American Home Shield 2007 Annual Report Download

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SERVICEMASTER CO
10-K
Annual report pursuant to section 13 and 15(d)
Filed on 02/27/2007
Filed Period 12/31/2006

Table of contents

  • Page 1
    SERVICEMASTER CO 10-K Annual report pursuant to section 13 and 15(d) Filed on 02/27/2007 Filed Period 12/31/2006

  • Page 2
    ... 1934 Commission File Number 1-14762 THE SERVICEMASTER COMPANY (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 860 Ridge Lake Boulevard, Memphis, Tennessee 38120 (Address of principal executive offices, including zip code...

  • Page 3

  • Page 4
    THE SERVICEMASTER COMPANY ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion...

  • Page 5
    PART I ITEM 1. BUSINESS The ServiceMaster Company ("ServiceMaster") is a national company serving both residential and commercial customers. Its services include lawn care, landscape maintenance, termite and pest control, home warranty, disaster response and reconstruction, cleaning and disaster ...

  • Page 6
    ... provider of termite and pest control services in the United States serving both residential and commercial customers. As of December 31, 2006, Terminix provided these services in 47 states and the District of Columbia through 394 company-owned locations and 134 franchised locations. As of December...

  • Page 7
    .... American Home Shield. American Home Shield is the leading provider of home warranty contracts for systems and appliances in the United States. It provides residential customers with contracts to repair or replace electrical, plumbing, central heating and central air conditioning systems...

  • Page 8

  • Page 9
    ...marketing, government and public relations, administrative, accounting, financial, tax, human resources, information technology and legal services. As of December 31, 2006, the Business Support Center is headquartered in Downers Grove, Illinois. In October 2006, the Board of Directors of the Company...

  • Page 10
    ... laws and regulations, compliance with which increases ServiceMaster's operating costs, limits or restricts the services provided by ServiceMaster's operating segments or the methods by which ServiceMaster's operating segments sell those services or conduct their respective businesses, or subjects...

  • Page 11
    ... businesses must also meet the Department of Transportation and Federal Motor Carrier Safety Administration requirements with respect to their fleets of vehicles. American Home Shield is regulated by the Department of Insurance in certain states and the Real Estate Commission in Texas. Consumer...

  • Page 12
    6

  • Page 13
    ... conditions, including, but not limited to, changes in interest rates, fuel and oil prices, and unemployment rates could reduce consumer confidence and related spending levels and, in turn, reduce the demand for ServiceMaster's services. Consolidation of corporate offices could affect financial...

  • Page 14
    The plea agreement entered into between InStar Services Group, Inc. and the United State's Attorney's Office for the Southern District of Florida will require ongoing monitoring and compliance by InStar for up to 7

  • Page 15
    ... 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. Operating Company Owned Facilities Leased Facilities TruGreen LawnCare TruGreen LandCare Terminix American Home Shield...

  • Page 16
    ... Services Group entered into a plea agreement with the United States Attorney's Office for the Southern District of Florida requiring that InStar implement an environmental compliance plan, be placed on probation for a period of up to five years, pay a fine of $0.5 million for each count, and make...

  • Page 17
    ... Conservation ("NYDEC") alleging 61 violations of New York pesticide law related to residential lawn applications occurring in New York over a 6-year period. The alleged violations include applying pesticides without signed contracts, applying pesticides without providing warning labels, expired...

  • Page 18
    Third Quarter Fourth Quarter 11.94 13.50 9.66 10.65 9 13.93 14.28 13.10 11.69 13.25 13.87 11.12 12.30

  • Page 19
    ... credit ratings and other strategic investment opportunities. ISSUER PURCHASES OF EQUITY SECURITIES Total Number of Shares Purchased as Part of Publicly Announced Plan Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan Period Total Number of Shares Purchased Average Price...

  • Page 20
    ... to the Company's decision to consolidate its corporate headquarters into its operations support center in Memphis, Tennessee and close its current headquarters in Downers Grove, Illinois. The restructuring charges totaled $21.6 million pretax, $6.9 million after-tax and $0.02 per diluted share. The...

  • Page 21
    ... program strives to ensure that the Company will have a consistent level of skilled managers across its branches. American Home Shield's new Customer Service Center Application equips its associates with the tools and information they need to serve their customers in a way which is both efficient...

  • Page 22
    12

  • Page 23
    ... care and related costs increased approximately $15 million pretax, or $.03 per share, in 2006. For 2007, the Company estimates that it will absorb approximately $. 02 per share of incremental health care costs. Increases in short term interest rates have adversely impacted the Company's businesses...

  • Page 24
    ... integral part of the business model at American Home Shield, and there will always be some market-based variability in the timing and amount of investment returns realized from year to year. Interest expense increased $4 million due to higher debt balances and interest rates. The effective tax rate...

  • Page 25
    ... initial positive results of the LQA program, as the initial retention rates for samples of customers that received an LQA was meaningfully higher than samples of customers that did not receive an LQA. The Company has also implemented faster response standards and followup calls on re-services, and...

  • Page 26
    ...million approximately $7 million more than prior year-end, reflecting the timing and reduced level of accounts payable and accrued expenses. Terminix Segment The Terminix segment, which includes termite and pest control services, reported a two percent increase in revenue to $1.08 billion from $1.06...

  • Page 27

  • Page 28
    ... of total annual contracts written, experienced a six percent decline in unit sales due to lower response rates on certain direct mail programs. The decline in operating income primarily resulted from increases in the average cost per service claim. Heating and air conditioning related costs were at...

  • Page 29
    16

  • Page 30
    ... safety-related costs throughout the enterprise. These factors were offset in part by higher fuel costs, increased claim costs at American Home Shield due to hotter weather conditions, a $10 million unfavorable adjustment recorded by Terminix to correct the estimation of prior year damage claim...

  • Page 31
    ... from the repayment of fixed rate debt in April 2005, as well as higher investment income experienced on the American Home Shield investment portfolio. It is important to note that investment returns are an integral part of the business model at American Home Shield, and there will always be...

  • Page 32
    ... Growth in Full Program Contracts Customer Retention Rate Terminix Growth in Pest Control Customers Pest Control Customer Retention Rate Growth in Termite Customers Termite Customer Retention Rate American Home Shield Growth in Warranty Contracts Customer Retention Rate 1% 61.2% 8% 62.2% 3% 77...

  • Page 33
    ...in the fourth quarter, improvements in safety-related costs and the impact of approximately $1.5 million of non-recurring branch shut down costs incurred in 2004. These profit gains were offset in part by higher fuel prices. Capital employed in the TruGreen LandCare segment increased one percent. 18

  • Page 34
    ... of one percent. New warranty contract sales, which are reported as earned revenue over the subsequent twelve-month contract period, increased seven percent in 2005. A solid increase in customer renewals, which are American Home Shield's largest source of revenue, was supported by a larger base...

  • Page 35
    19

  • Page 36
    ... new InStar commercial disaster restoration business, lower levels of customer prepayments at American Home Shield, primarily as a result of a market wide decline in sales from the real estate channel (where virtually all sales are paid for up-front), and severance and other cash payments associated...

  • Page 37
    February 16, 2007. 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 February 2006, ServiceMaster's Board of Directors authorized $250 million...

  • Page 38
    ... short and long-term marketable securities balance is associated with regulatory requirements at American Home Shield and for other purposes. Based on the Company's normal annual dividends and other payments from regulated American Home Shield subsidiaries, recent changes in regulations in certain...

  • Page 39
    ...88 $ 34 488 * These items are reported in the Consolidated Statements of Financial Position Not included in the table above are deferred income tax liabilities and the related interest payments on the Company's long-term debt. Deferred income tax liabilities totaled $168 million and are discussed...

  • Page 40
    ... revenue increased, reflecting growth in warranty contracts written at American Home Shield, partially offset by lower customer prepayment balances for lawn care services as a result of a one month delay in launching prepayment programs for the upcoming year, as well as a reduction at Terminix...

  • Page 41

  • Page 42
    ... 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 projections. Termite damage claim accruals are recorded based on both the historical rates of claims incurred within a contract year...

  • Page 43

  • Page 44
    ... 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 derivative financial instrument transactions is not material to the Company's financial statements. In December 2003 and...

  • Page 45

  • Page 46
    ...marketable securities balances. The Company estimates that on a net basis, each one percentage point change in interest rates would result in a change of less than $.01 in earnings per share on an annual basis. The Company has several debt and lease agreements where the interest rate or rent payable...

  • Page 47
    ... on our management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006. This attestation report is included below. Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of The ServiceMaster Company We...

  • Page 48
    ... to the Company's decision to consolidate its corporate headquarters into its operations support center in Memphis, Tennessee and close its current headquarters in Downers Grove, Illinois. The restructuring charges totaled $21.6 million pretax, $6.9 million after-tax and $0.02 per diluted share. The...

  • Page 49
    ... trade names, net Notes receivable Long-term marketable securities Other assets Assets of discontinued operations Total Assets Liabilities and Shareholders' Equity: Current Liabilities: Accounts payable Accrued liabilities: Payroll and related expenses Self-insured claims and related expenses...

  • Page 50
    28

  • Page 51
    ... Shareholders' dividends Shares issued under options, grant plans, and other (2,711 shares) Treasury shares purchased (5,353 shares) Shares issued for acquisitions (297 shares) Balance December 31, 2004 Net income 2005 Other comprehensive income, net of tax: Net unrealized loss on securities, net of...

  • Page 52
    ... $ (2) Upon the adoption of SFAS 123(R) and effective January 1, 2006, the Company reclassified within Shareholders' Equity the $14.4 million balance of "Restricted Stock (unearned compensation)" to "Additional paid-in capital." See accompanying Notes to the Consolidated Financial Statements. 29

  • Page 53
    ..., financial investments and securities Net Cash Used for Investing Activities from Continuing Operations Cash Flows from Financing Activities from Continuing Operations: Borrowings of debt Payments of debt Shareholders' dividends Purchase of ServiceMaster stock Proceeds from employee share plans Net...

  • Page 54
    ... self-insurance losses, as well as warranty claims in the American Home Shield business, are made based on the Company's claims experience and actuarial projections. Termite damage claim accruals are recorded based on both the historical rates of claims incurred within a contract year and the cost...

  • Page 55

  • Page 56
    ... statements for all periods. The Company had $442 million and $433 million of deferred revenue at December 31, 2006 and 2005, respectively, which consist primarily of payments received for annual contracts relating to home warranty, termite baiting, pest control and lawn care services. The revenue...

  • Page 57
    ... 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 derivative financial instrument transactions is not material to the Company's consolidated financial statements. In accordance...

  • Page 58
    ... care services. The TruGreen LandCare segment provides landscaping services primarily to commercial customers. The Terminix segment provides termite and pest control services to residential and commercial customers. The American Home Shield segment provides home warranties to consumers that cover...

  • Page 59
    ...repair and maid services. The Other Operations and Headquarters segment also includes the Company's headquarters operations, which provide various technology, marketing, finance, legal and other support services to the business units. Information regarding the accounting policies used by the Company...

  • Page 60
    ... to the Consolidated Financial Statements 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...

  • Page 61
    ... Financial Statements Business Segment Table (In thousands) Operating Revenue: TruGreen LawnCare TruGreen LandCare Terminix American Home Shield Other Operations and Headquarters Total Operating Revenue Operating Income (Loss):(1, 2) TruGreen LawnCare TruGreen LandCare Terminix American Home Shield...

  • Page 62
    ... periods that are related to the Company's decision to consolidate its corporate headquarters into its operations support center in Memphis, Tennessee and close its current headquarters in Downers Grove, Illinois. The restructuring charges totaled $21.6 million pretax. Capital employed is a non...

  • Page 63
    Notes to the Consolidated Financial Statements (4) There are no adjustments necessary to reconcile total depreciation and amortization as presented in the business segment table to the consolidated totals. 37

  • Page 64
    ... statements since the acquisition date. The purchase price was allocated to the underlying net assets acquired, consisting primarily of trade receivables, project costs in excess of billings and accounts payable and accrued expenses. In addition, the Company allocated $20 million to customer...

  • Page 65
    ... as a master limited partnership (1987 through 1997) or in subsequent years. Consequently, the examination covered numerous significant matters, including the tax consequences resulting from the Company's reincorporation in 1997, and the sale of its large Management Services segment in November...

  • Page 66
    Notes to the Consolidated Financial Statements complexity of the matters under review and the extended period of time effectively covered by the IRS' examination were recorded. This resulted in a non-cash reduction in the Company's 2004 income tax provision, thereby increasing 2004 consolidated net ...

  • Page 67
    ... average annual cash tax benefits; however, the cash tax benefits were accelerated into 2006 and 2007 such that the aggregate tax benefits are unchanged. Accounting standards require that the Company recognize deferred taxes relating to the differences between the financial reporting and tax basis...

  • Page 68
    ... 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 In February 2006, the Company acquired InStar, a leading provider of disaster response and reconstruction services...

  • Page 69
    ...of discontinued operations related to a comprehensive agreement with the IRS regarding its examination of the Company's federal income taxes through the year 2002. 2006 2005 Financial Position: Current assets Long-term assets Total assets Current liabilities Long-term liabilities Total liabilities...

  • Page 70
    ... ($3.6 million) directly related to implementing the organizational changes. In October, 2006, the Board of Directors of the Company approved a plan to consolidate its corporate headquarters into its operations support center in Memphis, Tennessee and close its current headquarters in Downers Grove...

  • Page 71
    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 41

  • Page 72
    ... claims in the American Home Shield business are made based on the Company's claims experience and actuarial assumptions. At December 31, 2006, these accruals totaled $202 million, with $89 million included in "Self-insured claims and related expenses" and $113 million included in "Other long-term...

  • Page 73
    ... part of the cost of the shares purchased by employees. Minority Interest Ownership and Related Parties The Company continues to have minority investors in Terminix. At any time, the holders of this minority interest may convert this equity security into eight million ServiceMaster common shares...

  • Page 74
    ... 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 accumulated other comprehensive...

  • Page 75
    ...billion shares of common stock with par value of $.01. In January 2007, the Company announced the declaration of a cash dividend of $.12 per share payable on February 27, 2007 to shareholders of record on February 16, 2007. The Company has an effective shelf registration statement to issue shares of...

  • Page 76
    related to non-vested share-based compensation arrangements. That cost is expected to be recognized primarily over the next four years. The Company's stock options and stock appreciation rights, collectively "option(s)", are issued at a price not less than the fair market value on the grant date and...

  • Page 77
    ..." as permitted under SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123", which required the Company to expense the fair value of new employee option grants awarded subsequent to 2002. Related to the unvested option awards granted...

  • Page 78
    ...01 13.59 The options priced at $77.56 are options assumed by the Company as a result of business acquisitions. The Company's share grants and restricted stock awards have a general vesting period of five years and are restricted as to the sale or transfer of the shares prior to vesting. Restricted...

  • Page 79
    ... 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 and stock appreciation rights (SARS) whose market price is in excess of...

  • Page 80
    Report of Independent Registered Public Accounting Firm To the Board of Directors and 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, 2006 and ...

  • Page 81
    ..." section in the Significant Accounting Policies, for interim accounting purposes, TruGreen LawnCare and other business segments of the Company incur pre-season advertising costs. In addition, TruGreen LawnCare incurs costs related to annual repairs and maintenance procedures that are performed in...

  • Page 82
    ... to be paid in future periods that are related to the Company's decision to consolidate its corporate headquarters into its operations support center in Memphis, Tennessee and close its current headquarters in Downers Grove, Illinois. The after-tax impact of the restructuring charges includes the...

  • Page 83
    to continuing operations ($.49 per diluted share) and $9 million related to discontinued operations ($.03 per diluted share). See the "Income Taxes" note in the Notes to the Consolidated Financial Statements. 50

  • Page 84
    ... Annual CEO Certification required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual. The Company has also filed, as exhibits to its Annual Report on Form 10-K for the year ended December 31, 2006, the certifications of its Chief Executive Officer and Chief Financial Officer...

  • Page 85
    ... Green Century Capital Management, Inc., a shareholder of the Company, has submitted a letter to the Company stating its intention to bring before the 2007 annual meeting of shareholders a shareholder proposal to adopt a resolution asking the Board of Directors to prepare a report on the feasibility...

  • Page 86
    ... is Chairman and Chief Executive Officer of McLennan Company, a full-service real estate company, 1998 to present. Coleman H. Peterson is President and Chief Executive Officer, Hollis Enterprises, L.L.C., engaged in supporting businesses in improving their organizational effectiveness, from 2004 to...

  • Page 87
    ... provider of advertising and marketing communications services, from 2001 to 2003. From 2000 to 2001, Ms. Kamerick was the Executive Vice President and Chief Financial Officer of United Stationers, Inc., a wholesale distributor of business products. Ms. Kamerick is a director of Westell Technologies...

  • Page 88
    54

  • Page 89
    ... President, TruGreen LawnCare from August 1994 to July 2004. FINANCIAL CODE OF ETHICS ServiceMaster has a Financial Code of Ethics that applies to the Chief Executive Officer, Chief Financial Officer and Controller, or persons performing similar functions, and other designated officers and employees...

  • Page 90
    ... Vice Chairman and Chief Financial Officer. Hinshaw & Culbertson served as one of our casualty program law firms prior to Ernest Mrozek's becoming employed by ServiceMaster. Ernest Mrozek does not have management responsibility for our litigation program. Independence Under New York Stock Exchange...

  • Page 91

  • Page 92
    ...-related fees" are fees for assurance and related services that are reasonably related to the performance of the audit or review of ServiceMaster's financial statements; "tax fees" are fees for tax compliance, tax advice and tax planning; and "all other fees" are fees for any products and services...

  • Page 93
    ... Statements Report of Independent Registered Public Accounting Firm contained in Part II, Item 8 of this Form 10-K. Consolidated Statements of Financial Position as of December 31, 2006 and 2005 contained in Part II, Item 8 of this Form 10K. Consolidated Statements of Operations for the years...

  • Page 94
    ..., thereunto duly authorized. THE SERVICEMASTER COMPANY Date: February 27, 2007 By /s/ J. PATRICK SPAINHOUR J. Patrick Spainhour 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...

  • Page 95
    59

  • Page 96
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of The ServiceMaster Company Downers Grove, Illinois We have audited the consolidated financial statements of The ServiceMaster Company and subsidiaries (the "Company") as of December 31, 2006 and 2005...

  • Page 97
    ...-offs of uncollectible accounts. Deductions for the remaining items reflect cash payments. Includes accruals for residual value guarantees on leased properties, severance for former executives and terminated employees and transaction and other costs. Includes severance, employee retention incentives...

  • Page 98

  • Page 99
    ...'s Current Report on Form 8-K dated May 12, 2005 (File No. 1-14762). Senior Executive Ownership Election Plan, as approved by the registrant's Board of Directors on December 10, 1999, is incorporated by reference to Exhibit 10.5 to the registrant's Annual Report on Form 10-K for the year ended...

  • Page 100
    62

  • Page 101
    ...Directors Stock Plan, as amended and restated effective January 24, 2003, is incorporated by reference to Exhibit 10.20 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-14762) (the "2002 10-K"). Form of Option Agreement for the 2001 Directors Stock Plan...

  • Page 102
    10.27* Employment Agreement dated August 16, 2006, effective as of June 30, 2006, between The ServiceMaster Company and J. Patrick Spainhour is incorporated by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K dated August 15, 2006. Change in Control Severance Agreement dated...

  • Page 103
    .... Certification of Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Letter dated February 15, 2007 from Newcastle Partners, L.P. to The ServiceMaster Company regarding notice of...

  • Page 104
    ... entity effecting the Change in Control does not advise you in writing that it is retaining you in your current employment in ServiceMaster's Downers Grove office because it is abandoning the Consolidation and (iii) you provide full-time services to ServiceMaster through your Separation Date, then...

  • Page 105
    .... Your participation and your eligibility to participate in the ServiceMaster Employee Stock Purchase Plan ("ESPP") will end on the effective date of your termination of employment.Any shares held in the ESPP will be distributed in accordance with the terms of the ESPP. 9. ABP and CPP.Subject to the...

  • Page 106
    ... you on the effective date of your termination of employment shall be governed by the terms of the applicable stock option agreement and SAR agreement. Each stock option and SAR may vary with regard to option schedule, exercise price, base price, and post-employment obligations regarding competition...

  • Page 107
    ... to make a payment of any Excise Tax, the Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by ServiceMaster to or for the benefit of you. (c) You shall notify ServiceMaster in writing of any claim by the Internal Revenue Service...

  • Page 108
    ...in Employment Act, the Employee Retirement Income Security Act ("ERISA"), claims for violation of public policy, tort or common law; and claims for additional compensation or damages or attorneys' fees. You understand that this Agreement includes a release of all known and unknown claims to the date...

  • Page 109
    ..., own, manage, operate, control, participate in, perform services for, or otherwise carry on, a business similar to or competitive with the business conducted by ServiceMaster or any subsidiary of ServiceMaster. (b) From the date you sign this Agreement until two years after the Separation Date, you...

  • Page 110
    ...you will refrain from taking actions or making statements, written or oral, which disparage or defame the goodwill or reputation of ServiceMaster, its directors, officers, executives, shareholders, subsidiaries, parent companies, and employees or statements which could adversely affect the morale of...

  • Page 111
    ...in Employment Act, the Employee Retirement Income Security Act ("ERISA"), claims for violation of public policy, tort or common law; and claims for additional compensation or damages or attorneys' fees. You understand that this Agreement includes a release of all known and unknown claims to the date...

  • Page 112
    ... K. Wiggs, Vice President and Associate General Counsel, Labor & Employment, 860 Ridge Lake Blvd, Memphis, Tennessee 38120 within seven days after you sign the Agreement. If you do not revoke it, the Agreement will become effective on the eighth day after you sign it; and The payment referenced in...

  • Page 113
    ... Vice President, Human Resources, The ServiceMaster Company Dated:_____ Dated:_____ A-3 Exhibit B From the Effective Date until the Separation Date: 1.) Employee agrees to perform his or her duties and responsibilities in a professional manner, including attending work during normal business...

  • Page 114
    ... GENERAL COUNSEL SVP & GENERAL COUNSEL LAW DEPARTMENT COORD EXECUTIVE ASST VP CORPORATE COMPLIANCE VP ENVIRONMENTAL STEWARDSHIP ADMINISTRATIVE ASST VP & DEPUTY GENERAL COUNSEL ADMINISTRATIVE ASST SR ATTORNEY II PARALEGAL I MGR PROJECT SHARE PLAN COORD B. Other Employees Age 64 52 52 49 48 48 47 47...

  • Page 115
    ... entity effecting the Change in Control does not advise you in writing that it is retaining you in your current employment in ServiceMaster's Downers Grove office because it is abandoning the Consolidation and (iii) you provide full-time services to ServiceMaster through your Separation Date, then...

  • Page 116
    .... Your participation and your eligibility to participate in the ServiceMaster Employee Stock Purchase Plan ("ESPP") will end on the effective date of your termination of employment.Any shares held in the ESPP will be distributed in accordance with the terms of the ESPP. 9. ABP and CPP.Subject to the...

  • Page 117
    ... you on the effective date of your termination of employment shall be governed by the terms of the applicable stock option agreement and SAR agreement. Each stock option and SAR may vary with regard to option schedule, exercise price, base price, and post-employment obligations regarding competition...

  • Page 118
    ... to make a payment of any Excise Tax, the Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by ServiceMaster to or for the benefit of you. (c) You shall notify ServiceMaster in writing of any claim by the Internal Revenue Service...

  • Page 119
    ...in Employment Act, the Employee Retirement Income Security Act ("ERISA"), claims for violation of public policy, tort or common law; and claims for additional compensation or damages or attorneys' fees. You understand that this Agreement includes a release of all known and unknown claims to the date...

  • Page 120
    ..., own, manage, operate, control, participate in, perform services for, or otherwise carry on, a business similar to or competitive with the business conducted by ServiceMaster or any subsidiary of ServiceMaster. (b) From the date you sign this Agreement until two years after the Separation Date, you...

  • Page 121
    ...you will refrain from taking actions or making statements, written or oral, which disparage or defame the goodwill or reputation of ServiceMaster, its directors, officers, executives, shareholders, subsidiaries, parent companies, and employees or statements which could adversely affect the morale of...

  • Page 122
    ...in Employment Act, the Employee Retirement Income Security Act ("ERISA"), claims for violation of public policy, tort or common law; and claims for additional compensation or damages or attorneys' fees. You understand that this Agreement includes a release of all known and unknown claims to the date...

  • Page 123
    ... K. Wiggs, Vice President and Associate General Counsel, Labor & Employment, 860 Ridge Lake Blvd, Memphis, Tennessee 38120 within seven days after you sign the Agreement. If you do not revoke it, the Agreement will become effective on the eighth day after you sign it; and The payment referenced in...

  • Page 124
    ... Vice President, Human Resources, The ServiceMaster Company Dated:_____ Dated:_____ A-3 Exhibit B From the Effective Date until the Separation Date: 1.) Employee agrees to perform his or her duties and responsibilities in a professional manner, including attending work during normal business...

  • Page 125
    ... Title VP YELLOW PAGES MARKETING ENTERPRISE MARKETING COORD SVP & CMO VP MARKETING ANALYTICS GROUP MGR MARKETING ANALYST B. Other Employees Age 60 58 55 48 29 The job titles and ages of all employees in your department who are not eligible for the separation and/or retention benefit are: Job Title...

  • Page 126
    ... Management L.L.C. ServiceMaster BSC L.L.C. ServiceMaster Consumer Services, Inc. ServiceMaster Consumer Services Limited Partnership ServiceMaster Employer Services, Inc. ServiceMaster Funding Company LLC ServiceMaster Gift L.L.C. ServiceMaster Holding Corporation ServiceMaster Home Health Care...

  • Page 127
    ... Management Corporation ServiceMaster of Canada Limited ServiceMaster Pacific Rim Expansion LLC ServiceMaster Receivables Company LLC ServiceMaster Residential/Commercial Services Limited Partnership SiteService L.L.C. SM Clean L.L.C. Snow Removers L.L.C. Steward Insurance Company Terminix...

  • Page 128
    ... of our reports dated February 26, 2007, relating to the financial statements and financial statement schedule of The ServiceMaster Company and subsidiaries, and management's report on the effectiveness of the internal control over financial reporting, appearing in this Annual Report on Form...

  • Page 129
    ...OF CHIEF EXECUTIVE OFFICER I, J. Patrick Spainhour, certify that: 1. I have reviewed this report on Form 10-K of the ServiceMaster Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements...

  • Page 130
    ... information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 23, 2007 /s/ Ernest J. Mrozek Ernest J. Mrozek Vice Chairman and Chief Financial Officer

  • Page 131
    ... presents, in all material respects, the financial condition and results of operations of The ServiceMaster Company. /s/ J. Patrick Spainhour J. Patrick Spainhour Chairman and Chief Executive Officer February 27, 2007 A signed original of this written statement required by Section 906 has been...

  • Page 132
    ...presents, in all material respects, the financial condition and results of operations of The ServiceMaster Company. /s/ Ernest J. Mrozek Ernest J. Mrozek Vice Chairman and Chief Financial Officer February 23, 2007 A signed original of this written statement required by Section 906 has been provided...

  • Page 133
    ..."Bylaws") of The ServiceMaster Company ("ServiceMaster") as to the nomination by Newcastle Partners, L.P., a Texas limited partnership ("Newcastle"), of four (4) nominees for election to the Board of Directors of ServiceMaster (the "ServiceMaster Board") at the 2007 annual meeting of stockholders of...

  • Page 134
    ... has served as Chairman of the Board of Hallmark Financial Services, Inc., a property and casualty insurance company, since October 2001 and was its Chief Executive Officer from January 2003 to August 2006. He currently serves as Chairman of the Board of Bell Industries, Inc., a computer systems...

  • Page 135
    ... Accounts. Michael T. Leatherman (Age 53) is currently a business consultant specializing in strategic planning, organizational effectiveness, internal process control, financial modeling and acquisitions. Prior to retiring, Mr. Leatherman was the Executive Vice President, Chief Financial Officer...

  • Page 136
    ..., that the stockholders recommend to the Board of Directors that The ServiceMaster Company reimburse Newcastle Partners, L.P. for all expenses it incurs in connection with its solicitation of proxies for the annual meeting of stockholders scheduled to be held on [Date of Stockholder Meeting], or any...

  • Page 137
    accounts are limited to the securities of ServiceMaster. NCM has acquired shares of Common Stock of ServiceMaster on behalf of these managed accounts and has the power to vote and dispose of such shares pursuant to the account management agreements. In addition, NCM and Starboard Value and ...

  • Page 138
    Very truly yours, NEWCASTLE PARTNERS, L.P. By: By: Newcastle Capital Management, L.P., its General Partner Newcastle Capital Group, L.L.C., its General Partner By: Mark E. Schwarz, Managing Member

  • Page 139
    ...SECURITIES OF SERVICEMASTER DURING THE PAST TWO YEARS Class of Security Quantity Purchased / (Sold) Price Per Share ($) Date of Purchase / Sale Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock...

  • Page 140
    ...(Sold) Price Per Share ($) Date of Purchase / Sale Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock...

  • Page 141
    ... 01/26/07 01/30/07 02/06/07 02/07/07 02/09/07 Compass Offshore SAV PCC Limited 20,765 11.2760 11.3874 9,706 1,339,000 10.9500 Other Managed Accounts 50,000 7,700 200,000 100,000 127,400 30,000 200,000 26,100 100,000 100,000...

  • Page 142
    EXHIBIT B NOMINEE CONSENTS

  • Page 143
    ...to nominate the undersigned as a director of The ServiceMaster Company ("ServiceMaster") at the 2007 annual meeting of stockholders, or any...ServiceMaster's Certificate of Incorporation at the time of his election to the ServiceMaster Board of Directors. The foregoing assumes that an Independent Board...

  • Page 144
    ...to nominate the undersigned as a director of The ServiceMaster Company ("ServiceMaster") at the 2007 annual meeting of stockholders, or any...ServiceMaster's Certificate of Incorporation at the time of his election to the ServiceMaster Board of Directors. The foregoing assumes that an Independent Board...

  • Page 145
    ...to nominate the undersigned as a director of The ServiceMaster Company ("ServiceMaster") at the 2007 annual meeting of stockholders, or any...ServiceMaster's Certificate of Incorporation at the time of his election to the ServiceMaster Board of Directors. The foregoing assumes that an Independent Board...

  • Page 146
    ...to nominate the undersigned as a director of The ServiceMaster Company ("ServiceMaster") at the 2007 annual meeting of stockholders, or any...ServiceMaster's Certificate of Incorporation at the time of his election to the ServiceMaster Board of Directors. The foregoing assumes that an Independent Board...