SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1993. Commission File
number 1-9378
SERVICEMASTER LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in its Certificate)
Delaware 36-3497008
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
One ServiceMaster Way, Downers Grove, Illinois 60515-9969
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (708) 964-1300
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
Partnership Shares New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by Check Mark Whether the Registrant (1) Has Filed
All Reports Required to Be Filed by Shorter Period That the
Registrant Was Required to File Such Reports), and (2) Has Been
Subject to Such Filing Requirements for the Past 90 Days. Yes X
No
The Aggregate Market Value of Shares Held by Non-Affiliates
of the Registrant As of March 9, 1994 was $2,017,119,884.
DOCUMENT INCORPORATED BY REFERENCE
Certain parts of the Registrant's Annual Report to
Shareholders for the year ended December 31, 1993 are
incorporated into Part I, Part II and Part IV of this Form 10-K.
<PAGE>
PART I
The Company
This annual report on Form 10-K is filed by ServiceMaster
Limited Partnership (hereinafter sometimes called the
"Registrant"). The Registrant and its immediate subsidiary, The
ServiceMaster Company Limited Partnership, were formed in
December 1986 as limited partnerships under the laws of the State
of Delaware to succeed to the business and assets of
ServiceMaster Industries Inc. The Registrant and The
ServiceMaster Company, together with all other entities
affiliated with these two limited partnerships and the
Registrant's predecessor organization, are hereinafter referred to
as "ServiceMaster" or the "Company" or the "ServiceMaster
enterprise".
The Registrant is a holding company whose limited partner
shares are listed on the New York Stock Exchange and whose
principal asset consists of all of the common limited partner
interest in The ServiceMaster Company. Until January 31, 1992, the
Registrant had both individual general partners and one corporate
general partner. In January 1992, the shareholders of the
Registrant approved an amendment of the Registrant's
agreement of limited partnership under which the structure of the
Registrant was changed by the withdrawal of the three individual
general partners and the admission of ServiceMaster Corporation as
a special general partner. These changes are described
further in this Preface under the caption "The 1992
Reorganization".
The two principal units of the ServiceMaster business are
Management Services and Consumer Services, each of which is
organized as a separate limited partnership. Each of these
partnerships has its own governance body. ServiceMaster
Management Services Limited Partnership was formed in December 1991
and ServiceMaster Consumer Services Limited Partnership was formed
in the Summer of 1990.
All subsidiaries of The ServiceMaster Company (which for
purposes of this paragraph are limited to first-tier
subsidiaries) are wholly owned except for the following:
ServiceMaster Consumer Services L. P., as to which a subsidiary of
WMX Technologies, Inc. owned a 22% common equity interest from
January 1, 1993 to June 8, 1993 and a 27.8% common equity interest
from June 8, 1993 forward; ServiceMaster Management Services, as to
which senior management owned a 10% equity
interest (determined after giving effect to intercompany debt) from
January 1, 1994 forward; and LTCS Investment L.P. (the immediate
parent of ServiceMaster Diversified Health Services), as to which
management of ServiceMaster Diversified Health
Services owns an 11% equity interest.
<PAGE>
All subsidiaries of ServiceMaster Consumer Services L.P.
(referred to in this paragraph as "SMCS") are wholly owned or will
be wholly owned by the end of 1994 except for TruGreen L.P., as to
which senior management owns a 15% interest.
All material subsidiaries of ServiceMaster Management
Services L. P. are wholly owned.
The 1992 Reorganization
At a meeting of the shareholders of the Registrant held on
January 13, 1992, the shareholders approved a "Reorganization
Package" consisting of a comprehensive amendment and restatement of
its partnership agreement and a merger by which the Registrant
would convert back into a corporation on or before December 31,
1997.
As a result of the approval of the Reorganization Package,
ServiceMaster Corporation was admitted as a Special General Partner
of the Registrant to serve as a vehicle through which institutional
investors could be offered opportunities to invest in ServiceMaster
through the acquisition of a corporate security. If shares of stock
were to be issued by ServiceMaster Corporation ("Corporate
Shares"), the Corporate Shares would indirectly represent the same
percentage interest in the Registrant as was then
represented by each limited partner share in ServiceMaster. At the
present time there are no plans to issue stock of
ServiceMaster Corporation.
The merger agreement which was approved as part of the
Reorganization Package provides for the merger by which
ServiceMaster expects to return to corporate form (the
"Reincorporating Merger"). ServiceMaster Incorporated of
Delaware has been organized to become the successor entity
through which the public will invest in ServiceMaster after the
Reincorporating Merger. The limited partner shares of the
Registrant together with any Corporate Shares which may be issued
prior to the Reincorporating Merger will be converted on a one-for-
one basis into new shares of common stock to be issued by
ServiceMaster Incorporated. As a result of these conversions,
ServiceMaster Incorporated will be entirely owned by the persons
who, collectively, owned all of the limited partner shares of the
Registrant and all of the Corporate Shares of ServiceMaster
Corporation (if any) immediately prior to the Reincorporating
Merger.
The Reorganization Package included certain changes in the
identity of and the capital contribution requirements for the
general partners of the Registrant. These changes were effected on
January 31, 1992, when the three individual general partners of the
Registrant and of The ServiceMaster Company withdrew as general
partners from each of these limited partnerships and became
stockholders of ServiceMaster Management Corporation.
ServiceMaster Management Corporation became the sole general
partner of the Registrant and of The ServiceMaster Company with
management authority with respect to these partnerships. As part
of these transactions, the amount of independent capital required
to be maintained by ServiceMaster Management Corporation was
reduced to $15 million.
For further information concerning the changes effected by
the 1992 Reorganization, see the discussion captioned
"Description of the Partnership Structure" beginning on page 9.
<PAGE>
Item 1. Business
DESCRIPTION OF THE BUSINESS
Business Groups
ServiceMaster is functionally divided into four operating
groups: Management Services, Consumer Services, Diversified Health
Services and International and New Business Development.
Management Services and Consumer Services are the two principal
business groups. Reference is made to the information under the
caption "Business Unit Reporting" on page 31 of the ServiceMaster
Annual Report to Shareholders for 1993 (the "1993 Annual Report")
for detailed financial information on these two groups.
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 ServiceMaster Residential/Commercial business,
the Merry Maids business, the Terminix business and the TruGreen-
ChemLawn business. 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 the majority of franchise agreements which expire
in any given year are renewed.
As discussed in further detail below, the Terminix and
TruGreen-ChemLawn businesses are seasonal in nature.
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 commercial customers (including the
management of housekeeping, plant operations and maintenance,
laundry and linen, grounds and landscaping, clinical equipment
maintenance, energy management services and food service).
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.
As of December 31, 1993, ServiceMaster was providing
supportive management services to approximately 2,300 health care,
educational and commercial facilities. These services were being
provided in all 50 states and the District of Columbia and in 15
foreign countries. Outside of the United States,
ServiceMaster was providing management services through
subsidiaries in the United Kingdom and Japan, through affiliated
companies in Canada, Japan and Italy, and through licensees in
Mexico, Korea, Australia, New Zealand, Singapore, Taiwan, Hong
Kong, Czechoslovakia, Japan and throughout the Middle East.
International and New Business Development is responsible for
overseeing the services provided in foreign markets.
<PAGE>
Consumer Services
ServiceMaster Consumer Services provides specialty services
to homeowners and commercial facilities through five companies:
The Terminix International Company L.P. ("Terminix"); TruGreen-
ChemLawn L.P. ("TruGreen-ChemLawn"); Merry Maids L.P. ("Merry
Maids"); American Home Shield Corporation ("American Home Shield"
or "AHS"); and ServiceMaster Residential/Commercial Services L.P.
("Res/Com"). The services provided by these companies include
termite and pest control and radon testing services under the
"Terminix" service mark; lawn care, tree and shrub services under
the "TruGreen" and "ChemLawn" service marks; domestic
housekeeping services under the "Merry Maids" service mark; home
systems and appliance warranty contracts under the "American Home
Shield" service mark; and residential and commercial cleaning and
disaster restoration services under the "ServiceMaster" service
mark.
The services provided by the five Consumer Services
companies are part of the ServiceMaster "Quality Service Network"
and are accessed by calling a single toll-free telephone number:
1-800-WE SERVE. ServiceMaster focuses on establishing
relationships to provide one or more of these services on a
repetitive basis to customers. Since 1986, the number of
customers served by ServiceMaster Consumer Services has increased
from fewer than one million customers to more than 5.9 million
customers (including International operations).
Terminix. Terminix is a wholly owned subsidiary of
ServiceMaster Consumer Services L.P. Terminix, both directly and
through franchisees, is the leading provider of termite, pest
control and radon testing services to approximately 1.9 million
residential and commercial customers in the United States. As of
December 1993, Terminix was providing these services through 315
company-owned branches in 39 states and Mexico and through 218
franchised branches in 21 states and Mexico. Terminix also
provides termite and pest control services in Japan, Taiwan,
Lebanon, Saudi Arabia, Oman and the United Kingdom through
licensing arrangements with local partners.
<PAGE>
TruGreen-ChemLawn. TruGreen-ChemLawn is an 85% owned
subsidiary of ServiceMaster Consumer Services Limited Partnership
(with senior management of TruGreen-ChemLawn holding the
remaining 15% interest) and is the entity through which
ServiceMaster provides lawn care services. TruGreen-ChemLawn is
the leading provider of lawn care services to over 2.2 million
residential and commercial customers in the United States. As of
December 31, 1993, TruGreen-ChemLawn had 172 company-owned branches
and 71 franchised branches.
Merry Maids. Merry Maids is a wholly owned subsidiary of
ServiceMaster Consumer Services Limited Partnership. (A minority
interest held by senior management of Merry Maids at the end of
1993 will be acquired by Merry Maids in 1994). Merry Maids is the
organization through which ServiceMaster provides domestic house
cleaning services, of which it is one of the country's leading
providers. As of December 31, 1993, these services were provided
to about 170,000 customers through one company-owned branch and
through 689 licensees operating in 49 states. Merry Maids also
provides domestic housecleaning services in Japan, the United
Kingdom, Canada, Saudi Arabia and Australia through
licensing arrangements with local service providers.
American Home Shield. AHS is a wholly owned subsidiary of
SVM Holding Corp., a holding company in which ServiceMaster
Consumer Services L.P. owns 100% of the equity. (An 8% interest
held by senior management of AHS at the end of 1993 will be
acquired by SVM Holding Corp. in 1994). AHS is a leading provider
of home service warranty contracts in the United States,
providing homeowners with contracts covering the repair or
replacement of built-in appliances, hot water heaters and the
electrical, plumbing, central heating, and central air
conditioning systems which malfunction by reason of normal use.
Service contracts are presently sold principally through
participating real estate brokerage offices in conjunction with
resales of single-family residences to homeowners. AHS also sells
service warranty contracts directly to non-moving homeowners
through various other distribution channels which are currently
being expanded. As of December 31, 1993, AHS was providing
services to approximately 268,000 homes through approximately 6,000
independent repair maintenance contractors in 48 states and the
District of Columbia, with operations in California, Texas and
Arizona accounting for 32%, 20% and 9%, respectively, of AHS' gross
contracts written. AHS also provides home service warranty
contracts in Japan and Saudi Arabia through licensing arrangements
with local service providers.
Res/Com. Res/Com is a wholly owned subsidiary of
ServiceMaster Consumer Services L.P. ServiceMaster, through
Res/Com, is one of the leading franchisors in the residential and
commercial cleaning field. Res/Com provides, through
franchisees, carpet and upholstery cleaning and janitorial
services, disaster restoration services and window cleaning
services to over 1.2 million residential and commercial customers
worldwide through a worldwide network of over 4,260 independent
franchisees.
<PAGE>
Diversified Health Services
The Diversified Health Services Group was organized in 1993.
It consists of ServiceMaster Home Health Care Services and
ServiceMaster Diversified Health Services. The latter company was
acquired by ServiceMaster in August 1993, at which time the company
was known as VHA Long Term Care.
ServiceMaster Diversified Health Services. ServiceMaster
Diversified Health Services, Inc., ServiceMaster Diversified Health
Services L.P. and their respective subsidiaries (collectively, the
"ServiceMaster Diversified Health Services Companies") form a
comprehensive health services organization which provides:
management services to freestanding, hospital based, and government
owned nursing homes and assisted living facilities; design,
development, refurbishing and construction consulting services to
long-term care facilities; hospice services; and various medical
supplies. The companies are the exclusive licensee to promote the
provision of long-term care services to the hospitals in the
Voluntary Hospitals of America alliance. As of December 31, 1993,
the ServiceMaster Diversified Health Services Companies were
providing management services to approximately 14,000 beds in 26
states in a total of 93 facilities.
Home Health Care Services. ServiceMaster Home Health Care
Services Inc. provides management services to hospital-based home
health care agencies and operates freestanding home health care
agencies. As of December 31, 1993, this organization was
serving 46 hospital-affiliated home health care agencies and was
serving four freestanding agencies.
International and New Business Development.
The International and New Business Development Group
oversees the performance of supportive management services and
consumer services in international markets in each case through the
arrangements described above.
The International and New Business Development Group also
operates employer or developer sponsored child care centers under
the "GreenTree" service mark. As of December 31, 1993, GreenTree
had 14 child care centers in operation, all of which were in the
greater Chicago area and in Milwaukee, Wisconsin.
Other Activities
Supporting Departments. ServiceMaster 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 manufactures 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 an
insignificant share of the market for the manufacture and
distribution of cleaning equipment, chemicals and supplies.
<PAGE>
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 Management Services, etc. business are price,
quality of service and history of providing management services.
The principal methods of competition employed by ServiceMaster in
the Consumer Services business are name recognition, assurance of
customer satisfaction and history of providing quality services to
homeowners. The principal methods of competition employed by
ServiceMaster in the Diversified Health Services business are name
recognition, price, quality of services and history of providing
management services.
Management Services: Health Care Market. 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, 1993,
ServiceMaster was serving in approximately 1,300 health care
facilities. The majority of health care facilities within this
market not currently served by ServiceMaster assume direct
responsibility for managing their own non-medical support
functions.
ServiceMaster believes that its management services for
health care facilities may expand by the addition of facilities not
presently served, by initiating additional services at
facilities which use only a portion of the services now offered, by
the development of new services and by growth in the size of
facilities served. At the same time, changes in use and methods of
health care delivery and payment for services continue to affect
the health care environment.
<PAGE>
Management Services: Education Market. ServiceMaster is a
leading provider of maintenance, custodial, grounds and food
management services to the education market. 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.
ServiceMaster continues to experience steady growth in this market.
As of December 31, 1993, ServiceMaster was serving in approximately
500 educational facilities. ServiceMaster believes there is
significant 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.
Management Services: Industrial and Commercial Market.
ServiceMaster believes it is a leading provider of plant
operations and maintenance, custodial and grounds management
services to industrial and commercial customers. During the period
1991 - 1993, this market has been adversely affected by generally
weak economic conditions and corporate downsizing, but
ServiceMaster continues to believe that there is potential for
expansion in the industrial and commercial market due to
ServiceMaster's low current penetration of that market and the
trend of industrial and commercial enterprises to consider
outsourcing more of their service requirements.
Consumer Services. Consumer Services franchisees 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 mark, their size and
financial capability, training and technical support services.
The market for termite, pest control and radon testing
services to commercial and residential customers includes several
large competitors and many small competitors. Terminix is the
leading national termite and pest control company within this
market and has a significant share of the 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 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.
<PAGE>
TruGreen-ChemLawn, both directly and through ChemLawn
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.
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 a significant potential for further expansion of
its housecleaning business through continued internal expansion and
greater penetration of the housecleaning market. Through its
franchisees, ServiceMaster has a small share of the market for the
cleaning of residential and commercial buildings.
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 approximately 6,000 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 5.3 million calls in 1993.
Diversified Health Services. The ServiceMaster Diversified
Health Services Companies constitute the nation's ninth largest
long term care company based on the number of beds served and the
largest company that is primarily a management services company (as
distinguished from a real estate operator). It is also a major
provider of planning and design services for long term care
facilities and for acute care hospitals.
ServiceMaster Home Health Care Services is a leading
provider of management services to hospital-affiliated home health
care agencies. The number of free-standing home health care
agencies operated by ServiceMaster Home Health Care Services
represents a very small proportion of home health care agencies in
the United States.
New Business Development. ServiceMaster Child Care
Services, Inc. is the sixth largest manager of employer-based child
care facilities in the United States. ServiceMaster believes that
there is a significant potential for expansion of its child care
services, including particularly in the market consisting of
employer-based child care.
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
that part. Revenues from governmental sources are not material.
Employees
On December 31, 1993, ServiceMaster had a total of
approximately 31,000 employees.
ServiceMaster provides its employees with annual vacation,
medical, hospital and life insurance benefits and the right to
participate in additional benefit plans which are described in the
Notes to Financial Statements included in the 1993 Annual Report.
<PAGE>
[CHART]
STRUCTURE OF SERVICEMASTER
<PAGE>
DESCRIPTION OF THE PARTNERSHIP STRUCTURE
Organization and Structure of the Parent Companies
Until December 30, 1986, the ServiceMaster business was
conducted by ServiceMaster Industries Inc. On December 30, 1986,
ServiceMaster was reorganized into a limited partnership with the
following results, among others: (i) ServiceMaster Limited
Partnership became the new parent unit in the ServiceMaster
enterprise with one limited partnership share in ServiceMaster
Limited Partnership being issued to replace every then
outstanding share of common stock issued by ServiceMaster
Industries Inc.; (ii) The ServiceMaster Company Limited
Partnership was established as the principal operating subsidiary
of ServiceMaster Limited Partnership, with the parent entity
receiving the entire limited partnership interest in The
ServiceMaster Company (representing not less than 99% of the entire
ownership interest); and (iii) substantially all of the assets and
liabilities associated with the ServiceMaster business were
conveyed to The ServiceMaster Company.
Until January 31, 1992, the general partners in
ServiceMaster Limited Partnership and The ServiceMaster Company
were ServiceMaster Management Corporation, which served as the
managing general partner, and three individual general partners.
On January 31, 1992, the three individual general partners
withdrew and became stockholders of ServiceMaster Management
Corporation, leaving ServiceMaster Management Corporation as the
sole general partner having management authority in the two
principal partnerships and, as further discussed below, the sole
general partner having an interest in the 1% carried interest
reserved to the general partners of the two partnerships.
Since January 1, 1987, the general partners have
collectively held a 1% interest in all profits and losses of
ServiceMaster Limited Partnership and of The ServiceMaster
Company, in each case limited to profits and losses generated since
the reorganization. Following the withdrawal of the
individual general partners on January 31, 1992, the entire 1%
interest in the profits and losses of each of ServiceMaster Limited
Partnership and The ServiceMaster Company has been held by
ServiceMaster Management Corporation. These separate interests
constitute an aggregate interest of approximately 2% of the
consolidated income and losses of the ServiceMaster business
(determined after allowing for minority interests in
subsidiaries, where applicable).
The Board of Directors of ServiceMaster Management
Corporation has the ultimate power to govern the ServiceMaster
business. A majority of the positions on the Board are reserved
for independent directors. Although the stock of ServiceMaster
Management Corporation is owned by members of ServiceMaster
management, the stockholders have entered into voting trust
arrangements under which the incumbent members of the Board have
the right to determine the persons who will be elected to the Board
each year. These arrangements were not altered by the 1992
Reorganization.
Although the owners of the outstanding limited partner shares
issued by ServiceMaster Limited Partnership do not have the right
to vote directly for the directors of ServiceMaster Management
Corporation, they do have the right to replace ServiceMaster
Management Corporation as the managing general partner by voting
the percentages of their shares prescribed in the Partnership
Agreement in favor of such replacement (provided, however, that
certain opinions of counsel are obtained). The holders of the
outstanding shares of ServiceMaster Limited Partnership accordingly
retain the ultimate right to select the ServiceMaster management.
<PAGE>
The 1992 Reorganization (ServiceMaster Corporation)
Reference is made to the Preface on page 1 for the
background of the 1992 Reorganization. As a result of the
approval of the Reorganization Package on January 13, 1992,
ServiceMaster Corporation was admitted as a Special General Partner
of the Registrant on January 31, 1992. As of March 21, 1994, no
shares of stock of ServiceMaster Corporation had been issued and
the corporation remained in a formative stage.
Organization and Structure of Management Services
ServiceMaster Management Services Limited Partnership
("SMMS") provides a separate identity for the Management Services
business. This business is primarily carried out through several
divisions of SMMS, with a small amount of specialized business
conducted through a wholly owned subsidiary.
SMMS has two general partners, ServiceMaster Management
Services, Inc. and The ServiceMaster Company and 44 limited
partners in two classes: Class A and Class B. The general
partners together hold a 1% interest in SMMS. The Class A
limited partners, all of whom are senior members of SMMS
management, collectively own 10% of the equity of SMMS (with equity
determined for this purpose after allowing for $505.6 million of
intercompany debt to The ServiceMaster Company). The Class B
limited partner is The ServiceMaster Company, which holds the
remaining equity interest in SMMS. The board of directors of
ServiceMaster Management Services, Inc. establishes policy for all
elements of the Management Services unit of the ServiceMaster
enterprise, subject to the overriding authority of the board of
directors of ServiceMaster Management Corporation.
Organization and Structure of Consumer Services
ServiceMaster Consumer Services Limited Partnership
("SMCS") provides a separate identity for the Consumer Services
business. SMCS is a holding company for all of the operating
units which comprise such business. SMCS holds all of the
Company's interests in the following organizations: ServiceMaster
Residential/Commercial Services L.P. and its managing general
partner; The Terminix International Company L. P. and its
managing general partner; TruGreen L.P. and its managing general
partner; Merry Maids L. P. and its managing general partner; and
SVM Holding Corp. (the parent company of American Home Shield
Corporation).
SMCS has two general partners, ServiceMaster Consumer
Services, Inc., and The ServiceMaster Company, and two limited
partners, The ServiceMaster Company and a subsidiary of WMX
Technologies, Inc. (which holds a 27.8% interest). The
controlling interest in ServiceMaster Consumer Services, Inc., is
held by ServiceMaster Management Corporation. The board of
directors of ServiceMaster Consumer Services, Inc. is the
governance body for SMCS and establishes policy for all elements
of the Consumer Services unit of the ServiceMaster enterprise,
subject to the overriding authority of the board of directors of
ServiceMaster Management Corporation.
<PAGE>
Organization and Structure of Diversified Health Services
The ServiceMaster Company holds the controlling interests in
the following organizations which, together, comprise the
ServiceMaster Diversified Health Services Group: the
ServiceMaster Diversified Health Services Companies and
ServiceMaster Home Health Care Services Inc.
The ServiceMaster Diversified Health Services Companies
consist of a limited partnership and its general partner and their
respective subsidiaries. The ServiceMaster Company owns 89% of the
equity of the ServiceMaster Diversified Health Services Companies,
with members of senior management owning the remaining 11% of such
equity.
ServiceMaster Home Health Care Services Inc. is wholly owned
by The ServiceMaster Company.
Organization and Structure of International and New Business
Development
International operations of the Company are carried out
through licensing or joint venture arrangements all of which are
coordinated and supervised by International and New Business
Development. This unit of the Company also owns all of the equity
in ServiceMaster Child Care Services, Inc.
Notes to Organizational Structure Chart
The following Notes are intended to be read in conjunction
with the organizational structure chart on page 13.
Note A--Public Investors
The public investors in the Registrant collectively hold a
99% interest in the profits, losses and distributions of the
Registrant through their ownership of the limited partner
interests in the Registrant ("Partnership Shares"). (If
ServiceMaster Corporation were to issue any shares of its common
stock, this 99% interest would be divided among the owners of the
Partnership Shares and the owners of the corporate shares in
accordance with their respective interests). The Partnership
Shares are listed on the New York Stock Exchange under the symbol
"SVM". For the reasons indicated in Note D below, the public
investors' 99% interest in the Registrant entitles the public
investors to an approximately 98% interest in the consolidated
profits, losses and distributions of ServiceMaster. On June 7,
1993 the Registrant effected a 3-for-2 split of its outstanding
Partnership Shares.
<PAGE>
Note B--ServiceMaster Limited Partnership
The Registrant (ServiceMaster Limited Partnership) serves as
the holding company for the ServiceMaster business. It does not
conduct any significant business operations or own any
significant property except for its 99% common equity interest in
the profits, losses and distributions of The ServiceMaster
Company Limited Partnership. ServiceMaster Corporation became a
special general partner of the Registrant following the approval of
and in accordance with the 1992 Reorganization. Reference is made
to the Proxy Statement/Prospectus of ServiceMaster Limited
Partnership dated December 11, 1991 for a complete discussion of
the background and arrangements regarding ServiceMaster
Corporation.
Note C--The ServiceMaster Company Limited Partnership
The ServiceMaster Company Limited Partnership conducts all of
the operations of the International and New Business Development
Group and serves as a holding company for the Management Services,
Consumer Services, and Diversified Health Services Groups. All of
its common limited partner interests are held by the Registrant.
An individual holds a preferred limited partner interest in The
ServiceMaster Company which will be redeemed by The ServiceMaster
Company on March 31, 1994 with payment to be made on May 31, 1994 -
see Note R. On January 1, 1993, the ServiceMaster SGP Trust became
a special general partner of The ServiceMaster Company - see Note
S.
Note D--ServiceMaster Management Corporation (Managing General
Partner)
ServiceMaster Management Corporation is the managing general
partner of ServiceMaster Limited Partnership and The ServiceMaster
Company Limited Partnership (collectively referred to in this Note
D as the "Partnerships"). ServiceMaster Management Corporation
has the ultimate authority to control each entity in the
ServiceMaster enterprise.
The certificate of incorporation of ServiceMaster
Management Corporation requires that a majority of the positions on
its board of directors must be comprised of independent
directors. The certificate of incorporation further provides that
this requirement may not be amended without the consent of the
holders of a majority of the outstanding shares of ServiceMaster
Limited Partnership. The stock of ServiceMaster Management
Corporation is owned by persons who were or are senior members of
the ServiceMaster management. The stockholders of this corporation
have deposited their stock in a voting trust of which the directors
themselves are trustees with discretionary power to vote the stock.
These arrangements enable the incumbent members of the Board of
Directors to choose the persons elected to the Board each year.
<PAGE>
On January 31, 1992, as contemplated by the 1992
Reorganization, all individuals who were then serving as general
partners of the Partnership withdrew as general partners and became
stockholders of ServiceMaster Management Corporation with stock
interests therein which indirectly represented their former general
partner carried interests. Their general partner carried interests
were transferred to ServiceMaster Management
Corporation as part of these adjustments.
ServiceMaster Management Corporation does not employ any
significant number of persons or own any office space or other
equipment used to conduct the day-to-day management of
ServiceMaster; rather, the employees and assets necessary to manage
the ServiceMaster business are based within the operating entities.
The applicable partnership agreements as adopted in 1986 and
as amended since then provide that the general partners of the
Partnerships are entitled to a 1% interest in each of the two
Partnerships. As noted above, since January 31, 1992, the sole
holder of the 1% interest in each of the two Partnerships has been
ServiceMaster Management Corporation. These interests are
"carried interests" which means that ServiceMaster Management
Corporation is not required to contribute to the capital of the
Partnerships except as may be necessary to pay liabilities for
which provision cannot otherwise be made. These carried
interests will remain at a constant 1% in each of the two
Partnerships at all times regardless of the extent to which
additional investments in the Partnerships are made by others and
regardless of the extent to which the Partnerships redeem other
interests. These 1% interests provide ServiceMaster Management
Corporation with approximately 1.99% of the profits and losses of
the entire ServiceMaster enterprise, that is, ServiceMaster
Management Corporation is entitled to 1% of the profits of The
ServiceMaster Company Limited Partnership and, because that
partnership is 99% owned by ServiceMaster Limited Partnership, it
is entitled to an additional 1% of the 99% of The ServiceMaster
Company Limited Partnership's profits which are allocated to
ServiceMaster Limited Partnership.
For the year 1993, each of the Partnerships made cash
distributions equal to 1% of its net income to ServiceMaster
Management Corporation. The total of the distributions made with
respect to 1993 was $2,547,618. From that amount the corporation
paid state corporate taxes and, on behalf of its stockholders, the
letter of credit fees charged with respect to the promissory notes
described in the next paragraph. The balance, $2,339,310, was
distributed by ServiceMaster Management Corporation to those past
and present officers of ServiceMaster who constituted the
stockholders of ServiceMaster Management Corporation. Such persons
include Messrs. Pollard, Stair, Cantu, Erickson and Oxley, whose
indirect allocations of the total 1.99% carried interest at the end
of 1993 were 15.46%, 11.34%, 11.34%, 11.34% and 5.02%,
respectively.
<PAGE>
At December 31, 1993, the stock of ServiceMaster Management
Corporation was owned by 33 ServiceMaster executives, each of whom
had signed a promissory note payable to the corporation in the
amount of the purchase price of his or her stock. Such notes
amounted to approximately $15,000,000 in the aggregate and are
payable upon demand. The payment of each such note is secured by
a letter of credit from the Continental Bank N.A. The fees for
such letters of credit are borne entirely by the makers of the
notes and not by ServiceMaster.
Note E--ServiceMaster Consumer Services Limited Partnership and
ServiceMaster Consumer Services,Inc.
ServiceMaster Consumer Services Limited Partnership
("SMCS") is the holding company and governance entity for the
Consumer Services business. The governance function is carried out
through ServiceMaster Consumer Services, Inc., one of the two
general partners of SMCS. The second general partner is The
ServiceMaster Company. The general partners collectively hold a 1%
interest in SMCS. The ServiceMaster Company, one of two limited
partners, holds a 72.2% equity interest in SMCS. The other limited
partner is WMI Urban Services, Inc. ("WMUS"), a wholly owned
subsidiary of WMX Technologies, Inc., which owned 27.8% of the
common equity of SMCS at the end of 1993.
In June 1992, WMUS and ServiceMaster amended the SMCS limited
partnership agreement for the purpose of eliminating the right
which WMUS theretofore held to withdraw from SMCS and to receive
$160 million in redemption of its equity ownership
interest. This withdrawal right was replaced by a right held by
WMUS to increase its equity ownership interest in SMCS to 27.8%
upon a payment to SMCS of $68 million. On June 8, 1993, WMUS
exercised such right, with the result that SMCS received $68
million and WMUS' limited partner interest in SMCS increased from
22% to 27.8%.
The board of directors of ServiceMaster Consumer Services,
Inc., consists of twelve persons in the following categories:
ServiceMaster directors and officers: C. William Pollard, Carlos H.
Cantu, Charles W. Stair; persons who are also members of the Board
of Directors of ServiceMaster Management Corporation or Senior
Management Advisors but who are not ServiceMaster officers: Henry
O. Boswell, Herbert P. Hess, Vincent C. Nelson, Kay A. Orr, Phillip
B. Rooney and Dallen W. Peterson; persons who are ServiceMaster
officers but not directors of ServiceMaster Management Corporation
or a Senior Management Adviser: Robert F. Keith; and persons not
affiliated with ServiceMaster except as a director of ServiceMaster
Consumer Services, Inc.: Donald G. Soderquist (Vice Chairman of
the Board and Chief Operating Officer of Wal Mart Stores, Inc.).
ServiceMaster Management Corporation has the power to elect and
remove the directors of ServiceMaster Consumer Services, Inc.
The following persons have been appointed as Senior
Management Advisers to the Board of Directors of ServiceMaster
Consumer Services, Inc.: Paul A. Bert and Thomas W. Scherer (both
of whom are officers of Consumer Services). A Senior Management
Adviser, Consumer Services, attends Consumer Services board
meetings but does not vote. This position carries no
compensation.
<PAGE>
Note F--ServiceMaster Management Services Limited Partnership
and ServiceMaster Management Services, Inc.
ServiceMaster Management Services Limited Partnership
("SMMS") is the holding company and governance entity for the
Management Services business. The governance function is carried
out through ServiceMaster Management Services, Inc., one of the two
general partners of SMMS. The second general partner is The
ServiceMaster Company. The general partners collectively hold a 1%
interest in SMMS, and The ServiceMaster Company, as the Class B
limited partner, and members of senior management of Management
Services, as Class A limited partners, hold the remaining 99%
interest.
The board of directors of ServiceMaster Management
Services, Inc. consists of nine persons in the following
categories: ServiceMaster directors and officers: C. William
Pollard, Carlos H. Cantu, Charles W. Stair and Robert D. Erickson;
persons who are also members of the Board of Directors of
ServiceMaster Management Corporation but who are not ServiceMaster
officers: Herbert P. Hess, Gunther H. Knoedler and David K.
Wessner; persons who are Senior Management Advisers and officers:
Brian D. Oxley; persons who are ServiceMaster officers but not
members of the Board of Directors of ServiceMaster Management
Corporation or a Senior Management Adviser: Jerry D. Mooney
(President, ServiceMaster Diversified Health Services); and persons
not affiliated with ServiceMaster except as a director of
ServiceMaster Management Services, Inc.: Paul W. Berezny, Jr. (real
estate investor). ServiceMaster Management Corporation has the
power to elect and remove the directors of ServiceMaster Management
Services, Inc.
Members of senior SMMS management purchased a 10% interest in
SMMS as Class A limited partners. The equity of SMMS is
determined, for purposes of such 10% interest, after allowing for
intercompany debt to The ServiceMaster Company. Such
intercompany debt is offset and eliminated in preparing the
consolidated financial statements of the Registrant. SMMS has the
right (the "call right") to purchase this minority interest and
each Class A limited partner has the right (the "put right") to
require SMMS to purchase his or her interest at any time during the
period beginning on January 1, 1999 and ending on January 31, 2003.
Each Class A limited partner can accelerate his or her put right to
the end of 1997 in order to receive shares of the Registrant
instead of cash. The purchase price for all transactions involving
the purchase of a Class A limited partner interest is the then
current fair market value of the interest as confirmed by an
independent appraisal.
<PAGE>
Note G--ServiceMaster Diversified Health Services
ServiceMaster Diversified Health Services is comprised of the
ServiceMaster Diversified Health Services Companies and
ServiceMaster Home Health Care Services. The former is 89% owned
by The ServiceMaster Company while the latter is 100% owned by The
ServiceMaster Company. The ServiceMaster Diversified Health
Services Companies include a parent limited partnership and its
general partner, and a number of subsidiary companies.
The governance body for the ServiceMaster Diversified Health
Services Companies is the board of directors of ServiceMaster
Diversified Health Services, Inc. This board consists of eight
persons in the following categories: ServiceMaster directors and
officers: Carlos H. Cantu, Charles W. Stair, Jerry D. Mooney,
Joseph K. Piper, Robert D. Erickson and David K. Wessner; and
persons not affiliated with ServiceMaster except as a director of
ServiceMaster Diversified Health Services, Inc.: Richard D. Thomas
and Curt W. Nomomaque.
The following persons have been appointed as Senior
Management Advisers, ServiceMaster Diversified Health Services:
Bradley T. Barker, James J. Goodrich, Steven R. Martin and Judith
A. Ullery. A Senior Management Adviser attends ServiceMaster
Diversified Health Services board meetings but does not vote. This
position carries no compensation.
Note H--The Terminix International Company Limited Partnership
The Terminix International Company Limited Partnership
("Terminix") has two general partners: Terminix International,
Inc., the managing general partner, and TSSGP Limited Partnership
("TSSGP"). Terminix is a wholly owned subsidiary of SMCS.
Note I--TruGreen Limited Partnership
TruGreen Limited Partnership ("TruGreen") has two general
partners: TruGreen, Inc., which is the managing general partner,
and TSSGP. Members of TruGreen management own a 15% minority
interest in TruGreen. TruGreen has the right (the "call right") to
purchase this 15% minority interest, and each person who holds a
part of the minority interest has the right (the "put right") to
require TruGreen to purchase his or her minority interest in
TruGreen. The call right and the put right may be exercised at any
time during the period beginning on January 1, 1997, and ending on
January 31, 2002. The purchase price for all
transactions involving a minority interest purchase is the then
current fair market value as confirmed by an independent
appraisal.
<PAGE>
Note J--Res/Com
ServiceMaster Residential/Commercial Services Limited
Partnership ("Res/Com") has two general partners: ServiceMaster
Residential/Commercial Services Management Corporation, which is
the managing general partner, and TSSGP. Res/Com is a wholly owned
subsidiary of SMCS.
Note K--Merry Maids
Merry Maids Limited Partnership ("Merry Maids") has two
general partners: Merry Maids, Inc., which is the managing
general partner, and TSSGP. Merry Maids is a wholly owned
subsidiary of SMCS. (The minority interest in Merry Maids held by
members of senior management of Merry Maids at the end of 1993 will
be acquired by Merry Maids in 1994).
Note L--American Home Shield
American Home Shield Corporation ("AHS") is a wholly-owned
subsidiary of SVM Holding Corp. ("Holding"). Holding is a wholly
owned subsidiary of SMCS. (The 8% interest in Holding held by
members of senior management of AHS at the end of 1993 was
acquired by Holding in 1994).
Note M--ServiceMaster Diversified Health Services Companies
The ServiceMaster Diversified Health Services Companies
(formerly VHA Long Term Care) are wholly owned subsidiaries of LTCS
Investment, L.P. The latter partnership is 89% owned by The
ServiceMaster Company and 11% by members of senior management of
the ServiceMaster Diversified Health Services Companies. LTCS L.P.
has the right (the "call right") to purchase this 11% minority
interest, and each person who holds a part of the minority interest
has the right (the "put right") to require LTCS L.P. to purchase
his or her minority interest in LTCS L.P. The call right and the
put right may be exercised at any time during the period beginning
on January 1, 1999, and ending on January 31, 2004. The purchase
price for all transactions involving a minority interest purchase
is the then current fair market value as confirmed by an
independent appraisal.
Note N--Home Health Care Services
ServiceMaster Home Health Care Services Inc. is a wholly
owned subsidiary of The ServiceMaster Company and is a part of the
ServiceMaster Diversified Health Services Group.
<PAGE>
Note O--International and New Business Development
International and New Business Development is a division of
The ServiceMaster Company. Its operations have been described
above (page 8).
Note P--Child Care Services
ServiceMaster Child Care Services, Inc., is a wholly owned
subsidiary of The ServiceMaster Company and is a part of the
International and New Business Development Group. Its
operations have been described above (page 8).
Note Q--Other Subsidiaries
Other subsidiaries include CMI Group, Inc., a subsidiary of
ServiceMaster Management Services L.P.; miscellaneous operating and
name protection entities; and ServiceMaster Operations, AG, a Swiss
corporation which, in turn, operates through separate subsidiaries
organized in the United Kingdom and Germany. Reference is made to
Exhibit 22 for a complete list of the subsidiaries of the
Registrant.
Note R--Norrell Corporation
On February 11, 1994, ServiceMaster sold to Norrell
Corporation ("Norrell") all of the common equity interest in
Norrell held by ServiceMaster for $29.3 million, an amount which
exceeded its carrying value. On March 31, 1994, ServiceMaster will
redeem the preferred interest in The ServiceMaster Company which
was issued in 1991 to, and thereafter held by, Norrell's principal
stockholder. Payment of the redemption price will be made on May
31, 1994 in the form of cash in the amount of $14.6 million and
372,950 shares of the Registrant.
Note S--ServiceMaster SGP Trust
On January 1, 1993, the limited partnership agreement of The
ServiceMaster Company was amended to admit a trust as a special
general partner of The ServiceMaster Company (the "SGP Trust").
The beneficiaries of the ServiceMaster SGP Trust are the limited
partners of the Registrant as constituted from time to time and
ServiceMaster Corporation (but the latter is a beneficiary only if
shares of its common stock are outstanding, which is not now the
case). SGP Trust will receive each year an allocation of taxable
income equal to the amount by which the aggregate taxable income of
The ServiceMaster Company exceeds the cash distributions made by
the Registrant directly to its limited partners and to
ServiceMaster Corporation. As a result of this allocation of
taxable income, the cash distributions made by the Registrant
directly to its limited partners and to ServiceMaster Corporation
will be exactly equal to the taxable income of the Registrant which
is directly allocated to its limited partners and to ServiceMaster
Corporation. The ServiceMaster Company will annually make a cash
distribution to SGP Trust in the amount required by the trust for
the payment of its federal and state income tax liabilities. This
arrangement solves the "crossover problem" described in earlier
annual reports and in the Registrant's Proxy Statement dated
December 11, 1991.
<PAGE>
Item 2. Properties
The headquarters facility of ServiceMaster, which also serves
as headquarters for the ServiceMaster Management Services and
International and New Business Development Groups, 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 will continue to be utilized by
ServiceMaster personnel.
ServiceMaster leases a 50,000 square foot facility near
Aurora, Illinois which is used by ServiceMaster as a
warehouse/distribution center.
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 leases a 44,000 square foot
manufacturing facility in Lancaster, Pennsylvania, which is used to
provide products and equipment primarily to customers of Management
Services in the eastern part of the United States. Management
believes that the foregoing manufacturing and warehouse facilities
are adequate to support the current needs of ServiceMaster.
<PAGE>
The headquarters for ServiceMaster Consumer Services L.P. are
located in leased premises at 855 Ridge Lake Boulevard, Memphis,
Tennessee. This facility also serves as the headquarters for
Terminix, Res/Com and TruGreen-ChemLawn.
The headquarters facility for Merry Maids is located in
leased premises at 11117 Mill Valley Road, Omaha, Nebraska.
The headquarters facility for American Home Shield is
presently located in leased premises at 90 South E Street, Santa
Rosa, California, but later in 1994 this facility will be closed
and the American Home Shield headquarters will be relocated to
Memphis, Tennessee. 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 98 acres of land in
Santa Rosa, California. 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.
Terminix owns 16 buildings which are used as branch sites.
These properties are all one-story buildings that contain both
office and storage space. These properties are located in New
Jersey (2 properties), California (2 properties), Florida (8
properties), and Texas (4 properties).
TruGreen-ChemLawn owns several buildings which are used as
branch sites for lawn care services. These facilities are
located in various parts of the United States. In July 1992,
TruGreen leased the former ChemLawn headquarters facility in
Columbus, Ohio. In 1993, this facility was sold by its owner and
the lease with TruGreen was terminated.
The headquarters for the ServiceMaster Diversified Health
Services Companies ("DHS") is located in leased premises at 5050
Poplar Avenue, Memphis, Tennessee. DHS leases other
administrative facilities in Plymouth Meeting, Pennsylvania;
Dallas, Texas; and Atlanta, Georgia. DHS has an ownership
interest in three nursing home facilities through joint venture
arrangements in which DHS has a 50% interest.
<PAGE>
Item 3. Legal Proceedings
In the ordinary course of conducting its business
activities, ServiceMaster becomes involved in judicial and
administrative proceedings which involve both private parties and
governmental authorities. As of March 21, 1994, these
proceedings included a number of general liability actions and a
very small number of environmental proceedings.
General Liability Matters. Terminix is a party to
litigation in Tennessee involving an alleged misapplication of the
chemical Aldrin. This matter has been settled as to the
compensatory element of the case for an amount within Terminix's
insurance coverage. The punitive damages element of the case will
be the subject of a new trial. Terminix expects that
punitive damages, if any, will not be material in amount.
Environmental Matters. Terminix is one of several
defendants named in a suit filed by the United States
Environmental Protection Agency (the "EPA") on November 3, 1986 in
the United States District Court for the Western District of
Tennessee, to recover the costs of remediation at two sites in
Tennessee which have been designated by the EPA as "Superfund
sites" under the Comprehensive Environmental Response
Compensation and Liability Act ("CERCLA"). Terminix has agreed, on
an interim basis, to a ten percent cost share with respect to one
site and has not entered a cost sharing agreement with
respect to the other. Terminix has also been notified by a letter
from the EPA, along with many other parties, as a "potentially
responsible party" under CERCLA at a site in Wichita, Kansas.
Terminix was named in a Superfund site in Michigan but Terminix's
connection to this matter is through an acquisition in which the
seller retained responsibility for environmental matters; Terminix
considers its exposure in this case to be not material. Terminix's
actual participation in the total volume of hazardous waste at
these sites is less than five percent. The CERCLA law is written
to impose joint and several liability for the cleanup costs at any
particular site on every contributor to that site, and accordingly
every contributor's potential liability at every site is large.
Based on practical experience with prior CERCLA situations and the
circumstances of the cases in which it is now involved, Terminix
expects that its actual liability at these sites will not be
material.
ServiceMaster believes the outcome of the proceedings
referred to above will not be, individually or in the aggregate,
material to its business, financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
<PAGE>
PART II
Item 5. Market for Registrant's Partnership Shares and Related
Shareholder Matters
Except for the information set forth in the second and third
sentences of this Item 5, the portions of the ServiceMaster Annual
Report to Shareholders for 1993 under the captions
"Shareholders' Equity" (pages 34 - 35) and "Cash Distributions Per
Share" and "Price Per Share" in the Quarterly Operating Results
table (page 36) supply the information required by this item and
such portions are hereby incorporated herein by
reference. The Registrant's shares are listed and traded on the
New York Stock Exchange. At March 21, 1994, the Registrant's
shares were held of record by approximately 65,000 persons.
Item 6. Selected Financial Data
The portion of the ServiceMaster Annual Report to
Shareholders for 1993 in the Financial Statements and Management
Discussion section ("FSMD Section") under the caption "Eleven Year
Financial Summary" (pages 24 - 25) supplies the information
required by this item and such portion is hereby incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition
and Results of Operations for the three years ended December 31,
1993, is contained in the FSMD Section of the ServiceMaster Annual
Report to Shareholders for 1993 on pages 19 - 23 and is hereby
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated statements of financial position of
ServiceMaster as of December 31, 1993 and 1992, and the
consolidated statements of income, cash flows and shareholders'
equity for the years ended December 31, 1993, 1992 and 1991 and
notes to the consolidated financial statements are contained in the
FSMD Section of the ServiceMaster Annual Report to
Shareholders for 1993 on pages 27 - 36 and are incorporated herein
by reference. The report of Arthur Andersen & Co. thereon dated
January 25, 1994, and the summary of significant accounting
policies are contained in the FSMD Section of the ServiceMaster
Annual Report to Shareholders for 1993 on page 26 and are hereby
incorporated herein by
reference.
Item 9. Disagreements on Accounting and Financial Disclosure
Inapplicable.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Corporate
General Partner of Registrant and The ServiceMaster
Company
The following section of this Item 10 shows: (i) the names
and ages (as of March 18, 1994) of the present directors of
ServiceMaster Management Corporation (the corporate general partner
of ServiceMaster Limited Partnership and The
ServiceMaster Company); (ii) all positions and offices with
ServiceMaster held by each such director; and (iii) the term of
each such person as a director and all period(s) during which each
director has served. There are no arrangements or
understandings between any director and any other person pursuant
to which the director was or is to be selected as a director or
nominee.
1994 Class
Carlos H. Cantu, age 60, has been a director since 1988. On
January 1, 1994, Mr. Cantu became the President and Chief Executive
Officer of ServiceMaster. He is the President and Chief Executive
Officer of ServiceMaster Consumer Services, a director and the
Chairman of ServiceMaster Consumer Services, Inc., a director and
the Chairman of ServiceMaster Management Services, Inc. and a
director of ServiceMaster Diversified Health Services, Inc. He
served as Executive Vice President and Chief Operating Officer,
Consumer Services, from October 1988 to May 1990 and as President
and Chief Operating Officer of ServiceMaster Consumer Services from
June 1, 1990 to May 1991. Mr. Cantu also serves as Vice Chairman
of American Home Shield Corporation. He served as President and
Chief Executive Officer of The Terminix International Company
Limited Partnership from December 18, 1986 to December 31, 1992.
He is a director of Terminix International, Inc., the corporate
general partner of The Terminix International Company Limited
Partnership. He has been a director of NationsBank/Memphis in
Memphis, Tennessee, since August 1988; of NationsBank/Tennessee in
Nashville, Tennessee, since January 1990; and of Midland Financial
Group, Inc., an insurance company in Memphis, Tennessee, since
September 1992.
Lord Brian Griffiths of Fforestfach, age 52, has been a
director since August 1992. He is a member of the Executive
Committee of the Board of Directors. He is an international
advisor to Goldman, Sachs & Co. concerned with strategic issues
related to their United Kingdom and European operations and
business development activities worldwide. During the period 1985
to 1990, he served at No. 10 Downing Street as Head of the Prime
Minister's Policy Unit. He was made a life peer at the conclusion
of his service to the Prime Minister. Lord Griffiths is a director
of THORN EMI plc, Times Newspapers Holding Ltd., Herman Miller,
Inc., Zeeland, Michigan, and HTV (Harlech Television).
<PAGE>
Gunther H. Knoedler, age 64, has been a director since 1979.
He is a member of the Executive Committee, the Chairman of the
Audit Committee and a member of the Share Option Committees of the
Board of Directors and he is a director of ServiceMaster Management
Services, Inc. Mr. Knoedler is Executive Vice President and
Director Emeritus of Bell Federal Savings & Loan Association,
Chicago, Illinois. He is the Chairman of the Board of Trustees of
Wheaton College, Wheaton, Illinois, and a member of the Board of
Directors of Tyndale House Publishers, Inc.
Vincent C. Nelson, age 52, has been a director since 1978.
Mr. Nelson is a member of the Executive Committee and the Audit,
Employee Share Purchase Plan, and Share Option Committees of the
Board of Directors. He is also a director of ServiceMaster
Consumer Services, Inc. Mr. Nelson is a business investor and is a
trustee of Westmont College, Santa Barbara, California. Mr.
Nelson is the foster son of Kenneth N. Hansen, Director Emeritus
and Adviser.
C. William Pollard, age 55, has been a director since
December 1977. Since May 1990, he has been the Chairman of the
Board and Chairman of the Executive Committee. From May 1983 to
December 31, 1993, Mr. Pollard served as the Chief Executive
Officer of ServiceMaster. He served as President of
ServiceMaster from 1981 to May 1990 and has been the Chief
Executive Officer of the Company since May 1983. He is a
director and the Vice Chairman of ServiceMaster Consumer
Services, Inc., a director and the Vice Chairman of ServiceMaster
Management Services, Inc. and a director and the Chairman of
American Home Shield Corporation. Mr. Pollard joined
ServiceMaster as Senior Vice President in December 1977. He served
as Executive Vice President and Chief Operating Officer from
November 1980 until his election as Chief Executive Officer in May
1983. Mr. Pollard is a director of Herman Miller, Inc., Zeeland,
Michigan; a director of Provident Life and Casualty Insurance
Company, Chattanooga, Tennessee; and an advisory director of
Trammell Crow Company, Dallas, Texas.
1995 Class
Henry O. Boswell, age 64, has been a director since 1985. He
is a member of the Executive Committee of the Board of
Directors and he is a director of ServiceMaster Consumer
Services, Inc. From 1983 until his retirement in October 1987, Mr.
Boswell was President of Amoco Production Company. During the same
time period, he was Chairman of the Board of Amoco Canada and a
director of Amoco Corporation. He has served in various
positions with affiliates of Amoco Corporation since 1953. Mr.
Boswell is a director of Rowan Companies, Inc., Houston, Texas, and
Cabot Oil & Gas Corp. in Houston, Texas.
<PAGE>
James D. McLennan, age 57, has been a director since May
1986. He is a member of the Audit Committee. Mr. McLennan joined
McLennan Company, a real estate service company, in 1958. He was
named partner in 1968 and became President in 1981. He is a member
of the Board of Directors of Lutheran General Medical Health
Systems, Park Ridge, Illinois and the Chairman of the Board of the
Lutheran General Foundation. Mr. McLennan is also a director of
NBD Bank of Park Ridge, Park Ridge, Illinois, a director of Potomac
Corporation in Wheeling, Illinois, a laminator of paper products
and a director of The Loewen Group Inc., a provider of funeral
services, Burnaby, B.C., Canada.
Burton E. Sorensen, age 64, has been a director since May
1984. He is a member of the Executive Committee of the Board of
Directors. He is the Chairman and Chief Executive Officer of Lord
Securities Corporation. He served as President and Chief Executive
Officer of the corporation from December 1984 to December 1992. He
joined Goldman, Sachs & Co., an investment banking and brokerage
firm, in 1972 as Vice President, Investment Banking Division, and
became a general partner in 1977. Mr. Sorensen is also a director
of Provident Life and Casualty Insurance Company, Chattanooga,
Tennessee.
Charles W. Stair, age 53, has been a director since
December 1986. He previously served as a director from 1976 to
1983. He has been the President and Chief Executive Officer of
ServiceMaster Management Services since May 1991, he is a
director of ServiceMaster Management Services, Inc. and he is a
director and the Chairman of ServiceMaster Diversified Health
Services, Inc. Mr. Stair served as President and Chief Operating
Officer, Management Services, from June 1990 to April 1991 and as
Executive Vice President and Chief Operating Officer, Management
Services, from October 1, 1988 to May 1990. He served as
Executive Vice President, Management Services from December 31,
1987 to September 30, 1988. Mr. Stair is a member of the Profit
Sharing, Savings and Retirement Plan Administrative Committee. He
is a director of Tyndale House Publishers, Inc., Wheaton, Illinois.
David K. Wessner, age 42, has been a director since March
1987. He is a member of the Executive Committee and is a
director of ServiceMaster Management Services, Inc. and
ServiceMaster Diversified Health Services, Inc. Mr. Wessner has
been Senior Vice President, Programs and Process Improvement,
Geisinger Health Systems, since January 1, 1994. He served as
Executive Vice President, Programs and Process Improvement,
Geisinger Health Systems from November 1992 to December 31, 1993
and as Senior Vice President and Administrative Director from 1982
to November 1992. Mr. Wessner is a director of Commonwealth Bank,
a division of Meridian Bank, Reading, Pennsylvania, and a director
of Geisinger Health Plan, Danville, Pennsylvania. He is the son of
Kenneth T. Wessner, who is a Director Emeritus.
<PAGE>
1996 Class
Herbert P. Hess, age 57, has been a director since 1981. He
is a member of the Executive Committee and a director of
ServiceMaster Consumer Services, Inc. Mr. Hess is a Managing
Director of Berents & Hess Capital Management, Inc., an
investment management firm. He is the past President and Chief
Executive Officer of State Street Research & Management Company, an
investment management firm. Mr. Hess was Chairman of MetLife-State
Street Investment Services, Inc. from 1988 to April 1, 1990.
Kay A. Orr, age 55, has been a director since January 1,
1994. She is also a director of ServiceMaster Consumer Services,
Inc. Mrs. Orr was Governor of Nebraska from 1987 to 1991 and served
as the State Treasurer of Nebraska from 1981 to 1986. From 1979 to
1981, she served as Chief of Staff to the Governor of Nebraska.
Mrs. Orr is a director of The Williams Companies, Tulsa, Oklahoma,
a trustee of Hastings (Nebraska) College, and a trustee of the
Peoples City Mission Foundation.
Philip B. Rooney, age 49, has been a director since January
1, 1994. He is a member of the Executive Committee of the Board
of Directors. He is also a director of ServiceMaster Consumer
Services, Inc. Mr. Rooney is a director and the President and
Chief Operating Officer of WMX Technologies, Inc., Oak Brook,
Illinois, the Chairman of the Board and Chief Executive Officer of
Wheelabrator Technologies, Inc., Hampton, New Hampshire, Chairman
of the Board of Rust International, Inc., Oak Brook, Illinois, a
director of Chemical Waste Management, Inc., Oak Brook, Illinois,
and a director of Waste Management International, Inc., Oak Brook,
Illinois. He is also a director of Illinois Tool Works, Inc.,
Caremark International, Inc. and Urban Shopping Centers, Inc.
Directors Emeritus
Kenneth N. Hansen, age 75, served as a director from 1947
until 1987. Mr. Hansen has been Director Emeritus and Adviser to
ServiceMaster since April 1987. He served as Vice Chairman from
1981 until 1987. He served as Chairman of the Executive
Committee from 1975 to 1981, as Chairman of the Board of
Directors from 1973 to 1981, as Chief Executive Officer from 1957
through 1975 and as President from 1957 to 1973. He is an ex-
officio member of all committees of the Board. Mr. Hansen is the
foster parent of Vincent C. Nelson, a director of ServiceMaster
Management Corporation.
Kenneth T. Wessner, age 71, served as a director from 1965 to
December 12, 1992. Since that date he has been Director Emeritus.
Mr. Wessner was Chairman of the Board and Chairman of the Executive
Committee of ServiceMaster from 1981 to May 1990. He was Chief
Executive Officer from 1975 until June 1, 1983 and President from
1973 until June 1, 1981. Mr. Wessner established the Health Care
Division in 1962 and served as its President. He is a director of
Bell Federal Savings & Loan Association, Chicago, Illinois. Mr.
Wessner is a member of the Nominating Committee. He is the father
of David K. Wessner who is a ServiceMaster director.
<PAGE>
Senior Management Advisers
The Bylaws of ServiceMaster Management Corporation provide
that the Board of Directors may appoint officers of ServiceMaster
and other persons having a special relationship to ServiceMaster to
serve as Senior Management Advisers. Senior Management
Advisers attend the meetings of the Board and advise the Board but
do not have the power to vote. The Board has determined that
providing a greater number of officers the opportunity to advise
and interact with the Board is in the best interest of
ServiceMaster as well as the individual officers. The Senior
Management Advisers receive no special compensation for their
services in this capacity.
The Board of Directors has appointed the persons listed below
as Senior Management Advisers effective as of the 1993 annual
meeting of shareholders to serve in such capacity until the annual
meeting of shareholders in 1994 or until otherwise determined by
the Board of Directors.
Robert D. Erickson, age 50, was a director from May 1987 to
May 1993. He previously served as a director from May 1981 through
May 1984. He is a director of ServiceMaster Management Services,
Inc. He is presently President, International and New Business
Development. He served as Executive Vice President and Chief
Operating Officer of this division from November 1992 to December
31, 1993. He served as Executive Vice President and Chief
Operating Officer, People Services, from January 1990 to October
1992 and as Executive Vice President and Chief Financial Officer of
ServiceMaster from January 1986 through December 1989. Mr.
Erickson is a director of Moody Bible Institute, Chicago, Illinois;
and VanCom Incorporated, South Holland, Illinois, a transportation
company. Mr. Erickson is a member of the Profit Sharing, Savings
and Retirement Plan Administrative Committee, the Employee Share
Purchase Plan Administrative Committee, and the Employee Benefits
Plan Committee.
Brian D. Oxley, age 43, is Executive Vice President and Chief
Operating Officer of ServiceMaster Management Services. He is a
director of ServiceMaster Management Services, Inc. From November
1992 to December 31, 1993, he served as the President and Chief
Executive Officer of the International and New Business
Development Group. He served as Executive Vice President, New
Business Development from January 1991 to November 11, 1992 and as
President of International Services from January 1, 1988 to
November 11, 1992. He served as President of the
Residential/Commercial and International divisions of
ServiceMaster from 1987 through 1989. Mr. Oxley is a director of
Kawakita Hospital, Tokyo, Japan.
<PAGE>
Dallen W. Peterson, age 57, served as the Chairman of Merry
Maids, Inc. until the acquisition of that company's assets by Merry
Maids Limited Partnership in July 1988. He is presently the
Chairman of Merry Maids Limited Partnership.
Donald K. Karnes, age 43, is President of TruGreen-
ChemLawn. He has served as President and Chief Operating Officer
of TruGreen-ChemLawn since January 1, 1992; from January 1, 1990 to
December 31, 1991, he was Senior Vice President, TruGreen Limited
Partnership. During the year 1989, Mr. Karnes was a Regional Vice
President for Waste Management Urban Services, Inc.
Executive Officers of ServiceMaster
The following table shows: (i) the names and ages (as of
March 18, 1994) of the present executive officers of the
Registrant, The ServiceMaster Company and ServiceMaster
Management Corporation; (ii) all positions presently held by each
officer; and (iii) the year each person became an officer. Each
person named has served as an officer of the Registrant
continuously since the year shown. There are no arrangements or
understandings between any executive officer and any other person
pursuant to which the officer was or is to be selected as an
officer.
<TABLE>
<CAPTION>
First Became
Name Age Present Position An Officer
<S> <C> <C> <C>
C. William Pollard 55 Chairman and Director 1977
Carlos H. Cantu 60 President and Chief Executive
Officer and Director 1986
Charles W. Stair 53 President and Chief Executive Officer,
Management Services, and Director 1973
Robert D. Erickson 50 President, International and New
Business Development, and a Senior
Management Adviser 1976
Brian D. Oxley 43 Executive Vice President and Chief
Operating Officer, Management Services,
and a Senior Management Adviser 1983
Vernon T. Squires 59 Senior Vice President and 1987
General Counsel
Ernest J. Mrozek 40 Vice President, Treasurer and
Chief Financial Officer 1987
</TABLE>
<PAGE>
Messrs. Pollard, Stair and Cantu are also Directors of
ServiceMaster Management Corporation. Messrs. Erickson and Oxley
are Senior Management Advisers. See pages 31, 32, and 33 for
biographical information with respect to these executive
officers.
Vernon T. Squires, age 59, was elected Senior Vice
President and General Counsel effective January 1, 1988. He served
as Vice President and General Counsel from April 1, 1987 until
December 31, 1987. He served as an associate and partner with the
law firm of Wilson & McIlvaine in Chicago, specializing in
corporate and tax law, from 1960 to April 1, 1987. He is presently
Of Counsel to that firm. He is a director of the Suburban Bus
Division of the Regional Transportation Authority.
Ernest J. Mrozek, age 40, was elected Vice President,
Treasurer and Chief Financial Officer effective November 1, 1992.
He served as Vice President and Chief Accounting Officer, from
January 1, 1990 to October 31, 1992 and as Vice President,
Accounting, from December 1987 to December 1989. He practiced
public accounting as a manager with Arthur Andersen and Co. from
1981 to December 1987.
Compliance With Section 16(a) of The Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934
requires ServiceMaster's officers and directors, and persons who
own more than ten percent of ServiceMaster's shares, to file
reports of ownership and changes in ownership with the Securities
and Exchange Commission (the "Commission") and the New York Stock
Exchange. The Commission's regulations require certain officers,
directors and greater-than-ten-percent shareholders to furnish to
ServiceMaster copies of all Section 16(a) forms that they file.
During 1993, ServiceMaster received Section 16(a) forms from such
officers and directors; ServiceMaster has no shareholders with an
interest greater than ten percent.
Based solely on a review of the copies of Section 16(a) forms
received by ServiceMaster or on written representations from
certain reporting persons that no Forms 5 were required for those
persons, ServiceMaster believes that during 1993, its officers and
directors complied with applicable filing
requirements except that five reports, covering an aggregate of six
transactions, were filed late by Messrs. Karnes, Oxley, Rooney and
Mrs. Orr. (Two of such late reports were amendments of earlier
reports which were timely filed).
<PAGE>
Item 11. Executive Compensation
The following table sets forth all compensation awarded to,
earned by, or paid to the Chief Executive Officer of
ServiceMaster and ServiceMaster's four most highly compensated
executive officers other than the Chief Executive Officer of
ServiceMaster during or in respect of the year 1993. Each of the
listed persons was holding the office indicated in the table on the
last day of December 1993.
<TABLE>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION (E)
<CAPTION>
(a) (b) (c) (d) (e)
Other Annual
Name and Salary Bonus Compensation
Principal Position Year ($) ($) ($)
<S> <C> <C> <C> <C>
C. William Pollard, 1993 $300,000 $450,000 -
Chief Executive 1992 $300,000 $390,000 -
Officer 1991 $300,000 $300,000 -
Carlos H. Cantu (A) 1993 $300,000 $525,000 -
1992 $300,000 $495,000 -
1991 $240,000 $ 60,000 -
Charles W. Stair (B) 1993 $300,000 $294,000 -
1992 $300,000 $130,000 -
1991 $240,000 $240,000 -
Brian D. Oxley (C) 1993 $240,000 $271,000 -
1992 $180,000 $180,000 -
1991 $125,000 $125,000 -
Robert D. Erickson (D) 1993 $230,000 $260,000
1992 $230,000 $ 68,770 -
1991 $210,000 $150,000 -
</TABLE>
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE (CONT'D)
LONG TERM COMPENSATION
<CAPTION>
(f) (g) (h) (i)
Restricted Securities
Stock Underlying LTIP All Other
Name and Awards Options/SARs Payouts Compensation
Principal
Position ($) (#) (G) ($) ($)
<S> <C> <C> <C> <C> <C>
C. William Pollard, - 112,500 - - -
Chief Executive - - - - -
Officer - - - - -
Carlos H. Cantu (A) - - - - -
- - - - -
- - - - -
Charles W. Stair (B) - - - - -
- - - - -
- - - - -
Brian D. Oxley (C) - 30,000 - - -
- - - - -
- 21,375 - - -
Robert D. Erickson (D) - 30,000 - - -
- - - - -
- - - - -
</TABLE>
Notes:
(A) President and Chief Executive Officer, ServiceMaster
Consumer Services.
(B) President and Chief Executive Officer, ServiceMaster
Management Services.
(C) Executive Vice President and Chief Operating Officer,
Management Services.
(D) President, International and New Business Development.
(E) The table does not include the cash distributions made
to ServiceMaster Management Corporation, as the managing general
partner of the Registrant and The ServiceMaster Company, and the
redistribution of such amounts to the stockholders of ServiceMaster
Management Corporation (who include the persons listed in the above
table). See "Description of the Partnership Structure" Note D,
page 18. The foregoing amounts represent the stockholders' share
of profits in return for their equity risk. The table also does
not include the value of shares of the Registrant issued to C.
William Pollard pursuant to certain agreements made in 1986 and
concluded in 1993 (see Item 13: "Miscellaneous Transactions", page
58).
(F) With respect to the year 1993, see Note (A) to the
Option/SAR Grants Table. The figures shown for earlier
years are the number of the underlying shares for grants of options
under the ServiceMaster 10 Plus Option Plan. The number of options
shown for Mr. Oxley for the year 1991 has been adjusted to
reflect the Registrant's 3-for-2 share split in June 1993.
<PAGE>
The following table summarizes the number and terms of the
stock options (if any) granted during the year 1993 to the named
executive officers.
<TABLE>
OPTION/SAR GRANTS IN 1993
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
(a) (b) (c) (d) (e) ( f) (g)
Number of
Securities % of Total
Underlying Options/SARs
Options/SARs Granted to Exercise or
Granted Employees Base Price Expiration
Name (#) (A)(B) in 1993 ($/Sh)(C) Date 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
C. William Pollard 112,500 11.00% $18.33 10-15-2002 $1,113,750 $2,994,750
Chief Executive
Officer
Carlos H. Cantu 0 - -
Charles W. Stair 0 - -
Brian D. Oxley 30,000 2.93% $18.33 10-15-2002 $ 297,000 $ 798,600
Robert D. Erickson 30,000 2.93% $18.33 10-15-2002 $ 297,000 $ 798,600
</TABLE>
Notes:
(A) ServiceMaster 10 Plus Option grants were approved for C.
William Pollard, Brian D. Oxley and Robert D. Erickson in October
1992. In the case of each of the foregoing grantees, acceptance of
the option and payment by the grantee of the price for the option
itself ($1.00 per option share on a post-split basis) was not
required and did not occur until early 1993. These grants were not
shown in the Option/SAR Grants Table in ServiceMaster's Form 10-K
for 1992 but are reported in the above table. Column (A) reflects
the 3-for-2 share split effected by the Registrant in June 1993.
(B) ServiceMaster 10 Plus Option grants were approved for C.
William Pollard, Carlos H. Cantu, and Robert D. Erickson in October
1993. In the case of each of the foregoing grantees, acceptance of
the option and payment by the grantee of the price for the option
itself ($1.50 per option share) was not required until early 1994.
These grants will be shown in the Option/SAR Grants Table in
ServiceMaster's Form 10-K for 1994.
(C) The fair market value of the Registrant's shares at the
time when the grants of the option were made (October 1992) was
$26.00. Each grantee was required to pay $1.50 per option share as
a condition to the actual grant of the option (which sum was, in
each case, paid in February 1993). Column (d) combines the
exercise price and the option price. In June 1993, the
Registrant split its shares 3-for-2 and the exercise price for the
options shown in the table has therefore been adjusted to $18.33
per share, which includes the option price as adjusted to $1.00 per
option share.
<PAGE>
The following table summarizes the exercises of stock options
during the year 1993 by the named executive officers and the number
of, and the spread on, unexercised options held by such officers at
December 31, 1993.
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN 1993 AND FY-END OPTION/SAR VALUES
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End(#) at FY-End($)
Shares Acquired Value
on Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
C. William Pollard, 0 0 112,500/0 $1,017,563/0
Chief Executive Officer
Carlos H. Cantu 0 0 0/0 0/0
Charles W. Stair 0 0 0/0 0/0
Brian D. Oxley 0 0 30,000/0 $271,350/0
Robert D. Erickson 0 0 30,000/0 $271,350/0
</TABLE>
<PAGE>
As shown in the following table, no long-term incentive
awards were granted to any of the named executive officers during
the year 1993.
<TABLE>
LONG-TERM INCENTIVE PLANS -- AWARDS IN 1993
Long-Term Incentive Plan Awards in Last Fiscal Year
<CAPTION>
Estimated Future Payouts
Under Non-Stock Price Based Plans
(a) (b) (c) (d) (e) (f)
Number of Performance or
Shares, Units Other Period
or Other Rights Until Matura- Threshold Target Maximum
Name (#) tion or Payout ($ or #) ($ or #) ($ or #)
<S> <C>
C. William Pollard,
Chief Exec. Officer 0
Carlos H. Cantu 0
Charles W. Stair 0
Brian D. Oxley 0
Robert D. Erickson 0
</TABLE>
<PAGE>
Compensation of Directors
Directors of ServiceMaster Management Corporation who are not
officers receive $3,000 for each meeting of the Board of Directors
and each meeting of the Executive Committee which they attend. In
addition, directors who are not officers and who are not members of
the Executive Committee receive an annual stipend of $5,000;
directors who are not officers and who are members of the Executive
Committee receive an annual stipend of $10,000. Directors who are
members of the Audit Committee (which committee does not include
any officers) receive an annual stipend of $8,000, except that the
annual stipend for the Chairman of the Audit Committee is $10,000.
A director of a subsidiary company who is not an officer of
that company or any ServiceMaster company which is a parent of the
subsidiary receives $3,000 for each meeting of the subsidiary board
of directors which he or she attends. If such a person is not a
director of ServiceMaster Management Corporation, he or she also
receives an annual stipend of $5,000.
Each director of ServiceMaster Management Corporation or of
a subsidiary board of directors may enter into a deferred fee
agreement with the company on whose board he or she is serving
whereby part or all of the fees payable 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 ServiceMaster Limited Partnership 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 a
director or attainment of age 70, whichever occurs first, a
director will receive the amount for his or her deferred fee
account in a lump sum or in installments or in shares of
ServiceMaster Limited Partnership, depending on which deferral plan
the director has elected.
Directors of ServiceMaster Corporation do not receive any
compensation for their services in that capacity.
Employment Contracts and Termination of Employment
ServiceMaster enters into employment contracts with each of
its executive officers in December of each year to cover the
officer's employment during the subsequent calendar year. Each
contract provides for the amount of such officer's base salary for
the calendar year covered by the contract. Either party may cancel
the contract on two week's notice to the other party. If an
executive's employment terminates, the executive is prohibited from
entering into certain activities which are competitive with any of
the ServiceMaster businesses. These contracts do not provide for
any bonuses or other form of compensation beyond the base salary
stated in the contract.
The amounts paid under the employment contracts with each of
the persons listed in the Summary Compensation Table are included
in Column (c) of the table.
<PAGE>
Change-in-Control Arrangements
The ServiceMaster Plan for Continuity of Employment (the
"Plan") was adopted by the Board of Directors of ServiceMaster
Industries Inc. on July 19, 1986 and assumed by ServiceMaster
Limited Partnership and its subsidiaries at the time the
ServiceMaster reorganization became effective on December 30, 1986.
The purpose of the Plan is to provide protection to a broad range
of ServiceMaster employees from damage to their careers which could
result if ServiceMaster were taken over by another organization.
The Plan provides that if during the period following a
takeover to which the Plan applies any covered employee is fired or
leaves after being demoted, then ServiceMaster will be
obligated to pay that employee an amount equal to either (i) the
amount of the employee's relevant annual compensation (if the
employee has between two and five years of credited service with
ServiceMaster) or (ii) 2.5 times the employee's relevant annual
compensation (if the employee has more than five years of
credited service). The amount of an employee's relevant annual
compensation will be the amount of the cash compensation received
by the employee during the calendar years preceding the year in
which the Plan becomes activated with respect to the takeover
involved, provided that in no event will an employee be entitled to
receive under the Plan more than twice the amount of the
compensation (including both cash compensation and benefits with a
monetary value received in a form other than cash) received by the
employee during the calendar year preceding the termination of his
or her employment.
The Plan is not limited to management employees but rather
covers every ServiceMaster employee who has at least two years of
credited service at the time his employment terminates.
The Plan provides that a takeover will be deemed to have
occurred for purposes of the Plan when (i) any organization or
group (other than ServiceMaster employees or plans established for
the benefit of ServiceMaster employees) acquires ownership of at
least 20% of ServiceMaster outstanding shares, or (ii) a majority
of the positions on the ServiceMaster Board come to be occupied by
"Takeover Directors" (as defined in the Plan).
The Plan provides that it will automatically become
activated with respect to any particular takeover ten days after
the ServiceMaster Chief Executive Officer becomes aware that the
takeover has occurred except that the ServiceMaster Board has the
right to accelerate or postpone the date upon which the Plan will
become activated with respect to any particular takeover. The
Board has the right at any time before the Plan becomes activated
to modify the terms of the Plan and to exempt any particular
takeover from operation of the Plan or to terminate the Plan, but
no such notification exemption or termination can be made after
activation.
<PAGE>
Employees are entitled to compensation under the Plan in
connection with any takeover to which the Plan applies only if
their employment terminates within the "Shakeout Period"
beginning at the time such takeover occurs and ending on the second
anniversary of the date on which the Plan is activated with respect
to that particular takeover.
The Plan is expressly intended to be a severance pay plan for
purposes of the Employee Retirement Income Security Act of 1974
("ERISA") and ServiceMaster employees are expressly entitled to the
protection afforded by ERISA to participants in a
severance pay plan.
The Plan is designed to put any organization which may at any
time consider taking over ServiceMaster on notice in advance that
it may be required to compensate individuals who have made
significant career investments in ServiceMaster if those
individuals are disadvantaged by the takeover. At the same time,
the Plan is intended to serve the best interests of those who
invest in ServiceMaster for the long term by (i) improving the
ability of the ServiceMaster enterprise to recruit and retain
employees, (ii) increasing the willingness of employees to risk
working for long-term rewards rather than seeking to maximize their
immediate salary, and (iii) providing insurance to
employees against any unfavorable outcome, and thereby
encouraging employees to remain with ServiceMaster while the
outcome of a takeover attempt is in doubt.
Compensation Committee Interlocks and Insider Participation
The persons who served as members of the compensation
committee of the Registrant's board of directors during 1993 are
listed in the next section. 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 Registrant on the compensation committee
of another entity and an executive officer of such other entity
serving on the ServiceMaster compensation committee.
<PAGE>
Board Compensation Committee Report on Executive Compensation
The following report of the Compensation Committee of the
Board of Directors of ServiceMaster Management Corporation was
delivered to the Board of Directors on March 18, 1994. The
Compensation Committee consists of the members of the Executive
Committee other than the Chairman of the Company. (The Executive
Committee consists of independent directors and the Chairman. As
used in the report, the term "salary year" means the calendar year.
"REPORT OF THE COMPENSATION COMMITTEE
To: The Board of Directors:
The Executive Committee as constituted in December 1993, in
its capacity as the Compensation Committee for the year 1993,
hereby submits its report to the Board of Directors for the year
1993.
In December of each year, the Compensation Committee
reviews the compensation levels of senior members of management,
evaluates the performance of management and recommends a base
salary for each member of senior management for the next salary
year. This review and recommendation process includes a review of
additional compensation (if any) payable under the Company's
Incentive Reward Compensation Plan. At the end of each salary
year, the Compensation Committee determines whether adjustments
should be made in the compensation of an executive as established
by his base salary and the Incentive Reward Compensation Plan. The
Compensation Committee does not constitute the administering
committee under any of the Company's stock option plans, but the
Compensation Committee does take option grants to senior members of
management into account in the reviews and recommendations
described above.
Summary of Compensation Policies. The compensation
policies applicable to all executive officers are as follows: (1)
a base level of compensation is established by reference to the
standards described below; (2) bonuses are paid in accordance with
the Company's Incentive Reward Compensation Plan, under which
bonuses are determined by the extent to which the actual
performance of the Company (or the relevant division thereof)
achieved budget objectives; and (3) such year-end adjustments as
the Compensation Committee may consider to be warranted.
The standards for determining the base compensation in any
given year for the Chief Executive Officer (and for all other
officers whose salaries are subject to Compensation Committee
approval) are: performance by the officer in the discharge of his
or her responsibilities, financial performance of the Company for
the immediately preceding year, and the base salary levels of
comparable officers in comparable companies.
Five Highest Paid Officers. The base compensation of each of
the highest paid officers for 1993 (including the Chief
Executive Officer) was in the amount recommended by the
Compensation Committee in December 1992 and approved by the Board
of Directors in the same month. This base compensation was further
reviewed at the end of 1993. The Compensation Committee
unanimously agrees that these base levels were reasonable at the
time established and reasonable in the context of the performance
of the Company in 1993 and the contribution of such persons to the
Company's performance.
<PAGE>
Chief Executive Officer. The base compensation of C. William
Pollard, Chairman and Chief Executive Officer of
ServiceMaster, for the year 1993 was set at $300,000 at the
commencement of the year. This amount did not reflect any
increase in his base compensation for the year 1992. No
increases in his base compensation were made during the year 1993.
An increase in the base compensation for the Chief
Executive Officer for the year 1993 would have been warranted in
the light of both the Company's and his performance in the year
1993. (Reference is made to the Management Discussion and
Analysis section of the Company's 1993 Annual Report to
Shareholders (the "Annual Report") for a summary of the Company's
growth in 1993 relative to 1992). The Committee approved a
modification of the formula in the Company's Incentive Reward
Compensation Plan so that the Chief Executive Officer was awarded
incentive compensation in the amount of 150% of his base
compensation. That award included $60,000 beyond what the
Incentive Reward Compensation Plan would have called for without
modification. (Reference is made to the Annual Report for a
discussion of the Company's performance in 1993).
The Compensation Committee notes that the Chief Executive
Officer was granted an option for 75,000 shares in October 1993,
subject to acceptance by him and payment of the price for the
option itself of $1.50 per option share. This grant was accepted
and the required payment was made in March 1994.
No member of the Compensation Committee is a former or
current officer or employee of the Company or any of its
subsidiaries. However, for a short period of time Mr. Nelson was
Vice Chairman of American Home Shield Corporation.
Dated: March 18, 1994
Respectfully submitted,
H. O. Boswell Lord Brian Griffiths
H. P. Hess G. H. Knoedler
V. C. Nelson D. K. Wessner
(Compensation Committee)"
<PAGE>
Performance Graph
The following graph compares the five-year cumulative total
return to shareholders of the Registrant with the five year
cumulative return as determined under the Standard & Poor's 500
Index and under the Standard & Poor's Commercial Services Group.
[Performance Graph]
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth as of March 18, 1994, the
beneficial ownership of the Partnership Shares with respect to the
ServiceMaster directors and senior management advisers and
directors and officers as a group. ServiceMaster does not know of
any person who is the beneficial owner of more than five percent of
the Partnership Shares.
<TABLE>
Number of Partnership Shares Beneficially
Owned by Management on March 18, 1994 (1)
<CAPTION>
(1) (2) (3) (4) (5)
Sole Voting
and Investment Percent
Name Power Other Total Ownership
<S> <C> <C> <C> <C>
Henry O. Boswell (2) 13,950 10,500 24,450 0.031%
Carlos H. Cantu (4) 444,809 468,108 912,917 1.173%
Robert D. Erickson (3)(4)(5)(7) 359,531 46,750 406,281 0.522%
Brian Griffiths 0 0 0 0%
Kenneth N. Hansen (5)(8) 74,467 1,378,996 1,453,463 1.869%
Herbert P. Hess (2)(5) 67,500 4,000 76,500 0.098%
Donald K. Karnes (3) 39,500 0 39,500 0.038%
Gunther H. Knoedler (5) 20,711 0 20,711 0.027%
James D. McLennan 4,420 0 4,420 0.006%
Vincent C. Nelson (5)(9) 126,738 4,204 130,942 0.168%
Kay A. Orr 1,225 0 1,225 0.002%
Brian D. Oxley (2)(3)(4) 145,931 79,390 225,321 0.290%
Dallen W. Peterson 31,033 0 31,033 0.040%
C. William Pollard (3)(4)(5)(13) 663,014 50,659 713,673 0.915%
Philip B. Rooney 25,862 0 25,862 0.033%
Burton E. Sorensen 3,375 0 3,375 0.004%
Charles W. Stair (3)(4)(10) 388,035 23,134 411,169 0.529%
David K. Wessner (2)(5)(11)(12) 473,850 375,677 849,527 1.092%
Kenneth T. Wessner (5)(14) 808,402 0 808,402 1.039%
All directors and officers
as a group (159 persons) (15) 6,721,496 5,479,341 12,200,837 15.685%
</TABLE>
Notes:
(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 shares held by spouse
and/or other family members.
(3) Shares in column (2) include shares which may be
acquired within sixty days under the ServiceMaster
Executive Debenture Plan, options granted under the
ServiceMaster Share Option Plan, and/or options
granted under the ServiceMaster 10-Plus Plan.
(4) 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.
<PAGE>
(5) Shares in column (2) include shares held in trust for
the benefit of self and/or family members.
(6) Shares in column (3) include shares held in trust for
the benefit of self and/or family members.
(7) Shares in column (3) include 28,792 shares owned by
spouse or held in trust for the benefit of family
members as to which beneficial ownership is
disclaimed.
(8) The 1,378,996 shares in column (3) are in trust for
the benefit of family members as to which beneficial
ownership is disclaimed.
(9) Shares in column (3) include 4,204 shares in trust for
the benefit of family members as to which beneficial
ownership is disclaimed.
(10) Shares in column (2) include 17,445 shares in trust
for the benefit of family members as to which
beneficial ownership is disclaimed.
(11) Shares in column (2) include 450,000 shares held in
trust for the benefit of the parents of David K.
Wessner and for charitable interests. Mr. Wessner is
a trustee of this trust and has sole voting and
investment power over such shares but he disclaims
beneficial ownership of such shares.
(12) Shares in column (3) includes 206,110 shares held by
an investment company of which David K. Wessner is a
shareholder and one of four directors.
(13) Shares in column (2) include 20,815 shares owned by a
charitable foundation of which C. William Pollard is
a director. Mr. Pollard disclaims beneficial
ownership of such shares.
(14) Shares in column (2) includes 292,408 shares held in
trust for the benefit of spouse as to which beneficial
ownership is disclaimed.
(15) Includes 2,150,464 shares which certain officers of
ServiceMaster, through the exercise of their respective
rights, may acquire within 60 days under share purchase
agreements, the ServiceMaster Executive Debenture Plan,
options granted under the ServiceMaster Share Option Plan
and options granted under the ServiceMaster 10-Plus
Option Plan. This figure includes shares purchasable by
the persons identified in Item 11 as follows: Mr.
Pollard - 112,500 shares; Mr. Oxley - 30,000 shares; Mr.
Erickson - 30,000 shares; and all executive officers
as a group - 292,500 shares.
<PAGE>
Item 13. Certain Relationships and Related Miscellaneous
Transactions
ServiceMaster Limited Partnership and The ServiceMaster
Company distributed an aggregate of $2,547,618 to ServiceMaster
Management Corporation with respect to the year 1993, the
managing general partner of each of these partnerships, with
respect to its aggregate 1.99% carried interest in the profits and
losses of these two partnerships. (See Note D, pages 18 -20).
On January 17, 1993, ServiceMaster Limited Partnership, as the
successor to ServiceMaster Industries Inc., distributed 18,708
partnership shares to C. William Pollard pursuant to the Exchange
Agreement between Mr. Pollard and ServiceMaster
Industries Inc. dated December 24, 1986. (This agreement related
to the acquisition by ServiceMaster of Jubilee Investment Company
in December 1986).
On March 19, 1993, the Executive Committee of the Board of
Directors of ServiceMaster Management Corporation, acting on the
basis of a recommendation from a special committee of three
independent directors, approved the issuance of 37,806 shares of
ServiceMaster Limited Partnership to C. William Pollard as a
payment in final settlement of the above-mentioned Exchange
Agreement of December 24, 1986.
On September 30, 1993, The ServiceMaster Company loaned Carlos
H. Cantu the sum of $282,143, with interest at the rate of 3.5% per
annum, as a bridge loan in connection with his purchase of a
personal residence in Illinois. This purchase was made in
connection with Mr. Cantu's assumption of the responsibilities as
the Chief Executive Officer of ServiceMaster on January 1, 1994.
This loan was paid in full in December, 1993.
Indebtedness of Management
The following executive officers were indebted to The
ServiceMaster Company in excess of $60,000 at some point during the
year 1993. Except for the indebtedness referred to in the last
sentence of this paragraph, in each case, the indebtedness was
incurred by reason of one or more share grants made to the person
before 1993 under the ServiceMaster Share Grant Award Plan. As
provided in the Share Grant Award Plan, The ServiceMaster Company
advances to a share grant recipient the amount of federal and state
income taxes incurred by the recipient as a result of the receipt
of the share grant. The figure set opposite the person's name
below is the largest amount of indebtedness outstanding during the
year 1993; the figure in parentheses is the amount of indebtedness
outstanding on March 21, 1994: Brian D. Oxley - $142,914
($118,373); Ernest J. Mrozek - $117,582 ($103,355); and Vernon T.
Squires $139,260 ($119,322). Interest on each of the foregoing
loans is charged to the borrower at a rate between 7.75% and 9.29%
per annum. Interest and principal payments on all of such loans
are made quarterly. On September 30, 1993 The ServiceMaster
Company made the loan to Carlos H. Cantu which is described under
"Miscellaneous Transactions"; such loan was paid in full prior to
the end of 1993.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) Financial Statements, Schedules and Exhibits
1. Financial Statements
The documents shown below are contained in the
Financial Statements and Management Discussion
section of the ServiceMaster Annual Report to
Shareholders for 1993, on pages 19 - 36 and are
incorporated herein by reference:
Summary of Significant Accounting Policies
Report of Independent Public Accountants
Consolidated Statements of Income for the three
years ended December 31, 1993, 1992 and 1991
Consolidated Statements of Financial Position as
of December 31, 1993 and 1992
Consolidated Statements of Cash Flows for the
three years ended December 31, 1993, 1992 and
1991
Consolidated Statements of Shareholders' Equity
for the three years ended December 31, 1993,
1992 and 1991
Notes to the Consolidated Financial Statements
2. Financial Statements Schedules
Schedule IV--Amounts Receivable from Related Parties
and Underwriters, Promoters, and Employees other than
Related Parties. The items required by this Schedule
are incorporated into the information relating to
Share Grants on page 35.
Included in Part IV of this Report:
Schedule VIII--Valuation and Qualifying Accounts
Schedule X--Supplementary Income Statement
Information
Report of Independent Public Accountants on
Schedules
Exhibit 11 -- Exhibit Regarding Detail of Income
Per Share Computation
Exhibit 24 -- Consent of Independent Public
Accountants
Other schedules are omitted because of the absence of
conditions under which they are required or because the required
information is given in the financial statements or notes
thereto.
Separate financial statements and supplemental schedules of
ServiceMaster are omitted because prior to 1987 the Registrant was
primarily an operating company. Its subsidiaries, included in the
consolidated financial statements being filed, did not have a
minority equity interest or indebtedness to any person other than
the Registrant in an amount in excess of five percent of the total
assets as shown by the consolidated financial
statements as filed herein.
<PAGE>
3. Exhibits
The exhibits filed with this report are listed on
pages 63-67 herein (the "Exhibits Index").
The following entries in the Exhibits Index are
management contracts or compensatory plans in which a
director or any of the named executive officers of the
Registrant does or may participate. Reference is made
to the Exhibits Index for the filing with the
Commission which contains such contract or plan.
Exhibit Contract or Plan
10.1 1987 ServiceMaster Option Plan.
10.3 Deferred Compensation and Salary
Continuation Agreement for Officers.
10.4 Deferred Directors Fee Agreement.
10.5 ServiceMaster Executive Share Subscription
Program.
10.6 Incentive Reward Compensation Plan.
10.9 ServiceMaster Profit Sharing, Savings &
Retirement Plan as amended and restated
effective January 1, 1987.
10.11 Share Grant Award Plan.
10.13 Executive Debenture Equity Program 9%
Convertible Subordinated Debenture due
April 1, 1995.
10.14 The Terminix International Company L.P.
Profit Sharing and Retirement Plan. See
note below.
10.15 ServiceMaster 10-Plus Plan. See also Item
10.21.
10.17 Directors Deferred Fees Plan
(ServiceMaster Shares Alternative).
10.20 ServiceMaster 10-Plus Plan as amended
September 3, 1991.
Notes:
The Terminix International Company L.P. Profit Sharing
and Retirement Plan (Item 10.14) was integrated into
the ServiceMaster Consumer Services Limited
Partnership Profit Sharing Plan in February 1993. The
ServiceMaster Consumer Services Limited Partnership
Profit Sharing Plan is available to officers and
employees generally.
<PAGE>
(b) Reports on Form 8-K
None in the last quarter of the period covered by this
Report on Form 10-K.
Certain Undertakings With Respect To Registration Statements on
Form S-8
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities
Act of 1933, the Registrant hereby undertakes as follows which
undertaking shall be incorporated by reference into each of the
Registrant's Registration Statements on Form S-8, including No.
33-19763 and No. 2-75851:
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in
the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or
controlling person in connection with the securities
being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such
issue.
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of Federal income tax matters
describes the material consequences to the non-corporate U.S.
shareholders of ServiceMaster Limited Partnership (the "Public
Partnership") and to the Public Partnership as sole common
limited partner of The ServiceMaster Company Limited Partnership
(the "Principal Subsidiary Partnership"). This discussion does not
consider state, local and foreign tax issues, nor does it
separately describe (except where noted) the consequences to
shareholders who received their shares as a form of compensation
(or in exchange for ServiceMaster stock issued in prior years as
compensation), or which are corporations, tax-exempt entities, or
non-resident alien individuals.
THIS DISCUSSION MAY NOT BE DIRECTLY APPLICABLE TO ANY
PARTICULAR SHAREHOLDER, DEPENDING ON THAT SHAREHOLDER'S UNIQUE
CIRCUMSTANCES. SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS TO DETERMINE THE FEDERAL INCOME TAX TREATMENT IN THEIR
SPECIFIC TAX SITUATIONS, INCLUDING THE APPLICATION AND EFFECT OF
THE STATE, LOCAL AND FOREIGN LAWS WHICH MIGHT APPLY TO A SPECIFIC
SHAREHOLDER.
The following discussion is based on provisions of the
Internal Revenue Code of 1986 (the "Code"), as amended, existing
and proposed regulations promulgated thereunder, judicial deci-
sions, legislative history, and current administrative rulings and
practices. For a number of Code sections the Internal
Revenue Service (the "IRS") has been directed or authorized by
statute to issue regulations that may materially affect the tax
consequences of holding an interest in ServiceMaster. As of the
date hereof, certain of these regulations have not yet been
promulgated. Moreover, any of the statutes, regulations,
rulings, practices, or judicial precedents upon which this
discussion is based could be changed, perhaps retroactively, with
adverse tax consequences.
The Federal income tax treatment of shareholders, as
described below, depends in some instances on interpretation by
ServiceMaster Management Corporation (hereinafter referred to as
the "Managing General Partner") of complex provisions of the
Federal income tax law for which no clear precedent or authority
may be available. In determining basis adjustments, allocations,
asset valuations and taxable income of the Principal
Partnerships, the Managing General Partner must make
determinations that will affect a shareholder in various ways
depending on such factors as the date a shareholder purchased
shares of the Principal Partnerships and subsidiary partnerships.
Possible Legislative Changes. Congress is considering the
possible enactment of proposals to revise in certain respects the
federal income taxation of widely held partnerships (such as the
Public Partnership). These proposals would, among other changes,
simplify the rules under which the partners report their share of
partnership income or loss and change the rules relating to the
auditing of, and the collection of deficiencies with respect to,
such partnerships.
<PAGE>
Tax Status of the Partnerships
Significance of "Partnership" Status. Except as otherwise
provided by Code Section 7704, a partnership incurs no Federal
income tax liability unless the partnership is classified as an
association taxable as a corporation. Instead, each partner in a
partnership is required to take into account in computing his or
her Federal income tax liability his or her allocable share of the
income, gains, losses, deductions and credits of the partnership.
The Federal income tax treatment contemplated for shareholders will
be available only if the Principal Partnerships are not classified
as associations taxable as corporations.
If either of the Principal Partnerships were classified as an
association taxable as a corporation in any year, such
partnership's income, gains, losses, deductions and credits would
be reflected on its own tax return, rather than being passed
through to shareholders, and its net income would be taxed at
corporate rates (with the maximum rate for regular tax currently
equal to 35%, and the rate for alternative minimum tax equal to
20%). In addition, distributions made to shareholders would be
treated as (a) taxable dividend income (to the extent of such
partnership's current and accumulated earnings and profits) or, to
the extent distributions exceed the partnership's earnings and
profits, (b) a non-taxable return of capital (to the extent of a
shareholder's basis for his or her shares) or (c) taxable capital
gain. In sum, classification of either of the Principal Partner-
ships as an association taxable as a corporation would result in a
material reduction in the anticipated cash flow and after-tax
return to shareholders from holding Public Partnership shares.
Classification of the Principal Partnerships. The
Principal Partnerships received an opinion of counsel that, as of
their formation in December, 1986, the Principal Partnerships would
be classified as partnerships for Federal income tax
purposes.
Counsel's opinion regarding the Federal income tax
classification of the Principal Partnerships is based upon, among
other things, the Managing General Partner's representations that:
(a) ServiceMaster Management Corporation has acted as
a general partner in each of the Principal Partnerships and will
maintain a net worth, on a fair market value basis, of at least
$15.0 million (apart from direct or indirect interests in either of
the Principal Partnerships or in any subsidiaries of the Principal
Partnerships) in the form of (i) cash or cash equivalents; (ii)
marketable obligations issued or guaranteed by the United States
government or any agency or political subdivision thereof or issued
by any state of the United States or any agency or political
subdivision thereof; (iii) commercial paper; (iv) certificates of
deposit; (v) bankers' acceptances; (vi) securities regularly traded
on an established market; and/or (vii) notes receivable secured by
bank letters of credit;
<PAGE>
(b) Each of the Principal Partnerships has operated at
all times in accordance with applicable provisions of the Delaware
Revised Uniform Limited Partnership Act, the terms and conditions
of their respective partnership agreements, and the statements and
representations made in ServiceMaster's December 11, 1991, proxy
statement/prospectus;
(c) Except as required by Section 704(c) of the Code
or as the result of a temporary allocation required under
Section 704(b) of the Code (for example, a qualified income
offset or a minimum gain chargeback), the aggregate interest of
the general partners of the Principal Partnerships in each material
item of gain, loss, deduction or credit of each of the Principal
Partnerships has been equal to at least 1% of each such item;
(d) The partnership agreement governing each of the
Principal Partnerships has provided, and continues to
provide, in accordance with IRS Revenue Procedure 89-12,
that upon dissolution of the respective partnership the
general partners of that partnership will contribute to the
partnership an amount equal to the deficit balance, if any, in
their capital accounts; and
(e) The general partners of each of the Principal
Partnerships have held their interests in each of the
Principal Partnerships for their own account and, in
managing each of the Principal Partnerships, have not acted
under the direction of or as agents for the limited partners
of the Public Partnership.
If the Managing General Partner were to withdraw as a partner
at a time when there is no successor Managing General Partner, or
if the successor Managing General Partner could not satisfy the
applicable net worth requirement and other restric-tions, then the
IRS might attempt to classify one or both of the Principal
Partnerships as associations taxable as corporations.
The general partners and the Principal Partnerships intend to
contest any material adverse determination by the IRS classifying
either of the Principal Partnerships as an associ-ation taxable as
a corporation. Shareholders should be aware that the Principal
Partnerships, and hence indirectly the shareholders, may incur
substantial legal expenses in the event of such a contest, and
there can be no assurance that such a contest would be successful.
<PAGE>
Publicly Traded Partnerships Treated as Corporations.
Pursuant to Code Section 7704, a publicly traded partnership (i.e.,
any partnership if interests in the partnership are traded on an
established securities market or are readily tradeable on a
secondary market or the substantial equivalent thereof) will
generally be treated as a corporation for Federal income tax
purposes with respect to taxable years beginning after 1987.
However, a partnership which was a publicly traded partnership on
December 17, 1987 will not be treated as a corporation under Sec-
tion 7704 until the partnership's first taxable year beginning
after 1997. This "grandfather status" is lost, however, if the
partnership adds a substantial new line of business after
December 17, 1987; in that event, the partnership may be treated as
a corporation as of the day after the date on which such
substantial new line of business is added. The Public
Partnership is a publicly traded partnership for purposes of
Section 7704 but ServiceMaster currently intends to operate its
businesses in a manner so as to qualify under this exception to the
general rule of Section 7704 and to thereby retain its
partnership tax status for Federal income tax purposes for tax
years beginning before 1998.
If the Public Partnership were treated as a corporation under
Code Section 7704, shareholders of the Public Partnership would be
deemed to exchange their shares in the Public Partner-ship
("Partnership Shares") for stock in a corporation. Such deemed
exchange is currently anticipated to be generally tax-free;
however, the exchange could result in tax liability for a
shareholder of the Public Partnership (i) if the shareholder's tax
basis for his or her partnership Shares is less than his or her
share of the Principal Partnerships' liabilities (as
determined for purposes of Code Section 752); (ii) if the deemed
exchange triggers any tax benefit recapture; or (iii) if
ServiceMaster's liabilities exceed the tax basis of its assets.
For most shareholders, it is unlikely that Federal income taxes
would have to be paid on the deemed exchange.
After such deemed exchange, shareholders would not be taxable
on their allocable shares of the taxable income of the Public
Partnership. Instead, distributions from the Public Part-nership
would generally be taxable to the shareholders to the same extent
as dividends from a corporation. Thus, distributions would be
taxable to the shareholders as ordinary income to the extent of the
Public Partnership's earnings and profits, and distributions in
excess of the Public Partnership's earnings and profits would first
reduce the shareholder's basis in his or her shares and would, to
the extent in excess of such basis, be taxed as capital gain.
<PAGE>
If the Public Partnership were treated as a corporation under
Code Section 7704, the Public Partnership's income, gains, losses,
deductions and credits would be reflected on its own tax return and
its net income would be taxed at corporate rates (with the top
average rate for regular tax currently equal to 35% and the rate
for alternative minimum tax equal to 20%).
The treatment of the Public Partnership as a corporation
pursuant to Section 7704 could result in a reduction in the
anticipated cash flows and after-tax return to shareholders holding
Partnership Shares and could have a negative impact on the value of
the Shares.
In accordance with shareholder approval granted on
January 13, 1992, ServiceMaster currently intends to engage in a
reincorporating merger on December 31, 1997, immediately prior to
the time when Code Section 7704 would otherwise automatically treat
the Public Partnership as a corporation for Federal income tax
purposes. The reincorporating merger should provide certain
benefits which might not be available if ServiceMaster remained in
partnership form subject to the application of Code Section 7704.
As discussed more fully in ServiceMaster's December 11, 1991 proxy
statement/prospectus, no Federal income tax will be imposed on
shareholders in the Public Partnership by reason of the
reincorporating merger, assuming that Federal income tax laws
remain as now constituted and also based on certain factual
assumptions
The board of directors of the Managing General Partner may
accelerate the effective date of the reincorporating merger to a
date earlier than December 31, 1997 if either changes in tax laws
or other developments cause more than 51% of ServiceMaster's income
to be subject to corporate income tax prior to 1998 or the board of
directors, in its sole discretion, determines that the advantages
of such acceleration to ServiceMaster and the holders of a majority
of its outstanding shares outweigh the disadvantages. It is
possible that acceleration of the effective date of the
reincorporating merger could adversely impact some shareholders in
the Public Partnership.
THE DISCUSSION THAT FOLLOWS IS BASED ON THE ASSUMPTION THAT
THE PRINCIPAL PARTNERSHIPS ARE NOT CLASSIFIED FOR FEDERAL INCOME
TAX PURPOSES AS ASSOCIATIONS TAXABLE AS CORPORATIONS, AND THAT THE
PUBLIC PARTNERSHIP IS NOT TREATED AS A CORPORATION PURSUANT TO CODE
SECTION 7704.
<PAGE>
Tax Consequences of Partnership Share Ownership
General. The Public Partnership is not subject to Federal
income tax as an entity. Rather, subject to the limitations
prescribed in Code Section 469, each partner is required to report
on his or her Federal and state income tax returns his or her
allocable share of the income, gains, losses, deductions and
credits (and, for alternative minimum tax purposes, tax
preference items) of the Public Partnership for the taxable year of
the Public Partnership ending with or within his or her
taxable year and will be taxable directly on his or her allocable
share of the Public Partnership's taxable income. The Public
Partnership's taxable income includes its allocable share of the
income, gains, losses, deductions and credits (and, for
alternative minimum tax purposes, tax preference items) of the
Principal Subsidiary Partnership which, in turn, includes its
allocable share of such items of subsidiary partnerships. The
beneficial owners of Partnership Shares are treated as partners of
the Public Partnership for Federal income tax purposes. Thus, if
Partnership Shares are held by a nominee, the beneficial owner of
the Partnership Shares will be taxed on income and loss of the
Public Partnership. Subject to the discussion set forth in the
next five paragraphs, because shareholders are required to
include Public Partnership income in their income for tax
purposes without regard to whether they receive cash
distributions of that income, shareholders may be liable for
Federal income taxes with respect to Public Partnership income even
though they have not received cash distributions from the Public
Partnership sufficient to pay such taxes. However,
throughout the period from January 1, 1987 to December 31, 1993,
the Public Partnership's cash distributions to its shareholders
have been substantially in excess of the taxes payable in respect
of the taxable income allocated to such shareholders. The Public
Partnership has no reason to expect that this situation will not
continue through the end of the year 1997.
ServiceMaster SGP Trust. In recognition of the fact that in
1993 (for the first time in the Public Partnership's history)
taxable income was likely to exceed cash distributions to many
shareholders of the Public Partnership, the Principal Subsidiary
Partnership admitted the ServiceMaster T Trust as a special general
partner of the Principal Subsidiary Partnership effective January
1, 1993. On September 30, 1993, the ServiceMaster T Trust was
replaced by the ServiceMaster A Trust. Each of these trusts is
hereinafter referred to as the "SGP Trust". The interest held by
the SGP Trust is denominated in the Principal Subsidiary
Partnership's partnership agreement as a Class T Partnership
Interest. (See Note S, page 16). As stated in such Note, the
beneficiaries of the SGP Trust are the limited partners of the
Public Partnership as constituted from time to time. On the date on
which ServiceMaster converts back to corporate form pursuant to the
Reincorporating Merger approved on January 16, 1992, the SGP Trust
will be assimilated into ServiceMaster Incorporated of Delaware,
the successor corporate holding company for the
ServiceMaster enterprise.
<PAGE>
The beneficial interests held by the beneficiaries of the SGP
Trust are not assignable or transferable separately, but only by
and in connection with the transfer of shares in the Public
Partnership Every assignment, sale or transfer of any interest in
shares in the Public Partnership prior to the date on which the SGP
Trust terminates will include a proportional undivided
beneficial interest in the SGP Trust.
The SGP Trust will receive each year, beginning with the year
1993, an allocation of the amount of the taxable income of the
Principal Subsidiary Partnership which exceeds the aggregate cash
distributions made by the Public Partnership to its limited
partners. The effect of this arrangement is that the cash
distributions made by the Principal Partnership to its limited
partners will be exactly equal to the taxable income of the
Principal Partnership which is directly allocated to its limited
partners. The Principal Subsidiary Partnership will make cash
distributions to the SGP Trust in the amounts required by the SGP
Trust to discharge its federal and state income tax liabilities.
The SGP Trust will not receive any other allocations of income or
cash distributions.
The formation of the SGP Trust was not a taxable event to the
Principal Partnerships or the shareholders, and the creation of the
Class T Partnership Interest was not a taxable event to either the
SGP Trust or the Principal Subsidiary Partnership or to the
Principal Partnership. The distribution of funds to the SGP Trust
by the Principal Subsidiary Partnership will not be a taxable event
to either party. The SGP Trust will include in its taxable income
its allocable share of the income of the Principal Subsidiary
Partnership.
If the SGP Trust were to distribute its income to its
beneficiaries, such distributions would be taxable to the
beneficiaries. However, because it is not anticipated that the SGP
Trust will make any distributions to its beneficiaries, the
shareholders of the Principal Partnership will not recognize any
taxable income on account of the establishment of, and
allocations to, the SGP Trust.
Accounting Method and Tax Information. The Public
Partnership uses the accrual method of accounting in reporting
income and computes income on the basis of a taxable year ending on
December 31. The Public Partnership will prepare and furnish to
each shareholder of record during any taxable year the
information necessary for the preparation of the shareholder's
Federal, state and other tax returns required as a result of the
operations of the Public Partnership for that year.
Tax Basis of Partnership Shares. The tax basis of a share-
holder in his or her Partnership Shares is significant because (i)
basis is used in measuring the gain or loss recognized for tax
purposes either upon the receipt of cash distributions from the
Public Partnership or upon a partial or complete disposition of
Partnership Shares by the shareholder and (ii) a shareholder may
deduct his or her allocable share of Public Partnership losses only
to the extent of his or her tax basis in his or her shares. See
"Tax Consequences of Partnership Share Ownership --Taxation of
Partners on Public Partnership Distributions" and "Sale or Other
Disposition of Shares." Generally, the initial tax basis of any
shareholder in his shares received upon the 1986 reorganization of
ServiceMaster (the "1986 Reorganization") was equal to the fair
market value of the shares on the date of the 1986 Reorganization
and the initial tax basis of any shareholder who purchases
Partnership Shares is equal to the amount paid. In either case, a
shareholder's tax basis is increased by his or her share (as
determined for purposes of Code Section 752) of the Principal
Partnerships' liabilities. Any reduction of his or her share of
liabilities would reduce a shareholder's basis.
Adjustments to a shareholder's tax basis are made to reflect
distributions and the shareholder's allocable share of Public
Partnership income and loss.
<PAGE>
Taxation of Partners on Public Partnership Distributions. If
the cash distributions to a shareholder by the Public Partner-ship
in any year exceed his or her allocable share of the Public
Partnership's taxable income for that year, the excess will
constitute a return of capital to the shareholder to the extent of
the shareholder's basis in his or her Partnership Shares. This
situation is expected to occur for shareholders whose
taxable income is determined by reference to the Section 754
election (see "Section 754 Election", page 51). A return of
capital will not be reportable as taxable income by a shareholder
for Federal income tax purposes, but will reduce the tax basis of
his or her Partnership Shares. If a shareholder's tax basis were
reduced to zero, then any further cash distribution to the
shareholder for any year in excess of his or her allocable share of
the Public Partnership's taxable income for that year would be
taxable to him or her as though it were gain on the sale or
exchange of his or her Partnership Shares. All or a portion of
such excess cash distribution could be treated as ordinary income
as the result of the application of the recapture provisions of the
Code. See "Sale or Other Disposition of Shares." A decrease in
the shareholder's percentage interest in the Public
Partnership due, for example, to a new Public Partnership
offering of shares, will give rise to a deemed cash distribution to
the extent the shareholder's share of liabilities (as
determined for purposes of Code Section 752) decreases. Such
deemed distribution would result in ordinary income pursuant to
Code 751(b) to a shareholder (whether or not such deemed
distribution exceeds the adjusted basis of the shareholder's
Partnership Shares) to the extent that such deemed distribution is
treated as an exchange of "unrealized receivables" (including
recapture amounts) and "substantially appreciated inventory" (as
defined in Code Sections 751(b) and 751(d)) for money. However,
when additional shares are issued by the Public Partnership,
certain items of income, gain, loss or deduction will be
reallocated to reflect the fair market value of the Principal
Partnerships' property and such reallocation should minimize or
eliminate the recognition of such ordinary income pursuant to Code
Section 751(b). Nevertheless, the IRS may contend that such
ordinary income must be recognized by shareholders whose percentage
interests have decreased due to an offering of addi-tional shares
by the Public Partnership.
Limitation on Losses. No investor should invest in the
Public Partnership with the expectation that an investment in the
Public Partnership will result in tax losses that may be applied to
offset an investor's income from other sources. To the extent that
the Principal Partnerships' operations result in losses for tax
purposes in any calendar year, a shareholder generally will be
entitled to use his or her allocable share of such losses to the
extent of his or her tax basis in his or her Partnership Shares at
the end of the year, subject to the limitations prescribed in Code
Section 469.
<PAGE>
Code Section 469 limits a taxpayer's ability to use losses or
credits generated by limited partnerships and other business
activities in which such taxpayer does not materially participate
("passive activities"). In general, losses from passive
activities will not offset earned income (salary and bonus) or
portfolio income (interest, dividends and royalties). Such losses
will generally only offset income from other passive activities.
Similarly, tax credits from passive activities will only reduce
income tax attributable to income from passive activities. Losses
and credits from a passive activity which cannot be used in a given
year are generally carried forward. These deferred losses and
credits, if not usable sooner, will generally be allowed in full
when the taxpayer disposes of his or her entire interest in the
activity.
Section 469 applies separately to each publicly traded
partnership. Thus, passive activity losses and credits attribut-
able to a limited partner's interest in a publicly traded
partnership (such as the Public Partnership) cannot be applied
against the limited partner's other income, even if such income is
treated as passive under Section 469. Such losses and credits are
suspended and carried forward for applications against income from
the publicly traded partnership in future years. Upon a complete
disposition of the limited partner's interest in the publicly
traded partnership in a fully taxable transaction, any of the
limited partner's remaining suspended losses generally may be
applied against other income. Income attributable to a
limited partner's interest in a publicly traded partnership (such
as the Public Partnership) cannot be offset by losses or credits
from the limited partner's other passive activities.
Substantially all of any losses or credits generated by the
Public Partnership will likely be subject to the limitations
prescribed in Section 469. The limitations prescribed in Section
469 generally apply to individuals, estates, trusts, personal
service corporations and, with certain modifications, closely-held
corporations.
Under current law, a partner who is subject to the "at-risk"
limitations of Code Section 465 may not deduct his or her allocable
share of partnership losses for a taxable year to the extent they
exceed the aggregate amount for which he or she is considered to be
"at-risk" with respect to the partnership activities giving rise to
those losses as of the end of its taxable year in which the losses
occur. Because it is not anticipated that the Principal
Partnerships will incur losses that exceed either the shareholders'
aggregate basis in their Partnership Shares or amounts "at-risk"
with respect to the Principal Partnerships' activities, the "at-
risk" limitations under current law should generally not affect
shareholders adversely.
<PAGE>
Federal Income Tax Allocations
General. In general, items of Principal Partnership
income, gain, loss, deduction and credit are allocated for both
accounting and Federal income tax purposes in accordance with the
percentage interests of the general and limited partners.
However, as discussed in greater detail below, the Managing General
Partner is empowered by the limited partnership agreements for the
Principal Partnerships (the "Principal Partnership Agreements") to
specially allocate various Principal Partnership tax items other
than in accordance with percentage interests when, in the judgment
of the Managing General Partner, such special allocations are
necessary to comply with applicable provisions of the Code and the
regulations or, to the extent permissible under the Code and the
regulations, to preserve the uniformity of the shares in the Public
Partnership, i.e., to ensure that all Partnership Shares will have
identical attributes. These allocation provisions will be
recognized for Federal income tax purposes if they are considered
to have "substantial economic effect" within the meaning of Code
Section 704(b). If any allocation fails to satisfy the
"substantial economic effect" requirement, the allocated items will
be reallocated among the shareholders based on their
respective "interests in the partnership," determined on the basis
of all of the relevant facts and circumstances.
Pursuant to regulations issued under Section 704(b), a
partnership allocation will be considered to have "substantial
economic effect" if it is determined that the allocation has
"economic effect" and the economic effect is "substantial." An
allocation to partners (other than an allocation of loss,
deduction or certain other items attributable to nonrecourse
liabilities ("nonrecourse deductions")) will be considered to have
"economic effect" if (i) the partnership maintains capital accounts
in accordance with specific rules set forth in the regulations and
the allocation is reflected through an increase or decrease in the
partners' capital accounts, (ii) liquidating distributions are
required to be made in accordance with the partners' respective
positive capital account balances by the end of the taxable year
(or, if later, within 90 days after the date of liquidation), and
(iii) any partner with a deficit in his or her capital account
following the distribution of liquidation proceeds would be
unconditionally required to restore the amount of such deficit to
the partnership. If the first two of these requirements are met
but the partner to whom an allocation is made is not obligated to
restore the full amount of any deficit balance in his or her
capital account, the allocation still will be considered to have
"economic effect" to the extent the allocation does not cause or
increase a deficit balance in the partner's capital account
(determined after reducing that account for certain "expected"
adjustments, allocations, and distributions specified by the
regulations) if the partnership agreement contains a "qualified
income offset" provision. A qualified income offset requires that
in the event of any unex-pected distribution (or specified
adjustments or allocations) to a partner that results in a
deficit balance in such partner's capital account, there must be an
allocation of income or gain to the distributee that
eliminates the resulting capital account deficit as quickly as
possible.
<PAGE>
In order for the "economic effect" of an allocation to be
considered "substantial," the regulations require that the
allocation must have a "reasonable possibility" of
"substantially" affecting the dollar amounts to be received by the
partners, independent of tax consequences. The regulations provide
that the "economic effect" of an allocation will be presumed to be
insubstantial if it merely shifts tax consequences within a
partnership taxable year or is transitory, i.e., likely to be
offset by other allocations in subsequent taxable years. The
regulations state, however, that adjustments to the tax basis in
property will be presumed to be matched by corresponding changes in
the fair market value of the property. Thus, the regulations
conclude that there will not be a strong likelihood that an
allocation of deductions attributable to depreciation will be
transitory due to a provision for a subsequent
corresponding allocation of gain attributable to the disposition of
that property.
In addition to the regulations described above, the
Treasury has issued regulations which address the effect of
nonrecourse liabilities upon partnership allocations. Under the
regulations, if (i) the partnership maintains capital accounts in
accordance with specific rules set forth in the regulations and
allocations are reflected through an increase or decrease in
partners'capital accounts and (ii) liquidating distributions are
required to be made in accordance with partners' respective
positive capital account balances by the end of the taxable year
(or, if later, within 90 days after the date of liquidation), then
a partner may be allocated nonrecourse deductions that cause his or
her capital account to fall below zero, provided (among other
requirements) that the deficit produced by the allocation is not in
excess of the minimum gain that would be allocated to the partner
in the event the partnership property securing the nonrecourse
liability were disposed of in a taxable transaction in full
satisfaction of such liability. The regulations further provide
that in the event there is a decrease in such partnership's minimum
gain for a partnership taxable year, the partners must be allocated
items of partnership income and gain for such year (and, if
necessary, for subsequent years) in proportion to, and to the
extent of, an amount equal to such partner's share of the net
decrease in partnership minimum gain during such year.
The Principal Partnership Agreements provide that a capital
account is to be maintained for each partner, that the capital
accounts are to be maintained in accordance with applicable prin-
ciples set forth in the regulations, and that all allocations to a
partner are to be reflected in the partner's capital account. In
addition, distributions upon liquidation of the Principal
Partnerships are to be made in accordance with respective capital
account balances. The Principal Partnership Agreements do not
require the limited partners to restore any deficit balance in
their capital accounts upon liquidation of the Principal
Partnerships. However, the Principal Partnership Agreements contain
a "minimum gain" allocation for nonrecourse deductions and a
"qualified income offset" provision. Pursuant to the Principal
Partnership Agreements, tax income and gain will be allocated in a
manner consistent with the book income and gain allocations
associated with the minimum gain and qualified income offset
provisions.
<PAGE>
The manner of allocation of items of income, gain, loss,
deduction and credit for both book and Federal income tax
purposes is set forth in the Principal Partnership Agreements. In
general, the Principal Partnerships' income, gains, losses,
deductions and credits are allocated pursuant to the Principal
Partnership Agreements among the partners pro rata in accordance
with their percentage interests, except that the allocation of
taxable income of the Principal Subsidiary Partnership to the
ServiceMaster SGP Trust is determined in the manner described above
and in Note S, page 25. The Principal Partnership Agreements
contain special allocations of book income and gain for the
qualified income offset and minimum gain provisions (discussed
above) and special allocations of income and deduction to preserve
the uniformity of shares. The Principal Partnership Agreements
further provide exceptions to the pro rata allocations for Federal
income tax purposes of (i) income, gain, loss and deductions
attributable to properties contributed to the Principal
Partnerships in exchange for shares ("Contributed Property"), (ii)
income, gain, loss and deductions attributable to the Principal
Partnerships' properties where the Principal Partnerships have
adjusted the book value of such properties upon the Public
Partnership's issuance of additional shares to reflect unrealized
appreciation or depreciation in value from the later of the
Principal Partnerships' acquisition date for such properties or the
latest date of a prior issuance of shares ("Adjusted Property"),
(iii) curative allocations of gross income and deductions to
preserve the uniformity of shares issued or sold from time to time,
(iv) recapture income resulting from the sale or disposition of
Principal Subsidiary Partnership assets ("Recapture Income"), (v)
income and gain in a manner consistent with the allocation of book
income and gain pursuant to a qualified income offset, and (vi)
income and gain attributable to nonrecourse debt in a manner
consistent with the allocation of book income and gain under a
minimum gain provision.
With respect to property contributed by a shareholder to the
Principal Partnerships, the Principal Partnership Agreements
provide that, for Federal income tax purposes, partnership
income, gain, loss and deductions shall first be allocated among
the partners in a manner consistent with Code Section 704(c). In
addition, the Principal Partnership Agreements provide that
partnership income, gain, loss and deductions attributable to
Adjusted Property shall be allocated for Federal income tax
purposes in accordance with Section 704(c) principles. Pursuant to
Section 704(c), items of partnership income, gain, loss and
deduction with respect to Contributed Property are to be shared
among the partners pursuant to regulations not yet adopted so as to
take account of the differences between the Principal
Subsidiary Partnership's basis for the property and the fair market
value of the property at the time of the contribution (i.e., a
Book-Tax Disparity).
<PAGE>
The IRS has issued proposed regulations under Section 704(c)
which provide that these allocations of partnership income, gain,
loss and deduction to account for the Book-Tax Disparity can be
made by any reasonable method. The proposed regulations set forth
three non-exclusive allocation methods which are generally
considered to be reasonable.
Because regulations have not been issued in final form under
Section 704(c), it is not clear whether allocations made pursuant
to the Principal Partnership Agreements will be respected for
Federal income tax purposes.
As discussed below, the Code Section 754 election permits an
adjustment in the basis in the assets of the Principal
Subsidiary Partnerships and subsidiary partnerships pursuant to
Code Section 743(b) to reflect the price at which Partnership
Shares are purchased from a shareholder as if such purchaser had
acquired a direct interest in such assets. See "Section 754
Election." Such Section 743(b) adjustment is attributed solely to
such purchaser of shares and is not added to the bases of the
assets of the Principal Subsidiary Partnership and subsidiary
partnerships associated with all of the shareholders ("common
bases"). With respect to Section 743(b) adjustments, proposed
regulations relating to ACRS depreciation appear to require the
acquiring partner to use a depreciation method and useful life for
the increase in basis which is different from the method and useful
life generally used to depreciate the Public Partnership's common
bases in the assets of the Principal Subsidiary
Partnerships and subsidiary partnerships.
The Managing General Partner has the authority under the
Principal Partnership Agreements to specially allocate items of
income and deductions in a manner that will preserve the
uniformity among all shares, so long as such allocations are
consistent with and supportable under the principles of Code
Section 704. The Managing General Partner may use a "depreciation
convention method" or any other convention to preserve the
uniformity of shares. If no allowable or workable convention is
available to preserve the uniformity of Partnership Shares or the
Managing General Partner in its discretion so elects, the
Partnership Shares may be separately identified as distinct classes
to reflect differences in tax consequences. The Managing General
Partner has adopted conventions and allocations to
achieve uniformity among all Partnership Shares.
The Principal Partnership Agreements also require that gain
from the sale of Principal Subsidiary Partnership properties, to
the extent characterized as Recapture Income, be allocated (to the
extent such allocation does not alter the allocation of gain
otherwise provided for in the Principal Partnership Agreements)
among the partners (or their successors) in the same manner in
which such partners were allocated the deductions giving rise to
such Recapture Income.
<PAGE>
The Section 704(b) regulations and Sections 1.1245-1(e) and
1.1250-1(f) of the regulations tend to support a special
allocation of Recapture Income. However, such regulations do not
specifically address a special allocation based on the allocation
of the deductions giving rise to such Recapture Income as stated in
the Principal Partnership Agreements. Therefore, it is not clear
that the allocation of Recapture Income will be given effect for
Federal income tax purposes. If it is not, such Recapture Income
will be allocated to all shareholders and the general partners.
Transferor/Transferee Allocations. The Principal Part-
nerships will allocate their taxable income and losses among the
shareholders of record in proportion to the number of Partnership
Shares owned by them based on the number of months during the year
for which each shareholder was record owner of the shares. The
Principal Partnerships' taxable income and loss allocable to each
month will be determined by allocating such income or loss pro rata
to each month in the year. With respect to any Partnership Share
that is transferred during any calendar month, the Principal
Partnerships will treat a shareholder who becomes the record owner
of such share on or before the close of business on the fifteenth
day of the month as having been the owner of such share for the
entire month if he or she holds such share for the remainder of
such month. Conversely, a shareholder who becomes the record owner
of a Partnership Share during such month but after the fifteenth
day of a calendar month will be allocated the taxable income and
losses attributable to the second half of such month if he or she
holds such share for the remainder of such month.
Code Section 706 generally requires that items of
partnership income and deduction be allocated among transferors and
transferees of partnership interests (as well as among
partners whose interests otherwise vary during a taxable period) on
a daily basis among the partners who own interests on the end of
each such day. The Principal Partnerships' proposed
allocation method will not literally comply with this
requirement. However, the legislative history indicates that
monthly and semi-monthly conventions may be permitted in normal
situations. This issue may be clarified by regulations. The floor
debates in connection with the enactment of the Deficit Reduction
Act of 1984 (the "1984 Act") reflect that Congress intended that
any regulations limiting the use of conventions under the 1984 Act
provisions would apply only on a prospective basis.
If the "mid-month" convention to be used by the Principal
Partnerships were not permitted by the regulations ultimately
adopted, then the IRS might contend that taxable income (or losses)
of the Principal Partnerships must be allocated among the
shareholders in a manner different from that presently
contemplated (for example, on a daily basis). In that event, the
respective tax liabilities of the shareholders might be adjusted,
and some shareholders might be allocated additional income. The
Principal Partnership Agreements authorize the Managing General
Partner to revise the Principal Partnerships' method of
allocating income and loss between transferor and transferee, as
well as among shareholders whose interests otherwise vary during a
taxable period, in order to comply with any regulations or rulings
ultimately adopted.
<PAGE>
Depreciation; Amortization; Recapture
General. The Principal Partnerships claim depreciation, cost
recovery and amortization deductions with respect to the purchase
price (or other tax basis) of the various properties of the
Principal Partnerships and subsidiary partnerships and
related improvements to the extent permitted by the applicable Code
provisions. Land is not subject to depreciation, cost recovery or
amortization deductions.
As a general rule, if an intangible asset has a
determinable useful life, then the cost of the asset may be
amortized over that useful life using a straight-line method. If,
however, the useful life of an intangible asset is not
determinable, then the cost of the intangible asset may not be
amortized or deducted.
Various components of the Principal Partnerships'
properties fall into each of the categories discussed in the
preceding paragraphs. A portion of the cost of certain Principal
Partnership properties is allocable to (i) nondepreciable,
nonamortizable land, (ii) tangible property, some of which is real
property (i.e., buildings and structural components) or tangible
personal property that may qualify for depreciation deductions, and
(iii) intangible property that may or may not qualify for
amortization.
As part of the Revenue Reconciliation Act of 1993, Congress
enacted Code Section 197. This section allows for the
amortization of certain intangibles over a 15-year period. This
15-year amortization period must be used even if the intangible
asset has a useful life of less than 15 years. The types of
intangible assets covered by Code Section 197 include goodwill,
going concern value, work force in place, licenses, permits,
covenants not to compete, franchises, trademarks, trade names,
customer-based intangible assets (e.g., favorable sale contracts )
and supplier-based intangible assets (e.g., favorable supply
contracts). Interests in partnerships are specifically excluded
from Code Section 197, among other types of intangible assets.
Code Section 197 applies to intangible assets acquired after August
10, 1993 unless an election is made to apply Code Section 197
retroactively starting after July 25, 1991.
<PAGE>
The Principal Partnerships will elect to have the
provisions of Code Section 197 apply retroactively to an increase
in basis for property acquired by the Principal Partnerships after
that date. This election can be expected to increase the amount of
intangible amortization of the Principal Partnerships.
For shareholders who purchased shares in the Public
Partnership after July 25, 1991, the amortization on the
intangible assets acquired by the Principal Partnerships before
July 26, 1991 allowed by Section 197 will apply only to the
increase in basis resulting from the Code Section 754 election. In
other words, no amortization under Code Section 197 will be allowed
on the Principal Partnerships' original basis in
intangible assets, unless those assets were acquired by the
Principal Partnerships after July 25, 1991.
With respect to bases adjustments for partners resulting from
the Section 754 election, in March 1994, the IRS issued proposed
and temporary regulations which, among other things, provided a
procedure by which a taxpayer who purchased shares of a partnership
during the period July 25, 1991 to August 10, 1993 and in respect
of which a Section 754 election was in effect (which is true for
the Public Partnership's shares) may elect to apply retroactively
the provisions of Code Section 197. However, the regulations as
initially issued may effectively prevent shareholders of publicly
traded partnerships (such as the Parent Partnership) from making
the election. Whether such regulations will become final as
initially written, and whether such regulations are entirely valid
in the form originally issued, were matters which were not clear as
of the date of this Form 10-K.
Deductions for depreciation, cost recovery and amortization
claimed by the Principal Partnerships with respect to assets of the
Principal Partnerships and subsidiary partnerships reduce the
partnerships' adjusted basis for the properties, thereby
increasing the potential gain (or decreasing the potential loss) to
the Principal Partnerships upon the ultimate disposition of the
properties. These deductions also have the effect of
reducing the shareholders' adjusted basis for their Partnership
Shares (by reducing taxable income or increasing tax losses),
thereby affecting the potential gain or loss to be realized upon a
subsequent sale of the shares. See "Sale or Other Disposition of
Shares."
<PAGE>
Sale or Other Disposition of Shares
General. In the event of a sale or disposition of Part-
nership Shares, a shareholder will recognize gain or loss, as the
case may be, on the disposition in an amount equal to the differ-
ence between the amount realized by the shareholder on the dispo-
sition and his adjusted tax basis for his Partnership Shares. See
"Tax Consequences of Partnership Share Ownership" -- "Tax Basis of
Partnership Shares." For these purposes, a shareholder's share (as
determined for purposes of Code Section 752) of any Principal
Partnership indebtedness attributable to the transferred Part-
nership Shares will be included in the amount realized on the
disposition.
Generally, under current law, gain recognized by a share-
holder on the sale or exchange of shares that have been held for
more than twelve months will be taxable as long-term capital gain,
taxable at a maximum rate of 28% in the case of taxpayers other
than corporations. However, that portion of the gain attributable
to "substantially appreciated inventory items" and "unrealized
receivables" of the Principal Partnerships, as those terms are
defined in the Code, will be treated as ordinary
income. Ordinary income attributable to unrealized receivables and
inventory items may exceed the net taxable gain realized upon the
sale and may be recognized even if there is a net tax loss realized
upon the sale. "Unrealized receivables" include, among other
things, the shareholder's proportionate share of the amounts that
would be recaptured as ordinary income if the Principal
Partnerships were to have sold their assets at fair market value at
the time the shareholder transferred his shares. See
"Depreciation; ACRS; Amortization; Recapture" -- "Recapture." Any
loss recognized upon the sale of shares generally will be treated
as a capital loss.
A shareholder will not ordinarily recognize any gain or loss
upon making a gift of Partnership Shares. However, a
shareholder making a gift of Partnership Shares more likely than
not will include as an amount realized the share (as determined for
purposes of Code Section 752) of any of the Partnerships' indebt-
edness allocable to the transferred Partnership Shares. See "Tax
Consequences of Partnership Share Ownership" -- "Tax Basis of
Partnership Shares," such shareholder would therefore recognize
gain (but not loss) on making a gift of Partnership Shares if the
shareholder's basis had declined so that it were less than such
amount deemed realized. In the case of a deductible gift to a
charitable organization the donor's basis is apportioned between
the value deemed contributed and the deemed sale price. Any gain
recognized more likely than not would be subject to the same rules
(described above) which apply to gain recognized on a sale of a
Partnership Share, so that some portion could be treated as
ordinary income.
<PAGE>
The IRS has ruled that a partner must maintain an aggregate
adjusted tax basis in his entire partnership interest (consisting
of all interests in a given partnership acquired in separate
transactions). Upon the sale of a portion of such aggregate
interest, such partner would be required to allocate his
aggregate tax basis between the portion of the interest sold and
the portion of the interest retained according to some equitable
apportionment method. (The IRS ruling requires that the
apportionment be based on the relative fair market values of such
interests on the date of sale.) This requirement, if applicable to
the Public Partnership, effectively would preclude a
shareholder owning shares that were purchased at different prices
on different dates from controlling the timing of the recognition
of the inherent gain or loss in his shares by selecting the
specific shares that he will sell. However, the application of
this ruling in the context of a publicly traded limited
partnership such as the Public Partnership is not clear. The
ruling does not address whether this aggregation requirement, if
applicable, results in the tacking of the holding period of older
shares onto the holding period of more recently acquired shares.
Transferor/Transferee Allocations. The manner in which the
Principal Partnerships intend to allocate their taxable income and
losses between transferors and transferees of shares is described
above under "Federal Income Tax Allocations" --
"Transferor/Transferee Allocations." Shareholders contemplating a
transfer of shares should note that cash distributions to which
they are entitled may not correspond to the Principal
Partnerships' taxable income and loss which shall be allocated
between the transferor and transferee of such shares.
Information Return Filing Requirements. Any shareholder who
sells or exchanges a share at a time when the Principal Part-
nerships have unrealized receivables (including certain recapture
items) or substantially appreciated inventory generally will be
required to notify the Public Partnership of such transaction
within 30 days of the transaction (or if earlier by January 5 of
the calendar year following the calendar year in which the trans-
action occurs). The notification is required to include (i) the
name and address of the transferor shareholder and the
transferee; (ii) the taxpayer identification number of the
transferor shareholder and, if known, of the transferee; and (iii)
the date of the sale or exchange. Any transferor of a share who
fails so to notify the Public Partnership may be
subject to a $50 penalty for each such failure.
<PAGE>
In addition, the Public Partnership is required to notify the
IRS of any sale or exchange (of which the Public Partnership has
notice) of a share and to report to the IRS the name,
address, and taxpayer identification number of the transferee and
the transferor who were parties to such transaction and of the
Public Partnership, the date of the transaction and any
additional information required by the applicable information
return or its instructions. The Public Partnership also must
provide this information to the transferor and the transferee. If
the Public Partnership fails to furnish the required
information to the IRS, the Public Partnership may be subject to a
penalty of up to $50 per failure, up to an annual maximum penalty
of $250,000, unless the failure is due to an intentional disregard
of the requirement, in which ease a penalty of $100 per failure or
if greater, 5% of the amount required to be reported, would apply,
without limit. Penalties could also be asserted against the Public
Partnership if it fails to furnish the required information to the
transferor and the transferee.
Any person who directly or indirectly holds an interest in
the Public Partnership as a nominee on behalf of another person
during a Public Partnership taxable year must furnish the Public
Partnership with a written statement for such taxable year iden-
tifying the name, address and taxpayer identification number of the
nominee and such other person and providing information regarding
acquisitions and transfers of Partnership Shares (including
information regarding acquisition cost and net sale proceeds) made
by the nominee on behalf of such other person during such taxable
year.
<PAGE>
Section 754 Election
Effect of the Election. The Principal Partnerships have made
and expect to continue to make the election permitted by Section
754 of the Code which allows adjustments to the basis of
partnership property under Section 743 of the Code upon certain
transfers of a partnership interest. Such election, once made, is
irrevocable absent the consent of the IRS. The general effect of
such an election upon a transfer of shares is to permit the
purchaser of such shares to adjust the basis of the Principal
Partnerships' properties for purposes of his tax return to
reflect the price at which his shares are purchased, as if such
purchaser had acquired a direct interest in the Principal
Partnerships' assets.
Effect of the Interplay Between the Section 754 Election,
Section 197 and the SGP Trust. As discussed on pages 69 - 70, the
existence of the SGP Trust means that the taxable income of
ServiceMaster Limited Partnership as allocated to each of its
shareholders will not be greater than the cash distributions made
to that shareholder. For many shareholders, however, taxable
income will be less than their cash distributions due to the effect
of the Section 754 election. The principal effect of the Section
754 election is to cause the calculation of a partner's share of
taxable income to reflect amortization and depreciation deductions
which are determined by using a higher basis (reflecting the
partner's purchase price) in the underlying assets than the
partnership's own internal, historical basis for those assets. In
this connection, the provision in the Revenue Reconciliation Act of
1993 which permits the amortization of intangible assets over a 15-
year period has important consequences to those persons who
purchased ServiceMaster shares on July 25, 1991 or thereafter. If
their purchase price for such shares is at least $22 per share ($33
per share before the June 7, 1993 3-for-2 share split), their
proportionate interest in the assets of ServiceMaster, including
goodwill and other intangible assets on which amortization is now
being taken over a 15-year period, will cause the calculation of
their share of ServiceMaster's taxable income to include deductions
which are expected to leave such persons with an allocation of no
taxable income on such ServiceMaster shares or with negative
taxable income on those shares. (If a limited partner is allocated
negative taxable income on his or her ServiceMaster shares, it can
be used to offset a like amount of positive taxable income on other
ServiceMaster shares or gain upon the sale of ServiceMaster shares;
however, it can not be used to offset taxable income from other
sources). Under these circumstances, cash distributions on such
shares will decrease the tax basis of those shares by the amount of
cash distributed and without an offset increase in basis
attributable to the allocation of taxable income to those shares.
Accordingly, the amount of gain realized upon a taxable disposition
of the shares will be greater than would be the case if the Section
754 election had not been made.
<PAGE>
Tax exempt organization such as pension plans, profit sharing
plans, IRAs, Keoghs, private foundations and other
charitable organizations will benefit from the interplay among the
Section 754 election, the SGP Trust and the amortization of
intangibles in another way. Such entities are subject to the
unrelated business income tax on their share of the taxable income
of a publicly traded partnership (such as ServiceMaster). However,
since their ServiceMaster taxable income is expected to be zero or
less (for the reasons discussed above), such entities should not be
subject to any unrelated business income tax liability.
Other Section 754-Related Matters. If a shareholder's
adjusted basis in his or her Partnership Shares is less than his or
her proportionate share of adjusted basis of the Principal
Partnerships' property at the time of acquisition of such
Partnership Shares, such shareholder's share of adjusted basis of
the Principal Partnerships' property must be reduced to equal his
or her basis in the Partnership Shares, resulting in adverse con-
sequences to such shareholder.
A proper allocation of the adjustment among the various
assets deemed purchased for purposes of Section 743(b) requires a
determination of the relative value of the Principal Partnerships'
assets at such time. The IRS may challenge any such allocations.
The Public Partnership calculates the basis adjustments for
purchasers of its shares. For basis adjustments relating to new
Code section 197 (see Depreciation; Amortization; Recapture) the
Public Partnership will not provide amended K-1s to its
shareholders but will provide the necessary information to the
shareholders upon request. The rules governing basis adjustments
under Section 743(b) and 754 of the Code are very complex and are
made more complex by the interaction of various tax rules
governing the allocation of the Public Partnership's items of
income, gain, loss and deduction. Interpretation and application
of the rules in some cases is uncertain because of the lack of
precedents. Reference is made to the discussion under
"Depreciation; Amortization; Recapture" for information on the
ability of partners of the Public Partnership to apply Section 157
retroactively to purchases of shares during the period July 25,
1991 to August 10, 1993.
Should the IRS require a different basis adjustment to be
made, and should, in the Corporate General Partner's opinion, the
expense of compliance exceed the benefit of the election, the
Corporate General Partner may seek permission from the IRS to
revoke the Section 754 elections for the Principal Partnerships. If
such permission is granted, a purchaser of Partnership Shares
probably will incur increased tax liability.
<PAGE>
Termination of the Principal Partnerships for Tax Purposes
Code Section 708 provides that if 50% or more of the
capital and profits interests in a partnership are sold or
exchanged within a single 12-month period, the partnership will be
considered to have terminated for tax purposes. Because of the
structure of the Principal Partnerships, it is likely that a Code
Section 708 termination of the Public Partnership would result in
a Code Section 708 termination of the Principal Subsidiary Part-
nership as well. In view of the fact that Partnership Shares will
be publicly traded, it is possible that shares representing 50% or
more of the Public Partnership's capital and profits interests
might be sold or exchanged within a single 12-month period.
However, a share that changes hands several times during a 12-month
period would only be counted once for purposes of determining
whether a termination has occurred. If the Principal Partnerships
should terminate for tax purposes, they would be deemed to have
distributed their assets to their partners, who would then be
deemed to have contributed the assets to new partnerships. The
Principal Partnerships would have a new basis in their non-cash
assets equal to the aggregate basis of the shareholders in their
Partnership Shares prior to the termination plus any gain
recognized by the shareholders in the termination, less any cash
deemed distributed to the shareholders in connection with the
termination. Accordingly, if the basis of the shareholders in
their Partnership Shares is more or less than the Principal
Partnerships' aggregate basis in their assets immediately prior to
the termination, the Principal Partnerships' basis in their non-
cash assets following the termination might have to be reallocated
among those assets to reflect the relative fair market values of
those assets at the time of termination. Such a reallocation may
be favorable or unfavorable, depending on the circumstances.
Generally, a shareholder would not recognize any taxable gain
or loss as a result of the deemed pro rata distribution of
Principal Partnership assets incident to a termination of the
Principal Partnerships. A shareholder, however, would recognize
gain to the extent, if any, that the shareholder's pro rata share
of the Principal Partnerships' cash (and the reduction, if any in
the shareholder's share of the Principal Partnerships'
indebtedness as determined for purposes of Code Section 752) at the
date of termination exceeded the adjusted tax basis of his
Partnership Shares. Also, the Principal Partnerships' taxable
years would terminate. If the shareholder's taxable year were
other than the calendar year, the inclusion of more than one year
of the Principal Partnerships' income in a single taxable year of
the shareholder could result. Also, new tax elections would be
required to be made by the reconstituted partnerships. Finally a
termination of the Principal Partnerships may cause the Principal
Partnerships or their assets to become subject to unfavorable
statutory or regulatory changes enacted prior to the termination
but previously not applicable to the Principal Partnerships or
their assets because of protective "transitional" rules.
However, a constructive termination under Code Section 708 should
not cause the Partnership to lose the benefits of the up-to-10-year
grace period during which the application of new Code
Section 7704 is postponed. See "Tax Status of the Partnerships"-
"Publicly Traded Partnerships Treated as Corporations."
In order to preserve maximum liquidity for the Partnership
Shares, the Public Partnership has not adopted procedures
designed to prevent a deemed termination of the Principal
Partnerships from occurring.
<PAGE>
An actual dissolution of the Principal Partnerships will
result in the distribution to the shareholders of record of any
assets remaining after payment of, or provision for, the
Principal Partnerships' debts and liabilities. To the extent that
a shareholder is deemed to receive money (including any reduction
in his share of Principal Partnership liabilities as determined for
purposes of Code Section 752) in excess of the basis of his
Partnership Shares, such excess generally will be taxed as a
capital gain, except to the extent of any unrealized receivables or
substantially appreciated inventory items, as described above. See
"Sale or Other Disposition of Shares." A shareholder will
recognize a loss upon dissolution only if the liquidating
distribution consists solely of cash, or of cash and unrealized
receivables and appreciated inventory items, and then only to the
extent that the adjusted basis of his Partnership Shares exceeds
the amount of money received and his basis in such unrealized
receivables and inventory items.
Minimum Tax on Tax Preference Items
For noncorporate taxpayers, the alternative minimum tax is
imposed on the excess of alternative minimum taxable income
("AMTI") over the exemption amount. If this excess is less than or
equal to $175,000, the alternative minimum tax is imposed at a rate
of 26% if such excess is greater than $175,000. The exemption
amount is reduced (though not below zero) by 25% of the amount by
which AMTI exceeds $150,000 for married taxpayers filing jointly,
$112,500 for single taxpayers, and $75,000 for estates, trusts, and
married taxpayers filing separately.
For corporate taxpayers, the alternative minimum tax is
imposed at the rate of 20% on the excess of the corporation's AMTI
over the $40,000 exemption amount. The exemption amount is reduced
(but not below zero) by 25% of the amount by which AMTI exceeds
$150,000. As in the case of noncorporate taxpayers, corporations
are liable for alternative minimum tax only to the extent the tax
exceeds regular Federal income tax liability (with certain
adjustments) for the taxable year.
Both corporate and noncorporate shareholders must take into
account in determining AMTI their respective shares of tax
preference items generated by the Principal Partnerships' opera-
tions including: (i) for most tangible property that the
Principal Partnerships place in service after 1986, both
corporate and noncorporate shareholders must essentially treat as
a preference item their respective shares of the excess of any
accelerated depreciation deductions taken by the Principal
Partnerships over the deductions that would have been allowed under
a new alternative depreciation system; (ii) if the
Principal Partnerships sell inventory or similar dealer property,
all shareholders will be prohibited from using the installment
method in computing their allocable shares of gain on the sale for
AMTI purposes; (iii) to the extent the Principal Partnerships
receive tax-exempt interest income from certain sources, all
shareholders must treat such income as a preference item; and (iv)
for a shareholder that is an individual, estate, trust, closely-
held C corporation, or personal service corporation, net losses
generated by the Principal Partnerships in any taxable year might
not be deductible for minimum tax (or regular tax) purposes unless
the shareholder materially participates in the activities of the
Principal Partnerships.
Although these rules are applicable to the shareholders of
the Public Partnership, in fact the Public Partnership has had no
preference items since inception and does not anticipate
generating any preference items in the future.
<PAGE>
Investment Interest
Each individual shareholder's distributive share of the
Public Partnership's portfolio income (i.e., income from
interest, dividends, annuities and royalties not derived in the
ordinary course of a trade or business) will be treated as
investment income under Code Section 163(d) and may be offset by
the shareholder's investment interest expense. Code section 163(d)
has been amended to exclude capital gains on the disposition of
investment property from the computation of investment income
unless a shareholder elects to include such gains in his or her
taxable income at ordinary rates. A portion of the interest
incurred by a shareholder to finance the acquisition of Partnership
Shares will generally be treated as investment interest expense if
the Principal Partnerships hold investment property.
The IRS has announced that forthcoming Regulations will also
treat an individual shareholder's net passive income from a
publicly traded partnership (such as the Public Partnership) as
investment income under Code Section 163(d). Accordingly, the
amount of an individual shareholder's net passive income if any
from the Public Partnership will be treated as investment income
for purposes of Code Section 163(d). For this purpose, the
computation of the amount of a shareholder's net passive income
from the Public Partnership will take into account any passive
activity deductions attributable to expenses of the shareholder
that are incurred outside the Public Partnership and are properly
allocable to the interest in passive activities that the share-
holder holds through Partnership Shares. Thus, the amount of a
shareholder's net passive income, if any, from the Public Part-
nership generally will be reduced on account of a portion of any
interest incurred by the shareholder to finance the acquisition of
Partnership Shares.
Noncorporate shareholders are urged to consult their tax
advisors with regard to the specific effect that limitations on the
deduction of investment interest would have on their investment in
the Public Partnership.
<PAGE>
Tax-Exempt Entities, Individual Retirement Accounts and
Regulated Investment Companies
Unrelated Business Taxable Income. Tax-exempt entities
(including IRAs and trusts that hold assets of employee benefit or
retirement plans) are subject to tax on certain income derived from
a business regularly carried on by the entity that is unre-lated to
its exempt activities (i.e., "unrelated business taxable income"
("UBTI")). It is anticipated that nearly all of any tax-exempt
entity's share (whether or not distributed) of the Principal
Partnerships' gross income will be treated as gross income from an
unrelated business, and the tax-exempt entity's share of nearly all
of the Principal Partnerships' deductions will be allowed in
computing the tax-exempt entity's UBTI.
Tax-exempt shareholders other than those who benefit from the
interplay between the Section 754 Election, Section 197 and the SGP
Trust as described on pages 51 and 52 would be subject to tax on
any UBTI to the extent that the sum of such UBTI (i.e., gross
income net of deductions), if any, from their Partnership Shares
and from other sources were to exceed $1,000 in any particular
year. Moreover, even if their UBTI does not exceed $1,000 so that
tax-exempt shareholders do not incur a Federal income tax
liability, they nevertheless will be required to file income tax
returns if their gross income included in computing such UBTI is
$1,000 or more for any tax year.
Investment Company Income. For purposes of determining
whether a shareholder is a regulated investment company (within the
meaning of Code Section 851), the shareholder's income derived from
the Principal Partnerships will be treated as income from
dividends, interest and gains from the sale or other disposition of
securities only to the extent the shareholder's income is
attributable to such dividends, interest and gains realized by the
Principal Partnerships.
<PAGE>
Administrative Matters
Information to Shareholders and Assignees. In addition to
the required Schedule K1 to be furnished by the Public Part-nership
to holders of Partnership Shares during a particular taxable year,
the Public Partnership intends to furnish detailed instructions and
explanations advising recipients of the Schedule K1 as to how to
fill out their own income tax returns. The information will be
provided within 90 days after the end of the Public Partnership's
taxable year.
Partnership Tax Returns and Possible Audit. Although a
partnership is not required to pay any Federal income tax, tax
audits are conducted, and the tax treatment of partnership
income, loss, deduction and credit is determined, at the
partnership level in a unified proceeding.
In audits of partnerships, the IRS ordinarily will provide
notice of the commencement of administrative proceedings and final
adjustment only to each partner with an interest in profits of 1%
or more. The Corporate General Partner is designated the "tax
matters partner" ("TMP") to receive notice on behalf of and to
provide notice to those shareholders with interests of less than 1%
in the Public Partnership ("non-notice shareholders"). The TMP may
extend the statutory period of limitations for assessment of
adjustments attributable to "partnership items" for all
shareholders and may enter into a binding settlement on behalf of
non-notice shareholders, except for any group of such shareholders
with an aggregate interest of 5% or more in Public Partnership
profits that elects to form a separate notice group or shareholders
who otherwise properly notify the IRS that the TMP is not
authorized to act on their behalf. If the IRS and the TMP fail to
settle an audit proceeding, then the TMP may choose to litigate the
matter. In that event, the TMP would select the court in which
such litigation would occur (including, perhaps, a court where
prepayment of the tax may be required). All shareholders would
have the right to participate in such litigation and, regardless of
participation, would be bound by the outcome of the litigation.
Because shareholders will be affected by the outcome of any
administrative or court proceedings with respect to both the Public
Partnership and the Principal Subsidiary Partnership, the Corporate
General Partner intends to provide shareholders with appropriate
notices of Federal income tax proceedings with respect to both
Principal Partnerships.
Shareholders will be required to treat Public Partnership
items on their individual returns in a manner consistent with the
treatment of those items on the Public Partnership's return, unless
the shareholders file with the IRS a statement identifying the
inconsistency. Examination of the Principal Partnerships' tax
returns could result in an adjustment to the tax liability of a
shareholder without any examination of the shareholder's tax
return. In addition, any such audit could result in an audit of a
shareholder's entire tax return and in adjustments to non-
partnership related items on that return.
<PAGE>
Tax Shelter Registration. The Code requires a tax shelter
organizer to register a "tax shelter" with the IRS by the first
date on which interests in the tax shelter are offered for sale.
Such registration does not indicate approval by the IRS and could
result in an audit. The registration provisions require the tax
shelter organizer to maintain a list containing information on each
investor, would require the shareholders to report the Public
Partnership's tax registration number on their separate Federal
income tax returns, and would require the Public Partnership to
maintain a list of each person to whom it transfers an interest in
a "tax shelter." Penalties may be imposed if registration is
required and not made. A "tax shelter" for purposes of the
registration requirement is one in which a person could reasonably
infer, from the representations made in connection with any offer
for sale of any interest in the investment, that the "tax shelter
ratio" for any investor may be greater than two to one as of the
close of any of the first five years ending after the date on which
the investment is offered for sale. The term "tax shelter ratio"
is the ratio that the aggregate amount of gross deductions plus
350% of the credits that are potentially allowable to an investor
bears to the partner's investment base for the year.
The Public Partnership has not been registered as a "tax
shelter" because it expects that no shareholder's tax shelter ratio
will exceed two to one.
Accuracy-Related Penalties. The Code provides for a
penalty to be assessed in the event of a tax underpayment
attributable to a substantial overstatement of the value or
adjusted basis of property claimed on a tax return. This penalty
will apply if (i) the claimed value or adjusted basis of the
property equals or exceeds 200% of the correct value or adjusted
basis, and (ii) the amount of the tax underpayment for the
taxable year attributable to substantial valuation overstatements
exceeds $5,000 ($10,000 in the case of a corporation other than an
S corporation or a personal holding company). The amount of the
penalty generally is 20% of the tax underpayment attributable to
substantial valuation overstatements where the claimed value or
adjusted basis is less than 400% of the correct value of adjusted
basis, and 40% of the tax underpayment attributable to substantial
valuation overstatements where the claimed value or adjusted basis
equals or exceeds 400% of the correct value or adjusted basis. The
penalty will likely be potentially applicable to partners in cases
where the partnership has made a substantial valuation
overstatement. The penalty generally will not apply with respect
to any portion of a tax underpayment attributable to a substantial
valuation overstatement (with respect to property other than
charitable deduction property) if it is shown that there was a
reasonable cause for such portion and that the taxpayer acted in
good faith with respect to such portion.
The IRS might contend that the portion of the Principal
Partnerships' basis allocated to certain customer contracts of the
properties exceeds the correct fair market value of those elements
and therefore that the adjusted basis used by the Principal
Partnerships for calculating deductions with respect to those
elements of the properties constitutes substantial valuation
overstatement for purposes of this penalty. Although the Corporate
General Partner's allocation of the basis among the various
properties and elements comprising the properties has been
determined by an independent appraisal of the individual assets,
there can be no assurance that the IRS will not contend that the
allocation resulted in an overvaluation of certain assets.
<PAGE>
The Code provides for a penalty in the amount of 20% of any
underpayment of tax attributable to a "substantial understatement
of income tax." A "substantial understatement of income tax" is
the amount of the understatement of tax on a taxpayer's return for
a particular taxable year that exceeds the greater of $5,000
($10,000 if the taxpayer is a corporation other than an
S corporation or a personal holding company) or 10% of the tax
required to be shown on the return for the year. As a general
rule, the penalty will not be imposed with respect to
underpayments attributable to items for which (i) there is or was
substantial authority for the tax treatment afforded such items by
the taxpayer, or (ii) the relevant facts affecting the
treatment of such items are adequately disclosed in the
taxpayer's return or in a statement attached to the return and
there was a reasonable basis for the position. The penalty will
not apply with respect to any portion of a tax underpayment
attributable to a substantial understatement of income tax if it is
shown that there was a reasonable cause for such portion and that
the taxpayer acted in good faith with respect to such
portion. There can be no assurance that a shareholder will not
have a substantial understatement of income tax as a result of the
treatment of items of income, gain, loss, deduction and credit
resulting from his investment in the Public Partnership or that the
IRS will not contend that there is not substantial authority for
the treatment on the shareholder's return of certain items of
income, gain, loss, deduction and credit. If the IRS should
challenge the treatment by the Principal Partner-ships for tax
purposes of the various items of income, gain, loss, deduction and
credit, and if a shareholder should fail to meet the substantial
authority and adequate disclosure tests, a shareholder could incur
a penalty for a substantial underpayment of taxes resulting from
his investment in the Public Partnership.
Interest on Deficiencies. The Code provides that interest
accrues on all tax deficiencies at a rate based on the Federal
short-term rate plus 3 percentage points (5 percentage points in
certain cases involving underpayment by a C corporation of tax
amounting to more than $100,000) and compounded daily. This
interest applies to penalties as well as tax deficiencies.
Backup Withholding. Distributions to shareholders whose
Partnership Shares are held on their behalf by a broker may con-
stitute reportable payments subject to backup withholding. Backup
withholding, however, would apply only if the shareholder (i)
failed to furnish his Social Security number or other
taxpayer identification number to the person subject to the backup
withholding requirement (e.g., the broker) or (ii) furnished an
incorrect Social Security number or taxpayer identification number.
If backup withholding were applicable to a shareholder, the person
subject to the backup withholding requirement would be required to
withhold 31% of each distribution to such shareholder and to pay
such amount to the IRS on behalf of such shareholder. Amounts
withheld under the backup withholding provisions are allowable as
a refundable credit against a taxpayer's Federal income tax.
<PAGE>
Tax Considerations for Foreign Investors
General. A nonresident alien or foreign corporation, trust
or estate ("foreign person") which is a partner in a partnership
which is engaged in a business in the United States will be
considered to be engaged in such business, even though the
foreign person is only a limited partner. The activities of the
Principal Partnerships will constitute a United States business for
this purpose, and such activities likely will be deemed to be
conducted through a permanent establishment within the meaning of
the Code and applicable tax treaties. Therefore, a foreign person
who becomes a shareholder in the Public Partnership will be
required to file a United States tax return on which he must report
his distributive share of the Principal Partnerships' items of
income, gain, loss, deduction and credit, and to pay United States
taxes at regular United States rates on his share of any of the
Principal Partnerships' net income, whether
ordinary income or capital gains.
Code Section 1446 generally requires partnerships which have
taxable income effectively connected with a trade or
business in the United States to withhold tax with respect to the
portion of such income allocable to foreign partners. This
withholding tax generally is imposed at the rate of 39.6% with
respect to effectively connected income (as computed for purposes
of Section 1446) allocable to foreign individuals, and 35% with
respect to effectively connected income (as computed for purposes
of Section 1446) allocable to foreign corporations and
withholding may be required under Section 1446 even if no actual
distribution has been made to partners. However, pursuant to an
IRS Revenue Procedure, in the case of a publicly traded
partnership (such as the Public Partnership) the Code Section 1446
withholding tax will be imposed in an alternative manner unless the
publicly traded partnership elects not to have such alternative
treatment apply. Under this alternative approach, the Code Section
1446 withholding tax is imposed on distributions made to individual
or corporate foreign partners. The Treasury is authorized to issue
such regulations applying Section 1446 to publicly traded
partnerships as may be necessary to carry out the purposes of
Section 1446, but such regulations have not yet been issued.
Although foreign shareholders would be entitled to a United States
tax credit for amounts withheld by Principal
Partnerships under Section 1446, either Section 1446 or the
regulations (not yet issued) applying Section 1446 to publicly
traded partnerships could under some circumstances adversely affect
the Principal Partnerships and the foreign shareholders, e.g., by
destroying the uniformity of Partnership Shares.
<PAGE>
Branch Profits Tax. Code Section 884 imposes a branch
profits tax at the rate of 30 percent (or lower to the extent
provided by any applicable income tax treaty) on the earnings and
profits (after certain adjustments) of a U.S. branch of a foreign
corporation, if such earnings and profits are attributable to
income effectively connected with a U.S. trade or business. The
legislative history of Code Section 884 indicates that the branch
prose tax is intended to apply to foreign corporations that are
partners in partnerships which have a U.S. trade or business.
Thus, foreign corporations which own shares in the Public Part-
nership may be subject to the branch profits tax on earnings and
profits attributable to the Principal Partnerships' income as well
as federal income tax on their share of Partnership income. The
earnings and profits (which are subject to branch profits tax)
attributable to Partnership Shares held by a foreign
corporation will, of course, reflect a reduction for Federal income
taxes paid by the foreign corporate shareholder on its share of
Partnership income.
FIRPTA. The Foreign Investment in Real Property Tax Act of
1980 ("FIRPTA"), as amended by subsequent legislation, provides
that gain or loss on the disposition of a United States Real
Property Interest ("USRPI") is taxable in the United States as if
effectively connected with a U.S. business and imposes
withholding requirements on such sales and on distributions of
USRPIs by partnerships to foreign persons. USRPIs include (i)
United States real estate and (ii) interest in certain
entities (including publicly traded partnerships) holding United
States real estate. The shares will not be USRPIs unless the value
of the Principal Partnerships' United States real estate equals or
exceeds 50% of the value of all its business assets. Furthermore,
the FIRPTA rules generally do not apply to any foreign person which
owns 5% or less of the publicly traded Partnership Shares. FIPPTA
also imposes certain withholding obligations with respect to
dispositions of USRPIs by a partnership that are includable in a
foreign person's share of partnership income.
Foreign Taxes. A foreign person may be subject to tax on his
share of the Principal Partnerships' income and gain in his country
of nationality or residence, or elsewhere. The method of taxation
in such jurisdictions, if any, may differ considerably from the
United States tax system described previously, and may be affected
by the United States characterization of the Principal Partnerships
and their income. Prospective investors who are foreign persons
should consult their own tax advisors with respect to the potential
tax effects of these and other items related to an investment in
the Public Partnership.
<PAGE>
State and Local Income Taxes
In addition to the Federal income tax consequences
described above, prospective investors should consider state and
local tax consequences of an investment in the Public
Partnership. A shareholder's share of the taxable income or loss
of the Principal Partnerships generally will be required to be
included in determining his reportable income for state or local
tax purposes. If the Public Partnership is treated as a
corporation under Code Section 7704, as described above under "Tax
Status of the Partnerships" -- "Publicly Traded Partnerships
Treated as Corporations," the Public Partnership may also be
treated as a corporation for state tax purposes in those states
which base state income taxes on Federal income tax laws.
Management has been successful in filing a composite return
on behalf of its individual shareholders in all states where the
Principal Partnerships do business. The Public Partnership will
provide information each year to the shareholders as to the share
of income and taxes paid on their behalf in each state. For those
entities not included in the composite state return (corpo-rations,
partnerships and certain other entities), the Public Partnership
will provide the applicable state information.
Certain tax benefits which are available to shareholders for
Federal income tax purposes may not be available to
shareholders for state or local tax purposes and, in this regard,
investors are urged to consult their own tax advisors. The Public
Partnership intends to supply shareholders with information
regarding their income, if any, derived from various
jurisdictions in which the Principal Subsidiary Partnership
operates.
<TABLE>
SCHEDULE VIII
SERVICEMASTER LIMITED PARTNERSHIP
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<CAPTION>
Deductions-
Balance at Charged to Reserves of Write-offs of Balance
Beginning of Costs and Acquired Uncollectible at End
Classification Period Expenses Companies Accounts of Period
<S> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1993:
Allowance for doubtful accounts-
Accounts receivable (current) $ 15,772 13,579 613 12,401 $ 17,563
Notes receivable (current) $ 2,128 694 - 947 $ 1,875
AS OF DECEMBER 31, 1992:
Allowance for doubtful accounts-
Accounts receivable (current) $ 9,065 14,782 3,714 11,789 $ 15,772
Notes receivablecurrent) $ 1,825 1,131 - 828 $ 2,128
AS OF DECEMBER 31, 1991:
Allowance for doubtful accounts-
Accounts receivable (current) $ 11,189 6,614 113 8,851 $ 9,065
Notes receivable (current) $ 1,081 963 - 219 $ 1,825
</TABLE>
<PAGE>
<TABLE>
SCHEDULE X
SERVICEMASTER LIMITED PARTNERSHIP
SUPPLEMENTARY INCOME STATEMENT INFORMATI0N
(in thousands)
<CAPTION>
Item Charged to costs and expense
1993 1992 1991
<S> <C> <C> <C>
Advertising Expenses 30,053 27,591 23,295
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of ServiceMaster Limited Partnership:
We have audited in accordance with generally accepted auditing
standards, the financial statements included in ServiceMaster
Limited Partnership's annual report to shareholders incorporated by
reference in this Form 10-K, and have issued our report thereon
dated January 25, 1994. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The
schedules included in Part IV in the Form 10-K are the
responsibility of the Company's management and are presented for
purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial
statements. These supporting schedules have been subjected to the
auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
/s/ Arthur Andersen & Co.
Chicago, Illinois
January 25, 1994
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SERVICEMASTER LIMITED PARTNERSHIP
Registrant
By: ServiceMaster Management
Corporation
(General Partner)
Date: March 18, 1994 By: /s/ C. WILLIAM POLLARD
C. William Pollard
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in their capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ C. WILLIAM POLLARD Chairman and Director March 18, 1994
C. William Pollard
/s/ CARLOS H. CANTU President and Chief Executive March 18, 1994
Carlos H. Cantu Officer and Director
/s/ CHARLES W. STAIR President and Chief Executive March 18, 1994
Charles W. Stair Officer, Management Services
and Director
/s/ ERNEST J. MROZEK Vice President, Treasurer and March 18, 1994
Ernest J. Mrozek Chief Financial Officer
(Principal Financial Officer)
/s/ HENRY O. BOSWELL Director March 18, 1994
Henry O.Boswell
/s/ BRIAN GRIFFITHS Director March 18, 1994
Brian Griffiths
/s/ HERBERT P. HESS Director March 18, 1994
Herbert P. Hess
/s/ GUNTHER H. KNOEDLER Director March 18, 1994
Gunther H. Knoedler
/s/ JAMES D. McLENNAN Director March 18, 1994
James D. McLennan
/s/ VINCENT C. NELSON Director March 18, 1994
Vincent C. Nelson
/s/ KAY A. ORR Director March 18, 1994
Kay A. Orr
/s/ PHILIP B. ROONEY Director March 18, 1994
Philip B. Rooney
/s/ BURTON E. SORENSEN Director March 18, 1994
Burton E. Sorensen
/s/ DAVID K. WESSNER Director March 18, 1994
David K. Wessner
</TABLE>
<PAGE>
<TABLE>
EXHIBITS INDEX
<CAPTION>
Exhibit No. Description of Exhibit
<C> <S>
2.1 Merger Agreement dated April 22, 1989, as Amended and
Restated as of September 22, 1989, by and among
ServiceMaster Limited Partnership, SVM Holding Corp., SVM
Acquisition Corp., and American Home Shield Corporation
is incorporated by reference to Annex A to the Proxy
Statement/Prospectus included as part of the Registration
Statement on Form S-4 as filed by American Home Shield
Corporation and ServiceMaster Limited Partnership on
September 26, 1989.
4.1 ServiceMaster Limited Partnership Agreement of Limited
Partnership, as Amended and Restated on December 30,
1986 is incorporated by reference to Exhibit 4.1 to the
Annual Report on Form 10-K for the year ended December
31, 1986 (SEC File Number 0-3168) (the "1986 10-K").
4.2 Amendment No. 1 to the Amended and Restated Agreement
of Limited Partnership of ServiceMaster Limited
Partnership is incorporated by reference to Exhibit 4.2
to the Annual Report on Form 10-K for the year ended
December 31, 1987 (SEC File No. 1-9378) (the "1987
10-K").
4.3 Amendment No. 2 to the Amended and Restated Agreement
of Limited Partnership of ServiceMaster Limited
Partnership is incorporated by reference to Exhibit 4.3
to the Annual Report on Form 10-K for the year ended
December 31, 1988 (SEC File No. 1-9378) (the "1988 10-
K").
4.4 Amendment No. 3 to the Amended and Restated Agreement
of Limited Partnership of ServiceMaster Limited
Partnership is incorporated by reference to Exhibit 4.4
to the Annual Report on Form 10-K for the year ended
December 31, 1989 (SEC File No. 1-9378) (the "1989 10-
K").
4.5 Amended and Restated Agreement of Limited Partnership
of ServiceMaster Limited Partnership, effective
January 31, 1992, is incorporated by reference to
Annex A to the Proxy Statement/Prospectus of
ServiceMaster Limited Partnership and ServiceMaster
Incorporated of Delaware dated December 11, 1991 (the
"December 1991 Proxy Statement/Prospectus").
4.6 Amended and Restated Agreement of Limited Partnership
of ServiceMaster Limited Partnership effective January
1, 1993 is incorporated by reference to Exhibit 4.10 to
the Annual Report on Form 10-K for the year ended
December 31, 1992 (SEC File No. 1-9378) (the"1992 10-
K").
4.7 The ServiceMaster Company Limited Partnership Agreement
of Limited Partnership, as Amended and Restated on
December 30, 1986 (the "Amended and Restated
ServiceMaster Company Limited Partnership Agreement"),
is incorporated by reference to Exhibit 4.2 to the 1986
10-K.
4.8 Amendment No. 1 to the Amended and Restated
ServiceMaster Company Limited Partnership Agreement is
incorporated by reference to Exhibit 4.5 to the 1988
10-K.
4.9 Amendment No. 2 to the Amended and Restated
ServiceMaster Company Limited Partnership Agreement is
incorporated by reference to Exhibit 4.7 to the 1989 10-
K.
4.11 Amended and Restated Agreement of Limited Partnership
of The ServiceMaster Company Limited Partnership,
effective January 1, 1993, is incorporated by reference
to Exhibit 4.11 of the 1992 10-K.
10.1 1987 ServiceMaster Option Plan is incorporated by
reference to Exhibit 10.1 of the ServiceMaster
Registration Statement on Form S-8 (No. 33-19109),
filed with the SEC on December 16, 1987 (the "Option
Plan Registration Statement").
10.2 Form of Option Agreement for 1987 ServiceMaster Option
Plan is incorporated by reference to Exhibit 10.2 of the
Option Plan Registration Statement.
10.3 Form of Deferred Compensation and Salary Continuation
Agreement for Officers is incorporated by reference to
Exhibit 10(c)(3) to the Annual Report on Form 10-K for
the year ended December 31, 1980 (SEC File No. 0-3168)
(the "1980 10-K").
10.4 Form of Deferred Directors Fee Agreement is
incorporated by reference to Exhibit 10(c)(4) to the
1980 10-K.
10.5 Form of ServiceMaster Executive Share Subscription
Program, Share Subscription and Purchase Agreement,
Disclosure Confirmation, effective August 18, 1987, is
incorporated by reference to Exhibit 10.5 to the 1987
10-K.
10.6 Incentive Reward Compensation Plan is incorporated by
reference to Exhibit 10(c)(6) to the 1980 10-K.
10.7 ServiceMaster Industries Inc. Profit Sharing, Savings
and Retirement Trust dated April 1, 1984 is
incorporated by reference to Exhibit 10(c)(11) to the
Annual Report on Form 10-K for the year ended December
31, 1985.
10.9 ServiceMaster Profit Sharing, Savings and Retirement
Plan amended and restated effective January 1, 1987 is
incorporated by reference to the 1987 10-K.
10.10 ServiceMaster Partnership Share Investment Plan (the
"PSIP") is incorporated by reference to the PSIP
Registration Statement on Form S-8 (No. 33-19763) filed
with the SEC on January 22, 1988, as amended through all
post-effective amendments filed on or before February
10, 1988.
10.11 Form of the Share Grant Award Plan is incorporated by
reference to Exhibit 10.12 to the 1987 10-K.
10.12 License Agreement by and among The ServiceMaster
Company Limited Partnership, The Terminix International
Company Limited Partnership and Duskin Co., Ltd., dated
May 11, 1987 is incorporated by reference to Exhibit 10.3
to the 1987 10-K.
10.13 Form of Executive Debenture Equity Program 9%
Convertible Subordinated Debenture Due April 1, 1995;
Subscription to Purchase; Form of Call Agreement; Form of
Promissory Note is incorporated by reference to Exhibit
10.14 to the 1987 10-K.
10.14 The Terminix International Company LP Profit Sharing
Retirement Plan (previously known as Cook
International, Inc. Profit Sharing Retirement Plan)
effective January 1, 1984; Amendment No. One to The
Terminix International Company L.P. Profit Sharing
Retirement Plan effective January 1, 1986 and April
1, 1986; Amendment No. Two, effective April 1, 1986;
Amendment No. Three, effective January 1, 1987 and
January 1, 1988; The Terminix International Company L.P.
Profit Sharing Retirement Trust, all of which are
incorporated by reference to Exhibit 10.15 to
the 1987 10-K.
10.15 ServiceMaster 10-Plus Plan is incorporated by reference
to Exhibit 4.2 to the ServiceMaster Limited Partnership
Registration Statement on Form S-8 (No. 33-39148) filed
with the SEC on February 26, 1991 (the "10-Plus
Registration Statement").
10.16 Form of Option Agreement for the ServiceMaster 10-Plus
Plan is incorporated by reference to Exhibit 4.3 to the
10-Plus Registration Statement.
10.17 Form of Directors Deferred Fees Plan (ServiceMaster
Shares Alternative) is incorporated by reference to
Exhibit 10.18 to the Annual Report on Form 10-K for the
year ended December 31, 1990 (SEC File No. 1-9378) (the
"1990 10-K")
10.18 Form of Directors Deferred Fees Agreement
(ServiceMaster Shares Alternative) is incorporated by
reference to Exhibit 10.19 of the 1990 10-K.
10.19 Form of ServiceMaster Deferred Fees Plan Trust is
incorporated by reference to Exhibit 10.20 of the 1990
10-K.
10.20 ServiceMaster 10-Plus Plan as amended September 3,
1991 is incorporated by reference to Exhibit 10.21 to
the Annual Report on Form 10-K for the year ended
December 31, 1991 (the "1991 10-K").
10.21 Form of Option Agreement for the ServiceMaster 10-Plus
Plan as amended September 3, 1991 is incorporated by
reference to Exhibit 10.22 to the 1991 10-K.
11 Exhibit regarding detail of income per share
computation for each of the three years ended
December 31, 1993, 1992 and 1991.
13 The ServiceMaster Annual Report to Shareholders for the
year ended December 31, 1993 (the "1993 Annual
Report"). The parts of the 1993 Annual Report which
are expressly incorporated into this report by
reference shall be deemed filed with this report. All
other parts of the 1993 Annual Report are furnished for
the information of the Commission and are not filed with
this report.
22 Subsidiaries of Registrant.
24 Consent of Arthur Andersen & Co.
28.1 Amended and Restated Certificate of Incorporation of
ServiceMaster Management Corporation is incorporated by
reference to Exhibit 28.1 to the 1986 10-K.
28.2 Amended and Restated Bylaws of ServiceMaster Management
Corporation is incorporated by reference to Exhibit 28.2
to the 1986 10-K.
28.3 Common Stock Purchase Agreement entered into by certain
purchasers of the Common Stock of ServiceMaster
Management Corporation on December 30, 1986 is
incorporated by reference to Exhibit 28.3 to the 1986 10-
K.
28.4 Voting Trust Agreement among the stockholders and
directors of ServiceMaster Management Corporation, dated
December 30, 1986 is incorporated by reference to Exhibit
28.4 to the 1986 10-K.
28.5 Participation Agreement dated November 8, 1990, by and
among ServiceMaster Consumer Services Limited
Partnership, The ServiceMaster Company Limited
Partnership, ServiceMaster Consumer Services Management
Corporation, ServiceMaster Management Corporation, Waste
Management, Inc., WMI Urban Services, Inc., and WMPC,
Inc. is incorporated by reference to Exhibit 4.2 to the
Form 8-K filed on November 21, 1990 (the "November 1990
8-K").
28.6 Amended and Restated Agreement of Limited Partnership
for ServiceMaster Consumer Services Limited
Partnership dated November 8, 1990 is incorporated by
reference to Exhibit 4.4 to the November 1990 8-K.
28.8 Amended and Restated Certificate of Incorporation of
ServiceMaster Corporation is incorporated by reference
to Annex C to the December 1991 Proxy
Statement/Prospectus.
28.9 Merger and Reorganization Agreement dated December 10,
1991, by and among ServiceMaster Incorporated of
Delaware, ServiceMaster Limited Partnership,
ServiceMaster Corporation, ServiceMaster Management
Corporation, NewSub A, Inc., and NewSub B, Inc., is
incorporated by reference to Annex D to the December 1991
Proxy Statement/Prospectus.
28.10 Amended and Restated Agreement of Limited Partnership
of ServiceMaster Management Services Limited
Partnership dated December 1991 is incorporated by
reference to Exhibit 28.10 to the 1991 10-K.
28.11 Amended and Restated Certificate of Incorporation of
ServiceMaster Incorporated of Delaware as filed on
December 17, 1991 is incorporated by reference to Exhibit
28.11 to the 1992 10-K.
28.12 Amended and Restated Agreement of Limited Partnership
of ServiceMaster Consumer Services Limited Partnership
effective June 30, 1992 is incorporated by
reference to Exhibit 28.12 to the 1992 10-K.
28.13 Amended and Restated Certificate of Incorporation of
ServiceMaster Incorporated of Delaware as filed in
January, 1993 is incorporated by reference to Exhibit
28.13 to the 1992 10-K.
28.14 Agreement of Trust between The ServiceMaster Company
Limited Partnership, as grantor, and Continental Bank
National Association, as trustee, dated January 1, 1993
is incorporated by reference to Exhibit 28.14 to the 1992
10-K.
28.15 Agreement of Trust (A Trust) between The ServiceMaster
Company Limited Partnership, as grantor, and
Continental Bank National Association, as trustee,
dated January 1, 1993 is incorporated by reference to
Exhibit 28.15 to the 1992 10-K.
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 11
SERVICEMASTER LIMITED PARTNERSHIP
EXHIBIT REGARDING DETAIL OF INCOME PER SHARE COMPUTATION
(In thousands, except per share data)
<CAPTION>
Year Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
Number of shares used in computing
income per share and equivalent shares--
Shares outstanding on weighted
average basis 75,235 74,023 71,193
Equivalent shares--
Options and subscriptions 1,611 1,665 1,363
outstanding
Total weighted average and equivalent
shares 76,846 75,688 72,556
Primary earnings per share $ 1.90 $ 1.61 $ 1.19
Net income $145,947 $122,065 $85,982
Interest on convertible debentures 2,539 2,374 2,429
Adjusted net income $148,486 $124,439 $88,411
Weighted average number of common
shares outstanding 77,466 75,747 73,296
Other potentially dilutive
securities 2,037 2,220 2,282
Total weighted average number
of shares 79,503 77,967 75,578
Fully diluted earnings per share $ 1.87 $ 1.60 $ 1.17
</TABLE>
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
As of March 21, 1994, ServiceMaster had the following
subsidiaries:
State or Country
of
Subsidiary or Organization Incorporation
The ServiceMaster Company Limited Partnership Delaware
ServiceMaster Consumer Services Limited Partnership Delaware
ServiceMaster Consumer Services, Inc Delaware
ServiceMasterResidential/Commercial Services
Limited Partnership Delaware
ServiceMaster Residential/Commercial Services
Management Corporation Delaware
The Terminix International Company Limited
Partnership Delaware
Terminix International, Inc. Delaware
Merry Maids Limited Partnership Delaware
Merry Maids, Inc. Delaware
TruGreen Limited Partnership Delaware
TruGreen, Inc. Delaware
SVM Holding Corp. Delaware
American Home Shield Corporation Delaware
ServiceMaster Direct Distributor Company Limited
Partnership Delaware
ServiceMaster DDC, Inc. Delaware
ServiceMaster Management Services
Limited Partnership Delaware
ServiceMaster Management Services, Inc. Delaware
CMI Group, Inc. Wisconsin
ServiceMaster Home Health Care Services Inc. Delaware
ServiceMaster Child Care Services, Inc. Delaware
The ServiceMaster Acceptance Company
Limited Partnership Delaware
ServiceMaster AM Limited Partnership Delaware
ServiceMaster Acceptance Corporation Delaware
Azimuth Advertising Limited Partnership Delaware
Azimuth Management Corporation Delaware
AFM Beveraging, Inc. Missouri
FCIC Inc. Illinois
ServiceMaster Employment Corporation Delaware
ServiceMaster International Limited
Partnership Delaware
ServiceMaster International Management Corporation Delaware
ServiceMaster Operations, AG Switzerland
ServiceMaster Limited United Kingdom
ServiceMaster Operations Germany GmbH Germany
ServiceMaster Japan, Inc. Japan
LTCS Investment Limited Partnership Delaware
ServiceMaster Diversified Health Services, Inc. Delaware
ServiceMaster Diversified Health Services, L.P. Tennessee
We Serve America, Inc. Delaware
TSSGP Limited Partnership Delaware
TSSGP, Inc. Delaware
<PAGE>
EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent
to the incorporation by reference in this Form 10-K of our report
dated January 25, 1994, included in the ServiceMaster Limited
Partnership Annual Report to Shareholders for the year ended
December 31, 1993.
ARTHUR ANDERSEN & CO.
/s/ Arthur Andersen & Co.
Chicago, Illinois
March 21, 1994
<PAGE>
Graphics Appendix
This appendix describes the graphics which could not be put
into electronic format and which have been filed with the
Securities and Exchange Commission as a paper filing.
A diagram captioned "Structure of ServiceMaster" is set forth
on page 8. This diagram shows the principal holding and operating
units within the ServiceMaster enterprise. The Registrant is shown
at the top of the diagram and The ServiceMaster Company appears
directly below the Registrant. The four principal segments of
ServiceMaster are set forth below. The principal operating units
within each segment are then depicted. Reference is made to the
"Notes to Organizational Structure Chart" on page 11 for a further
explanation of the diagram.
A Performance Graph is set forth on page 31 which consists of
a line graph which compares the yearly percentage change in
ServiceMaster's cumulative total shareholder return on its
limited partner shares (computed in accordance with the Item 302(d)
of Reg. S-K) with the cumulative return on the stocks of the
companies within the S&P 500 Index and with the S&P Commercial
Services Index over the five year period from January 1, 1988 to
December 31, 1993. The chart shows that ServiceMaster
underperformed both indices in 1988; ServiceMaster outperformed the
Commercial Services Index in 1989 but slightly underperformed the
S&P 500 Index in 1989; and outperformed both indices in 1991, 1992
and 1993 in increasingly wide margins over this three-year period.
EXHIBIT A
Material incorporated in this Form 10-K by reference to the
ServiceMaster Annual Report to Shareholders for 1993.
<TABLE>
SELECTED FINANCIAL DATA
Eleven Year Financial Summary
(In thousands, except per share and percentage data)
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Operating Results
Operating revenue. . . . . . . . . . . . . $2,758,859 $2,488,854 $2,109,941
Cost of services rendered
and products sold. . . . . . . . . . . . 2,187,837 2,029,710 1,762,700
Selling and administrative expenses. . . . 397,978 326,477 225,814
Restructuring and other unusual charges . --- 70,235 ---
Operating income (Note). . . . . . . . . . 173,044 62,432 121,427
Non-operating expense (income) . . . . . . 55,151 36,940 39,860
Gain on issuance of subsidiary shares. . . (30,200) (105,306) (5,841)
Provision for income taxes . . . . . . . . 2,146 1,233 1,426
Cumulative effect of change in
accounting principle . . . . . . . . . . --- 7,500 ---
Net Income (Note). . . . . . . . . . . . . $ 145,947 $ 122,065 $ 85,982
% return on average equity . . . . . . . . 59% 74% 79%
Per Share
Net Income (Note). . . . . . . . . . . . . $ 1.90 $ 1.61 $ 1.19
Cash distributions to shareholders . . . . $ .89 $ .87 $ .85
Share Price Range:
High Price. . . . . . . . . . . . . . $ 31.00 $ 19.88 $ 17.38
Low Price . . . . . . . . . . . . . . $ 17.63 $ 14.63 $ 9.75
Shares used to compute income per share. . 76,846 75,688 72,556
Financial Position (at year-end)
Current assets . . . . . . . . . . . . . . $ 291,325 $ 257,542 $ 217,517
Current liabilities. . . . . . . . . . . . 239,615 206,755 157,458
Working capital. . . . . . . . . . . . . . 51,710 50,787 60,059
Current ratio. . . . . . . . . . . . . . . 1.2-1 1.2-1 1.4-1
Total assets . . . . . . . . . . . . . . . 1,122,461 1,005,531 843,660
Non-current liabilities. . . . . . . . . . 476,114 511,211 376,638
Minority interest. . . . . . . . . . . . . 117,513 77,906 78,229
Deferred gain. . . . . . . . . . . . . . . --- --- 109,354
Shareholders' equity . . . . . . . . . . . 289,219 209,659 121,981
Shares outstanding, net of treasury
shares and share subscriptions . . . . . 76,415 75,670 72,156
</TABLE>
Note: Key financial information on a basis which excludes restructuring and
unusual charges, gains on issuance of subsidiary shares, and the change in
accounting for postretirement benefits is as follows:
<TABLE>
<S> <C> <C> <C>
Operating income . . . . . . . . . . . . . $ 173,044 $ 141,367 $ 121,427
% of operating revenue . . . . . . . . . . 6.3% 5.7% 5.8%
Net income . . . . . . . . . . . . . . . . $ 115,747 $ 94,394 $ 80,141
% of operating revenue . . . . . . . . . . 4.2% 3.8% 3.8%
Net Income per share . . . . . . . . . . . . $ 1.51 $ 1.25 $ 1.10
</TABLE>
All share and per share data reflect the three-for-two share splits
in 1993, 1992, 1985, and 1983.
<TABLE>
(Eleven Year Financial Summary, continued)
<CAPTION>
1990 1989 1988 1987 1986 1985
<C> <C> <C> <C> <C> <C>
$1,825,750 $1,609,267 $1,531,276 $1,425,316 $1,122,503 $1,002,213
1,545,527 1,387,448 1,327,128 1,228,885 975,137 869,855
177,941 129,035 118,275 116,938 83,216 72,504
6,500 --- --- --- --- ---
95,782 92,784 85,873 79,493 64,150 59,854
30,397 24,016 21,247 19,492 2,235 (1,586)
(20,000) --- --- --- --- ---
2,332 721 --- --- 29,160 28,735
--- --- --- --- --- ---
$ 83,053 $ 68,047 $ 64,626 $ 60,001 $ 32,755 $ 32,705
123% 150% 138% 162% 61% 46%
$ 1.17 $ .93 $ .90 $ .85 $ .45 $ .44
$ .82 $ .78 $ .75 $ .67 $ .38 $ .35
$ 10.50 $ 10.75 $ 12.50 $ 14.25 $ 11.88 $ 11.25
$ 8.75 $ 9.38 $ 9.88 $ 9.63 $ 8.88 $ 7.75
71,207 72,957 71,859 70,883 73,862 73,803
$ 237,262 $ 219,661 $ 203,925 $ 128,804 $ 107,047 $ 82,652
158,046 135,375 76,908 59,993 51,162 42,351
79,216 84,286 127,017 68,811 55,885 40,301
1.5-1 1.6-1 2.7-1 2.1-1 2.1-1 2.0-1
796,935 593,693 485,492 371,104 340,226 132,758
372,052 410,056 346,970 260,267 248,226 14,595
55,636 9,174 10,186 8,660 8,732 ---
115,195 --- --- --- --- ---
96,006 39,088 51,428 42,184 32,106 75,812
71,982 68,265 70,212 69,917 69,683 73,304
$ 102,282 $ 92,784 $ 85,873 $ 79,493 $ 64,150 $ 59,854
5.6% 5.8% 5.6% 5.6% 5.7% 6.0%
$ 69,553 $ 68,047 $ 64,626 $ 60,001 $ 32,755 $ 32,705
3.8% 4.2% 4.2% 4.2% 2.9% 3.3%
$ .98 $ .93 $ .90 $ .85 $ .45 $ .44
</TABLE>
<TABLE>
(Eleven Year Financial Summary, continued)
<CAPTION>
1984 1983
<C> <C>
$ 849,734 $ 700,638
728,979 597,232
65,824 57,777
--- ---
54,931 45,629
(2,980) (2,954)
--- ---
27,418 22,972
--- ---
$ 30,493 $ 25,611
48% 45%
$ .41 $ .35
$ .29 $ .25
$ 10.63 $ 13.63
$ 8.00 $ 7.63
73,688 74,136
$ 71,828 $ 69,358
34,184 34,340
37,644 35,018
2.1-1 2.0-1
103,394 94,644
1,333 1,713
--- ---
--- ---
67,877 58,591
73,256 73,142
$ 54,931 $ 45,629
6.5% 6.5%
$ 30,493 $ 25,611
3.6% 3.7%
$ .41 $ .35
</TABLE>
<PAGE>
Summary of Significant Accounting Policies
(All share and per share data reflect the three-for-two share splits in
1993 and 1992)
Basis of Consolidation: The consolidated financial statements
include the accounts of ServiceMaster Limited Partnership and
its majority-owned subsidiary partnerships and corporations,
collectively referred to as the Partnership. Intercompany
transactions and balances have been eliminated in consolidation.
Investments in unconsolidated subsidiaries representing ownership
of at least 20% but less than 50% are accounted for under the
equity method. Certain immaterial 1992 and 1991 amounts have
been reclassified to conform with the 1993 presentation.
Revenues: Revenues from Management Services consist of contract
fees for services rendered and reflect the total price of such
services. Where the Partnership principally uses people who are
employees of the facility, the payroll costs for such employees
are charged to the Partnership by the facility and are included
in "Cost of services rendered and products sold" in the Consolidated
Statements of Income. Receivables from the facilities are reflected
in the Consolidated Statements of Financial Position at the net
amount due, after deducting from the contract price all amounts
chargeable to the Partnership.
Revenues from termite, pest control, and lawn care services are
recognized as the services are provided.
Revenues from franchised services 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 service contract fees are recognized as revenues ratably
over the life of the contract. Customers' coverage under home
service contracts is on a "claims made" basis and contract costs
are expensed as incurred.
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 approximately 3% of
the inventory value at December 31, 1993. The remaining inventory
is finished goods to be used on the customers' premises or sold
to franchisees.
Depreciation and Amortization: Plant and equipment used in
the business are stated at cost and are depreciated over their
estimated useful lives using the straight-line method for
financial reporting purposes. Amortization of contract
rights, trade names, goodwill and other intangible assets is
computed using the straight-line method over periods ranging
from ten to forty years for financial reporting purposes.
Income Taxes: The Partnership is treated as a publicly-traded
partnership for federal and state income tax purposes for
lines of business existing at December 16, 1987. This tax
holiday expires at the end of 1997, at which time the
Partnership will be taxed as a corporation. During this
period, all Partnership shareholders are responsible for
federal and state income taxes on their proportionate share of
taxable income and are entitled to a proportionate share of
tax deductions and credits.
In January 1992, the Partnership's shareholders approved a
tax-free Plan of Reorganization to return to corporate form on
or before December 31, 1997, at the discretion of the
ServiceMaster Board of Directors.
Substantial new lines of business and international
operations are subject to federal and state income taxes.
Income Per Share: Income per share is based on the weighted
average number of common and common equivalent shares
outstanding during the year. Shares potentially issuable
under option and subscription plans have been considered
common equivalent shares.
Report of Independent Public Accountants
To the Shareholders of ServiceMaster Limited Partnership
We have audited the accompanying consolidated statements of
financial position of SERVICEMASTER LIMITED PARTNERSHIP
(organized under the laws of the State of Delaware) AND
SUBSIDIARIES, as of December 31, 1993 and 1992, and the
related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the
period ended December 31, 1993. These financial statements
are the responsibility of the Partnership'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 ServiceMaster Limited Partnership
and Subsidiaries as of December 31, 1993 and 1992, and the
consolidated results of operations and cash flows for each of
the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN & CO.
Chicago, Illinois.
January 25, 1994
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
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 1993 and 1992)
1993 Compared to 1992
Revenue increased 11% due to strong internal growth and the full
year inclusion of ChemLawn, which was acquired in May, 1992. Net
income, including the recognition of an unusual gain, totalled
$145.9 million and represented a 20% increase over net income from
the prior year, which also included an unusual net gain. Excluding
unusual items, which are summarized and explained in the Notes to
the Consolidated Financial Statements, net income increased 23%:
For Years Ended December 31,
%
1993 1992 Change
Net income excluding
unusual items $115,747 $ 94,394 23%
Earnings per share excluding
unusual items $1.51 $1.25 21%
Net income growth exceeded the growth in net income per share due
to shares issued for acquisitions and because of the impact of
share price increases on the computation of shares outstanding.
Revenue and net income increased primarily due to another year
ofvery strong growth in Consumer Services, continued volume and
profit increases in Management Services, and the recognition of a
gain resulting from the issuance of subsidiary shares. Consumer
Services revenues grew 17% while net income, excluding the impact
of the 1992 restructuring charges, grew 52%. TruGreen-ChemLawn
operations achieved significant profit growth due to expansion of
their customer base, effective spending controls, and productivity
improvements. Terminix operations continued to achieve good
revenue and profit growth through improvements in productivity and
cost controls, despite weather conditions which adversely impacted
the termite swarm season. Merry Maids operations continued to grow
at an accelerated rate due to both new sales and increased fees
from existing franchises. The ServiceMaster Residential/Commercial
business achieved strong increases in both revenues and profits as
a result of increases in disaster restoration fees and license
sales, and good cost controls. American Home Shield profit results
were slightly below prior year levels, primarily due to continued
softness in California home resales, although revenues continued to
increase in other geographic markets and from contract renewals.
Management Services revenues increased 7%, while net income
increased 6%, excluding the impact of the 1992 restructuring
charges. Strong growth in both revenues and profits was achieved
in the education market, with new starts more than doubling prior
year levels. Growth in revenues and profits was also achieved in
health care, despite market conditions which included uncertainties
in the first half of the year regarding the nature of the
government's reform proposals. Revenues and profits also increased
modestly in the industrial market, despite unfavorable conditions
and customer downsizing in certain industries.
Revenues of International & New Business Development and Parent
increased 54% due to the acquisition in late August, 1993 of VHA
Long Term Care (subsequently combined with ServiceMaster Home
Health Care to form ServiceMaster Diversified Health Services).
Net income before unusual items declined, as positive earnings from
International & New Business Development and ServiceMaster
Diversified Health Serviceswere offset by Parent general and
administrative costs and increased minority interest costs
associated with the additional ownership interest in Consumer
Services held by WMX Technologies, Inc. (WMX Technologies).
<PAGE>
Cost of services rendered and products sold increased 8% and
declined to 79% of revenue in 1993, compared to 82% of revenue in
1992. These results reflect continued growth in Consumer Services,
which operates at a higher gross profit rate but incurs higher
selling and administrative costs than Management Services.
Selling and administrative expenses increased 22% and equaled 14%
of revenue, compared to 13% of revenue in 1992. These changes
mirror a shift in the overall business mix, as discussed above.
Overall, operating income margins, excluding unusual items,
improved to 6.3% from 5.7%, primarily due to continuing
profitability improvements in the Consumer Services operating
units.
Debt balances were reduced as a result of strong cash flows from
operations and the cash received from WMX Technologies for an
increased interest in Consumer Services, partially offset by new
borrowings related to the VHA Long Term Care acquisition. Interest
income increased due to higher invested cash balances throughout
the year and gains on the sale of marketable securities at American
Home Shield. In June, 1993, WMX Technologies exercised its option
to purchase an additional 5.76% interest in Consumer Services
Limited Partnership for $68 million. As a result of this payment,
a $30.2 million gain was recognized, representing the amount by
which the pro rata share of cash proceeds received exceeded the net
book value of the equity interest sold. Proceeds were used to pay
down debt.
The increase in minority interest expense was attributable to
increased profits and the additional minority ownership interest in
Consumer Services.
1992 Compared to 1991
Revenue increased 18% due to both good internal growth and the
impact of the ChemLawn acquisition at midyear. Net income grew
42%, including the recognition of a previously deferred gain and
restructuring and other unusual charges, and net income per share
increased 35%. Excluding these unusual items, which are summarized
and explained in the Notes to the Consolidated Financial
Statements, net income increased 18% to $94.4 million and net
income per share increased 14% to $1.25. Net income growth
exceeded the growth in net income per share because new shares were
issued for the April, 1992 purchase of a 20% minority interest in
Terminix and, to a lesser extent, because of the impact of share
price increases on the computation of shares outstanding.
The revenue and net income increases reflect a continuation of
strong internal growth in Consumer Services, steady volume and
profitability growth in Management Services, and the recognition of
a previously deferred non-operating gain resulting from the
issuance of subsidiary shares. Earnings were also favorably
affected by approximately $2.7 million from the results of newly
acquired operations, consisting primarily of ChemLawn (acquired in
May, 1992) and the investment in Norrell Corporation (made in
November, 1991). The aggregate effect of the factors described
above was partially offset by various restructuring and other
charges which are discussed below and in the Notes to the
Consolidated Financial Statements.
<PAGE>
Consumer Services continued to grow at an accelerated pace, with
overall growth of 52% in revenues and 50% in net income before
restructuring charges. The Terminix and TruGreen businesses showed
excellent revenue and profit growth due to productivity
improvements and overall weather conditions which were favorable
for the lawn care business but had a negative effect on termite
business volume for the year. The Merry Maids business had another
strong year, with accelerated growth in revenues and profits. The
assimilation of the ChemLawn operations proceeded ahead of schedule
and made a positive contribution to segment revenues and profits.
The ServiceMaster licensed cleaning business continued to
experience soft market conditions, with overall results flat
between years. The American Home Shield business was adversely
impacted by soft home resales and competitive pricing pressures,
particularly in California, resulting in reduced margins and
operating profits well below 1991 levels. Including restructuring
charges which totalled $33.8 million (consisting primarily of a
partial write-down of goodwill related to American Home Shield,
relocation and integration reserves established as a result of
Consumer Services recent business acquisitions, and a write-down of
land held for resale due to adverse conditions in the California
real estate market), Consumer Services net income declined 53%.
Management Services revenues increased 6% due to steady growth in
the health care and education markets, partially offset by declines
in industrial market volume that were primarily attributable to
continued adverse conditions in the automotive and related sectors.
Management Services net income increased 6%, excluding
restructuring charges, resulting from good growth in both the
health care and education markets, while the industrial market
experienced profitability declines resulting from reduced volume.
Management Services profitability growth was strongest in the
education market due to profitability improvements in the new
business added in 1991 and early in 1992. Including restructuring
charges which totalled $17.5 million (and related primarily to the
abandonment of a previously acquired trade name due to the
consolidation of the Management Services food service operations),
Management Services net income declined 26%.
Revenues of International & New Business Development and Parent
increased 10%, while net income before unusual items declined, as
improved operating profits in International & New Business
Development were offset by increased minority interest costs
associated with the 22% ownership interest in Consumer Services by
WMX Technologies and, to a lesser extent, increases in Parent
costs. Restructuring charges of $19 million consisted primarily of
goodwill write-offs related to Home Health Care and certain
International operations, while other unusual charges of $8.7
million were primarily related to an increase in Parent
self-insurance reserves. Net income including unusual items
increased significantly due to the realized gain on issuance of
subsidiary shares.
Cost of services rendered and products sold increased 15% and
declined to 82% of revenue in 1992, compared to 84% of revenue in
1991. These results reflect continued growth in Consumer Services,
which operates at a higher gross profit rate but incurs higher
selling and administrative costs than Management Services.
Selling and administrative expenses increased 45% and equaled 13%
of revenue, compared to 11% of revenue in 1991. These changes
mirror a shift in the overall business mix, as discussed above.
The provision for losses on doubtful accounts increased
approximately $8 million during 1992, primarily due to the
first-time inclusion of ChemLawn. On an overall basis,
consolidated days sales outstanding remained constant between
years.
<PAGE>
New borrowings related to the ChemLawn acquisition, offset by
lower interest rates, resulted in a slight increase in interest
expense. Interest income declined due to lower invested cash
balances and lower market interest rates. The decrease in minority
interest expense was caused by the restructuring and other charges
and the purchase of the Terminix minority interest.
1993 Financial Position
Funds provided from operations increased to $163.7 million, well
in excess of net income excluding unusual items of $115.7 million,
enabling the Partnership to fund the growth in its businesses,
repurchase $11.3 million of treasury shares and reduce long-term
indebtedness by $41 million. The current ratio remained at 1.2 to
1 and the long-term debt to equity ratio improved to 1.3 to 1 from
2.0 to 1 at the end of 1992. Management believes that funds
generated from operations and existing cash resources are adequate
to satisfy the ongoing working capital needs of the Partnership.
In August, 1993, the Partnership acquired the assets and
liabilities of VHA Long Term Care ("VHA-LTC") for approximately
$82.5 million. The acquisition was financed through long-term
borrowings and a combination of shares, share options, and equity
investments made by certain members of VHA-LTC management, who
acquired an 11% equity interest in VHA-LTC.
Accounts receivable increased due to growth in revenues and the
acquisition of VHA-LTC. The increase in prepaid expenses and other
assets was caused primarily by overall business growth.
The increase in property, plant, and equipment resulted from
general business growth, including the VHA-LTC acquisition, as well
as the renovation of a building in the Partnership's headquarters
campus in Downers Grove, Illinois. Equipment increased due to
purchases made to service new and existing Management Services
customers, which was partially offset by the disposal of excess
vehicles acquired as part of the ChemLawn acquisition.
Contract rights, trade names, and other intangible assets
increased primarily because of the VHA-LTC acquisition. The
investment in Norrell Corporation decreased due to the early
redemption by Norrell of $5 million of preferred shares held by
ServiceMaster. Accounts payable, payroll, and other accrued
liabilities each increased due to overall business growth.
Deferred revenues increased due to increased prepayments from lawn
care customers to be applied toward 1994 services, as well as
strong fourth quarter growth in gross contracts written and
increases in estimated deferral requirements at American Home
Shield.
Long-term debt decreased primarily as a result of strong cash
flows from operations. In addition, debt reductions from the use
of cash received from WMX Technologies for their additional
investment in Consumer Services were virtually offset by $70
million of new debt associated with the purchase of VHA-LTC.
The increase in minority interest was primarily due to the
increased investment made by WMX Technologies.
Total shareholders' equity increased by 38% to $289 million. The
increase was primarily the result of strong earnings growth and the
recognition of the unusual gain. The Partnership also repurchased
approximately 515,000 Partnership shares in 1993. The rate of
return on average equity for 1993 was 59% compared to 74% in 1992.
This decrease is a result of the large increases in equity achieved
in the last few years. The aggregate market value of the
Partnership's outstanding shares totalled $2.1 billion at December
31, 1993.
Cash distributions paid directly to shareholders totalled $.89
per share in 1993, and full year shareholders experienced a total
return on their investment of approximately 54% during 1993.
<PAGE>
As disclosed in the prior year, management noted that cash
distributions were going to grow at a rate less than the rate of
growth in taxable income. To address this situation, ServiceMaster
established a trust for the benefit of Partnership shareholders.
The trust is allocated the portion of the Partnership's taxable
income which exceeds the level of cash distributions. The trust
receives cash payments sufficient to pay its income tax obligations
made on behalf of shareholders. Such payments totalled $9.5
million during 1993 and are accounted for as additional cash
distributions. Therefore, taxable income per Partnership share
will also be $.89 in 1993 for Partnership shareholders who have
held their Partnership shares since ServiceMaster adopted
partnership form in 1986. Taxable income per Partnership share
will be lower for Partnership shares purchased in 1987 and
thereafter. The Partnership has the right to alter this
arrangement in the future, but currently intends to continue to
make direct cash distributions on the Partnership shares at least
equal to the amount of the Partnership's taxable income allocable
to such shares.
The following table presents net income before interest, taxes,
depreciation and amortization (EBITD), and cash income. EBITD is a
commonly-used supplemental measurement of a company's ability to
generate cash flow used by many of the Partnership's investors and
lenders. All of the Partnership's existing debt covenants require
the Partnership to maintain specified levels of EBITD. Management
believes that EBITD demonstrates the cash-generating ability of the
Partnership's businesses, including acquired businesses, while
highlighting the potential leveraging effect of the acquisition-
related fixed charges of interest expense, depreciation, and
amortization.
Cash income is defined as net income (adjusted to eliminate non-
cash unusual charges and the gain on issuance of subsidiary shares)
plus the non-cash charges of depreciation and amortization. Cash
income represents an indication of the Partnership's ability to
continue to distribute cash to its Partnership shareholders in
amounts sufficient to cover the income tax liabilities incurred
by holding Partnership shares. EBITD and cash income should not be
used as exclusive measures of cash flow because they do 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 Statement of Cash
Flows.
<TABLE>
(In thousands, except percentage data)
<CAPTION>
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Net income $145,947 $122,065 $ 85,982 $ 83,053 $ 68,047
Depreciation 29,674 27,017 21,598 18,281 15,649
Amortization 20,282 19,322 16,581 11,595 7,960
Unusual non-cash
charges (see
Notes) --- 77,635 --- 6,500 ---
Gain on issuance of
subsidiary shares
(see Notes) (30,200) (105,306) (5,841) (20,000) ---
Cash Income $165,703 $140,733 $118,320 $ 99,429 $ 91,656
Interest expense 32,483 32,155 31,153 33,745 29,413
Taxes 2,146 1,233 1,426 2,332 721
EBITD $200,332 $174,121 $150,899 $135,506 $121,790
Growth in cash
income over prior
period 17.7% 18.9% 19.0% 8.5% 6.2%
Growth in EBITD
over prior period 15.1% 15.4% 11.4% 11.3% 11.7%
</TABLE>
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Notes to the Consolidated Financial Statements
Business Unit Reporting
The business of the Partnership is primarily conducted through
the ServiceMaster Management Services and ServiceMaster Consumer
Services operating units. The International & New Business
Development operations of the Partnership, which includes
ServiceMaster Diversified Health Services, have been grouped
with Parent due to the developmental status of these businesses.
Information relative to Management Services and Consumer Services
accounting is described in the Summary of Significant Accounting
Policies. Operating expenses consist primarily of direct costs and
a royalty payable to Parent based on the revenues and profitability
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. Cash and
marketable securities, short-term investments, the Partnership's
headquarters facility, and other investments are included in the
identifiable assets of International & New Business and Parent.
<TABLE>
<CAPTION>
International
& New Business
Management Consumer Development
1993 (In thousands) Services Services and Parent Consolidated
<S> <C> <C> <C> <C>
Operating revenue $1,762,883 $ 939,742 $ 56,234 $2,758,859
Operating income 68,257 92,885 11,902 173,044
Interest expense 4,854 18,922 8,707 32,483
Interest (income) (2,136) (3,320) (426) (5,882)
Minority and General
Partners' interest 3,911 5,712 18,927 28,550
Gain on issuance of
subsidiary shares ---- ---- (30,200) (30,200)
Provision for income
taxes 619 1,019 508 2,146
Net Income $ 61,009 $ 70,552 $ 14,386 $ 145,947
Identifiable assets
at December 31,
1993 $ 224,091 $ 721,948 $ 176,422 $1,122,461
Depreciation and
amortization
expense $ 14,766 $ 31,929 $ 3,261 $ 49,956
Capital expenditures$ 20,845 $ 4,343 $ 7,925 $ 33,113
1992 (In thousands)
Operating revenue $1,652,295 $ 800,027 $ 36,532 $2,488,854
Restructuring
charges 17,456 33,810 18,969 70,235
Operating income
(loss) 46,980 35,212 (19,760) 62,432
Interest expense 4,237 22,205 5,713 32,155
Interest (income) (1,908) (2,094) (431) (4,433)
Minority and General
Partners' interest 4,370 (145) 4,993 9,218
Gain on issuance of
subsidiary shares --- --- (105,306) (105,306)
Provision for income
taxes 345 829 59 1,233
Cumulative effect of
change in
accounting
principle --- --- 7,500 7,500
Net Income (Note) $ 39,936 $ 14,417 $ 67,712 $ 122,065
Identifiable assets
at December 31,
1992 $ 173,134 $ 744,355 $ 88,042 $1,005,531
Depreciation and
amortization
expense $ 13,653 $ 29,241 $ 3,445 $ 46,339
Capital expenditures$ 18,141 $ 3,777 $ 3,766 $ 25,684
</TABLE>
Note: Excluding the impact of the restructuring and unusual
charges, the gain on issuance of subsidiary shares, and the
cumulative effect of a change in accounting principle, 1992 net
income was $57,392 for Management Services, $46,380 for Consumer
Services, ($9,378) for International & New Business Development and
Parent, and $94,394 for the Partnership as a whole.
<TABLE>
<CAPTION>
1991 (In thousands)
<S> <C> <C> <C> <C>
Operating revenue $1,551,616 $ 525,031 $ 33,294 $2,109,941
Operating income 61,019 51,389 9,019 121,427
Interest expense 4,238 19,652 7,263 31,153
Interest (income) (1,115) (3,315) (1,464) (5,894)
Minority and
General Partners'
interest 3,387 3,084 8,130 14,601
Gain on issuance of
subsidiary shares ---- ---- (5,841) (5,841)
Provision for
income taxes 396 974 56 1,426
Net income $ 54,113 $ 30,994 $ 875 $ 85,982
Identifiable assets
at December 31,
1991 $ 160,616 $ 574,439 $ 108,605 $ 843,660
Depreciation and
amortization
expense $ 12,416 $ 21,742 $ 4,021 $ 38,179
Capital expenditures$ 14,463 $ 2,384 $ 8,187 $ 25,034
</TABLE>
Notes to the Consolidated Financial Statements (continued)
Partnership
ServiceMaster Limited Partnership ("The Partnership") holds as
its only asset a 99% interest in the profits, losses, and
distributions of The ServiceMaster Company Limited Partnership,
which through subsidiaries owns and operates the ServiceMaster
business. The Managing General Partner of these two partnerships
is ServiceMaster Management Corporation. The Managing General
Partner holds a 1% interest in the income of both ServiceMaster
Limited Partnership and The ServiceMaster Company Limited
Partnership.
ServiceMaster Management Corporation is owned by thirty-five
ServiceMaster executives who have given their voting rights to the
Board of Directors, a majority of whom are independent directors.
Under certain circumstances, the shareholders of ServiceMaster
Limited Partnership may remove and replace the Managing General
Partner.
ServiceMaster Corporation, a special general partner of the
Partnership, was created as part of the tax-free Plan of
Reorganization approved by the shareholders of the Partnership
in January, 1992. The reorganization is scheduled to become
effective on December 31, 1997, but the Partnership's Board of
Directors has the authority to accelerate the effective date under
certain circumstances, if it deems it to be in the best interest
of a majority of the Partnership shareholders. No shares of
ServiceMaster Corporation are currently outstanding.
Acquisitions and Other Events
Acquisitions have been accounted for using the purchase method,
and the results of the acquired businesses have been included in
the Partnership's financial statements since their dates of
acquisition. Two significant acquisitions have been consummated
within the last two years. In August 1993, the Partnership
acquired VHA Long Term Care ("VHA-LTC") for approximately $82.5
million. The purchase was financed primarily through $70 million in
long-term borrowings, with the balance provided from a combination
of Partnership shares, share options, and equity investments made
by certain members of VHA Long Term Care management, who acquired
an 11% equity interest in VHA-LTC operations. The assets and
liabilities of VHA-LTC were recorded in the Partnership's financial
statements at their estimated fair market values as of the
acquisition date, including approximately $68 million in intangible
assets which will be amortized on a straight-line basis over 40
years. The preliminary value allocations are subject to change
during 1994 as additional information is obtained.
In May, 1992, Consumer Services acquired certain operating assets
and liabilities of the ChemLawn Division of Ecolab, Inc. for
approximately $103 million and has integrated ChemLawn into its
existing TruGreen lawn care business. The acquisition was
financed through long-term borrowings and equity investments by
certain members of TruGreen\ChemLawn management who acquired a
15% equity interest in the combined lawn care business. The assets
and liabilities of ChemLawn were recorded in the Partnership's
financial statements at their estimated fair market values as of
the acquisition date, including approximately $87 million in
intangible assets which will be amortized on a straight-line basis,
primarily over 40 years. The final valuation resulted in an
increase in intangible assets of approximately $6 million, caused
mainly by the revision of estimates relating to the costs of
closing certain branch operating units of ChemLawn.
Operating results of VHA-LTC and ChemLawn have been included in
the Partnership's Consolidated Statements of Income since the dates
of acquisition.
The following schedule presents unaudited pro forma consolidated
results of operation as if the VHA-LTC and ChemLawn acquisitions
had occurred on January 1, 1992:
(unaudited)
(In thousands of dollars, except per share data) 1993 1992
Operating revenues $2,781,937 $2,615,416
Net income 146,584 106,482
Net income per share $1.90 $1.40
These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would
have occurred had the acquisitions been made on January 1, 1992, or
of the results which may occur in the future. This is in part
because the rules prescribed for preparing the pro forma
information do not allow recognition of certain planned cost
savings and operating synergies.
In November, 1990, Consumer Services completed a business
combination with WMI Urban Services, Inc., a wholly-owned
subsidiary of WMX Technologies, Inc. Consumer Services acquired
certain assets and liabilities of the pest control and TruGreen
lawn care businesses of WMX Technologies in exchange for a 22%
equity interest in Consumer Services. The Consumer Services
Partnership Agreement with WMX Technologies was amended in
June, 1992, giving WMX Technologies an option to acquire an
additional 5.76% of Consumer Services, with the Partnership
retaining the right to force the exercise or expiration of
the option in annual one-third increments beginning in 1995.
In June, 1993, WMX Technologies exercised its option and acquired
this additional interest in exchange for a $68 million cash
payment, thereby increasing their aggregate ownership interest
in Consumer Services to 27.76%. As a result of this payment,
the Partnership recognized a $30.2 million gain on the issuance
of subsidiary shares. This gain represents the amount by which the
pro rata share of cash proceeds received exceeded the net book
value of the equity interest sold.
<PAGE>
In April, 1992, Terminix acquired the 20% minority interest in
its shares previously held by a group which consisted of outside
investors and certain members of Terminix management. The interest
was purchased through the issuance of Partnership shares at a
then-current fair market value of $48.9 million.
Supplemental cash flow information regarding the Partnership's
acquisitions is as follows:
<TABLE>
<CAPTION>
(In thousands of dollars) 1993 1992 1991
<S> <C> <C> <C>
Fair value of assets acquired $ 106,147 $ 267,430 $ 15,294
Less liabilities assumed (13,407) (97,930) (1,179)
Net assets acquired 92,740 169,500 14,115
Partnership shares issued (18,285) (48,905) ---
Less cash acquired (2,922) (3,333) ---
Business acquisitions net of
cash acquired $ 71,533 $ 117,262 $ 14,115
</TABLE>
Restructuring and Unusual Charges
Management performed a comprehensive strategic and financial
review of its existing business units during the second quarter
of 1992. This occurred as part of its annual planning process,
accentuated by the large number of other significant events which
occurred during the same time period (i.e., the Terminix minority
interest and ChemLawn acquisitions, the amendment of the Consumer
Services partnership agreement, the refinancing of long-term debt,
and the adoption of a new accounting standard for postretirement
medical benefits). At the conclusion of this review, several
strategic decisions and financial judgments were made which
resulted in the recording of restructuring and other charges.
The restructuring charges included the write-down of certain
intangible assets and land held for resale, a prepayment fee
on debt refinanced, and charges providing for the relocation
and consolidation of previously acquired businesses. A charge
was also taken for an accounting change related to the adoption
of Statement of Financial Accounting Standards No. 106 ("SFAS 106")
on postretirement benefits. Additional unusual charges were
included in cost of services rendered and products sold, and
were primarily related to increased self-insurance reserves for
prior years' workers' compensation costs.
Key financial information on a basis which excludes restructuring
and unusual charges, gains on issuance of subsidiary shares, and
the change in accounting for postretirement benefits is as follows:
(In thousands of dollars, except per share data) 1993 1992
Net income $ 145,947 $ 122,065
Gain on issuance of subsidiary shares (30,200) (105,306)
Restructuring charges --- 70,235
Unusual charges included in cost of sales --- 8,700
Minority interest effects of the above charges --- (8,800)
Cumulative effect of change in accounting principle --- 7,500
Net income excluding unusual items $ 115,747 $ 94,394
Percent change from prior year 23% 18%
Earnings per share excluding unusual items $ 1.51 $ 1.25
Percent change from prior year 21% 14%
Income Taxes
The Partnership has certain subsidiaries which operate in
corporate form, including American Home Shield, its home health
care and child care businesses, and certain international
operations. Additionally, several of the Partnership's
subsidiaries are subject to a variety of state partnership level
business taxes which account for a significant portion of the
Partnership's tax expense. Deferred income taxes are provided for
corporate level expenses which are deducted for income tax purposes
before they are expensed for financial reporting purposes.
Income before income taxes consists of the following:
(In thousands of dollars) 1993 1992 1991
Partnership income not subject to federal
and state income taxes $ 156,256 $ 153,533 $ 86,621
Income (loss) of subsidiary corporations
subject to federal and state
income taxes (8,163) (22,735) 787
Income before income taxes $ 148,093 $130,798 $ 87,408
<PAGE>
Effective January 1, 1993, the Partnership adopted Statement
of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting
for Income Taxes." SFAS 109 requires companies to apply current
statutory income tax rates to deferred tax assets and liabilities
arising from differences in financial reporting and tax reporting
bases. ServiceMaster is organized as a publicly-traded limited
partnership and is not currently subject to federal income taxes.
However, upon reincorporation, as outlined in the Plan of
Reorganization, ServiceMaster will recognize a step-up in tax
basis which will be amortized against taxable income in future
years. The step-up is expected to more than offset any deferred
liability that would otherwise require recognition. As a result,
the adoption of SFAS 109 did not have a material impact on the
financial statements of the Partnership.
Long-Term Debt and Other Long-Term Obligations
Long-term debt and other long-term obligations include
the following:
<TABLE>
<CAPTION>
(In thousands of dollars except per share data) 1993 1992
Notes Payable:
<S> <C> <C>
7.47%, maturing in 1996 and 1997 . . . . . . . . . . $ 75,000 $ 75,000
8.38%, maturing in 1997 - 2001 . . . . . . . . . . . 50,000 50,000
10.57%, maturing in 1996 - 2000. . . . . . . . . . . 45,000 45,000
10.81%, maturing in 2000 - 2002. . . . . . . . . . . 55,000 55,000
9%, convertible at $12.92/share. . . . . . . . . . . 18,600 18,600
9%, subordinated, convertible at $9.63/share . . . . 5,720 7,488
6%, subordinated, convertible at $18.67/share. . . . 3,761 3,761
Revolving credit facilities maturing in 1994 - 1997. 110,000 153,900
Other. . . . . . . . . . . . . . . . . . . . . . . . 26,040 21,346
Less current portions. . . . . . . . . . . . . . . . (4,612) (3,243)
Total long-term debt . . . . . . . . . . . . . . . . $ 384,509 $ 426,852
Insurance accruals and other long-term liabilities . . $ 91,605 $ 84,359
</TABLE>
Covenants related to the notes include a limitation of
total debt and fixed charges to a multiple of cash flow and
a requirement to maintain positive shareholders' equity.
The revolving credit facilities had $67 million of unused
commitments as of December 31, 1993. On February 1, 1994,
$70 million of revolving credit borrowings were refinanced
into a 6.65% senior note, payable in three installments
beginning in 2002. Interest paid, net of amounts capitalized,
was $31.5 million in 1993, $27.0 million in 1992, and
$30.1 million in 1991. Average rates paid on the revolving
credit facilities were 3.60% in 1993 and 4.27% in 1992.
Based upon the borrowing rates currently available to the
Partnership for long-term borrowings with similar terms and
maturities, the fair value of long-term debt is approximately
$423 million.
The Partnership and the minority investors in
TruGreen-ChemLawn, Merry Maids, Diversified Health Services,
and certain other business units have rights, respectively,
to acquire or sell these minority interests between 1997 and
2002 at then-current fair market value. Based on current
projections, the aggregate future payments that the
Partnership could be required to make to purchase the
minority interests under these arrangements is approximately
$100 million. These purchases, if made, would be recorded as
the acquisition of minority interest at the time of payment.
Future long-term noncancelable operating lease payments
are $39.0 million in 1994, $18.1 million in 1995, $14.3
million in 1996, $10.0 million in 1997, $7.8 million in
1998, and $11.8 million thereafter. Rental expense for
1993, 1992, and 1991 was $49.7 million, $40.9 million, and
$27.4 million, respectively.
<PAGE>
Shareholders' Equity
As of December 31, 1993, there were 6,333,503 Partnership
shares available for issuance upon the exercise of subscriptions
and options outstanding and future grants. In 1993 and 1992,
the Partnership issued 102,472 shares and 87,742 shares,
respectively, which included the final consideration due in
connection with the acquisition of Jubilee Investment Company
in 1986. C. William Pollard was a major shareholder of Jubilee
and received approximately 55% of the shares issued.
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 Partnership Shares that have been
owned by the holder without restriction for an extended period.
Share subscriptions are issued at a price not less than the fair
market value on the grant date with the completion of the purchase
of shares within fifteen years of the grant date. Share grants
carry a vesting period and are restricted as to the sale or
transfer of the shares.
<TABLE>
<CAPTION>
Share
Share Price Subscriptions Price
Options Range and Grants Range
<S> <C> <C> <C> <C>
Exercised, paid or
vested during 1991 (226,420) $ 5.38-10.59 (79,630) $ 9.67-11.55
Total exercisable,
December 31, 1991 . . . . . 3,714,886 $ 5.38-13.33 --- ---
Total outstanding,
December 31, 1991 . . . . . 3,716,011 $ 5.38-13.33 1,394,334 $ 5.53-12.89
Exercised, paid or vested
during 1992 . . . . . . . . (1,718,695) $ 5.38-13.33 (398,709) $ 5.53-16.61
Total exercisable,
December 31, 1992 . . . . . 2,970,696 $ 5.38-17.33 --- ---
Total outstanding,
December 31, 1992 . . . . . 2,970,696 $ 5.38-17.33 989,913 $ 5.53-16.61
Transactions during 1993:
Granted . . . . . . . . . . 1,259,100 $24.63-25.75 25,000 $18.67-21.75
Assumed through acquisition 252,092 $ 2.46- 7.61 --- ---
Exercised, paid or vested . (497,105) $ 2.46-17.33 (143,202) $ 9.67-21.75
Terminated or resigned. . . (120,283) $ 8.52-13.33 --- ---
Total exercisable,
December 31, 1993 . . . . . 3,864,500 $ 2.46-25.75 --- ---
Total outstanding,
December 31, 1993 . . . . . 3,864,500 $ 2.46-25.75 871,711 $ 9.67-21.75
</TABLE>
In 1991, in connection with the Partnership's acquisition
of an equity interest in Norrell Corporation, a subsidiary of
the Partnership issued a $14.6 million preferred limited
partnership interest which carries a 7% cumulative distribution
and is redeemable on or before December, 1997. This obligation
and the related distributions have been treated as minority
interest in the Partnership's consolidated financial statements.
An equity conversion right associated with the preferred interest
entitled the holder to also receive a number of common Partnership
shares at redemption, depending upon the magnitude of subsequent
increases in the market price of Partnership shares. In December,
1993, the Partnership received notice of the holder's intent to
redeem the preferred shares in May, 1994, for $14.6 million of
cash and 372,950 common shares. In February, 1994, the Partnership
sold its investment back to Norrell for approximately $29.3
million, which exceeded its carrying value.
In February, 1994, a 10% equity interest in the Partnership's
Management Services subsidiary, determined after consideration
of intercompany debt to the Parent, was sold to members of senior
management of the subsidiary at fair market value, as confirmed
by an independent appraisal. The proceeds received by the
Partnership were recorded as additional minority interest in the
consolidated balance sheet. The Partnership and the minority
investors have rights, respectively, to acquire or sell these
minority interests between 1997 and 2002, at then-current fair
market values.
Cash and Marketable Securities
Marketable securities held at December 31, 1993, and
December 31, 1992, with a maturity of three months or less,
are valued at cost which approximates market and are included
in the Statements of Financial Position caption "Cash and
Marketable Securities." Marketable securities with maturities
in excess of three months are stated at amortized cost, which
approximates market value. Interest and dividend income
received on cash and marketable securities was $2.5 million,
$2.7 million, and $4.3 million in 1993, 1992, and 1991,
respectively.
Employee Benefit Plans
Contributions to qualified profit sharing plans were made in
the amount of $6.6 million in 1993, $4.8 million in 1992, and
$4.2 million in 1991.
Under the Employee Share Purchase Plan, the Partnership
contributed $0.8 million in 1993, $0.5 million in 1992, and
$0.4 million in 1991. These funds defrayed part of the purchase
cost of the shares bought by the employees.
In 1992, the Partnership decided to phase out its previously
existing defined benefit arrangements for postretirement health
care benefits. Retirees and current employees who had already
satisfied eligibility requirements will continue to receive
benefits but with certain modifications and limitations.
As required by SFAS 106, 1992 results reflect a $7.5 million
charge for the cumulative effect of a change to the accrual
method of accounting for these postretirement health care
benefits. This charge represents the actuarial estimate
of benefits that are expected to be paid under the defined
benefit structure as it is being phased out. The postretirement
health care benefit plan is currently unfunded.
<PAGE>
Quarterly Operating Results
(Unaudited, in thousands, except per share data)
Quarterly operating results and related growth for
the last three years in revenue, gross profit, net
income, and net income per share are shown in the table
below. For interim accounting purposes, certain costs
directly associated with the generation of lawn care
revenues are initially deferred and recognized as expense
as the related revenues are recognized. Full year results
are not affected.
Certain amounts from prior periods have also been
reclassified to conform with the current presentation.
<TABLE>
<CAPTION>
% Incr.
% Incr.
1993 1992 '93-'92 1991 '92-'91
<S> <C> <C> <C> <C> <C>
Operating Revenue:
First Quarter. . . . . $ 585,130 $ 523,151 12% $ 487,546 7%
Second Quarter . . . . 728,725 634,972 15 546,749 16
Third Quarter. . . . . 749,746 696,786 8 544,607 28
Fourth Quarter . . . . 695,258 633,945 10 531,039 19
$2,758,859 $2,488,854 11% $2,109,941 18%
Gross Profit:
First Quarter. . . . . $ 93,975 $ 79,691 18% $ 73,336 9%
Second Quarter . . . . 163,370 111,567 46 96,019 16
Third Quarter. . . . . 172,074 146,331 18 93,278 57
Fourth Quarter . . . . 141,603 121,555 16 84,608 44
$ 571,022 $ 459,144 24% $ 347,241 32%
Net Income:
First Quarter. . . . . $ 21,232 $ 11,850 79% $ 17,170 -31%
Second Quarter . . . . 62,059 60,252 3 23,997 151
Third Quarter. . . . . 31,632 25,464 24 22,791 12
Fourth Quarter . . . . 31,024 24,499 27 22,024 11
$ 145,947 $ 122,065 20% $ 85,982 42%
Net Income Per Share:
First Quarter. . . . . $0.28 $0.16 75% $ 0.24 -33%
Second Quarter . . . . 0.81 0.79 3 0.33 139
Third Quarter. . . . . 0.41 0.33 24 0.31 6
Fourth Quarter . . . . 0.40 0.32 25 0.30 7
$ 1.90 $ 1.61 18% $ 1.19 35%
Cash Distributions Per Share:
First Quarter. . . . . $ 0.22 $ 0.21 1/3 3% $ 0.21 2%
Second Quarter . . . . 0.22 0.21 1/3 3 0.21 2
Third Quarter. . . . . 0.22 0.22 0 0.21 1/3 3
Fourth Quarter . . . . 0.23 0.22 5 0.21 1/3 3
$ 0.89 $ 0.86 2/3 3% $ 0.84 2/3 2%
Price Per Share:
First Quarter. . . . . $20.00-17.63 $18.50-14.63 --- $ 12.88-9.75 ---
Second Quarter . . . . 24.88-17.88 17.50-14.88 --- 13.50-11.38 ---
Third Quarter. . . . . 25.38-21.75 19.88-17.00 --- 14.50-12.00 ---
Fourth Quarter . . . . 31.00-25.13 19.25-15.63 --- 17.38-13.38 ---
</TABLE>
The results for the second quarter of 1993 included the recognition
of a $30.2 million gain on the issuance of subsidiary shares. The
results for the second quarter of 1992 included the recognition of
a similar $105.3 million unusual gain and $77.6 million of
restructuring and other unusual charges. First quarter 1992
results included a $7.5 million charge for the cumulative effect of
a change in accounting principle for postretirement medical
benefits. An unusual gain totalling $5.8 million for the year was
also recognized in 1991. Exclusive of these unusual items, net
income per share was as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
First Quarter. . . . . $ 0.28 $ 0.25 12% $0.23 9%
Second Quarter . . . . 0.42 0.34 24 0.30 13
Third Quarter. . . . . 0.41 0.33 24 0.29 14
Fourth Quarter . . . . 0.40 0.32 25 0.28 14
$ 1.51 $ 1.25 21% $1.10 14%
</TABLE>
<PAGE>
MARKET FOR REGISTRANT'S PARTNERSHIP SHARES AND RELATED SECURITY
HOLDER MATTERS
<TABLE>
<S> <C> <C> <C> <C> <C>
First Quarter. . . . . $ 0.28 $ 0.25 12% $0.23 9%
Second Quarter . . . . 0.42 0.34 24 0.30 13
Third Quarter. . . . . 0.41 0.33 24 0.29 14
Fourth Quarter . . . . 0.40 0.32 25 0.28 14
$ 1.51 $ 1.25 21% $1.10 14%
</TABLE>
