SERVICEMASTER CO, 424B2, 1999-04-08

SERVICEMASTER CO
424B2, 1999-04-08
MANAGEMENT SERVICES

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<PAGE>
Filed Pursuant to
Rule No. 424 (B)(2)
Registration No. 333-75069

8,625,000 SHARES

The ServiceMaster Company

Common Stock
(par value $0.01 per share)

<TABLE>
<S> <C>
We may issue up to 8,625,000 shares of Common Stock This Prospectus provides you with detailed information
from time to time in the future in connection with about ServiceMaster. We encourage you to read this
the acquisition of businesses. entire document carefully. In addition, you may obtain
information about ServiceMaster from documents that we
This Prospectus may also be used under certain limited have filed with the Securities and Exchange Commission.
circumstances in connection with the resale of Common
Stock that was originally issued pursuant to this This Prospectus is dated April 7, 1999. You should be
Prospectus. aware that the delivery of this Prospectus and the sale
of Common Stock pursuant to this Prospectus will not in
The Common Stock is listed on the New York Stock any way create an implication that the information
Exchange, Inc. under the symbol SVM. On March 22, contained in this Prospectus is accurate or complete at
1999, the closing sale price of the Common Stock on any time after April 7, 1999.
the NYSE was $19.56 per share.
We are not making an offer of Common Stock in any state
where the offer is not permitted.
</TABLE>

--------------------------------------------------------------------------
NEITHER THE SEC NOR ANY STATE SECURITIES REGULATORS HAVE APPROVED THE
COMMON STOCK TO BE ISSUED UNDER THIS PROSPECTUS OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
--------------------------------------------------------------------------

The date of this Prospectus is April 7, 1999
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION...................................................... 3
SUMMARY.................................................................... 4
REINCORPORATION OF THE PREDECESSOR LIMITED PARTNERSHIP..................... 8
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS................................. 8
SECURITIES COVERED BY THIS PROSPECTUS...................................... 10
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................... 13
BUSINESS................................................................... 19
MANAGEMENT................................................................. 30
OWNERSHIP OF COMMON STOCK.................................................. 39
DESCRIPTION OF COMMON STOCK................................................ 41
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY............................ 45
LEGAL MATTERS.............................................................. 45
EXPERTS.................................................................... 45
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>

2
<PAGE>

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information we file at the public reference facilities of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the SEC at
Seven World Trade Center, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from commercial document retrieval
services and at the web site maintained by the SEC at http://www.sec.gov.

Our Common Stock is traded on the New York Stock Exchange, Inc. (the
"NYSE") under the symbol SVM and you can inspect our reports and other
information at the offices of the NYSE, 20 Broad Street, New York, New York
10005.

ServiceMaster filed a Registration Statement on Form S-1 to register with
the SEC the Common Stock offered by this Prospectus. As allowed by SEC rules,
this Prospectus does not contain all the information you can find in the
Registration Statement or the exhibits to the Registration Statement.

3
<PAGE>

SUMMARY

This summary highlights selected information from this Prospectus and may
not contain all of the information that is important to you. Unless otherwise
indicated or the context otherwise requires, all references herein to the
"Company" or "ServiceMaster" refer to The ServiceMaster Company, a Delaware
corporation, and its subsidiaries and their respective predecessors. See
"Reincorporation of the Predecessor Limited Partnership."

You should be aware that this summary may contain forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995.
Factors that could cause actual results to differ materially include, without
limitation, those identified in "Special Note on Forward-Looking Statements" and
elsewhere in this Prospectus. All references we make to numbers of shares of
Common Stock, or options for shares of Common Stock, and all references we make
to market and option prices per share, and income per share in this Prospectus
have been adjusted to reflect all stock dividends and stock splits of the
Company through the date of this Prospectus.

SERVICEMASTER

ServiceMaster, with operating revenue of approximately $4.7 billion in
1998, is one of the largest providers of residential services to individual
customers and supportive management services to businesses and institutions in
the United States. In addition, we have operations in 41 countries around the
world.

Our consumer services business ("ServiceMaster Consumer Services") provides
services to over 10.5 million residential and commercial customers under eight
market-leading brand names:

TRUGREEN-CHEMLAWN for lawn, tree and shrub care and commercial landscape
and indoor plant maintenance;

TERMINIX for termite and pest control services;

AMERICAN HOME SHIELD and AMERISPEC for home system and appliance warranty
contracts and home inspection services;

RESCUE ROOTER for plumbing and drain cleaning services and heating and air
conditioning services;

SERVICEMASTER RESIDENTIAL/COMMERCIAL SERVICES for heavy-duty residential
and commercial cleaning and disaster restoration services;

MERRY MAIDS for residential maid services; and

FURNITURE MEDIC for on-site furniture repair and restoration services.

Our management services business ("ServiceMaster Management Services")
provides facilities management services to over 2,000 customers in the health
care, education and business and industrial markets. These services include
plant operations and maintenance, housekeeping, grounds and landscaping,
clinical equipment management, food service, laundry and linen services, total
facilities management and other services.

These services comprise the "ServiceMaster Quality Service Network" and may
be accessed easily by calling a single toll-free telephone number: 1-800-WE
SERVE.

The principal executive offices of ServiceMaster are located at One
ServiceMaster Way, Downers Grove, Illinois 60515-1700 and its telephone number
is (630) 271-1300. The Company maintains a website on the Internet at
http://www.ServiceMaster.com. The website of the Company and the information
contained therein are not a part of this Prospectus.

4
<PAGE>

RECENT DEVELOPMENTS

On November 2, 1998, ServiceMaster and LandCare USA, Inc. ("LandCare")
announced approval by their boards of directors of a definitive agreement under
which ServiceMaster would acquire Houston-based LandCare in a stock-for-stock
merger. The LandCare shareholders approved the transaction at a special meeting
held on March 18, 1999 and the transaction uses was closed on the same day. This
acquisition will broaden the ability of ServiceMaster's TruGreen-ChemLawn
subsidiary to integrate fully its traditional fertilizer and weed control
services with landscape maintenance and installation, as well as indoor
plantcare, for commercial customers.

On January 4, 1999, ServiceMaster announced the formation of a strategic
venture with Texas Utilities Company for the ownership and operation of
ServiceMaster's energy management business. The new venture, which is owned 85%
by Texas Utilities and 15% by ServiceMaster, acquired all the assets of
ServiceMaster Energy Management.

Also on January 4, 1999, ServiceMaster announced the completion of its
strategic review of its home health care business and the decision to sell its
direct operations of home health care agencies and certain support operations
and to discontinue its outsourced operation of home health care agencies.
ServiceMaster will continue to provide consulting services to hospitals and
other providers of home health care.

On March 23, 1999, ServiceMaster announced that ServiceMaster and American
Residential Services, Inc. ("ARS") had entered into a definitive agreement under
which ServiceMaster will initiate a cash tender offer for all of the outstanding
shares of common stock of American Residential Services, Inc. at a price of
$5.75 per share. The total acquisition cost is approximately $92 million in cash
and $180 million of assumed indebtedness. Completion of the tender offer is
subject to certain conditions, including the tender of at least 52% of the
outstanding ARS shares. The offer and withdrawal rights are scheduled to expire
on April 26, 1999 unless the offer is extended.

5
<PAGE>

SUMMARY FINANCIAL DATA
(In thousands, except for per share and percentage data)(1)

We are providing the following summary financial information about us for
your benefit. This information is derived from our audited financial statements
for each of the fiscal years shown below. The following information is only a
summary and you should read it in connection with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in this
Prospectus and our consolidated financial statements and notes beginning on page
F-1 of this Prospectus.

<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Operating revenue................................. $4,724,119 $3,961,502 $3,458,328 $3,202,504 $2,985,207
Cost of services rendered and
products sold.................................. 3,679,612 3,058,160 2,681,008 2,499,700 2,356,435
Selling and administrative expenses............... 648,085 559,409 482,102 450,937 414,746
---------- ---------- ---------- ---------- ----------
Operating income.................................. 396,422 343,933 295,218 251,867 214,026

Non-operating expense (income):
Interest expense(2)............................ 92,945 76,447 38,298 35,855 31,543
Interest and investment income................. (15,301) (14,304) (10,183) (7,310) (5,389)
Minority interest.............................. -- 7,511 14,706 45,715 45,234
---------- ---------- ---------- ---------- ----------
Income before income taxes........................ 318,778 274,279 252,397 177,607 142,638
Provision for income taxes (pro forma
corporate form prior to 1998)(3)............... 128,786 110,809 101,968 71,753 57,626
---------- ---------- ---------- ---------- ----------
Net income (pro forma corporate form
prior to 1998)................................. $ 189,992 $ 163,470 $ 150,429 $ 105,854 $ 85,012
========== ========== ========== ========== ==========
Basic net income per share (pro forma
corporate form prior to 1998)(3)(6)............ $ 0.66 $ 0.57 $ 0.47 $ 0.41 $ 0.33
Diluted net income per share (pro
forma
corporate form prior to
1998)(3)(6).................................... $ 0.64 $ 0.55 $ 0.46 $ 0.39 $ 0.32

Cash distributions per share...................... $ 0.33 $ 0.31 $ 0.29 $ 0.28 $ 0.27
PARTNERSHIP INFORMATION: (3)
Income before income taxes........................ $ 274,279 $ 252,397 $ 177,607 $ 142,638
Provision for income taxes........................ 10,203 7,257 5,588 2,755
One time tax benefit relating to
change in tax status(4)........................ 65,000 -- -- --
---------- ---------- ---------- ----------
Net income........................................ $ 329,076 $ 245,140 $ 172,019 $ 139,883
========== ========== ========== ==========
OTHER DATA:
EBITDA(7)......................................... $ 516,328 $ 443,788 $ 369,701 $ 279,450 $ 228,389
Net cash provided from operations (5)............. 405,539 371,889 341,386 297,425 253,863
Property additions................................ 75,297 46,232 42,952 44,624 32,202
Operating income margin........................... 8.4% 8.7% 8.5% 7.9% 7.2%

Percent increase in pro forma diluted
net income per share........................... 16.4% 19.6% 17.9% 21.9% 18.5%

FINANCIAL POSITION AT PERIOD END:
Working capital (5)............................... $ (83,495) $ 35,907 $ 73,782 $ 20,309 $ 26,650
Total assets...................................... 2,914,851 2,475,224 1,846,841 1,649,890 1,230,839
Long-term debt.................................... 1,076,167 1,247,845 482,315 411,903 386,511
Shareholders' equity (2).......................... 956,486 524,438 796,767 746,660 307,266
</TABLE>

_______________________

(1) All per share data reflect the three-for-two share splits in 1996, 1997 and
1998.
(2) In 1997, the Company incurred bank borrowings of approximately $91 million
to finance the cash portion of the acquisition of Barefoot, Inc.
("Barefoot") and approximately $626 million to fund the repurchase of the 19
percent ownership interest in ServiceMaster held by Waste Management, Inc.
("WMX"). The increase in interest expense and the decrease in shareholders'
equity (as well as the number of shares

6
<PAGE>

outstanding) in 1997 is primarily the result of such borrowings and stock
repurchase. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(3) The Company converted from partnership to corporate form on December 26,
1997. See "The Reincorporation." Prior to the Reincorporation (as defined),
the partnership was not subject to federal or state income taxes since its
taxable income was allocated to the Company's shareholders. As a result of
the Reincorporation, the Company is a taxable entity and is responsible for
such payments. Pro forma information is presented to compare the continuing
results of operations as if the Company were a taxable corporation in the
periods presented. The pro forma provision for income taxes has been
calculated assuming that the Company's effective tax rate was approximately
40 percent of pre-tax earnings. The Company's historical net income per
share as a partnership was as follows:

<TABLE>
<CAPTION>
BEFORE ONE-TIME TAX BENEFIT (4) ACTUAL
-------------------------------- --------------------------
1997 1996 1995 1994 1997 1996 1995 1994
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic............ $0.92 $0.77 $0.66 $0.55 $1.15 $0.77 $0.66 $0.55
Diluted.......... $0.89 $0.75 $0.64 $0.53 $1.10 $0.75 $0.64 $0.53
</TABLE>

(4) As a result of the Reincorporation, the Company recorded a deferred tax
asset in 1997 that represents the tax effect of the difference between the
book and tax basis of the Company's assets and liabilities. This resulted in
the recognition of a deferred tax asset on the balance sheet and a
corresponding $65 million gain in the tax benefit line of the income
statement. The actual economic benefit to the Company of the tax basis step-
up significantly exceeds the amount of the gain and is expected to result in
a reduction of annual cash tax payments exceeding $25 million per year for
15 years following Reincorporation. See "The Reincorporation."
(5) In the first year after reincorporation, the Company was able to defer the
payment of its 1998 federal taxes until March 1999. Therefore the 1998 cash
flow is fairly comparable to 1997 when the Company was in partnership form
and paid no taxes. The current liabilities include the 1998 tax payable
amount.
(6) Basic earnings per share are calculated based on 289,315 shares in 1998,
285,944 shares in 1997, 317,381 shares in 1996, 260,382 shares in 1995, and
255,650 shares in 1994 while diluted earnings per share are calculated based
on 298,887 shares in 1998, 299,640 shares in 1997, 330,429 shares in 1996,
273,203 in 1995 and 266,892 shares in 1994. (Numbers are in thousands.)
(7) Represents earnings before interest expense, taxes, depreciation and
amortization ("EBITDA"). EBITDA is a commonly-used supplemental measurement
of a company's ability to generate cash flow. Management believes that
EBITDA is another measure which demonstrates the cash-generating abilities
of the Company's businesses. However, EBITDA should not be considered an
alternative to net income in measuring the Company's performance or used as
an exclusive measure of cash flow because it does not consider the impact of
working capital growth, capital expenditures, debt principal reductions or
other sources and uses of cash which are disclosed in the Consolidated
Statements of Cash Flows.

7
<PAGE>

REINCORPORATION OF THE PREDECESSOR LIMITED PARTNERSHIP

ServiceMaster began its operations in 1947 and the shares of the parent
entity in the ServiceMaster enterprise have been publicly traded since 1962. At
the end of 1986, the parent entity was converted from a publicly traded
corporation to a publicly traded limited partnership (the "Parent Partnership")
in order to enable most of the operations of the enterprise to be conducted free
of federal corporate income tax. However, a year later, in 1987, Congress
adopted legislation which effectively eliminated the benefits of operating in
partnership form after December 31, 1997. Accordingly, on December 26, 1997, the
Company succeeded to and became substituted for the Parent Partnership as the
parent entity in the ServiceMaster enterprise in a reorganization (the
"Reincorporation") in which all of the outstanding limited partnership interests
in the Parent Partnership were converted to shares of Common Stock of the
Company on a one-for-one basis. Soon thereafter, the Parent Partnership and its
immediate subsidiary (The ServiceMaster Company Limited Partnership) were merged
with and into the Company and the existence of the two partnerships was thereby
terminated.

The Reincorporation transactions were not taxable events for either
ServiceMaster or its shareholders. However, the Reincorporation did result in a
tax benefit to the Company in the form of a step-up in the tax basis of certain
of its assets. The basis step-up will be amortized against the Company's taxable
income over the next 15 years and is expected to result in a reduction of annual
cash tax payments exceeding $25 million per year over this period.

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This Prospectus contains or incorporates by reference certain forward-
looking statements within the meaning of Section 27A of the 1933 Act and Section
21E of the 1934 Act and the Company intends that such forward-looking statements
be subject to the safe harbors created thereby. Such forward-looking statements
involve risks and uncertainties and include, but are not limited to, statements
regarding future events and the Company's plans, goals and objectives. Such
statements are generally accompanied by words such as "intend," "anticipate,"
"believe," "estimate," "expect" or similar statements. The Company's actual
results may differ materially from such statements. Factors that could cause or
contribute to such differences are set forth below as well as those factors
discussed elsewhere in this Prospectus and in the documents incorporated herein
by reference. Although the Company believes that the assumptions underlying its
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the results
contemplated in such forward-looking statements will be realized. The inclusion
of such forward-looking information should not be regarded as a representation
by the Company or any other person that the future events, plans or expectations
contemplated by the Company will be achieved. Furthermore, past performance in
operations and share price is not necessarily predictive of future performance.

SEASONALITY AND IMPACT OF WEATHER CONDITIONS. The Company's lawn care,
landscaping and pest control businesses are highly seasonal in nature, with a
significant portion of their net revenues occurring in the spring and summer
months of each year. Adverse weather conditions could have a negative impact on
the demand for the Company's lawn care, landscaping and pest control services.

INCREASED COMPETITION. The service industries in which the Company operates
are highly competitive with limited barriers to entry. The entry of new
competitors into one or more of the markets served by the Company could impact
the demand for the Company's services as well as impose additional pricing
pressures.

LABOR SHORTAGES. Most of the services provided by the Company are highly
labor intensive. In the event of a labor shortage, the Company may experience
difficulty in delivering its services in a high-quality manner and may be forced
to increase wages in order to attract a sufficient number of employees, which
could result in higher operating costs for the Company.

CONTINUED CONSOLIDATION OF THE U.S. HOSPITAL MARKET. In recent years, there
has been an ongoing consolidation of hospitals in the health care market. This
continued consolidation could adversely impact the level of

8
<PAGE>

demand for the Company's health care management services and the prices which
the Company can charge for such services.

ABILITY TO CONTINUE ACQUISITION STRATEGY. The Company plans to continue to
pursue opportunities to expand through acquisitions. The Company's ability to
continue to make acquisitions at reasonable prices and to integrate the acquired
businesses are important factors in the Company's future growth.

9
<PAGE>

SECURITIES COVERED BY THIS PROSPECTUS

This Prospectus covers shares of Common Stock that may be issued from time
to time in the future by the Company on the completion of acquisitions of
assets, businesses or securities, or on the payment of dividends on or
conversion of shares of preferred stock or the conversion of or payment of
interest on convertible notes issued in connection with such acquisitions of
other businesses, properties or securities. The consideration offered by the
Company in such acquisitions, in addition to the shares of Common Stock offered
by this Prospectus, may include cash, debt or other securities (which may be
convertible into shares of Common Stock covered by this Prospectus), or
assumption by the Company of liabilities of the business, properties or
securities being acquired or of their owners, or a combination thereof.

It is expected that the terms of acquisitions involving the issuance of the
shares of Common Stock covered by this Prospectus will be determined by direct
negotiations with the owners or controlling persons of the assets, businesses or
securities to be acquired, and that the shares of Common Stock issued will be
valued at prices reasonably related to the market price of the Common Stock
either at or about the time an agreement is entered into concerning the terms of
the acquisition or at or about the time the shares are delivered. No
underwriting discounts or commissions will be paid, although finder fees and
certain other fees may be paid in connection with certain acquisitions. Any
person receiving such fees may be deemed to be an "underwriter" within the
meaning of the 1933 Act, and any profit on the resale of shares of Common Stock
purchased by them may be deemed to be underwriting commissions or discounts
under the 1933 Act.

The Company may from time to time, in an effort to maintain an orderly
market in the Common Stock or for other reasons, negotiate agreements with
persons receiving Common Stock covered by this Prospectus that will limit the
number of shares that may be sold by such persons at specified intervals. Such
agreements may be more restrictive than restrictions on sales made pursuant to
the exemption from registration requirements of the 1933 Act, including the
requirements under Rule 144 or Rule 145(d), and certain persons party to such
agreements may not otherwise be subject to such 1933 Act requirements. The
Company anticipates that, in general, such negotiated agreements will be of
limited duration and will permit the recipients of Common Stock issued in
connection with acquisitions to sell up to a specified number of shares per
business day or days.

With the consent of the Company, this Prospectus may also be used by
persons who have received or will receive from the Company Common Stock covered
by this Prospectus and who may wish to sell such stock under circumstances
requiring or making desirable its use. This Prospectus may also be used, with
the Company's consent, by pledgees, donees or assignees of such persons. The
Company's consent to any such use may be conditioned upon the agreement by such
persons not to offer more than a specified number of shares following
supplements or amendments to this Prospectus, which the Company may agree to use
its best efforts to prepare and file at certain intervals. The Company may
require that any such offering be effected in an organized manner through
securities dealers.

Sales by means of this Prospectus may be made from time to time privately
at prices to be individually negotiated with the purchasers, or publicly through
transactions in the over-the-counter market or on a securities exchange (which
may involve block transactions), at prices reasonably related to market prices
at or about the time of sale or at negotiated prices. Broker-dealers
participating in such transactions may act as agent or as principal and, when
acting as agent, may receive commissions from the purchasers as well as from the
sellers (if also acting as agent for the purchasers). The Company may indemnify
any broker-dealer participating in such transactions against certain
liabilities, including liabilities under the 1933 Act. Profits, commissions and
discounts on sales by persons who may be deemed to be underwriters within the
meaning of the 1933 Act may be deemed underwriting compensation under the 1933
Act.

Stockholders may also offer shares of stock covered by this Prospectus by
means of prospectuses under other registration statements or pursuant to
exemptions from the registration requirements of the 1933 Act, including sales
which meet the requirements of Rule 144 or Rule 145(d) under the 1933 Act.
Stockholders should seek the advice of their own counsel with respect to the
legal requirements for such sales.

10
<PAGE>

SELECTED FINANCIAL DATA
(In thousands, except for per share and Percentage data)(1)

<TABLE>
<CAPTION>
Year Ended December 31,

1998 1997 1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:.................... $4,724,119 $3,961,502 $3,458,328 $3,202,504 $2,985,207
Operating revenue
Cost of services rendered and
products sold....................... 3,679,612 3,058,160 2,681,008 2,499,700 2,356,435

Selling and administrative expenses... 648,085 559,409 482,102 450,937 414,746
---------- ---------- ---------- ---------- ----------
Operating income...................... 396,422 343,933 295,218 251,867 214,026
Non-operating expense (income):
Interest expense(2)................. 92,945 76,447 38,298 35,855 31,543
Interest and investment income...... (15,301) (14,304) (10,183) (7,310) (5,389)
Minority interest................... -- 7,511 14,706 45,715 45,234
---------- ---------- ---------- ---------- ----------
Income before income taxes............ 318,778 274,279 252,397 177,607 142,638
Provision for income taxes (pro forma
corporate form prior to 1998)(3).... 128,786 110,809 101,968 71,753 57,626
---------- ---------- ---------- ---------- ----------
Net income (pro forma corporate form $ 189,992 $ 163,470 $ 150,429 $ 105,854 $ 85,012
prior to 1998)...................... ---------- ---------- ---------- ----------
Basic net income per share (pro forma
corporate form prior to
1998)(3)(6)......................... $ 0.66 $ 0.57 $ 0.47 $ 0.41 $ 0.33
Diluted net income per share (pro
forma corporate form prior to
1998)(3)(6)......................... $ 0.64 $ 0.55 $ 0.46 $ 0.39 $ 0.32
Cash distributions per share.......... $ 0.33 $ 0.31 $ 0.29 $ 0.28 $ 0.27
PARTNERSHIP INFORMATION: (3)
Income before income taxes............ $ 274,279 $ 252,397 $ 177,607 $ 142,638
Provision for income taxes............ 10,203 7,257 5,588 2,755
One time tax benefit relating to
change in tax status(4)............. 65,000 -- -- --
---------- ---------- ---------- ----------
Net income............................ $ 329,076 $ 245,140 $ 172,019 $ 139,883
========== ========== ========== ==========

OTHER DATA:
EBITDA(7)............................. $ 516,328 $ 443,788 $ 369,701 $ 279,450 $ 228,389
Net cash provided from operations (5) 405,539 371,889 341,386 297,425 253,863
Property additions.................... 75,297 46,232 42,952 44,624 32,202
Operating income margin............... 8.4% 8.7% 8.5% 7.9% 7.2%

Percent increase in pro forma diluted 16.4% 19.6% 17.9% 21.9% 18.5%
net income per share................

FINANCIAL POSITION AT PERIOD END:
Working capital (5)................... $ (83,495) $ 35,907 $ 73,782 $ 20,309 $ 26,650
Total assets.......................... 2,914,851 2,475,224 1,846,841 1,649,890 1,230,839
Long-term debt........................ 1,076,167 1,247,845 482,315 411,903 386,511
Shareholders' equity (2).............. 956,486 524,438 796,767 746,660 307,266
</TABLE>

(1) All per share data reflect the three-for-two share splits in 1996, 1997 and
1998.

(2) In 1997, the Company incurred bank borrowings of approximately $91 million
to finance the cash portion of the acquisition of Barefoot, Inc.
("Barefoot") and approximately $626 million to fund the repurchase of the 19
percent ownership interest in ServiceMaster held by Waste Management, Inc.
("WMX"). The increase in interest expense and the decrease in shareholders'
equity (as well as the number of shares

11
<PAGE>

outstanding) in 1997 is primarily the result of such borrowings and stock
repurchase. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

(3) The Company converted from partnership to corporate form on December 26,
1997. See "The Reincorporation." Prior to the Reincorporation (as defined),
the partnership was not subject to federal or state income taxes since its
taxable income was allocated to the Company's shareholders. As a result of
the Reincorporation, the Company is a taxable entity and is responsible for
such payments. Pro forma information is presented to compare the continuing
results of operations as if the Company were a taxable corporation in the
periods presented. The pro forma provision for income taxes has been
calculated assuming that the Company's effective tax rate was approximately
40 percent of pre-tax earnings. The Company's historical net income per
share as a partnership was as follows:

<TABLE>
<CAPTION>
BEFORE ONE-TIME TAX BENEFIT (4) ACTUAL
------------------------------- --------------------------
1997 1996 1995 1994 1997 1996 1995 1994
------- ------ ------ ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic...................................... $0.92 $0.77 $0.66 $0.55 $1.15 $0.77 $0.66 $0.55
Diluted.................................... $0.89 $0.75 $0.64 $0.53 $1.10 $0.75 $0.64 $0.53
</TABLE>

(5) In the first year after reincorporation, the Company was able to defer the
payment of its 1998 federal taxes until March 1999. Therefore the 1998 cash
flow is fairly comparable to 1997 when the Company was in partnership form
and paid no taxes. The current liabilities include the 1998 tax payable
amount.

(6) Basic earnings per share are calculated based on 289,315 shares in 1998,
285,944 shares in 1997, 317,381 shares in 1996, 260,382 shares in 1995, and
255,650 shares in 1994 while diluted earnings per share are calculated based
on 298,887 shares in 1998, 299,640 shares in 1997, 330,429 shares in 1996,
273,203 in 1995 and 266,892 shares in 1994. (Numbers are in thousands.)

(7) Represents earnings before interest expense, taxes, depreciation and
amortization ("EBITDA"). EBITDA is a commonly-used supplemental measurement
of a company's ability to generate cash flow. Management believes that
EBITDA is another measure which demonstrates the cash-generating abilities
of the Company's businesses. However, EBITDA should not be considered an
alternative to net income in measuring the Company's performance or used as
an exclusive measure of cash flow because it does not consider the impact of
working capital growth, capital expenditures, debt principal reductions or
other sources and uses of cash which are disclosed in the Consolidated
Statements of Cash Flows.

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MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

(All share and per share data reflect the three-for-two share splits in August
1998, June 1997 and June 1996)

The terms "Company" and "ServiceMaster" refer to the operations of ServiceMaster
Limited Partnership and The ServiceMaster Company, its successor corporation.

1998 COMPARED WITH 1997

Revenues increased 19 percent to $4.7 billion through a combination of
acquisitions and solid growth from base operations. Approximately eight percent
of the revenue increase resulted from internal growth and small tuck-in
acquisitions in existing service lines, primarily lawn care and pest control,
with another six percent coming from platform acquisitions primarily in plumbing
and landscaping. The remaining five percent of the revenue growth represented
the acquisition of a professional employer organization in August 1997. The
professional employer organization has a significant impact on revenues and
margins, because the entire employee payroll of the customer is recognized both
as revenue and operating cost. As a result, the margins are low in this business
and reduce the Company's consolidated operating margins. Operating income
increased 15 percent to $396 million, while margins decreased to 8.4 percent of
revenue from 8.7 percent in 1997. Operating margins excluding the professional
employer organization improved 10 basis points over last year, reflecting the
continued strong growth of higher margin businesses, productivity improvements
and the successful integration of acquisitions at Consumer Services.

Pro forma information is presented for 1997 and 1996 to compare the
continuing results of operations as if the Company had been a taxable
corporation in all years. On this basis, net income grew 16 percent to $190
million. Basic and diluted earnings per share increased 16 percent to $.66 and
$.64, respectively.

The Consumer Services business unit achieved a 23 percent increase in
revenue, reflecting strong growth from both internal sources and acquisitions,
including the Rescue Rooter plumbing business and commercial landscaping
companies. Net income increased 27 percent, reflecting solid double-digit profit
increases at all of the companies. TruGreen-ChemLawn reported strong growth in
revenues and profits, reflecting base business growth and the entry into the
commercial landscape market through the acquisition of several companies. The
successful integration of acquisitions and other cost initiatives helped offset
the effects of severe summer weather conditions in many regions of the country.
Terminix achieved strong double-digit growth in revenues and profits, resulting
from excellent increases in termite completions and renewals and improved
margins. Higher customer retention levels and efficiency improvements
contributed to the increased margins. American Home Shield continued to
experience exceptional momentum with very strong double-digit increases in
warranty contracts written due to excellent growth in real estate and direct-to-
consumer sales, as well as strong renewal growth. This volume increase was
partially affected by increased service orders relating to expensive air
conditioning repairs due to the extreme heat experienced in many parts of the
country. The franchise operations, ServiceMaster Residential/Commercial and
Merry Maids, achieved solid revenue increases and higher margins, reflecting
improvements in company-owned operations and cost controls. The Rescue Rooter
operations reported very good results, reflecting improved marketing efforts,
productivity improvements and effective cost controls.

The traditional Management Services business achieved a seven percent
revenue increase as a result of acquisitions and modest growth in the base
business. Profits increased significantly due to a $38 million pretax gain
relating to the formation of a strategic venture between ServiceMaster and Texas
Utilities Company. The new venture has acquired all the assets of ServiceMaster
Energy Management and will be owned 85 percent by Texas Utilities and 15 percent
by ServiceMaster. This new business combination will provide the Company with an
expanded ability to provide comprehensive energy solutions to customers.
Excluding this gain, profits were one percent below the prior year level as
increases in the Business & Industry and Education markets were offset by
reduced profitability in the Healthcare market. The traditional Healthcare
market reported a slight decline in revenues with lower profits than last year
as a result of continued industry pressures and additional investments in the
business compared with the prior year. The Company achieved significant revenue
and profit increases in the Business & Industry market, reflecting the
successful integration of acquisitions and increased sales in the base business.
The Education market reported strong growth in profits due to

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better customer retention and the favorable effect of eliminating costs incurred
last year related to unwinding a large contract.

Other operations includes primarily Diversified Health Services, which
provides services and products to the long-term care market and Employer
Services, the professional employer organization. Revenues increased
significantly as the 1998 results include a full year of the professional
employer organization that was acquired in August 1997. Operating income was
down significantly from the prior year, reflecting a large charge related
primarily to the home health care operations and operational losses. In late
1998, the Company completed a strategic review of its Home Health Care business
and concluded that, without significant investment to make home health care one
of its core businesses, it could not profitably provide high quality service in
the future and continue to satisfy all the changes and the requirements of new
governmental reimbursement programs. The Company plans to sell its direct
operations of home health care agencies and certain support operations. In
addition, the Company is discontinuing its outsourced management contracts of
home health care agencies, but will continue to provide consulting services to
hospitals and other providers of home health care. The Company incurred and
established reserves of approximately $32 million (pre-tax) relating to home
health care, which included a write-down for the impairment of assets and costs
relating to exiting customer arrangements. An additional $6 million pretax
charge was recorded that was specifically designated for other Diversified
Health Services reserve needs. In addition to these charges and losses in home
health care, the decrease in operating income reflects margin reductions in
other Diversified Health Services operations and the non-recurrence of
transaction gains recognized in the prior year.

On a consolidated basis, cost of services rendered and products sold
increased 20 percent and increased as a percentage of revenue to 77.9 percent in
1998 from 77.2 percent in 1997. The addition of Employer Services had an impact
on the overall increase in costs as this business line carries a lower gross
margin level than the rest of the enterprise. Excluding Employer Services, cost
of services rendered and products sold decreased 10 basis points, as a
percentage of revenue. This reflects the changing mix of the enterprise as
Consumer Services increased in size relative to the overall business of the
Company. The Consumer Services unit operates at a higher gross profit margin
than the Management Services business unit, but incurs relatively higher levels
of selling and administrative costs.

Consolidated selling and administrative expenses increased 16 percent over
the prior year, and as a percentage of revenue, decreased from 14.1 percent in
1997 to 13.7 percent in 1998.

Interest expense increased over the prior year, reflecting increased debt
levels in the first quarter associated with the 1997 repurchase of shares
previously held by Waste Management, Inc. The impact of larger seasonal
borrowings, primarily due to acquisitions and higher interest rates associated
with the refinancing of floating-rate bank debt with longer term, fixed-rate
debt, was partially offset by proceeds from the May 1998 equity offering.

Interest and investment income increased over the prior year levels due to
growth in the investment portfolio at American Home Shield, as well as gains
realized on sales of marketable securities.

Minority interest expense decreased as the General Partners' interests in
the parent entities were eliminated upon reincorporation.

1997 COMPARED WITH 1996

Revenues increased 15 percent to $4 billion, reflecting the effect of
acquisitions and growth from base operations. Operating income increased 17
percent to $344 million, while margins increased to 8.7 percent of revenue from
8.5 percent in 1996, reflecting the continued strong growth of higher margin
businesses, productivity improvements, and the integration of the acquired
Barefoot operations. These improvements were offset in part by the impact of the
acquired professional employer organization, which has significantly lower
margins than the rest of the Company's businesses. Operating income margins
would have improved 50 basis points excluding this acquisition.

Pro forma information is presented which compares the continuing results of
operations as if the Company had been a taxable corporation in 1997 and 1996. On
this basis, net income grew nine percent to $163 million. Basic earnings per
share increased 21 percent to $.57 and diluted earnings per share were up 20
percent to $.55. Earnings per share grew at a higher rate than net income due to
the transaction with Waste Management, Inc. (WMX) in which the Company

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<PAGE>

repurchased WMX's 19 percent ownership interest in ServiceMaster (61.1 million
shares) for $626 million on April 1, 1997. This transaction increased interest
expense significantly and reduced shares outstanding.

Historical partnership net income, which did not include a provision for
corporate taxes, was $329 million, including a one-time tax gain of $65 million
realized upon reincorporation. The resulting historical basic and diluted
earnings per share were $1.15 and $1.10, respectively. This gain represented the
difference between the tax and book basis of the enterprise's assets and
liabilities, which was recognized as a result of the reincorporation.
Partnership net income excluding this gain increased eight percent to $264
million. On this basis, basic and diluted earnings per share were $.92 and $.89,
reflecting increases of 19 percent.

The Consumer Services business unit achieved a 14 percent increase in
revenue and a 21 percent increase in pro forma net income, reflecting the
successful integration of the Barefoot business (which was acquired in February
1997), combined with good growth from base operations and other acquisitions.
The TruGreen-ChemLawn operations achieved strong double-digit growth in revenues
and profits, reflecting the Barefoot acquisition, increases in the customer
base, improved branch efficiencies, strong sales of ancillary products and
favorable weather conditions throughout most of the year. Terminix achieved
solid growth in revenue and profits for the year. Strong growth in renewals and
productivity improvements offset the effects of adverse weather conditions on
termite operations and increased termite remediation costs. American Home Shield
achieved very strong double-digit increases in both revenues and profits, with
excellent increases in contract renewals and direct-to-consumer sales. This is
consistent with an overall strategy to expand channels of distribution in this
business, which have historically been concentrated in the residential resale
market. ServiceMaster Residential/Commercial and Merry Maids reported modest
profit growth and solid revenue growth for the year, reflecting the conversion
of certain franchises and distributors to company-owned operations.

The traditional Management Services business segment achieved five percent
growth in revenue, reflecting the Premier Manufacturing Support Services
(Premier) acquisition completed in 1996 and, to a lesser degree, growth in the
base business. The base business growth resulted from improvements in Healthcare
and Business & Industry, offset by reductions in Education. Pro forma net income
was up three percent compared with the prior year. Despite continuing
competitive pressures and industry consolidation in the acute care market, the
Company achieved solid revenue increases and improved customer retention in the
Healthcare market. Reported profits in this market were comparable to the prior
year. Within the acute care sector, good growth was realized from sales of the
IntegratedService product, which provides comprehensive service solutions to
clients. The Company achieved significant revenue and profit increases in the
Business & Industry market, largely as a result of the successful integration of
the Premier acquisition and modest growth in the base business. In the Education
market, revenues and profits declined due to the discontinuation of certain
large accounts and margin pressures in certain accounts.

Revenues in other operations increased significantly, reflecting the August
1997 acquisition of Certified Systems, Inc. (CSI) which added approximately $155
million in revenue and minimal profits after acquisition-related costs. CSI is a
professional employer organization that provides clients with administrative
processing of payroll, workers' compensation insurance, health insurance,
unemployment insurance, and other employee benefit plans. Other operations
primarily include CSI and Diversified Health Services. Pro forma net income
reflects the additional interest expense incurred at the parent level relating
to the WMX share repurchase.

On a consolidated basis, cost of services rendered and products sold
increased 14 percent and decreased slightly as a percentage of revenue to 77.2
percent in 1997 from 77.5 percent in 1996. This reflects the changing mix of the
enterprise as Consumer Services increased in size relative to the overall
business of the Company. The Consumer Services unit operates at a higher gross
profit margin than the Management Services business unit, but incurs relatively
higher levels of selling and administrative costs. However, much of this
reduction in cost of goods sold was offset by the acquisition of CSI, which
operates at significantly lower gross margins than the Company's other
businesses. Without CSI, cost of goods sold would have been 76.5 percent of
revenue in 1997.

Consolidated selling and administrative expenses increased 16 percent over
the prior year, and as a percentage of revenue, increased from 13.9 percent in
1996 to 14.1 percent in 1997, reflecting the changing business mix of the
Company described above.

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<PAGE>

Interest expense increased over the prior year primarily due to increased
debt levels associated with the repurchase of shares previously held by WMX and
acquisitions.

Interest and investment income increased over the prior year due to growth
in, and strong returns from, the investment portfolio at American Home Shield,
as well as a gain associated with the sale of an interest in an international
joint venture.

Minority interest expense decreased due to the repurchase of minority
ownership interests in subsidiary entities.

1998 FINANCIAL POSITION

The Company reported a nine percent increase in cash flows from operations
to $406 million and a two percent increase in free operating cash flows (defined
as cash flows from operations less net property additions) to $337 million. Cash
flows grew at a lower rate than net income, primarily due to the acceleration of
customer prepayments at TruGreen-ChemLawn into 1997, the full year funding of
preseason investments for Barefoot, and the timing of interest payments. Free
operating cash flow represents the cash available for enhancing shareholder
value (e.g., acquisitions, dividends and share repurchases) after financing the
growth of existing business units. The Company's free operating cash flows have
consistently exceeded recurring net income as a result of relatively low working
capital and fixed asset requirements, combined with the effects of noncash
charges for depreciation and amortization.

In the first year following reincorporation, the Company was able to defer
the payment of its federal taxes until March 1999. At that time the Company will
pay its 1998 obligation and will begin making estimated payments for its 1999
liability. Reported cash from operations reflects the deferral of this 1998 tax
payment which is approximately $83 million. Since the Company is able to defer
its 1998 tax payment, the cash flow is fairly comparable to last year when the
Company was in partnership form and paid no federal taxes. As a result of the
reincorporation, the Company also recognized a step-up in the tax basis of its
assets, which is being amortized against taxable income. The step-up resulted in
a reduction of the Company's cash tax payments in excess of $25 million per
annum for the current year and for the ensuing 14 years.

Cash and marketable securities totaled approximately $120 million at
December 31, 1998. Debt levels decreased, reflecting the use of proceeds from
the May 1998 equity offering to pay down debt, as well as strong cash from
operations partially offset by acquisitions, capital spending and distributions.
The Company is a party to a number of long-term debt agreements which require it
to comply with certain financial covenants, including limitations on
indebtedness, restricted payments, fixed charge coverage ratios and net worth.
The Company is in compliance with the covenants related to these debt
agreements. In addition, the Company had $700 million of unused commitment on
its revolving bank facility at December 31, 1998. Management believes that funds
generated from operations and other existing financial resources will continue
to be adequate to satisfy the ongoing operating needs of the Company.

During the year, the Company filed a Form S-3 registration statement and
21.2 million Company shares were sold at $19.17 per share. This included
approximately 11.4 million of newly-issued shares from the Company and 9.8
million shares sold by existing shareholders. The net proceeds to the Company
after the underwriting discount and offering expenses were approximately $209
million and were used to reduce outstanding debt under existing bank credit
facilities, thereby reducing interest expense and increasing the Company's
financial flexibility.

ServiceMaster also filed a Form S-1 shelf registration statement to issue up
to 5.3 million shares of common stock in connection with future unidentified
acquisitions. As of December 31, 1998, approximately 3.5 million shares had been
issued with 1.8 million shares remaining available for future acquisitions.

In February 1998, the Company also completed a $300 million senior unsecured
dual-tranche debt offering. The offering consisted of $150 million at 7.10
percent due March 1, 2018 and $150 million at 7.25 percent due March 1, 2038.
The net proceeds were used to refinance borrowings under bank credit facilities,
reducing the Company's exposure to short-term interest rate fluctuations.

The Company completed a number of acquisitions in 1998, which included
primarily lawn care, commercial landscape and pest control companies. Three of
the largest transactions were Rescue Industries, Inc., National Britannia

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<PAGE>

and Ruppert Landscape Company. Rescue Industries, Inc., which operates under the
trade name Rescue Rooter, was acquired in January 1998 and is one of the largest
companies in America specializing in plumbing and drain cleaning services. The
October 1998 acquisition of National Britannia, the third largest pest control
company in the United Kingdom, further strengthens the company's ability to grow
its Terminix business in Europe and continues the strategy of the enterprise to
expand internationally. Ruppert Landscape Company was purchased in August 1998
and represents one of the Mid-Atlantic's largest commercial landscape companies.

In March 1999, the Company is expected to complete the acquisition of
LandCare USA, Inc. (LandCare) in a stock-for-stock merger. The acquisition of
LandCare, one of the nation's leading commercial landscape companies, will
significantly broaden the Company's landscape initiative and will provide
TruGreen-ChemLawn the opportunity to fully integrate its traditional fertilizer
and weed control services with landscape maintenance and installation.

Accounts receivable increased, reflecting general business growth and
acquisitions. Property and equipment increased primarily due to investments in
computer systems and technology upgrades throughout the enterprise as well as
general business growth. The Company does not have any material capital
commitments at this time. The increase in intangible assets reflects the above
mentioned acquisitions as well as various commercial landscape companies and
other smaller companies.

Accounts payable and other accrued liabilities increased due to general
business growth and the effects of acquisitions. As previously discussed, there
is a significant current liability relating to the income taxes payable on 1998
earnings. Deferred revenues increased primarily as a result of strong growth in
warranty contracts written at American Home Shield.

Total shareholders' equity increased to $956 million in 1998 from $524
million at December 31, 1997, reflecting the May 1998 equity offering, strong
growth in earnings and shares issued for acquisitions, partially offset by
shareholder distributions. The Company continues to repurchase shares in the
open market or in privately negotiated transactions pursuant to the
authorization previously granted by the Board of Directors.

At year end, the aggregate market value of the Company's outstanding shares
exceeded $6.5 billion. ServiceMaster shareholders have experienced compounded
total returns exceeding 20 percent annually over the last three-, 10- and 20-
year periods.

Cash distributions paid directly to shareholders totaled $96 million, or
$.33 per share, a six percent per share increase over the prior year. The total
amount of cash distributions, including payments made to the shareholders' trust
described below, decreased 52 percent from the prior year, reflecting a
substantial reduction in payments to the shareholders' trust, partially offset
by the six percent increase in direct shareholder distributions.

The shareholders' trust was established for the benefit of Partnership
shareholders. Each year, the trust was allocated a portion of the Partnership's
taxable income and received cash payments in amounts sufficient to pay its
income tax obligations resulting from this income allocation. Cash distributions
made to the trust in 1997 totaled $65 million. The trust was terminated upon
reincorporation and had no residual resources. In 1998, it received
approximately $20 million in tax refunds relating to its final 1997 tax return.

Several years ago, the Company adopted a pattern of annual increases in
dividends to shareholders for the remaining term of the Partnership. In
corporate form, the Company has increased, and expects to continue to increase,
its dividend payment each year. The timing and amount of future dividend
increases will be at the discretion of the Board of Directors and will depend
on, among other things, the Company's corporate finance objectives and cash
requirements. The Company has announced its intended cash dividends for 1999 of
$.36 per share.

Earnings before interest, taxes, depreciation and amortization (EBITDA) is a
commonly-used supplemental measurement of a company's ability to generate cash
flow and is used by many of the Company's investors and lenders. Management
believes that EBITDA is another measure which demonstrates the exceptional cash-
generating abilities of the Company's businesses. EBITDA in 1998 of $516 million
has grown 16 percent, comparable to the growth in net income. EBITDA should not
be considered an alternative to net income in measuring the Company's
performance, or be

17
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used as an exclusive measure of cash flow because it does not consider the
impact of working capital growth, capital expenditures, debt principal
reductions or other sources and uses of cash which are disclosed in the
Consolidated Statements of Cash Flows.

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BUSINESS

THE COMPANY; PRINCIPAL BUSINESS GROUPS

ServiceMaster is a holding company whose shares of common stock are
traded on the NYSE. Through its subsidiaries, the Company is engaged in
providing a variety of specialty services to homeowners and commercial
facilities and supportive management services in several markets, including
the healthcare market, the education market and certain segments of the
business and industry market.

The Company is organized into two principal operating groups:
ServiceMaster Consumer Services and ServiceMaster Management Services. The
Company also has a third operating group: ServiceMaster Employer Services.
Each of these operating groups is headed by a limited partnership or a
corporation which has its own group of operating subsidiaries. The parent
companies for the principal operating groups are ServiceMaster Consumer Services
Limited Partnership, which was formed in the summer of 1990, and ServiceMaster
Management Services Limited Partnership, which was formed in December 1991. The
parent companies for the principal operating groups are wholly owned by the
Company. All subsidiaries of the operating group parent companies are wholly
owned, except for Rescue Rooter L.L.C., a subsidiary of ServiceMaster Consumer
Services in which senior Rescue Rooter management have acquired equity interests
of not more than 10 percent in total and which are subject to certain put and
call rights.

TRADEMARKS AND SERVICE MARKS; FRANCHISES

The Company's trademarks and service marks are important for all
elements of the Company's business, although such marks are particularly
important in the advertising and franchising activities conducted by the
operating subsidiaries of ServiceMaster Consumer Services L.P. Such marks are
registered and are renewed at each registration expiration date.

Within ServiceMaster Consumer Services, franchises are important for the
TruGreen-ChemLawn, Terminix, ServiceMaster Residential/Commercial, Merry
Maids, AmeriSpec and Furniture Medic businesses. Nevertheless, revenues and
profits derived from franchise-related activities constitute less than 10% of
the revenue and profits of the consolidated ServiceMaster enterprise. Franchise
agreements made in the course of these businesses are generally for a term of
five years. ServiceMaster's renewal history is that most of the franchise
agreements which expire in any given year are renewed.

SERVICEMASTER CONSUMER SERVICES

ServiceMaster Consumer Services provides specialty services to homeowners
and commercial facilities through eight companies: TruGreen L.P. ("TruGreen-
ChemLawn"); The Terminix International Company L.P. ("Terminix");
ServiceMaster Residential/Commercial Services L.P. ("Res/Com"); Merry Maids L.P.
("Merry Maids"); American Home Shield Corporation ("American Home Shield" or
"AHS"); AmeriSpec, Inc. ("AmeriSpec"); Furniture Medic L.P. ("Furniture Medic");
and Rescue Rooter L.L.C. ("Rescue Rooter"). Rescue Rooter was acquired by
ServiceMaster Consumer Services on January 1, 1998. The services provided by
these companies include: lawn care, tree and shrub services, landscaping and
indoor plant maintenance services under the "TruGreen", "ChemLawn" and
"Barefoot" service marks; termite and pest control services under the
"Terminix" service mark; residential and commercial cleaning and disaster
restoration services under the "ServiceMaster" service mark; domestic
housekeeping services under the "Merry Maids" service mark; home systems and
appliance warranty contracts under the "American Home Shield" service
mark; home inspection services under the "AmeriSpec" service mark; on-
site furniture repair and restoration under the "Furniture Medic" service
mark; and plumbing and drain cleaning services under the "Rescue Rooter"
service mark.

The services provided by the eight Consumer Services companies are part of
the ServiceMaster "Quality Service Network" and are accessed by calling a
single toll-free telephone number: 1-800-WE SERVE. ServiceMaster

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<PAGE>

focuses on establishing relationships to provide one or more of these services
on a repetitive basis to customers. Since 1986, the number of customers served
by ServiceMaster Consumer Services has increased from fewer than one million
domestic customers to more than 10.5 million worldwide customers.

Oversight responsibility for the ServiceMaster Consumer Services businesses
which are conducted in foreign markets is in the appropriate subsidiary of
ServiceMaster Consumer Services L.P.

TruGreen-ChemLawn. TruGreen-ChemLawn is a wholly-owned subsidiary of
ServiceMaster Consumer Services L.P. As of December 31, 1998, TruGreen-ChemLawn
had 289 company-owned branches and 103 franchised branches. With over 3
million residential and commercial customers, TruGreen-ChemLawn is the leading
provider of lawn care services in the United States and a leading provider of
commercial landscaping services. TruGreen-ChemLawn provides lawn, tree and
shrub care services in Egypt, Japan, Saudi Arabia, and Turkey through licensing
arrangements and in Canada through a subsidiary. TruGreen-ChemLawn also
provides interior plantscape services to commercial customers. The
TruGreen-ChemLawn businesses are seasonal in nature. On March 18, 1999,
ServiceMaster completed the acquisition of LandCare USA, Inc., a leading
provider of commercial landscaping services and tree services (including line
clearing and tree care). ServiceMaster thereafter combined the LandCare USA
business with the commercial landscaping business of TruGreen-ChemLawn.

Terminix. Terminix is a wholly-owned subsidiary of ServiceMaster
Consumer Services L.P. With over 2.5 million residential and commercial
customers, Terminix, through its company-owned branches and through
franchisees, is the leading provider of termite and pest control services in
the United States. As of December 31, 1998, Terminix was providing these
services through 256 company-owned branches in 40 states and through 240
franchised branches in 28 states. Terminix also manages the following European
pest control companies, all of which are subsidiaries of TMX-Europe B.V., a
wholly-owned subsidiary of the Company: Terminix Peter Cox Ltd., a leading pest
control and wood preservation company in the United Kingdom and Ireland;
Terminix Protekta B.V. and Riwa B.V., each a leading pest control company in the
Netherlands and Belgium; Anticimex Development A.B., a holding company for the
leading pest control company in Sweden and which also operates in Norway; and
the Stenglein Group, a group of pest control companies in Germany. Terminix also
provides termite and pest control services through licensing arrangements with
local service providers in twenty-seven other countries and through subsidiaries
in eight other countries. The Terminix business is seasonal in nature.

Res/Com. Res/Com is a wholly-owned subsidiary of ServiceMaster Consumer
Services L.P. ServiceMaster, through Res/Com, is the leading franchisor in the
United States in the residential and commercial cleaning field. Res/Com provides
carpet and upholstery cleaning and janitorial services, disaster restoration
services and window cleaning services. As of December 31, 1998, these services
were provided to approximately 1.7 million residential and commercial customers
worldwide through a network of over 4,420 independent franchisees. Res/Com
provides its services through subsidiaries in Canada, Germany, Ireland and the
United Kingdom, and through licensing arrangements with local service providers
in 17 other countries.

Merry Maids. Merry Maids is a wholly-owned subsidiary of ServiceMaster
Consumer Services L. P. Merry Maids is the organization through which
ServiceMaster provides domestic house cleaning services. With approximately
345,000 worldwide customers, Merry Maids is the leading provider of domestic
house cleaning services in the United States. As of December 31, 1998, these
services were provided through 27 company-owned branches in 19 states and
through 829 licensees operating in all 50 states. Merry Maids also provides
domestic house cleaning services through subsidiaries in Canada and the United
Kingdom and through licensing arrangements with local service providers in eight
other countries.

American Home Shield. AHS is a wholly-owned subsidiary of ServiceMaster
Consumer Services L.P. AHS is a leading provider of home systems and appliance
warranty contracts ("warranty contracts") in the United States, providing
homeowners with contracts covering the repair or replacement of built-in
appliances, hot water heaters and electrical, plumbing, central heating and
central air conditioning systems which malfunction by reason of normal wear and
tear. Warranty contracts are sold through participating real estate brokerage
offices in conjunction with resales of single-family residences to homeowners.
AHS also sells warranty contracts directly to non-moving homeowners by renewing
existing contracts and through various other distribution channels which are
currently being expanded. As of

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December 31, 1998, AHS warranty contracts provided for services to approximately
700,000 homes through approximately 12,250 independent repair maintenance
contractors in 50 states and the District of Columbia, with operations in
California, Texas and Arizona accounting for 32%, 26% and 8%, respectively, of
gross contracts written by AHS. AHS also provides home service warranty
contracts through licensing arrangements with local service providers in three
other countries.

AmeriSpec. AmeriSpec is a wholly-owned subsidiary of AHS. AmeriSpec is a
leading provider of home inspection services in the United States. During 1998,
AmeriSpec conducted approximately 135,000 home inspections in 45 states and
Canada, with operations in California, New York and Illinois accounting for 27%,
5% and 4%, respectively, of the gross number of inspections conducted through
AmeriSpec.

Furniture Medic. Furniture Medic is a wholly-owned subsidiary of
ServiceMaster Consumer Services L.P. Furniture Medic provides on-site furniture
repair and restoration services in 46 states. As of December 31, 1998, these
services were provided through 581 licensees. Furniture Medic also provides its
services through subsidiaries in Canada and the United Kingdom and through
licensing arrangements with local service providers in two other countries.

Rescue Rooter. Rescue Rooter is a subsidiary of ServiceMaster Consumer
Services L.P. Rescue Rooter acquired the business and assets of Rescue
Industries, Inc. on January 1, 1998. Rescue Rooter provides plumbing and drain
cleaning services, and heating and air conditioning services, in 12 states
through 25 company-owned branches and one franchise location. In 1998, Rescue
Rooter performed services for approximately 410,000 customers. As of March 1,
1999 certain key employees of Rescue Rooter had purchased an aggregate 8.35%
equity interest in Rescue Rooter pursuant to a management equity plan. Such
interest is subject to reciprocal put and call rights which will become
exercisable on January 1, 2003 and which will be consummated on the basis of the
then fair market value of the interest.

SERVICEMASTER MANAGEMENT SERVICES

ServiceMaster pioneered the providing of supportive management services to
health care facilities by instituting housekeeping management services in 1962.
Since then, ServiceMaster has expanded its management services business such
that it now provides a variety of supportive management services to health care,
education and business and industrial customers (including the management of
housekeeping, plant operations and maintenance, laundry and linen, grounds and
landscaping, clinical equipment maintenance, food service, energy
management, and total facility management). ServiceMaster's general programs and
systems free the customer to focus on its core business activity with confidence
that the support services are being managed and performed in an efficient
manner.

ServiceMaster Management Services L.P. is organized into three divisions,
each of which provides service on a nationwide basis within its market. These
markets are: Healthcare Management Services; Education Management Services; and
Business & Industry Management Services. The responsibility for overseeing the
Management Services businesses which are conducted in foreign markets lies with
ServiceMaster Management Services L.P.

As of December 31, 1998, ServiceMaster was providing supportive management
services to approximately 1,602 health care customers and to approximately 498
educational and commercial customers. These services were being provided in all
50 states and the District of Columbia. Outside of the United States,
ServiceMaster was providing management services through subsidiaries in Canada
and Japan, through an affiliated company in Mexico, and through licensing
arrangements with local service providers in twenty-five other countries.

ServiceMaster Healthcare Management Services. The Healthcare division of
ServiceMaster Management Services L.P. is a leading provider to the health care
market of supportive management services, including the management of
housekeeping, plant operations and maintenance, laundry and linen, grounds and
landscaping, clinical equipment maintenance, food services and total facility
management. As of December 31, 1998, the Healthcare division was serving in
approximately 1,846 healthcare facilities. Although the healthcare market has
undergone significant consolidation in recent years, ServiceMaster believes that
there continues to be potential for expansion in the healthcare market due to
the trend of healthcare facilities to outsource more of their service
requirements.

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ServiceMaster Education Management Services. The Education division of
ServiceMaster Management Services L.P. is a leading provider to the education
market of maintenance, custodial and grounds services. The facilities which
comprise the education market include primary schools, secondary schools and
school districts, private specialty schools and colleges and universities. As
of December 31, 1998, ServiceMaster was serving 281 educational customers.
ServiceMaster believes there is potential for expansion in the education market
due to its current relatively low penetration of that market and the trend of
educational facilities to consider outsourcing more of their service
requirements. However, a majority of the educational facilities continue to
assume direct responsibility for managing their support functions.

ServiceMaster Business & Industry Management Services. The Business &
Industry division of ServiceMaster Management Services L.P. is a leading
provider of plant operations and maintenance, custodial and grounds management
services to business and industrial customers in selected markets. Such markets
include the food processing, transportation, healthcare products and automotive
markets. ServiceMaster believes that there is potential for expansion in these
business and industrial markets due to ServiceMaster's current low penetration
of those markets, the trend of businesses to consider outsourcing more of their
service requirements and the trend of governmental units to privatize parts of
their operations. As of December 31, 1998, ServiceMaster was serving
approximately 217 business or industrial customers.

The Business and Industry division includes Premier Manufacturing Support
Services Limited Partnership. Premier is a leading provider of facility
management services in the automotive industry, specializing in paint booth
cleaning services. As of December 31, 1998, Premier was serving 77 customer
locations in ten countries.

OTHER BUSINESSES

ServiceMaster Diversified Health Services. In 1998, ServiceMaster
Diversified Health Services ("DHS") provided management services to
freestanding, hospital-based and government-owned nursing homes, skilled nursing
facilities, and assisted living facilities; design, development, refurbishing
and construction consulting services to long-term care facilities;
rehabilitation services; the sale of various medical produces and supplies; and
pharmacy management.

ServiceMaster Home Health Care. During the year 1998, ServiceMaster Home
Health Care Services Inc., a wholly owned subsidiary of the Company, provided
management services to hospital-based home health care agencies (as well as the
direct operation of freestanding home health care agencies). On January 4,
1999, the Company announced the completion of its strategic review of its home
health care business and the decision to sell its direct operations of home
health care agencies and certain support operations and to discontinue its
outsource and operation of home health care agencies. ServiceMaster Home Health
Care Services will continue to provide consulting services to hospitals and
other providers of home health care.

ServiceMaster Employer Services. ServiceMaster Employer Services is one of
the nation's larger professional employer organizations. It provides more than
950 clients with administrative processing of payroll, workers compensation
insurance, health insurance, unemployment insurance and other employee benefits.

Energy Management. During the year 1998, the Company provided energy
management services through Energy Management Services, a division of
ServiceMaster Management Services L.P. On January 4, 1999, the Company
announced the formation of a strategic venture with Texas Utilities Company for
the ownership and operation of the energy management business. The new venture
acquired all the assets of ServiceMaster Energy Management and is owned 85% by
Texas Utilities Company and 15% by the Company.

International Operations. Consumer services and supportive management
services in international markets are provided through licensing arrangements
and ownership of foreign operating companies acquired by ServiceMaster. Except
as noted below, these activities in Europe, Latin America and the Middle East
are administered as part of the operations of ServiceMaster Management Services
L.P. and ServiceMaster Consumer Services L.P., respectively. Operating
arrangements and market expansion efforts in the Pacific Rim are administered by
the parent company.

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OTHER ACTIVITIES

Supporting Departments. The Company has various departments responsible for
technical, engineering, management information, planning and market services,
and product and process development activities. Various administrative support
departments provide personnel, public relations, administrative, education,
accounting, financial and legal services.

Manufacturing Division. ServiceMaster has a manufacturing division which
formulates, combines and distributes supplies, products and equipment that are
used internally in providing management services to customers and which are sold
to licensees for use in the operation of their businesses. ServiceMaster has a
small share of the market for the manufacture and distribution of cleaning
equipment, chemicals and supplies.

Venture Fund. ServiceMaster Venture Fund L.L.C., a subsidiary of the
parent company (the "Venture Fund"), invests in emerging growth companies which
show an ability to provide innovative service technologies to ServiceMaster's
current and new customers. The Venture Fund is managed so as not to be intrusive
to the ongoing operations of the Company's operating units.

INDUSTRY POSITION, COMPETITION AND CUSTOMERS

The following information is based solely upon estimates made by the
management of ServiceMaster and cannot be verified. In considering
ServiceMaster's industry and competitive positions, it should be recognized that
ServiceMaster competes with many other companies in the sale of its services,
franchises and products and that some of these competitors are larger or have
greater financial and marketing strength than ServiceMaster.

The principal methods of competition employed by ServiceMaster in the
Consumer Services business are name recognition, assurance of customer
satisfaction and a history of providing quality services to homeowners. The
principal methods of competition employed by ServiceMaster in each of the
operating units in the Management Services business are price, quality of
service and experience in providing management services. The principal methods
of competition employed by ServiceMaster in the Employer Services business are
name recognition, assurance of customer satisfaction and financial strength.

Consumer Services

Subsidiaries of Consumer Services provide a variety of residential and
commercial services under their respective names on the basis of their and
ServiceMaster's reputation, the strength of their service marks, their size and
financial capability, and their training and technical support services. The
markets served by Terminix and TruGreen-ChemLawn are seasonal in nature.

Lawn Care Services. TruGreen-ChemLawn, both directly and through
franchisees, provides lawn care services to residential and commercial
customers. Competition within the lawn care market is strong, coming mainly from
regional and local, independently-owned firms and from homeowners who elect to
care for their lawns through their own personal efforts. TruGreen-ChemLawn is
the leading national lawn care company within this market. TruGreen-ChemLawn
also provides indoor plant maintenance to commercial customers.

Lawn care services are regulated by law in most of the states in which
TruGreen-ChemLawn provides such services. These laws require licensing which is
conditional on a showing of technical competence and adequate bonding and
insurance. The lawn care industry is regulated at the federal level under the
Federal Insecticide, Fungicide and Rodenticide Act, and lawn care companies
(such as TruGreen-ChemLawn) which apply herbicides and pesticides are regulated
under the Federal Environmental Pesticide Control Act of 1972. Such laws,
together with a variety of state and local laws and regulations, may limit or
prohibit the use of certain herbicides and pesticides, and such restrictions may
adversely affect the business of TruGreen-ChemLawn.

Landscaping and Tree Services. TruGreen-ChemLawn provides landscaping and
tree services to commercial customers. (See page 22 for a discussion of the
acquisition of LandCare USA, Inc.). The landscape and tree services

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industry is highly competitive. Most of TruGreen-ChemLawn's landscape services
competitors are small, owner-operated companies operating in a limited
geographic market but there are a few large companies operating in multiple
markets. Competition in the line clearing market is characterized by a small
number of large companies. The commercial tree services market is characterized
by a large group of small competitors, most of which are owner-operated
businesses operating in limited geographic areas and a few larger companies
operating in one or more regions.

Termite and Pest Control Services. The market for termite and pest control
services to commercial and residential customers includes many competitors.
Terminix is the leading national termite and pest control company within this
market. Competition within the termite and pest control market is strong, coming
mainly from regional and local, independently-owned firms throughout the United
States and from one other large company which operates on a national basis.

Termite and pest control services are regulated by law in most of the
states in which Terminix provides such services. These laws require licensing
which is conditional on a showing of technical competence and adequate bonding
and insurance. The extermination industry is regulated at the federal level
under the Federal Insecticide, Fungicide and Rodenticide Act, and pesticide
applicators (such as Terminix) are regulated under the Federal Environmental
Pesticide Control Act of 1972. Such laws, together with a variety of state and
local laws and regulations, may limit or prohibit the use of certain pesticides,
and such restrictions may adversely affect the business of Terminix.

House Cleaning Services. The market for domestic house cleaning services is
highly competitive. In urban areas the market involves numerous local companies
and a few national companies. ServiceMaster believes that its share of the total
potential market for such services is small and that there is significant
potential for further expansion of its housecleaning business through continued
internal expansion and greater penetration of the housecleaning market.
Through its company-owned branches and its franchisees, ServiceMaster has a
small share of the market for the cleaning of residential and commercial
buildings.

Home Systems and Appliance Warranty Contracts. The market for home systems
and appliance warranty contracts is relatively new. ServiceMaster believes that
AHS maintains a favorable position in its industry due to the system developed
and used by AHS for accepting, dispatching and fulfilling service calls from
homeowners through a nationwide network of independent contractors. AHS also has
a computerized information system developed and owned by AHS, and an electronic
digital voice communication system through which AHS handled more than 4.9
million calls in 1998.

Home Inspection Services. AmeriSpec is a leading provider of home
inspection services in the United States. Competition within this market is
strong, coming mainly from regional and local, independently-owned firms.

Furniture Repair Services. The market for on-site furniture repair services
is relatively new. ServiceMaster believes that Furniture Medic maintains a
favorable position in its industry due to its patented environmentally
sensitive procedure for repairing furniture in the customer's home.

Plumbing and Drain Cleaning Services. The market for plumbing and drain
cleaning services is highly competitive in both the residential and commercial
sectors. Rescue Rooter believes that its share of the total potential market for
such services is small and that there is significant potential for future
expansion and penetration. Plumbing is regulated by most states in which Rescue
Rooter provides such services. The level of licensing varies from state to
state. There are no state or federal guidelines regulating drain cleaning
services.

Management Services

Health Care. Within the market consisting of general health care facilities
having 50 or more beds, ServiceMaster is the leading supplier of plant
operations and maintenance, housekeeping, clinical equipment maintenance, and
laundry and linen management services. As of December 31, 1998, ServiceMaster
was serving approximately 1,602 customers and managing approximately 1,846
health care facilities. The majority of health care facilities within this
market not currently served by ServiceMaster assume direct responsibility for
managing their own non-medical support functions.

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ServiceMaster believes that its management services for health care
facilities may expand by the addition of facilities not presently served, by
initiating additional services at facilities which use only a portion of the
services now offered, by the development of new services and by growth in the
size of facilities served. At the same time, industry consolidation, changes in
use and methods of health care delivery and payment for services (including in
particular changes in Medicare reimbursement regulations) continue to affect the
health care environment.

Education. ServiceMaster is a leading provider to the education market of
maintenance, custodial and grounds services. The facilities which comprise the
education market served by ServiceMaster include primary schools, secondary
schools and school districts, private specialty schools and colleges and
universities. As of December 31, 1998, ServiceMaster was serving approximately
281 customers and managing approximately 5,700 facilities. ServiceMaster
believes there is potential for expansion in the education market due to its
current relatively low penetration of that market and the trend of educational
facilities to consider outsourcing more of their service requirements. However,
a majority of the educational facilities continue to assume direct
responsibility for managing their support functions.

Business and Industry. ServiceMaster is a leading provider of plant
operations and maintenance, custodial and grounds management services to
business and industrial customers in selected markets. ServiceMaster believes
that there is potential for expansion in those business and industrial markets
which ServiceMaster has elected to emphasize due to ServiceMaster's low current
penetration of those markets, the trend of businesses to consider outsourcing
more of their service requirements and the trend of governmental units to
privatize parts of their operations. The emphasized markets include the food
processing, transportation, healthcare products, and automotive markets. As of
December 31, 1998, ServiceMaster was serving approximately 217 customers and
managing approximately 817 business or industrial facilities.

MAJOR CUSTOMERS

ServiceMaster has no single customer which accounts for more than 10% of
its total revenues. No part of the Company's business is dependent on a single
customer or a few customers, the loss of which would have a material adverse
effect on the Company as a whole. Revenues from governmental sources are not
material.

EMPLOYEES

On December 31, 1998, ServiceMaster had a total of approximately 51,740
employees.

ServiceMaster provides its employees with annual vacation, medical,
hospital and life insurance benefits and the right to participate in additional
benefit plans.

YEAR 2000 COMPUTER PROGRAM COMPLIANCE

Year 2000 Compliance. Certain computer programs use two digits rather than
four to define the applicable year and consequently may not function properly
beyond the year 1999 unless they are remediated. In addition, some computer
programs are unable to recognize the year 2000 as a leap year. These problems
may also exist in chips embedded in various types of equipment. The Company has
long been aware of this Year 2000 (Y2K) problem. The Company is dealing with
the Y2K problem in part through system upgrades, which were planned to occur
in the normal course of business. In other cases, the Company has put programs
into place which the Company believes will result in the completion of necessary
remediation efforts prior to the year 2000.

State of Readiness. The Company has initiated a program (the "Y2K
program") to address Y2K issues as they affect the Company's information
technology (IT) systems, electronic data interfaces and its non-IT hardware.
The Y2K program was set up to use the following steps as appropriate: inventory
- - assessment - planning - renovation - testing - implementation. In addition,
the program calls for inquiries of the Company's major suppliers of goods and
services to determine their Y2K status and a review of the Company's
relationships with its customers to determine if the Company has any
responsibility for the status of the customers' IT and/or non-IT systems and
hardware.

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In 1998, the Company began to monitor its progress on the Y2K program on a
consolidated basis and completed an inventory which covered both IT and non-IT
items for all operating companies and administrative units within the
ServiceMaster enterprise. All items in the inventory were placed in one of four
categories: mission critical, critical, important and ordinary within the
context of the operating company or administrative unit involved. (A "mission
critical" or "critical" designation for an item within an operating company or
administrative unit does not necessarily hold the same level of criticality from
the perspective of the entire ServiceMaster enterprise).

Remediation plans have been developed for the mission critical and critical
matters, with milestones established for each plan which enable management to
measure the progress made in respect of a plan against the work schedule
established for that plan. Although these plans encompass many separately
identifiable items, from a ServiceMaster enterprise standpoint, there are nine
projects (the "Key Projects") which management has identified as either mission
critical or critical and which will require a measurable amount of attention to
remediate. Although all of the Key Projects are scheduled for completion before
the end of the year 1999, most of the Key Projects are scheduled for completion
by June 30, 1999. As of February 28, 1999, work on each of the Key Projects was
on schedule and the Company believes that all Key Projects will be completed in
accordance with their scheduled completion dates.

The Company has utilized the services of an outside consultant for the Y2K
program to help identify Y2K issues and to develop a system to closely monitor
remediation work. In early 1998, the Company established a Y2K committee in the
parent unit with responsibility for monitoring the Y2K program in each of the
Company's operating units and for providing status reports to the Board of
Directors.

Year 2000 Costs. Several of the Key Projects are upgrades of systems which
the Company would have undertaken irrespective of the Y2K problem. In some
cases, including a new accounting and financial reporting system for the parent
company and its Management Services subsidiary, work on these systems has been
accelerated in view of Y2K issues. Other upgrades or new systems were already
scheduled for completion prior to the year 2000, such as a new support system
for the Company's American Home Shield subsidiary and a new accounting and
billing system for the recently developed commercial landscape business within
the Company's TruGreen-ChemLawn subsidiary. References to "Year 2000 costs" in
this report do not include the costs of projects for which no acceleration is
occurring due to Y2K issues.

The Company's Year 2000 costs to date are not material to the Company's
results of operations or financial position and the Company does not expect its
future Year 2000 costs to be material to the Company's results of operations or
financial position. All Year 2000 costs (as well as the costs of installing the
system upgrades referred to above) have been, and are expected to continue to
be, funded with cash from operations.

Year 2000 Risks. The Company believes that its greatest Year 2000
compliance risk, in terms of magnitude of risk, is that key third party
suppliers of goods or services may fail to complete their own remediation
efforts in a timely manner and thereby provoke an interruption in the ability
of one or more of the operating segments of the Company to provide
uninterrupted services to their customers. Utility services (electrical,
water and gas), telephone service, banking services and, to a much lesser
degree, the delivery of chemical products are the critical items in this regard.
Based on the Company's inquiries to its providers of goods and services and on
the basis of the Company's general knowledge of the state of readiness of the
utility companies and banks with which it does business, the Company does not
expect to suffer any material interruption in the services on which the Company
depends.

The Company has reviewed its agreements with its customers, including
particularly the customers of its Management Services units for whom such units
provide facility management services. The Company is satisfied that it is not
responsible, contractually or otherwise, for the Y2K readiness of the customer's
IT and non-IT systems and hardware, and the Company is in the process of
notifying all of its customers to this effect where, in the Company's judgment,
the nature of the customers' business or facility warranted such notices.

Where the Company uses its own software in the course of providing
management services, the Company is responsible to make such software Y2K ready.
The Company is confident that such software is already, or soon will be, Y2K
ready. For those units of the Company which sell franchises and which provide
software to the franchisees, such software is already, or soon will be, fully
Y2K ready or, alternatively, provision has been made for making

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available to franchisees software from third-party developers from whom
appropriate Y2K compliance assurances have been or will be received.

Contingency Plans. At this time, the Company fully expects all of its
internal key IT and non-IT systems to be Y2K ready well in advance of the end
of the year 1999. If it appears that timely delivery of any Key Projects
becomes questionable, the Company will immediately develop appropriate
contingency plans.

The Company presently expects that its significant providers of goods and
services are or will be Y2K ready by the end of the year 1999. The Company will
continue to make inquires of its key suppliers for the purpose of testing this
expectation. Insofar as the Company is exposed to risks originating in Y2K
problems at key suppliers, the Company will utilize short-term solutions, but no
practical long-term contingency plans for these external Y2K problems are
possible.

Although the Company believes that critical remediation efforts will be
completed prior to the Year 2000, the untimely completion of these efforts
could, in certain circumstances, have a material adverse effect on the
operations of the Company.

Definition. As used in this Year 2000 statement, the term "year 2000 ready"
or "Y2K ready" when used with reference to a item of software or equipment means
the capability of the software or equipment to process correctly (including
calculating, comparing, sequencing, displaying, or storing), transmit, or
receive date data from, into, and between the 20th and 21st centuries, and
during the years 1999 and 2000, and to make leap year calculations, provided
that all products used with the software or equipment properly exchange accurate
date data with it.

PROPERTIES

The headquarters facility of ServiceMaster, which also serves as
headquarters for ServiceMaster Management Services, is owned by The
ServiceMaster Company and is located on a ten-acre tract at One ServiceMaster
Way, Downers Grove, Illinois. The initial structure was built in 1963, and two
additions were completed in 1968 and 1976. In early 1988, ServiceMaster
completed construction of a two-story 15,000 square foot addition for office
space, food service demonstrations and dining facilities. The building contains
approximately 118,900 square feet of air conditioned office space and 2,100
square feet of laboratory space. In the Spring of 1992, ServiceMaster completed
the conversion of approximately 30,000 square feet of space formerly used as a
warehouse to offices for Management Services and for The Kenneth and Norma
Wessner Training Center.

ServiceMaster owns a seven-acre, improved tract at 2500 Warrenville Road,
Downers Grove, Illinois, which is adjacent to its headquarters facility. In
1993, ServiceMaster substantially remodeled the building and thereafter leased
approximately half the space (50,000 square feet) to a commercial tenant. The
balance of the space is utilized by ServiceMaster personnel.

ServiceMaster owns a 50,000 square foot facility near Aurora, Illinois
which is used by ServiceMaster as a warehouse/distribution center. Ownership of
this facility was acquired on February 11, 1999 by a deed in lieu of foreclosure
from the company with whom ServiceMaster had, on August 2, 1989, entered into a
sale/leaseback arrangement.

ServiceMaster believes that the facilities described in the preceding three
paragraphs will satisfy the Company's needs for administrative and warehouse
space in the Chicago area for the immediate future.

ServiceMaster owns four properties in Cairo, Illinois, consisting of a
36,000 square foot, three-story building used for manufacturing and warehousing
equipment, supplies and products used in the business; a warehouse and package
facility comprising 30,000 square feet; a three-story warehouse and
manufacturing building consisting of 43,000 square feet; and a 2,500 square foot
building used for a machine shop. ServiceMaster also leases two warehouse
properties, one 14,000 square feet and the other 6,000 square feet, in Cairo,
Illinois. Management believes that the foregoing manufacturing and warehouse
facilities are adequate to support the current needs of ServiceMaster.

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The headquarters for ServiceMaster Consumer Services L.P. are located in
leased premises at 860 Ridge Lake Boulevard, Memphis, Tennessee. The 860 Ridge
Lake Boulevard facility also serves as the headquarters for TruGreen-
ChemLawn, Terminix, Res/Com, Merry Maids, American Home Shield, AmeriSpec,
Furniture Medic and Rescue Rooter.

A new call center is located in leased premises at 6399 Shelby View Drive,
Memphis, Tennessee. The center contains approximately 60,000 square feet of air
conditioned office space from which telephone sales, scheduling services, and
other business functions are conducted.

TruGreen-ChemLawn owns 8 buildings which are used as branch sites for lawn
care services. These facilities are located in Colorado (1), Florida (1),
Georgia (1), Michigan (1), Ohio (2), and Texas (2). TruGreen-ChemLawn also
leases 337 facilities used as branch sites.

Terminix owns 22 buildings which are used as branch sites for termite and
pest control services. These properties are all one-story buildings that contain
both office and storage space. These properties are located in California (3),
Florida (10), Georgia (1), Illinois (1), New Jersey (2), Tennessee (1), and
Texas (4).

American Home Shield has retained some leased space in the building at 90
South E Street, Santa Rosa, California, for administrative and sales operations.
Certain of American Home Shield's service and data processing departments are
located in premises owned by the company in Carroll, Iowa. This facility
consists of a 43,000 square foot building on a seven-acre site.

American Home Shield owns approximately 17 acres of land in Santa Rosa,
California of which 11.2 acres are under contracts for sales to occur in the
second quarter of 1999. This land is held for investment purposes and has been
and will continue to be offered for sale, with the timing of sales being
affected by, among other things, market demand, zoning regulations, and the
availability of financing to purchasers.

Rescue Rooter owns three buildings and leases 23 facilities which are used
for branch operations to provide plumbing and drain cleaning services, and
heating and air conditioning services. The owned facilities are located,
respectively, in Phoenix, Arizona; Round Lake, Illinois; and St. Louis,
Missouri. The leased facilities are located in California (11), Colorado (1),
Indiana (2), Ohio (1), Oregon (1), Tennessee (1), Texas (4), Utah (1), and
Washington (1).

The headquarters for Diversified Health Services are located in a leased
facility at 3839 Forest Hill-Irene Road, Memphis, Tennessee. DHS leases other
administrative facilities in St. Augustine, Florida; Minneapolis, Minnesota;
Plymouth Meeting, Pennsylvania; Memphis, Tennessee; and Irving, Texas. As of
March 1, 1999, through a joint venture and subsidiaries, DHS had an ownership
interest in four nursing home facilities and DHS leased several nursing home and
assisted living facilities. These facilities are located in Alabama,
Connecticut, Florida, Michigan, Tennessee, and Texas.

The headquarters for ServiceMaster Employer Services ("SES") and Certified
Systems, Inc., the principal subsidiary of SES, are located at 3218 Highway 67,
Mesquite, Texas. SES leases other administrative facilities in Little Rock,
Arkansas, and Memphis, Tennessee.

LEGAL PROCEEDINGS

In the ordinary course of conducting its business activities, ServiceMaster
becomes involved in judicial and administrative proceedings which involve both
private and governmental authorities. As of March 1, 1999, these proceedings
included a number of general liability actions and employment-related
proceedings which were ordinary routine litigation incidental to the Company's
business.

American Home Shield Class Action. A lawsuit was instituted in November
1997 and is currently pending in the District Court of Harris County, Texas
against ServiceMaster, ServiceMaster's American Home Shield subsidiary ("AHS")
and AHS' Texas subsidiary ("AHS-Texas") in which three plaintiffs, Brian
Carmichael, Penny Carmichael

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and Tanja Kortz, claim that AHS-Texas violated certain provisions of two Texas
consumer protection statues in the course of soliciting new and renewal service
contracts. (A second lawsuit of a similar nature was filed in the same court by
Edward Thorne III. This case has been abated pending disposition of the
certification issue described below.) The plaintiffs have requested the court to
permit the lawsuit to be maintained as a class action on behalf of all customers
who purchased service contracts since late 1993. Theoretically, this would place
some 300,000 contracts in issue. The plaintiffs have further claimed that the
number of contracts in issue times a statutory penalty of $1,000 per contract
represents the measure of damages. ServiceMaster believes that AHS-Texas
accurately represented the coverage provided in its service agreements and that
the changes in the wording of its renewal contacts were routine updates or
clarifications. In this regard, it is noteworthy that most of the AHS-Texas
contract forms were reviewed and approved by the Texas Real Estate commission
before the forms were distributed. In any and all events, no material actual
damages have been suffered by anyone in this matter. Furthermore, ServiceMaster
believes that the lawsuit cannot be sustained as a class action and the statutes
in question were not intended to be applied in the manner advanced by the
plaintiffs (and in fact cannot be so applied under the federal constitution).
Accordingly, ServiceMaster believes that the ultimate outcome of these cases
will not be material to ServiceMaster's financial condition or results of
operations

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MANAGEMENT

DIRECTORS OF SERVICEMASTER

The Board of Directors of the Company consists of 17 persons. Pursuant to
the Company's Certificate of Incorporation and the Company's Bylaws, the Board
is divided into 3 classes with staggered terms of 3 years each so that the term
of office of one class expires at each Annual Meeting of the Stockholders. Each
class is identified by the year in which its terms of office expires. The
classes of directors as of the date of this Prospectus are: the Class of 1999,
consisting of 6 persons; the Class of 2000, consisting of 6 persons and the
Class of 2001, consisting of 5 persons. Information regarding each of the
directors is set forth below. The descriptions of the business experience of
these persons include the principal positions held by them from July 1993 to the
date of this Prospectus. The period of service as a director includes service as
a director with the Company's predecessor.

Class of 1999

Paul W. Berezny. President. Berezny Investments, Inc., a real estate and
development company. He is a member of the Audit Committee. Age 64. Director
since 1995.

Henry O. Boswell. Retired President of Amoco Production Company and
Chairman of the Board of Amoco Canada. Mr. Boswell is a director of Rowan
Companies, Inc., Houston, Texas, an offshore oil drilling company; and Cabot Oil
& Gas Corporation, Houston, Texas, an oil and gas production company. He is a
member of the Executive Committee, the Compensation Committee (of which he is
the chairman), the Nominating Committee, the Employee Benefit Plan Oversight
Committee, and the Finance Committee. Age 69. Director since 1985.

Carlos H. Cantu. President and Chief Executive Officer of the Company since
January 1, 1994. From May 1991 to December 31, 1993, Mr. Cantu was President and
Chief Executive Officer of ServiceMaster Consumer Services L.P. Mr. Cantu is a
director of First Tennessee National Corporation, Memphis, Tennessee, a
financial institution, and of Unicom Corporation, Chicago, Illinois, the parent
company of Commonwealth Edison, an electric utility company. He is a member of
the Executive Committee, the Nominating Committee, the Finance Committee, and
the Employee Benefit Plan Oversight Committee. Age 65. Director since 1988.

Vincent C. Nelson. Business investor. Mr. Nelson is a member of the
Executive Committee, the Nominating Committee (of which he is the chairman), and
the Audit Committee. Age 57. Director since 1978.

Steven S Reinemund. Chairman and Chief Executive Officer of the Frito-Lay
Company, the packaged foods division of PepsiCo, Inc. From 1992 to March 1996,
he served as President and Chief Executive Officer of the North American
division of Frito-Lay. Mr. Reinemund is a director of PepsiCo, Inc., Purchase,
New York, a food and beverage conglomerate, and a director of Provident
Companies, Inc., Chattanooga, Tennessee, an insurance company. He is a member of
the Nominating Committee. Age 50. Director since January 1, 1998.

Charles W. Stair. Vice Chairman of the Board of Directors. He was President
and Chief Executive Officer of ServiceMaster Management Services L.P. from May
1991 to December 31, 1994. He is a member of the Nominating Committee. Age 58.
Director since 1986.

Class of 2000

Herbert P. Hess. Managing Director of Berents & Hess Capital Management,
Inc., Boston, Massachusetts, an investment management firm. He is a member of
the Executive Committee, the Finance Committee (of which he is the chairman),
the Employee Benefit Plan Oversight Committee, and the Compensation Committee.
Age 62. Director since 1981.

30
<PAGE>

Michele M. Hunt. Private business consultant. From 1980 to July 1993, she
was employed by Herman Miller, Inc., an office furniture manufacturer, and
during the period from July 1990 to July 1993 she served as the company's
Corporate Vice President for People and Quality. Ms. Hunt is a member of the
Nominating Committee. Age 49. Director since 1995.

Dallen W. Peterson. Retired Chairman, Merry Maids Limited Partnership. He
is a member of the Finance Committee and the Employee Benefit Plan Oversight
Committee. Age 62. Director since 1995.

Phillip B. Rooney. Vice Chairman of the Board of Directors. From June 5,
1996 to February 17, 1997, he was President and Chief Executive Officer of WMX
Technologies, Inc., Oak Brook, Illinois ("WMI"), and from November 1984 to May
1996, he was President and Chief Operating Officer of WMI. Mr. Rooney is a
director of Van Kampen American Capital, Oak Brook, Illinois, an investment
management company; Illinois Tool Works, Inc., Glenview, Illinois, a diversified
manufacturing company; and Urban Shopping Centers, Inc., Chicago, Illinois, a
retail real estate management company. Age 54. Director since 1994.

Burton E. Sorensen. Investor. From December 1984 to December 1995 he served
as Chairman, President and Chief Executive Officer of Lord Securities
Corporation. Mr. Sorensen is a director of Provident Companies, Inc.,
Chattanooga, Tennessee, an insurance company. He is a member of the Executive
Committee, the Finance Committee, the Employee Benefit Plan Oversight Committee,
and the Compensation Committee. Age 69. Director since 1984.

David K. Wessner. President, HealthSystem Minnesota. From August 1994 to
July 1998 he served as Executive Vice President of HealthSystem Minnesota. From
November 1992 to December 1993, he was Executive Vice President, Program and
Process Improvement, Geisinger Health System. He is a member of the Executive
Committee, the Nominating Committee, and the Compensation Committee. Age 47.
Director since 1987.

Class of 2001

Lord Brian Griffiths of Fforestfach. International adviser to Goldman,
Sachs & Co. concerned with strategic issues related to their United Kingdom and
European operations and business development activities worldwide. He was made a
life peer at the conclusion of his service to the British Prime Minister during
the period 1985 to 1990. Lord Griffiths is a director of Times Newspaper Holding
Ltd., London, England, a newspaper company; English, Welsh and Scottish
Railways, London, England, a rail freight company; Herman Miller, Inc., Zeeland,
Michigan, an office furniture manufacturer; and Trillium Investments GP Limited,
London, England, a facilities management company. He is a member of the
Executive Committee and the Nominating Committee. Age 57. Director since 1992.

Sidney E. Harris. Dean, Robinson College of Business Administration,
Georgia State University. From July 1987 to July 1997, Dr. Harris was Professor
of Management at the Peter F. Drucker Graduate Management Center at the
Claremont Graduate School, Claremont, California. He was Dean of the Graduate
Management Center from September 1991 to July 1996. Dr. Harris is a director of
Transamerica Investors, Inc., Los Angeles, California, a mutual funds investment
company; and Amresco, Inc., Dallas, Texas, a financial services company. He is a
member of the Executive Committee. Age 49. Director since 1994.

Gunther H. Knoedler. Retired Executive Vice President and Director Emeritus
of Bell Federal Savings and Loan Association, Chicago, Illinois. He is a member
of the Executive Committee and the Audit Committee (of which he is the
chairman). Age 69. Director since 1979.

James D. McLennan. President of McLennan Company, a full-service real
estate company. Mr. McLennan is a director of The Loewen Group, Inc., Burnaby,
B.C., Canada, a provider of funeral services; and Advocate Health Systems, Oak
Brook, Illinois, a health care provider. He is a member of the Audit Committee
and the Compensation Committee. Age 62. Director since 1986.

C. William Pollard. Chairman of the Board of Directors. He served as Chief
Executive Officer of the Company from May 1983 to December 31, 1993. Mr. Pollard
is a director of Herman Miller, Inc., Zeeland, Michigan, an office furniture
manufacturer; and Provident Companies, Inc., Chattanooga, Tennessee, an
insurance company. He is a member

31
<PAGE>

of the Executive Committee (of which he is the chairman), the Finance Committee,
the Employee Benefit Plan Oversight Committee, and the Nominating Committee. Age
60. Director since 1977.

COMPENSATION OF DIRECTORS

During the year 1998, directors of The ServiceMaster Company who were not
employees and who satisfied the other independence standards of the Bylaws
("independent directors") received $3,000 for each meeting of the Board of
Directors and each meeting of a committee which they attended. In addition, each
independent director received an annual stipend of $15,000. The Chairman of the
Audit Committee and the Chairman of the Compensation Committee each received an
additional annual stipend of $2,000. Directors who are employees of the Company
or any subsidiary do not receive either a retainer or meeting fee.

The ServiceMaster 1998 Non-Employee Directors Discounted Stock Option Plan
as approved by the Board of Directors in December 1997 and by the shareholders
of the Company in May 1998 provides that options to purchase shares of the
Company may be granted to those independent members of the Board who elect to
accept such portions in lieu of retainer and meeting fees that would otherwise
be paid in cash. The total amount of retainer and attendance fees for which
share options may be granted under this plan is $42,000 each year. Each option
granted under this plan has an exercise price per share equal to 85% of the fair
market value per share of the underlying shares of common stock of the Company
on the date the option is granted. The number of shares for which each option is
granted is determined by dividing the retainer or fee by 15%. In 1998, options
for a total of 114,903 shares were granted to eleven independent directors under
the Discounted Stock Option Plan.

Each independent director of the Company may enter into a deferred fee
agreement whereby part or all of the fees payable in cash to him or her as a
director are deferred and will either earn interest based on the five-year
borrowing rate for ServiceMaster or be used to purchase shares of the Company in
a number determined by the fair market value of such shares on the date of
purchase. Upon termination of a director's services as an independent director
or attainment of age 70, whichever occurs first, the director will receive the
amount for his or her deferred fee account in a lump sum or in installments or
in shares of the Company, depending on which deferral plan the director has
elected.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The persons who served as members of the Compensation Committee of the
Board of Directors during 1998 were Henry O. Boswell (Chairman), Herbert P.
Hess, James D. McLennan, Burton D. Sorensen and David K. Wessner. The
Compensation Committee consists solely of independent members of the board of
directors.

There are no interlocking arrangements involving service by any executive
officer of the Company on the Compensation Committee of another entity and an
executive officer of such other entity serving on the ServiceMaster Compensation
Committee.

EXECUTIVE OFFICERS OF SERVICEMASTER

The following table shows: (i) the names and ages as of March 1, 1999 of
the present executive officers of the Company; (ii) all positions presently held
by each officer; and (iii) the year each person became an officer. Each person
named has served as an officer of the Company and its predecessor company
continuously since the year shown. There are no arrangements or understandings
between any executive officer and any other person pursuant to which the officer
was or is to be selected as an officer.

32
<PAGE>

<TABLE>
<CAPTION>
First Became
Name Age Present Position An Officer
- ---- --- ----------------- ------------
<S> <C> <C> <C>
C. William Pollard 60 Chairman and Director 1977

Carlos H. Cantu 65 President and Chief Executive Officer and Director 1986

Phillip B. Rooney 54 Vice Chairman and Director 1997

Charles W. Stair 58 Vice Chairman and Director 1973

Donald K. Karnes 48 Group President, Consumer Services and a
Senior Management Adviser 1992

Ernest J. Mrozek 45 Group President, Consumer Services, and a Senior Management
Adviser 1987

Robert F. Keith 42 President and Chief Operating Officer, Health Care Management
Services, and a Senior Management Adviser 1986

Robert D. Erickson 55 Executive Vice President and a Senior Management Adviser 1976

Vernon T. Squires 64 Senior Vice President and General Counsel 1987

Stephen E. Reiter 46 Senior Vice President and Chief Information Officer 1998

Steven C. Preston 38 Executive Vice President and Chief Financial Officer
and a Senior Management Adviser 1997

Eric R. Zarnikow 39 Vice President and Treasurer 1994

Deborah A. O'Connor 36 Vice President and Controller 1993
</TABLE>

Messrs. Pollard, Cantu, Stair and Rooney are also Directors of the Company.
See "Directors of ServiceMaster" above for biographical information with respect
to such persons.

Robert D. Erickson. Executive Vice President. Mr. Erickson was a director
of ServiceMaster from May 1987 to May 1993. He previously served as a director
of ServiceMaster from May 1981 to June 1984. He served as the President and
Chief Operating Officer of ServiceMaster's international business unit from
October 1993 to December 1997.

Donald K. Karnes. Group President, ServiceMaster Consumer Services. He has
served as Group President of TruGreen-ChemLawn and Terminix since January 1996.
He served as President and Chief Operating Officer of TruGreen-ChemLawn from
January 1992 to December 1995.

Robert F. Keith. President, Healthcare Management Services. He served as
President and Chief Operating Officer, ServiceMaster Management Services, from
January 1, 1997 to October 2, 1998, as President and Chief Operating Officer,
ServiceMaster Consumer Services from July 1994 to December 31, 1996, and as
Group President, ServiceMaster Consumer Services, from November 1992 to July
1994.

Ernest J. Mrozek. Group President, ServiceMaster Consumer Services. He
served as President and Chief Operating Officer, ServiceMaster Consumer Services
from January 1, 1997 to October 2, 1998, as Senior Vice

33
<PAGE>

President and Chief Financial Officer of the Registrant from January 1, 1995 to
December 31, 1996, as Vice President and Chief Financial Officer of the
Registrant from May 1994 to December 1994, and as Vice President, Treasurer and
Chief Financial Officer from November 1, 1992 to April 30, 1994.

Deborah A. O'Connor. Vice President and Controller since January 1, 1993.

Steven C. Preston. Executive Vice President and Chief Financial Officer
since July 1, 1998. He served as Senior Vice President and Chief Financial
Officer from April 1, 1997 to June 30, 1998. From August 1993 to March 1997, he
was Senior Vice President and Corporate Treasurer for First Data Corporation,
Atlanta, Georgia.

Stephen E. Reiter. Senior Vice President and Chief Information Officer
since July 1, 1998. From May 8, 1996 to May 31, 1998, he was Vice President and
Partner for Computer Science Corporation, an outsourcing firm providing ITO
outsourcing and purchasing and materials management support to the chemical,
oil, gas and utilities industries. From June 1, 1994 to May 31, 1996 he was a
Principal/Practice Leader with A.T. Kearney, a management consulting firm
operating as a wholly-owned subsidiary of Electronic Data Systems (EDS). For the
preceding three-year period, he was a Vice President and Chief Information
Officer with Tenneco, Inc., a global industrial manufacturer in auto parts and
packaging.

Vernon T. Squires. Senior Vice President and General Counsel since January
1, 1988. He has served as Secretary since December 7, 1998.

Eric R. Zarnikow. Vice President and Treasurer since May 1, 1994. From
August 1991 to April 1994, he served as Vice President and Treasurer of Gaylord
Container Corporation.

34
<PAGE>

EXECUTIVE OFFICER COMPENSATION; SUMMARY COMPENSATION TABLE

The following table sets forth all compensation awarded to, earned by, or
paid to the Chief Executive Officer of ServiceMaster and ServiceMaster's next
four most highly compensated executive officers during or in respect of the year
1998. Each of the listed persons was holding the office indicated in the table
on the last day of December 1998.

SUMMARY COMPENSATION TABLE

LONG-TERM COMPENSATION
-----------------------------------------
ANNUAL COMPENSATION (B) AWARDS PAYOUTS
----------------------------------------------------------------------------------------
(a) (B) (C) (D) (E) (F) (G) (H) (I)
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING
COMPEN- STOCK OPTIONS/ LTIP ALL
SALARY BONUS SATION AWARDS SARS PAYOUTS OTHER
NAME AND PRINCIPAL POSITION Year ($) ($)(C) ($) ($) (#)(D) ($)(E) ($)
- --------------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carlos H. Cantu............................ 1998 475,000 570,000 - - 150,000 469,580 -
President and Chief Executive Officer 1997 450,000 900,021 - - 225,000 - -
1996 388,000 679,000 - - 168,750 -- -
C. William Pollard......................... 1998 400,000 300,000 - - 112,500 349,368 -
Chairman 1997 375,000 550,934 - - 168,750 - -
1996 300,000 300,000 - - 168,750 - -

Phillip B. Rooney (A)...................... 1998 300,000 325,000 - - 75,000 338,098 -
Vice Chairman 1997 166,667 200,000 - - 348,750 - -
1996 -- -- - - 10,125 - -
Ernest J. Mrozek........................... 1998 290,000 290,000 - - 52,500 270,948 -
Group President, Consumer Services 1997 275,000 382,618 - - 303,750 - -
1996 220,000 264,000 - - 84,375 - -
Steven C. Preston (A)..................... 1998 256,250 281,250 - - 45,000 253,573 -
Executive Vice President and Chief 1997 180,000 242,983 - - 337,500 - -
Financial Officer 1996 -- -- - - 0 - -
</TABLE>

_______________________________

(A) Neither Mr. Rooney nor Mr. Preston were employed by the Company in 1996.
The option shares shown for Mr. Rooney in column (g) for the year 1996 were
issued in connection with his service as a director.

(B) The Summary Compensation Table does not include the cash distributions made
in respect of the year 1997 by ServiceMaster Management Corporation (the
managing general partner of ServiceMaster Limited Partnership and The
ServiceMaster Company Limited Partnership) to the persons listed in the
table in their capacity as stockholders of ServiceMaster Management
Corporation. Such distributions were dividends and represented a return on
the investment made by such persons in the corporation. The source of these
dividends was the cash distributions made to ServiceMaster Management
Corporation by ServiceMaster Limited Partnership and The ServiceMaster
Company Limited Partnership on the 1% carried interests held by
ServiceMaster Management Corporation in each of these two partnerships
throughout the year 1997. As part of the Reincorporating Merger which was
completed at the end of 1997 (described on page 8), the two partnerships
were terminated, ServiceMaster Management Corporation was dissolved, and
the requirement for direct investments by senior management in a managing
general partner of the parent entity and the principal subsidiary was
eliminated. Accordingly, the foregoing dividend payments will not occur in
1998 or thereafter. Effective January 1, 1998, the Company instituted a
long-term performance based award program. The following table has been
prepared as a supplement to the Summary Compensation Table in order to show
both the 1997 payments reflected in the Summary Compensation Table and the
ServiceMaster Management Corporation dividends paid to the persons listed
in the Summary Compensation Table for the year 1997.

35
<PAGE>

1997 SUMMARY COMPENSATION AND SERVICEMASTER
MANAGEMENT CORPORATION DIVIDEND TABLE
(SUPPLEMENT TO THE SUMMARY COMPENSATION TABLE)

<TABLE>
<CAPTION>
(A) (B) (C) (D)
TOTAL ANNUAL
COMPENSATION SERVICEMASTER
FOR 1997 (FROM MANAGEMENT TOTAL OF
COMPENSATION CORPORATION COLUMNS
NAME AND PRINCIPAL POSITION TABLE) DIVIDENDS (B) AND (C)
- ------------------------------------------------------ ------------ ------------ -----------
<S> <C> <C> <C>
Carlos H. Cantu................................... $1,350,021 $727,742 $2,077,763
President and Chief Executive Officer
C. William Pollard................................ $932,434 $698,118 $1,631,052
Chairman
Phillip B. Rooney................................. $366,667 N/A $366,667
Vice Chairman
Ernest J. Mrozek.................................. $657,618 $340,283 $997,901
Group President, Consumer Services
Steven C. Preston................................. $525,000 $174,555 $699,555
Executive Vice President and Chief
Financial Officer
</TABLE>

________________________________

Footnotes to Summary Compensation Table (continued)

(C) The amounts shown in column (d) of the Summary Compensation Table include
payments made under the ServiceMaster Incentive Compensation Plan plus
payments made in connection with a gain arising from the Reincorporation.

(D) The numbers of shares listed in column (g) of the Summary Compensation Table
have been adjusted, where appropriate, for 3-for-2 share splits occurring in
June 1996, June 1997 and August 1998.

(E) This column (h) shows the amounts paid or credited to the five named
executive officers in respect of the year 1998 pursuant to the Company's
1998 Long-Term Performance Award Plan (the "LTPA Plan") as approved by the
Company's stockholders in May 1998. The LTPA Plan did not exist prior to
1998. Awards under the LTPA Plan are paid (or credited, if a participant
elects to defer payment pursuant to the Company's deferred compensation
plan) either in cash or in shares of common stock. To the extent that stock
is elected as the form of payment, such election will entitle the
participant to shares in a number which, at their then fair market value,
reflects 120% of the amount which would be paid if the payment were made in
cash. The total amount payable each year under the LTPA Plan is
determined by the performance of the Company with respect to growth in
earnings per share relative to the preceding year, growth in economic value
relative to the preceding year, growth in revenue relative to the preceding
year and a comparison of the Company's total return to stockholders relative
to the S&P 500 total return. 20% of the total payout for the year 1998 was,
in accordance with the LTPA Plan, held back for payment in whole or in part
in early 2001. The extent to which the held-back amount is paid will depend
upon the extent to which the Company achieved its strategic planning
objectives for the five-year planning cycle ending on December 31, 2000. A
participant's interest in the held-back amount is forfeited in the case of
certain terminations of his or her employment. The amount held back for
each of the five named executive officers in respect of the year 1998 in
shown in the Long-Term Incentive Plans table on page 38.

36
<PAGE>

The following table summarizes the number and terms of the stock options
granted during the year 1998 to the named executive officers.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F)
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/SARS GRANTED TO EXERCISE OR
GRANTED (K#) EMPLOYEES BASE PRICE EXPIRATION GRANT DATE
NAME AND PRINCIPAL POSITION (A) 1998 ($/SH) (A) DATE VALUE (B)
- ------------------------------------------------ ------------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Carlos H. Cantu.................................. 150,000 4.6% $18.2583 2-15-08 $762,000
President and Chief Executive Officer
C. William Pollard............................... 112,500 3.4% $18.2583 2-15-08 $571,500
Chairman
Phillip P. Rooney................................ 75,000 2.3% $18.2583 2-15-08 $381,000
Vice Chairman
Ernest J. Mrozek................................. 52,500 1.7% $18.2583 2-15-08 $266,700
Group President, Consumer Services
Steven C. Preston................................ 45,000 1.4% $18.2583 2-15-08 $228,600
Executive Vice President and Chief
Financial Officer
</TABLE>

________________________

(A) The options listed in column (b) were granted in February 1998. The number
of shares shown in column (b) and the exercise price shown in column (d)
have been adjusted to reflect the 3-for-2 split in the Company's shares
effected in August 1998. Each of the options listed in column (b) is subject
to a vesting schedule under which the option becomes exercisable in 20%
increments on the 1st, 2nd, 3rd, 4th and 5th anniversaries of grant date.

(B) In accordance with Item 402(c)(2)(vi)(B) of Regulation S-K of the
Commission, the grant date value of each of these options has been estimated
based on the Black-Scholes option pricing model by an independent consulting
firm using the following assumptions: a risk-free rate of interest of 5.6%,
a volatility rate of 22%, a 1.9% distribution yield, and an expected life of
seven years. The values of the options which are shown in the table are
theoretical and do not necessarily reflect the actual values which the
option holders may eventually realize. Such actual values will depend on the
extent to which the market value of the Company's shares at a future date
exceeds the exercise price of the options.

The following table summarizes the exercises of stock options during the
year 1998 by the named executive officers and the number of, and the spread on,
unexercised options held by such officers at December 31, 1998.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
VALUE OPTIONS/SARS AT FY- THE-MONEY OPTIONS/SARS
SHARES ACQUIRED ON REALIZED END(#) AT FY-END($)
NAME EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------------------------- ------------------ -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Carlos H. Cantu,...................... 0 $0 112,500/431,250 1,249,587/3,664,676
Chief Executive Officer
C. William Pollard.................... 0 $0 101,250/348,750 1,127,628/3,034,163
Phillip B. Rooney..................... 0 $0 71,775/360,075 602,773/2,368,214
Ernest J. Mrozek...................... 0 $0 109,808/346,125 1,311,648/3,482,248
Steven C. Preston..................... 0 $0 67,500/315,000 706,453/2,744,627
</TABLE>

37
<PAGE>

LONG-TERM INCENTIVE PLANS - AWARDS IN 1998 (A)

<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F)
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE-BASED PLANS
-----------------------------------------------
PERFORMANCE OR
NUMBER OF SHARES, OTHER PERIOD UNTIL
UNITS OR OTHER MATURATION OR THRESHOLD TARGET MAXIMUM
NAME RIGHTS (#) PAYOUT ($ OR #) ($ OR #) ($ OR #)
- -------------------- ----------------- ------------------ -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Carlos. H. Cantu, 1,000 2001 $117,395
CEO
C. William Pollard 620 2001 $ 87,342
Phillip B. Rooney 600 2001 $ 84,525
Ernest J. Mrozek 577 2001 $ 67,737
Steven C. Preston 500 2001 $ 63,393
</TABLE>

(A) This table pertains to the awards made in respect of the year 1998 under
the Company's 1998 Long-Term Performance Award Plan (the "LTPA Plan"). See
footnote (D) to the Summary Compensation Table for a description of the
LTPA Plan. The figures in column (b) show the number of units awarded for
the year 1998 to each of the named executive officers. The LTPA Plan has a
total of 10,000 participation units. The figures in column (f) reflect the
amounts held back from the awards to each of such persons for the year 1998
for payment in 2001. The extent to which such held-back amounts are in fact
paid will depend upon the extent to which the Company achieved its
strategic planning objectives for the five-year planning cycle ending on
December 31, 2000. If and to the extent such held-back amounts are not paid
to the named executive officers, the unpaid sums will revert to the
Company.

EMPLOYMENT AND SEVERANCE ARRANGEMENTS

The Company has an employment agreement in effect with each of the
executive officers named in the Summary Compensation Table. Each of such
agreements establish a 1999 base salary, provide that certain information
proprietary to the Company be kept confidential, provide for certain
restrictions on employment with a competitor or a customer following termination
of employment with the Company and is terminable by the Company without prior
notice in the case of misconduct, nonperformance or incompetent performance and
upon two weeks' notice in all other cases subject to certain exceptions and
limitations.

The Company does not presently have employment agreements with any members
of the Company's senior management under which termination benefits are provided
if a change in control of the Company occurs. The Board of Directors is
considering the desirability of such arrangements, as well as the desirability
of a more broadly based plan to cover employees who are not members of senior
management and who meet certain employment longevity standards.

The ServiceMaster 1998 Equity Incentive Plan provides that all stock
options granted prior to the occurrence of a change in control shall become
immediately exercisable upon the occurrence of a change in control and shall
remain exercisable thereafter throughout the entire terms of the options.

INDEBTEDNESS OF MANAGEMENT

No executive officer was indebted to the Company in excess of $60,000 at
any point during the year 1998.

38
<PAGE>

OWNERSHIP OF COMMON

As of March 1, 1999, no one is the beneficial owner of more than five
percent of the Common Stock. The following table sets forth as of January 1,
1999 the beneficial ownership of the Common Stock with respect to
ServiceMaster's directors, senior management advisers and those executive
officers named in the Summary Compensation Table and the Company's directors and
officers as a group:

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (1)
------------------------------------------------------
(1) (2) (3) (4) (5)
SOLE VOTING
AND
INVESTMENT TOTAL PERCENT
NAME OF BENEFICIAL OWNER POWER OTHER OWNERSHIP OWNERSHIP
- ------------------------------------------------------------- -------------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Paul W. Berezny (3)(4)(6)(8).................................. 139,607 1,198,779 1,338,386 0.448%
Henry O. Boswell (2)(4)....................................... 83,706 91,108 174,814 0.058%
Carlos H. Cantu (4)(5)(12).................................... 693,031 2,428,929 3,121,960 1.043%
Robert D. Erickson (4)(5)(7).................................. 1,044,268 123,391 1,167,659 0.390%
Brian Griffiths (4)........................................... 34,723 0 34,723 0.012%
Sidney E. Harris (4).......................................... 22,710 1,687 24,397 0.008%
Herbert P. Hess (4)(8)........................................ 251,725 30,375 282,100 0.094%
Michele M. Hunt (4)........................................... 22,136 0 22,136 0.007%
Donald K. Karnes (4).......................................... 1,948,459 0 1,948,459 0.651%
Robert F. Keith (4)(5)........................................ 457,100 104,339 561,439 0.188%
Gunther H. Knoedler (4)....................................... 76,277 0 76,277 0.026%
James D. McLennan (4)......................................... 65,744 0 65,744 0.022%
Ernest J. Mrozek (4)(5)....................................... 519,096 61,189 580,285 0.193%
Vincent C. Nelson (4)(8)(9)(10)............................... 59,386 787,547 846,933 0.283%
Dallen W. Peterson (4)........................................ 2,473,273 0 2,473,273 0.827%
C. William Pollard (4)(5)(11)................................. 1,120,978 223,540 1,344,518 0.449%
Steven C. Preston (4)......................................... 144,000 0 144,000 0.048%
Steven S Reinemund (4)........................................ 10,002 15,000 25,002 0.008%
Phillip B. Rooney (3)(4)...................................... 419,581 13,500 433,081 0.145%
David M. Slott (4)............................................ 622,227 439,938 1,062,165 0.355%
Burton E. Sorensen (4)........................................ 43,477 0 43,477 0.015%
Charles W. Stair (5)(6)(13)................................... 891,824 103,092 994,916 0.333%
David K. Wessner (3)(4)(8)(14)(15)............................ 299,727 1,710,459 2,010,186 0.672%
All directors and officers as a group (128 persons) (16)...... 21,021,936 9,107,406 30,129,342 9.898%
</TABLE>

__________________________

(1) The shares owned by each person and by all directors and officers as a
group, and the shares included in the total number of shares, have been
adjusted, and the percentage ownership figures have been computed, in
accordance with Rule 13d-3(d)(1)(i).
(2) Shares in column (3) include 60,658 shares owned by spouse as to which
beneficial ownership is disclaimed.
(3) Shares in column (3) include shares held by spouse and/or other family
members.
(4) Shares in column (2) include shares which may be acquired within sixty days
under options granted under the ServiceMaster Share Option Plan, the
ServiceMaster 10-Plus Option Plan, the ServiceMaster 1998 Equity Incentive
Plan, the ServiceMaster Non-Employee Directors Option Plan and/or the
ServiceMaster 1998 Non-Employee Directors Discounted Stock Option Plan.
(5) Shares in column (3) include shares held in one or more investment
partnerships in which the listed person is a partner with shared voting
power and investment power.
(6) Shares in column (2) include shares held in trust for the benefit of family
members as to which beneficial ownership is disclaimed.
(7) Shares in column (3) include 97,168 shares owned by spouse or held in trust
for the benefit of family members as to which beneficial ownership is
disclaimed.
(8) Shares in column (3) include shares held in trust for benefit of self
and/or family members.

39
<PAGE>

(9) Shares in column (2) include 43,804 shares in trust for the benefit of
family members as to which beneficial ownership is disclaimed. Shares in
column (3) include 16,252 shares held in trust for the benefit of family
members as to which beneficial ownership is disclaimed.
(10) Shares in column (3) include 353,211 shares owned by a charitable trust of
which Vincent C. Nelson is a trustee. Mr. Nelson disclaims beneficial
ownership of such shares.
(11) Shares in column (3) include 35,620 shares owned by a charitable foundation
of which C. William Pollard is a director. Mr. Pollard disclaims beneficial
ownership of such shares. Shares in column (3) also include 34,426 shares
in trust for the benefit of family members.
(12) Shares in column (3) include 11,523 shares owned by a charitable foundation
of which Carlos H. Cantu is an officer. Mr. Cantu disclaims beneficial
ownership of such shares.
(13) Shares in column (3) include 59,400 shares owned by a charitable foundation
of which Charles W. Stair is a director. Mr. Stair disclaims beneficial
ownership of such shares.
(14) Shares in column (3) include 731,162 shares owned by a charitable
foundation of which David K. Wessner is a director. Mr. Wessner disclaims
beneficial ownership of such shares.
(15) Shares in column (3) include 545,620 shares held by an investment company
of which David K. Wessner is a shareholder and one of four directors.
(16) Includes 5,419,879 shares which certain officers of ServiceMaster, through
the exercise of their respective rights, may acquire within 60 days under
share purchase agreements, options granted under the ServiceMaster Share
Option Plan and options granted under the ServiceMaster 10-Plus Option
Plan. 20% of the options granted under the ServiceMaster 1998 Equity
Incentive Plan in February 1998 were exercisable on March 1, 1999. None of
the options granted under the ServiceMaster 1998 Equity Incentive Plan in
February 1999 were exercisable on March 1, 1999. Shares purchasable by the
persons identified in the Summary Compensation Table under one or more of
the foregoing plans are as follows: Mr. Cantu - 187,500 shares; Mr. Pollard
- 157,500 shares; Mr. Rooney - 91,050 shares; Mr. Mrozek - 197,933 shares;
Mr. Preston - 144,000 shares; and all executive officers as a group -
1,502,981 shares.

40
<PAGE>

DESCRIPTION OF COMMON STOCK

Under the Company's Amended and Restated Certificate of Incorporation (the
"Restated Certificate"), the Company is authorized to issue 1,000,000,000 shares
of Common Stock, par value $0.01 per share, and 11,000,000 shares of preferred
stock, par value $0.01 per share (the "Preferred Stock"). As of March 1, 1999,
approximately 300,000,000 shares of Common Stock (excluding treasury shares)
were issued and outstanding and no shares of Preferred Stock were issued and
outstanding. In addition, as of March 1, 1999, the Board of Directors had
approved the issuance of 7,500,000 shares of Common Stock under the Company's
equity incentive plans, and of that number approximately 2,160,000 were subject
to issuance under outstanding stock options. The number of authorized shares of
Preferred Stock includes 1,000,000 authorized shares of Junior Participating
Preferred Stock, Series A (the "Series A Preferred Stock") issuable pursuant to
the rights agreement dated as of December 15, 1997 between the Company and
Harris Trust and Savings Bank (the "Rights Plan"), none of which were
outstanding as of December 31, 1998. See "--Stock Purchase Rights."

COMMON STOCK

Subject to the rights of the holders of any Preferred Stock, each holder of
Common Stock on the applicable record date is entitled to receive such dividends
as may be declared by the Board of Directors out of funds legally available
therefor, and, in the event of liquidation, to share pro rata in any
distribution of the Company's assets after payment of liabilities. Each holder
of Common Stock is entitled to one vote for each share held of record on the
applicable record date on all matters presented to a vote of stockholders. The
outstanding Common Stock is, and the shares of Common Stock offered hereby by
the Company will be, fully paid and non-assessable.

Harris Trust and Savings Bank of Chicago, Illinois is the registrar and
transfer agent for the Common Stock.

STOCK PURCHASE RIGHTS

Each outstanding share of Common Stock includes, and each share of Common
Stock offered hereby will include, one preferred stock purchase right
(individually a "Right" and collectively the "Rights") provided under the Rights
Plan. Each Right entitles the holder, until the earlier of December 11, 2007 or
the redemption of the Rights, to buy one one-thousandth of a share of Series A
Preferred Stock at a price of $130 per one one-thousandth of a share (as may be
adjusted to reflect stock splits since the issuance of the Rights). The Series A
Preferred Stock is nonredeemable and will have 1,000 votes per share (subject to
adjustment). The Company has reserved 1,000,000 shares of Series A Preferred
Stock for issuance upon exercise of such Rights.

In the event that any person becomes the beneficial owner of 15% or more of
the Company's Common Stock, the Rights (other than Rights held by the acquiring
stockholder) would become exercisable for that number of shares of the Common
Stock having a market value of two times the exercise price of the Right.
Furthermore, if after any person becomes the beneficial owner of 15% or more of
the Company's Common Stock the Company is acquired in a merger or other business
combination or 50% or more of its assets or earnings power were sold, each Right
(other than Rights held by the acquiring person) would become exercisable for
that number of shares of Common Stock (or securities of the surviving company in
a business combination) having a market value of two times the exercise price of
the Right.

The Company may redeem the Rights at one cent per Right prior to the
occurrence of an event that causes the Rights to become exercisable for Common
Stock.

One Right will be issued in respect of each share of Common Stock issued
before the earlier of December 11, 2007 or the redemption of the Rights. As of
the date of this Prospectus, the Rights are not exercisable, certificates
representing the Rights have not been issued and the Rights automatically trade
with the shares of Common Stock. The Rights will expire on December 11, 2007,
unless earlier redeemed.

41
<PAGE>

PREFERRED STOCK

Shares of Preferred Stock may be issued from time to time in one or more
series. The Board is authorized to determine and alter all rights, preferences
and privileges and qualifications, limitations and restrictions thereof
(including, without limitation, voting rights and the limitation and exclusion
thereof) granted to or imposed upon any wholly unissued series of Preferred
Stock and the number of shares constituting any such series and the designation
thereof, to determine whether fractional shares can be issued in any particular
series and, if so, the nature of the fractional interests which can be issued in
that series, and to increase or decrease (but not below the number of shares of
such series then outstanding) the number of shares of any series subsequent to
the issue of shares of that series then outstanding. In case the number of
shares of any series is so decreased, the shares constituting such reduction
shall resume the status which such shares had prior to the adoption of the
resolution originally fixing the number of shares of such series.

CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE AND BY-LAWS

The following summary of certain provisions of the Restated Certificate and
By-Laws of the Company (the "By-Laws") does not purport to be complete and is
subject to and qualified in its entirety by reference to the Restated
Certificate and the By-Laws, which are incorporated by reference as exhibits to
the Registration Statement of which this Prospectus is a part.

Classification of Directors. The Company's Restated Certificate and By-Laws
provide that its Board of Directors shall be divided into three classes, each
class being as nearly equal in number as reasonably practicable, and that at
each annual meeting of the Company's stockholders, the successors to the
Directors whose terms expire that year shall be elected for a term of three
years. The number of Directors is fixed by the affirmative vote of the majority
of the Directors then in office, but may not be less than three. Newly created
Directorships and any vacancies on the Board of Directors are filled by a
majority vote of the remaining Directors then in office, even if less than a
quorum. Except in certain limited circumstances, no Director may be removed from
the Board prior to the time such person's term would expire unless (i) such
removal is for cause and (ii) such removal has been approved by the affirmative
vote of the holders of 67% of the outstanding voting shares of the Company. The
Restated Certificate requires that a majority of the members of the Board be
"independent directors," which is defined to generally include any person (i)
who is not and has not been employed by any ServiceMaster unit within one year;
(ii) is not a "Related Person" (as hereinafter defined) and has not been
employed by a Related Person within one year; (iii) is not a party to any
agreement, requirement or arrangement under which such person may be obligated
to act in his or her capacity as a Director in accordance with instructions
provided by any person who is not independent (including, but not limited to, a
Related Person); and (iv) is not subject to any relationship, arrangement or
circumstance (including any relationship with a Related Person) which, in the
judgment of a majority of the independent Directors (the "Independent Board
Majority") is reasonably possible will interfere with such person's exercise of
independent judgment as a Director.

Special Meetings. The By-Laws provide that stockholder action can be taken
only at an annual or special meeting of stockholders and cannot be taken by
written consent in lieu of a meeting. The By-Laws provide that, except as
otherwise required by law, special meetings of the stockholders can only be
called pursuant to a resolution adopted by a majority of the Board of Directors.
Stockholders are not permitted to call a special meeting or to require the Board
to call a special meeting.

Approval of Certain Business Combinations. The Restated Certificate
provides that the affirmative vote of the holders of not less than 80% of the
outstanding shares of the Common Stock held by stockholders other than a
"Related Person" (any person or entity which, together with its affiliates and
associates, beneficially owns in the aggregate 15% or more of the outstanding
Common Stock and any affiliate or associate of such person or entity) is
required for the approval or authorization of any "Business Combination" (as
hereinafter defined) of the Company with any Related Person; provided, that the
foregoing 80% voting requirement is not applicable if an "Independent Board
Majority" (a majority of the group comprised of all individuals who are
independent sitting directors) either (a) has expressly approved in advance the
acquisition of the outstanding shares of Common Stock that caused such Related
Person to become a Related Person or (b) has expressly approved such Business
Combination either in advance of or subsequent

42
<PAGE>

to such Related Person's having become a Related Person. The term "Business
Combination" is defined under the Restated Certificate to mean (a) any merger or
consolidation of the Company or a subsidiary of the Company with or into a
Related Person; (b) any sale, lease, exchange, transfer or other disposition of
all or any substantial part (as defined in the Restated Certificate) of the
assets either of the Company (including without limitation any voting securities
of a subsidiary) or of a subsidiary of the Company to a Related Person; (c) any
merger or consolidation of a Related Person with or into the Company or a
subsidiary of the Company; (d) any sale, lease, exchange, transfer or other
disposition of all or any substantial part of the assets of a Related Person to
the Company or a subsidiary of the Company; (e) the issuance of any securities
of the Company or a subsidiary of the Company to a Related Person; (f) any
recapitalization that would have the effect of increasing the voting power of a
Related Person; and (g) any agreement, contract or other arrangement providing
for any of the transactions described in this definition of a Business
Combination.

Action by Written Consent. The By-Laws provide that a holder of Common
Stock or any other class of stock at any time issued by the Company shall not
have the right to take action by written consent. Rather, stockholders shall
only have the right to act with respect to any particular issue at a meeting of
stockholders at which that issue is properly up for a vote by stockholders.

Stockholder Proposals. Stockholders are only entitled to make proposals to
be voted upon by stockholders at an annual meeting if they comply with certain
procedures set forth in the By-Laws, which require, among other things, that the
proposing stockholder must deliver a written notice identifying such proposal to
the office of the Company's General Counsel at the Company's headquarters no
later than the close of business on the 60th day nor earlier than the close of
business on the 90th day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that if the date of the annual meeting is
more than 30 days before or more than 60 days after such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier than the
close of business on the 90th day prior to such annual meeting and not later
than the close of business on the later of the 60th day prior to such annual
meeting or the 10th day following the day on which public announcement of the
date of such meeting is first made by the Company. At a special stockholders
meeting, a stockholder's proposal will be timely for that meeting if it is
actually delivered to the General Counsel's office at the Company's headquarters
no later than the close of business on the 10th day following the day on which
the Company first publicly announced the date of the special meeting and that a
vote by stockholders will be taken at that meeting. Such stockholder's proposal
notice must: (i) contain a description of the proposal, the reasons for the
proposal and any material interest in such proposal by the proposing stockholder
or the beneficial owner of the stockholder's record shares; (ii) contain an
affirmation by the proposing stockholder that the stockholder satisfies the
requirements specified in the By-Laws for presentation of such proposal; and
(iii) as to the stockholder making the proposal and the beneficial owner, if
any, on whose behalf the proposal is made (x) the name and address of such
stockholder, as they appear on the Company's books, and of such beneficial owner
and the telephone number at which each may be reached during normal business
hours through the time for which the meeting is scheduled and (y) the class and
number of shares of the Company which are owned beneficially and of record by
such stockholder and such beneficial owner.

Amendments to the Restated Certificate and Bylaws. The Restated Certificate
provides that no change in the Restated Certificate shall be effective unless it
shall have been approved by at least 80% of the Company's sitting directors and
shall have received such other approvals as may have been required by the
Company's By-Laws or by applicable law. Amendment of the Bylaws requires either
the approval of 80% of the sitting directors in office at the time such
amendment is approved or the approval of the holders of 80% of the outstanding
Common Stock.

CERTAIN ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW

The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Company (or its majority-owned
subsidiaries) for three years following the time such person became an
interested stockholder unless: (i) before such person became an interested
stockholder, the Company's Board of Directors approved the transaction in which
the interested stockholder became an interested stockholder or approved the
business combination; (ii) upon consummation of the transaction that resulted in
the interested stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the Company's voting stock outstanding at the

43
<PAGE>

time the transaction commenced (excluding stock held by directors who are also
officers of the Company and by employee stock plans that do not provide
employees with the rights to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer); or (iii) at
or following the transaction in which such person became an interested
stockholder, the business combination is approved by the Company's Board of
Directors and approved at a meeting of stockholders by the Affirmative vote of
the holders of at least two-thirds of the Company's outstanding voting stock not
owned by the interested stockholder. Under Section 203, the restrictions
described above also do not apply to certain business combinations proposed by
an interested stockholder following the earlier of the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who had not been an interested stockholder during the previous
three years or who became an interested stockholder with the approval of a
majority of the Company's directors, if such extraordinary transaction is
approved or not opposed by a majority of the directors who were directors prior
to any person becoming an interested stockholder during the previous three years
or were recommended for election or elected to succeed such directors by a
majority of such directors.

44
<PAGE>

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Common Stock is listed on the NYSE under the symbol "SVM." The
following table sets forth the high and low sale prices of the Common Stock for
the year 1998 and for the Partnership Shares for all other periods as reported
on the New York Stock Exchange Composite Tape and the cash dividends paid per
share of Common Stock or the cash distributions paid per Partnership Share for
the periods indicated. The prices have been adjusted to give retroactive effect
to ServiceMaster's three-for-two share splits in August 1998, June 1997 and June
1996 (share prices have been rounded to the nearest one cent).

CASH
DISTRIBUTIONS
High LOW PAID
------ ------ -------------
Year ended December 31, 1996:
First Quarter............................. $ 9.93 $ 8.61 $ 0.07-1/8
Second Quarter............................ 10.45 9.17 0.07-1/8
Third Quarter............................. 11.00 9.55 0.07-1/2
Fourth Quarter............................ 11.83 10.55 0.07-1/2
Year ended December 31, 1997:
First Quarter............................. 12.33 10.92 0.07-1/2
Second Quarter............................ 15.92 12.09 0.07-1/2
Third Quarter............................. 19.67 15.17 0.08
Fourth Quarter............................ 19.50 14.00 0.08
Year ended December 31, 1998:
First Quarter............................. 19.63 16.50 0.08
Second Quarter............................ 25.50 17.92 0.08
Third Quarter............................. 24.75 19.75 0.09
Fourth Quarter............................ 23.81 16.00 0.09
Year ended December 31, 1999:
First Quarter (through March 22, 1999).... 22.00 17.50 0.09

As of February 15, 1999, there were approximately 28,724 holders of record
of the Common Stock. A recent last reported sale price on the NYSE for the
Common Stock is set forth on the cover page of this Prospectus.

The Company has consistently paid increasing dividends or cash
distributions over the last 28 years. The Company's current policy is to
continue to increase its dividend payment. The timing and amount of future
dividends will be at the discretion of the Board of Directors and will depend
on, among other things, the Company's results of operations, corporate finance
objectives and cash requirements. The Company has announced that its intended
cash dividend for 1999 will be $0.36 per share.

LEGAL MATTERS

Certain legal matters regarding the issuance of the Common Stock, under
laws other than federal or state securities laws, have been passed upon for the
Company by the General Counsel of the Company.

EXPERTS

The financial statements and schedules included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.

45
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
THE SERVICEMASTER COMPANY (AND PREDECESSOR) PAGE
----
<S> <C>
Report of Independent Public Accountants............................................. F-2

Summary of Significant Accounting Policies........................................... F-3

Statements of Income for the years ended December 31, 1998, December 31, 1997,
and December 31, 1996............................................................... F-4

Statements of Financial Position as of December 31, 1998 and December 31, 1997....... F-5

Statements Cash Flows for the years ended December 31, 1998, December 31, 1997
and December 31, 1996............................................................... F-6

Statements of Shareholders' Equity for the years ended December 31, 1998,
December 31, 1997 and December 31, 1996............................................. F-7

Notes to Consolidated Financial Statements for the years ended December 31, 1998,
December 31, 1997 and December 31, 1996............................................. F-8
</TABLE>

See Notes to Consolidated Financial Statements

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
The Servicemaster Company

We have audited the accompanying consolidated statements of financial position
of THE SERVICEMASTER COMPANY (organized under the laws of the State of Delaware,
formerly ServiceMaster Limited Partnership) AND SUBSIDIARIES, as of December 31,
1998 and 1997, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
ServiceMaster Company and Subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of operations and cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP
Chicago, Illinois
January 25, 1999

F-2
<PAGE>

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION: The consolidated financial statements include the
accounts of ServiceMaster and its majority-owned subsidiary partnerships and
corporations, collectively referred to as the Company. Intercompany transactions
and balances have been eliminated in consolidation. Investments in
unconsolidated subsidiaries representing ownership of at least 20 percent, but
less than 50 percent, are accounted for under the equity method. Certain
immaterial 1997 and 1996 amounts have been reclassified to conform with the 1998
presentation. The preparation of the consolidated financial statements requires
management to make certain estimates and assumptions required under generally
accepted accounting principles which may differ from the actual results.

REVENUES: Revenues from lawn care, termite, pest control, and plumbing services
are recognized as the services are provided. Revenues from franchised services
(which in aggregate represent less than 10 percent of consolidated totals)
consist of initial franchise fees received from the sales of licenses, sales of
products to franchisees, and continuing monthly fees based upon franchise
revenue.

Home warranty contract fees are recognized as revenues ratably over the life of
the contract while the contract costs are expensed as incurred.

Revenues from management services are recognized as services are rendered and
consist of contract fees which reflect the total price of such services. Where
the Company principally manages people who are employees of the facility, the
payroll costs for such employees are recognized by the Company and included in
"Cost of services rendered and products sold" in the Consolidated Statements of
Income. Receivables from the facilities are reflected in the Consolidated
Statements of Financial Position at the net amount due, after deducting from the
contract price all amounts chargeable to the Company.

Revenues from the professional employer organization (PEO) are recognized as the
services are rendered. Consistent with PEO industry practice, revenues include
the gross amount billed to clients, which includes payroll and other direct
costs.

INVENTORY VALUATION: Inventories are valued at the lower of cost (first-in,
first-out basis) or market. Inventory costs include material, labor, and factory
overhead and related handling costs. Raw materials represent less than three
percent of the inventory value at December 31, 1998. The remaining inventory is
finished goods to be used on the customers' premises or sold to franchisees.

DEPRECIATION AND AMORTIZATION: Buildings and equipment used in the business are
stated at cost and depreciated over their estimated useful lives using the
straight-line method for financial reporting purposes. The estimated useful
lives for building and improvements range from 10 to 40 years, while the
estimated useful lives for equipment range from three to 10 years. Intangible
assets consist primarily of trade names ($177 million) and goodwill ($1.7
billion). These assets are amortized on a straight-line basis over their
estimated useful lives, which are predominately 40 years. Long-lived assets,
including fixed assets and intangible assets, are periodically reviewed to
determine recoverability by comparing their carrying values to the undiscounted
future cash flows expected to be realized from their use. No recovery problems,
other than that noted in the discontinued Home Health Care operations, have been
indicated by these comparisons. Based on the reviews, if the undiscounted future
cash flows are less than the carrying amount of the asset, an impairment loss is
recognized based on the asset's fair value, and the carrying amount of the asset
is reduced accordingly.

INCOME TAXES: The Company accounts for income taxes under the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
statement utilizes an asset and liability approach that requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences
of events that have been recognized in the Company's financial statements or tax
returns. Deferred income taxes are provided to reflect the differences between
the tax bases of assets and liabilities and their reported amounts in the
financial statements.

EARNINGS PER SHARE: Basic earnings per share is based on the weighted-average
number of common shares outstanding during the year. Shares potentially issuable
under options have been considered outstanding for purposes of the diluted
earnings per share calculation.

NEWLY ISSUED ACCOUNTING STATEMENTS AND POSITIONS: In 1998, Statement of Position
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use," and Statement of Position No. 98-5, "Reporting on the Costs
of Start Up and Preoperating Activities," were issued. The Company intends to
adopt these policies beginning in 1999 as required by the Statements. The
Company does not expect the adoption of these Statements to have a material
impact on the financial statements.

Also in 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Company intends to adopt this Statement in January
2000 as required by the Statement. Adoption of this Statement is not expected to
have a material impact on the Company's financial statements.
F-3
<PAGE>

STATEMENTS OF INCOME
(In thousands, except per Share Data)

<TABLE>
<CAPTION>
Years Ended December 31

1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUE................................................................ $ 4,724,119 $ 3,961,502 $ 3,458,328

OPERATING COSTS AND EXPENSES:
Cost of services rendered and products sold...................................... 3,679,612 3,058,160 2,681,008
Selling and administrative expenses.............................................. 648,085 559,409 482,102
------------ ------------ ------------
Total operating costs and expenses............................................... 4,327,697 3,617,569 3,163,110
------------ ------------ ------------
OPERATING INCOME................................................................. 396,422 343,933 295,218

NON-OPERATING EXPENSE (INCOME):
Interest expense................................................................. 92,945 76,447 38,298
Interest and investment income................................................... (15,301) (14,304) (10,183)
Minority interest................................................................ - 7,511 14,706
------------ ------------ ------------

INCOME BEFORE INCOME TAXES....................................................... 318,778 274,279 252,397

Provision for income taxes (pro forma corporate form in 1997 and 1996)/(1)/...... 128,786 110,809 101,968
------------ ------------ ------------

NET INCOME (pro forma corporate form in 1997 and 1996)/(1)/...................... $ 189,992 $ 163,470 $ 150,429
------------ ------------ ------------

PER SHARE (pro forma corporate form in 1997 and 1996):/(1)/(2)/
BASIC........................................................................... $ 0.66 $ 0.57 $ 0.47
------------ ------------ ------------
DILUTED......................................................................... $ 0.64 $ 0.55 $ 0.46
------------ ------------ ------------
</TABLE>

(1) The Company converted from partnership to corporate form in a tax-free
exchange for shareholders on December 26, 1997. Prior to the conversion, the
Partnership was not subject to federal income taxes as its taxable income was
allocated to the Company's shareholders. As a result of the conversion, the
Company is a taxable entity and is responsible for such payments. The results
shown above for the years ended December 31, 1997 and 1996 have been restated to
adjust the actual historical partnership information to a pro forma basis that
assumes that reincorporation had occurred as of the beginning of the year. Upon
reincorporation, the Company recognised a significant increase in the tax basis
of certain assets and recorded a $65 million tax gain related to
reincorporation, which represented the difference between the tax basis and book
value of its assets. The Company's historical net income and net income per
share as a partnership were as follows:

<TABLE>
<CAPTION>
Before One-Time
---------------

Tax Benefit Actual
------------------- -------------------
Partnership information as Recorded: 1997 1996 Earnings Per Share: 1997 1996 1997 1996
- ----------------------------------- ---------- ---------- ------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes............ $ 274,279 $ 232,397 Basic $ .92 $ .77 $ 1.10 $ .77

Partnership tax provision............. 10,203 7,257 Diluted $ .89 $ .75 $ 1.10 $ .75
Tax benefit relating to change
in tax status....................... $ 65,000 -
---------- ----------
Net income............................ $ 239,076 $ 245,140
========== ==========
</TABLE>

(2) Basic earnings per share are calculated based on 289,315 shares in 1998,
285,944 shares in 1997, and 317,381 shares in 1996, while diluted earnings per
share are calculated based on 298,887 shares in 1998, 299,640 shares in 1997,
and 330,429 shares in 1996. All share and per share data reflect the
three-for-two share splits in August 1998, June 1997 and June 1996.

See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statements.

F-4
<PAGE>

STATEMENTS OF FINANCIAL POSITION (In thousands)

<TABLE>
<CAPTION>
As of December 31,
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 66,400 $ 64,876
Marketable securities......................................... 54,022 39,248
Receivables, less allowances of $38,988 in 1998 and $32,221 in
1997......................................................... 372,375 299,138
Inventories................................................... 49,770 48,157
Prepaid expenses and other assets............................. 127,635 122,665
----------- -----------
Total current assets........................................ 670,202 594,084
----------- -----------

PROPERTY, PLANT, AND EQUIPMENT, AT COST:
Land and buildings............................................ 33,068 46,632
Equipment..................................................... 388,141 316,021
----------- -----------
441,209 362,653
Less: accumulated depreciation................................ 229,049 204,383
----------- -----------
Net property, plant, and equipment............................ 212,160 158,270
----------- -----------

OTHER ASSETS:
Intangible assets, primarily trade names and goodwill,
less accumulated amortization of $272,254 in 1998 and
$218,293 in 1997............................................ 1,881,002 1,563,302
Notes receivable, long-term securities, and other assets...... 148,487 159,561
----------- -----------
Total Assets................................................ $ 2,914,881 $ 2,475,224
----------- -----------

LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES
Accounts payable.............................................. $ 110,523 $ 84,673
Accrued liabilities:
Payroll and related expenses................................. 96,199 85,315
Insurance and related expenses............................... 56,748 55,909
Income taxes payable......................................... 84,165 8,423
Other........................................................ 149,477 121,020
Deferred revenues............................................. 204,969 181,298
Current portion of long-term debt............................. 51,616 21,539
----------- -----------
Total current liabilities.................................... 753,697 558,177
----------- -----------

Long-Term Debt................................................ 1,076,167 1,247,845
OTHER LONG-TERM OBLIGATIONS................................... 128,501 144,764

COMMITMENTS AND CONTINGENCIES (SEE NOTES)

SHAREHOLDERS' EQUITY:
Common stock $0.01 par value, authorized 1 billion shares;
issued and outstanding of 298,030 shares in 1998 and 279,944
shares in 1997............................................... 2,980 2,799
Additional paid-in capital.................................... 788,124 513,148
Retained earnings............................................. 179,840 65,000
Accumulated other comprehensive income........................ 3,911 5,343
Restricted stock.............................................. (3,383) (4,270)
Treasury stock................................................ (14,986) (57,582)
----------- -----------
Total shareholders' equity................................... 956,486 524,438
----------- -----------
Total Liabilities and Shareholders' Equity.................... $ 2,914,851 $ 2,475,224
----------- -----------
</TABLE>

See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statements.

F-5
<PAGE>

<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and Cash equivalents at January 1................................ $ 64,876 $ 72,009 $ 23,113

CASH FLOWS FROM OPERATION:
NET INCOME............................................................ 189,992 329,076 245,140
Adjustments to reconcile net income to
net cash provided from operations:
Depreciation....................................................... 50,644 45,392 41,658
Amortization....................................................... 53,961 47,670 37,348
Tax asset recorded upon reincorporation............................ - (65,000) -
Change in working capital, net of acquisitions:
Receivables........................................................ (46,205) (6,853) (19,084)
Inventories and other current assets............................... (2,360) (14,210) (12,666)
Accounts payable................................................... 18,475 5,603 10,302
Deferred revenues.................................................. 22,033 30,012 17,602
deferred ? tax payment............................................ 85,000 - -
Deferred income tax expense........................................ 36,400 - -
Accrued liabilities................................................ (2,028) (82) 13,140
Other,net........................................................... 1,627 281 7,946
--------- ---------- ---------

NET CASH PROVIDED FROM OPERATIONS..................................... 405,539 371,889 341,386
--------- ---------- ---------

CASH FLOW FROM INVESTING ACTIVITIES:
Property additions.................................................. (75,297) (46,232) (42,952)
Sale of equipment and other assets.................................. 6,941 4,134 2,664
Business acquisitions, net of cash acquired......................... (222,452) (233,689) (58,473)
Proceeds from sale of businesses.................................... 45,893 - 4,526
Net purchases of investment securities.............................. (11,011) (16,733) (20,075)
Notes receivable and financial investments.......................... (10,645) (3,593) 3,304
Payments to sellers of acquired businesses.......................... (10,271) (4,723) (3,742)
--------- ---------- ---------
Net Cash Used for Investing Activities................................ (276,842) (300,856) (114,748)
--------- ---------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings, net..................................................... 310,190 888,528 123,732
Payments of borrowings and other obligations........................ (564,448) (160,155) (82,857)
Proceeds from stock offering........................................ 208,561 - -
Distributions to shareholders and shareholders' trust............... (75,152) (155,883) (146,520)
Purchase of Service Master stock.................................... (18,310) (657,191) (76,556)
Proceeds from employee share plans.................................. 12,638 6,526 6,835
Distributions to holders of minority interests...................... - (542) (3,074)
Other............................................................... (652) 551 698
--------- ---------- ---------
NET CASH USED FOR FINANCING ACTIVITIES................................ (127,173) (78,166) (177,742)
--------- ---------- ---------

CASH INCREASE (DECREASE) DURING THE YEAR.............................. 1,524 (7,133) 48,896
--------- ---------- ---------

CASH AND CASH EQUIPMENTS AT DECEMBER 31............................... $ 66,400 $ 64,876 $ 72,009
--------- ---------- ---------
</TABLE>

See accompanying Summary of Significant Accounting Policies
and Notes to the Consolidated Financial Statements.

F-6
<PAGE>

STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)

<TABLE>
<CAPTION>
CORPORATE EQUITY
-------------------------------------------
ADDITIONAL LIMITED ACCUMULATED
COMMON PAID-IN RETAINED PARTNERS' COMPREHENSIVE
STOCK CAPITAL EARNINGS EQUITY INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995........................... $ - $ - $ - $ 761,710 $ 5,904
============================================================================

Net income 1996...................................... 245,140
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment.................... 1,452

Foreign currency translation ($678 tax expense).... (999)
----------------------------------------------------------------------------
Total comprehensive income........................... 245,140 453

Shareholder distributions............................ (146,520)
Shares issued under option, subscription,
grant plans and other (3,667 shares)............... (7,166)
Treasury shares purchased and related costs
(7,825 shares).....................................
Shares issued for acquisitions (3,213 shares)........ 3,104
----------------------------------------------------------------------------

BALANCE, DECEMBER 31,1996............................ $ - $ - $ - $ 856,268 $ 6,357
============================================================================

Net income 1997...................................... 65,000 264,076
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment.................... 4,269
Foreign currency translation ($3,580 tax expense).. (3,283)
----------------------------------------------------------------------------
Total comprehensive income........................... 65,000 264,076 (1,014)
Shareholder distributions............................ (155,883)
Shares issued under option, debentures,
grant plans and other (6,552 shares)............... 21,165
Treasury shares repurchased from WMX
(61,112 shares).................................... (625,978)
Treasury shares purchased and related costs
(2,051 shares).....................................
Shares issued for acquisitions of Barefoot,
Inc., and other acquisitions (16,161 shares)....... 156,299
Conversion to corporate form......................... 2,799 513,148 (515,947)
----------------------------------------------------------------------------

BALANCE, DECEMBER 31,1997............................ $ 2,799 $513,148 $ 65,000 $ - $ 5,343
============================================================================

Net income 1998...................................... 189,992
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment.................... (485)
Foreign currency translation ($640 tax expense).... (947)
----------------------------------------------------------------------------
Total comprehensive income........................... 189,992

Shareholder distributions............................ (75,152)
Shares issued in public offering (11,400 shares)..... 114 208,447
Shares issued under option, debentures,
grant plans and other (2,514 shares)............... 25 9,403
Treasury shares purchased and related costs
(888 shares)....................................... (9)
Shares issued for acquisitions (5,059 shares)........ 51 57,126
----------------------------------------------------------------------------

BALANCE, DECEMBER 31,1998............................ $ 2,980 $788,124 $179,840 $ - $ 3,911
============================================================================

<CAPTION>
TREASURY RESTRICTED TOTAL
STOCK STOCK EQUITY
---------------------------------------------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1995........................... $ (13,405) $ (7,549) $ 746,660
===================================================

Net income 1996...................................... 245,140
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment.................... 1,452
Foreign currency translation ($678 tax expense).... (999)
---------------------------------------------------
Total comprehensive income........................... 245,593

Shareholder distributions............................ (146,520)
Shares issued under option, subscription,
grant plans and other (3,667 shares)............... 2,506 1,691 (2,969)
Treasury shares purchased and related costs
(7,825 shares)..................................... (76,556) (76,336)
Shares issued for acquisitions (3,213 shares)........ 27,455 30,559
---------------------------------------------------

BALANCE, DECEMBER 31,1996............................ $ (60,000) $ (5,858) $ 796,767
===================================================

Net income 1997...................................... 329,076
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment.................... 4,269
Foreign currency translation ($3,580 tax expense).. (5,283)
---------------------------------------------------
Total comprehensive income........................... 328,062
Shareholder distributions............................ (155,883)
Shares issued under option, debentures,
grant plans and other (6,552 shares)............... 7,511 1,588 26,264
Treasury shares repurchased from WMX
(61,112 shares).................................... (625,978)
Treasury shares purchased and related costs
(2,051 shares)..................................... (31,213) (31,213)
Shares issued for acquisitions of Barefoot,
Inc., and other acquisitions (16,161 shares)....... 30,120 136,419
Conversion to corporate form.........................
---------------------------------------------------

BALANCE, DECEMBER 31,1997............................ $ (57,582) $ (4,270) $ 524,438
===================================================

Net income 1998...................................... 189,992
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment.................... (485)
Foreign currency translation ($640 tax expense).... (947)
---------------------------------------------------
Total comprehensive income........................... 188,560

Shareholder distributions............................ (75,152)
Shares issued in public offering (11,400 shares)..... 208,561
Shares issued under option, debentures,
grant plans and other (2,514 shares)............... 13,507 887 23,822
Treasury shares purchased and related costs
(888 shares)....................................... (18,301) (18,310)
Shares issued for acquisitions (5,059 shares)........ 47,390 104,567
---------------------------------------------------

BALANCE, DECEMBER 31,1998............................ $ (14,986) $ (3,383) $ 956,486
===================================================
</TABLE>

All share data reflect the three-for-two share splits in August 1998, June 1997
and June 1996.

Disclosure of reclassification amounts (net of tax) relating to comprehensive
income:
1998 1997 1996
---- ---- ----
Unrealized holding gains arising in period $ 3,295 $ 5,904 $ 2,795
Less gains realized (3,780) (1,635) (1,343)
-------- ------- --------
Net unrealized gains on securities $ (485) $ 4,269 $ 1,452
======== ======= ========

See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statements.

F-7
<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

BUSINESS UNIT REPORTING

The business of the Company is primarily conducted through the
ServiceMaster Consumer Services and ServiceMaster Management Services operating
units. In accordance with Statement of Financial Accounting Standards No. 131,
the Company's reportable segments are strategic business segments that offer
different services. They are managed separately because each business requires
different technology and marketing strategies. The Consumer Services unit
provides a variety of specialty services to residential and commercial
customers. The Management Services unit provides a variety of supportive
management services to health care, education and commercial accounts. The
Company derives substantially all of its revenues from customers in the United
States with less than five percent generated in foreign markets.

The other operations group includes primarily ServiceMaster Employer
Services, a professional employer organization that provides clients with
administrative processing of payroll, workers' compensation insurance, health
insurance, unemployment insurance and other employee benefit plans, and
Diversified Health Services, which provides services and products to the
long-term care industry. In the previous year, Diversified Health Services was
reflected in the Management Services operating unit. It is now reflected in the
other operations group for all years. The Company has reclassified Diversified
Health Services into the other operations segment due to the unique nature of
the services it provides and the industry factors which affect its performance.
It also operates in a highly regulated industry and is managed separately from
the other service lines.

Information regarding the accounting policies used by the Company is
described in the Summary of Significant Accounting Policies. Operating expenses
of the business units consist primarily of direct costs and a royalty payable to
parent based on the revenues or profits of the business unit.

Identifiable assets are those used in carrying out the operations of the
business unit and include intangible assets directly related to its operations.
The Company's headquarters facility and other investments are included in the
identifiable assets of other operations.

The following information prior to 1998 is presented on a pro forma basis
as if the Company had been a taxable corporation in all years and corporate
taxes had been allocated to the segments.

F-8
<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
(in thousands) Consumer Management Other
Services Services Operations Consolidated
----------------------------------------------------------------------
1998
<S> <C> <C> <C> <C>
Operating Expenses................................... $ 2,048,185 $ 2,040,912 $ 534,986 $ 4,724,119
Operating income..................................... 305,408 112,919 (21.903) 396,422
Net interest expense (income)........................ 42,259 (1,882) 37,267 77,644
Income before income taxes........................... 263,149 114,801 (39,172) 318,778
Provision for income taxes........................... 106,309 46,380 (23,903) 128,786
----------- ----------- ----------- -----------
Net income........................................... $ 156,840 $ 68,421 $ (35,269) $ 189,992
=========== =========== =========== ===========
Net income, excluding unusual items (Note)........... $ 156,840 $ 43,774 $ (12,022) $ 189,992
=========== =========== =========== ===========

Identifiable assets................................. $ 2,244,632 $ 237,924 $ 432,275 $ 2,914,851
Depreciation and amortization expense................ $ 71,369 $ 22,023 $ 11,213 $ 104,605
Capital expenditures................................. $ 36,206 $ 29,757 $ 9,334 $ 75,297

1997

Operating revenue.................................... $ 1,662,319 $ 1,905,291 $ 393,692 $ 3,961,502
Operating income..................................... 235,064 76,224 32,645 343,933
Net interest and non-operating expense (income)...... 27,740 (1,264) 43,128 69,654
Income before income taxes........................... 207,324 77,488 (10,533) 274,279
Corporate provision for income taxes................. 83,739 31,304 (4,254) 110,809
----------- ----------- ----------- -----------
Net income (pro forma corporate form)................ $ 123,563 $ 46,184 $ (6,279) $ 163,470
=========== =========== =========== ===========

Identifiable assets.................................. $ 1,783,186 $ 212,727 $ 479,311 $ 2,475,224
Depreciation and amortization expense................ $ 63,010 $ 21,315 $ 8,737 $ 93,062
Capital expenditures................................. $ 16,778 $ 21,232 $ 8,222 $ 46,232

1996

Operating revenue.................................... $ 1,461,696 $ 1,816,953 $ 179,679 $ 3,458,328
Operating income..................................... 185,895 75,577 33,746 295,218
Net interest and non-operating expense............... 14,233 276 28,312 42,821
Income before income taxes........................... 171,662 75,301 5,434 252,397
Corporate provision for income taxes................. 69,552 50,422 2,194 101,968
----------- ----------- ----------- -----------
Net income (pro forma corporate form)................ $ 102,310 $ 44,879 $ 3,240 $ 150,429
=========== =========== =========== -----------

Identifiable assets.................................. $ 1,394,177 $ 236,038 $ 216,626 $ 1,846,841
Depreciation and amortization expense................ $ 82,446 $ 21,304 $ 5,256 $ 79,006
Capital expenditures................................. $ 19,915 $ 17,852 $ 5,185 $ 42,952
</TABLE>

Note: This line excludes the $38 million pretax gain in the Management
Services segment related to the formation of a strategic venture which
acquired the assets of ServiceMaster Energy Management and the pretax
charges totaling $38 million in the Other Operations segment related
primarily to the home health care operations, which included a write-
down for the impairment of assets and costs relating to exiting
customer arrangements.

F-9
<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

REINCORPORATION

Most operations of ServiceMaster and its subsidiary partnerships were
conducted from 1986 through 1997 in partnership form, free of federal corporate
income tax. Had ServiceMaster remained a partnership, the Internal Revenue Code
would have imposed federal corporate tax on ServiceMaster operations beginning
in 1998. In January 1992, in anticipation of this change, the Partnership's
shareholders approved a tax-free plan of reorganization to return to corporate
form.

The ServiceMaster Company was created as part of this plan. The
reorganization became effective December 26, 1997, and was structured as a
merger in which The ServiceMaster Company became the successor entity through
which the public now invests in ServiceMaster. (The terms "the Company" and
"ServiceMaster" are used to collectively refer to the Partnership and its
successor corporation, The ServiceMaster Company.) At the time of
reincorporation, each outstanding limited partnership share was converted into
one share of $0.01 par value common stock. No federal income taxes were imposed
on the shareholders of the Partnership as a result of the reincorporation.

Pro forma information has been presented in the accompanying financial
statements in order to compare the continuing results of operations as if the
Company had been a taxable entity in 1997 and 1996. The pro forma tax provision
has been calculated assuming that the Company's effective tax rate had been
approximately 40 percent of pretax earnings.

Prior to December 26, 1997, The ServiceMaster Limited Partnership held as
its only asset a 99 percent interest in the profits, losses and distributions of
The ServiceMaster Company Limited Partnership, which through subsidiaries owned
and operated the ServiceMaster business. The Managing General Partner was
ServiceMaster Management Corporation, which held a one percent interest in the
income of both Partnerships. As a result of the reorganization, The
ServiceMaster Company owns all of the general and limited partnership interests
in the Partnership. No payment or equity issuance was made to the Managing
General Partner in connection with the reorganization except for the payout of
any income allocated to its capital account prior to reincorporation.

INCOME TAXES

Prior to reincorporation at the end of 1997, most operations conducted by
the Company and its subsidiary partnerships were exempt from federal corporate
income tax since 1986. As a result of the reincorporation, the Company
recognized a step-up in the tax basis of its assets, which is being amortized
against taxable income. The step-up resulted in a reduction of the Company's
cash tax payments in excess of $25 million per annum for the current year and
for the ensuing 14 years.

The reconciliation of income tax for 1998 computed at the U.S. federal
statutory tax rate to the Company's effective income tax rate is as follows:

Tax at U.S. federal statutory rate 33.0%
State and local income taxes,
net of U.S. federal benefit 4.4%
Other 1.0%
----
Effective rate 40.4%
====

Income tax expense for 1998 consists of:

<TABLE>
<CAPTION>
(In thousands) CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
U.S. federal $ 76,646 $ 30,200 $106,846
State and local 15,740 6,200 21,940
-------- -------- --------
$ 92,386 $ 36,400 $128,786
======== ======== ========
</TABLE>

Deferred income tax expense of $36.4 million for the year ended December
31, 1998 results from timing differences in the recognition of income and
expense for income tax and financial reporting purposes.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. Management believes that,
based upon its lengthy and consistent history of profitable operations, it is
probable that the net deferred tax assets will be realized on future tax
returns, primarily from the generation of future taxable income. Significant
components of the Company's deferred tax assets are as follows:

<TABLE>
<CAPTION>
(In thousands) 1998 1997
---- ----
<S> <C> <C>
Deferred tax assets (liabilities):

Current:
Prepaid expenses and other $ (23,400) $ (11,500)
Accounts receivable allowance 7,400 12,000
Accrued insurance and
related expenses 24,100 18,000
Other accrued expenses 16,700 18,100

Long-Term:
Long-term assets (500) 13,000
Insurance expenses 32,500 32,000
Other long-term obligations (11,600) -
--------- ---------
Net deferred tax assets $ 45,200 $ 81,600
========= =========
</TABLE>

There were no federal taxes paid in 1998 and approximately $5 million of state
tax payments were made in the year. In the first year of corporate form, the
Company was able to defer the remaining 1998 tax payments into 1999.

ACQUISITIONS
CURRENT YEAR -

Acquisitions have been accounted for using the purchase method and,
accordingly, the results of operations of the acquired businesses have been
included in the Company's consolidated financial statements since their dates of
acquisition. The assets and liabilities of these businesses were recorded in the
financial statements at their estimated fair market values as of the acquisition
dates.

In 1998, the Company completed a number of acquisitions, including Rescue
Industries, Inc. (Rescue), Ruppert Landscape Company (Ruppert), National
Britannia and other lawn care, landscape and pest control businesses. Rescue,
which operates under the Rescue Rooter trade name, is one of the largest
plumbing and drain cleaning companies in America. Ruppert is

F-10
<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

one of the Mid-Atlantic's largest commercial landscape companies. National
Britannia, the third largest pest control company in the United Kingdom,
significantly increases the international presence of Terminix. The aggregate
fair market value of the assets acquired less liabilities assumed for these
acquisitions was $139 million, which consisted almost entirely of intangible
assets, primarily goodwill. During the year, the Company acquired a number of
smaller companies primarily in the lawn care, landscaping and pest control
businesses. The aggregate fair market value of the assets acquired less seller
financed notes and liabilities assumed for these purchases was $194 million,
including approximately $249 million of goodwill.

On November 1, 1998, the Company entered into an agreement to acquire
LandCare USA, Inc., one of the leading commercial landscape companies in the
country. The transaction is expected to be consummated in March 1999.

PRIOR YEARS -

On February 24, 1997, the Company acquired Barefoot Inc., (Barefoot) the
second largest professional residential lawn care services company in the United
States. The Company paid approximately $237 million by issuing 12.9 million
shares and paying $91 million in cash in exchange for all of the Barefoot stock.
The excess of the consideration paid over the fair value of the Barefoot
business of $254 million was recorded as goodwill, which is being amortized on a
straight-line basis over 40 years.

During 1997, the Company made several smaller acquisitions which included
Certified Systems, Inc. one of the nation's largest professional employer
organizations, Orkin's lawn care and plantscaping division and a number of other
lawn care and pest control businesses. The Company also purchased the minority
interests of Management Services and Diversified Health Services for a
combination of cash and Company shares, totaling approximately $25 million. The
aggregate fair market value of the assets acquired less liabilities assumed for
these smaller acquisitions was $196 million, including approximately $267
million of intangible assets, primarily goodwill.

During 1996, the Company acquired Premier Manufacturing Support Services, a
provider of management services to the automotive industry, and several other
smaller companies, predominately pest control, lawn care and pharmacy management
businesses. The aggregate fair value of assets acquired less liabilities assumed
was $91 million, including approximately $96 million of intangible assets which
are being amortized on a straight-line basis over 40 years.

Supplemental cash flow information regarding the Company's acquisitions is
as follows:

<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Fair value of assets acquired........................ $ 465,380 $ 590,600 $ 134,377
Less liabilities assumed............................. (132,381) (157,741) (43,781)
---------- ---------- ----------
Net assets acquired.................................. 332,999 432,859 90,596
Less shares issued................................... (104,567) (186,419) (30,559)
Less cash acquired................................... (5,980) (12,751) (1,564)
---------- ---------- ----------
Business acquisitions, net of cash acquired.......... $ 222,452 $ 233,689 $ 58,473
---------- ---------- ----------
</TABLE>

OTHER EVENTS

The Company formed a strategic venture with Texas Utilities Company for the
ownership and operation of the ServiceMaster Energy Management business. The new
venture acquired all of the assets of ServiceMaster Energy Management and is
owned 85 percent by Texas Utilities and 15 percent by ServiceMaster. This
transaction resulted in a pretax gain of $38 million.

In late 1998, the Company completed a strategic review of its Home Health
Care operations and concluded that, without significant investment, it could not
profitably provide high quality service in the future and continue to satisfy
all the changes and the requirements of new governmental reimbursement programs.
The Company has decided to sell its direct operations and is discontinuing its
outsourced management operation of home health care agencies. The Company will
continue to provide consulting services to hospitals and other providers of home
health care.

During the course of the Company's strategic review of its Home Health Care
operations, the Company assessed the recoverability of the carrying value of the
intangible assets and fixed assets which resulted in pretax impairment losses of
$13 million and $3 million, respectively. In accordance with Statement of
Financial Accounting Standards No. 121, these losses reflect the amounts by
which the carrying values of these assets exceed their estimated fair values
determined by their future discounted cash flows. In addition, the Company has
recorded a pretax charge of $8 million related to the costs associated with
exiting customer arrangements in the Home Health Care business. In response to
the impact that changes in governmental reimbursement programs have begun to
have on the financial condition of certain customers of the Home Health Care and
Diversified Health Services businesses, the Company increased its reserves for
accounts receivable by $8 million and $6 million, respectively.

F-11
<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

EMPLOYEE BENEFIT PLANS

Contributions to qualified profit sharing plans were made in the amount of
$9.9 million in 1998, $8.2 million in 1997, and $6.9 million in 1996. Under the
Employee Share Purchase Plan, the Company contributed $1.2 million in 1998, $1.1
million in 1997, and $1.0 million in 1996. These funds defrayed part of the cost
of the shares purchased by employees.

F-12
<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

LONG-TERM DEBT

Long-term debt includes the following:

<TABLE>
<CAPTION>
(In thousands, except per share data) 1998 1997
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes Payable:
10.57%, maturing in 1999 - 2000................................. $ 18,000 $ 27,000
8.38%, maturing in 1999 - 2001................................. 30,000 40,000
10.81%, maturing in 2000 - 2002................................. 55,000 55,000
6.65%, maturing in 2002 - 2004................................. 70,000 70,000
7.40%, maturing in 2006........................................ 125,000 125,000
6.95%, maturing in 2007........................................ 100,000 100,000
7.10%, maturing in 2018........................................ 150,000 -
7.45%, maturing in 2027........................................ 200,000 200,000
7.25%, maturing in 2038........................................ 150,000 -
6.00%, subordinated, convertible at $5.53 per share............ - 3,581
Revolving credit facilities...................................... 50,000 550,000
International borrowings......................................... 48,272 29,856
Other............................................................ 131,511 68,947
Less current portion............................................. (51,616) (21,539)
----------- -----------
Total long-term debt............................................. $ 1,076,167 $ 1,247,845
=========== ===========

--------------------------------------------------------------------------------------------------
</TABLE>

The Company is party to a number of long-term debt agreements which require
it to comply with certain financial covenants, including limitations on
indebtedness, restricted payments, fixed charge coverage ratios and net worth.
The Company has been and currently is in compliance with the covenants related
to these debt agreements.

ServiceMaster filed a shelf registration statement with the Securities and
Exchange Commission for the sale of up to $950 million in unsecured senior debt
securities or equity interests in June 1997. As of year end, the Company had
$350 million of securities available for issuance under this shelf registration
statement. The first debt issuance from the shelf occurred in August 1997. It
included two tranches of debt totaling $300 million. The Company completed a
second $300 million dual-tranche offering of unsecured senior notes in February
1998, that consisted of $150 million, 7.10 percent notes due March 1, 2018, and
$150 million, 7.25 percent notes due March 1, 2038. The net proceeds of these
offerings reduced borrowings under bank credit facilities and thereby reduced
exposure to short-term interest rate fluctuations.

In May 1998, the Company filed a Form S-3 registration statement under
which 11.4 million newly-issued shares were sold at $19.17 per share. The net
proceeds to the Company were approximately $209 million and were used to reduce
outstanding debt under existing bank credit facilities.

The Company has a committed revolving credit facility for up to $750
million maturing in April 2002. The facility can be used for general Company
purposes. The revolving credit facility had $700 million of unused commitment as
of December 31, 1998.

The Company is exposed to interest rate fluctuations on its floating rate
debt. As of year end, the Company had approximately $100 million in 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 year end, the Company was not a party
to any interest rate swaps.

Cash interest payments were $88 million in 1998, $63 million in 1997, and
$34 million in 1996. Average rates paid on the revolving credit facility were
5.9 percent in 1998, 6.0 percent in 1997 and 5.6 percent in 1996. Future
scheduled long-term debt payments are $51.6 million in 1999 (average rate of 4.2
percent), $67.7 million in 2000 (average rate of 6.0 percent), $44.3 million in
2001 (average rate of 6.7 percent), $45.9 million in 2002 (average rate of 6.6
percent), and $34.8 million in 2003 (average rate of 5.4 percent). Notes payable
of $19 million due in 1999 are intended to be refinanced by the long term
revolving credit facility in 1999 and therefore are not included in the $51.6
million of current liabilities. The $50 million revolving credit facility
balance as of year end has not been included in the scheduled payments above as
the Company expects to extend the revolving credit facility beyond 2003.

Based upon the borrowing rates currently available to the Company for
long-term borrowings with similar terms and maturities, the fair value of
long-term debt is approximately $1.1 billion.

Future long-term noncancelable operating lease payments are $33.4 million
in 1999, $25.5 million in 2000, $17.9 million in 2001, $11.3 million in 2002,
$6.6 million in 2003, and $7.4 million thereafter. Rental expense for 1998,
1997, and 1996 was $103.8 million, $83.9 million, and $74.8 million,
respectively.

The Company maintains an $80 million operating lease facility with a bank
which provides for the acquisition and development of properties to be leased by
the Company. The Company has guaranteed the residual value of the properties
under the lease up to 82 percent of the fair market value at the commencement of
the lease. The Company does not expect to be required to make residual value
payments and therefore, no amounts have been included in the future payments
above. At December 31, 1998, approximately $38 million was funded under this
facility.

F-13
<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

CASH AND MARKETABLE SECURITIES

Marketable securities held at December 31, 1998 and 1997, with a maturity
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. Marketable
securities available for current operations are classified as current assets
while securities held for noncurrent uses are classified as long-term. The
Company's investments consist primarily of publicly-traded debt and common
equity securities. As of December 31, 1998, the aggregate market value of the
Company's short- and long-term investments in debt and equity securities was $97
million and the aggregate cost basis was $84 million. In 1998, the Company
entered into a hedging arrangement in a notional amount of $40 million expiring
November 1999, designed to protect its equity portfolio against a decline in the
equity market. This arrangement, which is linked to the Standard & Poor's 500
Index, provides protection for a market decline of up to 15 percent, while it
caps the potential appreciation at 15 percent. At year end, the fair market
value of this arrangement was an immaterial net liability to the Company. There
was no participation in the trading of derivative securities in 1998 or 1997.

Interest and dividend income received on cash and marketable securities was
$8.9 million, $8.3 million and $8.0 million, in 1998, 1997 and 1996,
respectively. Gains and losses on sales of investments, as determined on a
specific identification basis, are included in investment income in the period
they are realized.

COMPREHENSIVE INCOME

The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," which requires the reporting of all changes in
equity during a period, except those resulting from investment by owners and
distribution to owners. The Company has chosen to disclose Comprehensive Income,
which encompasses net income, unrealized gains on marketable securities, and the
effect of foreign currency translation, in the Statement of Shareholders'
Equity.

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unrealized holding gains
arising in period $5,529 $9,908 $4,690
Tax expense 2,234 4,004 1,895
------ ------ ------
Net of tax amount $3,295 $5,904 $2,795
====== ====== ======

Gains realized $6,342 $2,743 $2,254
Tax expense 2,562 1,108 911
------ ------ ------
Net of tax amount $3,780 $1,635 $1,343
====== ====== ======
</TABLE>

Accumulated comprehensive income included the following components as of
December 31:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unrealized gain on
securities $7,753 $ 8,238 $ 3,969
Foreign currency
translation 2,388 (3,842) (2,895)
------ ------- -------
Total $3,911 $ 5,343 $ 6,357
====== ======= =======
</TABLE>

SHAREHOLDERS' EQUITY

The Company has authorized one billion shares of common stock with a par
value of $.01 and 11 million shares of preferred stock. There were no shares of
preferred stock issued or outstanding. In December 1997, ServiceMaster converted
from a publicly traded limited partnership to a corporation. At the time of
reincorporation, each outstanding limited partnership share was converted into
one share of common stock on a tax-free basis to the shareholders. Upon
reincorporation, all Limited Partners' equity was transferred to common stock
and additional paid-in capital. The shares underlying the obligations and rights
relating to the employee option plans were also converted from partnership
shares to corporate stock on a one-for-one basis.

In 1997, the Company filed a $950 million shelf registration statement with
the Securities and Exchange Commission for the sale of unsecured senior debt
securities and equity interests. On May 15, 1998, the Company filed a Form S-3
registration statement, and 21.2 million Company shares were sold at $19.17 per
share. This included approximately 11.4 million of newly-issued shares from the
Company and 9.8 million shares sold by existing shareholders. The net proceeds
to the Company, after the underwriting discount and offering expenses, were
approximately $209 million and were used to reduce outstanding debt under
existing bank credit facilities.

On July 23, 1998, the Company filed a Form S-1 shelf registration statement
to issue up to 5.3 million shares of common stock in connection with future,
unidentified acquisitions. The S-1 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 roll-up acquisitions
and small strategic acquisitions. There were approximately 3.5 million shares
issued at year end.

On April 1, 1997, the Company bought Waste Management, Inc.'s (WMX) entire
ownership interest in ServiceMaster for approximately $626 million. This
transaction resulted in the Company acquiring the 61.1 million Company shares
held by WMX and canceling WMX's option to purchase an additional 4.2 million
Company shares.

As of December 31, 1998, there were 18.1 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 vesting period and are restricted as to the sale or
transfer of the shares.

F-14
<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company accounts for employee share options under Accounting Principles
Board Opinion 25, as permitted under generally accepted accounting principles.
Accordingly, no compensation cost has been recognized in the accompanying
financial statements related to these options. Had compensation cost for these
plans been determined consistent with Statement of Financial Accounting
Standards No. 123 (SFAS 123), which is an accounting alternative that is
permitted, but not required, pro forma net income and net income per share would
reflect the following:

<TABLE>
<CAPTION>
(In thousands, except per share data) 1998 1997 1996
---- ---- ----

<S> <C> <C> <C>
Net Income:
As reported (1) $189,992 $163,470 $150,429
SFAS 123 pro forma $185,555 $160,966 $149,480

Net Income Per Share:
Basic: As reported (1) $ .66 $ .57 $ .47
SFAS 123 pro forma $ .64 $ .56 $ .47

Diluted: As reported (1) $ .64 $ .55 $ .46
SFAS 123 pro forma $ .62 $ .54 $ .45
</TABLE>

(1) Pro forma corporate form prior to 1998.

The SFAS 123 pro forma net income reflects options granted in 1998, 1997
and 1996. Since SFAS 123 does not apply to options granted prior to 1995, the
pro forma disclosure is not likely to be indicative of pro forma results which
may be expected in future years. This primarily relates to the fact that options
vest over several years and pro forma compensation cost is recognized as the
options vest. In addition, awards may have been granted in earlier years, which
would have resulted in pro forma compensation cost in 1998.

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 1998, 1997 and 1996: risk-free interest rates of 5.6 percent, 6.3
percent and 5.6 percent, respectively; volatility rates of 22 percent, 21
percent and 27 percent, respectively; distribution yields of 1.9 percent, 3.2
percent and 3.2 percent, respectively; and average expected lives of seven
years. The options granted to employees in 1998, 1997 and 1996 have weighted-
average fair values of $5.17, $2.81 and $2.40, 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.

F-15
<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

A summary of option and grant transactions during the last three years is
summarized below:

<TABLE>
<CAPTION>
Share Price Weighted-Avg. Share Price
Options Range Exercise Price Grants Range
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
Total exercisable, December 31, 1995 14,033,661 $ 0.73 - 7.63 $ 5.46 ----- -----
Total outstanding, December 31, 1995 18,252,411 $ 0.73 - 9.78 $ 6.46 2,205,738 $ 2.86 - 7.96

TRANSACTIONS DURING 1996
Granted to employees 4,154,625 $ 9.26 - 10.78 $ 9.40 ----- -----
Exercised, paid, or vested (5,470,646) $ 0.73 - 7.63 $ 5.56 (398,997) $ 2.86 - 7.96
Terminated or resigned (360,274) $ 2.79 - 7.63 $ 3.89 ----- -----

Total exercisable, December 31, 1996 8,202,741 $ 0.73 - 7.63 $ 5.49 ----- -----
Total outstanding, December 31, 1996 16,576,116 $ 0.73 - 10.78 $ 7.56 1,806,741 $ 2.86 - 7.96

TRANSACTIONS DURING 1997
Granted to employees 5,295,785 $ 11.23 - 18.42 $ 11.62 ----- -----
Exercised, paid, or vested (1,892,034) $ 2.17 - 9.26 $ 5.17 (430,460) $ 2.86 - 7.96
Cancelled, related to WMX (4,218,750) $ 9.78 $ 9.78 ----- -----
Terminated or resigned (440,960) $ 1.97 - 11.22 $ 7.11 (120,175 $ 2.86 - 7.96

Total exercisable, December 31, 1997 (6,919,718) $ 0.73 - 10.78 $ 6.05 ----- -----
Total outstanding, December 31, 1997 15,320,157 $ 0.73 - 18.42 $ 8.65 1,256,106 $ 2.86 - 7.96

TRANSACTIONS DURING 1998
Granted to employees 3,574,376 $ 15.74 - 22.77 $ 18.29 ----- -----
Exercised, paid, or vested (1,604,784) $ 2.25 - 11.22 $ 6.29 (293,376) $ 2.86 - 7.96
Terminated or resigned (377,023) $ 0.73 - 18.26 $ 8.57 ----- -----

Total exercisable, December 31, 1998 7,269,279 $ 0.73 - 22.33 $ 7.51 ----- -----
Total outstanding, December 31, 1998 16,912,726 $ 0.73 - 22.77 $ 10.89 962,730 $ 2.86 - 7.96
=======================================================================================================================
</TABLE>

Options outstanding at December 31, 1998:

<TABLE>
<CAPTION>
Range of Number Outstanding Remaining Weighted Average Number Exercisable Weighted-Average
Exercise Prices at 12/31/98 Life Exercise Price at 12/31/98 Exercise Price
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
$ 0.73 - 5.14 1,896,782 3.0 years $ 3.74 1,896,782 $ 3.74
6.44 - 9.33 6,040,722 6.5 years 8.27 4,048,253 7.78
10.78 - 22.77 8,975,222 8.5 years 14.17 1,428,808 12.50
- ------------------------------------------------------------------------------------------------------------------------------
$ 0.73 - 22.77 16,912,726 7.0 years $ 10.89 7,373,843 $ 7.65
==============================================================================================================================
</TABLE>

F-16
<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of shares outstanding for the
period. Diluted earnings per share effects the potential diluted or convertible
securities and options to purchase common stock.

The following chart reconciles both the numerator and the denominator of
the basic earnings per share computation to the numerator and the denominator of
the diluted earnings per share computation.

<TABLE>
<CAPTION>
For year ended 1998 For year ended 1997 For year ended 1996
------------------------------------------------------------------------------------

(In thousands, except per share data) Income Shares EPS Income Shares EPS Income Shares EPS
--------- ------- ------ --------- ------- ------ --------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS
(pro forma corporate form in 1997 and 1996) $ 189,992 289,315 $ 0.66 $ 163,470 285,944 $ 0.57 $ 150,429 317,381 $ 0.47
====== ====== ======
EFFECT OF DILUTIVE SECURITIES, NET OF TAX
Options 9,391 8,333 7,607
Convertible debentures 32 181 1,114 5,363 1,115 5,441
--------- ------- --------- ------- --------- -------

DILUTED EPS
(pro forma corporate form in 1997 and 1996) $ 190,024 298,887 $ 0.64 $ 164,584 299,640 $ 0.55 $ 151,544 330,429 $ 0.46
========= ======= ====== ========= ======= ====== ========= ======= ======
</TABLE>

QUARTERLY OPERATING RESULTS

Quarterly operating results and related growth for the last three years in
revenues, gross profit, net income, and basic and diluted net income per share
are shown in the table below. Net income and earnings per share amounts for 1997
and 1996 have been restated to a basis that assumes reincorporation had occurred
as of the beginning of each year. For interim accounting purposes, certain costs
directly associated with the generation of lawn care revenues are initially
deferred and recognized as expense as the related revenues are recognized. Full
year results are not affected.

Certain amounts from prior periods have been reclassified to conform with
the current presentation.,

F-17
<PAGE>

(Unaudited, in thousands, except per share data)

<TABLE>
<CAPTION>
Percent Incr. Percent Incr.
1998 '98-'97 1997 '98-'96 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUE:
First Quarter $ 981,788 20% $ 817,138 10% $ 740,299
Second Quarter 1,244,627 23 1,010,794 10 916,931
Third Quarter 1,273,093 17 1,090,114 18 927,227
Fourth Quarter 1,224,611 17 1,043,458 19 873,871
------------- ------------- -------------
$ 4,724,119 19% $ 3,961,302 15% $ 3,438,328

GROSS PROFIT:
First Quarter $ 186,991 17% $ 159,991 13% $ 142,116
Second Quarter 293,261 14 237,260 16 221,505
Third Quarter 316,718 23 2?7,44? 17 219,127
Fourth Quarter 247,537 8 228,642 18 194,572
------------- ------------- -------------
$ 1,044,507 16% $ 903,332 16% $ 777,320

NET INCOME:
(pro forma in 1997 and 1996):
First Quarter $ 29,270 1% $ 28,982 15% $ 25,118
Second Quarter 56,404 21 46,707 8 43,326
Third Quarter 56,352 20 46,793 11 42,262
Fourth Quarter 47,966 17 40,988 3 39,653
------------- ------------- -------------
$ 189,992 16% $ 163,470 9% $ 150,429

BASIC NET INCOME PER SHARE:
(pro forma in 1997 and 1996):
First Quarter $ 0.11 22% $ 0.09 13% $ 0.08
Second Quarter 0.20 18 0.17 21 0.14
Third Quarter 0.19 12 0.17 31 0.13
Fourth Quarter 0.16 7 0.15 25 0.12
------------- ------------- -------------
$ 0.66 16% $ 0.37 21% $ 0.47

DILUTED NET INCOME PER SHARE:
(pro forma in 1997 and 1996):
First Quarter $ 0.10 11% $ 0.09 13% $ 0.08
Second Quarter 0.19 19 0.16 23 0.13
Third Quarter 0.19 19 0.16 23 0.13
Fourth Quarter 0.16 14 0.14 17 0.12
------------- ------------- -------------
$ 0.64 16% $ 0.55 20% $ 0.46

CASH DISTRIBUTIONS PER SHARE:
First Quarter $ 0.08 7% $ 0.07 1/2 5% $ 0.07 1/8
Second Quarter 0.08 7 0.07 1/2 5 0.07 1/8
Third Quarter 0.08 - 0.08 7 0.07 1/2
Fourth Quarter 0.09 13 0.08 7 0.07 1/2
-------------- ------------- -------------
$ 0.33 6% $ 0.31 6% $ 0.28 1/4

PRICE PER SHARE:
First Quarter $ 19.63-16.50 $ 12.33-10.92 $ 9.93-8.61
Second Quarter 25.50-17.92 15.92-12.09 10.45-9.17
Third Quarter 24.75-19.75 19.67-15.17 11.00-9.55
Fourth Quarter 23.81-16.00 19.50-14.00 $ 11.83-10.55
</TABLE>

All share and per share data reflect the three-for-two share splits in August
1998, June 1997 and June 1996.

F-18