plan nor its operation shall in any way affect the right and
power of the Employers to dismiss or otherwise terminate the employment or
change the terms of the employment or amount of compensation of any Participant
at any time for any reason with or without cause. By accepting any payment under
the Plan, each Participant, former Participant, designated Beneficiary and each
person claiming under or through such person, shall be conclusively bound by any
action or decision taken or made or to be taken or made under the Plan by the
Board or the Committee.
Section 10.8. Severability. If any provision of the Plan shall be held
------------
illegal or invalid for any reason, such illegality or invalidity shall not
affect the remaining provisions of the Plan, and the Plan shall be construed and
enforced as if illegal or invalid provisions had never been set forth herein.
Section 10.9. Successors and Assigns. The Plan is binding on all persons
----------------------
entitled to benefits hereunder and their respective heirs and legal
representatives, on the Committee and its successor, on the Employers, and on
ServiceMaster and its successors.
Section 10.10. Withholding for Taxes. Notwithstanding anything contained in
---------------------
the Plan to the contrary, the appropriate amounts shall be withheld from any
distribution made under the Plan or from a Participant's Compensation as may be
required for purposes of complying with applicable Federal or state tax
withholding requirements.
14
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>12
<FILENAME>exhibit1035.txt
<DESCRIPTION>FEES PLAN
<TEXT>
Exhibit 10.35
THE SERVICEMASTER COMPANY
2002 DIRECTORS DEFERRED FEES PLAN
ARTICLE I
Purpose
The purpose of The ServiceMaster Company 2002 Directors Deferred Fees
Plan is to provide Non-Employee Directors with the opportunity to defer the
receipt of all or a portion of their annual cash retainer and meeting attendance
fees. The terms of this Plan replace the Director Deferred Fees Plan as in
effect immediately prior to the Effective Date (the "Former Plan"). All
capitalized terms used in the Plan shall have the meanings set forth in Article
II.
ARTICLE II
Definitions
"Board" means the Board of Directors of ServiceMaster.
"Common Stock" means the common stock of ServiceMaster.
"Deferral" shall have the meaning set forth in Section 4.1.
"Deferral Account" means a bookkeeping account in the name of a
Non-Employee Director who elects to defer, pursuant to the Plan, all or a
portion of his or her Retainer/Fees.
"Deferral Crediting Date" shall have the meaning set forth in Article
V.
"Deferral Election" shall have the meaning set forth in Section 4.1.
"Distribution Date" shall have the meaning set forth in Section 7.1.
"Effective Date" means October 25, 2002.
"Fair Market Value" means the average of the closing transaction
prices, as reported in the New York Stock Exchange Composite Transactions, of a
share of Common Stock for the five-day period ended on or immediately prior to
the date as of which such value is being determined; provided, however, that
Fair Market Value may be determined by ServiceMaster by whatever means or method
as ServiceMaster, in the good faith exercise of its discretion, shall at such
time deem appropriate.
"Interest Account" means an account established on behalf of a
Non-Employee Director pursuant to Section 6.3 of the Plan.
"Non-Employee Director" means any director of ServiceMaster who is not
an officer or employee of ServiceMaster or any subsidiary of ServiceMaster.
"Plan" means this 2002 Directors Deferred Fees Plan, as amended and
restated from time to time.
<PAGE>
"Plan Year" means the 12-month period coincident with the calendar
year.
"Retainer/Fees" means the annual cash retainer fee and meeting
attendance fees payable to Non-Employee Directors for service as a member of the
Board or a committee of the Board, excluding such fees that a Non-Employee
Director elects to forgo in exchange for Elective Options granted under The
ServiceMaster Company 2001 Directors Stock Plan.
"ServiceMaster" means The ServiceMaster Company, a Delaware
corporation.
"Share Equivalent" means a bookkeeping unit credited to a Non-Employee
Director's Share Equivalent Account and having a value equal to one share of
Common Stock.
"Share Equivalent Account" means an account established on behalf of a
Non-Employee Director pursuant to Section 6.2 of the Plan.
"Termination Date" means the date on which a Non-Employee Director
ceases to serve as a member of the Board.
"Valuation Date" means the last day of each calendar month.
ARTICLE III
Administration
The Plan shall be administered by the Board or a committee designated
by the Board. The Board shall, subject to the terms of this Plan, interpret this
Plan and the application thereof, and establish rules and regulations it deems
necessary or desirable for the administration of this Plan. All such
interpretations, rules and regulations shall be final, binding and conclusive.
The Board may delegate administrative duties under the Plan to one or more
agents, as it shall deem necessary or advisable.
ARTICLE IV
Deferral Elections
Section 4.1. Eligibility for Deferral Elections. Each Non-Employee
----------------------------------
Director shall be eligible to participate in the Plan. In addition, any
individual who was a participant in the Former Plan as of the Effective Date
shall be considered a participant in the Plan as of the Effective Date and any
amounts deferred under the Former Plan shall be payable pursuant to the terms of
the Plan as set forth herein. Prior to the first day of each Plan Year, a
Non-Employee Director may make an irrevocable election to defer receipt of all
or any portion of his or her Retainer/Fees for such Plan Year in accordance with
this Article (each such election shall be referred to as a "Deferral Election"
and the amounts deferred pursuant to such an election the "Deferral"). A
Non-Employee Director shall be eligible to make a Deferral Election if he or she
is a current member of the Board or has been elected to the Board on the date
such election is made.
Section 4.2. Election Procedures. All Deferral Elections must be made
-------------------
in accordance with prescribed procedures and must be received by the Plan
administrator no later than the first day of the Plan Year for which such
election is effective. Any Deferral Election
2
<PAGE>
shall apply only to the Retainer/Fees otherwise payable in the year
for which the Deferral Election is made.
Section 4.3. Election of Investment Alternatives. As part of each
-----------------------------------
Deferral Election, a Non-Employee Director must elect the investment
alternatives that shall apply to the Deferral in accordance with Article VI.
ARTICLE V
Deferral Accounts
All amounts deferred pursuant to a Non-Employee Director's Deferral
Elections under the Plan shall be credited to a Deferral Account maintained on
behalf of such Non-Employee Director as of the date on which, in the absence of
a Deferral Election, the Non-Employee Director would otherwise have received the
Deferral (the "Deferral Crediting Date"). A Non-Employee Director shall be fully
vested at all times in the balance of his or her Deferral Account.
ARTICLE VI
Investment Alternatives
Section 6.1. Investment Election. A Non-Employee Director must make an
-------------------
investment election at the time of each Deferral Election. The investment
election must be made in accordance with procedures prescribed by the Board, and
shall designate the portion of the Deferral which is to be treated as invested
in each of the investment alternatives described in Sections 6.2 and 6.3. All
investment elections with respect to a Deferral shall be irrevocable.
Section 6.2. Share Equivalent Account. Under the Share Equivalent
------------------------
Account, the value of the Non-Employee Director's Deferral shall be determined
as if the Deferral were invested in shares of Common Stock as of the Deferral
Crediting Date. The number of Share Equivalents to be credited to the
Non-Employee Director's Deferral Account on each Deferral Crediting Date shall
be determined by dividing the Deferral to be "invested" on that date by the Fair
Market Value of a share of Common Stock as of that date. An amount equal to the
number of Share Equivalents multiplied by the dividend paid on a share of Common
Stock on each dividend payment date shall be credited to the Non-Employee
Director's Deferral Account within 10 days after the dividend payment date and
"invested" in additional Share Equivalents as though such dividend credit was a
Deferral for such year. The number of shares of Common Stock to be paid to a
Non-Employee Director on a Distribution Date, as defined in Section 7.1, shall
be equal to the number of Share Equivalents accumulated in the Share Equivalent
Account on the Distribution Date divided by the total number of payments to be
made.
Section 6.3. Interest Account. Under the Interest Account, interest
----------------
will be credited to the Non-Employee Director's Deferral Account as of each
Valuation Date and on the date the final payment of a Deferral is to be made
based on the balance in the Non-Employee Director's Deferral Account deemed
invested in the Interest Account on the Valuation Date or such final payment
date. The rate of interest to be credited for a Plan Year will be set at the
beginning of each Plan Year based on the current cost to ServiceMaster of
issuing five-year maturity debt. If installment payments are elected pursuant to
Section 7.1, the amount to be paid
3
<PAGE>
to the Non-Employee Director on each payment date shall be determined
as follows: the amount of the principal payment of each installment shall be
determined by dividing the current principal balance by the number of remaining
installment payments and the amount of the interest payment shall be determined
by dividing the current interest balance by the number of remaining installment
payments.
ARTICLE VII
Payment of Deferral Accounts
Section 7.1. Time and Method of Payment. Payment of a Non-Employee
--------------------------
Director's Deferral Account shall be made in a single lump sum or in
installments as elected by the Non-Employee Director prior to his or her
Termination Date. If a Non-Employee Director's Deferral Account is payable in a
single lump sum, the payment shall be made as soon as practicable after the
first day of the Plan Year following the Termination Date, but not earlier than
six months after the Termination Date (the "Distribution Date"). If a
Non-Employee Director's Deferral Account is payable in installment payments,
then the Non-Employee Director's Deferral Account shall be paid in substantially
equal annual installments over the period, not longer than 10 years, as elected
by the Non-Employee Director, and commencing as soon as practicable following
the Distribution Date.
Section 7.2. Change in Payment Election. A Non-Employee Director may
--------------------------
elect to change the method of payment in accordance with prescribed procedures y
the Board; provided that such election shall not be effective unless it is
received by ServiceMaster prior to the Termination Date.
Section 7.3. Form of Payment. The payment of that portion of a
---------------
Deferral Account deemed to be invested in the Interest Account shall be made in
cash. The distribution of that portion of a Deferral Account deemed to be
invested in the Share Equivalent Account shall be distributed in whole shares of
Common Stock with fractional shares distributed in cash.
ARTICLE VIII
Payment Upon Death of a Non-Employee Director
Section 8.1. Payment to Beneficiary. In the event a Non-Employee
----------------------
Director dies before all amounts credited to his or her Deferral Account have
been paid, payment of the Non-Employee Director's Deferral Account shall be made
or shall commence in the form of payment elected by the Non-Employee Director or
in such other form designated by ServiceMaster in its sole discretion.
Section 8.2. Designation of Beneficiary. Each Non-Employee Director
--------------------------
may file with the Corporate Secretary a written designation of one or more
persons as such Non-Employee Director's beneficiary or beneficiaries (both
primary and contingent) in the event of the Non-Employee Director's death. Each
beneficiary designation shall become effective only when filed in writing with
the Corporate Secretary during the Non-Employee Director's lifetime on a form
prescribed by ServiceMaster. The filing with the Corporate Secretary of a new
beneficiary designation shall cancel all previously filed beneficiary
designations. If a Non-Employee Director fails to designate a beneficiary, or if
all designated beneficiaries of a Non-
4
<PAGE>
Employee Director predecease the Non-Employee Director, then the
Deferral Account shall be paid to the Non-Employee Director's estate.
ARTICLE IX
Funding
Benefits payable under the Plan to any Non-Employee Director shall be
paid by ServiceMaster. ServiceMaster shall not be required to fund, or otherwise
segregate assets to be used for payment of benefits under the Plan.
Notwithstanding the foregoing, ServiceMaster, in the discretion of the Board,
may maintain one or more grantor trusts (each, a "Trust") to hold assets to be
used for payment of benefits under the Plan. The assets of the Trust shall
remain the assets of ServiceMaster subject to the claims of its general
creditors. Any payments by a Trust of benefits provided to a Non-Employee
Director under the Plan shall be considered payment by ServiceMaster and shall
discharge ServiceMaster of any further liability under the Plan for such
payments.
ARTICLE X
General
Section 10.1. Effective Date; Termination. This Plan, as amended and
---------------------------
restated herein, shall be effective as of the Effective Date. The Board may
terminate this Plan at any time. Termination of this Plan shall not affect the
payment of any amounts credited to a Non-Employee Director's Deferral Account.
Section 10.2. Amendments. The Board may amend this Plan as it shall
----------
deem advisable, subject to any requirement of stockholder approval required by
applicable law, rule or regulation. No amendment may impair the rights of a
Non-Employee Director to payment of his or her Deferral Account without the
consent of such Non-Employee Director.
Section 10.3. Non-Transferability of Benefits. No benefit payable at
-------------------------------
any time under the Plan shall be subject in any manner to alienation, sale,
transfer, assignment, pledge, attachment, or other legal process, or encumbrance
of any kind. Any attempt to alienate, sell, transfer, assign, pledge or
otherwise encumber any such benefits, whether currently or thereafter payable,
shall be void. No person shall, in any manner, be liable for or subject to the
debts or liabilities of any person entitled to such benefits. If any person
shall attempt to, or shall alienate, sell, transfer, assign, pledge or otherwise
encumber his benefits under the Plan, or if by any reason of his bankruptcy or
other event happening at any time, such benefits would devolve upon any other
person or would not be enjoyed by the person entitled thereto under the Plan,
then the Board, in its discretion, may terminate the interest in any such
benefits of the person entitled thereto under the Plan and hold or apply them
for or to the benefit of such person entitled thereto under the Plan or his
spouse, children or other dependents, or any of them, in such manner as the
Board may deem proper.
Section 10.4. Adjustment. In the event of any stock split, stock
----------
dividend, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, liquidation, spin-off or other similar change in
capitalization or event, or any distribution to holders of Common Stock other
than a regular cash dividend, the number of Share Equivalents
5
<PAGE>
credited to each Share Equivalent Account under the Plan shall be
appropriately adjusted by the Board. The decision of the Board regarding any
such adjustment shall be final, binding and conclusive.
Section 10.5. Forfeitures and Unclaimed Amounts. Unclaimed amounts
---------------------------------
shall consist of the amounts of the Deferral Account of a Non-Employee Director
that are not distributed because of the ServiceMaster's inability, after a
reasonable search, to locate a Non-Employee Director or his or her Beneficiary,
as applicable, within a period of two (2) years after the Distribution Date upon
which the payment of any benefits becomes due. Unclaimed amounts shall be
forfeited at the end of such two-year period. These forfeitures will reduce the
obligations of ServiceMaster under the Plan and the Non-Employee Director or
Beneficiary, as applicable, shall have no further right to his Deferral Account.
Section 10.6. Governing Law. This Plan and all determinations made and
-------------
actions taken pursuant thereto shall be governed by the laws of the State of
Delaware and construed in accordance therewith without giving effect to
principles of conflicts of laws.
6
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>13
<FILENAME>annrpt.txt
<DESCRIPTION>THE SERVICEMASTER COMPANY ANNUAL REPORT
<TEXT>
<TABLE>
FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
(RESTATED 4)
AS OF AND FOR THE YEARS ENDED DECEMBER 31 2002 2001 CHANGE
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING RESULTS
Operating revenue $3,589,089 $3,561,445 1%
Operating income (loss) (1) 341,336 (23,177)
Income (loss) from continuing operations 170,098 (164,464)
Income (loss) from discontinued operations (2) (3,875) 284,270
Extraordinary loss (3) (9,229) (3,422)
---------------------------
Net income $156,994 $116,384
Diluted earnings per share:
Income (loss) from continuing operations $0.56 $(0.55)
Discontinued operations, net (2) (0.01)
0.95
Extraordinary loss, net (3) (0.03) (0.01)
---------------------------
Diluted earnings per share $0.52 $0.39
Cash dividends per share $0.41 $0.40 3%
--------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Total assets $3,414,938 $3,621,245
Total debt 835,475 1,155,193
Shareholders' equity 1,218,700 1,207,187
--------------------------------------------------------------------------------------------------------
CASH FLOWS
Cash from operations $381,049 $362,933 5%
--------------------------------------------------------------------------------------------------------
SHARE PRICE RANGE
(Traded on the New York Stock Exchange under the symbol SVM)
High price for the year $15.50 $14.20
Low price for the year 8.89 9.84
Closing price as of December 31, 11.10 13.80
--------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets", which eliminates the
amortization of goodwill and intangible assets with indefinite lives
beginning in 2002. Had the provisions of SFAS 142 been applied to 2001,
amortization expense would have been reduced by $60 million ($42 million,
after-tax), or $0.14 per diluted share.
In the fourth quarter of 2001, the Company recorded a pretax charge of $345
million ($279 million, after-tax), related primarily to goodwill and asset
impairments and other items. The impact on diluted earnings per share of
this charge was $0.94.
(2) In the fourth quarter of 2001, the Company's Board of Directors approved a
series of actions related to the strategic review of its portfolio of
businesses that commenced earlier in 2001. These actions included the sale
in November 2001 of the Company's Management Services business as well as
the decision to exit certain non-strategic and under-performing businesses
including TruGreen LandCare Construction, Certified Systems, Inc. and
certain Terminix operations in Europe. During the third quarter of 2002,
the Company sold its remaining European Terminix operations. These
operations are classified as "Discontinued Operations" for all periods
presented.
(3) In 2002 and 2001, the Company repurchased a portion of its public debt
securities and in 2001 the Company prepaid some of its longer-term debt.
The net impact of these transactions was extraordinary losses of $9 million
($15 million pretax) and $3 million ($6 million pretax) in 2002 and 2001,
respectively. The Company intends to adopt SFAS 145 beginning in fiscal
2003. Adoption of this Statement in 2003 will result in the
reclassification of the extraordinary losses into income from continuing
operations.
(4) See the "Restatement" section in the Notes to the Consolidated Financial
Statements for the basis of the restatement and the financial statement
impact.
1
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<PAGE>
2002 COMPARED WITH 2001
CONSOLIDATED REVIEW
The Company has restated its financial statements for 2001 and 2000 as well as
the previously reported 2002 quarterly results. See the "Restatement" section in
the Notes to the Consolidated Financial Statements for the basis of the
restatement and the financial statement impact. This Management Discussion and
Analysis reflects the impacts of the restatement.
Revenues for 2002 were $3.6 billion, one percent above 2001 with operating
income of $341 million. The Company recorded income from continuing operations
in 2002 of $170 million, a loss from discontinued operations of $4 million, and
a $9 million extraordinary loss from the early extinguishment of debt. Net
income was $157 million in 2002 and $116 million in 2001 and diluted earnings
per share were $.52 in 2002 and $.39 in 2001.
Diluted earnings per share from continuing operations was $.56 in 2002 compared
with a loss of $(.55) in 2001. There were three significant items in 2001 that
impact the comparability of the reported amounts with the 2002 figures. First,
diluted earnings per share from continuing operations for 2001 includes a charge
of $.94 per share ($345 million pretax) primarily related to goodwill and asset
impairments and other items. Second, as discussed further in the Notes to the
Consolidated Financial Statements, Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets", requires that beginning
in 2002, goodwill and trade names no longer be amortized. SFAS 142 does not
permit the restatement of 2001 financial information to reflect the impact of
this Statement. The diluted earnings per share equivalent of reduced
amortization expense under SFAS 142 is $.14 ($60 million pretax) for 2001.
Third, in the fourth quarter of 2001, the Company received approximately $740
million of after-tax proceeds, net of expected cash payments relating to the
sale and exit of discontinued businesses.
In 2002, operating income was $341 million compared to an operating loss of $23
million in 2001. The 2001 figure includes a $345 million charge primarily
related to goodwill and asset impairments and other items. Additionally, the
reduced amortization expense under SFAS 142 was $60 million. Operating income
margins after adjusting for these items decreased to 9.5 percent of operating
revenue in 2002 from 10.7 percent in 2001. The decline in operating income
reflects strong growth at American Home Shield offset by reduced volume in the
heating, ventilation and air conditioning (HVAC) and plumbing businesses of ARS
and AMS, increased workers compensation and health insurance costs, as well as
increased expenditures related to enterprise-wide initiatives.
Cost of services rendered and products sold were unchanged compared to the prior
year and decreased as a percentage of revenue to 69.1 percent in 2002 from 69.6
percent in 2001. This decrease reflects a change in the mix of business as
TruGreen ChemLawn, Terminix, and American Home Shield increased in size in
relationship to the overall business of the Company. These 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
revenue. Selling and administrative expenses increased 11 percent and increased
as a percentage of revenue to 21.2 percent from 19.3 percent in 2001. This
increase in selling and administrative expenses reflects increased expenditures
for marketing leadership and sales initiatives, as well as enterprise-wide
expenditures in procurement, technology and initiatives to measure and improve
customer and employee satisfaction.
Interest expense decreased from the prior year, reflecting reduced debt levels
resulting from the pay down of debt with the proceeds received from the sales of
the Management Services and certain European pest control businesses as well as
strong cash flows from operations. Interest income declined as a result of net
investment losses recorded on the American Home Shield investment portfolio in
2002 compared with net investment gains from this portfolio as well as venture
capital gains realized in 2001. Minority interest and other expense increased in
2002 because 2001 included minority interest income related to the ServiceMaster
Home Service Center initiative. In the first quarter of 2001 and until May 2001,
the operating losses of ServiceMaster Home Service Center had been offset
through minority interest income (below the operating income line) because of
investments in the venture made by Kleiner Perkins Caufield & Byers. In December
2001, the Company acquired the minority interest in the ServiceMaster Home
Service Center held by Kleiner Perkins.
The tax provision in 2002 reflects a lower effective tax rate based on benefits
received through the consolidation for tax purposes of the ServiceMaster Home
Service Center. As a result of the Company's acquisition of the minority
interest, it was able to reorganize the subsidiary in 2002 and utilize prior
year net operating losses of this subsidiary operation.
EXTRAORDINARY LOSS
In the second quarter of 2002, the Company repurchased a portion of its public
debt securities and recorded an extraordinary loss of $.03 per diluted share ($9
million after-tax) resulting from the early extinguishment of debt.
In the fourth quarter of 2001, the Company used a portion of the cash proceeds
from the sale of Management Services to pay down debt and recorded an
extraordinary loss of $.03 per diluted share ($9 million after-tax) resulting
from the early extinguishment of debt. This was partially offset by the
realization of gains ($.02 per diluted share; $6 million after-tax) resulting
from the repurchase of certain ServiceMaster corporate debt in the first
quarter.
2
<PAGE>
As discussed in the Notes to the Consolidated Financial Statements, the Company
intends to adopt SFAS 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" in 2003. Adoption
of this Statement in 2003 will result in the reclassification of the
extraordinary loss resulting from extinguishment of debt into interest expense
within income from continuing operations.
KEY PERFORMANCE INDICATORS
The table below presents selected metrics related to customer counts and
customer retention for the three most profitable businesses of the Company.
These measures are presented on a rolling, twelve-month basis.
KEY PERFORMANCE
INDICATORS
As of December 31,
2002 2001
----------- -----------
TRUGREEN -
Growth in Full Program Contracts 2% -4%
Customer Retention Rate 59.3% 57.7%
TERMINIX -
Growth in Pest Control Customers 2% 25%
Pest Control Customer Retention 75.8% 77.8%
Rate
Growth in Termite Customers -% 30%
Termite Customer Retention Rate 89.0% 89.7%
AMERICAN HOME SHIELD -
Growth in Warranty Contracts 15% 14%
Customer Retention Rate 53.5% 52.4%
OUTLOOK
Economic uncertainty and world events contributing to consumer confidence being
at a ten-year low, make it particularly difficult for the Company to have
visibility to the full year results for 2003. If current conditions persist, the
Company expects to achieve mid single-digit earnings growth in 2003.
SEGMENT REVIEW (2002 VS. 2001)
SEGMENT RESULTS FOR 2002 REFLECT THE ELIMINATION OF GOODWILL AND TRADE NAME
AMORTIZATION REQUIRED UNDER SFAS 142. THEREFORE, FOR COMPARATIVE PURPOSES, 2001
RESULTS HAVE BEEN PRESENTED ON A PROFORMA BASIS AS IF SFAS 142 HAD BEEN IN
EFFECT FOR 2001 THEREBY EXCLUDING THE AMORTIZATION EXPENSE AFFECTED BY THE NEW
ACCOUNTING STANDARD. (SEE THE "BUSINESS SEGMENT REPORTING" NOTE IN THE NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS). MANAGEMENTS DISCUSSION AND ANALYSIS
FOCUSES ON THE 2002 REPORTED AND THE 2001 PROFORMA AMOUNTS.
TRUGREEN SEGMENT
The TruGreen segment includes lawn care services performed under the TruGreen
ChemLawn brand name and landscape maintenance services provided under the
TruGreen LandCare brand name. The TruGreen segment reported revenues of $1.4
billion, slightly above the prior year. Operating income was $171 million, a
decrease of five percent compared to $181 million (proforma) in 2001.
Revenue in the lawn care business increased one percent over 2001, which
included a two percent increase in customer contracts over 2001. This increase
compares with a four percent decline in customer contracts in 2001. The Company
is realizing the benefit of improved customer retention as well as the impact
from new marketing strategies. In addition to telemarketing, which is the
primary channel used by TruGreen ChemLawn to sell its services, the business has
increased expenditures on direct mail and television advertising leading to
higher sales of new customers. Quality and other satisfaction initiatives have
resulted in the customer retention rate improving 160 basis points to 59.3
percent compared with 57.7 percent in 2001. Margins in the lawn care operations
declined slightly, reflecting increased expenditures in marketing and customer
retention initiatives, partially offset by margin improvements resulting from
revenue growth and the quality of service and Six Sigma initiatives.
Revenue in the landscape maintenance business declined one percent as a softer
economic environment contributed to a decline in the core maintenance business
as well as a decline in add-on services (e.g., seasonal flower plantings).
Despite the decline in the maintenance business, the contract base is more
profitable reflecting lower job costs, improved pricing, and a stronger customer
base. This business has strengthened and expanded its sales operations.
Operating income margins in the landscaping business declined primarily as a
result of higher workers compensation claims and increased expenditures for
field operations training. Management continues to focus on labor efficiency and
margin improvement through Six Sigma projects. Capital employed decreased two
percent, primarily reflecting improved working capital management resulting from
increased customer prepayments and elimination of excess equipment.
TERMINIX SEGMENT
The Terminix segment, which includes termite and pest control services, reported
a nine percent increase in revenue to $924 million from $845 million in 2001 and
operating income growth of four percent to $127 million from $123 million
(proforma) last year. Revenue growth was driven by the acquisition in October
2001 of Sears Termite & Pest Control as well as solid internal growth. As
expected by the Company, there has been a substantial decrease in profitable
pest control customers from the Sears name in certain markets. New sales in
these markets have not kept pace with cancellations and as a result, overall
customer retention rates have shown a decline. The Company has begun to
experience a reduction in revenue growth which is likely to continue into 2003.
In addition, as experienced during late 2002, operating margins have been
impacted by the near-term expenses associated with the rollout of Terminix's new
branch information system. The rollout of this system to the branches will
continue through 2004. The system will be an important tool in the Company's
efforts to improve sales productivity, customer service, cost efficiency and
regulatory compliance. Operating margins for the year decreased 80 basis points
reflecting the near term expenses related to the new information system as well
as increased expenditures for marketing and health insurance, partially offset
by improved branch efficiencies. Capital employed increased four percent to
support overall business growth.
3
<PAGE>
AMERICAN HOME SHIELD SEGMENT
The American Home Shield segment, which provides home warranties to consumers
that cover HVAC, plumbing and other appliances, reported a 15 percent increase
in revenue to $424 million from $369 million in 2001 and operating income growth
of 84 percent to $48 million compared to $26 million (proforma) in 2001. Revenue
growth reflected increases in all sales channels, complemented by improved
customer retention. Operating margins improved as the segment benefited from
strong volume growth, improved management of service costs and reduced incidence
of claims resulting, in part, from less extreme weather trends. In light of the
favorable impact that the weather had on operating margins, management believes
margins will be somewhat lower in 2003. Capital employed increased 21 percent
reflecting the volume growth in the business resulting in an increased level of
required regulatory investments.
ARS/AMS SEGMENT
The ARS/AMS segment, which provides direct HVAC and plumbing services reported
revenue of $719 million, a decrease of 12 percent compared with $820 million in
2001. Operating income decreased 65 percent to $17 million, compared with $49
million (proforma) in the prior year. Industry wide there is a growing trend by
consumers to repair rather than replace defective equipment, reflecting
uncertainties in the economy, as well as a marked reduction in construction
activity. A decline in call volume for residential air conditioning and plumbing
service resulted in the Company's decrease in revenue and profit. Margins
declined in part due to higher marketing and insurance costs. In addition, lower
revenue led to reduced leverage of the fixed cost structure. ARS and AMS
continue their efforts towards a comprehensive rebuilding of marketing and sales
strategies by hiring a marketing leader and expanding the sales force and sales
training. Management has realigned its field operating structure to narrow the
span of control. The leaders of ARS are conducting a thorough review of
individual branches to determine their long-term profit potential and whether
under performing locations should be exited. Capital employed decreased four
percent, reflecting improved working capital management from a reduction in
accounts receivable days sales outstanding.
OTHER OPERATIONS SEGMENT
The Other Operations segment includes the Company's ServiceMaster Clean, Merry
Maids, and international operations as well as its headquarters functions.
Reported segment revenues of $149 million in 2002 compared with $158 million in
the prior year. The segment reported an operating loss of $23 million compared
with a loss of $342 million (proforma) in 2001. The 2001 results include a
charge of $345 million related primarily to goodwill and asset impairments and
other items.
The 2002 results reflect continuing growth in profit from the franchise
businesses, offset by higher costs related to enterprise initiatives and lower
profits from trade name licensing. Revenues from the franchise operations
decreased by one percent. ServiceMaster Clean revenue in 2001 included direct
management of a significant disaster restoration project at the Pentagon, which
was, in part, offset in 2002 by growth in the remaining franchise disaster
restoration business and acquisitions at Merry Maids. Operating margin
improvement in the franchise operations reflects the impact of prior year work
at the Pentagon which was at a lower margin and higher fee income, offset in
part by an increased mix of direct owned branches at Merry Maids, which carry
lower margins than the base franchise business.
Operating income in the Other Operations segment includes income from license
agreements for the use of Company-owned trade names in certain markets. In the
third quarter of 2002, the Company sold its Terminix operations in the United
Kingdom and entered into a two year licensing agreement with the buyer for the
use of the Terminix trade name in the United Kingdom. This agreement was valued
at $6 million and accordingly, a like amount was allocated from the purchase
price. In the fourth quarter of 2001, the Company sold its Management Services
business unit and the Company entered into a three-year licensing agreement with
ARAMARK for the use of the ServiceMaster trade name in certain markets. This
agreement was valued at $15 million and accordingly, a like amount was allocated
from the purchase price. The Company recorded the license fee income in the
fourth quarter of 2001 related to this agreement.
Total initial and recurring franchise fees (excluding the aforementioned trade
name license agreements) represented 2.5 percent of consolidated revenue in both
2002 and 2001 and related franchise operating expenses were 1.6 percent and 1.7
percent of consolidated operating expenses in 2002 and 2001, respectively.
Franchised revenue consist principally of continuing monthly fees based upon the
franchisee revenue and is recognized when the related franchise revenue is
reported from the franchisee and collectibility is assured. Franchise revenue
also includes initial franchise fees resulting from the sale of the franchise,
which are fixed and are recognized as revenue when collectibility is assured and
all material services or conditions relating to the sale have been substantially
performed. Total initial and recurring franchise fee income (excluding the
aforementioned trade name license agreements) comprised 11.3 percent and 10.2
percent of consolidated operating income in 2002 and 2001, respectively. The
portion of total franchise fee income related to initial fees received from the
sales of franchises was not material to the Company's consolidated financial
statements for all periods.
The Other Operations segment increased expenditures in 2002 on technology and
major operational initiatives to improve operating efficiency and build greater
customer and employee satisfaction. Capital employed in this segment includes
the discontinued operations and therefore is significantly reduced from the
prior year, reflecting the prior year divestitures of businesses.
DISCONTINUED OPERATIONS
During the third quarter of 2002, the Company sold its Terminix operations in
the United Kingdom. The impact of this sale was not material to the consolidated
financial statements.
In 2001 the Company sold its Management Services business to ARAMARK Corporation
for approximately $800 million. The all-cash transaction closed on November 30,
2001 and the Company recorded an after-tax gain of $404 million from this sale.
(A portion of Management Services was not sold as part
4
<PAGE>
of this transaction and represented a $15 million loss upon disposition). In
addition, the Company exited several non-strategic and under-performing
businesses including TruGreen LandCare Construction, Certified Systems Inc.
(CSI), and certain Terminix Europe operations. The TruGreen LandCare
Construction operations were sold to Environmental Industries, Inc. (EII) in
certain markets. EII managed the wind-down of the contracts in the remaining
markets. The Company also sold all of its customer contracts relating to CSI
(the Company's professional employer organization) to AMS Staff Leasing, N.A.,
Inc.
Reported "Discontinued operations" for all periods presented include the
operating results of the sold and discontinued businesses noted above and 2001
also includes the gain from the sale of Management Services, net of losses from
the disposition of other entities.
In the fourth quarter of 2002, the purchaser of the Company's European pest
control and property services operations made a claim for a purchase price
adjustment (relating to the 2001 sale), relating to an alleged breach of certain
conditions in the purchase agreement. In the course of responding to that claim,
the Company discovered that personnel of the former operations had made
unsupported monthly adjustments to certain accounts. The Company subsequently
agreed to an adjustment to the purchase price consisting of an $8 million cash
payment and the cancellation of a previously reserved note receivable of $7
million. This $8 million charge was recorded in 2002.
The components of discontinued operations are as follows:
(In thousands) 2002 2001 2000
- -----------------------------------------------------------------
Management
Services income* $ - $33,172 $40,683
Income (loss) from
other discontinued
operations 965 (72,115) (115)
Gain on sale of
Management Services,
net of losses
from disposition of
other entities (4,840) 323,213 -
- -----------------------------------------------------------------
Discontinued
operations ($3,875) $284,270 $40,568
- -----------------------------------------------------------------
* This business was sold on November 30, 2001, consequently the 2001 results
reflect eleven months of operations.
2001 COMPARED WITH 2000
CONSOLIDATED REVIEW
Revenues for 2001 increased four percent to $3.6 billion. The Company reported
an operating loss in 2001 of $23 million compared to operating income of $321
million in 2000. The Company reported a loss from continuing operations in 2001
of $164 million (after the $279 million after-tax impact of the charge), income
from discontinued operations of $284 million, and a $3 million extraordinary
loss from the early extinguishment of debt. Net income was $116 million in 2001
and $154 million in 2000 and diluted earnings per share was $.39 in 2001 and
$.50 in 2000.
Diluted earnings per share from continuing operations was a loss of $(.55) in
2001 compared to income of $.41 in 2000. As previously noted, diluted earnings
per share from continuing operations for 2001 includes a charge of $.94 per
diluted share ($345 million pretax) primarily related to goodwill and asset
impairments and other items.
In 2001, the Company reported an operating loss of $23 million compared to
operating income of $321 million in 2000. The 2001 figure includes a $345
million charge primarily related to goodwill and asset impairments and other
items. In addition, both 2001 and 2000 include amortization expense that has
been eliminated under SFAS 142. Operating income margins on a comparable basis
after adjusting for the charge and SFAS 142 decreased to 10.7 percent in 2001
from 11.1 percent in 2000. The events of September 11th and the already weakened
economy contributed to earnings pressure during the third and fourth quarters of
2001 by bringing caution and changes in consumer buying behavior. The Company
experienced the downturn in the economy as customers began deferring the
replacement of HVAC units, landscape and lawn care customers showed a reduced
propensity to purchase enhancements and there were increased skips in maid
service.
On a consolidated basis, costs of services rendered and products sold increased
two percent and decreased as a percentage of revenue to 69.6 percent from 71.1
percent in 2000. Selling and administrative expenses increased 14 percent and
increased as a percentage of revenue to 19.3 percent from 17.6 percent in 2000.
Interest expense decreased from 2000, primarily due to reduced debt levels from
improved cash flows, debt retirements with the proceeds from the Management
Services sale, and the sale of certain of the Company's accounts receivable
throughout the year. Interest income decreased primarily due to a lower level of
investment gains realized, net of impairment losses in 2001.
Minority interest and other expense reflected $19 million more expense than 2000
due to reduced minority interest income of $8 million related to the
ServiceMaster Home Service Center venture, increased minority interest expense
of $8 million related to the equity security issued in the Allied Bruce
acquisition, and a $3 million loss recorded in 2001 on the Company's sale of
receivables. Throughout 2000 and until May 2001, the operating losses of
ServiceMaster Home Service Center had been offset through minority interest
income (below the operating income line) because of investments in the venture
made by Kleiner Perkins Caufield & Byers. In 2001, this minority interest income
totaled $6 million, compared with $14 million in 2000. In May 2001, the
cumulative operating losses of ServiceMaster Home Service Center began exceeding
the funding provided by Kleiner Perkins. As a result, all of the operating
losses after May of 2001 had been absorbed in the Company's financial statements
without an offset at the minority interest income line.
EXTRAORDINARY LOSS
In the fourth quarter of 2001, the Company used a portion of the cash proceeds
from the sale of Management Services to pay down debt balances and recorded an
extraordinary loss of $.03 per diluted share ($9 million after-tax) resulting
from the
5
<PAGE>
early extinguishment of debt. This was partially offset by the realization of
gains ($.02 per diluted share; $6 million after-tax) resulting from the
repurchase of corporate debt in the first quarter.
As previously discussed, the Company intends to adopt SFAS 145 in 2003, which
will result in the reclassification of the extraordinary loss into interest
expense within income from continuing operations.
SEGMENT REVIEW (2001 VS. 2000)
2001 AND 2000 RESULTS HAVE BEEN PRESENTED ON A PROFORMA BASIS AS IF SFAS 142 HAD
BEEN IN EFFECT FOR 2001 AND 2000 THEREBY EXCLUDING THE AMORTIZATION EXPENSE
AFFECTED BY THE NEW ACCOUNTING STANDARD. (SEE THE "BUSINESS SEGMENT REPORTING"
NOTE IN THE NOTES TO THE FINANCIAL STATEMENTS). MANAGEMENTS DISCUSSION AND
ANALYSIS FOCUSES ON THE 2001 AND 2000 PROFORMA AMOUNTS.
TRUGREEN SEGMENT
This segment's results for both 2001 and 2000 exclude the discontinued TruGreen
LandCare Construction business. The TruGreen segment reported revenue of $1.4
billion, consistent with 2000. Operating income decreased three percent to $181
million (proforma) from $187 million (proforma) in 2000.
Revenue in the lawn care business was consistent with 2000, reflecting the
realization of price increases and growth in ancillary services, offset by a
decrease in customer counts. The lawn care operations' results were negatively
impacted by winter weather conditions that persisted much later in the first
quarter of 2001 than in 2000, resulting in reduced production levels and lower
margins from sub-optimal labor utilization and fixed cost leverage. In addition,
management was optimistic that the selling season, which had been delayed due to
adverse weather in March and April, would rebound in the second and third
quarters. However, sales were below expectations and margins in the lawn care
operations were unfavorably impacted by a cost structure that was in place to
support a higher anticipated level of demand.
Landscape maintenance revenue increased one percent compared to 2000. Revenue
growth was negatively affected by management's decision to enforce stricter
profitability standards on contract sales and renewals as well as soft sales in
enhancement services. Operating margins in the landscaping operations increased
reflecting improved labor efficiency, offset in part by higher plant and
material costs. Capital employed decreased five percent primarily reflecting
continued improvement of working capital and the reduction of excess equipment
levels.
TERMINIX SEGMENT
The Terminix segment reported a 16 percent increase in revenue to $845 million
from $728 million in 2000 and operating income growth of 25 percent to $123
million (proforma) from $98 million (proforma) in 2000. The strong growth
reflects the impact of acquisitions, the continued migration of the customer
base to termite baiting systems, improved customer retention, and the impact of
price increases. In January 2001, the Company acquired the Allied Bruce Terminix
Companies, the largest Terminix franchise and the fourth largest pest control
company in the United States. In October 2001, the Company completed the
acquisition of certain assets of Sears Termite and Pest Control, Inc. The
improvement in Terminix's operating margins reflects the benefit of
acquisitions, in particular an increased mix of higher margin termite baiting
sales, as well as the impact of price increases and ongoing productivity
improvements. Capital employed increased 15 percent primarily due to
acquisitions, offset in part by higher prepaid contracts and improved working
capital management.
AMERICAN HOME SHIELD SEGMENT
The American Home Shield segment reported a 17 percent increase in revenue to
$369 million compared to $315 million in 2000 reflecting double-digit growth in
all sales channels. Operating income increased 25 percent to $26 million
(proforma) compared to $21 million (proforma) in 2000. Operating margin
improvement reflected a decrease in the incidence of claims and expanded use of
network contractors with negotiated lower rates, partially offset by a greater
mix of higher cost claims. Capital employed decreased four percent, resulting
from improved management of working capital.
ARS/AMS SEGMENT
The ARS/AMS segment reported revenue growth of four percent to $820 million,
compared to $787 million in 2000. Operating income decreased ten percent to $49
million (proforma), compared to $55 million (proforma) in 2000. Revenue growth
was supported primarily by acquisitions and price increases. Call volume for
residential plumbing and HVAC services was below management's expectations and
was impacted by cooler weather, a softening economic environment and a slow-down
in construction activity. Of all the businesses in ServiceMaster, ARS/AMS has
the largest mix of non-recurring revenue and is most affected by new
construction, and consequently appears to be most impacted by the condition of
the economy. In an effort to mitigate the impact of the volume shortfall on
operating margins, the Company implemented a detailed cost reduction program in
the second and third quarters of 2001. In addition, in order to focus on
improving performance, the Company discontinued acquisition activity in the
fourth quarter of 2001. Capital employed increased three percent, primarily
reflecting the impact of acquisitions.
OTHER OPERATIONS SEGMENT
Revenues in the Other Operations segment decreased 30 percent to $158 million
from $226 million, primarily reflecting divestitures in 2000. The operating loss
in 2001 of $342 million (proforma) compared with operating income of $19 million
(proforma) in 2000. 2001 results include a charge of $345 million primarily
related to goodwill and asset impairments and other items.
In 2001, the Company recognized $15 million of license fee income related to a
three-year licensing agreement with ARAMARK for the use of the ServiceMaster
trade name in certain markets. This fee income was offset by increased
expenditures in ServiceMaster Home Service Center and corporate support
functions.
The franchise operations, ServiceMaster Clean and Merry Maids, achieved
double-digit revenue and profit growth,
6
<PAGE>
reflecting growth in disaster restoration services (which included a significant
level of direct managed disaster restoration work at the Pentagon in 2001), the
benefit of successful marketing programs, national account relationships, and
employee retention initiatives. Total initial and recurring franchise fees
(excluding the aforementioned licensing fee) represented 2.5 percent of
consolidated revenue in both 2001 and 2000 and 1.7 percent of consolidated
operating expenses in both 2001 and 2000. Total franchise fee income comprised
10.2 percent and 9.8 percent of consolidated operating income in 2001 and 2000,
respectively.
2002 FINANCIAL POSITION AND CASH FLOWS
Net cash provided from operations was $381 million in 2002, $18 million higher
than 2001 and $224 million in excess of 2002 net income. The increase reflects
lower working capital usage. This improvement included better receivable and
payables management, most notably in the TruGreen ChemLawn and ARS businesses.
Property additions increased $19 million, reflecting the net purchase price
relating to the residual value guarantees of leases for five assisted living
facilities sold in the second quarter. Cash used for acquisitions declined to
$13 million from $56 million in 2001 reflecting the reduction or curtailment of
acquisitions at Terminix and ARS.
CASH AND DEBT LEVELS
Cash and marketable securities totaled approximately $303 million at December
31, 2002. In 2002, the Company repurchased a portion of its publicly traded debt
with a principal amount of $252 million, including approximately $218 million
repurchased in a tender offer during the second quarter of 2002. The Company has
completed the debt reduction program announced in October 2001. As a result of
continued strong cash flows and the application of the net proceeds received
from the Company's 2001 dispositions, total debt was reduced by $320 million for
the twelve months ended December 31, 2002. This represents a reduction in debt
outstanding of approximately $1.0 billion over the last two years and the
Company's lowest level in over five years. The debt repurchase allowed the
Company the opportunity to lengthen its maturity profile by focusing the
majority of the repurchase on debt with shorter maturities. Approximately 67
percent of the Company's debt now matures beyond five years and 42 percent
beyond fifteen years. The Company's next significant debt maturity is not until
2005.
The Company is party to a number of debt agreements which require it to maintain
certain financial and other covenants, including limitations on indebtedness
(debt cannot exceed 3.5 times EBITDA) and interest coverage ratio (EBITDA needs
to exceed four times interest expense). In addition, under certain
circumstances, the agreements may limit the Company's ability to pay dividends
and repurchase shares of common stock. These limitations are not expected to be
a factor in the Company's future dividend and share repurchase plans. Failure by
the Company to maintain these covenants could result in the acceleration of the
maturity of the debt. At December 31, 2002, the Company was in compliance with
the covenants related to these debt agreements and based on its operating
outlook for 2003 expects to be able to maintain compliance in the future. The
Company does not have any debt agreements that contain put rights or provide for
acceleration of maturity as a result of a change in credit rating.
Management believes that funds generated from operations and other existing
resources will continue to be adequate to satisfy ongoing working capital needs
of the Company. The Company has a committed revolving credit facility for $490
million, which will expire in December 2004. As of December 31, 2002, the
Company had issued approximately $136 million of letters of credit under the
facility and had unused commitments of approximately $354 million. The Company
also has $550 million of senior unsecured debt and equity securities available
for issuance under an effective shelf registration statement.
In 2001, the Company entered into an agreement to ultimately sell, on a
revolving basis, certain receivables to unrelated third party purchasers. At
December 31, 2002 and 2001, there were no receivables outstanding that had been
sold to third parties. The agreement is a 364-day facility that is renewable at
the option of the purchasers. The Company may sell up to $65 million of its
receivables to these purchasers in the future and therefore has immediate access
to cash proceeds from these sales. The amount of the eligible receivables varies
during the year based on seasonality of the business and will at times limit the
amount available to the Company.
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. There are residual value guarantees of these properties up to 82
percent of the fair market value of the properties. At December 31, 2002 there
was approximately $72 million funded under these facilities. Of the $95 million
in facilities, $80 million expires in October 2004 and $15 million expires in
January 2008. Approximately $15 million of these leases that involve constructed
properties have been included on the balance sheet as assets with related debt
as of December 31, 2002 and 2001.
The majority of the Company's vehicle fleet is leased through operating leases.
The lease terms are non-cancelable for the first twelve month term, then are
month-to-month leases, cancelable at the Company's option. There are residual
value guarantees (ranging from 70 percent to 87 percent depending on the
agreement) on these vehicles, which historically have not resulted in
significant net payments to the lessors. At December 31, 2002, there was
approximately $257 million of residual value relating to the Company's fleet.
The following table presents the Company's obligations and commitments:
(IN MILLIONS) Total < 1 Yr 2-3 Yrs 4-5 Yrs > 5 yrs
- -----------------------------------------------------------------
Debt balances $835 $31 $175 $70 $559
Non-cancelable
operating
leases 261 63 90 57 51
- -----------------------------------------------------------------
Total amount $1,096 $94 $265 $127 $610
- -----------------------------------------------------------------
As of December 31, 2002, the Company had approximately $136 million of letters
of credit issued under its bank credit
7
<PAGE>
facility and approximately $26 million of annually renewable surety bonds
outstanding that primarily support obligations the Company has under insurance
programs. If the surety bonds are not renewed, the Company expects to replace
them with letters of credit issued under its bank credit facility.
DISCONTINUED OPERATIONS
The assets and liabilities related to discontinued businesses have been
classified in separate captions on the Consolidated Statements of Financial
Position. This includes the assets and liabilities specifically related to the
CSI, LandCare Construction, and Terminix Europe businesses. The decrease in
assets of the discontinued operations reflects the sale of equipment and
receivable collections. The decline in liabilities from discontinued operations
represents the settlement of insurance claims and other cash payments. The
remaining liabilities primarily represent the obligations related to long-term
insurance claims and litigation exposures.
CONTINUING OPERATIONS
Receivables are slightly below the level last year reflecting improved
collections and days sales outstanding at several businesses. Deferred customer
acquisition costs increased reflecting growth in the volume of baiting contracts
written at Terminix. The Company capitalizes sales commissions and other direct
contract acquisition costs relating to termite baiting and pest contracts, as
well as home warranty agreements. Property and equipment decreased slightly,
reflecting general business growth offset by depreciation expense on
larger-scale technology projects. The Company does not have any material capital
commitments at this time.
Deferred revenue increased reflecting growth in warranty contracts written at
American Home Shield, increased volume in termite baiting contracts and customer
prepayments in the lawn care business.
As of the date of the Company's acquisition of ARS in 1999, certain members of
management acquired, at fair market value, equity interests in the HVAC and
plumbing operations. In the fourth quarter of 2002, the Company repurchased, at
fair market value, these shares. The Company continues to maintain minority
investors in Terminix. This minority ownership reflects an interest issued to
the prior owners of the Allied Bruce Terminix Companies in connection with that
acquisition. This equity security is convertible into eight million
ServiceMaster common shares. The ServiceMaster shares are included in the shares
used for the calculation of diluted earnings per share.
Total shareholders' equity increased one percent to $1.2 billion, reflecting
earnings partially offset by dividends paid to shareholders. Cash dividends paid
to shareholders totaled $123 million, or $.41 per share, compared to $.40 per
share in 2001. The total amount of cash dividends increased four percent from
the prior year primarily reflecting the per share increase.
In January 2003, the Company paid a cash dividend of $.105 per share and in
March 2003, declared a second quarter cash dividend of $.105 per share payable
on April 30, 2003. The timing and amount of future dividend increases are at the
discretion of the Board of Directors and will depend on, among other things, the
Company's capital structure objectives and cash requirements. In July 2000, the
Board of Directors authorized $350 million for share repurchases. In 2002, the
Company repurchased $52 million of its shares. There remains approximately $229
million available for repurchases under the July 2000 authorization. Decisions
relating to any future share repurchases will depend on various factors such as
the Company's commitment to maintain investment grade credit ratings and other
strategic investment opportunities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The economy and its impact on discretionary consumer spending, labor wages, fuel
prices, insurance costs and medical inflation rates could be significant to
future operating earnings.
The Company does not hold or issue financial instruments for trading or
speculative purposes. The Company has entered into specific financial
arrangements in the normal course of business to manage certain market risks,
with a policy of matching positions and limiting the terms of contracts to
relatively short durations. The effect of financial instrument transactions is
not material to the Company's financial statements.
The Company generally maintains the majority of its debt at fixed rates. Over 95
percent of total debt at December 31, 2002 and December 31, 2001 was at a fixed
rate. The payments on the approximately $72 million of funding outstanding under
the Company's real estate operating lease facilities as well as its vehicle
fleet and equipment operating leases (approximately $257 million in residual
value) are tied to floating interest rates. Nonetheless, the Company believes
its exposure to interest rate fluctuations is not significant to its overall
results of operations.
The Company has several debt and lease agreements where the interest rate or
rent payable under the agreements automatically adjusts based on changes in the
Company's credit ratings. While the Company is not currently expecting a change
in its credit ratings, based on amounts outstanding at December 31, 2002, a one
rating category improvement in the Company's credit ratings would reduce expense
on an annualized basis by approximately $0.7 million. A one rating category
reduction in the Company's credit ratings would increase expense on an
annualized basis by approximately $1.3 million.
The following table summarizes information about the Company's fixed rate debt
instruments as of December 31, 2002 and presents the principal cash flows and
related weighted-average interest rates by expected maturity dates. The fair
value of the Company's fixed rate debt was approximately $880 million at
December 31, 2002.
Expected Maturity Date
----------------------------------
There-
(In millions) 2003 2004 2005 2006 2007 after Total
- -----------------------------------------------------------------
Fixed rate debt $31 $24 $151 $11 $59 $559 $835
Avg. Rate 4.2% 4.8% 8.2% 6.0% 6.7% 7.5% 7.2%
- -----------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
The preparation of the consolidated financial statements requires management to
make certain estimates and assumptions required under generally accepted
accounting
8
<PAGE>
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, settlement of home
warranty claims, the possible outcomes of outstanding litigation, the useful
lives for depreciation and amortization expense and the valuation of tangible
and intangible assets.
The allowance for receivables is developed based on several factors including
overall customer credit quality, historical write-off experience and specific
account analysis that project the ultimate collectibility of the account. As
such, these factors may change over time causing the reserve level to vary.
The Company carries insurance policies on insurable risks. The Company generally
has self-insured retention limits and has obtained insured layers of coverage
above such self-insured retention limits. Accruals for self-insurance losses are
recorded based on the Company's claims experience and actuarial assumptions. The
establishment of appropriate reserves is an inherently uncertain process.
Reserve estimates are regularly reviewed and updated using the most current
information available. Any resulting adjustments, which could be material, are
reflected in the period identified.
Tangible (fixed) and intangible assets with finite lives are depreciated and
amortized, on a straight-line basis, over their estimated useful lives. These
lives are based on the Company's previous experience for similar assets, the
potential market obsolescence and other industry and business data. The Company
also periodically reviews the assets for impairment and a loss would be
recorded, if and when, the Company determines that the book value of the asset
exceeds the true value to the Company. Changes in the estimated useful lives or
in asset values could cause the Company to adjust its book value or future
expense accordingly. The Company also reviews its goodwill and trade names at
least once a year for impairment. An impairment loss would be recorded, if and
when, the Company determines that the expected present value of the future cash
flows is less than the book value.
Revenues from lawn care, pest control, liquid and fumigation termite
applications, as well as heating/air conditioning and plumbing services are
recognized as the services are provided. Revenues from landscaping services are
recognized as they are earned based upon monthly contractual arrangements or
when services are performed for non-contractual arrangements. Revenues from the
Company's commercial installation contracts, primarily relating to HVAC, are
recognized on the percentage of completion method in the ratio that total
incurred costs bear to total estimated costs. The Company eradicates termites
through the use of baiting stations, as well as through non-baiting methods
(e.g., fumigation or liquid treatment). Termite services using baiting stations
as well as home warranty services typically are sold through annual contracts
for a one-time, upfront payment. Direct costs of these contracts (service costs
for termite contracts and claim costs for warranty contracts) are expensed as
incurred. The Company recognizes revenue over the life of these contracts in
proportion to the expected direct costs. Revenue from trade name licensing
arrangements is recognized when earned. Franchised revenues consist principally
of monthly fee revenue which is recognized when the related franchise revenue is
reported from the franchisee and collectibility is assured. Franchise revenue
also includes initial franchise fees resulting from the sale of the franchise,
which are fixed and are recognized as revenue when collectibility is assured and
all material services or conditions relating to the sale have been substantially
performed.
Customer acquisition costs, which are incremental and direct costs of obtaining
the customer, are deferred and amortized over the life of the contract in
proportion to revenue recognized. These costs include sales commissions and
direct selling costs which can be shown to have resulted in a successful sale.
FORWARD-LOOKING STATEMENTS
THE COMPANY'S ANNUAL REPORT CONTAINS STATEMENTS CONCERNING FUTURE RESULTS AND
OTHER MATTERS THAT MAY BE DEEMED TO BE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE COMPANY
INTENDS THAT THESE FORWARD-LOOKING STATEMENTS, WHICH LOOK FORWARD IN TIME AND
INCLUDE EVERYTHING OTHER THAN HISTORICAL INFORMATION, BE SUBJECT TO THE SAFE
HARBORS CREATED BY SUCH LEGISLATION. THE COMPANY NOTES THAT THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES THAT COULD AFFECT ITS
RESULTS OF OPERATIONS, FINANCIAL CONDITION OR CASH FLOWS. FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN A
FORWARD-LOOKING STATEMENT INCLUDE THE FOLLOWING (AMONG OTHERS): EXTREME WEATHER
CONDITIONS THAT AFFECT THE DEMAND FOR THE COMPANY'S SERVICES; COMPETITION IN THE
MARKETS SERVED BY THE COMPANY; LABOR SHORTAGES OR INCREASES IN WAGE RATES;
UNEXPECTED INCREASES IN OPERATING COSTS, SUCH AS HIGHER INSURANCE, HEALTH CARE
OR FUEL PRICES; INCREASED GOVERNMENTAL REGULATION OF TELEMARKETING; GENERAL
ECONOMIC CONDITIONS IN THE UNITED STATES, ESPECIALLY AS THEY MAY AFFECT HOME
SALES OR CONSUMER SPENDING LEVELS; TIME AND EXPENSES ASSOCIATED WITH INTEGRATING
AND WINDING DOWN BUSINESSES; AND OTHER FACTORS DESCRIBED FROM TIME TO TIME IN
DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION.
9
<PAGE>
<TABLE>
FIVE YEAR FINANCIAL SUMMARY
(Restated 1) (Restated 1) (Restated 1) (Restated 1)
2002 2001 2000 1999 1998
(In thousands, except per share data) unaudited unaudited
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS:
<S> <C> <C> <C> <C> <C>
Operating revenue $3,589,089 $3,561,445 $3,421,802 $3,063,668 $2,185,352
Operating income 341,336 (23,177) 320,851 245,672 296,530
PERCENTAGE OF OPERATING REVENUE 9.5% (1.0%) 9.4% 8.0% 13.6%
Non-operating expense 77,770 121,718 103,733 86,981 77,644
Provision for income taxes 93,468 19,569 92,844 67,628 90,510
------------------------------------------------------------------------
Income from continuing operations 170,098 (164,464) 124,274 91,063 128,376
Discontinued operations, net (3,875) 284,270 40,568 61,626 51,601
Extraordinary loss, net of income taxes (9,229) (3,422) - - -
Cumulative effect of accounting change,
net of income taxes - - (11,161) - -
------------------------------------------------------------------------
Net income $156,994 $116,384 $153,681 $152,689 $179,977
Earnings per share:
Basic $0.52 $0.39 $0.51 $0.50 $0.62
Diluted:
Income from continuing operations $0.56 $(0.55) $0.41 $0.29 $0.43
Discontinued operations, net (0.01) 0.95 0.13 0.20 0.17
Extraordinary loss, net (0.03) (0.01) - - -
Cumulative effect of accounting change - - (0.04) - -
------------------------------------------------------------------------
Diluted earnings per share $0.52 $0.39 $0.50 $0.49 $0.60
Shares used to compute basic earnings per share 300,383 298,659 302,487 307,637 289,315
Shares used to compute diluted earnings per share 314,112 298,659 305,518 314,406 298,887
Shares outstanding, net of treasury shares 298,253 300,531 298,474 307,530 289,030
Cash dividends per share $0.41 $0.40 $0.38 $0.36 $0.33
Share price range:
High price $15.50 $14.20 $14.94 $22.00 $25.50
Low price $8.89 $9.84 $8.25 $10.13 $16.00
Financial Position (at year end):
Current assets $919,174 $1,119,050 $693,019 $705,661 $461,758
Current liabilities 839,064 805,298 675,902 712,520 608,289
Working capital 80,110 313,752 17,117 (6,859) (146,531)
Current ratio 1.1 - 1 1.4 - 1 1.0 - 1 1.0 - 1 .8 - 1
Total assets $3,414,938 $3,621,245 $3,939,710 $3,819,687 $2,882,242
Total liabilities 2,095,929 2,311,381 2,753,226 2,567,372 1,861,217
TOTAL DEBT OUTSTANDING 835,475 1,155,193 1,833,556 1,769,298 1,127,783
Minority interest 100,309 102,677 5,933 2,934 -
Shareholders' equity 1,218,700 1,207,187 1,180,551 1,249,381 1,021,025
(1) See the "Restatement" section in the Notes to the Consolidated Financial
Statements for the basis of the restatement and financial statement impact.
</TABLE>
10
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Restated 6) (Restated 6)
For years ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUE $3,589,089 $3,561,445 $3,421,802
OPERATING COSTS AND EXPENSES:
Cost of services rendered and products sold 2,481,226 2,480,472 2,431,912
Selling and administrative expenses 761,085 688,429 601,835
Goodwill, trade name and other intangible amortization (1) 7,442 70,890 67,204
Charge (credit) for impaired assets and other items (2) (2,000) 344,831 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 3,247,753 3,584,622 3,100,951
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 341,336 (23,177) 320,851
NON-OPERATING EXPENSE (INCOME)
Interest expense 77,519 128,033 136,831
Interest and investment income (6,431) (11,972) (19,861)
Minority interest and other expense (income), net 6,682 5,657 (13,237)
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 263,566 (144,895) 217,118
Provision for income taxes 93,468 19,569 92,844
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY
ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 170,098 (164,464) 124,274
Discontinued operations, net of income taxes (3) (3,875) 284,270 40,568
Extraordinary loss, net of income taxes (4) (9,229) (3,422) -
Cumulative effect of accounting change, net of income taxes (5) - - (11,161)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $156,994 $116,384 $153,681
- -----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Income from continuing operations before extraordinary items
and cumulative effect of accounting change $0.57 ($0.55) $0.41
Discontinued operations, net (3) (0.01) 0.95 0.13
Extraordinary loss, net (4) (0.03) (0.01) -
Cumulative effect of accounting change, net (5) - - (0.04)
- -----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $0.52 $0.39 $0.51
- -----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
Income from continuing operations before extraordinary items
and cumulative effect of accounting change $0.56 ($0.55) $0.41
Discontinued operations, net (3) (0.01) 0.95 0.13
Extraordinary loss, net (4) (0.03) (0.01) -
Cumulative effect of accounting change, net (5) - - (0.04)
- -----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $0.52 $0.39 $0.50
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets", which eliminates the
amortization of goodwill and intangible assets with indefinite lives
beginning in 2002. Had the provisions of SFAS 142 been applied to 2001 and
2000, amortization expense would have been reduced by $60 million ($42
million after-tax, $0.14 per diluted share) in 2001 and $58 million ($40
million after-tax, $0.13 per diluted share) in 2000.
(2) The Company recorded a pretax charge of $345 million ($279 million,
after-tax) or $.94 per diluted share in the fourth quarter of 2001, related
primarily to goodwill and asset impairments as well as other items.
(3) In the fourth quarter of 2001, the Company's Board of Directors approved a
series of actions related to the strategic review of its portfolio of
businesses that commenced earlier in 2001. These actions included the sale
in November 2001 of the Company's Management Services business as well as
the decision to exit non-strategic and under performing businesses
including TruGreen LandCare Construction and Certified Systems, Inc., as
well as certain Terminix operations in Europe. During the third quarter of
2002, the Company sold its remaining European Terminix operations. These
operations are classified in "Discontinued operations" for all periods
presented. See "Portfolio Review and Dispositions in 2001" section in the
Notes to the Consolidated Financial Statements.
(4) In 2002 and 2001, the Company repurchased a portion of its public debt
securities and in 2001 the Company prepaid some of its longer-term debt.
The net impact of these transactions was extraordinary losses of $9 million
($15 million pretax) and $3 million ($6 million pretax) in 2002 and 2001,
respectively. The Company intends to adopt SFAS 145 beginning in fiscal
2003. Adoption of this Statement in 2003 will result in the
reclassification of the extraordinary losses into income from continuing
operations.
(5) 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).
(6) See the "Restatement" section in the Notes to the Consolidated Financial
Statements for the basis of the restatement and the financial statement
impact.
See accompanying Notes to the Consolidated Financial Statements.
11
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands)
(Restated 1)
As of December 31, 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
ASSETS:
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $227,409 $402,644
Marketable securities 75,194 72,429
Receivables, less allowances of $27,616 and $28,397, respectively 332,186 340,935
Inventories 67,748 68,036
Prepaid expenses and other assets 39,464 34,734
Deferred customer acquisition costs 48,419 46,004
Deferred taxes and income taxes receivable 123,100 90,200
Assets of discontinued operations 5,654 64,068
- ------------------------------------------------------------------------------------------------------------------------
Total Current Assets 919,174 1,119,050
- ------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
At cost 413,939 469,140
Less: accumulated depreciation (219,062) (272,930)
- ------------------------------------------------------------------------------------------------------------------------
Net Property and Equipment 194,877 196,210
- ------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Goodwill 1,919,780 1,904,178
Intangible assets, primarily trade names 257,781 261,136
Notes receivable 55,770 59,204
Long-term securities and other assets 67,556 81,467
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $3,414,938 $3,621,245
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable 92,121 97,251
Accrued liabilities:
Payroll and related expenses 99,504 83,182
Self-insured claims and related expenses 84,521 63,819
Other 102,380 131,780
Deferred revenues 397,290 343,873
Liabilities of discontinued operations 32,113 50,449
Current portion of long-term debt 31,135 34,944
- ------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 839,064 805,298
- ------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 804,340 1,120,249
LONG-TERM LIABILITIES
Deferred taxes 312,500 233,000
Liabilities of discontinued operations 28,800 50,600
Other long-term obligations 111,225 102,234
- ------------------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 452,525 385,834
- ------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST 100,309 102,677
COMMITMENTS AND CONTINGENCIES (See Note)
SHAREHOLDERS' EQUITY
Common stock $0.01 par value, authorized 1 billion shares; issued
316,024 and 314,538, respectively 3,160 3,145
Additional paid-in capital 1,054,272 1,039,228
Retained earnings 355,893 322,103
Accumulated other comprehensive loss (849) (2,496)
Restricted stock (1,988) (581)
Treasury stock (191,788) (154,212)
- ------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,218,700 1,207,187
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,414,938 $3,621,245
- ------------------------------------------------------------------------------------------------------------------------
(1) See the "Restatement" section in the Notes to the Consolidated Financial
Statements for the basis of the restatement and the financial statement
impact.
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
12
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Additional Accumulated
Common Paid-in Retained Comprehensive Treasury Restricted Total
Stock Capital Earnings Income Stock Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1999 (As Previously
Reported) $ 3,132 $1,033,568 $ 241,701 $ (1,821) $ (68,287) $ (2,577) $1,205,716
Prior period adjustment (1) 1,214 43,666 (4,028) 40,852
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 1, 2000 (Restated 1) $ 3,132 $1,034,782 $ 285,367 $ (5,849) $ (68,287) $ (2,577) $1,246,568
====================================================================================================================================
Net Income 2000 (Restated 1) 153,681 153,681
Other comprehensive income, net of tax
Net unrealized gains on securities,
net of reclassification adjustment (2) 3,169 3,169
Foreign currency translation (6,597) (6,597)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 153,681 (3,428) 150,253
Shareholder dividends (114,321) (114,321)
Shares issued under options,
debentures, grant plans and
other (2,099 shares) (981) 18,887 748 18,654
Treasury shares purchased (12,637 shares) (135,633) (135,633)
Shares issued for acquisitions
(1,482 shares) 5 (1,514) 16,539 15,030
====================================================================================================================================
BALANCE DECEMBER 31, 2000 (Restated 1) $3,137 $1,032,287 $324,727 $(9,277) $(168,494) $(1,829) $1,180,551
====================================================================================================================================
Net Income 2001 (Restated 1) 116,384 116,384
Other comprehensive income, net of tax
Net unrealized (loss) on securities,
net of reclassification adjustment (2) (4,359) (4,359)
Foreign currency translation 11,140 11,140
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 116,384 6,781 123,165
Shareholder dividends (119,008) (119,008)
Shares issued under options
debentures, grant plans and
other (2,142 shares) 8 6,941 15,590 1,248 23,787
Treasury shares purchased (124 shares) (1,308) (1,308)
====================================================================================================================================
BALANCE DECEMBER 31, 2001 (Restated 1) $3,145 $1,039,228 $322,103 $(2,496) $(154,212) $(581) $1,207,187
====================================================================================================================================
Net Income 2002 156,994 156,994
Other comprehensive income, net of tax
Net unrealized (loss) on securities,
net of reclassification adjustment (2) (3,869) (3,869)
Foreign currency translation 5,516 5,516
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 156,994 1,647 158,641
Shareholder dividends (123,204) (123,204)
Shares issued under options,
debentures, grant plans and
other (2,706 shares) 15 15,044 14,482 (1,407) 28,134
Treasury shares purchased (4,985 shares) (52,058) (52,058)
====================================================================================================================================
BALANCE DECEMBER 31, 2002 $3,160 $1,054,272 $355,893 $(849) $(191,788) $(1,988) $1,218,700
====================================================================================================================================
(1) See the "Restatement" section in the Notes to the Consolidated Financial
Statements for the basis for the restatement and the financial statement
impact.
(2) Disclosure of reclassification amounts (net of tax) relating to
comprehensive income:
2002 2001 2000
======================================================================================================================
Unrealized holding gains (losses) arising in period $(4,745) $(1,219) $12,106
Less:(Gains)losses realized 876 (3,140) (8,937)
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $(3,869) $(4,359) $3,169
======================================================================================================================
See accompanying Notes to the Consolidated Financial Statements.
</TABLE>
13
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Restated 1) (Restated 1)
For years ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS AT JANUARY 1 $ 402,644 $ 42,669 $ 49,565
CASH FLOWS FROM OPERATIONS:
NET INCOME 156,994 116,384 153,681
Adjustments to reconcile net income to net cash provided from operations:
(Income) loss from discontinued operations 3,875 (284,270) (40,568)
Charge for impaired assets and other items, net of tax (1,200) 279,393 --
Extraordinary loss 9,229 3,422 --
Cumulative effect of accounting change -- -- 11,161
Depreciation expense 50,434 49,913 48,320
Amortization expense 7,442 70,890 67,204
Deferred income tax expense 65,799 37,470 43,821
Change in working capital, net of acquisitions:
Receivables 13,282 (1,313) (3,584)
Inventories and other current assets (8,030) (14,677) (2,320)
Accounts payable (4,241) (4,445) (11,995)
Deferred revenues 49,849 35,750 21,129
Accrued liabilities 37,127 22,266 (23,403)
Tax refund from prior years payments -- 51,000 39,000
Other, net 489 1,150 721
====================================================================================================================
NET CASH PROVIDED FROM OPERATIONS 381,049 362,933 303,167
====================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (60,599) (41,709) (56,460)
Sale of equipment and other assets 4,615 9,838 13,576
Business acquisitions, net of cash acquired (13,003) (55,842) (144,834)
Proceeds from business sales -- -- 44,784
Notes receivable, financial investments and securities (2,117) (15,361) (22,398)
Proceeds from sale of Management Services -- 766,779 --
Proceeds from sale of European businesses 30,500 90,387 --
====================================================================================================================
NET CASH PROVIDED FROM (USED FOR) INVESTING ACTIVITIES (40,604) 754,092 (165,332)
====================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) (345,142) (719,963) 11,266
Shareholders' dividends (123,204) (119,008) (114,321)
Purchase of ServiceMaster stock (52,058) (1,308) (135,633)
Other, net 19,140 13,970 12,769
====================================================================================================================
NET CASH USED FOR FINANCING ACTIVITIES (501,264) (826,309) (225,919)
====================================================================================================================
NET CASH PROVIDED FROM (USED FOR) DISCONTINUED OPERATIONS (14,416) 69,259 81,188
===================================================================================================================
CASH INCREASE (DECREASE) DURING THE YEAR (175,235) 359,975 (6,896)
====================================================================================================================
CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 227,409 $ 402,644 $ 42,669
====================================================================================================================
(1) See the "Restatement" section in the Notes to the Consolidated Financial
Statements for the basis for the restatement and the financial statement
impact.
See accompanying Notes to the Consolidated Financial Statements.
</TABLE>
14
<PAGE>
Notes to Consolidated Financial Statements
SIGNIFICANT ACCOUNTING POLICIES
SUMMARY: 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.
The preparation of the consolidated financial statements requires management to
make certain estimates and assumptions required under generally accepted
accounting principles ("GAAP") 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, settlement
of home warranty claims, the possible outcomes of outstanding litigation, the
useful lives for depreciation and amortization expense, and the valuation of
tangible and intangible assets.
The allowance for receivables is developed based on several factors including
overall customer credit quality, historical write-off experience and specific
account analysis that project the ultimate collectibility of the account. As
such, these factors may change over time causing the reserve level to vary.
The Company carries insurance policies on insurable risks at levels which it
believes to be appropriate. The Company generally has self-insured retention
limits and has obtained 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 establishment of
appropriate reserves is an inherently uncertain process. Reserve estimates are
regularly reviewed and updated using the most current information available. Any
resulting adjustments, which could be material, are reflected in the period
identified.
Tangible (fixed) and intangible assets with finite lives are depreciated and
amortized on a straight-line basis, over their estimated useful lives. These
lives are based on the Company's previous experience for similar assets, the
potential for market obsolescence and other industry and business data. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", these assets
are tested for recoverability whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. In performing this
test, if the undiscounted future cash flows from the asset are less than the
carrying amount of the asset, an impairment loss would be recognized based on
the asset's fair value, and the carrying amount of the asset would be reduced
accordingly.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", the
Company does not amortize its goodwill or indefinite-lived intangible assets.
The Company tests these assets for impairment, at a minimum, on an annual basis
by applying a fair-value based test.
REVENUES: Revenues from lawn care, pest control, liquid and fumigation termite
applications, as well as heating/air conditioning and plumbing services are
recognized as the services are provided. Revenues from landscaping services are
recognized as they are earned based upon monthly contractual arrangements or
when services are performed for non-contractual arrangements. Revenues from the
Company's commercial installation contracts, primarily relating to HVAC, are
recognized on the percentage of completion method in the ratio that total
incurred costs bear to total estimated costs. The Company eradicates termites
through the use of baiting stations, as well as through non-baiting methods
(e.g., fumigation or liquid treatment). Termite services using baiting stations
as well as home warranty services typically are sold through annual contracts
for a one-time, upfront payment. Direct costs of these contracts (service costs
for termite contracts and claim costs for warranty contracts) are expensed as
incurred. The Company recognizes revenue over the life of these contracts in
proportion to the expected direct costs. Revenue from trade name licensing
arrangements is recognized when earned. Franchised revenues (which in the
aggregate represent less than three percent of consolidated revenue) consist
principally of continuing monthly fees based upon the franchisee revenue.
Monthly fee revenue is recognized when the related franchise revenue is reported
from the franchisee and collectibility is assured. Franchise revenue also
includes initial franchise fees resulting from the sale of the franchise, which
are fixed and are recognized as revenue when collectibility is assured and all
material services or conditions relating to the sale have been substantially
performed. Total franchise fee income (excluding trade name licensing) comprised
11.4 percent, 10.2 percent and 9.8 percent of consolidated operating income in
2002, 2001 and 2000, respectively. The portion of total franchise fee income
related to initial fees received from the sale of a franchise were immaterial to
the Company's consolidated financial statements for all periods.
The Company had $397 million and $344 million of deferred revenues at December
31, 2002 and 2001, respectively, which consist primarily of payments received
for annual contracts relating to home warranty, termite baiting and lawn care
services. The revenue related to these services is recognized as the service is
performed over the contractual period.
DEFERRED CUSTOMER ACQUISITION COSTS: Customer acquisition costs, which are
incremental and direct costs of obtaining the customer, are deferred and
amortized over the life of the contract in proportion to revenue recognized.
These costs include sales commissions and direct selling costs which can be
shown to have resulted in a successful sale.
INTERIM REPORTING: TruGreen ChemLawn has significant seasonality to its
business. In the winter and early spring, this business sells a series of lawn
applications to customers which are rendered primarily in March through October.
The Company incurs incremental selling expenses at the beginning of the year
that directly relate to successful sales in which the revenues will be
recognized in later quarters. This business also defers, on an interim basis,
pre-season advertising costs and annual repairs and maintenance procedures that
are performed in the first quarter. These costs are deferred and recognized in
proportion to the contract revenue over the production season, and are not
deferred beyond the calendar year-end.
15
<PAGE>
Notes to Consolidated Financial Statements
ADVERTISING: As discussed in the "Interim Reporting" note above, TruGreen's
pre-season advertising costs are deferred and recognized in proportion to the
contract revenue over the year. These costs are not deferred beyond the calendar
year-end. Beginning in 2002, the cost of direct-response advertising at Terminix
is capitalized and amortized over its expected period of future benefits. This
direct-response advertising consists primarily of direct-mail promotions, for
which the cost is capitalized and amortized over the one-year customer contract
life. At December 31, 2002, approximately $1.3 million of direct response
advertising costs were deferred and recorded in prepaid expenses. For all other
advertising, the Company expenses the cost of advertising the first time the
advertising takes place.
INVENTORY VALUATION: Inventories are valued at the lower of cost (first-in,
first-out basis) or market. Inventory costs include material, labor, and related
overhead and handling costs. Raw materials represent less than one percent of
the inventory value at December 31, 2002. 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. Leasehold
improvements relating to leased facilities are depreciated over the remaining
life of the lease. Technology equipment as well as software and development have
an estimated useful life of three to seven years. Intangible assets consist
primarily of goodwill ($1.9 billion), trade names ($239 million) and other
intangible assets ($19 million). As required by SFAS 142 beginning in 2002,
goodwill is not subject to amortization and intangible assets with indefinite
useful lives are not amortized until their useful lives are determined to be no
longer indefinite. Goodwill and intangible assets that are not subject to
amortization are subject to at least an annual assessment for impairment by
applying a fair-value based test. Estimated fair value is determined for each
reporting unit by utilizing the expected present value of the future cash flows
of the units. The Company completed its initial assessment of goodwill
impairment in the second quarter of 2002. The Company has also completed its
annual assessment of impairment as of October 1. These assessments concluded
that there were no impairment issues. The Company performs impairment testing on
an annual basis and may test for impairment on a more frequent basis if
management believes events have occurred or circumstances have changed resulting
in a reporting unit's fair value being reduced below its book value. Intangible
assets with finite lives ($19 million and $23 million at December 31, 2002 and
2001, respectively) are amortized on a straight-line basis over their estimated
useful lives.
As discussed in the "Portfolio Review and Strategic Actions" Note to the
Consolidated Financial Statements, in the course of completing its portfolio
review, the Company recorded impairment charges in 2001 related to goodwill of
TruGreen LandCare and the United Kingdom Terminix operations. The Company
computed the impairment of the associated goodwill by utilizing a discounted
cash flow methodology, in which the present value of the future expected cash
flows of the businesses, were compared to the book values. The impairment losses
recorded were the excess of the book values over the discounted cash flows.
As required by SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets", the Company's long-lived assets, including fixed assets and intangible
assets (other than goodwill), are tested for recoverability whenever events or
changes in circumstances indicate that their carrying amounts may not be
recoverable. No recovery problems have been indicated by these comparisons.
Based on these reviews, when the undiscounted future cash flows from the asset
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND CREDIT RISK: The carrying amounts of
cash and cash equivalents, receivables, accounts payable, and accrued
liabilities approximate fair value because of the short maturity of these
instruments. The carrying amounts of long-term receivables approximate fair
value as the effective rates for these instruments are comparable to market
rates at year-end. The carrying amount of marketable and long-term securities
also approximate fair value as unrealized gains and losses on investments
accounted for at market value are reported net-of-tax as a component of
accumulated comprehensive income (loss). The carrying amount of debt is $835
million and $1.2 billion and the estimated fair value is approximately $880
million and $1.1 billion at December 31, 2002 and 2001, respectively. The
estimated fair value of debt is based upon borrowing rates currently available
to the Company for long-term borrowings with similar terms and maturities.
The Company does not hold or issue financial instruments for trading or
speculative purposes. The Company has entered into specific financial
arrangements in the normal course of business to manage certain market risks,
with a policy of matching positions and limiting the terms of contracts to
relatively short durations. The effect of financial instrument transactions is
not material to the Company's consolidated financial statements.
Financial instruments, which potentially subject the Company to financial and
credit risk, consist principally of investments and receivables. Investments
consist primarily of publicly traded debt and common equity securities. The
Company periodically reviews its portfolio of investments to determine whether
there has been an other than temporary decline in the value of the investments
from factors such as deterioration in the financial condition of the issuer or
the market(s) in which it competes. As a result of such a review, the Company
wrote down the value of its investment portfolio by $4 million, pretax in 2001.
Receivables have little concentration of credit risk due to the large number of
customers and the dispersion across geographical areas. The Company maintains an
allowance for losses based upon the expected collectibility of receivables.
INCOME TAXES: The Company accounts for income taxes under the SFAS 109,
"Accounting for Income Taxes." This statement uses an asset and liability
approach for the expected future tax
16
<PAGE>
Notes to Consolidated Financial Statements
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. The weighted average common
shares for the diluted earnings per share calculation include the incremental
effect related to outstanding options whose market price is in excess of the
exercise price and shares potentially issuable under convertible securities. In
computing diluted earnings per share, the after-tax interest expense related to
convertible debentures is added back to net income in the numerator, while the
diluted shares in the denominator include the shares issuable upon conversion of
the debentures. The effects of outstanding stock options whose market price is
in excess of the exercise price and shares potentially issuable under
convertible securities have not been included in the 2001 diluted loss per share
calculation as their effect would have been anti-dilutive.
STOCK-BASED COMPENSATION: Beginning in 2003, the Company will account for
employee stock options as compensation expense in accordance with SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123", provides alternative methods of transitioning to the fair value based
method of accounting for employee stock options as compensation expense. The
Company will use the "prospective method" of SFAS 148 and expense the fair value
of new employee option grants awarded subsequent to 2002. If the Company
continues its historical pattern of option granting, the impact would be
approximately $.005 per share in 2003, increasing to approximately $.03 per
share over five years.
Prior to 2003, the Company has accounted for employee share options under the
intrinsic method of Accounting Principles Board Opinion 25, as permitted under
GAAP. Accordingly, no compensation cost has been recognized in the accompanying
financial statements related to these options. Had compensation expense for
employee options been determined under the fair value based method of SFAS 123,
proforma reported net income and net earnings per share would reflect the
following:
(In thousands, except per share data) 2002 2001 2000
========================================================================
Net income as reported $156,994 $116,384 $153,681
Deduct: total stock-based
compensation expense
determined under fair value
based method, net
of related tax effects (7,576) (7,613) (8,170)
- ------------------------------------------------------------------------
Proforma net income $149,418 $108,771 $145,511
Basic Earnings Per Share::
As reported $.52 $.39 $.51
Proforma .50 .36 .48
Diluted Earnings Per Share:
As reported $.52 $.39 $.50
Proforma .49 .36 .48
========================================================================
SEE THE "SHAREHOLDERS' EQUITY" NOTE TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR
A DESCRIPTION OF THE ASSUMPTIONS USED TO COMPUTE THE ABOVE STOCK BASED
COMPENSATION EXPENSE.
NEWLY ADOPTED ACCOUNTING PRINCIPLES: In June 2001, the Financial Accounting
Standards Board issued SFAS 142 "Goodwill and Other Intangible Assets". SFAS 142
requires that after December 31, 2001, existing goodwill will not be amortized
and intangible assets with indefinite useful lives will not be amortized until
their useful lives are determined to be no longer indefinite. In accordance with
SFAS 142, the Company discontinued the amortization of goodwill and indefinite
lived intangible assets effective January 1, 2002. Goodwill and intangible
assets that are not amortized are subject to at least an annual assessment for
impairment by applying a fair-value-based test. The Company completed its
initial assessment of goodwill impairment in the second quarter of 2002. The
Company has also completed its annual assessment of impairment as of October 1.
These assessments concluded that there were no impairment issues.
NEWLY ISSUED ACCOUNTING STATEMENTS AND POSITIONS: In April 2002, the Financial
Accounting Standards Board (FASB) issued SFAS 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". The primary impact to the Company of this Statement is that it
rescinds SFAS 4 which required all material gains and losses from the
extinguishment of debt to be classified as extraordinary items. SFAS 145
requires that the more restrictive criteria of APB Opinion No. 30 will be used
to determine whether such gains or losses are extraordinary. The Company intends
to adopt this Statement in its fiscal year 2003, as required by the Statement.
Adoption of this Statement will result in the reclassification of the
extraordinary losses into income from continuing operations included in the
accompanying Consolidated Statements of Income.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities". This Statement requires recording costs associated
with exit or disposal activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were accrued upon
management's commitment to an exit plan, which is generally before an actual
liability has been incurred. The provisions of this Statement are effective for
exit or disposal activities that are initiated after December 31, 2002.
17
<PAGE>
Notes to Consolidated Financial Statements
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". FIN 45 elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees, such as
standby letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value, of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. FIN 45
will be effective for the Company on a prospective basis to guarantees issued or
modified after December 31, 2002. The Company is assessing the impact of this
Statement on the Company's financial position and results of operations. The
disclosure requirements in this interpretation have been adopted by the Company.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). Under this Interpretation, certain
entities known as "Variable Interest Entities" (VIE) must be consolidated by the
"primary beneficiary" of the entity. The primary beneficiary is generally
defined as having the majority of the risks and rewards arising from the VIE.
For VIE's in which a significant (but not majority) variable interest is held,
certain disclosures are required. The Company is required to apply the
requirements of FIN 46 starting with its third quarter 2003 Form 10-Q filing.
The Company is presently assessing the impact of this Interpretation, however,
it is not expected to have a material impact on the Consolidated Financial
Statements. Based on information as of December 31, 2002, adoption of this
Interpretation in 2003 could result in approximately $5 million to $60 million
of real estate operating leases being included on the balance sheet as assets
with associated debt.
BUSINESS SEGMENT REPORTING
The business of the Company is conducted through five operating segments:
TruGreen, Terminix, American Home Shield, ARS/AMS and Other Operations. Due to
the Company's sale of its Management Services business unit and its exit from
other businesses in 2001, certain operations have become more significant for
segment reporting purposes. In addition, the Company's management and reporting
structure changed during 2002. As a result, the Company has expanded its
business segment reporting which will allow for better ongoing visibility into
the components of the business. The companies that previously were reported in
the Home Maintenance & Improvement segment have been further broken out into
American Home Shield and the combination of ARS/AMS. The franchise operations,
ServiceMaster Clean and Merry Maids, formerly in the Home Maintenance &
Improvement segment, are reported in the Other Operations segment. In accordance
with Statement of Financial Accounting Standards No. 131, the Company's
reportable segments are strategic business units that offer different services.
The TruGreen segment provides residential and commercial lawn care and
landscaping services through the TruGreen ChemLawn and TruGreen LandCare
companies. As a result of the decision in the fourth quarter of 2001 to exit the
LandCare Construction business, the results of the construction operations are
now included in discontinued operations for all periods. The Terminix segment
provides termite and pest control services to residential and commercial U.S.
customers. The American Home Shield segment provides home warranties to
consumers that cover heating, ventilation, air conditioning (HVAC), plumbing and
certain appliances. This segment also includes home inspection services provided
by AmeriSpec. The American Residential Services, (ARS) and American Mechanical
Services (AMS) segment provides HVAC and plumbing services provided under the
ARS, AMS and Rescue Rooter brand names. The Other Operations segment includes
the franchise operations of ServiceMaster Clean and Merry Maids, which provide
disaster restoration and cleaning services as well as the Company's headquarters
operations which provides various technology, marketing, finance and other
support services to the business units.
Information regarding the accounting policies used by the Company is described
in the Significant Accounting Policies. The Company derives substantially all of
its revenues from customers in the United States with less than one 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.
Segment information for the years ended December 31, 2002, 2001, and 2000 is
presented below. As discussed in the "Restatement" Note, the information for
2001 and 2000 has been restated.
SFAS 142, "Goodwill and Other Intangible Assets", eliminates the amortization of
goodwill and intangible assets with indefinite lives beginning in 2002. The
table below also presents "Proforma" information for 2001 and 2000 which
eliminates amortization expense related to goodwill and intangible assets with
indefinite lives, so that these periods are presented on a comparable basis to
the 2002 information.
18
<PAGE>
<TABLE>
Notes to Consolidated Financial Statements
BUSINESS SEGMENT TABLE
(In thousands) 2002 % Change 2001 % Change 2000
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE:
TruGreen $ 1,372,984 0% $ 1,368,770 0% $ 1,365,470
Terminix 924,384 9 845,453 16 728,299
American Home Shield 423,526 15 368,951 17 315,266
ARS/AMS 718,892 (12) 820,177 4 787,026
Other Operations 149,303 N/A 158,094 (30) 225,741
- ---------------------------------------------------------------------------------------------------------------------------
Total Operating Revenue $ 3,589,089 1% $ 3,561,445 4% $ 3,421,802
===========================================================================================================================
OPERATING INCOME:
TruGreen $ 171,235 11% $ 154,301 (4%) $ 160,982
Terminix 127,441 23 103,925 26 82,176
American Home Shield 47,890 104 23,512 29 18,272
ARS/AMS 17,342 (57) 39,978 (14) 46,444
Other Operations (1) (22,572) N/A (344,893) N/A 12,977
- ---------------------------------------------------------------------------------------------------------------------------
Total Operating Income (1) $ 341,336 N/A $ (23,177) N/A $ 320,851
===========================================================================================================================
OPERATING INCOME - SFAS 142 PROFORMA:
TruGreen $ 171,235 (5%) $ 180,676 (3%) $ 186,856
Terminix 127,441 4 122,979 25 98,215
American Home Shield 47,890 84 25,993 25 20,751
ARS/AMS 17,342 (65) 49,210 (10) 54,607
Other Operations (1) (22,572) N/A (341,582) N/A 18,655
- ---------------------------------------------------------------------------------------------------------------------------
Total Operating Income - SFAS 142 Proforma (1) $ 341,336 N/A $ 37,276 N/A $ 379,084
===========================================================================================================================
CAPITAL EMPLOYED: (2)
TruGreen $ 1,011,846 (2%) $ 1,031,387 (5%) $ 1,090,099
Terminix 620,863 4 594,970 15 518,010
American Home Shield 100,026 21 82,374 (4) 86,236
ARS/AMS 416,068 (4) 431,756 3 417,931
Other Operations 5,681 N/A 324,570 (64) 907,764
- ---------------------------------------------------------------------------------------------------------------------------
Total Capital Employed $ 2,154,484 (13%) $ 2,465,057 (18%) $ 3,020,040
===========================================================================================================================
IDENTIFIABLE ASSETS:
TruGreen $ 1,070,031 (1%) $ 1,082,135 (9%) $ 1,192,942
Terminix 841,437 2 823,333 20 685,126
American Home Shield 376,059 16 323,229 10 292,587
ARS/AMS 489,366 (6) 519,026 1 514,408
Other Operations 638,045 (27) 873,522 (30) 1,254,647
- ---------------------------------------------------------------------------------------------------------------------------
Total Identifiable Assets $ 3,414,938 (6%) $ 3,621,245 (8%) $ 3,939,710
===========================================================================================================================
DEPRECIATION & AMORTIZATION EXPENSE:
TruGreen $ 25,163 (53%) $ 53,140 2% $ 52,339
Terminix 11,150 (64) 30,822 7 28,875
American Home Shield 5,583 (26) 7,516 4 7,253
ARS/AMS 9,166 (49) 18,048 7 16,857
Other Operations 6,814 (40) 11,277 11 10,200
- ---------------------------------------------------------------------------------------------------------------------------
Total Depreciation & Amortization Expense $ 57,876 (52%) $ 120,803 5% $ 115,524
===========================================================================================================================
CAPITAL EXPENDITURES:
TruGreen $ 11,803 107% $ 5,709 (76%) $ 28,030
Terminix 17,013 63 10,427 47 7,075
American Home Shield 4,794 (40) 8,033 104 3,935
ARS/AMS 5,658 (20) 7,093 (15) 8,342
Other Operations 21,331 104 10,447 (22) 9,078
- ---------------------------------------------------------------------------------------------------------------------------
Total Capital Expenditures $ 60,599 45% $ 41,709 (26%) $ 56,460
===========================================================================================================================
</TABLE>
(1) In the fourth quarter of 2001, the Company recorded a pretax charge of $345
million, related primarily to goodwill and asset impairments as well as
other items.
(2) Capital employed represents the segments total assets less liabilities
(exclusive of debt balances).
The following table summarizes the previously amortized goodwill and trade names
by segment at December 31 that, beginning on January 1, 2002 are no longer
amortized. See the "Acquisition" and "Dispositions" Notes to the Consolidated
Financial Statements for information relating to goodwill acquired and amounts
impaired or part of a discontinued operation.
<TABLE>
(In thousands) 2002 % Change 2001 % Change 2000
================================================================================================
<S> <C> <C> <C> <C> <C>
TruGreen $ 916,216 1% $ 910,573 (3%) $ 934,318
Terminix 709,955 1 705,608 25 563,943
American Home Shield 72,085 - 72,085 (3) 74,277
ARS/AMS 347,968 - 347,863 4 334,857
Other Operations 112,106 5 106,599 N/A 382,073
- ------------------------------------------------------------------------------------------------
Total $ 2,158,330 1% $ 2,142,728 (6%) $ 2,289,468
================================================================================================
</TABLE>
19
<PAGE>
Notes to Consolidated Financial Statements
RESTATEMENT
The Company has restated its consolidated financial statements for the years
ended December 31, 2001 and 2000. Subsequent to the issuance of the Company's
2001 consolidated financial statements, management determined that the
historical accounting treatment relating to the items below required revision.
The table below presents the net income and equity impacts from the restatement.
Net Net Beginning
($ IN MILLIONS, EXCEPT PER SHARE DATA) Income Income Equity
2001 2000 2000
-------- -------- ----------
CONTINUING OPERATIONS:
AHS deferred acquisition costs $(8.5) $(6.1) $(30.0)
Trade name license fee 9.0 - -
Insurance (TruGreen) 3.7 (3.7) -
Other, net (0.6) (5.8) (20.7)
Tax adjustment from reincorporation (0.8) (0.8) 35.0
-------- -------- ----------
INCOME/EQUITY IMPACT $2.8 $(16.4) $(15.7)
EPS IMPACT $0.01 $(0.05)
DISCONTINUED OPERATIONS:
INCOME/EQUITY IMPACT * $(41.5) $(3.7) $59.4
EPS IMPACT $(0.14) $(0.01)
* PRIMARILY REPRESENTS THE TAX ADJUSTMENT FROM REINCORPORATION
A summary of the significant effects of the restatement is as follows:
<TABLE>
2001 2000
------------------------------------------------------------
As Previously As Previously
(In thousands, except per share data) Reported (1) As Restated Reported (1) As Restated
- ----------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31
<S> <C> <C> <C> <C>
Operating revenue $ 3,539,187 $ 3,561,445 $ 3,420,371 $ 3,421,802
Operating income (38,336) (23,177) 340,354 320,851
Income from continuing operations before
income taxes (152,264) (144,895) 241,762 217,118
Income from continuing operations before
extraordinary items and cumulative
effect of accounting change (167,313) (164,464) 140,690 124,274
Discontinued operations, net 325,768 284,270 44,298 40,568
Extraordinary loss, net (3,422) (3,422) -- --
Cumulative effect of accounting change -- -- (11,161) (11,161)
- ----------------------------------------------------------------------------------------------------------
Net income $ 155,033 $ 116,384 $ 173,827 $ 153,681
==========================================================================================================
Diluted earnings per share:
Income from continuing operations before
extraordinary items $(0.52) ($0.55) $0.46 $0.41
Discontinued operations, net 1.05 0.95 0.15 0.13
Extraordinary loss, net (0.01) (0.01) - -
Cumulative effect of accounting change - - (0.04) (0.04)
- ----------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.51 $0.39 $0.57 $0.50
==========================================================================================================
AS OF DECEMBER 31
Current assets $ 1,131,824 $ 1,119,050
Net property, plant, and equipment 180,937 196,210
Other long-term assets 2,361,978 2,305,985
- ----------------------------------------------------------------------------------------------------------
Total assets $ 3,674,739 $ 3,621,245
==========================================================================================================
Current liabilities $ 796,113 $ 805,298
Long-term debt 1,105,518 1,120,249
Long-term liabilities 449,470 385,834
Minority interest 102,677 102,677
Total shareholders' equity 1,220,961 1,207,187
- ----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 3,674,739 $ 3,621,245
==========================================================================================================
</TABLE>
(1) During the third quarter of 2002, the Company sold its Terminix operations
in the United Kingdom. The financial results from these operations have
been reclassified from "Continuing Operations" to "Discontinued Operations"
for all periods presented. Amounts as restated include this
reclassification in order to conform with the 2002 presentation.
20
<PAGE>
Notes to Consolidated Financial Statements
AMERICAN HOME SHIELD DEFERRED ACQUISITION COSTS
In July 2002, the Company changed its method of accounting for deferred customer
acquisition costs in its American Home Shield business from SFAS No. 60,
"Accounting and Reporting by Insurance Enterprises," pursuant to which the
Company believed it was appropriate to amortize deferred acquisition costs over
the expected customer life to FASB Technical Bulletin No. 90-1, "Accounting for
Separately Priced Extended Warranty and Product Maintenance Contracts," pursuant
to which deferred acquisition costs are amortized over the initial contract
life.
The new method of accounting reduced after-tax earnings by $.03 per diluted
share in 2002, but had no material impact on cash flow in current or future
years. In the second quarter of 2002, the Company recorded a cumulative charge
of $45 million ($.14 per diluted share) to effect this change.
Following discussions with the Staff of the Securities and Exchange Commission,
the Company has restated prior years to account for deferred acquisition costs
in accordance with FASB Technical Bulletin No. 90-1. The effect of this
restatement is to reduce net income by $8.5 million or $.03 per diluted share in
2001, and $6.1 million or $.02 per diluted share in 2000. In addition, this
change results in a reduction of retained earnings of $30 million at January 1,
2000.
TRADE NAME LICENSE FEE
In connection with the sale of its Management Services business in the fourth
quarter of 2001, the Company entered into a three-year licensing arrangement
with ARAMARK Corporation for the use of the ServiceMaster trade name. This
agreement was valued at $15 million and accordingly, a like amount was allocated
from the purchase price. The Company intended to recognize this amount over the
three-year contractual period, and as such, recognized $2 million related
thereto in each of the first and second quarters of 2002. In November 2002, the
Company announced that it had determined that it was appropriate to recognize
the entire $15 million licensing fee in the fourth quarter of 2001. The effect
of this correction is to increase net income by $9 million and earnings per
share by $.03 in 2001, and to reduce net income by $2.5 million and earnings per
share by $.01 in the first half of 2002.
INSURANCE (TRUGREEN)
In January 2002, the Company reported that it had recognized a $9 million pretax
expense in 2001 relating to a revised estimate of the 2000 insurance reserve
requirements. Net income has been restated for this item which results in an
increase to income from continuing operations of $3.7 million (or $.01) in 2001
and a decrease to income from continuing operations of the same amount in 2000.
The remaining adjustment results in a decrease to income from discontinued
operations of $1.1 million.
REINCORPORATION TAX
Prior to 1997, the Company was in partnership form and therefore was not a
federal taxpayer. Consequently, the Company did not record deferred tax balances
reflecting the differences between the book and tax basis of its assets and
liabilities. When the Company converted to corporate form in 1997, it realized a
significant step-up in the tax basis of its assets, which was largely reflected
as an increase in the basis of the tax intangibles and provided for significant
tax deductions over the next 15 years. In accounting for this event in 1997, the
Company recorded the net deferred tax asset associated with differences between
the book and tax basis of its assets and liabilities. As it related to
intangible assets, the Company made a determination that the tax basis of
intangibles equaled the overall book balance of intangible assets on an
enterprise basis. Subsequently it was determined that intangible assets needed
to be considered at the individual business unit level which resulted in a
situation where tax basis exceeded book basis. This created a deferred tax
asset. The Company restated the financial statements to reflect the deferred tax
asset as if it had been recorded in 1997.
This change results in an increase to retained earnings as of January 1, 2000 of
$92.6 million, and an increase to the tax provision for continuing operations of
$.8 million in both 2001 and 2000 and an increase to the tax provision for
discontinued operations of $.8 million and $1.2 million in 2001 and 2000,
respectively. This restatement also results in an increase to the tax provision
relating to the gain on certain businesses sold in 2001 of $45.8 million. The
net impact of these items was to increase deferred tax assets by $33.4 million
and equity by $43.2 million as of December 31, 2001.
OTHER, NET
Other items primarily relate to adjustments in accruals, timing of revenue and
expense items and other miscellaneous items. The Company also determined it was
appropriate to expense the costs associated with telephone directory placements
when the directory is published rather than expensing the cost over the contract
period. In addition, certain operating leases of constructed properties have
been included in the balance sheet as assets with associated debt. The financial
statements have been restated from the amounts previously reported for these
items.
21
<PAGE>
Notes to Consolidated Financial Statements
GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued SFAS 142,
"Goodwill and Other Intangible Assets". SFAS 142 requires that after December
31, 2001, existing goodwill will no longer be amortized and intangible assets
with indefinite useful lives will not be amortized until their useful lives are
determined to be no longer indefinite. In accordance with SFAS 142, the Company
discontinued the amortization of goodwill and indefinite lived intangible assets
effective January 1, 2002. Goodwill and intangible assets that are not amortized
are subject to at least an annual assessment for impairment by applying a
fair-value-based test. The Company completed its initial assessment of goodwill
impairment in the second quarter of 2002. The Company has also completed its
annual assessment of impairment as of October 1. These assessments concluded
that there were no impairment issues. In accordance with SFAS 142, the following
table provides summarized transitional information for the years ended December
31, 2002, 2001 and 2000, with the 2001 and 2000 information presented on an
adjusted basis to reflect the elimination of amortization expense required under
SFAS 142:
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2000
- -------------------------------------------------------------------------------
Reported operating income $ 341,336 ($ 23,177) $ 320,851
Add back: Goodwill and trade name
amortization -- 60,453 58,233
- -------------------------------------------------------------------------------
Operating income as adjusted under
SFAS 142 $ 341,336 $ 37,276 $ 379,084
===============================================================================
Reported income from continuing
operations before extraordinary loss
and cumulative effect of accounting
change $ 170,098 ($164,464) $ 124,274
Add back: Goodwill and trade name
amortization, net of tax -- 41,590 40,244
- -------------------------------------------------------------------------------
Income from continuing
operations before extraordinary
loss and cumulative effect of
accounting change as adjusted
under SFAS 142 170,098 (122,874) 164,518
Discontinued operations, net of taxes (3,875) 284,270 40,568
Extraordinary loss, net of taxes (9,229) (3,422) -
Cumulative effect of accounting
change, net of taxes - - (11,161)
- -------------------------------------------------------------------------------
Net income as adjusted under
SFAS 142 $ 156,994 $ 157,974 $ 193,925
===============================================================================
Reported basic earnings per share
from continuing operations before
extraordinary loss and cumulative
effect of accounting change $0.57 ($0.55) $0.41
Add back: Goodwill and trade name
amortization, net of tax - 0.14 0.13
- -------------------------------------------------------------------------------
Basic earnings per share
from continuing
operations before extraordinary
loss and cumulative effect of
accounting change as adjusted
under SFAS 142 0.57 (0.41) 0.54
Discontinued operations, net (0.01) 0.95 0.13
Extraordinary loss, net (0.03) (0.01) -
Cumulative effect of accounting
change, net - - (0.04)
- -------------------------------------------------------------------------------
Basic earnings per share as adjusted
under SFAS 142 $0.52 $0.53 $0.64
===============================================================================
Reported diluted earnings per share
from continuing operations before
extraordinary loss and cumulative
effect of accounting change $0.56 ($0.55) $0.41
Add back: Goodwill and trade name
amortization, net of tax - 0.14 0.13
- -------------------------------------------------------------------------------
Diluted earnings per share
from continuing
operations before extraordinary
loss and cumulative effect of
accounting change as adjusted
under SFAS 142 0.56 (0.41) 0.54
Discontinued operations, net (0.01) 0.95 0.13
Extraordinary loss, net (0.03) (0.01) -
Cumulative effect of accounting
change, net - - (0.04)
- -------------------------------------------------------------------------------
Diluted earnings per share as adjusted
under SFAS 142 $0.52 $0.53 $0.63
===============================================================================
The following table summarizes goodwill and intangible assets as of December 31:
(IN THOUSANDS) 2002 2001 2000
======================================================================
Goodwill (1) $1,919,780 1,904,178 2,043,179
Trade names (1) 238,550 238,550 246,289
Other intangible assets 78,284 74,197 61,517
Accumulated amortization (2) (59,053) (51,611) (44,014)
- ----------------------------------------------------------------------
Net other intangibles 19,231 22,586 17,503
- ----------------------------------------------------------------------
Total $2,177,561 $2,165,314 $2,306,971
======================================================================
(1) Not subject to amortization
(2) Amortization expense of $7 million, $10 million and $9 million was recorded
in 2002, 2001 and 2000, respectively. Annual amortization expense of
approximately $6 - $8 million is expected over the next five years.
INCOME TAXES
The reconciliation of income tax computed at the U.S. federal statutory tax rate
to the Company's effective income tax rate for continuing operations is as
follows:
2002 2001 2000
===============================================================
Tax at U.S.
Federal statutory rate 35.0% (35.0%) 35.0%
State and local income
taxes net of U.S. federal
benefit 3.6 1.4 4.3
Net operating loss and
tax credits (3.7) (1.7) (0.7)
Impairment of non-deductible
goodwill - 43.5 -
Non-deductible amortization
expense - 2.7 2.5
Other 0.6 2.6 1.7
- ---------------------------------------------------------------
Effective rate 35.5% 13.5% 42.8%
===============================================================
The effective tax rate for discontinued operations was 39.4%, 44.7%, and 43.9%
for 2002, 2001, and 2000, respectively. The difference between these rates and
the federal statutory tax rate of 35% reflects state taxes, net of federal
benefit, the impairment of non-deductible goodwill in 2001, and permanent items,
primarily amortization expense in 2001 and 2000. The effective tax rate for
extraordinary items and the cumulative effect of accounting change was 40.0%,
41.1% and 41.1% for 2002, 2001 and 2000, respectively.
22
<PAGE>
Notes to Consolidated Financial Statements
Income tax expense from continuing operations is as follows:
(In thousands) 2002
-----------------------------------
CURRENT DEFERRED TOTAL
U.S. federal $33,718 $48,838 $82,556
State and local 359 10,553 10,912
- ------------------------------------------------------------
$34,077 $59,391 $93,468
============================================================
2001
-----------------------------------
Current Deferred Total
U.S. federal $38,619 $(22,267) $16,352
State and local 7,174 (3,957) 3,217
- ------------------------------------------------------------
$45,793 $(26,224) $19,569
============================================================
2000
-----------------------------------
Current Deferred Total
U.S. federal $43,406 $35,217 $78,623
State and local 7,782 6,439 14,221
- ------------------------------------------------------------
$51,188 $41,656 $92,844
============================================================
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. The deferred tax asset primarily reflects the impact of
future tax deductions related to the Company's accruals. Management believes
that, based upon its lengthy and consistent history of profitable operations, it
is probable that its deferred tax assets will be realized, primarily from the
generation of future taxable income. The deferred tax liability primarily
reflects the basis differences related to intangible assets. In 2002, the
Company adopted SFAS 142 which eliminated the requirement to record goodwill
amortization expense in the financial statements. The Company continues to
amortize the intangible assets for tax purposes which yields an annual tax
benefit of approximately $50 million. The tax benefit is reflected in the
Consolidated Statement of Financial Position as an increase in the deferred tax
liability. Significant components of the Company's deferred tax balances are as
follows:
(In thousands) 2002 2001
=================================================================
Deferred tax assets (liabilities):
Current:
Prepaid expenses and other $(4,500) $(5,700)
Receivables allowances 11,400 11,100
Accrued insurance and
related expenses 16,800 17,200
Other accrued expenses 92,500 56,600
- -----------------------------------------------------------------
Total current asset 116,200 79,200
=================================================================
Long-Term:
Long-term assets (1) (302,700) (237,100)
Insurance expenses 26,800 38,800
Other long-term obligations (36,600) (34,700)
- -----------------------------------------------------------------
Total long-term liability (312,500) (233,000)
=================================================================
Net deferred tax liability $(196,300) $(153,800)
=================================================================
(1) The deferred tax liability relates primarily to the difference in the tax
versus book basis of intangible assets. This liability does not represent
expected future cash payments until a business unit of the Company is sold.
Total tax payments in 2002 were $27 million. In 2001, the Company received net
tax refunds of $1 million, and in 2000, the Company made total tax payments of
$38 million, net of refunds.
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 values as of the acquisition dates.
CURRENT YEAR
During 2002, the Company acquired several small companies, primarily in the pest
control and lawn care businesses. The net purchase price of these acquisitions
was $18 million. The Company recorded goodwill of $12 million and other
intangible assets of $4 million related to these acquisitions.
PRIOR YEARS
In January 2001, the Company acquired the Allied Bruce Terminix Companies, the
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 valued at $100 million, which is convertible into eight
million ServiceMaster common shares, and longer-term cash payments due over nine
years totaling $25 million. Approximately $122 million of goodwill was recorded
related to this acquisition.
During 2001, the Company acquired several small companies, primarily in the pest
control and heating/air conditioning and plumbing businesses. The net purchase
price of these acquisitions was $64 million. All of these companies were
acquired before June 30, 2001 (the date that SFAS 141 became effective).
Approximately $56 million of goodwill was recorded relating to these
acquisitions.
In October 2001, the Company acquired certain assets of Sears Termite and Pest
Control, Inc., a company that provides pest control services and protection
against termite damage to residential customers located primarily in the
Southeast. The cash paid after assuming the liabilities to remediate the
premises owned by current customers was not material. Approximately $54 million
was recorded as goodwill and $6 million assigned to other intangible assets
which will be amortized over three to seven years.
During 2000, the Company acquired many small companies, primarily in the lawn
care, HVAC and plumbing, pest control and landscaping businesses. The net
purchase price was $207 million, of which approximately $162 million was
recorded as goodwill.
23
<PAGE>
Notes to Consolidated Financial Statements
Supplemental cash flow information regarding the Company's acquisitions is as
follows:
(in thousands) 2002 2001 2000
==================================================================
Purchase price $18,850 $245,646 $246,886
Less liabilities
assumed (1,207) (54,790) (39,588)
- ------------------------------------------------------------------
Net purchase price $17,643 $190,856 $207,298
==================================================================
Net cash paid
for acquisitions $13,003 $55,842 $144,834
Shares issued - - 15,030
Seller financed debt 4,640 35,014 47,434
Minority ownership
in Terminix - 100,000 -
- ------------------------------------------------------------------
Payment for
acquisitions $17,643 $190,856 $207,298
==================================================================
DISPOSITIONS
During the second quarter of 2002, the Company completed the sale of its
ownership interest in five assisted living facilities. These properties were
financed through an operating lease arrangement, whereby, the Company guaranteed
a portion of the residual value of the properties. In the fourth quarter of
2001, a $13.5 million reserve was established representing the amount by which
the residual value guarantees exceeded the value of bids to purchase the
facilities at that time. The final sales price was significantly greater than
these bid levels and the Company realized a gain of $3.6 million from the sale
on the assisted living properties in 2002, which is included in operating
income.
During the third quarter of 2002, the Company sold its remaining Terminix
operations in the United Kingdom. The sale was not material to the Company's
operating results. Related to this sale, the Company entered into a two year
licensing agreement with the buyer for the use of Terminix trade name in the
United Kingdom. This agreement was valued at $6 million and accordingly, a like
amount was allocated from the purchase price.
PORTFOLIO REVIEW AND DISPOSITIONS IN 2001
In October 2001, the Company's Board of Directors approved a series of strategic
actions which were the culmination of an extensive portfolio review process that
was initiated earlier in 2001. In the fourth quarter of 2001, the Company sold
its Management Services business to ARAMARK Corporation for approximately $800
million and recorded an after-tax gain of $404 million. (A portion of Management
Services was not sold as part of this transaction and represented a $15 million
loss upon disposition). Also in the fourth quarter of 2001, the Company's Board
of Directors approved the exit of non-strategic and under-performing businesses
including TruGreen LandCare Construction, Certified Systems Inc. (CSI), and
certain Terminix operations in Europe. The Company sold its TruGreen LandCare
Construction operations to Environmental Industries, Inc. (EII) in certain
markets and EII managed the wind-down of commercial landscaping construction
contracts in the remaining markets. In addition, the Company sold all of its
customer contracts relating to the exit of CSI (the Company's professional
employer organization) to AMS Staff Leasing, N.A., Inc. In the fourth quarter of
2001, the Company sold certain subsidiaries of its European pest control and
property services operations.
In the fourth quarter of 2002, the purchaser of the Company's European pest
control and property services operations made a claim for a purchase price
adjustment (relating to the 2001 sale), relating to an alleged breach of certain
conditions in the purchase agreement. In the course of responding to that claim,
the Company discovered that personnel of the former operations had made
unsupported monthly adjustments to certain accounts. The Company subsequently
agreed to an adjustment to the purchase price consisting of an $8 million cash
payment and the cancellation of a previously reserved note receivable of $7
million. This $8 million charge was recorded in 2002.
At December 31, 2002, the Company has certain assets on its financial statements
relating to discontinued operations, primarily receivables. Management is
actively collecting the outstanding receivables. The Company believes that the
remaining assets are presented at their net realizable value.
Reported "Discontinued operations" for all periods presented include the
operating results of the sold and discontinued businesses noted above and the
2001 results include the gain from the sale of Management Services, net of
losses from the disposition of other entities. The operating results and
financial position of discontinued operations are as follows:
(in thousands, except per share data)
Operating Results: 2002 2001 2000
=================================================================
Operating revenue $40,692 $2,271,376 $2,550,244
Income (loss) from
discontinued
operations before
income taxes 1,600 (27,232) 72,328
Provision for income
taxes 635 11,711 31,760
- -----------------------------------------------------------------
Income from
discontinued
operations 965 (38,943)
Gain on sale of
Management Services,
net of losses from
disposition of other
entities
(4,840) 323,213 -
=================================================================
Income from
discontinued
operations ($3,875) $284,270 $40,568
=================================================================
Diluted earnings
per share from
discontinued
operations ($0.01) $0.95 $0.13
=================================================================
Financial Position: 2002 2001
=================================================================
Current assets $5,300 $46,700
Property, plant and equipment 400 12,300
Long-term assets - 5,100
- -----------------------------------------------------------------
Total assets $5,700 $64,100
- -----------------------------------------------------------------
Current liabilities $32,200 $50,400
Long-term liabilities 28,800 50,600
- -----------------------------------------------------------------
Total liabilities $61,000 $101,000
=================================================================
In the fourth quarter of 2001, the Company recorded a pretax charge primarily
related to goodwill and asset impairments and other items totaling $345 million.
Reserves and accrual balances remain on the financial statements relating to
these operations. Cash payments incurred for the wind-down of LandCare
construction contracts, lease termination costs, workers compensation and health
claims as well as professional service fees have been made during 2002. During
the second quarter of 2002, the Company completed the sale of its ownership
interest in five assisted living facilities. These properties were financed
through an operating lease
24
<PAGE>
Notes to Consolidated Financial Statements
arrangement, whereby, the Company guaranteed a portion of the residual value of
the properties. At December 31, 2001, a $13.5 million reserve was established
representing the amount by which the residual value guarantees exceeded the
value of bids to purchase the facilities at that time. The final sales price was
significantly greater than these bid levels and the Company realized a gain of
$3.6 million from the sale on the assisted living properties.
The table below summarizes the activity during the twelve months ended December
31, 2002 for the remaining liabilities from the discontinued operations and the
reserves for items recorded in the fourth quarter of 2001. The Company believes
that the remaining reserves continue to be adequate and reasonable.
Balance at Cash Balance at
Dec. 31, Payments Income/ Dec. 31,
(in thousands) 2001 or Other (Expense) 2002
- --------------------------------------------------------------------------------
Remaining liabilities
from discontinued
operations
LandCare Construction $34,100 $22,700 $(2,600) $14,000
Certified Systems, Inc. 23,800 13,700 (3,500) 13,600
Management Services 7,400 1,300 4,500 1,600
International businesses 19,600 20,100(1) (21,900)(1) 21,400
Other 16,100 6,300 (600) 10,400
Reserves related to
strategic actions in the
fourth quarter of 2001 $36,000 $14,900 $5,600 $15,500
(1) The liabilities of this business assumed by the buyer of the sold operations
totaled $19.6 million. During 2002, the Company recorded accruals in connection
with sold operations and a cash adjustment to the purchase price of the 2001
dispositions.
The Company recorded a $3.2 million charge in the second quarter of 2002 in
operating income relating to the retirement agreement of a key executive. This
severance will be paid out over three years.
DISPOSITIONS IN 2000
In September 2000, the Company completed the sales of two non-core businesses.
The Company's interior plant care business was sold for $44 million in cash. In
addition, the Company sold its Diversified Health Services unit, a business that
manages long-term care facilities. Neither transaction had a material impact on
the Company's operating results.
COMMITMENTS AND CONTINGENCIES
The Company carries insurance policies on insurable risks at levels 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 and warranty claims in the
American Home Shield business 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.
In the ordinary course of conducting its business activities, the Company
becomes involved in judicial, administrative and regulatory proceedings
involving both private parties and governmental authorities. These proceedings
included general and commercial liability actions and a small number of
environmental proceedings. The Company does not expect any of these proceedings
to have a material adverse effect on its financial condition or results of
operations.
EMPLOYEE BENEFIT PLANS
Discretionary contributions to qualified profit sharing and non-qualified
deferred compensation plans were made in the amount of $9.2 million in 2002,
$8.9 million in 2001 and $9.3 million in 2000. Under the Employee Share Purchase
Plan, the Company contributed $.9 million in 2002, $.8 million in 2001 and $.8
million in 2000. These funds defrayed part of the cost of the shares purchased
by employees.
MINORITY INTEREST OWNERSHIP AND RELATED PARTIES
The Company continues to maintain minority investors in Terminix. This minority
ownership reflects an interest issued to the prior owners of the Allied Bruce
Terminix Companies in connection with that acquisition. This equity security is
exchangeable into eight million ServiceMaster common shares. The ServiceMaster
shares are included in the shares used for the calculation of diluted earnings
per share. As of the date of the Company's acquisition of ARS in 1999, certain
members of management acquired, at fair market value, equity interests in the
HVAC and plumbing operations. In the fourth quarter of 2002, the Company
repurchased at fair value the shares of ARS for approximately $3 million.
Kleiner Perkins Caufield & Byers (KP) purchased a minority interest in
ServiceMaster Home Service Center (SMHSC) in January 2000 for $15 million and
exercised an option to purchase an additional $5 million in January 2001. In May
2000 certain members of ServiceMaster management purchased a minority interest
in SMHSC for approximately $1 million. The Company had allocated losses in SMHSC
to KP's minority interest in 2000 and 2001 based on its relative priority in
liquidation until such interest was reduced to zero in 2001. In December 2001,
the Company acquired, at fair value ($20 million), the minority interest SMHSC
held by KP. The entire purchase price to KP was allocated to goodwill. The
Company also purchased management's ownership is SMHSC for approximetely $1
million.
Also in 2001, and in connection with the sale and disposition of the TruGreen
LandCare construction operations, the Company repurchased at fair value the
shares of TruGreen that were previously purchased by management earlier in the
year. The purchase and sales prices of the shares were at identical amounts of
$12 million, which was charged to the minority interest liability.
In January 2001, Jonathan P. Ward, President and Chief Executive Officer of
ServiceMaster, purchased from ServiceMaster a 5.50 percent convertible debenture
due January 9, 2011, with a face value of $1.1 million. The Company loaned Mr.
Ward the entire amount of the purchase price through a 5.50 percent full
recourse loan due January 9, 2011. In May 2001, Mr. Ward purchased a second 5.50
percent convertible debenture due May 10, 2011, with a face value of $1.1
million. The Company loaned 50 percent of the purchase price of this second
debenture with a 5.50 percent full recourse loan due May 10, 2011. Each
debenture becomes convertible into 20,000 shares of ServiceMaster common stock
on December 31, in each of the years 2001 through 2005. The Company has treated
these transactions under variable plan accounting and the impact to the
financial statements was immaterial in 2002 and 2001.
25
<PAGE>
Notes to Consolidated Financial Statements
LONG-TERM DEBT
Long-term debt includes the following:
(In thousands) 2002 2001
- -------------------------------------------------------
8.45% maturing in 2005 $137,499 $250,000
6.95% maturing in 2007 49,225 100,000
7.88% maturing in 2009 179,000 193,000
7.10% maturing in 2018 79,473 149,000
7.45% maturing in 2027 195,000 195,000
7.25% maturing in 2038 82,650 88,150
International borrowings - 36,519
Other 112,628 143,524
Less current portion (31,135) (34,944)
- -------------------------------------------------------
Total long-term debt $804,340 $1,120,249
=======================================================
The Company is party to a number of debt agreements which require it to maintain
certain financial and other covenants, including limitations on indebtedness
(debt cannot exceed 3.5 times earnings before interest, taxes, depreciation, and
amortization (EBITDA)) and interest coverage ratio (EBITDA needs to exceed four
times interest expense). In addition, under certain circumstances, the
agreements may limit the Company's ability to pay dividends and repurchase
shares of common stock. These limitations are not expected to be a factor in the
Company's future dividend and share repurchase plans. Failure by the Company to
maintain these covenants could result in the acceleration of the maturity of the
debt. At December 31, 2002, the Company was in compliance with the covenants
related to these debt agreements and based on its operating outlook for 2003,
expects to be able to maintain compliance in the future.
The Company does not have any debt agreements that contain put rights or provide
for acceleration of maturity as a result of a change in credit rating. However,
the Company has a number of debt agreements which contain standard ratings-based
"pricing grids" where the interest rate payable under the agreement changes as
the Company's credit rating changes. While the Company does not expect a
negative change in credit ratings, the impact on interest expense resulting from
changes in credit ratings is not expected to be material to the Company.
Since August 1997, ServiceMaster has issued $1.1 billion of unsecured debt
securities pursuant to registration statements filed with the Securities and
Exchange Commission. As of December 31, 2002, ServiceMaster had $550 million of
senior unsecured debt securities and equity interests available for issuance
under an effective shelf registration statement.
In the second quarter of 2002, the Company recorded an extraordinary loss on
early extinguishment of $9 million after-tax, or $.03 per diluted share,
resulting from the repurchase of its publicly traded debt with a principal
amount of $252 million including approximately $218 million repurchased in a
tender offer.
In the fourth quarter of 2001, the Company repaid prior to maturity, its 10.81
percent notes maturing 2001-2002, 6.65 percent notes maturing 2002-2004 and its
7.4 percent notes maturing in 2006. In connection with the early retirement of
these notes, the Company paid "make-whole" premiums of $17 million pretax. In
addition, during 2001, the Company repurchased, prior to maturity, approximately
$123.9 million of its public debt and recognized a pretax gain of approximately
$11 million.
The Company has a committed revolving bank credit facility for up to $490
million that expires in December 2004. The facility can be used for general
Company purposes. As of December 31, 2002, the Company had issued approximately
$136 million of letters of credit under the facility and had unused commitments
of approximately $354 million. At the Company's current credit ratings, the
interest rate under the facility is LIBOR plus 125 to 150 basis points depending
upon usage.
As of December 31, 2002, the Company had approximately $26 million of annually
renewable surety bonds outstanding that primarily support obligations the
Company has under insurance programs. If the surety bonds are not renewed, the
Company expects to replace them with letters of credit issued under its bank
credit facility.
The Company is exposed to interest rate fluctuations on its floating rate debt.
As of year-end, the Company had no floating rate borrowings. The Company has,
from time to time, entered into interest rate swap or similar arrangements to
mitigate its exposure to interest rate fluctuations, and does not, as a matter
of policy, enter into hedging contracts for trading or speculative purposes. As
of December 31, 2002, no interest rate swaps were outstanding.
Cash interest payments were $76 million in 2002, $128 million in 2001 and $130
million in 2000. Average rates paid on the revolving credit facility were 5.0
percent in 2001 and 6.6 percent in 2000. There were no material borrowings under
the facility in 2002. Future scheduled long-term debt payments are $31.1 million
in 2003 (average rate of 4.2 percent), $24.3 million in 2004 (average rate of
4.8 percent), $151.3 million in 2005 (average rate of 8.2 percent), $10.6
million in 2006 (average rate of 6.0 percent) and $59.1 million in 2007 (average
rate of 6.7 percent).
The Company leases certain property and equipment under various operating lease
arrangements. Most of the property leases provide that the Company pay taxes,
insurance and maintenance applicable to the leased premises. As leases for
existing locations expire, the Company would normally expect to renew the leases
or substitute another location and lease.
The majority of the Company's vehicle fleet is leased through operating leases.
Lease terms are non-cancelable for the first 12 month term and then are month-to
- -month leases, cancelable at the Company's option. There are residual value
guarantees (ranging from 70 percent to 87 percent depending on the agreement) on
these vehicles, which historically have not resulted in significant net payments
to the lessors. There are no net payments reflected in the future minimum lease
obligation as the leases are cancelable and there are no expected net payments
due under the guarantees. At December 31, 2002 there was approximately $257
million of residual value relating to the Company's fleet.
Rental expense for 2002, 2001 and 2000 was $159 million, $160 million and $147
million, respectively. Future long-term
26
<PAGE>
Notes to Consolidated Financial Statements
noncancelable operating lease payments are $63.0 million in 2003, $49.7 million
in 2004, $39.8 million in 2005, $31.8 million in 2006, $25.2 million in 2007 and
$51.5 million thereafter.
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 leases up to 82 percent of the fair market value at the commencement
of the lease. At December 31, 2002, approximately $72 million was funded under
these facilities. Of the $95 million in facilities, $80 million expires in
October 2004 and $15 million expires in January 2008. Approximately $15 million
of these leases that involve constructed properties have been recorded on the
balance sheet as capital leases with related assets and debt recorded as of
December 31, 2002 and 2001.
CASH AND MARKETABLE SECURITIES
Cash, money market funds and certificates of deposits, 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.
As of December 31, 2002, the aggregate market value of the Company's short- and
long-term investments in debt and equity securities was $116.7 million and the
aggregate cost basis was $119.1 million.
Interest and dividend income received on cash and marketable securities was
$10.6 million, $9.7 million, and $10.0 million, in 2002, 2001, and 2000,
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. The Company periodically reviews its portfolio of investments
to determine whether there has been an other than temporary decline in the value
of the investments from factors such as deterioration in the financial condition
of the issuer or the market(s) in which it competes. As a result of such a
review, the Company wrote down the value of its investment portfolio by $4
million, pretax in 2001.
RECEIVABLE SALES
In 2001, the Company entered into an agreement which provides for the ongoing
revolving sale of a designated pool of accounts receivable of TruGreen and
Terminix to a wholly-owned, bankruptcy-remote subsidiary, ServiceMaster Funding
LLC. ServiceMaster Funding LLC has entered into an agreement to transfer, on a
revolving basis, an undivided percentage ownership interest in a pool of
accounts receivable to unrelated third party purchasers. ServiceMaster Funding
LLC retains an undivided percentage interest in the pool of accounts receivable
and bad debt losses for the entire pool are allocated first to this retained
interest. The Company recorded a $3 million pretax loss in 2001 related to this
program which was recorded in minority interest expense. At December 31, 2002,
there were no receivables sold to third parties under this agreement. However,
the Company may sell its receivables in the future which would provide an
alternative funding source. The agreement is a 364-day facility that is
renewable at the option of the purchasers. The Company may sell up to $65
million of its receivables to these purchasers in the future and therefore has
immediate access to cash proceeds from these sales. The amount of the eligible
receivables varies during the year based on seasonality of the business and will
at times limit the amount available to the Company.
COMPREHENSIVE INCOME
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) 2002 2001 2000
- -------------------------------------------------------------
Unrealized holding
gains (losses)
arising in period $(7,941) $(3,601) $20,553
Tax expense (3,196) (2,382) 8,447
- -------------------------------------------------------------
Net of tax amount $(4,745) $(1,219) $12,106
=============================================================
Gains (losses) realized $(1,460) $3,845 $15,173
Tax expense (584) 705 6,236
- -------------------------------------------------------------
Net of tax amount $(876) $3,140 $8,937
=============================================================
Accumulated comprehensive income included the following components as of
December 31:
(In thousands) 2002 2001 2000
- -------------------------------------------------------------
Unrealized gains
(losses) on securities $(1,036) $2,832 $7,192
Foreign currency
translation 187 (5,329) (16,469)
- -------------------------------------------------------------
Total $(849) $(2,496) $(9,277)
=============================================================
SHAREHOLDERS' EQUITY
The Company has authorized one billion shares of common stock with par value of
$.01 and 11 million shares of preferred stock. There were no shares of preferred
stock issued or outstanding.
The Company has an effective shelf registration statement to issue shares of
common stock in connection with future, unidentified acquisitions. This
registration statement 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 acquisitions. There
were approximately 4.7 million shares available for issuance under this
registration statement at December 31, 2002.
As of December 31, 2002, there were 37.3 million Company shares available for
issuance upon the exercise of employee options outstanding and future grants.
Share options are issued at a price not less than the fair market value on the
grant date and expire within ten years of the grant date. Certain options may
permit the holder to pay the option exercise price by tendering Company shares
that have been owned by the holder without restriction for an extended period.
Share grants carry a
27
<PAGE>
Notes to Consolidated Financial Statements
vesting period and are restricted as to the sale or transfer of the shares.
Beginning in 2003, the Company will account for employee stock options as
compensation expense in accordance with SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of FASB Statement No. 123", provides alternative
methods of transitioning to the fair value based method of accounting for
employee stock options as compensation expense. The Company will use the
"prospective method" of SFAS 148 and expense the fair value of new employee
option grants awarded subsequent to 2002. If the Company continues its
historical pattern of option granting, the impact would be approximately $.005
per share in 2003, growing to approximately $.03 per share over five years.
Prior to 2003, the Company has accounted for employee share options under the
intrinsic method of Accounting Principles Board Opinion 25, as permitted under
GAAP. Accordingly, no compensation cost has been recognized in the accompanying
financial statements related to these options. See the "Stock-Based
Compensation" note in the "Significant Accounting Policies" section for the
proforma net income and earnings per share under the fair value based method of
SFAS 123. In computing this proforma impact, 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 2002, 2001 and 2000:
risk-free interest rates of 4.5 percent, 4.8 percent and 6.1 percent,
respectively; distribution yields of 3.2 percent 3.7 percent and 4.1 percent,
respectively; and average expected lives of six to seven years. The options
granted to employees in 2002, 2001 and 2000 have weighted-average fair values of
$3.51, $2.41 and $2.19, 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.
Options and grant transactions during the last three years are summarized below:
<TABLE>
Share Price Weighted Avg. Share Price
Options Range Exercise Price Grants Range
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Total exercisable, December 31, 1999 10,180,246 $2.24 - 87.55 $11.20 - -
Total outstanding, December 31, 1999 23,773,529 $2.24 - 87.55 $13.37 713,830 $2.86 - 7.96
================================================================================================================================
TRANSACTIONS DURING 2000
Granted to employees 4,326,164 $8.48 - 12.55 $9.75 - -
Exercised or vested (591,517) $2.24 - 14.55 $5.04 (231,474) $2.86 - 7.96
Terminated or resigned (992,847) $2.25 - 81.60 $16.86 - -
- --------------------------------------------------------------------------------------------------------------------------------
Total exercisable, December 31, 2000 12,208,351 $2.25 - 87.55 $12.37 - -
Total outstanding, December 31, 2000 26,515,329 $2.25 - 87.55 $12.84 482,356 $2.86 - 7.96
================================================================================================================================
TRANSACTIONS DURING 2001
Granted to employees 5,184,141 $9.10 - 12.52 $10.63 - -
Exercised or vested (864,418) $2.25 - 11.41 $6.52 (171,518) $2.86 - 7.96
Terminated or resigned (1,503,167) $2.25 - 87.55 $17.27 - -
- --------------------------------------------------------------------------------------------------------------------------------
Total exercisable, December 31, 2001 15,237,607 $2.25 - 77.56 $12.36 - -
Total outstanding, December 31, 2001 29,331,885 $2.25 - 77.56 $12.40 310,838 $2.86 - 7.96
================================================================================================================================
TRANSACTIONS DURING 2002
Granted to employees 4,939,141 $9.09 - 15.10 $13.08 179,000 $10.51-13.80
Exercised or vested (1,586,248) $2.25 - 14.55 $7.60 (129,533) $2.86 - 7.96
Terminated or resigned (871,439) $5.14 - 73.53 $16.37 - -
- --------------------------------------------------------------------------------------------------------------------------------
Total exercisable, December 31, 2002 18,089,830 $2.25 - 77.56 $13.05 - -
Total outstanding, December 31, 2002 31,813,339 $2.25 - 77.56 $12.64 360,305 $2.86 - 13.80
================================================================================================================================
</TABLE>
28
<PAGE>
Notes to Consolidated Financial Statements
Options outstanding at December 31, 2002:
<TABLE>
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/02 Life Exercise Price at 12/31/02 Exercise Price
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
$2.25 - 6.44 813,696 2.0 Years $6.43 813,696 $6.43
7.41 - 10.78 11,684,161 4.0 Years 9.58 5,796,771 9.18
10.80 - 15.94 12,853,267 6.0 Years 12.32 6,282,043 11.78
16.12 - 22.33 6,098,288 6.0 Years 18.18 4,836,464 18.21
27.20 - 77.56 363,927 4.0 Years 42.88 360,856 42.88
- -----------------------------------------------------------------------------------------------------------------------
$2.25 - 77.56 31,813,339 5.0 Years $12.64 18,089,830 $13.05
=======================================================================================================================
</TABLE>
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. The weighted average common shares for the diluted earnings per share
calculation includes the incremental effect related to outstanding options whose
market price is in excess of the exercise price. Shares potentially issuable
under convertible securities have been considered outstanding for purposes of
the diluted earnings per share calculations. In computing diluted earnings per
share, the after-tax interest expense related to convertible debentures is added
back to net income in the numerator, while the diluted shares in the denominator
include the shares issuable upon conversion of the debentures. The effects of
outstanding stock options whose market price is in excess of the exercise price
and shares potentially issuable under convertible securities have not been
included in the 2001 diluted loss per share calculation as their effect would
have been anti-dilutive. As a result, diluted earnings per share is the same as
basic earnings per share. Had the Company recognized income from continuing
operations in 2001, incremental shares attributable to the assumed exercise of
outstanding options and conversion of debentures would have increased diluted
shares outstanding by 12.7 million shares, and the after-tax interest expense
related to convertible debentures that would have been added to net income in
the numerator totaled $4.8 million.
The following table reconciles both the numerator and the denominator of the
basic earnings per share from continuing operations computation to the numerator
and the denominator of the diluted earnings per share from continuing operations
computation.
<TABLE>
(In thousands, except per
share data)
FOR YEAR ENDED 2002 For year ended 2001 For year ended 2000
CONTINUING OPERATIONS: INCOME SHARES EPS Loss Shares EPS Income Shares EPS
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS $170,098 300,383 $0.57 $(164,464) 298,659 $(0.55) $124,274 302,487 $0.41
Effect of Dilutive
Securities, net of tax:
Options 5,529 - 3,031
Convertible
Debentures 4,780 8,200 - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted EPS $174,878 314,112 $0.56 $(164,464) 298,659 $(0.55) $124,274 305,518 $0.41
====================================================================================================================================
</TABLE>
29
<PAGE>
Notes to Consolidated Financial Statements
QUARTERLY OPERATING RESULTS (UNAUDITED)
As discussed in the Notes to the Consolidated Financial Statements, the Company
has restated its consolidated financial statements for the years ended December
31, 2001 and 2000 as well as the previously reported 2002 quarterly results. The
impact of the restatement on operating revenue, gross profit, income from
continuing operations and earnings per share is presented below.
For interim accounting purposes, TruGreen ChemLawn incurs pre-season advertising
costs and annual repair and maintenance procedures that are performed in the
first quarter. These costs are deferred and recognized as expense in proportion
to the related revenues. Full year results are not affected. The quarterly
information for 2002, 2001 and 2000 has been restated to treat certain costs
that were previously deferred as period costs. There was no impact on full-year
results for 2002, 2001 and 2000 as a result of this change.
The table below excludes extraordinary items and the cumulative effect of
accounting changes. These items are as follows. In the second quarter of 2002,
the Company recorded an extraordinary loss from the early extinguishment of debt
of $.03 per diluted share ($9 million after-tax). In 2001, also related to the
early extinguishment of debt, the Company recorded an extraordinary loss of $.03
per diluted share ($9 million after-tax) in the fourth quarter and an
extraordinary gain of $.02 per diluted share ($6 million after-tax) in the first
quarter.
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).
<TABLE>
(in thousands, except
per share data) AS PREVIOUSLY AS RESTATED % As Previously As Restated % As Previously As Restated
REPORTED Reported Reported
2002 2002 Chg 2001 (1) 2001 Chg 2000 (1) 2000
====================================================================================================================================
CONTINUING OPERATIONS:
Operating Revenue:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $733,385 $734,263 2% $719,591 $722,861 1% $712,105 $714,865
Second Quarter 1,032,807 1,034,937 1 1,015,687 1,020,034 5 974,528 976,081
Third Quarter 1,013,484 1,010,661 3 981,552 981,284 3 955,081 953,895
Fourth Quarter N/A 809,228 (3) 822,357 837,266 8 778,657 776,961
====================================================================================================================================
$3,589,089 1% $3,539,187 $3,561,445 4% $3,420,371 $3,421,802
====================================================================================================================================
Gross Profit:
First Quarter $203,135 $188,202 7% $193,924 $175,085 7% $180,924 $163,858
Second Quarter 346,050 359,769 4 332,577 344,643 6 316,159 326,129
Third Quarter 323,456 335,252 4 306,063 321,774 2 300,766 316,755
Fourth Quarter N/A 224,640 (6) 217,006 239,471 31 195,428 183,148
====================================================================================================================================
$1,107,863 2% $1,049,570 $1,080,973 9% $993,277 $989,890
====================================================================================================================================
Income from Continuing
Operations:
First Quarter $23,785 $11,858 N/A $17,006 $734 (94%) $27,104 $13,322
Second Quarter 60,750 71,437 44 45,019 49,735 (8) 49,469 54,239
Third Quarter 57,810 66,988 49 35,730 45,042 (11) 42,231 50,659
Fourth Quarter N/A 19,815 N/A (265,068) (259,975) N/A 21,886 6,054
====================================================================================================================================
$170,098 N/A $(167,313) $(164,464) N/A $140,690 $124,274
====================================================================================================================================
Basic Earnings Per Share:
First Quarter $0.08 $0.04 N/A $0.06 $ - (100%) $0.09 $0.04
Second Quarter 0.20 0.24 41 0.15 0.17 (6) 0.16 0.18
Third Quarter 0.19 0.22 47 0.12 0.15 (12) 0.14 0.17
Fourth Quarter N/A 0.07 N/A (0.89) (0.87) N/A 0.07 0.02
====================================================================================================================================
$0.57 N/A $(0.56) $(0.55) N/A $0.47 $0.41
====================================================================================================================================
Diluted Earnings Per Share:
First Quarter $0.08 $0.04 N/A $0.06 $ - (100%) $0.09 $0.04
Second Quarter 0.20 0.23 44 0.15 0.16 11 0.16 0.18
Third Quarter 0.19 0.22 47 0.12 0.15 (12) 0.14 0.17
Fourth Quarter N/A 0.07 N/A (0.84) (0.87) N/A 0.07 0.02
====================================================================================================================================
$0.56 N/A $(0.52) $(0.55) N/A $0.46 $0.41
====================================================================================================================================
DISCONTINUED OPERATIONS:
Income from Discontinued
Operations:
First Quarter $(43) $(217) $6,218 $5,258 $8,950 $8,463
Second Quarter 200 295 5,694 4,225 16,846 15,993
Third Quarter 527 1,095 10,393 7,490 8,555 8,753
Fourth Quarter N/A (5,048) 303,463 267,297 9,947 7,359
====================================================================================================================================
$(3,875) $325,768 $284,270 $44,298 $40,568
====================================================================================================================================
Diluted Earnings Per Share:
First Quarter $ - $ - $0.02 $0.02 $0.03 $0.03
Second Quarter - - 0.02 0.01 0.05 0.05
Third Quarter - - 0.03 0.02 0.03 0.03
Fourth Quarter N/A (0.02) 0.97 0.89 0.03 0.02
====================================================================================================================================
$(0.01) $1.05 $0.95 $0.14 $0.13
====================================================================================================================================
</TABLE>
(1) During the third quarter of 2002, the Company sold its Terminix operations
in the United Kingdom. The financial results from these operations have
been reclassified from "Continuing Operations" to "Discontinued Operations"
for all periods presented.
2002 2001 2000
- -------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE:
First Quarter $0.10 0% $0.10 11% $0.09
Second Quarter 0.10 0 0.10 11 0.09
Third Quarter 0.105 5 0.10 0 0.10
Fourth Quarter 0.105 5 0.10 0 0.10
===============================================================================
$0.41 3% $0.40 5% $0.38
===============================================================================
30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of The ServiceMaster Company
We have audited the accompanying consolidated statements of financial position
of The ServiceMaster Company and subsidiaries (the "Company") as of December 31,
2002 and 2001, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2002. 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 of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of The ServiceMaster Company and
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in the Restatement note to the consolidated financial statements,
the accompanying 2001 and 2000 consolidated financial statements have been
restated.
As discussed in the Newly Adopted Accounting Principles note to the consolidated
financial statements, effective January 1, 2002, the Company adopted SFAS No.
142, Goodwill and Other Intangible Assets.
Deloitte & Touche LLP
Chicago, Illinois
March 26, 2003
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>14
<FILENAME>exhibit1020.txt
<DESCRIPTION>STOCK PLAN
<TEXT>
Exhibit 10.20
THE SERVICEMASTER COMPANY
2001 DIRECTORS STOCK PLAN
(As Approved by Stockholders -April 27, 2001;
Amended and Restated Effective January 24, 2003)
I. INTRODUCTION
1.1. Purposes. The purposes of this 2001 Directors Stock Plan (this "Plan") of
--------
The ServiceMaster Company, as amended and restated effective January 24, 2003,
are (1) to align the interests of ServiceMaster's stockholders and Non-Employee
Directors by increasing the proprietary interest of Non-Employee Directors in
ServiceMaster's growth and success, (2) to advance the interests of
ServiceMaster by attracting and retaining individuals to serve as directors of
ServiceMaster, and (3) to motivate Non-Employee Directors to act in the
long-term best interests of ServiceMaster and its stockholders.
1.2. Definitions.
-----------
"Agreement" means the written agreement evidencing an award under this
---------
Plan.
"Board" means the Board of Directors of ServiceMaster.
-----
"Bonus Stock" means shares of Common Stock which are not subject to a
-----------
Restriction Period or Performance Measures.
"Bonus Stock Award" means an award of Bonus Stock under this Plan.
-----------------
"Change in Control" has the meaning set forth in Section 4.6(b).
-----------------
"Common Stock" means the common stock of ServiceMaster.
------------
"Corporate Transaction" has the meaning set forth in Section 4.6(b)(3).
---------------------
"Elective Option" means an Option granted under Section 2.2.
---------------
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Fair Market Value" means the average of the closing transaction
-----------------
prices, as reported in the New York Stock Exchange Composite Transactions,
of a share of Common Stock for the five-day period ended on or immediately prior
to the date as of which such value is being determined; provided, however, that
Fair Market Value may be determined by ServiceMaster by whatever means or method
as ServiceMaster, in the good faith exercise of its discretion, shall at such
time deem appropriate.
"Incumbent Board" has the meaning set forth in Section 4.6(b)(2).
---------------
<PAGE>
"Mature Shares" means previously-acquired shares of Common Stock for
-------------
which the holder thereof has good title, free and clear of all liens and
encumbrances and which such holder either (1) has held for at least six months
or (2) has purchased on the open market.
"Non-Employee Director" means any director of ServiceMaster
---------------------
who is not an officer or employee of ServiceMaster or any subsidiary of
ServiceMaster.
"Option" means an option to purchase shares of Common Stock granted
------
under Section 2.1 or 2.2.
"Outstanding Common Stock" has the meaning set forth in Section 4.6(b)(1).
------------------------
"Outstanding Voting Securities" has the meaning set forth in Section
-----------------------------
4.6(b)(1).
"Performance Measures" means the criteria and objectives, established by
--------------------
the Board, which shall be satisfied (1) as a condition to the exercisability of
all or a portion of an Option, (2) as a condition to the grant of a Stock Award
or (3) during the applicable Restriction Period as a condition to the
Non-Employee Director's receipt of the shares of Common Stock subject to a
restricted Stock Award. Such criteria and objectives may include, but are not
limited to, the attainment by a share of Common Stock of a specified Fair Market
Value for a specified period of time, earnings per share, return to stockholders
(including dividends), return on equity, earnings of ServiceMaster, revenues,
market share, cash flow or cost reduction goals, or any combination of the
foregoing and any other criteria and objectives established by the Board.
The Board may amend or adjust the Performance Measures or other terms and
conditions of an outstanding award in recognition of unusual or nonrecurring
events affecting ServiceMaster or its financial statements or changes in law or
accounting principles.
"Person" has the meaning set forth in Section 4.6(b)(1).
------
"Pooling Transaction" has the meaning set forth in Section 4.6(c).
-------------------
"Restricted Stock" means shares of Common Stock which are subject to a
----------------
Restriction Period.
"Restricted Stock Award" means an award of Restricted Stock under this
----------------------
Plan.
"Retainer/Fees" means the annual retainer fee and meeting attendance fees
-------------
payable to Non-Employee Directors for service as a member of the Board or a
committee of the Board.
"Restriction Period" means the period set forth in an Agreement during
------------------
which the Common Stock subject to a Restricted Stock Award may not be sold,
transferred, assigned, pledged, or otherwise encumbered or disposed of, except
as provided in this Plan or the related Restricted Stock Award Agreement.
"Stock Award" means a Restricted Stock Award or Bonus Stock Award.
-----------
2
<PAGE>
1.3. Administration. This Plan shall be administered by the Board or a committee
--------------
designated by the Board. Any one or a combination of the following awards may be
made under this Plan to Non-Employee Directors: (1) Options, (2) Restricted
Stock Awards and (3) Bonus Stock Awards. The Board shall, subject to the terms
of this Plan, select Non-Employee Directors for participation in this Plan and
determine the form and timing of each award, the number of shares of Common
Stock subject to each award, the purchase price associated with each Option, and
all other terms and conditions of each award, including, without limitation, the
form of the Agreement evidencing each award. The Board may, in its sole
discretion and for any reason at any time, take action such that (i) any or all
outstanding Options shall become exercisable in part or in full and (ii) all or
a portion of the Restriction Period applicable to any outstanding Restricted
Stock Award shall lapse. The Board shall, subject to the terms of this Plan,
interpret this Plan and the application thereof, establish rules and regulations
it deems necessary or desirable for the administration of this Plan. All such
interpretations, rules and regulations shall be final, binding and conclusive.
1.4. Eligibility. All Non-Employee Directors shall be eligible to participate in
-----------
this Plan.
1.5. Shares Available. Subject to adjustment as provided in Section 4.5, (1)
----------------
300,000 shares of Common Stock shall be available under this Plan during each
calendar year for the grant of Options under Section 2.1 and Stock Awards and
(2) 400,000 shares of Common Stock shall be available under this Plan during
each calendar year for the grant of Elective Options under Section 2.2. Shares
of Common Stock shall be made available from authorized and unissued shares of
Common Stock, or authorized and issued shares of Common Stock reacquired and
held as treasury shares or otherwise or a combination thereof.
II. STOCK OPTIONS
2.1. General. The Board may, in its discretion, grant Options to such
-------
Non-Employee Directors as may be selected by the Board. Options shall be subject
to the following terms and conditions and shall contain such additional terms
and conditions, not inconsistent with the terms of this Plan, as the Board shall
deem advisable:
(a) Number of Shares. The number of shares of Common Stock subject to an
----------------
Option shall be determined by the Board.
(b) Purchase Price and Exercise. The purchase price per share of Common
-----------------------------
Stock shall not be less than 100% of the Fair Market Value of a share of Common
Stock on the date of grant of the Option. The Board shall determine the period
during which an Option, or any portion of an Option, may be exercised. The Board
may, in its discretion, establish Performance Measures which shall be satisfied
as a condition to the grant of an Option or to the exercisability of all or a
portion of an Option.
(c) Termination of Service. All terms relating to the exercise,
-------------------------
cancellation or other disposition of an Option upon a termination of service as
a director of ServiceMaster, whether by reason of disability, retirement, death
or any other reason, shall be determined by the Board.
3
<PAGE>
2.2. Elective Options. In addition to Options that may be granted pursuant to
----------------
Section 2.1, each Non-Employee Director may from time to time elect, in
accordance with procedures specified by ServiceMaster, to receive Elective
Options in lieu of all or part of such Non-Employee Director's Retainer/Fees.
Elective Options shall be subject to the following terms and conditions and
shall contain such additional terms and conditions, not inconsistent with the
terms of this Plan, as the Board shall deem advisable:
(a) Number of Shares. The number of shares of Common Stock subject to an
----------------
Elective Option shall equal the number determined by dividing (1) the amount of
Retainer/Fees for any period specified by ServiceMaster that the Non-Employee
Director has elected to forego by (2) 15% of the Fair Market Value of a share of
Common Stock on the date of grant.
(b) Purchase Price and Exercise. The purchase price per share of Common
-----------------------------
Stock subject to an Elective Option shall equal to 85% of the Fair Market Value
of a share of Common Stock on the date of grant. Each Elective Option shall be
fully exercisable on and after the date of grant and shall expire ten years
after the date of grant without regard to whether the Non-Employee Director
receiving such Elective Option shall remain a member of the Board during that
ten-year period.
2.3. Method of Exercise. An exercisable Option, or portion thereof, may be
------------------
exercised only with respect to whole shares of Common Stock. An Option may be
exercised by giving written notice to ServiceMaster specifying the number of
whole shares of Common Stock to be purchased and accompanied by payment therefor
in full (or arrangement made for such payment to ServiceMaster's satisfaction)
either (1) in cash, (2) by delivery (either actual delivery or by attestation
procedures established by ServiceMaster) of Mature Shares having an aggregate
Fair Market Value, determined as of the date of exercise, equal to the aggregate
purchase price payable by reason of such exercise or (3) in cash by a
broker-dealer acceptable to ServiceMaster to whom the Non-Employee Director has
submitted an irrevocable notice of exercise of the Option. Any fraction of a
share of Common Stock which would be required to pay the purchase price shall be
disregarded and the remaining amount due shall be paid in cash by the
Non-Employee Director. No certificate representing Common Stock shall be
delivered until the full purchase price has been paid (or arrangement made for
such payment to ServiceMaster's satisfaction).
2.4. Death. If a Non-Employee Director dies prior to the expiration of the term
-----
of an Option, the Option may thereafter be exercised by the Non-Employee
Director's executor, administrator, legal representative, beneficiary or similar
person until and including the expiration date of the term of the Option.
III. STOCK AWARDS
3.1. Stock Awards. The Board may, in its discretion, grant Stock Awards to
------------
Non-Employee Directors as may be selected by the Board. The Agreement relating
to a Stock Award shall specify whether the Stock Award is a Restricted Stock
Award or Bonus Stock Award.
4
<PAGE>
3.2. Terms of Stock Awards. Stock Awards shall be subject to the following terms
---------------------
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of this Plan, as the Board shall deem advisable.
(a) Number of Shares and Other Terms. The number of shares of Common Stock
--------------------------------
subject to a Restricted Stock Award or Bonus Stock Award and the Performance
Measures (if any) and Restriction Period applicable to a Restricted Stock Award
shall be determined by the Board.
(b) Vesting and Forfeiture. The Agreement relating to a Restricted Stock
----------------------
Award shall provide, in the manner determined by the Board, in its discretion,
and subject to the provisions of this Plan, for the vesting of the shares of
Common Stock subject to such award (1) if specified Performance Measures are
satisfied during the Restriction Period or (2) if the Non-Employee Director who
is granted such award continues to serve as a member of the Board during the
Restriction Period and for the forfeiture of all or a portion of the shares of
Common Stock subject to such award (x) if specified Performance Measures are not
satisfied during the Restriction Period or (y) if the Non-Employee Director who
is granted such award does not continue to serve as a member of the Board during
the Restriction Period.
Bonus Stock Awards shall not be subject to any Performance Measures or
Restriction Periods.
(c) Share Certificates. During the Restriction Period, a certificate(s)
-------------------
representing a Restricted Stock Award may be registered in the holder's name or
a nominee name at the discretion of ServiceMaster and may bear a legend
indicating that the ownership of the shares of Common Stock represented by such
certificate is subject to the restrictions, terms and conditions of this Plan
and the Agreement relating to the Restricted Stock Award. As determined by
ServiceMaster, all certificates registered in the holder's name shall be
deposited with ServiceMaster, together with stock powers or other instruments of
assignment (including a power of attorney), each endorsed in blank with a
guarantee of signature if deemed necessary or appropriate by ServiceMaster,
which would permit transfer to ServiceMaster of all or a portion of the shares
of Common Stock subject to the Restricted Stock Award in the event such award is
forfeited in whole or in part. Upon termination of any applicable Restriction
Period (and the satisfaction of applicable Performance Measures), or upon the
grant of a Bonus Stock Award, a certificate or certificates evidencing ownership
of the requisite number of shares of Common Stock shall be delivered to the
Non-Employee Director.
(d) Rights with Respect to Restricted Stock Awards. Unless otherwise set
-----------------------------------------------
forth in, and subject to the terms and conditions of, a Restricted Stock Award,
the holder of such award shall have all rights as a stockholder of
ServiceMaster, including, but not limited to, voting rights, the right to
receive dividends and the right to participate in any capital adjustment
applicable to all holders of Common Stock; provided, however, that a
distribution with respect to shares of Common Stock, other than a regular cash
dividend, shall be deposited with ServiceMaster and shall be subject to the same
restrictions as the shares of Common Stock with respect to which such
distribution was made.
5
<PAGE>
3.3 Termination of Service. All of the terms relating to the satisfaction of
----------------------
Performance Measures and the termination of the Restriction Period relating to a
Restricted Stock Award, or any forfeiture and cancellation of such award upon a
termination of service as a director of ServiceMaster, whether by reason of
disability, retirement, death or any other reason, shall be determined by the
Board.
IV. GENERAL
4.1. Effective Date and Term of Plan. The Plan, as amended and restated, shall
-------------------------------
be effective January 24, 2003, and shall constitute an amendment and restatement
of the 2001 Directors Stock Plan, as approved by stockholders on April 27, 2001.
This Plan shall terminate on April 27, 2011, unless terminated earlier by the
Board. Termination of this Plan shall not affect the terms or conditions of any
award granted prior to termination.
4.2. Amendments. The Board may amend this Plan as it shall deem advisable,
----------
subject to any requirement of stockholder approval required by applicable law,
rule or regulation. No amendment may impair the rights of a holder of an
outstanding award without the consent of such holder.
4.3. Agreement. No award shall be valid until an Agreement is executed by
---------
ServiceMaster and the Non-Employee Director who received such award and, upon
execution by each party and delivery of the Agreement to ServiceMaster, such
award shall be effective as of the effective date set forth in the Agreement.
4.4. Non-Transferability of Awards. Unless otherwise specified in the Agreement
-----------------------------
relating to an award, no award (other than a Bonus Stock Award) shall be
transferable other than by will, the laws of descent and distribution or
pursuant to beneficiary designation procedures approved by ServiceMaster. Except
to the extent permitted by the foregoing sentence or the Agreement relating to
an award, each award may be exercised or settled during the Non-Employee
Director's lifetime only by the Non-Employee Director or the Non-Employee
Director's legal representative or similar person. Except to the extent
permitted by the second preceding sentence or the Agreement relating to an
award, no award may be sold, transferred, assigned, pledged, encumbered or
otherwise disposed of (whether by operation of law or otherwise) or be subject
to execution, attachment or similar process. Upon any attempt to so sell,
transfer, assign, pledge, encumber or otherwise dispose of any such award, such
award and all rights thereunder shall immediately become null and void.
4.5. Adjustment. In the event of any stock split, stock dividend,
----------
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Common Stock other than a regular cash
dividend, the number and class of securities available under this Plan, the
number and class of securities subject to each outstanding Option and the
purchase price per security, and the number and class of securities subject to
each outstanding Restricted Stock Award, shall be appropriately adjusted by the
Board, such adjustments to be made in the case of outstanding Options without an
increase in the aggregate purchase price. The decision of the Board regarding
any such adjustment shall be final, binding and conclusive. If any such
6
<PAGE>
adjustment would result in a fractional security being (a) available under this
Plan, such fractional security shall be disregarded, or (b) subject to an award
under this Plan, ServiceMaster shall pay the holder of such award, in connection
with the vesting of a Restricted Stock Award or exercise of an Option in whole
or in part occurring after such adjustment, an amount in cash determined by
multiplying (i) the fraction of such security (rounded to the nearest hundredth)
by (ii) the excess, if any, of (A) the Fair Market Value on the vesting or
exercise date over (B) the exercise price, if any, of such award.
4.6. Change in Control.
-----------------
(a) (1) Notwithstanding any provision in this Plan or any Agreement to the
contrary, in the event of a Change in Control pursuant to Section (b)(3) or (4)
below in connection with which holders of Common Stock may receive consideration
consisting solely of shares of stock that are registered under Section 12 of the
Exchange Act (and disregarding the payment of cash in lieu of fractional
shares), (i) all outstanding Options shall immediately become exercisable in
full, (ii) the Restriction Period applicable to any outstanding Restricted Stock
Award shall lapse, (iii) the Performance Measures applicable to any Restricted
Stock Award shall be deemed to be satisfied at the maximum level and (iv) there
shall be substituted for each share of Common Stock available under this Plan,
whether or not then subject to an outstanding award, the number and class of
shares into which each outstanding share of Common Stock shall be converted
pursuant to such Change in Control. In the event of any such substitution, the
purchase price per share in the case of an Option shall be appropriately
adjusted by the Board (whose determination shall be final, binding and
conclusive), such adjustments to be made without an increase in the aggregate
purchase price.
(2) Notwithstanding any provision in this Plan or any Agreement to the
contrary, in the event of a Change in Control pursuant to Section (b)(1) or (2)
below, or in the event of a Change in Control pursuant to Section (b)(3) or (4)
below as to which (a)(1) above does not apply, each outstanding award shall be
surrendered to ServiceMaster by the holder thereof, and each such award shall
immediately be canceled by ServiceMaster, and the holder shall receive, within
ten days of the occurrence of a Change in Control, a cash payment from
ServiceMaster in an amount equal to (i) in the case of an Option, the number of
shares of Common Stock then subject to such option, multiplied by the excess, if
any, of the greater of (A) the highest per share price offered to stockholders
of ServiceMaster in any transaction whereby the Change in Control takes place or
(B) the Fair Market Value of a share of Common Stock on the date of occurrence
of the Change in Control, over the purchase price per share of Common Stock
subject to the Option, (ii) in the case of a Restricted Stock Award, the number
of shares of Common Stock then subject to such award, multiplied by the greater
of (A) the highest per share price offered to stockholders of ServiceMaster in
any transaction whereby the Change in Control takes place or (B) the Fair Market
Value of a share of Common Stock on the date of occurrence of the Change in
Control. ServiceMaster may, but is not required to, cooperate with any person
who is subject to Section 16 of the Exchange Act to assure that any cash payment
in accordance with the foregoing to such person is made in compliance with
Section 16 and the rules and regulations thereunder.
(b) "Change in Control" means:
-----------------
7
<PAGE>
(1) the acquisition by any individual, entity or group (a "Person"),
------
including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act, of beneficial ownership within the meaning of Rule 13d-3
promulgated under the Exchange Act, of 25% or more of either (i) the then
outstanding shares of Common Stock (the "Outstanding Common Stock") or (ii) the
-------------------------
combined voting power of the then outstanding securities of ServiceMaster
entitled to vote generally in the election of directors (the "Outstanding Voting
------------------
Securities"); excluding, however, the following: (A) any acquisition directly
- ----------
from ServiceMaster (excluding any acquisition resulting from the exercise of an
exercise, conversion or exchange privilege unless the security being so
exercised, converted or exchanged was acquired directly from ServiceMaster), (B)
any acquisition by ServiceMaster, (C) any acquisition by an employee benefit
plan (or related trust) sponsored or maintained by ServiceMaster or any entity
controlled by ServiceMaster or (D) any acquisition by any entity pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of subsection (3) of
this Section 4.6(b); provided further, that for purposes of clause (B), if any
Person (other than ServiceMaster or any employee benefit plan (or related trust)
sponsored or maintained by ServiceMaster or any entity controlled by
ServiceMaster) shall become the beneficial owner of 25% or more of the
Outstanding Common Stock or 25% or more of the Outstanding Voting Securities by
reason of an acquisition by ServiceMaster, and such Person shall, after such
acquisition by ServiceMaster, become the beneficial owner of any additional
shares of the Outstanding Common Stock or any additional Outstanding Voting
Securities, in either case other than pursuant to a stock split, stock dividend
or similar transaction, and such beneficial ownership is publicly announced,
such additional beneficial ownership shall constitute a Change in Control;
(2) individuals who, as of April 28, 2001 constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
---------------
Board; provided, however, that any individual who becomes a director of
ServiceMaster subsequent to April 27, 2001 whose election, or nomination for
election by ServiceMaster's stockholders, was approved by the vote of at least
two-thirds of the directors then comprising the Incumbent Board shall be deemed
a member of the Incumbent Board; and provided further, that any individual who
was initially elected as a director of ServiceMaster as a result of an actual or
threatened solicitation by a Person or group for the purpose of opposing a
solicitation by any other Person or group with respect to the election or
removal of directors, or any other actual or threatened solicitation of proxies
or consents by or on behalf of any Person other than the Board shall not be
deemed a member of the Incumbent Board;
(3) the consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of ServiceMaster
(a "Corporate Transaction"); excluding, however, a Corporate Transaction
----------------------
pursuant to which (i) all or substantially all of the individuals or entities
who are the beneficial owners, respectively, of the Outstanding Common Stock and
the Outstanding Voting Securities immediately prior to such Corporate
Transaction will beneficially own, directly or indirectly, more than 60% of,
respectively, the outstanding shares of common stock, and the combined voting
power of the outstanding securities entitled to vote generally in the election
of directors (or similar persons), as the case may be, of the entity resulting
from such Corporate Transaction (including, without limitation, an entity which
as a result of such transaction owns ServiceMaster or all or substantially all
of ServiceMaster's assets either directly or indirectly) in substantially the
same proportions relative to each other as their
8
<PAGE>
ownership, immediately prior to such Corporate Transaction, of the Outstanding
Common Stock and the Outstanding Voting Securities, as the case may be,
(ii) no Person (other than: ServiceMaster; any employee benefit plan
(or related trust) sponsored or maintained by ServiceMaster or any entity
controlled by ServiceMaster; and any Person which beneficially owned,
immediately prior to such Corporate Transaction, directly or indirectly,
25% or more of the Outstanding Common Stock or the Outstanding Voting
Securities, as the case may be) will beneficially own, directly or indirectly,
25% or more of, respectively, the outstanding shares of common stock of the
entity resulting from such Corporate Transaction or the combined voting
power of the outstanding securities of such entity entitled to vote generally
in the election of directors and (iii) individuals who were members of the
Incumbent Board will constitute at least a majority of the members of the
board of directors (or similar body) of the entity resulting from such Corporate
Transaction; or
(4) the consummation of a plan of complete liquidation or dissolution of
ServiceMaster.
(c) Notwithstanding the exercise period(s) of any Option set forth in this
Plan or in any Agreement and notwithstanding the expiration date of the term of
any Option, in the event ServiceMaster is involved in a business combination
which is intended to be treated as a pooling of interests for financial
accounting purposes (a "Pooling Transaction"), pursuant to which a Non-Employee
-------------------
Director receives a substitute option to purchase securities of any entity,
including an entity directly or indirectly acquiring ServiceMaster, then each
Option (or option in substitution thereof) held by such Non-Employee Director
shall be exercisable to the extent set forth in this Plan or the related
Agreement until and including the latest of (x) the expiration date of the term
of the Option or, in the event of such Non-Employee Director's termination of
service as a director of ServiceMaster, the date determined pursuant to this
Plan or the related Agreement, (y) the date which is nine months after the
consummation of such business combination and (z) the date which is 90 days
after the date of expiration of any period during which such Non-Employee
Director may not dispose of a security issued in the Pooling Transaction in
order for the Pooling Transaction to be accounted for as a pooling of interests.
4.7. Rights as Stockholder. No person shall have any right as a stockholder of
---------------------
ServiceMaster with respect to any shares of Common Stock or other equity
security of ServiceMaster which is subject to an award hereunder unless and
until such person becomes a stockholder of record with respect to such shares of
Common Stock or equity security.
4.8. Designation of Beneficiary. A holder of an award may file with the
--------------------------
Corporate Secretary a written designation of one or more persons as such
holder's beneficiary or beneficiaries (both primary and contingent) in the event
of the holder's death. To the extent an outstanding Option granted hereunder is
exercisable, such beneficiary or beneficiaries shall be entitled to exercise
such Option.
Each beneficiary designation shall become effective only when filed in
writing with the Corporate Secretary during the holder's lifetime on a form
prescribed by ServiceMaster. The filing with the Corporate Secretary of a new
beneficiary designation shall cancel all previously filed beneficiary
designations.
9
<PAGE>
If a holder fails to designate a beneficiary, or if all designated
beneficiaries of a holder predecease the holder, then each outstanding Option
held by such holder, to the extent exercisable, may be exercised by such
holder's executor, administrator, legal representative or similar person.
4.9. Governing Law. This Plan, each award hereunder and the related Agreement,
-------------
and all determinations made and actions taken pursuant thereto shall be governed
by the laws of the State of Delaware and construed in accordance therewith
without giving effect to principles of conflicts of laws.
10
<PAGE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----