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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, 1994. Commission File number 1-9378
SERVICEMASTER LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in its Certificate)
Delaware 36-3497008
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One ServiceMaster Way, Downers Grove, Illinois 60515-9969
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (708) 271-1300
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
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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 Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such Shorter
Period That the Registrant Was Required to File Such Reports), and (2)
Has Been Subject to Such Filing Requirements for the Past 90 Days.
Yes X No
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The Aggregate Market Value of Shares Held by Non-Affiliates of the
Registrant As of March 14, 1995 was $1,891,376,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Registrant's Annual Report to Shareholders for
the year ended December 31, 1994 are incorporated into Part I, Part II
and Part IV of this Form 10-K.
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PART I
Item 1. Business
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 under the caption "The 1992 Reorganization".
The two principal operating groups of the ServiceMaster
business are Consumer Services and Management Services, each of
which is organized as a separate limited partnership.
ServiceMaster Consumer Services Limited Partnership was formed in
the summer of 1990, and ServiceMaster Management Services Limited
Partnership was formed in December 1991.
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. owns a 27.8% common equity interest;
ServiceMaster Management Services L.P., as to which senior
management owns a 10% equity interest (determined after giving
effect to intercompany debt), 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.
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All subsidiaries of ServiceMaster Consumer Services L.P. are
now wholly owned. However, throughout the year 1994 senior
management of TruGreen Limited Partnership owned a 15% interest
in that partnership. This 15% interest was acquired by the
Registrant in January 1995. See Note I, page 14, for further
information regarding this transaction.
All subsidiaries of ServiceMaster Management Services L.P.
are wholly owned.
The 1992 Reorganization
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 can convert back into corporate form. The
expected time of such conversion is the end of December 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. On that date, ServiceMaster Management
Corporation became the sole general partner of the Registrant and
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of The ServiceMaster Company with sole management authority with
respect to these partnerships and 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 Structure of the ServiceMaster Enterprise"
beginning on page 14.
Principal Business Groups
ServiceMaster is functionally divided into four operating
groups: Consumer Services,Management Services, Diversified Health
Services and International and New Business Development.
Consumer Services and Management Services are the two principal
operating groups. Reference is made to the information under the
caption "Business Unit Reporting" on page 29 of the ServiceMaster
Annual Report to Shareholders for 1994 (the "1994 Annual Report")
for detailed financial information on these two groups.
Trademarks and Service Marks; Franchises
The Company's trademarks and service marks are important for
all elements of the Company's business, although such marks are
particularly important in the advertising and franchising
activities conducted by the operating subsidiaries of
ServiceMaster Consumer Services L.P. Such marks are registered
and are renewed at each registration expiration date.
Within ServiceMaster Consumer Services, franchises are
important for the TruGreen-ChemLawn, Terminix, ServiceMaster
Residential/Commercial, and Merry Maids businesses.
Nevertheless, revenues and profits derived from franchise-related
activities constitute less than 10% of the revenue and profits of
the consolidated ServiceMaster enterprise. Franchise agreements
made in the course of these businesses are generally for a term
of five years. ServiceMaster's renewal history is that most of
the franchise agreements which expire in any given year are
renewed.
Consumer Services
ServiceMaster Consumer Services provides specialty services
to homeowners and commercial facilities through five companies:
TruGreen L.P. ("TruGreen-ChemLawn"); The Terminix International
Company L.P. ("Terminix"); ServiceMaster Residential/Commercial
Services L.P. ("Res/Com"); Merry Maids L.P. ("Merry Maids"); and
American Home Shield Corporation ("American Home Shield" or
"AHS"). The services provided by these companies include: lawn
care, tree and shrub services under the "TruGreen" and "ChemLawn"
service marks; termite and pest control and radon testing
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services under the "Terminix" service mark; residential and
commercial cleaning and disaster restoration services under the
"ServiceMaster" service mark; domestic housekeeping services
under the "Merry Maids" service mark; and home systems and
appliance warranty contracts under the "American Home Shield"
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 6.4 million
customers (including international operations).
The International and New Business Development Group is
responsible for overseeing the Consumer Services which are
provided in foreign markets.
TruGreen-ChemLawn. Until January 1, 1995, TruGreen-ChemLawn
was an 85% owned subsidiary of ServiceMaster Consumer Services
Limited Partnership with senior management of TruGreen-ChemLawn
holding the remaining 15% interest. However, effective January
1, 1995, all of the holders of the 15% minority interest
contributed their interests to the Registrant in exchange for
shares of the Registrant. See Note I, page 21 for further
information regarding this transaction. With 2.3 million
residential and commercial customers, TruGreen-ChemLawn is the
leading provider of lawn care services in the United States. As
of December 31, 1994, TruGreen-ChemLawn had 173 company-owned
branches and 73 franchised branches. TruGreen-ChemLawn also
provides lawn care services in Saudi Arabia through a licensing
arrangement. The TruGreen-ChemLawn business is seasonal in
nature.
Terminix. Terminix is a wholly owned subsidiary of
ServiceMaster Consumer Services L.P. With approximately 2.0
million residential and commercial customers, Terminix, through
its company-owned branches and through franchisees, is the
leading provider of termite, pest control and radon testing
services in the United States. As of December 1994, Terminix was
providing these services through 314 company-owned branches in 40
states and Mexico and through 225 franchised branches in 22
states and Mexico. Terminix also provides termite and pest
control services in Japan, Taiwan, Lebanon, Saudi Arabia, Oman,
the Bahamas, Dominican Republic, Jamaica, and Puerto Rico through
licensing arrangements with local partners. It provides the same
services through subsidiaries in Belgium, the Netherlands,
Norway, Sweden, the United Kingdom, and Mexico. The Terminix
business is seasonal in nature.
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Res/Com. Res/Com is a wholly owned subsidiary of
ServiceMaster Consumer Services L.P. ServiceMaster, through
Res/Com, is the leading franchisor in the residential and
commercial cleaning field. Res/Com provides carpet and
upholstery cleaning and janitorial services, disaster restoration
services and window cleaning services to over 1.3 million
residential and commercial customers worldwide through a network
of over 4,300 independent franchisees. Res/Com provides its
services through subsidiaries in Germany and the United Kingdom,
through an affiliate in Canada, and through licensees in
Australia, New Zealand, Austria, Belgium, Finland, Spain, Turkey,
Saudi Arabia, Korea, Japan, Brazil, and Canada.
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 was acquired by Merry Maids in 1994). Merry Maids is the
organization through which ServiceMaster provides domestic house
cleaning services. With nearly 200,000 customers, Merry Maids is
the leading provider of domestic house cleaning services in the
United States. As of December 31, 1994, these services were
provided through 4 company-owned branches in four states and
through 774 licensees operating in 49 states. Merry Maids also
provides domestic housecleaning services in Canada through an
affiliate and in Japan, the United Kingdom, Saudi Arabia, Denmark
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 was 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 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, 1994, AHS was providing services to approximately
328,000 homes through approximately 6,000 independent repair
maintenance contractors in 47 states and the District of
Columbia, with operations in California, Texas and Arizona
accounting for 30%, 21% 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.
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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.
For many years, Management Services was organized in
geographic companies, with each of these companies providing the
full range of ServiceMaster's supportive management services. In
October 1994, Management Services was reorganized into three
discrete operating units each providing a separate functional
service on a nationwide basis. These units are: Healthcare
Management Services; Education Management Services; and Business
and Industry Management Services.
As of December 31, 1994, ServiceMaster was providing
supportive management services to approximately 2,200 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 Japan, through affiliated companies in Canada,
Japan, Italy, Mexico, and the United Kingdom, and through
licensees in Korea, Australia, New Zealand, Singapore, Taiwan,
Hong Kong, Czech Republic, Slovakia, Chile, Japan and throughout
the Middle East. The International and New Business Development
Group is responsible for overseeing the management services which
are provided in foreign markets.
In February 1995, Management Services formed a joint venture
with DAKA International in which the latter, in effect, acquired
80% of Management Services'education food service management
business. At the time of its formation, the DAKA-ServiceMaster
Management Services joint venture was serving approximately 100
customers.
Diversified Health Services
The Diversified Health Services Group was organized in 1993.
It consists of the ServiceMaster Diversified Health Services
companies and ServiceMaster Home Health Care Services. The
Diversified Health Services companies were acquired by
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ServiceMaster in August 1993, at which time they were 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, 1994, the ServiceMaster Diversified
Health Services Companies were providing management services to
approximately 14,800 beds in 28 states in a total of 103
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, 1994, this organization was serving
46 home health care agencies, four of which are wholly-owned.
International and New Business Development
The International and New Business Development Group
consists of International Services and companies which are in a
formative stage of development.
International Services. The International Services
component of the International and New Business Development Group
oversees the performance of supportive management services and
consumer services in international markets either through the
arrangements described above or through ownership of foreign
operating companies acquired by ServiceMaster.
In the Spring of 1994, ServiceMaster made a strategic
decision to expand its pest control business into Europe through
the acquisition of existing pest control companies. Thereafter,
in August 1994, International Services organized TMX-Europe B.V.,
a Netherlands limited company ("TMX-Europe") as a subsidiary of
The ServiceMaster Company to serve as a holding company for
acquisitions of pest control businesses in the United Kingdom and
Europe. At the end of August 1994, TMX-Europe acquired Peter Cox
plc, a leading pest control company in the United Kingdom; in
early September 1994, TMX-Europe acquired Protekta B.V. and Riwa
B.V., each a pest control company in the Netherlands; and at the
end of December 1994, TMX-Europe acquired Anticimex Development
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AB, a holding company for pest control and related businesses in
Sweden.
Child Care Services. ServiceMaster Child Care Services,
Inc., a part of the New Business Development component of the
International and New Business Development Group, operates
employer or developer sponsored child care centers under the
"GreenTree" service mark. As of December 31, 1994, GreenTree had
17 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.
Industry Position, Competition and Customers
The following information is based solely upon estimates
made by the management of ServiceMaster and cannot be verified.
In considering ServiceMaster's industry and competitive
positions, it should be recognized that ServiceMaster competes
with many other companies in the sale of its services, franchises
and products and that some of these competitors are larger or
have greater financial and marketing strength than ServiceMaster.
The principal methods of competition employed by
ServiceMaster in the Consumer Services business are name
recognition, assurance of customer satisfaction and history of
providing quality services to homeowners. The principal methods
of competition employed by ServiceMaster in each of the operating
units in the Management Services business are price, quality of
service and history of providing management services. 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.
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Consumer Services
Consumer Services subsidiaries provide a variety of
residential and commercial services under their respective names
on the basis of their and ServiceMaster's reputation, the
strength of their service marks, their size and financial
capability, training and technical support services. The markets
served by Terminix and TruGreen/ChemLawn are seasonal in nature.
Lawn Care Services. TruGreen-ChemLawn, both directly and
through franchisees, provides lawn care services to residential
and commercial customers. Competition within the lawn care
market is strong, coming mainly from regional and local,
independently owned firms and from homeowners who elect to care
for their lawns through their own personal efforts. TruGreen-
ChemLawn is the leading national lawn care company within this
market.
Lawn care services are regulated by law in most of the
states in which TruGreen-ChemLawn provides such services. These
laws require licensing which is conditional on a showing of
technical competence and adequate bonding and insurance. The
lawn care industry is regulated at the federal level under the
Federal Insecticide, Fungicide and Rodenticide Act, and lawn care
companies (such as TruGreen-ChemLawn) which apply herbicides and
pesticides are regulated under the Federal Environmental
Pesticide Control Act of 1972. Such laws, together with a
variety of state and local laws and regulations, may limit or
prohibit the use of certain herbicides and pesticides, and such
restrictions may adversely affect the business of TruGreen-
ChemLawn.
Termite, Pest Control and Radon Testing 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,
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may limit or prohibit the use of certain pesticides, and such
restrictions may adversely affect the business of Terminix.
House Cleaning Services. The market for domestic house
cleaning services is highly competitive. In urban areas the
market involves numerous local companies and a few national
companies. ServiceMaster believes that its share of the total
potential market for such services is small and that there is 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.
Home Systems and Appliance Warranty Contracts. The market
for home systems and appliance warranty contracts is relatively
new. ServiceMaster believes that AHS maintains a favorable
position in its industry due to the system developed and used by
AHS for accepting, dispatching and fulfilling service calls from
homeowners through a nationwide network of independent
contractors. AHS also has a computerized information system
developed and owned by AHS, and an electronic digital voice
communication system through which AHS handled more than 5.1
million calls in 1994.
Management Services
Health Care. Within the market consisting of general health
care facilities having 50 or more beds, ServiceMaster is the
leading supplier of plant operations and maintenance,
housekeeping, clinical equipment maintenance, and laundry and
linen management services. As of December 31, 1994,
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.
Education. ServiceMaster is a leading provider of
maintenance, custodial, and grounds services and through the
DAKA/ServiceMaster joint venture, food management services, to
the education market. The facilities which comprise the
education market served by ServiceMaster include primary schools,
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secondary schools and school districts, private specialty schools
and colleges and universities. As of December 31, 1994,
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.
Business and Industry. ServiceMaster believes it is a
leading provider of plant operations and maintenance, custodial
and grounds management services to business and industrial
customers. During the period 1991 - 1994, this market has been
adversely affected by periods of weak economic conditions and
corporate downsizing, but ServiceMaster continues to believe that
there is potential for expansion in the business and industrial
markets due to ServiceMaster's low current penetration of that
market and the trend of business to consider outsourcing more of
their service requirements and the trend of governmental units to
privatize parts of their operations. As of December 31, 1994,
ServiceMaster was serving in 141 business or industrial
facilities.
Diversified Health Services
Long-Term Care Management 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.
Home Health Care Services. 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.
International and New Business Development
International Services. The pest control companies acquired
by ServiceMaster through International Services are each leaders
in the pest control business in the countries in which they
respectively operate. ServiceMaster believes that there is
potential for expansion of these businesses in both the United
Kingdom and elsewhere on the European continent.
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Child Care Services. 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, 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, 1994, ServiceMaster had a total of
approximately 34,000 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 1994 Annual
Report.
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STRUCTURE OF SERVICEMASTER
This chart shows the entities which collectively make up the
ServiceMaster enterprise. The public shareholders are shown at
the top of the chart, below which are listed ServiceMaster
Limited Partnership, The ServiceMaster Company, the four business
units and their respective significant subsidiaries, in that
order.
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DESCRIPTION OF THE STRUCTURE OF THE SERVICEMASTER ENTERPRISE
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: ServiceMaster Limited
Partnership became the 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., and The ServiceMaster Company Limited
Partnership was established as the principal operating subsidiary
of ServiceMaster Limited Partnership.
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 that date. 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.
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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.
The 1992 Reorganization (ServiceMaster Corporation)
Reference is made to the discussion 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 20,
1995, no shares of stock of ServiceMaster Corporation had been
issued and the corporation remains dormant.
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 groups which
comprise such business, i.e., TruGreen-ChemLawn, Terminix,
ServiceMaster Residential/Commercial Services, Merry Maids, and
American Home Shield.
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 in SMCS). The
controlling interest in ServiceMaster Consumer Services, Inc., is
held by ServiceMaster Management Corporation.
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 three
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
<PAGE>
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.
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 subsidiaries, licensing or joint venture arrangements all
of which are coordinated and supervised by the International
Services component of International and New Business Development.
As previously noted, in 1994, the Company, through its
Netherlands subsidiary, TMX-Europe B.V., acquired pest control
businesses in the United Kingdom, the Netherlands and Sweden.
The ServiceMaster Company owns all of the equity in
ServiceMaster Child Care Services, Inc. as part of its New
Business Development group.
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
<PAGE>
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.
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, but
ServiceMaster Corporation has not been activated through the
issuance of any of its stock. 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
Consumer Services, Management Services, and Diversified Health
Services groups. All of its common limited partner interests are
held by the Registrant. An individual held a preferred limited
partner interest in The ServiceMaster Company which was redeemed
by The ServiceMaster Company in May 1994 - see Note S. On
January 1, 1993, the ServiceMaster SGP Trust became a special
general partner of The ServiceMaster Company and has remained a
special general partner of The ServiceMaster Company since that
date - see Note T.
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
<PAGE>
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. During the year 1994, the stock of ServiceMaster
Management Corporation was owned by persons who were past or
present 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.
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. 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
<PAGE>
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 1994, 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 the year 1994 was $3,041,268. From that amount the
corporation paid state corporate taxes and, on behalf of its
stockholders but subject to reimbursement by them, the letter of
credit fees charged with respect to the promissory notes
described in the next paragraph. The balance, $2,895,062, was
distributed by ServiceMaster Management Corporation to those past
and present officers of ServiceMaster who constituted the
stockholders of ServiceMaster Management Corporation. At
December 31, 1994, such persons included Messrs. Cantu, Erickson,
Mooney, Keith, and Squires, whose participations within the 1.99%
total carried interest of ServiceMaster Management Corporation at
the end of 1994 were, respectively, 11.44%, 11.44%, 2.53%, 3.04%,
and 3.04%.
The stock of ServiceMaster Management Corporation is
presently owned by 35 ServiceMaster executives, each of whom has
signed a promissory note payable to the corporation in the amount
of the purchase price of his or her stock. Such notes total
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 Bank of America (Illinois). 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 for the Consumer Services business.
ServiceMaster Consumer Services, Inc. is one of the two general
partners of SMCS. The second general partner is The
ServiceMaster Company. The ServiceMaster Company, through its
direct and indirect ownership of the 1% interest held by the
general partners and as one of two limited partners, holds in
total 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 1994. Beginning on January 1, 1998, WMUS
has a right to convert its equity interest in SMCS into common
stock of the ServiceMaster parent entity based on relative fair
market values at the date of conversion. However, the parent
<PAGE>
entity has the unilateral option to substitute cash for the
parent shares which would otherwise be issued.
Note F--ServiceMaster Management Services Limited Partnership and
ServiceMaster Management Services, Inc.
ServiceMaster Management Services Limited Partnership
("SMMS") is the holding company for the Management Services
business. ServiceMaster Management Services, Inc. is 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.
In January 1994, 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 after
the end of the year 1997. 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.
Note G--ServiceMaster Diversified Health Services
ServiceMaster Diversified Health Services is a division of
The ServiceMaster Company. It is comprised of the ServiceMaster
Diversified Health Services Companies ("DHS") and ServiceMaster
Home Health Care Services. The former is 89% owned by The
ServiceMaster Company (see Note N) while the latter is 100% owned
by The ServiceMaster Company but the latter's earnings are
included as part of the earnings of DHS for purposes of the
minority interest in DHS. The ServiceMaster Diversified Health
Services Companies include a parent limited partnership and its
general partner, and a number of subsidiary companies.
Note H--International and New Business Development
International and New Business Development is a division of
The ServiceMaster Company. It consists of International Services
and New Business Development. The International Services
component oversees and provides administrative support for
<PAGE>
ServiceMaster's international operations. The New Business
Development component oversees and provides administrative
support for businesses which are in their formative stages (e.g.,
ServiceMaster Child Care Services).
Note I--TruGreen Limited Partnership
TruGreen Limited Partnership ("TruGreen") has two general
partners: TruGreen, Inc., which is the managing general partner,
and TSSGP. Until January 1, 1995, members of TruGreen management
owned a 15% minority interest in TruGreen. Effective January 1,
1995, all of the holders of the minority interest contributed
their limited partner units in TruGreen to the Registrant in
exchange for 2,824,062 shares of the Registrant and a contingent
right to receive an additional payment in 1997 depending upon the
magnitude of TruGreen's earnings and the performance of the
Registrant's shares in 1995 and 1996. As a result of this
transaction, the Registrant and Consumer Services together became
the owners of 100% of the equity interests in TruGreen.
Note J--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 K--Res/Com Limited Partnership
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 L--Merry Maids Limited Partnership
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 was acquired by
Merry Maids in 1994).
<PAGE>
Note M--American Home Shield Corporation
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 was acquired by Holding in
1994.)
Note N--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. ("LTCS"). LTCS is 89% owned by The
ServiceMaster Company and 11% by members of senior management of
the ServiceMaster Diversified Health Services Companies. LTCS
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 to
purchase his or her minority interest in LTCS. 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 O--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.
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 New
Business Development group. Its operations have been described
above (page 8).
Note Q--International Services
The International Services component of the International
and New Business Development group is a division of The
ServiceMaster Company. Its operations have been described above
(page 7). It owns all of the shares of TMX-Europe B.V., the
Netherlands holding company for all pest control businesses
acquired in Europe.
<PAGE>
Note R--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 21 for a complete list of the
subsidiaries of the Registrant.
Note S--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
redeemed 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 was 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 T--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 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).
The SGP Trust receives 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, if and when ServiceMaster Corporation is activated).
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 equal or exceed
the taxable income of the Registrant which is directly allocated
to its limited partners and to ServiceMaster Corporation. The
ServiceMaster Company makes cash distributions to the SGP Trust
in the amounts required by the trust for the payment of its
federal and state income tax liabilities. This arrangement
prevents taxable income as allocated to the public shareholders
from exceeding their cash distributions from the Registrant and
thereby solves the "crossover problem" as 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 is 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.
The headquarters for ServiceMaster Consumer Services L.P.
are located in leased premises at 860 Ridge Lake Boulevard,
Memphis, Tennessee. Until January 1995, Consumer Services was
headquartered at 855 Ridge Lake Boulevard, Memphis, Tennessee.
<PAGE>
The 860 Ridge Lake Boulevard facility also serves as the
headquarters for TruGreen-ChemLawn, Terminix, Res/Com, and
American Home Shield and, in mid-1995, will become the
headquarters for Merry Maids. Consumer Services maintains some
functions at the 855 Ridge Lake Boulevard facility, including
computer and telecommunication services.
TruGreen-ChemLawn owns 5 buildings which are used as branch
sites for lawn care services. These facilities are located in
Texas (2 properties), Colorado (1 property), Ohio (1 property),
and Georgia (1 property).
Terminix owns 16 buildings which are used as branch sites
for termite and pest control services. These properties are all
one-story buildings that contain both office and storage space.
These properties are located in New Jersey (2 properties),
California (2 properties), Florida (8 properties), and Texas (4
properties).
The headquarters facility for Merry Maids is presently
located in leased premises at 11117 Mill Valley Road, Omaha,
Nebraska, but as stated above, the Merry Maids headquarters will
be relocated to Memphis, Tennessee in mid-1995.
American Home Shield moved all of its administration
operations to Memphis, Tennessee during the year 1994, but the
company retained some leased space in the building at 90 South E
Street, Santa Rosa, California for administrative and sales
operations. 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.
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. As of December 31, 1994,
DHS had 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 20, 1995, 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. In October 1991, Terminix was 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; there have not been any developments in this
matter since that date. 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. However, 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.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None
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 1994 under the captions
"Shareholders' Equity" (pages 32-33) and "Cash Distributions Per
Share" and "Price Per Share" in the Quarterly Operating Results
table (page 34) 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 20, 1995, 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 1994 in the Financial Statements and Management
Discussion section ("FSMD Section") under the caption "Eleven
Year Financial Summary" (pages 22-23) 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,
1994, is contained in the FSMD Section of the ServiceMaster
Annual Report to Shareholders for 1994 on pages 17-21 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, 1994 and 1993, and the
consolidated statements of income, cash flows and shareholders'
equity for the years ended December 31, 1994, 1993 and 1992 and
notes to the consolidated financial statements are contained in
the FSMD Section of the ServiceMaster Annual Report to
Shareholders for 1994 on pages 24 - 34 and are incorporated
herein by reference. The report of Arthur Andersen LLP thereon
dated January 24, 1995, and the summary of significant accounting
<PAGE>
policies are contained in the FSMD Section of the ServiceMaster
Annual Report to Shareholders for 1994 on page 24 and are hereby
incorporated herein by reference.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
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 17, 1995) of the present directors of
ServiceMaster Management Corporation (the managing 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. All committee memberships to which reference is made
means membership on a committee of the Board of Directors of
ServiceMaster Management Corporation.
1995 Class
Henry O. Boswell, age 65, has been a director since 1985. He
is a member of the Executive Committee, the Consumer Services and
International and New Business Development Committee, the Finance
Committee, the Nominating Committee and the Compensation
Committee. 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. Mr. Boswell is a director
of Rowan Companies, Inc., Houston, Texas, and Cabot Oil & Gas
Corp. in Houston, Texas.
James D. McLennan, age 58, has been a director since May
1986. He is a member of the Management Services and Diversified
Health Services Committee and the Audit Committee. Mr. McLennan
joined McLennan Company, a full service real estate company, in
1958. He was named partner in 1968 and became President in 1981.
He is the Chairman of the Board of the Lutheran General Medical
Center Foundation. Mr. McLennan is also a director of NBD Bank
of Park Ridge, Park Ridge, Illinois, a director of Potomac
<PAGE>
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 65, has been a director since May
1984. He is a member of the Executive Committee, the Finance
Committee and the Compensation Committee. 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. Mr. Sorensen is
also a director of Provident Life and Casualty Insurance Company
of America, Chattanooga, Tennessee.
Charles W. Stair, age 54, has been a director since December
1986. He previously served as a director from 1976 to 1983. On
December 10, 1994 he was elected Vice Chairman of the Board of
Directors. He is a member of the Management Services and
Diversified Health Services Committee. Mr. Stair is a member of
the Profit Sharing, Savings and Retirement Plan Administrative
Committee. He served as the President and Chief Executive
Officer of ServiceMaster Management Services from May 1991 to
December 31, 1994, 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 is Chairman of
the board of directors of Greater Europe Mission, Monument,
Colorado, and Executive Chairman of Tyndale House Publishers,
Inc., Wheaton, Illinois.
David K. Wessner, age 43, has been a director since March
1987. He is a member of the Executive Committee, the Management
Services and Diversified Health Services Committee and the
Compensation Committee. Mr. Wessner is Executive Vice President,
HealthSystem Minnesota. Previously, he was Senior Vice
President, Program and Process Improvement, Geisinger Health
System, from November 1992 to August 1994. He was Senior Vice
President and Administrative Director from 1982 to November 1992.
1996 Class
Sidney E. Harris, age 45, has been a director since December
10, 1994. He is a member of the Management Services and
Diversified Health Services Committee. He has been the Dean of
the Peter F. Drucker Graduate Management Center at the Claremont
Graduate School, Claremont, California since 1991. He is a co-
founder of the Institute for the Study of U.S./Japan Relations in
the World Economy. Dr. Harris is a director of Family Savings
Bank, Los Angeles, California, and Property Secured Investments,
Inc., Los Angeles, California, a real estate investment trust.
<PAGE>
He is also a member of the Board of Governors of the Peter F.
Drucker Non-Profit Foundation, New York, and a trustee of Menlo
College, Atherton, California.
Herbert P. Hess, age 58, has been a director since 1981. He
is a member of the Executive Committee, the Consumer Services and
International and New Business Development Committee, the Finance
Committee, the Nominating Committee, the Compensation Committee
and the Share Option Committee. 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 56, has been a director since January 1,
1994. She is a member of the Consumer Services and International
and New Business Development Committee. 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 director
of VanCom Incorporated, Oak Brook Terrace, Illinois, a
transportation company, a trustee of Hastings (Nebraska) College,
and a trustee of the Peoples City Mission Foundation.
Phillip B. Rooney, age 50, has been a director since January
1, 1994. He is a member of the Executive Committee, the
Consumer Services and International and New Business Development
Committee and the Compensation Committee. Mr. Rooney is a
director and the President and Chief Operating Officer of WMX
Technologies, Inc., Oak Brook, Illinois and the Chairman and
Chief Executive Officer of its Waste Management, Inc. subsidiary,
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.,
Birmingham, Alabama, and a director of Waste Management
International, plc, London, England. He is also a director of
Illinois Tool Works, Inc., Caremark International, Inc. and Urban
Shopping Centers, Inc.
1997 Class
Carlos H. Cantu, age 61, has been a director since 1988. He
is a member of the Consumer Services and International and New
Business Development Committee, the Management Services and
Diversified Health Services Committee, the Finance Committee and
the Nominating Committee. On January 1, 1994, Mr. Cantu became
the President and Chief Executive Officer of ServiceMaster. He
<PAGE>
served as the President and Chief Executive Officer of
ServiceMaster Consumer Services from May 1991 to August 1994, 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. He served as President and Chief
Executive Officer of The Terminix International Company Limited
Partnership from December 18, 1986 to December 31, 1992. He has
been a director of Midland Financial Group, Inc., an insurance
company in Memphis, Tennessee, since September 1992 and of Haggar
Corporation, a clothing company in Dallas, Texas, since February
9, 1995.
Lord Brian Griffiths of Fforestfach, age 53, has been a
director since August 1992. He is a member of the Executive
Committee, the Nominating Committee and the Compensation
Committee. 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 Telewest, London, England.
Gunther H. Knoedler, age 65, has been a director since 1979.
He is a member of the Executive Committee, the Management
Services and Diversified Health Services Committee, the Audit
Committee (of which he is the Chairman), the Compensation
Committee and the Share Option Committee. Mr. Knoedler is a
retired Executive Vice President and Director Emeritus of Bell
Federal Savings & Loan Association, Chicago, Illinois. He is a
member 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 53, has been a director since 1978.
Mr. Nelson is a member of the Executive Committee, the Consumer
Services and International and New Business Development
Committee, the Nominating Committee, the Compensation Committee,
the Audit Committee, the Employee Share Purchase Plan
Administrative Committee and the Share Option Committee. Mr.
Nelson is a business investor and is a trustee of Westmont
College, Santa Barbara, California.
C. William Pollard, age 56, has been a director since
December 1977. Since May 1990, he has been the Chairman of the
Board of Directors and Chairman of the Executive Committee of the
Board of Directors. He is a member of the Consumer Services and
International and New Business Development Committee, the
Management Services and Diversified Health Services Committee,
<PAGE>
the Finance Committee and the Nominating 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. Mr. Pollard is a director
of Herman Miller, Inc., Zeeland, Michigan, an office furniture
manufacturer; a director of Provident Life and Casualty Insurance
Company of America, Chattanooga, Tennessee; and advisory director
of Trammell Crow Company, Dallas, Texas, a real estate management
company. He is the Chairman of the Board of Trustees of Wheaton
College, Wheaton, Illinois.
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 1994
annual meeting of shareholders to serve in such capacity until
the annual meeting of shareholders in 1995 or until otherwise
determined by the Board of Directors.
Robert D. Erickson, age 51, was a director from May 1987 to
May 1993. He previously served as a director from May 1981
through May 1984. He is a non-director member of the Consumer
Services and International and New Business Development
Committee. Mr. Erickson also 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. He is President and Chief
Operating Officer, International and New Business Development.
He served as Executive Vice President and Chief Operating Officer
of this division from November 1992 to October 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
and Vice Chairman of Moody Bible Institute, Chicago, Illinois, an
educational institution, and he is a director of VanCom
Incorporated, Oak Brook Terrace, Illinois, a transportation
company.
<PAGE>
Brian D. Oxley, age 44, is President and Chief Operating
Officer of ServiceMaster Management Services. 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. Mr. Oxley is a director of Kawakita Hospital,
Tokyo, Japan. He is a non-director member of the Management
Services and Diversified Health Services Committee.
Dallen W. Peterson, age 58, 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. He is a non-
director member of the Consumer Services and International and
New Business Development Committee.
Donald K. Karnes, age 44, 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. He is a
non-director member of the Consumer Services and International
and New Business Development Committee.
Robert F. Keith, age 38, was elected President and Chief
Operating Officer of ServiceMaster Consumer Services, Inc.,
effective August 1, 1994. He served as Group President,
ServiceMaster Consumer Services, from November 1992 to July 1994.
He had been Vice President, Treasurer and Chief Financial Officer
from November 1989 to October 1992. He is a non-director member
of the Consumer Services and International and New Business
Development Committee.
Executive Officers of ServiceMaster
The following table shows: (i) the names and ages (as of
March 20, 1995) 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, except for Jerry D. Mooney,
who has served as an officer of the Registrant's subsidiaries,
ServiceMaster Diversified Health Services, Inc. and ServiceMaster
Diversified Health Services L.P. since August 31, 1993 and as an
executive officer of the Registrant since March 1995. There are
no arrangements or understandings between any executive officer
<PAGE>
and any other person pursuant to which the officer was or is to
be selected as an officer.
<PAGE>
<TABLE>
<CAPTION>
First
Became
Name Age Present Position An
Officer
------------ ---- ------------------ -----
<S> <C> <C> <C>
C. William Pollard 56 Chairman and Director 1977
Carlos H. Cantu 61 President and Chief Executive 1986
Officer and Director
Charles W. Stair 54 Vice Chairman and Director 1973
Robert D. Erickson 51 President and Chief Operating Officer, 1976
International and New
Business Development,
and a Senior Management Adviser
Brian D. Oxley 44 President and Chief Operating Officer, 1983
Management Services, and a
Senior Management Adviser
Jerry D. Mooney 41 President and Chief Executive Officer, 1993
Diversified Health Services
Robert F. Keith 38 President, Chief Operating Officer, 1986
Consumer Services, and
a Senior Management Adviser
Vernon T. Squires 60 Senior Vice President and 1987
General Counsel
Ernest J. Mrozek 41 Senior Vice President and 1987
Chief Financial Officer
Eric R. Zarnikow 35 Vice President and Treasurer 1994
Deborah A. O'Connor 32 Vice President and Controller 1993
</TABLE>
<PAGE>
Messrs. Pollard, Stair and Cantu are also Directors of
ServiceMaster Management Corporation. Messrs. Erickson, Oxley
and Keith are Senior Management Advisers. See pages 20-23 for
biographical information with respect to these executive
officers.
Jerry D. Mooney, age 41, is the President and Chief
Executive Officer of ServiceMaster Diversified Health Services,
Inc. and ServiceMaster Diversified Health Services L.P. He has
held these positions since the acquisition of these companies by
the Registrant in August 1993. He is a non-director member of
the Management Services and Diversified Health Services Committee
of the Board of Directors. He is also a director, chairman of
the audit committee and member of the compensation committee of
Concord EFS, Inc., a company headquartered in Memphis, Tennessee,
involved primarily in the electronic processing of debit and
credit card transactions.
Vernon T. Squires, age 60, 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 and a member of
the Advisory Board to The Private Bank, Wilmette, Illinois.
Ernest J. Mrozek, age 41, was elected Senior Vice President
and Chief Financial Officer effective January 1, 1995. He served
as Vice President and Chief Financial Officer from May 1, 1994 to
December 9, 1994, as Vice President, Treasurer and Chief
Financial Officer from November 1, 1992 to April 30, 1994, 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 & Co. from 1981 to December
1987.
Eric R. Zarnikow, age 35, was elected Vice President and
Treasurer effective May 1, 1994. From August 1991 to April 1994,
he served as Vice President and Treasurer of Gaylord Container
Corporation. He was Treasurer of Gaylord Container Corporation
from June 1987 to July 1991.
Deborah A. O'Connor, age 32, was elected Vice President and
Controller effective January 1, 1993. From July 1991 to December
1992, she was Manager of Financial Projects. She previously had
practiced public accounting with Arthur Andersen and Co. since
1984. She is a member of the Profit Sharing, Savings and
Retirement Plan Administrative Committee.
<PAGE>
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 1994, 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 1994, its
officers and directors complied with applicable filing
requirements except that two reports, covering an aggregate of
two transactions, were filed late by Messrs. Wessner and Stair.
<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 1994. Each of the
listed persons was holding the office indicated in the table on
the last day of December 1994.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
-----------------------------------------------------
ANNUAL COMPENSATION (A) Awards Payouts
----------------------------------- ---------------------------- -----------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Salary Bonus Compensation Awards Options/SARs Payouts Compensation
Principal Position Year ($) ($) ($) ($) (#) (B) ($) ($)
------------------ ---- ------- ------- -------- ----------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Carlos H. Cantu 1994 $350,000 $612,500 - - 75,000 - -
President and 1993 $300,000 $525,000 - - 0 - -
Chief Executive Officer 1992 $300,000 $495,000 - - 0 - -
Robert D. Erickson 1994 $245,000 $294,000 - - 25,000 - -
President, International 1993 $230,000 $260,000 - - 30,000 - -
Services 1992 $230,000 $ 68,770 - - 0 - -
Jerry D. Mooney (C) 1994 $182,000 $288,000 - - - - -
President, Diversified 1993 - - - - - - -
Health Services 1992 - - - - - - -
Robert F. Keith 1994 $200,000 $225,000 - - 35,000 - -
President, 1993 $180,000 $200,000 - - 30,000 - -
Consumer Services 1992 $140,000 $168,000 - - 0 - -
Vernon T. Squires 1994 $190,000 $228,000 - - 25,000 - -
Sr. Vice President and 1993 $165,000 $198,000 - - 30,000 - -
General Counsel 1992 $160,000 $192,000 - - 0 - -<PAGE>
Notes:
</TABLE>
<PAGE>
(A) The table does not include the cash distributions
made to ServiceMaster Management Corporation, as the
managing general partner of the Registrant and The
ServiceMaster Company, and the redistribution of such
amounts to the stockholders of ServiceMaster Management
Corporation (who include the persons listed in the above
table). See Note D, page 12. The foregoing amounts
represent the stockholders' share of profits in return for
their equity risk.
(B) With respect to the year 1994, see Note (A) to the
Option/SAR Grants Table. The figures shown for earlier
years are the number of the underlying shares for grants of
options under the ServiceMaster 10 Plus Option Plan.
(C) Mr. Mooney was not employed within the
Registrant's organization in 1992 and for most of 1993 and
he was not an executive officer of the Registrant during
either of these two years.
<PAGE>
The following table summarizes the number and terms of the stock options
(if any) granted during the year 1994 to the named executive officers.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN 1994
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
------------------------------------------------- -------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of
Securities % of Total
Underlying Options/SARs Exercise
Options/ Granted to or Base Expira-
SARs Granted Employees Price (%/ tion
Name (#) (A)(B) in 1994 Sh) (C) Date 5% ($) 10%($)
---- ----------- ------- ------- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Carlos H. Cantu,
Chief Executive
Officer 75,000 7.2% $27.25 09-30-03 $1,102,053 $2,965,415
Robert D. Erickson 25,000 2.4% $27.25 09-30-03 $367,351 $988,472
Jerry D. Mooney 0 0.0% - - - -
Robert F. Keith 35,000 3.3% $27.25 09-30-03 $514,291 $1,383,860
Vernon T. Squires 25,000 2.4% $27.25 09-30-03 $367,351 $988,472<PAGE>
Notes:
</TABLE>
<PAGE>
(A) ServiceMaster 10 Plus Option grants were approved
for each of the named executive officers in October 1993.
In each case, 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 were
not shown in the Options/SAR Grants Table in the
Registrant's Form 10-K for 1993 but are reported in the
above table.
(B) ServiceMaster 10 Plus Option grants were approved
for each of the named executive officers in December 1994.
In each case, acceptance of the option and payment of the
price for the option itself ($1.50 per option share) was not
required until early 1995. These grants will be shown in
the Option/SAR Grants Table in ServiceMaster's Form 10-K for
1995.
(C) The fair market value of the Registrant's shares
at the time when the grants of the options were made
(October 1993) was $25.75. Each grantee was required to
pay $1.50 per option share as a condition to receiving the
option (which sum was, in each case, paid in February 1994).
Column (d) combines the exercise price and the option price.
(D) C. William Pollard was a named executive officer
in the Option/SAR Grant Table in the Registrant's Form 10-K
for 1993. He was granted an option in 1993 which was not
accepted until early 1994. In accordance with Note (B) to
the 1993 Option/SAR Table, the following details for such
option are set forth in this Form 10-K for 1994. Number of
option shares granted: 75,000; percent of total options
granted in 1993: 7.16%; exercise or base price:
$27.25/option share; expiration date: 9-30-2003; potential
realizable value at 5% and 10% assumed annual rates of stock
price appreciation for the option term: $1,102,053 and
$2,965,415.
<PAGE>
The following table summarizes the exercises of stock options during the
year 1994 by the named executive officers and the number of, and the spread
on, unexercised options held by such officers at December 31, 1994.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN 1994 AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs at
at FY-End(#) FY-End($)(A)
Shares ----------- ---------------
Acquired Value
on Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
---- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Carlos H. Cantu, 0 0 75,000/0 0/0
Chief Executive
Officer
Robert D. Erickson 0 0 55,000/0 $181,250/0
Jerry D. Mooney 0 0 0/0 0/0
Robert F. Keith 0 0 69,500/0 $246,937/0
Vernon T. Squires 0 0 55,000/0 $181,250/0
</TABLE>
(A) The Options shown in the Options/SAR Grants Table on the preceding page
were not in-the-money at December 31, 1994. Accordingly, such options are not
included in column (e).
As shown in the following table, no long-term incentive awards were
granted to any of the named executive officers during the year 1994.
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLANS -- AWARDS IN 1994
Long-Term Incentive Plan Awards in Last Fiscal Year
Estimated Future Payouts
Under Non-Stock
Price Based Plans
----------------------------
(a) (b) (c) (d) (e) (f)
Number of Performance or
Shares, Units Other Period
or Other Rights Until Matura- Threshold Target Maximum
Name (#) tion or Payout ($ or #) ($ or #) ($ or #)
---- --------------- -------------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Carlos H. Cantu, 0
Chief Executive
Officer
Robert D. Erickson 0
Jerry D. Mooney 0
Robert F. Keith 0
Vernon T. Squires 0
</TABLE>
<PAGE>
Compensation of Directors
During the year 1994, directors of ServiceMaster Management
Corporation who were not officers received $3,000 for each
meeting of the Board of Directors and each meeting of the
Executive Committee which they attended. In addition, directors
who were not officers and who were not members of the Executive
Committee received an annual stipend of $5,000; and directors who
were not officers and who were members of the Executive Committee
received an annual stipend of $10,000. Directors who were
members of the Audit Committee (which committee does not include
any officers) received an annual stipend of $8,000, except that
the annual stipend for the Chairman of the Audit Committee was
$10,000. In 1995, the annual stipend for outside directors will
be $12,000.
During the year 1994, a director of a subsidiary company who
was not an officer of that company or any ServiceMaster company
which is a parent of the subsidiary received $3,000 for each
meeting of the subsidiary board of directors which he or she
attended. If such a person was not a director of ServiceMaster
Management Corporation, he or she also received an annual stipend
of $5,000. The practice of having independent directors on the
board of directors of subsidiary entities was discontinued
effective January 1, 1995 and no compensation will be paid
thereafter in respect of directorships on such boards.
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.
In July 1994, the Board of Directors adopted the
ServiceMaster 1994 Non-Employee Directors Share Option Plan (the
"Directors Option Plan") and authorized a total of 250,000 shares
of the Registrant to be issued pursuant to the exercise of
options granted under such plan. The Directors Option Plan
provides that options to purchase shares of the Registrant may be
granted from time to time by the Board of Directors to those
members of the Board who are not employees of any ServiceMaster
entity. The exercise price of such options is the fair market
value of the shares at the time of the grant. The Directors
<PAGE>
Option Plan contemplates that the options themselves will be
purchased at a price which reflects the value of the option at
the time of the grant. Thereafter, a total of nine options for
5,000 shares each were granted at a price of $1.50 per option
share.
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 weeks' notice to the other party. If
an executive officer's employment terminates, he or she 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.
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
<PAGE>
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 or her 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 Board of Directors of
ServiceMaster Management Corporation (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
ServiceMaster 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.
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
<PAGE>
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 1994 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.
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 17, 1995. 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 1994, in
its capacity as the Compensation Committee for the year 1994,
hereby submits its report to the Board of Directors for the year
1994.
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 or her 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
<PAGE>
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 1994 (including the Chief
Executive Officer) was in the amount recommended by the
Compensation Committee in December 1993 and approved by the Board
of Directors in the same month. This base compensation was
further reviewed at the end of 1994. 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 1994 and the contribution of such persons to
the Company's performance.
Chief Executive Officer. The base compensation of Carlos H.
Cantu, President and Chief Executive Officer, for the year 1995
was set at $380,000 at the commencement of the year. This amount
reflects an increase of $30,000 in his base compensation for the
year 1994. This increase in the base compensation for the Chief
Executive Officer for the year 1995 was warranted in the light of
both the Company's and his performance in the year 1994.
(Reference is made to the Management Discussion and Analysis
section of the Company's 1994 Annual Report to Shareholders for a
discussion of the Company's performance in 1994 and a summary of
the Company's growth in 1994 relative to 1993). The Committee
also approved a modification of the formula in the Company's
Incentive Reward Compensation Plan so that, with respect to the
year 1994, the Chief Executive Officer was awarded incentive
compensation in the amount of 175% of his 1994 base compensation.
The Compensation Committee notes that the Chief Executive
Officer was granted an option for 75,000 shares in December 1994,
subject to acceptance by him and payment of the price for the
<PAGE>
option itself of $1.50 per option share. This grant was accepted
and the required payment was made in March 1995.
No member of the Compensation Committee is a former or
current officer or employee of the Company or any of its
subsidiaries.
Respectfully submitted,
Dated: March 17, 1995
Henry O. Boswell Lord Brian Griffiths
Herbert P. Hess Gunther H. Knoedler
Vincent C. Nelson Phillip B. Rooney
Burton E. Sorensen David K. Wessner
(Compensation Committee)
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 Dow Jones Consumer and Household Services
Index.
See Graphics Appendix
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth as of March 20, 1995, the
beneficial ownership of the Partnership Shares with respect to
ServiceMaster's directors and senior management advisers, those
executive officers named in the Summary Compensation Table (page
26), and the Registrant's directors and officers as a group. The
Registrant does not know of any person who is the beneficial
owner of more than five percent of its shares.
<PAGE>
<TABLE>
<CAPTION>
Number of Partnership Shares Beneficially
Owned by Management on March 20, 1995 (1)
---------------------------------------------
(1) (2) (3) (4) (5)
Sole Voting
and
Investment Percent
Name Power Other Total Ownership
------- ---------- ----- ----- ---------
<S> <C> <C> <C> <C>
Henry O. Boswell (2)(4) 23,950 18,000 41,950 0.054%
Carlos H. Cantu (4)(5)(12) 588,809 396,608 985,417 1.255%
Robert D. Erickson (4)(5)(6)(7) 389,531 46,750 436,281 0.556%
Brian Griffiths 0 0 0 0.000%
Sidney E. Harris 0 0 0 0.000%
Herbert P. Hess (4)(8) 72,500 9,000 81,500 0.104%
Donald K. Karnes (4) 577,336 0 577,336 0.736%
Robert F. Keith (4)(5) 193,853 41,902 235,755 0.300%
Gunther H. Knoedler (4)(6) 24,958 0 24,958 0.032%
James D. McLennan (4) 11,320 0 11,320 0.014%
Jerry D. Mooney (4)(16) 53,010 200,506 253,516 0.323%
Vincent C. Nelson (4)(8)(9)(10) 18,717 181,828 200,545 0.256%
Kay A. Orr (4) 6,225 0 6,225 0.008%
Brian D. Oxley (3)(4)(5) 201,628 86,190 287,818 0.367%
Dallen W. Peterson 32,442 0 32,442 0.041%
C. William Pollard (4)(5)(11) 701,049 68,659 769,708 0.978%
Philip B. Rooney (4) 31,485 0 31,485 0.041%
Burton E. Sorensen (4) 8,375 0 8,375 0.016%
Vernon T. Squires (4)(5) 140,696 41,902 182,598 0.233%
Charles W. Stair (5)(6)(13) 342,817 43,834 386,651 0.493%
David K. Wessner (3)(4)(8)(14)(15)28,850 1,222,717 1,251,567 1.596%
All directors and officers
as a group (158 persons) (17) 8,936,164 2,869,098 11,805,262 15.184%<PAGE>
Notes:
</TABLE>
<PAGE>
(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) are owned by spouse as to which
beneficial ownership is disclaimed.
(3) Shares in column (3) include shares held by spouse and/or
other family members.
(4) Shares in column (2) include shares which may be acquired
within sixty days under options granted under the
ServiceMaster Share Option Plan, under the ServiceMaster 10-
Plus Option Plan and/or the Directors Option Plan.
(5) Shares in column (3) include shares held in one or more
investment partnerships in which the listed person is a
partner with shared voting power and investment power.
(6) Shares in column (2) include shares held in trust for the
benefit of 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) Shares in column (3) include shares held in trust for
benefit of self and/or family members.
(9) Shares in column (2) include 13,717 shares in trust for the
benefit of family members as to which beneficial ownership
is disclaimed. Shares in column (3) include 4,365 shares
held in trust for the benefit of family members as to which
beneficial ownership is disclaimed.
(10) Shares in column (3) include 51,725 shares owned by a
charitable trust of which Vincent C. Nelson is a trustee.
Mr. Nelson disclaims beneficial ownership of such shares.
(11) Shares in column (3) include 18,000 shares owned by a
charitable foundation of which C. William Pollard is a
director. Mr. Pollard disclaims beneficial ownership of
such shares. Shares in column (3) also include 10,201
shares in trust for the benefit of family members.
(12) Shares in column (3) include 3,500 shares owned by a
charitable foundation of which Carlos H. Cantu is an
<PAGE>
officer. Mr. Cantu disclaims beneficial ownership of such
shares.
(13) Shares in column (3) include 20,700 shares owned by a
charitable foundation of which Charles W. Stair is a
director. Mr. Stair disclaims beneficial ownership of such
shares.
(14) Shares in column (3) include 450,000 shares owned by a
charitable foundation of which David K. Wessner is a
director. Mr. Wessner disclaims beneficial ownership of
such shares.
(15) Shares in column (3) include 206,110 shares held by an
investment company of which David K. Wessner is a
shareholder and one of four directors.
(16) Shares in column (3) are owned by a corporation in which Mr.
Mooney owns no stock but of which he is the president. Mr.
Mooney disclaims beneficial ownership of such shares.
(17) Includes 2,640,395 shares which certain officers of
ServiceMaster, through the exercise of their respective
rights, may acquire within 60 days under share purchase
agreements, options granted under the ServiceMaster Share
Option Plan and options granted under the ServiceMaster 10-
Plus Option Plan. This figure includes shares purchasable
by the persons identified in Item 11 as follows: Mr. Cantu
- 150,000 shares; Mr. Erickson - 95,000 shares; Mr. Mooney -
50,000 shares; Mr. Keith - 119,500 shares; Mr. Squires -
70,000 shares; and all executive officers as a group -
792,000 shares.
Item 13. Certain Relationships and Related Miscellaneous
Transactions
ServiceMaster Limited Partnership and The ServiceMaster
Company made distributions to ServiceMaster Management
Corporation (the managing general partner of these two
partnerships) with respect to the year 1994 based on the managing
general partner's 1.99% carried interest in the profits and
losses of these two partnerships. (See Note D, page 17).
Indebtedness of Management
The following executive officers were indebted to The
ServiceMaster Company in excess of $60,000 at some point during
the year 1994. Their indebtedness was incurred by reason of tax
loans made in connection with one or more share grants ("Share
Grants") made to the person before 1994 under the ServiceMaster
<PAGE>
Share Grant Award Plan and/or by reason of a full recourse loan
made to assist the person in connection with a portion of his
acquisition of an equity interest in certain subsidiaries of the
Registrant. The figure set opposite the person's name below is
the largest amount of indebtedness outstanding during the year
1994; the figure in parentheses is the amount of indebtedness
outstanding on March 20, 1995: Charles W. Stair - $500,000
($500,000); Brian D. Oxley - $523,925 ($306,342); Jerry D. Mooney
- $363,000 ($363,000); Robert F. Keith - $118,656 ($97,409);
Ernest J. Mrozek - $106,685 ($90,399); and Vernon T. Squires -
$123,895 ($57,945). Interest on each of the foregoing loans is
charged to the borrower at a rate between 6% and 10% per annum
and is charged quarterly.
<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
1994, on pages 17 - 34 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, 1994, 1993 and 1992
Consolidated Statements of Financial Position as
of December 31, 1994 and 1993
Consolidated Statements of Cash Flows for the
three years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Shareholders' Equity
for the three years ended December 31, 1994, 1993
and 1992
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 36.
Included in Part IV of this Report:
Schedule VIII--Valuation and Qualifying Accounts
Report of Independent Public Accountants on
Schedules
Exhibit 11 -- Exhibit Regarding Detail of Income
Per Share Computation
<PAGE>
Exhibit 23 -- Consent of Independent Public
Accountants
Other schedules are omitted because of the absence of
conditions under which they are required or because the required
information is given in the financial statements or notes
thereto.
Separate financial statements and supplemental schedules of
the Registrant 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.
3. Exhibits
The exhibits filed with this report are listed on pages
94-100 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.
<TABLE>
<CAPTION>
Exhibit Contract or Plan
<C> <S>
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.
10.15 ServiceMaster 10-Plus Plan. See also Item
10.20.
<PAGE>
10.17 Directors Deferred Fees Plan (ServiceMaster
Shares Alternative).
10.20 ServiceMaster 10-Plus Plan as amended
September 3, 1991.
10.22 ServiceMaster 1994 Non-Employee Directors
Share Option Plan.
</TABLE>
(b) Reports on Form 8-K
None in the last quarter of the period covered by this
Report on Form 10-K.
<PAGE>
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"). (These two
partnerships are together referred to as the "Principal
Partnerships".) 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 (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 Public Partnership.
Possible Legislative Changes. Congress is considering the
possible enactment of proposals to revise in certain respects the
<PAGE>
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.
Tax Status of the Principal 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 of the Public Partnership will be available only if
the Public Partnership is not classified as an association
taxable as a corporation.
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. The
Principal Partnerships believe that, since that date, nothing has
occurred which changes the conclusion that each of these entities
is to be classified as a partnership for Federal income tax
purposes. This conclusion is based upon the following factors,
among other things:
(a) ServiceMaster Management Corporation has acted as
a general partner in each of the Principal Partnerships and
has maintained and will continue to maintain a net worth, on
<PAGE>
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;
(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 Managing General Partner in each material item of
gain, loss, deduction or credit of each of the Principal
Partnerships has always 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 partnerships 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 always held their respective interests in
each of the Principal Partnerships for their own accounts
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.
<PAGE>
The Managing General Partner 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. At the same time, however, such an
adverse determination is not expected to occur.
Publicly Traded Partnerships Treated as Corporations.
Section 7704 of the Code provides that 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, Section 7704 also provides that a
partnership whose interests were publicly traded on December 17,
1987 will not be treated as a corporation under Section 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
continue 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 all tax years beginning before
1998.
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.
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
<PAGE>
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 an 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.
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, 1994,
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
<PAGE>
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 T, page 16). As stated in Note T, 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.
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.
Since January 1, 1993 the SGP Trust has been allocated that
amount of the taxable income (determined without regard to
section 743(b) adjustments) 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
Public Partnership to its limited partners will always equal or
exceed the taxable income of the Public Partnership which is
directly allocated to its limited partners. With respect to the
additional taxable income which is allocated to the SGP Trust,
the Principal Subsidiary Partnership makes cash distributions to
the SGP Trust from time to time in the amounts required by the
SGP Trust to discharge its federal and state income tax
liabilities. The SGP Trust does 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 Public Partnership. The distribution of funds to the SGP
Trust by the Principal Subsidiary Partnership is not be a taxable
event to either party. The SGP Trust includes in its taxable
income its allocable share of the income of the Principal
Subsidiary Partnership.
<PAGE>
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 Public Partnership will not recognize any
taxable income on account of the establishment of, and the
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."
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 50). 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."
Limitation on Losses. No investor should invest in the
Public Partnership with the expectation that an investment in the
<PAGE>
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.
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
<PAGE>
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.
Federal Income Tax Allocations
General. In general, items of income, gain, loss, deduction
and credit for the Principal Partnerships 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
<PAGE>
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
unexpected 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.
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
<PAGE>
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
principles 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.
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 T, page [16]. 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
<PAGE>
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 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).
The IRS has issued final 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 final regulations set forth
three non-exclusive allocation methods which are generally
considered to be reasonable. The Principal Subsidiary
Partnership makes every effort to comply with these regulations.
As discussed below, the Code Section 754 election permits an
adjustment in the basis in the assets of the Principal Subsidiary
Partnership 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.
<PAGE>
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.
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
Partnerships 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
<PAGE>
second half of such month if he or she holds such share for the
remainder of such month.
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.
Until the enactment of Code section 197 in 1993, the general
rule was that 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.
In 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.
The Principal Partnerships elected 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.
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.
<PAGE>
For shareholders who purchased shares in the Public
Partnership after August 18, 1993, 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.
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."
Sale or Other Disposition of Shares
General. In the event of a sale or disposition of
Partnership Shares, a shareholder will recognize gain or loss, as
the case may be, on the disposition in an amount equal to the
difference between the amount realized by the shareholder on the
disposition 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 Partnership Shares will be included in the amount
realized on the disposition.
Generally, under current law, gain recognized by a
shareholder 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
<PAGE>
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'
indebtedness 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.
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
<PAGE>
Partnerships' taxable income and loss which shall be allocated
between the transferor and transferee of such shares.
Information Return Filing Requirements. 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 case 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
identifying 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.
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 page 43, the
existence of the SGP Trust means that the taxable income of
ServiceMaster Limited Partnership as allocated to each of its
<PAGE>
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 August 10, 1993 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.
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
<PAGE>
the Principal Partnerships' property must be reduced to equal his
or her basis in the Partnership Shares, resulting in adverse
consequences 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.
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.
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
Partnership 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.
<PAGE>
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.
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.
<PAGE>
Minimum Tax on Tax Preference Items
The Code provides for an alternative minimum tax on the
excess of alternative minimum taxable income over an exemption
amount. 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.
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
shareholder holds through Partnership Shares. Thus, the amount of
a shareholder's net passive income, if any, from the Public
Partnership 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.
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
<PAGE>
or retirement plans) are subject to tax on certain income derived
from a business regularly carried on by the entity that is
unrelated 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 50 and 51 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 copany (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.
Administrative Matters
Information to Shareholders and Assignees. In addition to
the required Schedule K1 to be furnished by the Public
Partnership 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
<PAGE>
"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.
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
<PAGE>
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 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
<PAGE>
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
Partnerships 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 Ccorporation 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
constitute 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.
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
<PAGE>
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.
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
Partnership 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
<PAGE>
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. FIRPTA 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.
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
<PAGE>
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.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VIII
SERVICEMASTER LIMITED PARTNERSHIP
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Deductions--
Balance at Charged to Reserves of Write-offs of
Beginning of Costs and Acquired Uncollectible Balance at
Classification Period Expenses Companies Accounts End of Period
------------------------------ ------------ --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1994:
Allowance for doubtful accounts--
Accounts receivable (current) $17,563 15,428 531 15,912 $17,610
-------- ------- ---- ------- -------
Notes receivable (current) $1,875 685 -- 56 $ 2,504
------- ------ ---- ------- -------
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 receivable (current) $ 1,825 1,131 --- 828 $ 2,128
------- ------ ------ ------ -------
</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 24, 1995. Our audit was made for the
purpose of forming an opinion on those statements taken as a
whole. The schedules included in Part IV in the Form 10-K are
the responsibility of the Company's management and are presented
for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial
statements. These supporting schedules have been subjected to
the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Chicago, Illinois
January 24, 1995
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SERVICEMASTER LIMITED PARTNERSHIP
Registrant
By: ServiceMaster Management
Corporation
(General Partner)
Date: March 17, 1995 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.
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ C. WILLIAM POLLARD Chairman and Director March 17, 1995
C. William Pollard
/s/ CARLOS H. CANTU President and Chief Executive March 17, 1995
Carlos H. Cantu Officer and Director
/s/ CHARLES W. STAIR Vice Chairman and Director March 17, 1995
Charles W. Stair
/s/ ERNEST J. MROZEK Senior Vice President and March 17, 1995
Ernest J. Mrozek Chief Financial Officer
(Principal Financial Officer)
/s/ HENRY O. BOSWELL Director March 17, 1995
Henry O. Boswell
/s/ BRIAN GRIFFITHS Director March 17, 1995
Brian Griffiths
/s/ SIDNEY E. HARRIS Director March 17, 1995
Sidney E. Harris
/s/ HERBERT P. HESS Director March 17, 1995
Herbert P. Hess
<PAGE>
/s/ GUNTHER H. KNOEDLER Director March 17, 1995
Gunther H. Knoedler
/s/ JAMES D. McLENNAN Director March 17, 1995
James D. McLennan
/s/ VINCENT C. NELSON Director March 17, 1995
Vincent C. Nelson
/s/ KAY A. ORR Director March 17, 1995
Kay A. Orr
/s/ PHILIP B. ROONEY Director March 17, 1995
Philip B. Rooney
/s/ BURTON E. SORENSEN Director March 17, 1995
Burton E. Sorensen
/s/ DAVID K. WESSNER Director March 17, 1995
David K. Wessner
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS INDEX
Exhibit No. Description of Exhibit
----------- -------------------------------------------------
<S> <C>
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
<PAGE>
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").
<PAGE>
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
<PAGE>
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.
10.22 ServiceMaster 1994 Non-Employee Director Share
Option Plan is incorporated by reference to
Exhibit to the ServiceMaster Limited Partnership
Registration Statement on Form S-8 (No. 33- )
filed with the Securities and Exchange Commission
on October 5, 1994 (the "Directors Share Plan
Registration Statement").
<PAGE>
10.23 Form of Option Agreement for the ServiceMaster
1994 Non-Employee Director Share Option Plan is
incorporated by reference to Exhibit 4.3 to the
Directors Share Plan Registration Statement.
11 Exhibit regarding detail of income per share
computation for each of the three years ended
December 31, 1994, 1993 and 1992.
13 The ServiceMaster Annual Report to Shareholders
for the year ended December 31, 1994 (the "1994
Annual Report"). The parts of the 1994 Annual
Report which are expressly incorporated into this
report by reference shall be deemed filed with
this report. All other parts of the 1994 Annual
Report are furnished for the information of the
Commission and are not filed with this report.
21 Subsidiaries of Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule (EDGAR filing only)
99.1 Amended and Restated Certificate of Incorporation of
ServiceMaster Management Corporation is incorporated by
reference to Exhibit 28.1 to the 1986 10-K.
99.2 Amended and Restated Bylaws of ServiceMaster Management
Corporation is incorporated by reference to Exhibit
28.2 to the 1986 10-K.
99.3 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.
99.4 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.
99.5 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").
<PAGE>
99.6 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.
99.7 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.
99.8 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.
99.9 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.
99.10 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.
99.11 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.
99.12 Agreement of Trust (T 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.
99.13 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.
<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 9. 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 10 for a further explanation of the
diagram.
A Performance Graph is set forth on page 33 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 Dow Jones
Consumer and Household Services Index over the five year period
from January 1, 1990 to December 31, 1994. The chart shows that
ServiceMaster outperformed both indices in 1990, 1991, 1992, 1993
and 1994 in wide margins over the last four years.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
SERVICEMASTER LIMITED PARTNERSHIP
EXHIBIT REGARDING DETAIL OF INCOME PER SHARE COMPUTATION
(In thousands, except per share data)
Years Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Number of shares used in computing
income per share and equivalent
shares--Shares outstanding on
weighted average basis. . . . . . . 75,748 75,235 74,023
Equivalent shares--
Options and subscriptions outstanding 1,690 1,611 1,665
. . . . . . . . . . . . . . . . . . ----- ----- -----
Total weighted average and equivalent shares 77,438 76,846 75,688
. . . . . . . . . . . . . . . . . . ====== ====== ======
Primary earnings per share . . . . . . . $1.81 $1.90 $1.61
. . . . . . . . . . . . . . . . . . ===== ===== ======
Net income . . . . . . . . . . . . . . . $139,883 $145,947 $122,065
Interest on convertible debentures . . . 2,078 2,539 2,374
. . . . . . . . . . . . . . . . . . ----- ----- -----
Adjusted net income. . . . . . . . . . . $141,961 $148,486 $124,439
. . . . . . . . . . . . . . . . . . ======== ======== ========
Weighted average number of common
shares outstanding. . . . . . . . . 77,656 77,466 75,747
Other potentially dilutive securities 1,448 2,037 2,220
. . . . . . . . . . . . . . . . . . ------ ------ ------
Total weighted average number
of shares . . . . . . . . . . . . . 79,104 79,503 77,967
. . . . . . . . . . . . . . . . . . ====== ======= =======
Fully diluted earnings per share . . . . $1.79 $1.87 $1.60
. . . . . . . . . . . . . . . . . . ===== ======= =======
</TABLE>
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(All share and per share data reflect the three-for-two share
split in 1993)
1994 Compared to 1993
Revenue increased 8% to approximately $3.0 billion primarily
due to internal growth and, to a lesser degree, the full year
inclusion of VHA Long Term Care, which was acquired in August,
1993. Operating margins improved to 7.2% from 6.3% due to
effective spending controls and ongoing productivity improvements
in the Consumer Services businesses. As shown below, net income
totalled $139.9 million, a 21% increase over the comparable prior
year amount. Earnings per share totalled $1.81, a 20% increase on
that same basis.
<TABLE>
For Years Ended December 31,
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Net income before
unusual gain
on issuance
of subsidiary shares $139,883 $115,747
Per limited
partners' share $ 1.81 $ 1.51
Gain on issuance
of subsidiary shares --- 30,200
--------- --------
Net income $139,883 $145,947
========= ========
Per limited
partners' share $1.81 $1.90
========= ========
</TABLE>
The Consumer Services business segment achieved an 11%
increase in revenues and net income growth of 45%, with strong
performances achieved by all units. TruGreen-ChemLawn operations
had strong growth in revenues and profits resulting from a
significant increase in customer base from an excellent response
to its residential marketing program, ongoing cost controls and
productivity improvements. Terminix operations continued to
improve margins, enabling them to achieve solid profit growth
despite unfavorable late winter weather which adversely affected
termite service revenues industry-wide. Merry Maids operations
continued their accelerated rate of growth as a result of new
license sales and increased fees from existing franchises.
American Home Shield achieved very strong improvements in
revenues and operating income, with a strong rebound in new
contract sales in California and increases in other major
geographical areas, as well as continued improvement in the
percentage of contracts renewed. The ServiceMaster
Residential/Commercial operations achieved strong increases in
revenues and profits primarily due to increased demand for heavy
cleaning and disaster restoration services.
Management Services revenue increased 3%, but net income
decreased 3% due to reorganization-related costs. Health care
operations achieved growth in both revenues and profits, despite
industry consolidation and uncertainties regarding reform
legislation. Profits were reduced in the business and industry
unit as a result of customer downsizing. Revenues in the
education market grew at a solid rate, but profits were below
prior year levels due to reorganization costs and profit
shortfalls in the food service business, including a significant
loss at an account started late in 1993 which is being
renegotiated on more favorable terms. In February, 1995, a joint
venture was formed with DAKA International, Inc., which
effectively acquired 80% of the education food service business
for cash, at a modest gain to ServiceMaster.
During the second half of 1994, Management Services
reorganized its operations from a decentralized, geographic-based
structure to a more centralized, market-oriented organization.
These actions were taken to enhance customer focus and reduce
costs. Relocation, severance, and other costs associated with the
implementation of this plan totalled approximately $2.0 million.
Revenues of New Business Development and Parent increased
115% to $120.7 million
17
<PAGE>
and operating income almost doubled to
$23.4 million, reflecting the full year inclusion of VHA Long
Term Care (combined with ServiceMaster Home Health Care in 1994
to form ServiceMaster Diversified Health Services). ServiceMaster
Diversified Health Services continued to achieve strong growth in
revenues and profits due to increases in the number of facilities
managed and strong sales growth in ancillary products and
services. International operations achieved solid growth in
royalty fees from existing licensees. Income derived from new
sales of license rights was well below prior year levels as a
result of a strategic decision to participate in certain markets
via direct operations, instead of through licensing arrangements.
Three European pest control businesses were acquired late in the
year and made a modest contribution to net income after
acquisition costs.
Consolidated cost of services rendered and products sold
increased 7.2% over 1993, but declined as a percent of revenue
from 79.5% in 1993 to 78.7% in 1994, reflecting the continued
stronger mix of the higher gross margin Consumer Services and
Diversified Health Services businesses. These businesses incur a
relatively lower level of cost of services but higher selling and
administrative costs than Management Services.
Consolidated selling and administrative expenses increased
7.1% over last year, but decreased as a percentage of revenue
from 14.2% in 1993 to 14.1% in 1994. This improvement reflects
ongoing productivity increases at TruGreen-ChemLawn and Terminix,
as well as the favorable leveraging effects of increased volume
and fixed amortization costs. Overall operating income margins
improved to 7.2% of revenue from 6.3% in 1993.
New borrowings relating to the International acquisitions
were offset by a reduction in previously existing debt from
strong operating cash flows, resulting in a slight decrease in
interest expense. The increase in minority interest ex-pense
reflects the increased ownership interest held by WMX
Technologies, Inc. (WMX) in the Consumer Services segment, as
well as the effect of the significant increase in Consumer
Services earnings. WMX had purchased an additional 5.76% interest
in Consumer Services in June, 1993, which resulted in the
recognition of a $30.2 million gain by ServiceMaster.
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 from the
prior year, which also included an unusual net gain. Excluding
these unusual items, which are summarized and explained in the
Notes to the Consolidated Financial Statements, net income
increased 23%:
<TABLE>
For Years Ended December 31,
<CAPTION>
1993 1992 % Change
---- ---- --------
<S> <C> <C> <C>
Net income
excluding
unusual items $ 115,747 $94,394 23%
Earnings per share
excluding
unusual items $ 1.51 $ 1.25 21%
</TABLE>
Net income growth exceeded the growth in earnings per share
due to the effects of shares issued in acquisitions and the
impact of share price increases on the computation of outstanding
shares.
Revenue and net income increased primarily due to another
year of very 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.
18
<PAGE>
Management Services revenues increased 7%, while net income
increased 6% over comparable prior year amounts. Strong growth in
both revenues and profits was achieved in the education market.
Growth was also achieved in health care revenues and profits,
despite market conditions and uncertainties regarding the nature
of the government's reform proposals. Revenues and profits
increased modestly in the business and industry unit.
Revenues of New Business Development and Parent increased
54% to $56.2 million and net income before unusual items grew 30%
mainly due to the acquisition in late August, 1993, of VHA Long
Term Care. International operations achieved solid growth in both
revenues and profits.
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 20% 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 $68 million of cash received from WMX 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.
The increase in minority interest expense was attributable
to increased profits and the additional minority ownership
interest in Consumer Services.
1994 Financial Position
Net cash flows from operations increased 50% to $254
million, substantially exceeding net income of $140 million,
enabling the Partnership to fund $90 million of acquisitions,
internal growth, and the repurchase of $41 million of treasury
shares with only a nominal $2 million increase in long-term debt.
Consolidated operating cash flows again significantly exceeded
accounting net income as a result of non-cash charges for
depreciation, amortization and minority interest, combined with
relatively low working capital and fixed asset requirements.
Cash and marketable securities totalled approximately $34.4
million, a slight increase from one year ago. Long-term debt
increased approximately $2 million, while the long-term debt-to-
equity ratio improved to 1.26 to 1 from 1.33 to 1 at the end of
1993. Unused commitments under existing revolving credit
facilities totalled $168 million at December 31, 1994.
Management believes that funds generated from operations and
other existing resources are adequate to satisfy the ongoing
working capital needs of the Partnership.
In August, 1994, the Partnership acquired Peter Cox PLC, a
United Kingdom-based pest control and wood preservation business,
for approximately $22 million in cash. In September, 1994, the
Partnership acquired Protekta/RIWA, a Netherlands-based group of
pest control companies, for approximately $7 million in cash. At
year end, the Partnership acquired Anticimex, a Swedish-based
pest control company, for approximately $45 million in cash.
Accounts and notes receivable increased due to general
business growth and the effect of the above acquisitions.
The increase in land and buildings resulted from general
business growth, building improvements relating to the relocation
of the Consumer Services headquarters to a larger facility, and
acquisitions. Equipment increased primarily due to acquisitions
and purchases made to service new and existing customers. The
Partnership has no material capital commitments at this time.
19
<PAGE>
Contract rights, trade names, and other intangible assets
increased primarily due to the three European pest control
acquisitions.
In February, 1994, the Partnership sold its minority
interest in Norrell Corporation for approximately $29 million in
cash. In May, 1994, the Partnership redeemed all of the preferred
shares of a Partnership subsidiary that were formerly held by the
principal shareholder of Norrell Corporation for a combination of
$14.6 million in cash and approximately 373,000 limited
partnership shares.
Payroll and other accrued liabilities each increased due to
general business growth and the effects of acquisitions. Deferred
revenues increased due to increased gross contracts written at
American Home Shield and customer prepayments relating to the
acquired pest control companies.
Long-term debt increased slightly due to $90 million of
acquisitions offset by strong operating cash flows. Proceeds from
the sale of the Norrell investment were more than offset by the
preferred share redemption described above and by increased
treasury share purchases.
Minority interest increased over prior year levels
reflecting normal accruals of minority interest expense and the
effect of the sale of small minority equity interests in the
Partnership's Management Services segment to members of senior
management of that unit. The minority interest increases were
partially offset by the previously described redemption of
preferred shares.
Total shareholders' equity increased by 6.2% to $307.3
million as a result of strong earnings, partially offset by
distributions to shareholders and share repurchases. The rate of
return on average equity for 1994 was 47%, again substantially
above industry norms. The aggregate market value of the
Partnership's outstanding shares totalled approximately $1.9
billion at December 31, 1994.
Cash distributions paid directly to shareholders totalled
$70.5 million or $.92 per share, a 3.4% increase over the prior
year. Total cash distributions, including payments made to the
shareholders' trust described below, increased 13%, to
approximately $89 million.
As discussed in previous years, ServiceMaster has
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 direct cash distributions. The
trust receives cash payments sufficient to pay its income tax
obligations made on behalf of shareholders. These additional cash
distributions totalled $16.3 million during 1994. Therefore, 1994
taxable income per Partnership share will be $.92 for Partnership
shareholders who have held their shares since ServiceMaster
adopted partnership form in 1986. Taxable income per Partnership
share will be less than $.92 per share for Partnership shares
purchased in 1987 and thereafter.
In December, 1994, the Board of Directors of the Partnership
authorized the repurchase of up to an additional $60 million of
Partnership shares in the open market or in privately negotiated
transactions. Shares repurchased under the program are available
for general partnership purposes, including employee benefit
programs and business acquisitions. As of December 31, 1994, $57
million of the total amount authorized had not yet been expended.
The following table presents net income before
interest,taxes, depreciation and amortization (EBITDA), and cash
income. EBITDA 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 EBITDA. Management believes that EBITDA
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.
20
<PAGE>
<TABLE>
(In thousands)
<CAPTION>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income $ 139,883 $ 145,947 $ 122,065 $ 85,982 $ 83,053
Depreciation 32,885 29,674 27,017 21,598 18,281
Amortization 21,323 20,282 19,322 16,581 11,595
Unusual non-cash
charges --- --- 77,635 --- 6,500
Gain on issuance of
subsidiary shares --- (30,200) (105,306) (5,841) (20,000)
-------- -------- -------- -------- --------
Cash income $ 194,091 $ 165,703 $ 140,733 $ 118,320 $ 99,429
Interest expense 31,543 32,483 32,155 31,153 33,745
Taxes 2,755 2,146 1,233 1,426 2,332
-------- -------- -------- -------- --------
EBITDA $ 228,389 $ 200,332 $ 174,121 $ 150,899 $ 135,506
======== ======== ======== ======== ========
</TABLE>
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.
EBITDA 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 Statements of Cash Flows.
21
<PAGE>
<TABLE>
ELEVEN YEAR FINANCIAL SUMMARY
(In thousands, except per share and percentage data)
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Operating Results (excluding all unusual items)
Operating revenue. . . . . . $ 2,985,207 $ 2,758,859 $ 2,488,854
Cost of services rendered
and products sold. . . . . 2,350,011 2,192,684 2,021,010
Selling and administrative
expenses . . . . . . . . . 421,170 393,131 326,477
. . . . . . . . . . . . --------- --------- ---------
Operating income (Note). . . $ 214,026 $ 173,044 $ 141,367
. . . . . . . . . . . . --------- --------- ---------
% of operating revenue. 7.2% 6.3% 5.7%
Non-operating expense
(income) . . . . . . . . . 71,388 55,151 45,740
Provision for income taxes . 2,755 2,146 1,233
. . . . . . . . . . . . --------- --------- ---------
Net income excluding
unusual items (Note) . . . $ 139,883 $ 115,747 $ 94,394
. . . . . . . . . . . . ========= ========= =========
% of operating revenue. 4.7% 4.2% 3.8%
% return on average
shareholder equity . . . . 47% 46% 57%
Per Share
Net income per share
excluding unusual
items (Note) . . . . . . . $ 1.81 $ 1.51 $ 1.25
Cash distributions
to shareholders. . . . . . $ .92 $ .89 $ .87
Share price range:
High price. . . . . . . $ 28.38 $ 31.00 $ 19.88
Low price . . . . . . . $ 21.50 $ 17.63 $ 14.63
Shares used to compute
income per share . . . . . 77,438 76,846 75,688
Financial Position (at year end)
Current assets . . . . . . . $ 331,045 $ 291,325 $ 257,542
Current liabilities. . . . . 304,395 244,552 206,755
Working capital. . . . . . . 26,650 46,773 50,787
Current ratio. . . . . . . . 1.1-1 1.2-1 1.2-1
Total assets . . . . . . . . 1,230,839 1,122,461 1,005,531
Non-current liabilities. . . 483,906 471,177 511,211
Minority interest. . . . . . 135,272 117,513 77,906
Deferred gain. . . . . . . . --- --- ---
Shareholders' equity . . . . 307,266 289,219 209,659
Shares outstanding,
net of treasury shares
and share subscriptions. . 75,976 76,415 75,670
Note: Operating results on a basis which includes prior year
unusual items (i.e. restructuring and unusual charges, gains on
issuance of subsidiary shares, and the change in accounting for
postretirement benefits) are as follows:
Operating income . . . . . . $ 214,026 $ 173,044 $ 62,432
Net income . . . . . . . . . $ 139,883 $ 145,947 $ 122,065
Net income per share . . . . $ 1.81 $ 1.90 $ 1.61
</TABLE>
22
<PAGE>
<TABLE>
1991 1990 1989 1988 1987 1986 1985 1984
<CAPTION>
---- ---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C> <C>
$2,109,941$1,825,750$1,609,267$1,531,276$1,425,316$1,122,503$1,002,213 $849,734
1,762,700 1,545,527 1,387,448 1,327,128 1,228,885 975,137 869,855 728,979
225,814 177,941 129,035 118,275 116,938 83,216 72,504 65,824
--------- --------- --------- --------- --------- --------- --------- ---------
$121,427 $102,282 $92,784 $85,873 $79,493 $64,150 $59,854 $54,931
--------- --------- --------- --------- --------- --------- --------- ---------
5.8% 5.6% 5.8% 5.6% 5.6% 5.7% 6.0% 6.5%
39,860 30,397 24,016 21,247 19,492 2,235 (1,586) (2,980
1,426 2,332 721 --- --- 29,160 28,735 27,418
--------- --------- --------- --------- --------- --------- --------- ---------
$80,141 $69,553 $68,047 $64,626 $60,001 $32,755 $32,705 $30,493
========= ========= ========= ========= ========= ========= ========= =========
3.8% 3.8% 4.2% 4.2% 4.2% 2.9% 3.3% 3.6%
74% 103% 150% 138% 162% 61% 46% 48%
$1.10 $.98 $.93 $.90 $.85 $.45 $.44 $.41
$.85 $.82 $.78 $.75 $.67 $.38 $.35 $.29
$17.38 $10.50 $10.75 $12.50 $14.13 $11.88 $11.38 $10.63
$9.75 $8.75 $9.38 $9.88 $9.75 $8.88 $7.75 $8.00
72,556 71,207 72,957 71,859 70,883 73,862 73,803 73,688
$217,517 $237,262 $219,661 $203,925 $128,804 $107,047 $82,652 $71,828
157,458 158,046 135,375 76,908 59,993 51,162 42,351 34,184
60,059 79,216 84,286 127,017 68,811 55,885 40,301 37,644
1.4-1 1.5-1 1.6-1 2.7-1 2.1-1 2.1-1 2.0-1 2.1-1
843,660 796,935 593,693 485,492 371,104 340,226 132,758 103,394
376,638 372,052 410,056 346,970 260,267 248,226 14,595 1,333
78,229 55,636 9,174 10,186 8,660 8,732 --- ---
109,354 115,195 --- --- --- --- --- ---
121,981 96,006 39,088 51,428 42,184 32,106 75,812 67,877
72,156 71,982 68,265 70,212 69,917 69,683 73,304 73,256
$121,427 $95,782 $92,784 $85,873 $79,493 $64,150 $59,854 $54,931
$85,982 $83,053 $68,047 $64,626 $60,001 $32,755 $32,705 $30,493
$1.19 $1.17 $.93 $.90 $.85 $.45 $.44 $.41
All share and per share data reflect the three-for-two
share splits in 1993, 1992, and 1985.
</TABLE>
23
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 1993 and 1992 amounts have been
reclassified to conform with the 1994 presentation.
Revenues: Revenues from termite, pest control, and lawncare
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 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.
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.
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, 1994. 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, after which the Partnership will be
taxed as a corporation. During the intervening 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.
International operations are subject to local 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, 1994 and 1993, and the related
consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December
31, 1994. 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, 1994 and 1993, and the
consolidated results of operations and cash flows for each of the
three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 24, 1995
24
<PAGE>
<TABLE>
STATEMENTS OF INCOME
(In thousands, except per share data)
<CAPTION>
Years Ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Operating Revenue $2,985,207$2,758,859$2,488,854
Operating Costs and Expenses:
Cost of services rendered
and products sold . . . . . . . .2,350,011 2,192,684 2,029,710
Selling and administrative
expenses 421,170 393,131 326,477
Restructuring charges --- --- 70,235
--------- --------- ---------
Total operating costs and
expenses 2,771,181 2,585,815 2,426,422
--------- --------- ---------
Operating Income 214,026 173,044 62,432
Non-operating Expense (Income):
Interest expense . . . . . . . . . . . 31,543 32,483 32,155
Interest income (5,389) (5,882) (4,433)
Gain on issuance of subsidiary
shares --- (30,200) (105,306)
Minority interest, including
General Partners' 2%
interest which totalled
$2,829 in 1994,
$2,979 in 1993, and $2,478
in 1992 45,234 28,550 9,218
--------- --------- ---------
Income before Income Taxes . . . . . .142,638 148,093 130,798
Provision for income taxes . . . . . . .2,755 2,146 1,233
--------- --------- ---------
Income before Cumulative
Effect of Change in
Accounting Principle . . . . . . . . .139,883 145,947 129,565
--------- --------- ---------
Cumulative effect of change
in accounting for
postretirement medical
benefits --- --- 7,500
--------- --------- ---------
Net Income $139,883 $145,947 $122,065
========= ========= =========
Net Income Per Share $1.81 $1.90 $1.61
========= ========= =========
</TABLE>
Excluding the impact of restructuring and unusual charges, the
gain on issuance of subsidiary shares, and the cumulative effect
of a change in accounting principle, 1994 net income was $139,883
($1.81 per share, the same as shown above), 1993 net income was
$115,747 ($1.51 per share), and 1992 net income was $94,394
($1.25 per share).
Based on 77,438 shares in 1994, 76,846 shares in 1993, and 75,688
shares in 1992. All share and per share data reflect the three-
for-two share splits in 1993 and 1992.
See accompanying Summary of Significant Accounting Policies and
Notes to the Consolidated Financial Statements.
25
<PAGE>
<TABLE>
STATEMENTS OF FINANCIAL POSITION
(In thousands)
<CAPTION>
As of December 31,
1994 1993
---- ----
<S> <C> <C>
Assets
Current Assets:
Cash and marketable securities,
consisting of:
Cash and cash equivalents of
$14,333 in 1994 and $17,271
in 1993
Marketable securities of $20,111
in 1994 and $15,459 in 1993. . . . $34,444 $32,730
Receivables, less allowances of
$20,114 in 1994 and $19,438
in 1993. . . . . . . . . . . . . . . 211,714 173,278
Inventories. . . . . . . . . . . . . . 36,062 37,870
Prepaid expenses and other assets. . . 48,825 47,447
. . . . . . . . . . . . . . . . . . -------- --------
Total current assets . . . . . . . . 331,045 291,325
. . . . . . . . . . . . . . . . . . -------- --------
Property, Plant, and Equipment, at Cost:
Land and buildings . . . . . . . . . . 45,043 33,088
Equipment. . . . . . . . . . . . . . . 215,144 193,364
. . . . . . . . . . . . . . . . . . -------- --------
. . . . . . . . . . . . . . . . . . 260,187 226,452
Less: Accumulated depreciation . . . . 131,739 110,677
. . . . . . . . . . . . . . . . . . -------- --------
Net property, plant, and equipment . . 128,448 115,775
. . . . . . . . . . . . . . . . . . -------- --------
Other Assets:
Contract rights, trade names,
goodwill, and other, less accumulated
amortization of $105,619 in 1994
and $84,296 in 1993. . . . . . . . . 686,309 604,613
Investment in Norrell Corporation. . . --- 26,948
Notes receivable, long-term securities,
and other assets . . . . . . . . . . 85,037 83,800
. . . . . . . . . . . . . . . . . . -------- --------
Total Assets . . . . . . . . . . . . $1,230,839 $1,122,461
. . . . . . . . . . . . . . . . . . ========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable . . . . . . . . . . . $44,272 $34,154
Accrued liabilities:
Payroll and related expenses . . . . 53,605 47,883
Insurance and related expenses . . . 34,120 32,299
Other. . . . . . . . . . . . . . . . 79,513 58,739
Deferred revenues. . . . . . . . . . . 84,658 66,865
Current portion of long-term
obligations. . . . . . . . . . . . . 8,227 4,612
. . . . . . . . . . . . . . . . . . -------- --------
Total current liabilities. . . . . . 304,395 244,552
. . . . . . . . . . . . . . . . . . -------- --------
Long-Term Debt . . . . . . . . . . . . 386,511 384,509
Other Long-Term Obligations. . . . . . 97,395 86,668
Commitments and Contingencies
(see Notes). . . . . . . . . . . . .
Minority and General Partners' Interests
including General Partners'
interest of $1,516 in 1994
and $1,576 in 1993 . . . . . . . . . 135,272 117,513
Shareholders' Equity:
Limited partners' equity -
78,055 shares issued
in 1994 and 1993 . . . . . . . . . . 364,673 328,320
Treasury shares at cost -
2,033 shares in 1994
and 1,629 shares in 1993 . . . . . . (48,497) (29,571)
Share subscriptions receivable
and restricted shares -
810 shares in 1994
and 872 shares in 1993 . . . . . . . (8,910) (9,530)
. . . . . . . . . . . . . . . . . . -------- --------
Total shareholders' equity . . . . . 307,266 289,219
. . . . . . . . . . . . . . . . . . -------- --------
Total Liabilities and
Shareholders' Equity . . . . . . . . $1,230,839 $1,122,461
. . . . . . . . . . . . . . . . . . ========= =========
</TABLE>
All share data reflects the three-for-two share split in 1993.
See accompanying Summary of Significant Accounting Policies and
Notes to the Consolidated Financial Statements.
26
<PAGE>
<TABLE>
STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<CAPTION>
Years Ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash and Cash Equivalents
at January 1 $17,271 $27,576 $32,082
Cash Flows from Operations:
Net Income 139,883 145,947 122,065
Adjustments to reconcile net income to
Net cash provided from operations:
Depreciation 32,885 29,674 27,017
Amortization 21,323 20,282 19,322
Gain on issuance of subsidiary
shares (see Notes) --- (30,200) (105,306)
Restructuring charges
(see Notes) --- --- 70,235
Cumulative effect of change
in accounting principle --- --- 7,500
Change in working capital,
net of acquisitions:
Receivables (21,957) (17,468) 11,428
Inventories and other
current assets 1,213 (13,681) 27,111
Accounts payable 5,081 32 (18,795)
Deferred revenues 10,751 20,367 (16,239)
Accrued liabilities 18,254 1,265 (876)
Minority interest and
other, net 46,430 12,885 11,358
--------- --------- ---------
Net Cash Provided from
Operations 253,863 169,103 154,820
--------- --------- ---------
Cash Flows from Investing Activities:
Business acquisitions,
net of cash acquired (90,250) (71,533) (117,262)
Property additions (32,202) (33,113) (25,684)
Investment activity in
Norrell Corporation 29,021 5,524 (1,454)
Notes receivable and
financial investments (9,043) (5,426) (10,782)
Net sales (purchases) of
securities (4,594) (774) (5,463)
Sale of equipment and
other assets 2,229 4,639 602
Payments to sellers of
acquired businesses (2,223) (2,750) (4,836)
--------- --------- ---------
Net Cash Used for Investing
Activities (107,062) (103,433) (164,879)
--------- --------- ---------
Cash Flows from Financing Activities:
Distributions to shareholders
and shareholders' trust (89,153) (79,123) (68,572)
Payment of long-term debt
and other long-term
obligations (77,405) (155,974) (32,004)
Short-term borrowings, net 75,904 111,652 118,949
Purchase of treasury shares (41,266) (11,254) (18,888)
Redemption of preferred
stock (14,650) --- ---
Distributions to holders
of minority interests (13,088) (14,258) (372)
Proceeds from employee
share option plans 5,274 5,341 5,028
Proceeds from issuance of
subsidiary shares --- 68,000 ---
Other 4,645 (359) 1,412
--------- --------- ---------
Net Cash Provided from (Used for)
Financing Activities (149,739) (75,975) 5,553
--------- --------- ---------
Cash Decrease During the Year (2,938) (10,305) (4,506)
--------- --------- ---------
Cash and Cash Equivalents
at December 31 $14,333 $17,271 $27,576
========= ========= =========
</TABLE>
See accompanying Summary of Significant Accounting Policies and
Notes to the Consolidated Financial Statements.
27
<PAGE>
<TABLE>
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
<CAPTION>
Subscriptions Limited Total
Treasury & Restricted Partners' Shareholders'
Shares Shares Equity Equity
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1991 . . . $ (20,981) $ (14,580) $ 157,542 $ 121,981
Net income 1992. . . . . . . . . 122,065 122,065
Shareholder distributions. . . . (68,572) (68,572)
Shares issued under option,
subscription, and
grant plans, and
other (1,244,418 shares) . . . 2,897 3,931 (2,660) 4,168
Treasury shares purchased
and related costs
(1,094,224 shares) . . . . . . (18,888) (18,888)
Share subscriptions paid or
terminated (10,212 shares) . . (108) 108 ---
Shares issued for acquisition
of Terminix
minority interest. . . . . . . 48,905 48,905
. . . . . . . . . . . . . . . . --------- --------- --------- ---------
Balance, December 31, 1992 . . . $ (37,080) $ (10,541) $ 257,280 $ 209,659
Net income 1993. . . . . . . . . 145,947 145,947
Shareholder distributions. . . . (79,123) (79,123)
Shares issued under option,
subscription, and
grant plans, and
other (294,594 shares) . . . . 8,995 1,011 (3,691) 6,315
Treasury shares purchased
and related costs
(536,592 shares) . . . . . . . (11,254) (11,254)
Shares issued for acquisitions . 9,768 7,907 17,675
. . . . . . . . . . . . . . . . --------- --------- --------- ---------
Balance, December 31, 1993 . . . $ (29,571) $ (9,530) $ 328,320 $ 289,219
Net income 1994. . . . . . . . . 139,883 139,883
Shareholder distributions. . . . (89,153) (89,153)
Shares issued under option,
subscription, and
grant plans, and
other (434,310 shares) . . . . 17,449 620 (15,156) 2,913
Treasury shares purchased
and related costs
(1,704,222 shares) . . . . . . (41,266) (41,266)
Shares issued for acquisitions . 4,891 779 5,670
. . . . . . . . . . . . . . . . --------- --------- --------- ---------
Balance, December 31, 1994 . . . $ (48,497) $ (8,910) $ 364,673 $ 307,266
. . . . . . . . . . . . . . . . ========= ========= ========= =========
All share and per share data reflect the three-for-two share splits
in 1993 and 1992.
See accompanying Summary of Significant Accounting Policies
and Notes to the Consolidated Financial Statements.
</TABLE>
28
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Business Unit Reporting
The business of the Partnership is conducted through the
ServiceMaster Consumer Services, ServiceMaster Management
Services, and New Business Development and Parent operating
units. The New Business Development unit includes ServiceMaster
Diversified Health Services and the International operations of
the Partnership, which have been grouped with Parent due to the
developmental status of these businesses.
Information relative to the accounting policies used by the
Partnership is described in the Summary of Significant Accounting
Policies. Operating expenses of the business units consist
primarily of direct costs and a royalty payable to Parent based
on the revenues 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. The Partnership's headquarters
facility and other investments are included in the identifiable
assets of New Business Development and Parent.
<TABLE>
<CAPTION>
New Business
Consumer Management Development
Services Services and Parent Other Consolidated
<S> <C> <C> <C> <C> <C>
1994 (In thousands)
Operating revenue. $1,041,533 $ 1,822,984 $ 120,690 $ --- $ 2,985,207
. . . . . . . . . --------- --------- --------- --------- ---------
Operating income . 124,752 65,888 23,386 --- 214,026
. . . . . . . . . --------- --------- --------- --------- ---------
Interest expense . 11,900 4,015 15,628 --- 31,543
Interest (income). (1,897) (1,938) (1,554) --- (5,389)
Minority and General
Partners'
interest . . . . 10,984 3,916 (378) 30,712 45,234
Provision for income
taxes. . . . . . 1,337 645 773 --- 2,755
. . . . . . . . . --------- --------- --------- --------- ---------
Net income (loss). $ 102,428 $ 59,250 $ 8,917 $ (30,712) $ 139,883
. . . . . . . . . ========= ========= ========= ========= =========
Identifiable assets at
December 31,
1994 . . . . . . $ 728,986 $ 196,201 $ 305,652 $ 1,230,839
Depreciation and
amortization
expense. . . . . $ 31,831 $ 16,718 $ 5,659 $ 54,208
Capital
expenditures . . $ 7,777 $ 18,424 $ 6,001 $ 32,202
1993 (In thousands)
Operating revenue. $ 939,742 $1,762,883 $ 56,234 $ --- $ 2,758,859
. . . . . . . . .
. . . . . . . . . --------- --------- --------- --------- ---------
Operating income . 92,885 68,257 11,902 --- 173,044
. . . . . . . . . --------- --------- --------- --------- ---------
Interest expense . 18,922 4,854 8,707 --- 32,483
Interest (income). (3,320) (2,136) (426) --- (5,882)
Minority and General
Partners'
interest . . . . 5,712 3,911 (216) 19,143 28,550
Gain on issuance of
subsidiary
shares . . . . . --- --- --- (30,200) (30,200)
Provision for income
taxes. . . . . . 1,019 619 508 --- 2,146
. . . . . . . . . --------- --------- --------- --------- ---------
Net income . . . . $ 70,552 $ 61,009 $ 3,329 $ 11,057 $ 145,947
. . . . . . . . . ========= ========= ========= ========= =========
Identifiable assets at
December 31,
1993 . . . . . . $ 721,948 $ 224,091 $ 176,422 $ 1,122,461
Depreciation and
amortization
expense. . . . . $ 31,929 $ 14,766 $ 3,261 $ 49,956
Capital
expenditures . . $ 4,343 $ 20,845 $ 7,925 $ 33,113
1992 (In thousands)
Operating revenue. $ 800,027 $1,652,295 $ 36,532 $ --- $ 2,488,854
. . . . . . . . . --------- --------- --------- --------- ---------
Restructuring
charges. . . . . 33,810 17,456 18,969 --- 70,235
. . . . . . . . . --------- --------- --------- --------- ---------
Operating income
(loss) . . . . . 35,212 46,980 (19,760) --- 62,432
. . . . . . . . . --------- --------- --------- --------- ---------
Interest expense . 22,205 4,237 5,713 --- 32,155
Interest
(income) . . . . (2,094) (1,908) (431) --- (4,433)
Minority and General
Partners'
interest . . . . (145) 4,370 --- 4,993 9,218
Gain on issuance
of subsidiary
shares . . . . . ---- ---- --- (105,306) (105,306)
Provision for income
taxes. . . . . . 829 345 59 --- 1,233
Cumulative effect
of change in
accounting principle --- --- --- 7,500 7,500
. . . . . . . . . --------- --------- --------- --------- ---------
Net income (Note). $ 14,417 $ 39,936 $ (25,101) $ 92,813 $ 122,065
. . . . . . . . . ========= ========= ========= ========= =========
Identifiable assets at
December 31,
1992 . . . . . . $ 744,355 $ 173,134 $ 88,042 $ 1,005,531
Depreciation and
amortization
expense. . . . . $ 29,241 $ 13,653 $ 3,445 $ 46,339
Capital
expenditures . . $ 3,777 $ 18,141 $ 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 $46,380 for Consumer Services, $57,392 for Management
Services, $2,568 for New Business Development and Parent, and
$94,394 for the Partnership as a whole.
29
<PAGE>
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 Sales
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. The Partnership acquired several businesses
during 1994 which were accounted for using the purchase method.
The aggregate consideration paid for those businesses totalled
$90 million. 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 are being amortized on a straight-line
basis over 40 years. 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 TruGreen lawncare 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 lawncare 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 $93 million in
intangible assets which are being amortized on a straight-line
basis, primarily over 40 years.
Supplemental cash flow information regarding the
Partnership's acquisitions is as follows:
<TABLE>
(In thousands of dollars)
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Fair value of assets acquired. $144,710 $106,147 $267,430
Less liabilities assumed . . . (46,867) (13,407) (97,930)
. . . . . . . . . . . . . . . --------- --------- ---------
Net assets acquired. . . . . . 97,843 92,740 169,500
Partnership shares issued. . . (5,670) (18,285) (48,905)
Less cash acquired . . . . . . (1,923) (2,922) (3,333)
. . . . . . . . . . . . . . . --------- --------- ---------
Business acquisitions,
net of cash acquired . . . . $ 90,250 $ 71,533 $ 117,262
. . . . . . . . . . . . . . . ========= ========= =========
</TABLE>
In November, 1990, Consumer Services completed a business
combination with WMI Urban Services, Inc., a wholly-owned
subsidiary of WMX Technologies, Inc. (WMX). Consumer Services
acquired certain assets and liabilities of the pest control and
TruGreen lawncare businesses of WMX in exchange for a 22% equity
interest in Consumer Services. The Consumer Services Partnership
Agreement with WMX was amended in June, 1992, giving WMX an
option to acquire an additional 5.76% of Consumer Services. In
June, 1993, WMX 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 transaction, the
Partnership recognized a $30.2 million gain on the issuance of
subsidiary shares.
In connection with the Partnership's 1991 acquisition of a
minority equity interest in Norrell Corporation, a subsidiary of
the Partnership issued a $14.6 million preferred limited
partnership interest. This obligation and the related
distributions had 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. The
Partnership sold its investment
30
<PAGE>
in Norrell in February, 1994, for
approximately $29.3 million, which exceeded its carrying value.
In May, 1994, the preferred shares were redeemed for $14.6
million in cash and 372,950 common shares.
In February, 1994, a 10% equity interest in the
Partnership's Management Services subsidiary, determined after
consideration of intercompany debt to Parent, was sold to members
of senior management of that 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.
In January, 1995, Consumer Services acquired the 15%
minority interest in TruGreen-ChemLawn. The interest was
purchased through the issuance of 2,824,000 partnership shares
and a contingent right to receive an additional payment in 1997,
depending upon the magnitude of TruGreen-Chemlawn earnings and
the performance of ServiceMaster shares in 1995 and 1996. When
the contingency is resolved, any additional consideration due
will be distributed and recorded.
Restructuring
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. At the conclusion of this
review, several strategic decisions and financial judgments were
made which resulted in the recording of restructuring and other
charges. A charge was also taken for an accounting change related
to the adoption of Statement of Financial Accounting Standards
No. 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 unusual
charges and gains on issuance of subsidiary shares is as follows:
<TABLE>
(In thousands of dollars, except per share data)
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Net income . . . . . . . . . . $139,883 $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. . . . . . . . $139,883 $115,747 $94,394
. . . . . . . . . . . . . . . ======== ======== ========
Percent change from
prior year . . . . . . . . . 21% 23% 18%
Earnings per share excluding
unusual items. . . . . . . . $1.81 $1.51 $1.25
. . . . . . . . . . . . . . . ======== ======== ========
Percent change from prior year 20% 21% 14%
</TABLE>
Income Taxes
The Partnership is not directly subject to federal income
taxes. Instead, its taxable income or loss is allocated to the
individual partners. However, 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 provision for
income taxes reflected in the Partnership's consolidated income
statement. 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:
<TABLE>
(In thousands of dollars)
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Partnership income not
subject to federal
income taxes . . . . . . . . $145,760 $156,256 $153,533
Income (loss) of subsidiary
corporations subject to
federal income taxes . . . . (3,122) (8,163) (22,735)
. . . . . . . . . . . . . . . -------- -------- --------
Income before income taxes . . $142,638 $148,093 $130,798
. . . . . . . . . . . . . . . ======== ======== ========
</TABLE>
31
<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 amount of the step-up will depend upon the price and
trading volume of the Partnership shares prior to
reincorporation. Management believes that the step-up in tax
basis will more than offset any deferred liability that would
otherwise require recognition.
Long-Term Debt and Other Long-Term Obligations
Long-term debt and other long-term obligations include the
following:
<TABLE>
(In thousands of dollars, except per share data)
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Notes Payable:
6.65%, maturing in 2002 - 2004. . . . . $ 70,000 $ ---
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. . . . . . . . . . . . 49 5,720
6%, subordinated, convertible
at $18.67/share . . . . . . . . . . . 3,761 3,761
Revolving credit facilities
maturing in 1995 - 1997 . . . . . . . 41,000 110,000
Other . . . . . . . . . . . . . . . . . 36,328 26,040
Less current portions . . . . . . . . . (8,227) (4,612)
. . . . . . . . . . . . . . . . . . . . -------- --------
Total long-term debt. . . . . . . . . . $386,511 $384,509
. . . . . . . . . . . . . . . . . . . . ======== ========
Insurance accruals and other
long-term liabilities . . . . . . . . $ 97,395 $ 86,668
. . . . . . . . . . . . . . . . . . . . ======== ========
</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 $168 million of unused
commitments as of December 31, 1994. Interest paid was $29.6
million in 1994, $31.5 million in 1993, and $27.0 million in
1992. Average rates paid on the revolving credit facilities were
4.33% in 1994 and 3.60% in 1993. Future long-term debt payments
are $34.0 million in 1996, $69.0 million in 1997, $19.0 million
in 1998, and $19.0 million in 1999. 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 $388 million.
The Partnership and the minority investors in Management
Services, 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 $37 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
$26.1 million in 1995, $21.7 million in 1996, $18.1 million in
1997, $14.4 million in 1998, $11.3 million in 1999, and $40.6
million thereafter. Rental expense for 1994, 1993, and 1992 was
$55.3 million, $49.7 million, and $40.9 million, respectively.
Shareholders' Equity
As of December 31, 1994, there were 5,789,000 Partnership
shares available for issuance upon the exercise of subscriptions
and options outstanding and future grants.
Share options are issued at a price not less than the fair
market value on the grant date and expire within ten years of the
grant date. Certain options may permit the holder to pay the
option exercise price by tendering 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
32
<PAGE>
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.
Beginning on January 1, 1998, WMX has a right to convert its
27.76% equity interest in Consumer Services into common stock of
ServiceMaster, based on relative fair market values at the date
of conversion. If WMX exercises the conversion right,
ServiceMaster then has the unilateral option to redeem their
holdings in cash instead of stock. The conversion right expires
if a qualifying initial public offering of Consumer Services
shares has occurred prior to exercise.
<TABLE>
<CAPTION>
Share
Share Price Subscriptions Price
Options Range and Grants Range
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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
Exercised, paid or vested
during 1993. . . . . . . . . (497,105) $2.46-17.33 (143,202) $9.67-21.75
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
Transactions during 1994:
Granted 1,225,000 $21.75-21.75 4,000 $21.75-25.50
Exercised, paid or vested. . . (368,395) $2.46-25.75 (65,944) $9.67-25.50
Terminated or resigned . . . . (35,129) $5.56-17.33 --- ---
Total exercisable,
December 31, 1994. . . . . . 4,685,976 $2.46-25.75 --- ---
Total outstanding,
December 31, 1994. . . . . . 4,685,976 $2.46-25.75 809,767 $9.67-25.50
</TABLE>
Cash and Marketable Securities
Marketable securities held at December 31, 1994, and
December 31, 1993, with a maturity of three months or less are
included in the Statements of Financial Position caption "Cash
and Cash Equivalents." Debt securities are stated at amortized
cost and equity securities approximate market value. Interest and
dividend income received on cash and marketable securities was
$2.3 million, $2.5 million, and $2.7 million in 1994, 1993, and
1992, respectively.
Employee Benefit Plans
Contributions to qualified profit sharing plans were made in
the amount of $6.4 million in 1994, $6.6 million in 1993, and
$4.8 million in 1992. Under the Employee Share Purchase Plan, the
Partnership contributed $0.8 million in 1994, $0.8 million in
1993, and $0.5 million in 1992. 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. A charge of $7.5 million was reflected in the
financial statements representing the actuarial estimate of
benefits expected to be paid under this defined benefit structure
as it is phased out. Retirees and current employees who had
already satisfied eligibility requirements will continue to
receive benefits but with certain modifications and limitations.
33
<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 lawncare 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.
1994 1993 '94-'93 1992 '93-'92
---- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Revenue:
First Quarter $ 657,638 $ 585,130 12 % $ 523,151 12 %
Second Quarter . . 791,496 728,725 9 634,972 15
Third Quarter. . . 797,015 749,746 6 696,786 8
Fourth Quarter . . 739,058 695,258 6 633,945 10
--------- --------- ---------
$ 2,985,207 $ 2,758,859 8 % $ 2,488,854 11 %
Gross Profit:
First Quarter $ 114,364 $ 93,098 23 % $ 79,691 17 %
Second Quarter . . 180,954 163,809 10 111,567 47
Third Quarter. . . 184,751 167,665 10 146,331 15
Fourth Quarter . . 155,127 141,603 10 121,555 16
--------- --------- ---------
$ 635,196 $ 566,175 12 % $ 459,144 23 %
Net Income:
First Quarter
(Note) $ 24,546 $ 21,232 16 % $ 11,850 79 %
Second Quarter
(Note) . . . . . 40,434 62,059 -35 60,252 3
Third Quarter. . . 38,054 31,632 20 25,464 24
Fourth Quarter . . 36,849 31,024 19 24,499 27
---------- --------- ---------
$ 139,883 $ 145,947 -4 % $ 122,065 20 %
Net Income Per Share:
First Quarter
(Note) $ 0.32 $ 0.28 14 % $ 0.16 75 %
Second Quarter
(Note) . . . . . 0.52 0.81 -36 0.79 3
Third Quarter. . . 0.49 0.41 20 0.33 24
Fourth Quarter . . 0.48 0.40 20 0.32 25
--------- --------- ---------
$ 1.81 $ 1.90 -5 % $ 1.61 18 %
Cash Distributions Per Share:
First Quarter $ 0.23 $ 0.22 5 % $ 0.21 1/3 3 %
Second Quarter . . 0.23 0.22 5 0.21 1/3 3
Third Quarter. . . 0.23 0.22 5 0.22 0
Fourth Quarter . . 0.23 0.23 0 0.22 5
--------- --------- ---------
$ 0.92 $ 0.89 3 % $ 0.86 2/3 3 %
Price Per Share:
First Quarter. . . $ 28.38-22.00 $ 20.00-17.63 $ 18.50-14.63
Second Quarter 26.38-22.63 24.88-17.88 17.50-14.88
Third Quarter 26.50-24.00 25.38-21.75 19.88-17.00
Fourth Quarter 25.38-21.50 31.00-25.13 19.25-15.63
Note: 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. Exclusive of these unusual items, net income and net
income per share were as follows:
Net Income:
First Quarter. . . $ 24,546 $ 21,232 16 % $ 19,350 10 %
Second Quarter . . 40,434 31,859 27 25,081 27
Third Quarter. . . 38,054 31,632 20 25,464 24
Fourth Quarter . . 36,849 31,024 19 24,499 27
--------- --------- ---------
$ 139,883 $ 115,747 21 % $ 94,394 23 %
Net Income Per Share:
First Quarter $ 0.32 $ 0.28 14 % $ 0.25 12 %
Second Quarter . . 0.52 0.42 24 0.34 24
Third Quarter. . . 0.49 0.41 20 0.33 24
Fourth Quarter . . 0.48 0.40 20 0.32 25
--------- --------- ---------
$ 1.81 $ 1.51 20 % $ 1.25 21 %
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
As of March 20, 1995, ServiceMaster had the following
subsidiaries:
State or Country
of
Incorporation
Subsidiary or Organization
---------- ---------------
<C> <C>
The ServiceMaster Company Limited Partnership. . . . . . . . .Delaware
ServiceMaster Consumer Services Limited Partnership. . . . . .Delaware
ServiceMaster Consumer Services, Inc . . . . . . . . . . . . .Delaware
TruGreen Limited Partnership . . . . . . . . . . . . . . . . .Delaware
TruGreen, Inc. . . . . . . . . . . . . . . . . . . . . . . . .Delaware
The Terminix International Company Limited Partnership . . . .Delaware
Terminix International, Inc. . . . . . . . . . . . . . . . . .Delaware
ServiceMaster Residential/Commercial Services Limited
Partnership. . . . . . . . . . . . . . . . . . . . . . . . . .Delaware
ServiceMaster Residential/Commercial Services Management
Corporation. . . . . . . . . . . . . . . . . . . . . . . . . .Delaware
Merry Maids Limited Partnership. . . . . . . . . . . . . . . .Delaware
Merry Maids, Inc.. . . . . . . . . . . . . . . . . . . . . . .Delaware
SVM Holding Corp.. . . . . . . . . . . . . . . . . . . . . . .Delaware
American Home Shield Corporation (1) . . . . . . . . . . . . .Delaware
ServiceMaster Direct Distributor Company Limited
Partnership. . . . . . . . . . . . . . . . . . . . . . . . . .Delaware
ServiceMaster DDC, Inc.. . . . . . . . . . . . . . . . . . . .Delaware
ServiceMaster Management Services Limited Partnership. . . . .Delaware
ServiceMaster Management Services, Inc.. . . . . . . . . . . .Delaware
ServiceMaster Aviation Services Limited Partnership. . . . . .Delaware
ServiceMaster Aviation Management Corporation. . . . . . . . .Delaware
CMI Group, Inc.. . . . . . . . . . . . . . . . . . . . . . . Wisconsin
AFM Beveraging, Inc. . . . . . . . . . . . . . . . . . . . . .Missouri
FCIC Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . .Illinois
ServiceMaster Employment Corporation . . . . . . . . . . . . .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
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
TMX-Europe B.V.. . . . . . . . . . . . . . . . . . . . The Netherlands
<PAGE>
Peter Cox Ltd. . . . . . . . . . . . . . . . . . . . . .United Kingdom
Protekta B.V.. . . . . . . . . . . . . . . . . . . . . The Netherlands
Riwa B.V.. . . . . . . . . . . . . . . . . . . . . . . The Netherlands
Anticimex Development AB (2).. . . . . . . . . . . . . . . . . .Sweden
LTCS Investment Limited Partnership. . . . . . . . . . . . . .Delaware
ServiceMaster Home Health Care Services Inc. . . . . . . . . .Delaware
ServiceMaster Diversified Health Services, Inc. (3). . . . . .Delaware
ServiceMaster Diversified Health Services Limited
Partnership (4). . . . . . . . . . . . . . . . . . . . . . . Tennessee
We Serve America, Inc. . . . . . . . . . . . . . . . . . . . .Delaware
TSSGP Limited Partnership. . . . . . . . . . . . . . . . . . Delaware
TSSGP, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . .Delaware
</TABLE>
Notes:
1. American Home Shield Corporation has 19 subsidiaries through
which it carries on its business in the various states in
which it markets its products.
2. Anticimex Development AB has 5 subsidiaries.
3. ServiceMaster Diversified Health Services, Inc. has 6
subsidiaries.
4. ServiceMaster Diversified Health Services L.P. has 10
subsidiaries.
<PAGE>
EXHIBIT 23
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 24, 1995, included in the ServiceMaster Limited
Partnership Annual Report to Shareholders for the year ended
December 31, 1994.
Arthur Andersen LLP
Chicago, Illinois
March 20, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 14,333
<SECURITIES> 20,111
<RECEIVABLES> 231,828
<ALLOWANCES> 20,114
<INVENTORY> 36,062
<CURRENT-ASSETS> 331,045
<PP&E> 260,187
<DEPRECIATION> 131,739
<TOTAL-ASSETS> 1,230,839
<CURRENT-LIABILITIES> 304,395
<BONDS> 386,511
<COMMON> 0
0
0
<OTHER-SE> 307,266
<TOTAL-LIABILITY-AND-EQUITY> 1,230,839
<SALES> 0
<TOTAL-REVENUES> 2,985,207
<CGS> 0
<TOTAL-COSTS> 2,350,011
<OTHER-EXPENSES> 421,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,543
<INCOME-PRETAX> 142,638
<INCOME-TAX> 2,755
<INCOME-CONTINUING> 139,883
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 139,883
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 1.79
</TABLE>
