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, 1995. 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 (I.R.S. Employer
of 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 February 6, 1996 was $3,032,880,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Registrant's Annual Report to Shareholders for the
year ended December 31, 1995 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 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 senior management of
ServiceMaster Diversified Health Services owns an 11% equity interest.
All subsidiaries of ServiceMaster Consumer Services L.P. are wholly owned.
The 15% interest in TruGreen Limited Partnership which was owned by senior
management of TruGreen Limited Partnership was acquired by the Registrant in
January 1995. See Note I, page 15, 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 of the Registrant approved a
"Reorganization Package" consisting of a comprehensive amendment and
restatement of the Registrant's partnership agreement and a merger by which the
Registrant can convert to corporate form. Current tax law effectively requires
such conversion to occur at the end of December 1997; however, pursuant to the
Reorganization Package, the board of directors of the Registrant's general
partner has the authority to decide to accelerate the conversion date to a date
prior to December 31, 1997. The best interests of the Registrant's
shareholders will be the determinative consideration in selecting a conversion
date.
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
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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 will be converted on a one-for-one
basis into new shares of common stock of 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 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 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 11.
1995 Transaction with WMX Technologies, Inc.
On December 31, 1995, the Registrant completed a transaction with WMI
Urban Services, Inc. ("WMUS"), a wholly owned subsidiary of WMX Technologies,
Inc. ("WMX") in which WMUS contributed its 27.76% interest in ServiceMaster
Consumer Services L.P. to the Registrant and, in exchange therefor, the
Registrant issued to WMUS 18,107,143 unregistered limited partner shares of the
Registrant and an option to purchase an additional 1,250,000 shares of the
Registrant's limited partner shares at a price of $33.00 per share at any time
and from time to time during the period January 1, 1997 to December 31, 2000.
This issuance of limited partner shares to WMUS increased the Registrant's
total shares outstanding to approximately 95,200,000. The shares held by WMX
(through WMUS) immediately after the foregoing exchange transaction constituted
approximately 19% of the Registrant's total shares outstanding.
Concurrently with the foregoing exchange transaction, the Registrant and
WMX entered into an agreement under which WMX committed not to increase its
ownership interest in the Registrant to more than 21% through purchases of the
Registrant's shares. To the extent that an exercise of the option would result
in WMX owning more than a 21% interest in the Registrant, the Registrant may at
its sole option pay WMX cash in the amount of the spread between the value of
the shares not issued and the option exercise price for such shares.
The shares which WMUS received on December 31, 1995 together with the
shares which WMUS can acquire under the option are subject to certain
restrictions, including among other things, commitments by WMX and WMUS: not to
sell at any one time any of such shares in public market transactions in a
number in excess of 15% of the average daily trading volume of the Registrant's
shares over the preceding four calendar weeks; not to sell such shares to
anyone who is or would become, as a result of the sale, an owner of more than
5% of the Registrant's outstanding shares; not to attempt to or propose or
endorse a takeover of the Registrant; not to vote such shares in favor of a
takeover which is opposed by the Registrant's board of directors; and not to
oppose candidates for the Registrant's board of directors who are nominated by
a majority of the incumbent ServiceMaster directors. In addition, the
Registrant has a first refusal right, at then current market prices, by which
the Registrant can elect to acquire any shares that WMX or WMUS may desire to
sell.
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The shares which WMUS received on December 31, 1995 and the shares which
WMUS can acquire under the option were not and will not be registered under the
Securities Act of 1933, but WMUS may demand up to four registrations of such
shares after December 31, 1997, with each registration being subject to
specified minimum and maximum amounts. WMX also has piggyback registration
rights with respect to such shares.
The foregoing is a brief summary of the major provisions of the agreements
entered into among the Registrant, WMX and WMUS on December 31, 1995. Such
agreements are described in further detail in the Registrant's Form 8-K dated
January 15, 1996 and filed with the Securities and Exchange Commission on that
date. The contents of such Form 8-K and the exhibits thereto are incorporated
herein by reference.
Principal Business Groups
ServiceMaster is functionally divided into four operating groups: Consumer
Services, Management Services, Diversified Health Services and International.
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 39 of the ServiceMaster Annual Report to Shareholders for
1995 (the "1995 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 and indoor plant maintenance services under the "TruGreen" and
"ChemLawn" service marks; termite, pest control and radon testing 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 7.7 million customers (including international
operations).
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The International 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 15 for further information regarding this
transaction. With over 2.5 million residential and commercial customers,
TruGreen-ChemLawn is the leading provider of lawn care services in the United
States. As of December 31, 1995, TruGreen-ChemLawn had 182 company-owned
branches and 76 franchised branches. TruGreen-ChemLawn also provides lawn,
tree and shrub care services in some parts of the Middle East 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 2.1 million residential and commercial
customers, Terminix, through its company-owned branches and through
franchisees, is the leading provider of termite and pest control services in
the United States. As of December 1995, Terminix was providing these services
through 327 company-owned branches in 40 states and Mexico and through 234
franchised branches in 27 states. Terminix also provides termite and pest
control services in Japan, Taiwan, Indonesia, Turkey, 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 Republic
of Ireland, the United Kingdom, and Mexico. The Terminix business is seasonal
in nature.
Res/Com. Res/Com is a wholly owned subsidiary of ServiceMaster Consumer
Services L.P. ServiceMaster, through Res/Com, is the leading franchisor in the
residential and commercial cleaning field. Res/Com provides carpet and
upholstery cleaning and janitorial services, disaster restoration services and
window cleaning services to over 1.4 million residential and commercial
customers worldwide through a network of over 4,400 independent franchisees.
Res/Com provides its services through subsidiaries in Germany, Ireland and the
United Kingdom, through an affiliate in Canada, and through licensees in
Australia, New Zealand, Austria, Brazil, Canada, Finland, Spain, Turkey, Saudi
Arabia, Korea, and Japan.
Merry Maids. Merry Maids is a wholly owned subsidiary of ServiceMaster
Consumer Services Limited Partnership. Merry Maids is the organization through
which ServiceMaster provides domestic house cleaning services. With
approximately 217,000 customers, Merry Maids is the leading provider of
domestic house cleaning services in the United States. As of December 31,
1995, these services were provided through 14 company-owned branches in 13
states and through 820 licensees operating in 49 states. Merry Maids also
provides domestic housecleaning services in the United Kingdom through a
subsidiary, in Canada through an affiliate and in Japan, 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 wholly owned subsidiary of ServiceMaster Consumer Services L.P. 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 wear and tear. 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, 1995, AHS was
providing services to approximately 387,000 homes through approximately 10,000
independent repair maintenance contractors in 47 states and the District of
Columbia, with operations in California, Texas and Arizona accounting for 26%,
23% and 8%, 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.
At the end of 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. Effective
January 1, 1996, the services provided by the Healthcare Management Services
unit and the services provided by ServiceMaster Diversified Health Services
Group (described below) were integrated so as to provide a coordinated range of
services to the health care market.
As of December 31, 1995, ServiceMaster was providing supportive management
services to more than 2,500 health care, educational and commercial facilities.
These services were being provided in all 50 states and the District of
Columbia and in 16 foreign countries. Outside of the United States,
ServiceMaster was providing management services through a subsidiary 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, Chile, Japan, Malaysia, Spain and and
several countries in 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. As of December 31, 1995,
the DAKA/ServiceMaster joint venture was serving approximately 57 customers.
ServiceMaster Healthcare Services
The integration of ServiceMaster Healthcare Management Services and
ServiceMaster Diversified Health Services under the name "ServiceMaster
Healthcare Services" is expected to increase the ability of the Registrant to
deliver services across the broad spectrum of customer needs in the various
segments of the healthcare market. These segments include acute care hospitals,
long-term care, assisted living facilities, hospice and home health care. As
of January 1, 1996, ServiceMaster Healthcare Services was serving more than
1,600 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 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 and ServiceMaster Home Health Care Services
(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,
skilled nursing facilities, and assisted living facilities; management services
to hospital-based home health
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care agencies (as well as the direct operation of freestanding home health care
agencies); design, development, refurbishing and construction consulting
services to long-term care facilities; hospice services; rehabilitation
services and the sale of various medical products and supplies. As of December
31, 1995, the ServiceMaster Diversified Health Services Companies had
management services contracts with over 130 facilities in 28 states with a
total of approximately 15,000 beds. Effective January 1, 1996, the services
provided by Diversified Health Services Companies and the services provided by
the Healthcare Management Services unit were integrated so as to provide a
coordinated range of services to the health care market.
International and New Business Development
International. The International unit 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. In August 1994, International 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. As a result of acquisitions made
during 1994, TMX-Europe owned controlling interests in Peter Cox Ltd., a
leading pest control and wood preservation company in the United Kingdom;
Protekta B.V. and Riwa B.V., each a leading pest control company in the
Netherlands; and Anticimex Development AB, a holding company for the leading
pest control company in Sweden. In October 1995, Peter Cox Ltd. acquired two
pest control companies in the Republic of Ireland and Northern Ireland, and in
January 1996, TMX-Europe acquired the Stenglein group of pest control companies
in Germany.
New Business Development. ServiceMaster Child Care Services, Inc., was
part of the New Business Development Group until November 30, 1995. This
company operated employer or developer sponsored child care centers under the
"GreenTree" service mark. The company was sold to Bright Horizons Children's
Centers, Inc. effective December 1, 1995 for cash, a promissory note and a
warrant to purchase common stock of the buyer. This transaction was not
material to the Registrant's financial statements.
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
formulates, combines and distributes supplies, products and equipment that are
used internally in providing management services to customers and which are
sold to licensees for use in the operation of their businesses. ServiceMaster
has an insignificant share of the market for the manufacture and distribution
of cleaning equipment, chemicals and supplies.
Venture Capital Fund. In August 1995, the Registrant established the
ServiceMaster Venture Fund (the "Fund") with the objective of establishing a
mechanism within the ServiceMaster enterprise which would invest in emerging
growth companies which show an ability to provide innovative service
technologies to the Registrant's current and new customers. The Fund is to be
managed so as not to be intrusive to the ongoing operations of the Registrant's
operating units.
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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.
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, and their training and technical support services. The
markets served by Terminix and TruGreen/ChemLawn are seasonal in nature.
Lawn Care Services. TruGreen-ChemLawn, both directly and through
franchisees, provides lawn care services to residential and commercial
customers. Competition within the lawn care market is strong, coming mainly
from regional and local, independently owned firms and from homeowners who
elect to care for their lawns through their own personal efforts. TruGreen-
ChemLawn is the leading national lawn care company within this market. In
1995, TruGreen-ChemLawn initiated a business to provide indoor plant
maintenance to commercial customers.
Lawn care services are regulated by law in most of the states in which
TruGreen-ChemLawn provides such services. These laws require licensing which
is conditional on a showing of technical competence and adequate bonding and
insurance. The lawn care industry is regulated at the federal level under the
Federal Insecticide, Fungicide and Rodenticide Act, and lawn care companies
(such as TruGreen-ChemLawn) which apply herbicides and pesticides are regulated
under the Federal Environmental Pesticide Control Act of 1972. Such laws,
together with a variety of state and local laws and regulations, may limit or
prohibit the use of certain herbicides and pesticides, and such restrictions
may adversely affect the business of TruGreen-ChemLawn.
Termite and Pest Control Services. The market for termite and pest
control services to commercial and residential customers includes many
competitors. Terminix is the leading national termite and pest control company
within this market. Competition within the termite and pest control market is
strong, coming mainly from regional and local, independently owned firms
throughout the United States and from one other large company which operates on
a national basis.
Termite and pest control services are regulated by law in most of the
states in which Terminix provides such services. These laws require licensing
which is conditional on a showing of technical competence and adequate bonding
and insurance. The extermination industry is regulated at the federal level
under the Federal Insecticide, Fungicide and Rodenticide Act, and pesticide
applicators (such as Terminix) are regulated under the Federal Environmental
Pesticide Control Act of 1972. Such laws, together with a variety of state and
local laws and regulations, may limit or prohibit the use of certain
pesticides, and such restrictions may adversely affect the business of
Terminix.
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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 5.2 million calls in 1995.
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, 1995,
ServiceMaster was serving in approximately 1,500 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, industry consolidation, changes
in use and methods of health care delivery and payment for services continue to
affect the health care environment.
As described on page 5, effective January 1, 1996, ServiceMaster
Healthcare Management Services was integrated with ServiceMaster Diversified
Health Services to form ServiceMaster Healthcare Services.
Education. ServiceMaster is a leading provider to the education market of
maintenance, custodial and grounds services, and, through the
DAKA/ServiceMaster joint venture, food management services. The facilities
which comprise the education market served by ServiceMaster include primary
schools, secondary schools and school districts, private specialty schools and
colleges and universities. As of December 31, 1995, ServiceMaster was serving
in approximately 400 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 is a leading provider of plant
operations and maintenance, custodial and grounds management services to
business and industrial customers. ServiceMaster believes that there is
potential for expansion in those business and industrial markets which
ServiceMaster has elected to emphasize due to ServiceMaster's low current
penetration of those markets 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. The emphasized markets include the food
processing, transportation, healthcare products, and automotive markets. As of
December 31, 1995, ServiceMaster was serving in approximately 160 business or
industrial facilities.
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Diversified Health Services
At December 31, 1995, the ServiceMaster Diversified Health Services
Companies constituted the nation's twelfth largest long term care company based
on the number of beds served and the largest company that was primarily a
management services company (as distinguished from a real estate operator). It
was also a major provider of planning and design services for long term care
facilities and for acute care hospitals.
At December 31, 1995, ServiceMaster Home Health Care Services was a
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 represented a very small percentage of
home health care agencies in the United States.
As described on page 5, effective January 1, 1996, ServiceMaster
Diversified Health Services was integrated with ServiceMaster Healthcare
Management Services to form ServiceMaster Healthcare Services.
International
The pest control companies acquired by ServiceMaster through its European
holding company (TMX-Europe) are each leaders in the pest control business in
the countries in which they operate. ServiceMaster believes that there is
potential for expansion of these businesses in both the United Kingdom and
elsewhere on the European continent.
Major Customers.
ServiceMaster has no single customer which accounts for more than 10% of
its total revenues. No part of the Company's business is dependent on a single
customer or a few customers the loss of which would have a material adverse
effect on the Company as a whole. Revenues from governmental sources are not
material.
Employees
On December 31, 1995, 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 1995 Annual Report.
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[CHART]
STRUCTURE OF SERVICEMASTER
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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.
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 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 15, 1996,
no shares of stock of ServiceMaster Corporation had been issued and the
corporation remains dormant.
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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. As a result of the transaction with WMX
Technologies, Inc. on December 31, 1995 (described on pages 2 and 3), The
ServiceMaster Company is the sole limited partner of 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 53 limited partners in two classes: Class A
and Class B. The general partners together hold a 1% interest in SMMS. The
Class A limited partners, all of whom are senior members of SMMS management,
collectively own 10% of the equity of SMMS (with equity determined for this
purpose after allowing for $505.6 million of intercompany debt to The
ServiceMaster Company). The Class B limited partner is The ServiceMaster
Company, which holds the remaining equity interest in SMMS.
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 the International and New Business Development
Group
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 component of the International
and New Business Development Group. 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.
On December 1, 1995, The ServiceMaster Company sold all of its equity
interest in ServiceMaster Child Care Services, Inc. to Bright Horizons
Children's Centers, Inc.
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Notes to Organizational Structure Chart
The following Notes are intended to be read in conjunction with the
organizational structure chart on page 10.
Note A--Public Investors
The public investors in the Registrant collectively hold a 99% interest in
the profits, losses and distributions of the Registrant through their ownership
of the limited partner interests in the Registrant ("Partnership Shares"). 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.
Note C--The ServiceMaster Company Limited Partnership
The ServiceMaster Company Limited Partnership supervises the Company's
international operations and serves as a holding company for the Consumer
Services, Management Services, and Diversified Health Services groups. All of
the common limited partner interests of The ServiceMaster Company are held by
the Registrant. 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 R.
Note D--ServiceMaster Management Corporation (Managing General Partner)
ServiceMaster Management Corporation is the managing general partner of
ServiceMaster Limited Partnership and The ServiceMaster Company Limited
Partnership (collectively referred to in this Note D as the "Partnerships").
ServiceMaster Management Corporation has the ultimate authority to control each
entity in the ServiceMaster enterprise.
The certificate of incorporation of ServiceMaster Management Corporation
requires that a majority of the positions on its board of directors must be
comprised of independent directors. The certificate of incorporation further
provides that this requirement may not be amended without the consent of the
holders of a majority of the outstanding shares of ServiceMaster Limited
Partnership. During the year 1995, 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.
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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
ServiceMaster Company or 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 remain at a constant 1% in each of the two Partnerships at all times
regardless of the extent to which additional investments in the Partnerships
are made by others and regardless of the extent to which the Partnerships
redeem other interests. These 1% interests provide ServiceMaster Management
Corporation with approximately 1.99% of the profits and losses of the entire
ServiceMaster enterprise, that is, ServiceMaster Management Corporation is
entitled to 1% of the profits of The ServiceMaster Company Limited Partnership
and, because that partnership is 99% owned by ServiceMaster Limited
Partnership, it is entitled to an additional 1% of the 99% of The ServiceMaster
Company Limited Partnership's profits which are allocated to ServiceMaster
Limited Partnership.
For the year 1995, 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 1995 was $3,717,268. 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, $3,514,856, 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,
1995, such persons included Messrs. Cantu, Erickson, Keith, Mrozek and Oxley,
whose participations within the 1.99% total carried interest of ServiceMaster
Management Corporation at the end of 1995 were, respectively, 14.79%, 10.85%,
5.44%, 3.20%, and 5.44%.
At December 31, 1995, the stock of ServiceMaster Management Corporation
was owned by 34 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 the sole limited partner, holds a 100% equity interest in SMCS.
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%
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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. 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 the International unit and New Business
Development. The International unit oversees and provides administrative
support for ServiceMaster's international operations. It owns all of the
shares of TMX-Europe B.V., the Netherlands holding company for all pest control
businesses acquired in Europe. The New Business Development component oversees
and provides administrative support for businesses which are in their formative
stages. At December 31, 1995, there were no such businesses in operation.
Note I--TruGreen Limited Partnership
TruGreen Limited Partnership ("TruGreen") has two general partners:
TruGreen, Inc., which is the managing general partner, and TSSGP Limited
Partnership, a Delaware limited partnership ("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. Terminix is a wholly owned subsidiary of SMCS.
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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.
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.
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--TMX-Europe
TMX-Europe B.V., a Netherlands limited company, is a wholly owned
subsidiary of The ServiceMaster Company. TMX-Europe serves as the holding
company for ServiceMaster's European pest control companies.
Note Q--Other Subsidiaries
Other subsidiaries include CMI Group, Inc., a subsidiary of ServiceMaster
Management Services L.P., and miscellaneous operating and name protection
entities. Reference is made to Exhibit 21 for a complete list of the
subsidiaries of the Registrant.
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Note R--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.
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. As a result of this allocation of taxable income, the cash
distributions made by the Registrant directly to its limited partners will
equal or exceed the taxable income of the Registrant which is directly
allocated to its limited partners. 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.
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. The 860 Ridge
Lake Boulevard facility also serves as the headquarters for TruGreen-ChemLawn,
Terminix, Res/Com, Merry Maids and American Home Shield.
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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).
American Home Shield moved all of its administrative 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, 1995,
DHS had an ownership interest in two nursing home facilities through joint
venture arrangements in which DHS has a 50% interest.
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 15,
1996, these proceedings included a number of general liability actions and a
very small number of environmental proceedings.
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").
In January 1992, the EPA issued a Unilateral Administrative Order for Remedial
Design and Remedial Action which required Terminix and other initial defendants
and third party defendants to clean up one of these sites. Terminix agreed, on
an interim basis, to a 10% allocation of the cost of the remediation work. The
parties to the interim allocation agreement remain in disagreement with the EPA
over the most appropriate remediation procedures to be followed at the site and
they remain in disagreement among themselves regarding the final allocations of
responsibility. With respect to the second site, the companies cited by the
EPA all disclaim responsibility. Terminix has been advised by one of the
defendant parties that such party has settled its disagreement with the EPA.
However, the settlement agreement has not yet been presented to or approved by
the District Court and, in any event, such party has not resolved its
disagreement with the other parties as to its proper participation. Unless
there is a general settlement among all of the parties, this matter is expected
to go to trial in early 1997. Terminix's actual participation in the total
volume of hazardous waste at the Tennessee sites was less than 5%. Terminix
considers that percentage to be its maximum appropriate exposure. Based on a
projected maximum cost of remediation for the two sites of $17.5 million, a 5%
participation for Terminix would amount to $875,000. At 10% (which is
significantly greater than what Terminix believes is appropriate), Terminix's
liability would be $1,750,000. Based on the Registrant's review and on advice
of counsel, in the opinion of management the likelihood of the Registrant
incurring a material liability in excess of present estimates is remote.
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In October 1991, Terminix was notified by a letter from the EPA that
Terminix, along with many other parties, was listed 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.
The CERCLA law was 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 could be
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 the outcome of the proceedings referred to above will not be, individually
or in the aggregate, material to its business, financial condition or results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
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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 1995 under the captions "Shareholders' Equity" (page 43) and "Cash
Distributions Per Share" and "Price Per Share" in the Quarterly Operating
Results table (page 44) 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 under the symbol "SVM".
At March 15, 1996, 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
1995 in the Financial Statements and Management Discussion section ("FSMD
Section") under the caption "Eleven Year Financial Summary" (pages 32-33)
supplies the information required by this item and such portion is hereby
incorporated herein by reference.
Item 7. Management Discussion and Analysis of Financial Condition and Results
of Operations
Management Discussion and Analysis of Financial Condition and Results of
Operations for the three years ended December 31, 1995, is contained in the
FSMD Section of the ServiceMaster Annual Report to Shareholders for 1995 on
pages 27-31 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, 1995 and 1994, and the consolidated statements of income, cash
flows and shareholders' equity for the years ended December 31, 1995, 1994 and
1993 and notes to the consolidated financial statements are contained in the
FSMD Section of the ServiceMaster Annual Report to Shareholders for 1995 on
pages 35 and are incorporated herein by reference. The report of Arthur
Andersen LLP thereon dated January 24, 1996, and the summary of significant
accounting policies are contained in the FSMD Section of the ServiceMaster
Annual Report to Shareholders for 1995 on page 34 and are hereby incorporated
herein by reference.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
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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 15, 1996) 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.
1996 Class
Sidney E. Harris, age 46, 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 Transamerica Investors, Inc., Los
Angeles, California, a mutual funds investment company.
Herbert P. Hess, age 59, 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 57, 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, Inc., Tulsa, Oklahoma, a pipeline company.
C. William Pollard, age 57, 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. 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. 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, and a
director of Provident Companies, Inc., Chattanooga, Tennessee.
Phillip B. Rooney, age 51, 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, the Chairman of the
Board and Chief Executive Officer of Wheelabrator Technologies Inc., Hampton,
New Hampshire, and a director of Waste Management International, plc, London,
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England. He is also a director of Illinois Tool Works, Inc., Caremark
International, Inc. and Urban Shopping Centers, Inc.
1997 Class
Paul W. Berezny, age 61, has been a director since October 7, 1995. He is
a member of the Management Services and Diversified Health Services Committee.
He is President of Berezny Investments, Inc., a real estate development and
management company.
Lord Brian Griffiths of Fforestfach, age 54, has been a director since
August 1992. He is a member of the Executive Committee, the Nominating
Committee and the Compensation Committee. Since 1991, he has been 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, a music recording company, Times
Newspapers Holding Ltd., London, England, a newspaper company, Herman Miller,
Inc., Zeeland, Michigan, an office furniture manufacturer, and Telewest,
London, England, a television company.
Michele M. Hunt, age 46, has been a director since October 7, 1995. She
is a member of the Management Services and Diversified Health Services
Committee. Since July 1995, Ms. Hunt has been a private business consultant.
She was appointed by President Clinton as Director of the Federal Quality
Institute and served in such role from August 1993 to June 1995. From 1980 to
July 1993, she served as Corporate Vice President for People and Quality with
Herman Miller, Inc., an office furniture manufacturer.
Gunther H. Knoedler, age 66, 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.
Vincent C. Nelson, age 54, 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.
Dallen W. Peterson, age 59, has been a director since October 7, 1995.
Mr. Peterson 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 member
of the Consumer Services and International and New Business Development
Committee.
1998 Class
Henry O. Boswell, age 66, 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, an offshore oil drilling company, and Cabot Oil & Gas Corp.,
Houston, Texas, an oil and gas production company.
22
<PAGE>
Carlos H. Cantu, age 62, has been a director since 1988. He is a member
of the Executive Committee, 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 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 manufacturing
company in Dallas, Texas, since February 9, 1995.
James D. McLennan, age 59, 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. Mr. McLennan is also a director of The Loewen Group Inc., a provider of
funeral services, Burnaby, B.C., Canada.
Burton E. Sorensen, age 66, 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 Companies, Inc., Chattanooga, Tennessee.
Charles W. Stair, age 55, 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.
David K. Wessner, age 44, 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 and Senior Vice President and Administrative
Director from 1982 to November 1992.
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 1995 annual meeting of shareholders to
serve in such capacity until the annual meeting of shareholders in 1996 or
until otherwise determined by the Board of Directors.
23
<PAGE>
Robert D. Erickson, age 52, 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.
Donald K. Karnes, age 45, is Group President of TruGreen-ChemLawn and
Terminix. He served as President and Chief Operating Officer of TruGreen-
ChemLawn from January 1992 to December 1995; 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 39, is President and Chief Operating Officer of
ServiceMaster Consumer Services, Inc. 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.
Jerry D. Mooney, age 42, was the President and Chief Executive Officer of
ServiceMaster Diversified Health Services, Inc. until December 31, 1995, and
now serves as President, Healthcare New Business Initiatives. He has held the
positions with Diversified Health Services since the acquisition of the
business 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., Memphis, Tennessee,
involved primarily in the electronic processing of debit and credit card
transactions. He also serves as a director of Thompco Medical, Inc., and on an
Advisory Board for SouthTrust Corporation.
Ernest J. Mrozek, age 42, was elected Senior Vice President and Chief
Financial Officer effective January 1, 1995. He served as Vice President and
Chief Financial Officer from May 1994 to December 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 LLP
from 1981 to December 1987.
Brian D. Oxley, age 45, is President and Chief Operating Officer of
ServiceMaster Management Services and ServiceMaster Healthcare 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. He is a non-director member of the Management
Services and Diversified Health Services Committee.
Executive Officers of ServiceMaster
The following table shows: (i) the names and ages (as of March 15, 1996)
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
24
<PAGE>
1995. There are no arrangements or understandings between any executive
officer and any other person pursuant to which the officer was or is to be
selected as an officer.
<TABLE>
<CAPTION>
First Became
Name Age Present Position An Officer
- ---- --- ---------------- ------------
<S> <C> <C> <C>
C. William Pollard 57 Chairman and Director 1977
Carlos H. Cantu 62 President and Chief Executive Officer 1986
and Director
Charles W. Stair 55 Vice Chairman and Director 1973
Robert D. Erickson 52 President and Chief Operating Officer, 1976
International and New Business Development,
and a Senior Management Adviser
Brian D. Oxley 45 President and Chief Operating Officer, 1983
ServiceMaster Management Services,
ServiceMaster Healthcare Services, and
a Senior Management Adviser
Jerry D. Mooney 42 President, Healthcare New Business 1993
Initiatives, and a Senior Management
Adviser
Robert F. Keith 39 President and Chief Operating Officer, 1986
Consumer Services, and a Senior
Management Adviser
Vernon T. Squires 61 Senior Vice President and General 1987
Counsel
Ernest J. Mrozek 42 Senior Vice President, Chief Financial 1987
Officer, and a Senior Management Adviser
Eric R. Zarnikow 36 Vice President and Treasurer 1994
Deborah A. O'Connor 33 Vice President and Controller 1993
</TABLE>
Messrs. Pollard, Stair and Cantu are also Directors of ServiceMaster
Management Corporation. Messrs. Erickson, Keith, Mooney, Mrozek and Oxley are
Senior Management Advisers. See pages 21-24 for biographical information with
respect to these executive officers.
Vernon T. Squires, age 61, 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.
Eric R. Zarnikow, age 36, was elected Vice President and Treasurer
effective May 1, 1994. He is a member of all ServiceMaster employee benefit
plan committees. 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.
25
<PAGE>
Deborah A. O'Connor, age 33, 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 LLP since 1984. She is a member of the Profit Sharing, Savings and
Retirement Plan Administrative Committee.
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 1995,
ServiceMaster received Section 16(a) forms from such officers and directors.
As of January 1, 1996, ServiceMaster has one shareholder 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
1995, its officers and directors complied with applicable filing requirements
except that one report, covering one December 1995 transaction for 900 shares,
was filed late by Mr. Berezny.
26
<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 1995. Each of the
listed persons was holding the office indicated in the table on the last day of
December 1995.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
-----------------------------------------------
ANNUAL COMPENSATION (A) AWARDS PAYOUTS
--------------------------------------- -------------------------- ----------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted Securities All
Annual Stock Underlying LTIP Other
Name and Salary Bonus Comp. Awards Options/ Payouts Comp.
Principal Position Year ($) ($) ($) ($) SARs(#)(B) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carlos H. Cantu 1995 $380,000 $665,000 - - 75,000 - -
President and 1994 $350,000 $612,500 - - 75,000 - -
Chief Executive 1993 $300,000 $525,000 - - 0 - -
Officer
Robert D. Erickson 1995 $260,000 $260,000 - - 40,000 - -
President, Inter- 1994 $245,000 $294,000 - - 25,000 - -
national Services 1993 $230,000 $260,000 - - 30,000 - -
Robert F. Keith 1995 $240,000 $276,000 - - 50,000 - -
President, 1994 $200,000 $225,000 - - 35,000 - -
Consumer Services 1993 $180,000 $200,000 - - 30,000 - -
Ernest J. Mrozek 1995 $208,000 $299,600 - - 15,000 - -
Sr. Vice President 1994 $190,000 $228,000 - - 35,000 - -
and Chief Financial 1993 $165,000 $198,000 - - 30,000 - -
Officer
Brian D. Oxley 1995 $270,000 $200,000 - - 60,000 - -
President, 1994 $260,000 $ 65,000 - - 0 - -
Management Services 1993 $240,000 $271,000 - - 30,000 - -
</TABLE>
Notes:
(A) The table does not include the cash distributions made to
ServiceMaster Management Corporation, as the managing general partner of
the Registrant and The ServiceMaster Company, and the redistribution of
such amounts to the stockholders of ServiceMaster Management Corporation
(who include the persons listed in the above table). See Note D, page 13.
The foregoing amounts represent the stockholders' share of profits in
return for their equity risk.
(B) With respect to the year 1995, see Note (A) to the Option/SAR
Grants Table. The figures shown for earlier years are the number of the
underlying shares for grants of options under the ServiceMaster 10 Plus
Option Plan.
27
<PAGE>
The following table summarizes the number and terms of the stock options
(if any) granted during the year 1995 to the named executive officers.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN 1995
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
--------------------------------------------------------- ---------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of
Securities % of Total
Underlying Options/SARs
Options/SARs Granted to Exercise or
Granted Employees Base Price Expiration
Name (#)(A) in 1995 ($/Sh)(B) Date 5% ($) 10% ($)
- ---- ------------ ------------ ----------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Carlos H. Cantu,
Chief Executive
Officer 75,000 6.0% $23.25 12-09-2004 $913,384 $2,487,292
Robert D. Erickson 40,000 3.2% $23.25 12-09-2004 $487,138 $1,326,556
Robert F. Keith 50,000 4.0% $23.25 12-09-2004 $608,922 $1,658,195
Ernest J. Mrozek 15,000 1.2% $23.25 12-09-2004 $182,677 $497,458
Brian D. Oxley 60,000 4.8% $23.25 12-09-2004 $730,707 $1,989,834
</TABLE>
Notes:
(A) 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 February 1995. These grants were not
shown in the Option/SAR Grants Table in ServiceMaster's Form 10-K for 1994
but are reported in the above table.
(B) The fair market value of the Registrant's shares at the time
when the grants of the options were made (December 1994) was $21.75. 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 1995).
Column (d) combines the exercise price and the option price.
(C) Jerry D. Mooney and Vernon T. Squires were named executive
officers in the Option/SAR Grant Table in the Registrant's Form 10-K for
1994. Each was granted an option in 1994 which was not accepted until
early 1995. In accordance with Note (B) to the 1994 Option/SAR Grant
Table, the following details for their respective options are set forth in
this Form 10-K for 1995. Number of option shares granted: 50,000
(Mooney), 15,000 (Squires); percent of total options granted in 1994: 4.0%
(Mooney), 1.2% (Squires); exercise or base price: $23.25/option share;
expiration date: 12-09-2004; potential realizable value at 5% and 10%
assumed annual rates of stock price appreciation for the option term:
$608,922 and $1,658,195 (Mooney), $182,677 and $497,458 (Squires).
28
<PAGE>
The following table summarizes the exercises of stock options during the
year 1995 by the named executive officers and the number of, and the spread on,
unexercised options held by such officers at December 31, 1995.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN 1995 AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End(#) FY-End($)
------------- -------------
Shares Acquired Value
on Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- --------------- --------------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Carlos H. Cantu, 0 0 150,000/0 $750,000/0
Chief Executive
Officer
Robert D. Erickson 0 0 95,000/0 $712,500/0
Robert F. Keith 4,500 89,312 115,000/0 $812,500/0
Ernest J. Mrozek 0 0 80,000/0 $567,500/0
Brian D. Oxley 0 0 90,000/0 $510,000/0
</TABLE>
A table for long-term incentive plan awards is omitted because no long-
term incentive plan awards were granted to any of the named executive officers
during the year 1995.
Compensation of Directors
During the year 1995, directors of ServiceMaster Management Corporation
who were not officers received $3,000 for each meeting of the Board of
Directors and each meeting of a Committee which they attended. In addition,
directors each received an annual stipend of $12,000. The Chairman of the
Audit Committee received an additional annual stipend of $2,000. In 1996, the
annual stipend for outside directors will be $12,000.
Each director of ServiceMaster Management Corporation may enter into a
deferred fee agreement 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 average
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 Board of Directors may elect to
charge a price for the option itself, which is payable at the time of the
grant. The exercise price of options granted under the Directors Option Plan
is the fair market value of the shares at the time of the grant. In 1995, no
options were granted under the Directors Option Plan.
29
<PAGE>
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
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.
30
<PAGE>
The Plan is expressly intended to be a severance pay plan for purposes of
the Employee Retirement Income Security Act of 1974 ("ERISA") and ServiceMaster
employees are expressly entitled to the protection afforded by ERISA to
participants in a severance pay plan.
The Plan is designed to put any organization which may at any time
consider taking over ServiceMaster on notice in advance that it may be required
to compensate individuals who have made significant career investments in
ServiceMaster if those individuals are disadvantaged by the takeover. At the
same time, the Plan is intended to serve the best interests of those who invest
in ServiceMaster for the long term by (i) improving the ability of the
ServiceMaster enterprise to recruit and retain employees, (ii) increasing the
willingness of employees to risk working for long-term rewards rather than
seeking to maximize their immediate salary, and (iii) providing insurance to
employees against any unfavorable outcome, and thereby encouraging employees to
remain with ServiceMaster while the outcome of a takeover attempt is in doubt.
Compensation Committee Interlocks and Insider Participation
The persons who served as members of the Compensation Committee of the
Registrant's board of directors during 1995 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 15, 1996. 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 1995, in its capacity
as the Compensation Committee for the year 1995, hereby submits its report to
the Board of Directors for the year 1995.
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 takes option
grants to senior members of management into account in the reviews and
recommendations described above.
Summary of Compensation Policies. The compensation policies applicable to
all executive officers are as follows: (1) a base level of compensation is
established by reference to the standards described below; (2) bonuses are paid
in accordance with the Company's Incentive Reward Compensation Plan, under
which bonuses are determined by the extent to which the actual performance of
the Company (or the relevant division thereof) achieved budget objectives; and
(3) such year-end adjustments as the Compensation Committee may consider to be
warranted.
31
<PAGE>
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 and
bonuses of comparable officers in comparable companies.
Five Highest Paid Officers. The base compensation of each of the highest
paid officers for 1995 (including the Chief Executive Officer) was in the
amount recommended by the Compensation Committee in December 1994 and approved
by the Board of Directors in the same month. This base compensation was
further reviewed at the end of 1995. 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 1995 and the
contribution of such persons to the Company's performance.
Chief Executive Officer. The base compensation of the Chief Executive
Officer for the year 1995 was established at the beginning of the year at
$380,000 and remained at that amount throughout the year. Because the
Company's results of operations for 1995 exceeded the 1995 budget, in
accordance with the Company's Incentive Compensation Plan the Chief Executive
Officer became entitled to an incentive compensation award at the end of 1995
equal to 175% of his 1995 base compensation. The base compensation of the
Chief Executive Officer for the year 1996 was set at $388,000. This amount
reflects an increase of $8,000 over his base compensation for the year 1995.
Any material difference between the Chief Executive Officer's total
compensation for 1996 compared to 1995 will be determined by the Company's
performance in 1996.
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 option itself of $1.50 per option share.
This grant was accepted and the required payment was made in February 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 15, 1996
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)"
32
<PAGE>
Performance Graph
The following graph compares the five-year cumulative total return to
shareholders of the Registrant with the five year cumulative return as
determined under the Standard & Poor's 500 Index and under the Dow Jones
Consumer Services Index.
[Performance Graph]
33
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of March 15, 1996, the beneficial
ownership of the Registrant's limited partner shares with respect to each
person who is known to the Registrant to be the beneficial owner of more than
five percent of such shares:
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership
(1) (2) (3) (4) (5)
Sole Voting
Name and Address and Investment Total Percent
of Beneficial Owner Power Other Ownership Ownership
- ------------------- -------------- ----- --------- ---------
<S> <C> <C> <C> <C>
WMI Urban Services, Inc.
3003 Butterfield Road
Oak Brook, IL 60521 18,107,143 (1) 0 18,107,143 19%
</TABLE>
Notes:
(1) The shares shown in this table do not include the 1,250,000 shares which
are the subject of an option granted to WMI Urban Services, Inc. on
December 31, 1995 for the reason that such option is not exercisable until
January 1, 1997.
(Item 12 is continued on the next page.)
34
<PAGE>
The following table sets forth as of March 5, 1996 the beneficial
ownership of the Registrant's limited partner shares with respect to
ServiceMaster's directors and senior management advisers, those executive
officers named in the Summary Compensation Table (page 27) and the Registrant's
directors and officers as a group:
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership (1)
(1) (2) (3) (4) (5)
Sole Voting
Name of and Investment Total Percent
Beneficial Owner Power Other Ownership Ownership
- ---------------- -------------- ----- --------- ---------
<S> <C> <C> <C> <C>
Paul W. Berezny (3)(6)(8) 34,608 356,455 391,063 0.412%
Henry O. Boswell (2)(4) 11,000 30,050 41,050 0.043%
Carlos H. Cantu (4)(5)(12) 582,309 396,608 978,917 1.029%
Robert D. Erickson (4)(5)(6)(7) 383,278 46,750 430,028 0.452%
Brian Griffiths 0 0 0 0.000%
Sidney E. Harris 0 381 381 0.000%
Herbert P. Hess (4)(8) 72,500 9,000 81,500 0.086%
Michele M.Hunt 0 0 0 0.000%
Donald K. Karnes (4) 577,336 0 577,336 0.608%
Robert F. Keith (4)(5) 193,129 41,902 235,031 0.247%
Gunther H. Knoedler (4)(6) 25,496 0 25,496 0.027%
James D. McLennan (4) 11,320 0 11,320 0.012%
Jerry D. Mooney (4)(16) 55,140 200,506 255,646 0.269%
Ernest J. Mrozek (4)(5) 138,878 41,902 180,780 0.190%
Vincent C. Nelson (4)(8)(9)(10) 18,717 181,945 200,662 0.211%
Kay A. Orr (4) 6,325 0 6,325 0.007%
Brian D. Oxley (3)(4)(5) 189,548 96,554 286,102 0.301%
Dallen W. Peterson 32,442 0 32,442 0.034%
C. William Pollard (4)(5)(11) 655,639 62,619 718,258 0.754%
Philip B. Rooney (4) 32,479 0 32,479 0.034%
Burton E. Sorensen (4) 8,375 0 8,375 0.009%
Charles W. Stair (5)(6)(13) 360,262 40,859 401,121 0.422%
David K. Wessner (3)(4)(8)(14)(15) 53,190 968,111 1,021,301 1.075%
All directors and officers
as a group (141 persons) (17) 8,248,525 3,147,391 11,395,916 11.704%
</TABLE>
Notes:
(1) The shares owned by each person and by all directors and officers as a
group, and the shares included in the total number of shares, have been
adjusted, and the percentage ownership figures have been computed, in
accordance with Rule 13d-3(d)(1)(i).
(2) Shares in column (3) 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.
35
<PAGE>
(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 4,482 shares held in trust for the benefit of family
members as to which beneficial ownership is disclaimed.
(10) Shares in column (3) include 1,725 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 4,300 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 officer. Mr. Cantu disclaims beneficial
ownership of such shares.
(13) Shares in column (3) include 17,725 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 2,365,908 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. Keith - 115,000 shares; Mr. Mrozek - 80,000 shares; Mr.
Oxley - 90,000; and all executive officers as a group - 792,000 shares.
36
<PAGE>
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 1995 based on the
managing general partner's 1.99% carried interest in the profits and losses of
these two partnerships. (See Note D, page 13).
Indebtedness of Management
The following executive officers were indebted to The ServiceMaster
Company in excess of $60,000 at some point during the year 1995. 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 1995 under the
ServiceMaster 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 such indebtedness
outstanding during the year 1995; the figure in parentheses is the amount of
such indebtedness outstanding on March 15, 1996: Charles W. Stair - $500,000
($500,000); Brian D. Oxley - $712,298 ($363,167); Jerry D. Mooney - $405,587
($405,587); Robert F. Keith - $102,066 ($77,852); Ernest J. Mrozek - $94,008
($75,402); and Vernon T. Squires - $63,664 ($0). 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.
37
<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 1995, on pages 27 - 44 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, 1995, 1994 and 1993
Consolidated Statements of Financial Position as of December 31,
1995 and 1994
Consolidated Statements of Cash Flows for the three years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity for the three
years ended December 31, 1995, 1994 and 1993
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 37.
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
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.
38
<PAGE>
3. Exhibits
The exhibits filed with this report are listed on pages 63-67 herein
(the "Exhibits Index").
The following entries in the Exhibits Index are management contracts
or compensatory plans in which a director or any of the named
executive officers of the Registrant does or may participate.
Reference is made to the Exhibits Index for the filing with the
Commission which contains such contract or plan.
Exhibit Contract or Plan
------- ----------------
10.1 1987 ServiceMaster Option Plan.
10.3 Deferred Compensation and Salary Continuation Agreement
for Officers.
10.4 Deferred Directors Fee Agreement.
10.5 ServiceMaster Executive Share Subscription Program.
10.6 Incentive Reward Compensation Plan.
10.9 ServiceMaster Profit Sharing, Savings & Retirement Plan
as amended and restated effective January 1, 1987.
10.11 Share Grant Award Plan.
10.15 ServiceMaster 10-Plus Plan. See also Item 10.20.
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.
(b) Reports on Form 8-K
None in the last quarter of the period covered by this Report on Form 10-K.
39
<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.
40
<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 SHARE-
HOLDER, 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 decisions, 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 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
41
<PAGE>
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
Partnerships 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 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 restrictions, then the IRS might attempt to classify one or both of
the Principal Partnerships as associations taxable as corporations.
42
<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 association 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 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
43
<PAGE>
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, 1995, the Public Partnership's cash distributions to its shareholders have
been substantially in excess of the taxes payable in respect of the taxable
income allocated to such shareholders. The Public Partnership has no reason to
expect that this situation will not continue through the end of the year 1997.
ServiceMaster SGP Trust. In recognition of the fact that in 1993 (for the
first time in the Public Partnership's history) taxable income was likely to
exceed cash distributions to many shareholders of the Public Partnership, the
Principal Subsidiary Partnership admitted the ServiceMaster T Trust as a
special general partner of the Principal Subsidiary Partnership effective
January 1, 1993. On September 30, 1993, the ServiceMaster T Trust was replaced
by the ServiceMaster A Trust. Each of these trusts is hereinafter referred to
as the "SGP Trust". The interest held by the SGP Trust is denominated in the
Principal Subsidiary Partnership's partnership agreement as a Class T
Partnership Interest. (See Note R, page 17). As stated in Note R, 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 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.
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
44
<PAGE>
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 shareholder 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 Partnership 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 tax-
able 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 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 attributable 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 Part-
nership) 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.
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Under current law, a partner who is subject to the "at-risk" limitations
of Code Section 465 may not deduct his or her allocable share of partnership
losses for a taxable year to the extent they exceed the aggregate amount for
which he or she is considered to be "at-risk" with respect to the partnership
activities giving rise to those losses as of the end of its taxable year in
which the losses occur. Because it is not anticipated that the Principal
Partnerships will incur losses that exceed either the shareholders' aggregate
basis in their Partnership Shares or amounts "at-risk" with respect to the
Principal Partnerships' activities, the "at-risk" limitations under current law
should generally not affect shareholders adversely.
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 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 dis-
tributee 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
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that an allocation of deductions attributable to depreciation will be
transitory due to a provision for a subsequent corresponding allocation of gain
attributable to the disposition of that property.
In addition to the regulations described above, the Treasury has issued
regulations which address the effect of nonrecourse liabilities upon
partnership allocations. Under the regulations, if (i) the partnership
maintains capital accounts in accordance with specific rules set forth in the
regulations and allocations are reflected through an increase or decrease in
partners' capital accounts and (ii) liquidating distributions are required to
be made in accordance with partners' respective positive capital account
balances by the end of the taxable year (or, if later, within 90 days after the
date of liquidation), then a partner may be allocated nonrecourse deductions
that cause his or her capital account to fall below zero, provided (among other
requirements) that the deficit produced by the allocation is not in excess of
the minimum gain that would be allocated to the partner in the event the
partnership property securing the nonrecourse liability were disposed of in a
taxable transaction in full satisfaction of such liability. The regulations
further provide that in the event there is a decrease in such partnership's
minimum gain for a partnership taxable year, the partners must be allocated
items of partnership income and gain for such year (and, if necessary, for
subsequent years) in proportion to, and to the extent of, an amount equal to
such partner's share of the net decrease in partnership minimum gain during
such year.
The Principal Partnership Agreements provide that a capital account is to
be maintained for each partner, that the capital accounts are to be maintained
in accordance with applicable 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 Partner-
ships 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 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.
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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.
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
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owner of a Partnership Share during such month but after the fifteenth day of a
calendar month will be allocated the taxable income and losses attributable to
the second half of such month if he or she holds such share for the remainder
of such month.
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.
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."
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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 market value at the time the shareholder transferred his shares. See
"Depreciation; Amortization; 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 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
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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 44, the existence of the SGP Trust means
that the taxable income of ServiceMaster Limited Partnership as allocated to
each of its shareholders will not be greater than the cash distributions made
to that shareholder. For many shareholders, however, taxable income will be
less than their cash distributions due to the effect of the Section 754
election. The principal effect of the Section 754 election is to cause the
calculation of a partner's share of taxable income to reflect amortization and
depreciation deductions which are determined by using a higher basis
(reflecting the partner's purchase price) in the underlying assets than the
partnership's own internal, historical basis for those assets. In this
connection, the provision in the Revenue Reconciliation Act of 1993 which
permits the amortization of intangible assets over a 15-year period has
important consequences to those persons who purchased ServiceMaster shares on
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 offsetting 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 organizations 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
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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 or tax return filing
requirement.
Other Section 754-Related Matters. If a shareholder's adjusted basis in
his or her Partnership Shares is less than his or her proportionate share of
adjusted basis of the Principal Partnerships' property at the time of
acquisition of such Partnership Shares, such shareholder's share of adjusted
basis of the Principal Partnerships' property must be reduced to equal his or
her basis in the Partnership Shares, resulting in adverse 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.
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
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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
Principal Partnerships" and "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.
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.
53
<PAGE>
Tax-Exempt Entities, Individual Retirement Accounts and
Regulated Investment Companies
Unrelated Business Taxable Income. Tax-exempt entities (including IRAs
and trusts that hold assets of employee benefit or retirement plans) are
subject to tax on certain income derived from a business regularly carried on
by the entity that is 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
page 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 company (within the meaning of Code
Section 851), the shareholder's income derived from the Principal Partnerships
will be treated as income from dividends, interest and gains from the sale or
other disposition of securities only to the extent the shareholder's income is
attributable to such dividends, interest and gains realized by the Principal
Partnerships.
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 infor-
mation will be provided within 90 days after the end of the Public
Partnership's taxable year.
Partnership Tax Returns and Possible Audit. Although a partnership is not
required to pay any Federal income tax, tax audits are conducted, and the tax
treatment of partnership income, loss, deduction and credit is determined, at
the partnership level in a unified proceeding.
In audits of partnerships, the IRS ordinarily will provide notice of the
commencement of administrative proceedings and final adjustment only to each
partner with an interest in profits of 1% or more. The Corporate General
Partner is designated the "tax matters partner" ("TMP") to receive notice on
behalf of and to provide notice to those shareholders with interests of less
than 1% in the Public Partnership ("non-notice shareholders"). The TMP may
extend the statutory period of limitations for assessment of adjustments
attributable to "partnership items" for all shareholders and may enter into a
binding settlement on behalf of non-notice shareholders, except for any group
of such shareholders with an aggregate interest of 5% or more in Public
Partnership profits that elects to form a separate notice group or shareholders
who otherwise properly notify the IRS that the TMP is not authorized to act on
their behalf. If the IRS and the TMP fail to settle an audit proceeding, then
the TMP may choose to litigate the matter. In that event, the TMP would select
the court in which such litigation would occur (including, perhaps, a court
where prepayment of the tax may be required). All shareholders would have the
right to participate in such litigation and, regardless of participation, would
be bound by the outcome of the litigation. Because shareholders will be
affected by the outcome of any administrative or court proceedings with respect
to both the Public Partnership and the Principal Subsidiary Partnership, the
Corporate General Partner intends to provide shareholders with appropriate
notices of Federal income tax proceedings with respect to both Principal
Partnerships.
54
<PAGE>
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 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 attributable to a
substantial understatement of income tax if it is shown that there was a rea-
sonable 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
55
<PAGE>
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 C corporation of tax amounting to more than $100,000) and compounded
daily. This interest applies to penalties as well as tax deficiencies.
Backup Withholding. Distributions to shareholders whose Partnership
Shares are held on their behalf by a broker may 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 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
56
<PAGE>
with a U.S. trade or business. The legislative history of Code Section 884
indicates that the branch prose tax is intended to apply to foreign
corporations that are partners in partnerships which have a U.S. trade or
business. Thus, foreign corporations which own shares in the Public Part-
nership may be subject to the branch profits tax on earnings and profits
attributable to the Principal Partnerships' income as well as federal income
tax on their share of Partnership income. The earnings and profits (which are
subject to branch profits tax) attributable to Partnership Shares held by a
foreign corporation will, of course, reflect a reduction for Federal income
taxes paid by the foreign corporate shareholder on its share of Partnership
income.
FIRPTA. The Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"), as amended by subsequent legislation, provides that gain or loss on
the disposition of a United States Real Property Interest ("USRPI") is taxable
in the United States as if effectively connected with a U.S. business and
imposes withholding requirements on such sales and on distributions of USRPIs
by partnerships to foreign persons. USRPIs include (i) United States real
estate and (ii) interest in certain entities (including publicly traded
partnerships) holding United States real estate. The shares will not be USRPIs
unless the value of the Principal Partnerships' United States real estate
equals or exceeds 50% of the value of all its business assets. Furthermore,
the FIRPTA rules generally do not apply to any foreign person which owns 5% or
less of the publicly traded Partnership Shares. 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 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.
57
<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, 1995:
Allowance for doubtful accounts--
Accounts receivable (current) $17,610 16,878 94 16,553 $18,029
------- ------ ------ ------ -------
Notes receivable (current) $ 2,504 350 --- 415 $ 2,439
------- ------ ------ ------ -------
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
------- ------ ------ ------ -------
</TABLE>
58
<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, 1996. 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, 1996
59
<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 15, 1996 By: /s/ C. WILLIAM POLLARD
----------------------
C. William Pollard
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in their capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ C. WILLIAM POLLARD Chairman and Director March 15, 1996
- ----------------------
C. William Pollard
/s/ CARLOS H. CANTU President and Chief Executive March 15, 1996
- ------------------- Officer and Director
Carlos H. Cantu
/s/ CHARLES W. STAIR Vice Chairman and Director March 15, 1996
- --------------------
Charles W. Stair
/s/ ERNEST J. MROZEK Senior Vice President and March 15, 1996
- -------------------- Chief Financial Officer (Principal
Ernest J. Mrozek Financial Officer)
60
<PAGE>
Signature Title Date
--------- ----- ----
/s/ PAUL W. BEREZNY, JR. Director March 15, 1996
- ------------------------
Paul W. Berezny, Jr.
/s/ HENRY O. BOSWELL Director March 15, 1996
- --------------------
Henry O. Boswell
/s/ BRIAN GRIFFITHS Director March 15, 1996
- -------------------
Brian Griffiths
/s/ SIDNEY E. HARRIS Director March 15, 1996
- --------------------
Sidney E. Harris
/s/ HERBERT P. HESS Director March 15, 1996
- -------------------
Herbert P. Hess
/s/ MICHELE M. HUNT Director March 15, 1996
- -------------------
Michele M. Hunt
/s/ GUNTHER H. KNOEDLER Director March 15, 1996
- -----------------------
Gunther H. Knoedler
/s/ JAMES D. McLENNAN Director March 15, 1996
- ---------------------
James D. McLennan
/s/ VINCENT C. NELSON Director March 15, 1996
- ---------------------
Vincent C. Nelson
/s/ KAY A. ORR Director March 15, 1996
- --------------
Kay A. Orr
61
<PAGE>
Signature Title Date
--------- ----- ----
/s/ DALLEN W. PETERSON Director March 15, 1996
- ----------------------
Dallen W. Peterson
/s/ PHILIP B. ROONEY Director March 15, 1996
- --------------------
Philip B. Rooney
/s/ BURTON E. SORENSEN Director March 15, 1996
- ----------------------
Burton E. Sorensen
/s/ DAVID K. WESSNER Director March 15, 1996
- --------------------
David K. Wessner
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
<C> <S>
2.1 Merger Agreement dated April 22, 1989, as Amended and Restated
as of September 22, 1989, by and among ServiceMaster Limited
Partnership, SVM Holding Corp., SVM Acquisition Corp., and
American Home Shield Corporation is incorporated by reference to
Annex A to the Proxy Statement/Prospectus included as part of
the Registration Statement on Form S-4 as filed by American Home
Shield Corporation and ServiceMaster Limited Partnership on
September 26, 1989.
2.2 Contribution Agreement dated December 31, 1995, among
ServiceMaster Limited Partnership, ServiceMaster Consumer
Services Limited Partnership, WMI Urban Services, Inc., and WMX
Technologies, Inc., is incorporated by reference to Exhibit 1 to
the Current Report on Form 8-K as filed by ServiceMaster Limited
Partnership on January 15, 1996 (the "January 15, 1996 8-K").
2.3 Option Agreement dated December 31, 1995 between ServiceMaster
Limited Partnership, ServiceMaster Incorporated of Delaware, and
WMI Urban Services, Inc. is incorporated by reference to Exhibit
2 to the January 15, 1996 8-K.
2.4 Relationship Agreement dated December 31, 1995 between
ServiceMaster Limited Partnership, ServiceMaster Incorporated of
Delaware, WMX Technologies, Inc. and WMI Urban Services, Inc. is
incorporated by reference to Exhibit 3 to the January 15, 1996
8-K.
4.1 ServiceMaster Limited Partnership Agreement of Limited
Partnership, as Amended and Restated on December 30, 1986 is
incorporated by reference to Exhibit 4.1 to the Annual Report on
Form 10-K for the year ended December 31, 1986 (SEC File Number
0-3168) (the "1986 10-K").
4.2 Amendment No. 1 to the Amended and Restated Agreement of Limited
Partnership of ServiceMaster Limited Partnership is incorporated
by reference to Exhibit 4.2 to the Annual Report on Form 10-K
for the year ended December 31, 1987 (SEC File No. 1-9378) (the
"1987 10-K").
4.3 Amendment No. 2 to the Amended and Restated Agreement of Limited
Partnership of ServiceMaster Limited Partnership is incorporated
by reference to Exhibit 4.3 to the Annual Report on Form 10-K
for the year ended December 31, 1988 (SEC File No. 1-9378) (the
"1988 10-K").
4.4 Amendment No. 3 to the Amended and Restated Agreement of Limited
Partnership of ServiceMaster Limited Partnership is incorporated
by reference to Exhibit 4.4 to the Annual Report on Form 10-K
for the year ended December 31, 1989 (SEC File No. 1-9378) (the
"1989 10-K").
4.5 Amended and Restated Agreement of Limited Partnership of
ServiceMaster Limited Partnership, effective January 31, 1992,
is incorporated by reference to Annex A to the Proxy
Statement/Prospectus of ServiceMaster Limited Partnership and
ServiceMaster Incorporated of Delaware dated December 11, 1991
(the "December 1991 Proxy Statement/Prospectus").
4.6 Amended and Restated Agreement of Limited Partnership of
ServiceMaster Limited Partnership effective January 1, 1993 is
incorporated by reference to Exhibit 4.10 to the Annual Report
on Form 10-K for the year ended December 31, 1992 (SEC File No.
1-9378) (the"1992 10-K").
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<PAGE>
Exhibit No. Description of Exhibit
- ----------- ----------------------
4.7 The ServiceMaster Company Limited Partnership Agreement of
Limited Partnership, as Amended and Restated on December 30,
1986 (the "Amended and Restated ServiceMaster Company Limited
Partnership Agreement"), is incorporated by reference to Exhibit
4.2 to the 1986 10-K.
4.8 Amendment No. 1 to the Amended and Restated ServiceMaster
Company Limited Partnership Agreement is incorporated by
reference to Exhibit 4.5 to the 1988 10-K.
4.9 Amendment No. 2 to the Amended and Restated ServiceMaster
Company Limited Partnership Agreement is incorporated by
reference to Exhibit 4.7 to the 1989 10-K.
4.11 Amended and Restated Agreement of Limited Partnership of The
ServiceMaster Company Limited Partnership, effective January 1,
1993, is incorporated by reference to Exhibit 4.11 of the 1992
10-K.
10.1 1987 ServiceMaster Option Plan is incorporated by reference to
Exhibit 10.1 of the ServiceMaster Registration Statement on Form
S-8 (No. 33-19109), filed with the SEC on December 16, 1987 (the
"Option Plan Registration Statement").
10.2 Form of Option Agreement for 1987 ServiceMaster Option Plan is
incorporated by reference to Exhibit 10.2 of the Option Plan
Registration Statement.
10.3 Form of Deferred Compensation and Salary Continuation Agreement
for Officers is incorporated by reference to Exhibit 10(c)(3) to
the Annual Report on Form 10-K for the year ended December 31,
1980 (SEC File No. 0-3168) (the "1980 10-K").
10.4 Form of Deferred Directors Fee Agreement is incorporated by
reference to Exhibit 10(c)(4) to the 1980 10-K.
10.5 Form of ServiceMaster Executive Share Subscription Program,
Share Subscription and Purchase Agreement, Disclosure
Confirmation, effective August 18, 1987, is incorporated by
reference to Exhibit 10.5 to the 1987 10-K.
10.6 Incentive Reward Compensation Plan is incorporated by reference
to Exhibit 10(c)(6) to the 1980 10-K.
10.7 ServiceMaster Industries Inc. Profit Sharing, Savings and
Retirement Trust dated April 1, 1984 is incorporated by
reference to Exhibit 10(c)(11) to the Annual Report on Form 10-K
for the year ended December 31, 1985.
10.9 ServiceMaster Profit Sharing, Savings and Retirement Plan
amended and restated effective January 1, 1987 is incorporated
by reference to the 1987 10-K.
10.10 ServiceMaster Partnership Share Investment Plan (the "PSIP") is
incorporated by reference to the PSIP Registration Statement on
Form S-8 (No. 33-19763) filed with the SEC on January 22, 1988,
as amended through all post-effective amendments filed on or
before February 10, 1988.
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<PAGE>
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.11 Form of the Share Grant Award Plan is incorporated by reference
to Exhibit 10.12 to the 1987 10-K.
10.12 License Agreement by and among The ServiceMaster Company Limited
Partnership, The Terminix International Company Limited
Partnership and Duskin Co., Ltd., dated May 11, 1987 is
incorporated by reference to Exhibit 10.3 to the 1987 10-K.
10.13 Form of Executive Debenture Equity Program 9% Convertible
Subordinated Debenture Due April 1, 1995; Subscription to
Purchase; Form of Call Agreement; Form of Promissory Note is
incorporated by reference to Exhibit 10.14 to the 1987 10-K.
10.14 The Terminix International Company LP Profit Sharing Retirement
Plan (previously known as Cook International, Inc. Profit
Sharing Retirement Plan) effective January 1, 1984; Amendment
No. One to The Terminix International Company L.P. Profit
Sharing Retirement Plan effective January 1, 1986 and April 1,
1986; Amendment No. Two, effective April 1, 1986; Amendment No.
Three, effective January 1, 1987 and January 1, 1988; The
Terminix International Company L.P. Profit Sharing Retirement
Trust, all of which are incorporated by reference to Exhibit
10.15 to the 1987 10-K.
10.15 ServiceMaster 10-Plus Plan is incorporated by reference to
Exhibit 4.2 to the ServiceMaster Limited Partnership
Registration Statement on Form S-8 (No. 33-39148) filed with the
SEC on February 26, 1991 (the "10-Plus Registration Statement").
10.16 Form of Option Agreement for the ServiceMaster 10-Plus Plan is
incorporated by reference to Exhibit 4.3 to the 10-Plus
Registration Statement.
10.17 Form of Directors Deferred Fees Plan (ServiceMaster Shares
Alternative) is incorporated by reference to Exhibit 10.18 to
the Annual Report on Form 10-K for the year ended December 31,
1990 (SEC File No. 1-9378) (the "1990 10-K")
10.18 Form of Directors Deferred Fees Agreement (ServiceMaster Shares
Alternative) is incorporated by reference to Exhibit 10.19 of
the 1990 10-K.
10.19 Form of ServiceMaster Deferred Fees Plan Trust is incorporated
by reference to Exhibit 10.20 of the 1990 10-K.
10.20 ServiceMaster 10-Plus Plan as amended September 3, 1991 is
incorporated by reference to Exhibit 10.21 to the Annual Report
on Form 10-K for the year ended December 31, 1991 (the "1991 10-
K").
10.21 Form of Option Agreement for the ServiceMaster 10-Plus Plan as
amended September 3, 1991 is incorporated by reference to
Exhibit 10.22 to the 1991 10-K.
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").
65
<PAGE>
Exhibit No. Description of Exhibit
- ----------- ----------------------
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, 1995, 1994 and 1993.
13 The ServiceMaster Annual Report to Shareholders for the year
ended December 31, 1995 (the "1995 Annual Report"). The parts
of the 1995 Annual Report which are expressly incorporated into
this report by reference shall be deemed filed with this report.
All other parts of the 1995 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").
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.
66
<PAGE>
Exhibit No. Description of Exhibit
- ----------- ----------------------
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.
</TABLE>
67
<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 10.
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 13 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 Services
Index over the five year period from January 1, 1991 to December 31, 1995. The
chart shows that ServiceMaster outperformed both indices in 1991, 1992, 1993,
1994 and 1995 by wide margins over the last four years.
68
<PAGE>
EXHIBIT A
Material incorporated in this Form 10-K by reference to the ServiceMaster
Annual Report to Shareholders for 1995.
Selected Financial Data
[Attached]
Management's Discussion and Analysis of Financial Condition and Results of
Operation
[Attached]
Financial Statements and Supplemental Data
[Attached]
Market For Registrant's Partnership Shares and Related Security Holder Matters
[Attached]
69
<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
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Number of shares used in computing
income per share and equivalent shares--
Shares outstanding on weighted
average basis. . . . . . . . . . . . . . . . . . . 77,150 75,748 75,235
Equivalent shares--
Options and subscriptions outstanding. . . . . . . 2,163 1,690 1,611
------ ------ ------
Total weighted average and equivalent shares 79,313 77,438 76,846
====== ====== ======
Primary earnings per share. . . . . . . . . . . . . . . $ 2.17 $ 1.81 $ 1.90
====== ====== ======
Net income. . . . . . . . . . . . . . . . . . . . . . . $172,019 $139,883 $145,947
Interest on convertible debentures. . . . . . . . . . . 1,901 2,078 2,539
------ ------ ------
Adjusted net income . . . . . . . . . . . . . . . . . . $173,920 $141,961 $148,486
======== ======== ========
Weighted average number of common
shares outstanding. . . . . . . . . . . . . . . . . . 80,081 77,656 77,466
Other potentially dilutive securities . . . . . . . . . 1,443 1,448 2,037
------ ------ ------
Total weighted average number
of shares . . . . . . . . . . . . . . . . . . . . . . 81,524 79,104 79,503
====== ====== ======
Fully diluted earnings per share. . . . . . . . . . . . $ 2.13 $ 1.79 $ 1.87
====== ====== ======
</TABLE>
Highlights
<TABLE>
<CAPTION>
(For years ended December 31,)
1995 1994 Change
<S> <C> <C> <S>
Partnership Operating Results:
(In thousands, except per share data)
Customer level revenue (1) $4,525,000 $4,243,000 + 7%
Operating revenue 3,202,504 2,985,207 + 7%
Operating income 251,867 214,026 + 18%
Net income:
Consolidated 172,019 139,883 + 23%
Consumer Services business unit 135,892 102,428 + 33%
Management Services business unit 65,501 59,250 + 11%
Net income per share (2) 2.17 1.81 + 20%
Cash distributions to shareholders
and shareholders' trust 127,070 89,153 + 43%
Direct cash distributions per share .95 .92 + 3%
Proforma Corporate Operating Results:(3)
(in thousands, except per share data)
Net income $ 105,854 $ 85,012 + 25%
Net income per share 1.33 1.10 + 21%
Financial Position (In thousands):
Total assets $1,649,890 $1,230,839 + 34%
Long-term debt 411,903 386,511 + 7%
Shareholders' equity 746,660 307,266 +143%
Share Price Range:
(traded on the New York Stock Exchange under the symbol SVM)
High price $ 30.38 $ 28.38
Low price $ 21.50 $ 21.50
Closing price $ 30.25 $ 24.38
</TABLE>
Notes:
(1) Customer level revenue represents the revenues of ServiceMaster
operations and the estimated revenues of the independent licensed franchises
operating under the Terminix, ServiceMaster, TruGreen-ChemLawn, and Merry
Maids trade names.
(2) Computations are based on the weighted average shares outstanding of 79.3
million in 1995 and 77.4 million in 1994.
(3) The Partnership is not currently subject to federal and state income
taxes. However, under current law, this tax status will expire at the end of
1997, after which the Partnership will be taxed as a corporation. A plan for
early reincorporation has been approved by the shareholders and if deemed
appropriate, the Partnership will reincorporate, on a tax-free basis to
shareholders, on or before December 31, 1997. It is currently estimated that
the effective tax rate upon reincorporation will be approximately 40% of
pretax earnings. This estimate is necessarily subject to change based on
changes in circumstances, statutory tax rates, etc. The proforma information
provided above has been determined on a basis that assumes that
reincorporation had occurred as of the beginning of each respective year
1
<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)
1995 Compared to 1994
Revenues increased 7% to $3.2 billion due to internal growth and
the inclusion of the European pest control acquisitions made in the
second half of 1994, partially offset by the disposition of the
Education Food Service business in February, 1995. Operating income
increased 18% to $252 million, while margins increased to 7.9% of
revenue from 7.2% in 1994, reflecting the combined effects of the
continued rapid growth of our higher margin Consumer Services business
unit, the favorable effects of overhead leveraging throughout the
enterprise and reduced costs in the Management Services business unit.
Net income was $172 million, reflecting a 23% increase over 1994,
while earnings per share totalled $2.17, an increase of 20%. Earnings
per share reflect the issuance of 2.8 million shares in January, 1995,
in connection with the acquisition of the TruGreen-ChemLawn minority
interest, partially offset by the effects of the ongoing share
repurchase program.
The Consumer Services business segment achieved a 14% increase in
revenues and net income growth of 33%, with solid performances
achieved by all units. TruGreen-ChemLawn operations had strong growth
in revenues and profits despite unfavorable weather conditions. This
primarily resulted from significant increases in the customer base and
productivity improvements. Terminix achieved solid growth in revenues
and profits, with improvements in customer retention, cost controls
and improved productivity. American Home Shield achieved very strong
increases in gross contracts written and operating profits, primarily
as a result of geographic expansion in the home resale market,
increases in direct-to-consumer sales, and continued improvement in
the rate of contract renewals. The ServiceMaster
Residential/Commercial operations continued to achieve strong
increases in disaster recovery services, which are provided by both
franchisees and on a direct basis for more significant commercial
projects. The Merry Maids business achieved solid double-digit
increases in revenues and profits as a result of strong growth in
royalty fees from existing franchisees along with encouraging results
from company-owned branches.
The Management Services business segment achieved 11% profit growth
for the year. Revenues were below prior year levels, primarily
reflecting the disposition of the Education Food Service business
early in the year. On a comparable basis, revenues increased
approximately 3% for the year. Profits in the healthcare market
increased sharply, despite continuing industry contraction in the
acute care sector of that market, as a result of cost reductions and
improvements in customer retention. Annualized new start revenues in
healthcare increased over prior year levels, primarily due to strong
sales of management support services to long term care facilities. In
early 1996, the Management Services Healthcare operations were
combined with the Diversified Health Services operations in order to
integrate all of the health care capabilities of the Partnership and
to provide a competitive advantage in efficiently and effectively
serving the entire continuum of health care. This combination should
provide expanded sales opportunities and operating synergies in the
future. Profits in the education market increased modestly over prior
year levels, despite losses and wind-down costs in the food service
line prior to its disposition. The increase in profits primarily
reflects improved efficiencies resulting from last year's
reorganization, as well as other cost control efforts. The Business
and Industry unit achieved strong increases in both revenues and
profits, with a substantial increase in services to the aviation
industry.
Revenues in New Business Development and Parent increased 117% to
$265.8 million and operating income increased 30% to $33.4 million,
reflecting the full year inclusion of the European pest control
operations acquired in the last four months of 1994. ServiceMaster
Diversified Health Services continued to achieve excellent growth in
revenues and profits due to increases in the numbers of facilities
served and strong growth in medical supply sales and ancillary
services. International operations achieved solid growth in royalty
fees from existing licensees. The direct European pest control
operations acquired in the second half of 1994 achieved modest net
income after all acquisition costs and continued to perform in
accordance with expectations.
On a consolidated basis, cost of services rendered and products sold
increased 5.8% but continued to decline as a percentage of revenue
from 78.7% in 1994 to 77.6% in 1995. This decrease as a percentage of
revenue reflects the changing mix of the business as Consumer Services
increases in size in relation to the overall business of the
Partnership. The Consumer Services units operate at a higher gross
profit margin than the Management Services business units, but incur
relatively higher levels of selling and administrative costs.
Consolidated selling and administrative expenses increased 10.3%
over the prior year, reflecting increased volume in the Consumer
Services businesses as well as the International acquisitions. As a
percent of revenue, these costs increased from 14.1%
27
<PAGE>
in 1994 to 14.5% in 1995. This increase as a percentage of revenue is
also primarily attributable to the changing business mix of the
Partnership.
Overall operating income margins continue to reflect effective
leveraging and rapid growth in higher margin businesses, increasing to
7.9% of revenues.
Interest expense increased over prior year levels reflecting
increased borrowings primarily relating to the late 1994 European pest
control acquisitions and a volume-related increase in seasonal
borrowings, partially offset by the proceeds received from the sale of
the Education Food Service business. Minority interest expense
increased slightly for the year reflecting higher amounts associated
with the minority ownership interest in the rapidly growing Consumer
Services business, partially offset by the purchase of the TruGreen-
ChemLawn minority interest early in 1995. Taxes increased over 1994
levels, reflecting increased profitability at American Home Shield
and, to a lesser extent, taxes relating to the recently acquired
European pest control businesses. Unlike the rest of the enterprise,
these businesses are organized as corporations and hence are subject
to corporate level income taxes.
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.
For the Years Ended December 31,
1994 1993
---- ----
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
==== ====
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. 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 contract
renewals. The ServiceMaster Residential/Commercial operations
achieved strong increases in revenues and profits primarily due to
increased demand for heavy cleaning and disaster restoration services.
Merry Maids operations continued their accelerated rate of growth as a
result of new license sales and increased fees from existing
franchises.
Management Services revenue increased 3%, but net income decreased
3% due to reorganization-related costs. Healthcare operations
achieved growth in both revenues and profits, despite industry
consolidation and uncertainties regarding reform legislation. Profits
were reduced in the Business and Industry group 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. 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 and
charged to expense in 1994 totalled approximately $2.0 million.
Revenues of New Business Development and Parent increased 113% to
$122.4 million and operating income almost doubled, to $25.7 million,
reflecting the full year inclusion of VHA Long Term
28
<PAGE>
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 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 expense 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.
1995 Financial Position
The Partnership continued to exhibit strong cash generating ability
with cash flows from operations increasing 17% to $297 million and
free cash flows (after deducting property additions) increasing to
$253 million. Free cash flow is a key measurement for understanding
the growing of the Partnership. It represents the cash available for
investment after financing the growth of existing business units. For
may companies, free cash flow is less than reported earnings because
the incremental investment required to growth their existing
businesses is so high. This is not the case for the Partnership, as
free cash flow has consistently exceeded net income, primarily as a
result of non-cash charges for depreciation, amortization and minority
interest, combined with relatively low working capital requirements.
Cash and marketable securities totalled approximately $49 million, a
$15 million increase from the prior year. Unused commitments under
existing bank revolving credit facilities totalled $250 million at
December 31, 1995. Management believes that funds generated from
operations and other existing financial resources will continue to be
adequate to satisfy the ongoing operating needs of the Partnership.
In January, 1995, Consumer Services acquired the 15% minority
interest in TruGreen-ChemLawn. The interest was purchased through the
issuance of 2.8 million Partnership shares and a contingent right to
receive an additional payment of shares in 1997, depending upon the
relative magnitude of TruGreen-ChemLawn earnings in comparison to the
market performance of ServiceMaster shares in 1995 and 1996. Based on
current management projections, potential additional shares issued
would represent less than 1% of total shares outstanding at year-end,
and would not have a material effect on the Partnership's financial
statements.
In February, 1995, the Partnership sold 80% of the Education Food
Service business to DAKA International, Inc. for $20.25 million.
In December, 1995, the Partnership completed a transaction with WMX
Technologies, Inc., (WMX) in which it received their 28% minority
interest in Consumer Services in exchange for 18.1 million
unregistered shares of ServiceMaster. The transaction represented a
negotiated acceleration of a conversion right previously held by WMX.
As a result, WMX now owns approximately 19% of the outstanding shares
of the Company. In addition, WMX received a five year option to
purchase an additional 1.25 million ServiceMaster shares at $33 per
share. Both the shares and the option include a number of important
voting and trading restrictions. WMX has also agreed not to increase
its ownership interest to over 21 percent. As part of this
transaction, both
29
<PAGE>
companies renewed their commitment to a long-term strategic
partnership that will offer expanded services and benefits to the
combined customer base of over 18 million customers.
The increase in accounts and notes receivable reflects general
business growth, increased short term notes receivable related to
specific investment projects in the long term care industry, and
modest increases in accounts receivable collection periods due to the
changing mix of the business.
The increases in inventories and prepaids and other assets are a
result of normal business growth.
Property and equipment increased primarily due to general business
growth, expansion and improvements at the Memphis headquarters
facility for Consumer Services and various acquisitions made during
the year. The Partnership does not have any material capital
commitments at this time.
The increase in intangible assets is primarily attributable to the
minority interest acquisitions of Consumer Services in December, 1995
and TruGreen-ChemLawn during the first quarter of the year, as well as
other small acquisitions.
Accounts payable and other liabilities increased from year end due
to general business growth and the effects of acquisitions. Deferred
revenues increased primarily as a result of strong growth in customer
prepayments in the lawn care operations and sharp increases in volume
at American Home Shield, where customers typically make an up-front
cash payment for home warranty coverage.
Long-term debt increased slightly reflecting acquisitions and
treasury share repurchases, which were mostly offset by strong
operating cash flows and proceeds from the sale of Education Food
Service.
Minority interest decreased from last year primarily reflecting the
acquisitions of the Consumer Services and TruGreen-ChemLawn minority
interests.
Total shareholders' equity increased by 143% to $747 million,
primarily as a result of the issuance of ServiceMaster shares in
connection with the purchase of the Consumer Services and TruGreen-
ChemLawn minority interests and strong earnings, partially offset by
share repurchases. The rate of return on weighted average equity for
1995 was 46%, again substantially exceeding industry norms.
The debt to book equity ratio continued to improve, from 1.28 to 1
at the end of 1994 to just under .6 to 1 at the end of 1995. Based on
market value of the Partnership's equity, which the Company believes
is more meaningful under the circumstances, the ratio was under .15 to
1.
At year end, the aggregate market value of the Partnership's
outstanding shares totalled nearly $2.9 billion, an increase of
approximately 56% over the level at the beginning of the year,
reflecting the combined effects of 24% market appreciation during the
year and the issuance of Partnership shares to WMX at year end. An
investor who held their shares for the entire year realized a total
return on their investment of 28%, very closely approximating the
annual compounded return experienced by ServiceMaster shareholders
over the last five years.
In December, 1995, the Board of Directors of the Partnership
authorized the repurchase of up to $150 million of outstanding
Partnership shares in the open market or in privately negotiated
transactions. Shares repurchased under this program are available for
general Partnership purposes, including employee benefit programs.
The Partnership fully utilized the $60 million share repurchase
authorization that was received from the Board in December, 1994.
Cash distributions paid directly to shareholders totalled $74.3
million or $.95 per share, a 3.3% increase over the prior year.
However, total cash distributions, including payments made to the
shareholders' trust described below, increased 43% to approximately
$127 million.
Several years ago, the Partnership adopted a pattern of $.03 to
$.04 annual increases in direct distributions to shareholders for the
remaining term of the Partnership. As a result of this pattern,
management expects to be able to continue to increase the amount of
the direct distribution in both the year of reincorporation and
thereafter. Under current tax law, the Partnership is required to
convert to corporate form on or before December 31, 1997. The
shareholders have already approved a plan of reincorporation that
provides for a one-for-one, tax-free exchange of partnership shares
for stock. This is scheduled to occur at the end of 1997, although
earlier reincorporation is a possibility, with the exact timing at the
discretion of the Board of Directors.
30
<PAGE>
As discussed in previous years, ServiceMaster has established a
trust for the benefit of Partnership shareholders. On behalf of
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 from the Partnership sufficient to
pay its income tax obligations on this allocated taxable income. Cash
distributions made to the trust totalled $49.6 million in 1995 and
$16.3 million in 1994. The increase in 1995 includes a final payment
for 1994 taxes of approximately $8.3 million, along with increased
payments for 1995 due to significantly increased taxable income.
Taxable income per Partnership share in 1995 will be $.95 for those
shareholders who have held their shares since ServiceMaster adopted
partnership form in 1986. Taxable income per Partnership share will
be less than $.95 for Partnership shares purchased in 1987 and
thereafter.
The following table presents net income before interest, taxes,
depreciation and amortization (EBITDA). 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.
Substantially all of the Partnership's existing long-term debt
arrangements require it to maintain specified levels of EBITDA.
Management believes that EBITDA is another measure which demonstrates
the exceptional cash-generating abilities of the Partnership's
businesses, while highlighting the potential leveraging effect of the
acquisition-related fixed charges of interest expense, depreciation,
and amortization.
<TABLE>
<CAPTION>
(In thousands, except percentage data) 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net income $172,019 $139,883 $145,947 $122,065 $ 85,982
Depreciation 38,332 32,885 29,674 27,017 21,598
Amortization 27,656 21,323 20,282 19,322 16,581
Unusual non-cash charges --- --- --- 77,635 ---
Gain on issuance of subsidiary shares --- --- (30,200) (105,306) (5,841)
Cash income $238,007 $194,091 $165,703 $140,733 $118,320
Interest expense 35,855 31,543 32,483 32,155 31,153
Taxes 5,588 2,755 2,146 1,233 1,426
EBITDA $279,450 $228,389 $200,332 $174,121 $150,899
Growth over prior period 22% 14% 15% 15% 11%
</TABLE>
EBITDA should not be considered as alternatives to net income in
measuring the Partnership's performance, or used as exclusive measures of
cash flow because it does not consider the impact of working capital
growth, capital expenditures, debt principal reductions or other sources
and uses of cash which are disclosed in the Consolidated Statements of
Cash Flows.
31
<PAGE>
<TABLE>
<CAPTION>
Eleven Year Financial Summary
(In thousands, except per share and percentage data)
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operating Results (excluding all unusual items)
Operating revenue $ 3,202,504 $2,985,207 $2,758,859
Cost of services rendered
and products sold 2,486,292 2,350,011 2,192,684
Selling and administrative expenses 464,345 421,170 393,131
--------- --------- ---------
Operating income (Note) 251,867 214,026 173,044
--------- --------- ---------
% of operating revenue 7.9% 7.2% 6.3%
Non-operating expense (income) 74,260 71,388 55,151
Provision for income taxes 5,588 2,755 2,146
--------- --------- ---------
Net income excluding
unusual items (Note) $ 172,019 $ 139,883 $ 115,747
========= ========= =========
% of operating revenue 5.4% 4.7% 4.2%
% return on weighted
average shareholders' equity 46% 47% 46%
Per Share
Net income per share
excluding unusual items (Note) $ 2.17 $ 1.81 $ 1.51
Cash distributions to shareholders $ .95 $ .92 $ .89
Share price range:
High price $ 30.38 $ 28.38 $ 31.00
Low price $ 21.50 $ 21.50 $ 17.63
Shares used to compute net
income per share 79,313 77,438 76,846
Financial Position (at year end)
Current assets $ 393,239 $ 331,045 $ 291,325
Current liabilities 372,930 304,395 244,552
Working capital 20,309 26,650 46,773
Current ratio 1.1-1 1.1-1 1.2-1
Total assets 1,649,890 1,230,839 1,122,461
Non-current liabilities 517,603 483,906 471,177
Minority interest 12,697 135,272 117,513
Deferred gain --- --- ---
Shareholders' equity 746,660 307,266 289,219
Shares outstanding, net of treasury
shares and share subscriptions 95,212 75,976 76,415
Note: Operating results on a basis which includes restructuring and
unusual charges, gains on issuance of subsidiary shares, and the change in
accounting for postretirement benefits in prior years, are as follows.
There were no such unusual items in 1995 or 1994.
Operating income $ 251,867 $ 214,026 $ 173,044
Net income $ 172,019 $ 139,883 $ 145,947
Net income per share $ 2.17 $ 1.81 $ 1.90
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
ELEVEN YEAR FINANCIAL SUMMARY
(In thousands, except per share and percentage data)
1992 1991 1990 1989 1988 1987 1986 1985
---- ---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C> <C>
$2,488,854 $2,109,941 $1,825,750 $1,609,267 $1,531,276 $1,425,316 $1,122,503 $1,002,213
2,021,010 1,762,700 1,545,527 1,387,448 1,327,128 1,228,885 975,137 869,855
326,477 225,814 177,941 129,035 118,275 116,938 83,216 72,504
--------- --------- --------- --------- --------- --------- --------- ---------
141,367 121,427 102,282 92,784 85,873 79,493 64,150 59,854
--------- --------- --------- --------- --------- --------- --------- ---------
5.7% 5.8% 5.6% 5.8% 5.6% 5.6% 5.7% 6.0%
45,740 39,860 30,397 24,016 21,247 19,492 2,235 (1,586)
1,233 1,426 2,332 721 --- --- 29,160 28,735
--------- --------- --------- --------- --------- --------- --------- ---------
$ 94,394 $ 80,141 $ 69,553 $ 68,047 $ 64,626 $ 60,001 $ 32,755 $ 32,705
========= ========= ========= ========= ========= ========= ========= =========
3.8% 3.8% 3.8% 4.2% 4.2% 4.2% 2.9% 3.3%
54% 74% 130% 139% 135% 166% 48% 46%
$ 1.25 $ 1.10 $ .98 $ .93 $ .90 $ .85 $ .45 $ .44
$ .87 $ .85 $ .82 $ .78 $ .75 $ .67 $ .38 $ .35
$ 19.88 $ 17.38 $ 10.50 $ 10.75 $ 12.50 $ 14.13 $ 11.88 $ 11.38
$ 14.63 $ 9.75 $ 8.75 $ 9.38 $ 9.88 $ 9.75 $ 8.88 $ 7.75
75,688 72,556 71,207 72,957 71,859 70,883 73,862 73,803
$ 257,542 $ 217,517 $ 237,262 $ 219,661 $ 203,925 $ 128,804 $ 107,047 $ 82,652
206,755 157,458 158,046 135,375 76,908 59,993 51,162 42,351
50,787 60,059 79,216 84,286 127,017 68,811 55,885 40,301
1.2-1 1.4-1 1.5-1 1.6-1 2.7-1 2.1-1 2.1-1 2.0-1
1,005,531 843,660 796,935 593,693 485,492 371,104 340,226 132,758
511,211 376,638 372,052 410,056 346,970 260,267 248,226 14,595
77,906 78,229 55,636 9,174 10,186 8,660 8,732 ---
--- 109,354 115,195 --- --- --- --- ---
209,659 121,981 96,006 39,088 51,428 42,184 32,106 75,812
75,670 72,156 71,982 68,265 70,212 69,917 69,683 73,304
$ 62,432 $ 121,427 $ 95,782 $ 92,784 $ 85,873 $ 79,493 $ 64,150 $ 59,854
$ 122,065 $ 85,982 $ 83,053 $ 68,047 $ 64,626 $ 60,001 $ 32,755 $ 32,705
$ 1.61 $ 1.19 $ 1.17 $ .93 $ .90 $ .85 $ .45 $ .44
</TABLE>
All share and per share data reflect the three-for-two share splits in 1993,
1992, and 1985.
33
<PAGE>
Notes to the Consolidated Financial Statements
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 1994 and
1993 amounts have been reclassified to conform with the 1995
presentation. The preparation of the consolidated financial
statements requires management to make certain estimates and
assumptions required under generally accepted accounting principles
which may differ from the actual results.
Revenues: Revenues from termite, pest control, and lawncare services
are recognized as the services are provided. Revenues from franchised
services (which in aggregate represent less than 10% of consolidated
totals) consist of initial franchise fees received from the sales of
licenses, sales of products to franchisees, and continuing monthly
fees based upon franchise revenue.
Home warranty contract fees are recognized as revenues ratably over
the life of the contract. Customers' coverage under home warranty
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, 1995. The remaining inventory is finished goods to be
used on the customers' premises or sold to franchisees.
Depreciation and Amortization: Buildings and equipment used in the
business are stated at cost and depreciated over their estimated
useful lives using the straight-line method for financial reporting
purposes. The estimated useful lives for building and improvements
range from 10 to 40 years, while the estimated useful lives for
equipment range from 3 to 10 years. Intangible assets consist
primarily of trade names ($187 million), covenants not to compete ($17
million) and goodwill ($817 million). These assets are amortized on a
straight-line basis over their estimated useful lives as follows:
trade names - 40 years; covenants not to compete - 10 to 20 years; and
goodwill - 40 years. Long-lived assets, including fixed assets and
intangible assets, are periodically reviewed to determine
recoverability by comparing their carrying values to the undiscounted
future cash flows expected to be realized from their use. No recovery
problems have been indicated by these comparisons. If the
undiscounted future cash flows had been less than the carrying amount
of the asset, an impairment loss would have been recognized based on
the asset's fair value, and the carrying amount of the asset would
have been reduced accordingly.
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. Substantial new lines of
business and international operations are subject to federal and state
income taxes. Under existing legislation, this tax status will expire
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, with the exact timing determined at the discretion
of the ServiceMaster Board of Directors.
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, 1995 and 1994, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1995. 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, 1995 and 1994, and the consolidated results of operations and cash
flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
January 24, 1996
34
<PAGE>
<TABLE>
<CAPTION>
Statements of Income
(In thousands, except per share data)
Years Ended December 31,
------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operating Revenue $ 3,202,504 $ 2,985,207 $ 2,758,859
Operating Costs and Expenses:
Cost of services rendered
and products sold 2,486,292 2,350,011 2,192,684
Selling and administrative expenses 464,345 421,170 393,131
--------- --------- ---------
Total operating costs and expenses 2,950,637 2,771,181 2,585,815
--------- --------- ---------
Operating Income 251,867 214,026 173,044
Non-operating Expense (Income):
Interest expense 35,855 31,543 32,483
Interest and investment income (7,310) (5,389) (5,882)
Gain on issuance of subsidiary shares --- --- (30,200)
Minority interest, including General Partners' 2%
interest which totalled $3,505 in 1995,
$2,829 in 1994, and $2,979 in 1993 45,715 45,234 28,550
--------- --------- ---------
Income before Income Taxes 177,607 142,638 148,093
Provision for income taxes (1) 5,588 2,755 2,146
--------- --------- ---------
Net Income $ 172,019 $ 139,883 $ 145,947
========= ========= =========
Net Income Per Share (1 and 2) $ 2.17 $ 1.81 $ 1.90
==== ==== ====
</TABLE>
(1) The Partnership is not currently subject to federal and state income
taxes. However, under current law, this tax status will expire at the end
of 1997, after which the Partnership will be taxed as a corporation. A plan
for early reincorporation has been approved by the shareholders and if
deemed appropriate, the Partnership will reincorporate, on a tax-free basis
to shareholders, on or before December 31, 1997. It is currently estimated
that the effective tax rate upon reincorporation will be approximately 40%
of pretax earnings. This estimate is necessarily subject to change based
on changes in circumstances, statutory tax rates, etc. Proforma earnings
per share would be $1.33 in 1995, $1.10 in 1994 and $0.91 in 1993, assuming
reincorporation had occurred at the beginning of each year.
(2) Based on 79,313 shares in 1995, 77,438 shares in 1994, and 76,846
shares in 1993. All share and per share data reflect the three-for-two
share split in 1993.
(3) See accompanying Summary of Significant Accounting Policies and Notes
to the Consolidated Financial Statements.
35
<PAGE>
<TABLE>
<CAPTION>
Statements of Financial Position
(In thousands) As of December 31,
----------------------
1995 1994
---- ----
<S> <C> <C>
Assets
Current Assets:
Cash and marketable securities, consisting of:
Cash and cash equivalents of $23,113 in 1995
and $14,333 in 1994. Marketable securities
of $26,316 in 1995 and $20,111 in 1994 $ 49,429 $ 34,444
Receivables, less allowances of $20,468 in 1995
and $20,114 in 1994 243,649 211,714
Inventories 40,583 36,062
Prepaid expenses and other assets 59,578 48,825
------- -------
Total current assets 393,239 331,045
------- -------
Property, Plant, and Equipment, at Cost:
Land and buildings 47,621 45,043
Equipment 244,662 215,144
------- -------
292,283 260,187
Less: Accumulated depreciation 146,431 131,739
------- -------
Net property, plant, and equipment 145,852 128,448
------- -------
Other Assets:
Intangible assets, primarily trade names and goodwill,
less accumulated amortization of $133,275
in 1995 and $105,619 in 1994 1,021,050 686,309
Notes receivable, long-term securities,
and other assets 89,749 85,037
--------- ---------
Total Assets $ 1,649,890 $ 1,230,839
========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 50,456 $ 38,061
Accrued liabilities:
Payroll and related expenses 69,808 59,153
Insurance and related expenses 39,924 34,120
Other 84,067 73,965
Deferred revenues 115,244 90,869
Current portion of long-term obligations 13,431 8,227
------- -------
Total current liabilities 372,930 304,395
------- -------
Long-Term Debt 411,903 386,511
Other Long-Term Obligations 105,700 97,395
Commitments and Contingencies (see Notes)
Minority and General Partners' Interests
including General Partners' interest
of $1,392 in 1995 and $1,516 in 1994 12,697 135,272
Shareholders' Equity 746,660 307,266
--------- ---------
Total Liabilities and Shareholders' Equity $ 1,649,890 $ 1,230,839
========= =========
</TABLE>
See accompanying Summary of Significant Accounting Policies and Notes to
the Consolidated Financial Statements.
36
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows
(In thousands) Years Ended December 31,
---------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash and Cash Equivalents at January 1 $ 14,333 $ 17,271 $ 27,576
Cash Flows from Operations:
Net Income 172,019 139,883 145,947
Adjustments to reconcile net income to
net cash provided from operations:
Depreciation 38,332 32,885 29,674
Amortization 27,656 21,323 20,282
Gain on issuance of subsidiary shares --- --- (30,200)
Change in working capital, net of acquisitions:
Receivables (28,503) (21,957) (17,468)
Inventories and other current assets (16,209) 1,213 (13,681)
Accounts payable 10,773 5,081 32
Deferred revenues 19,691 10,751 20,367
Accrued liabilities 24,287 18,254 1,265
Minority interest and other, net 49,379 46,430 12,885
------- ------- -------
Net Cash Provided from Operations 297,425 253,863 169,103
------- ------- -------
Cash Flows from Investing Activities:
Property additions (44,624) (32,202) (33,113)
Business acquisitions, net of cash acquired (42,763) (90,250) (71,533)
Proceeds from sale of businesses 23,255 29,021 5,524
Notes receivable and financial investments (12,250) (9,043) (5,426)
Net purchases of securities (6,820) (4,594) (774)
Sale of equipment and other assets 2,250 2,229 4,639
Payments to sellers of acquired businesses (2,908) (2,223) (2,750)
------- ------- -------
Net Cash Used for Investing Activities (83,860) (107,062) (103,433)
------- ------- -------
Cash Flows from Financing Activities:
Distributions to shareholders and
shareholders' trust (127,070) (89,153) (79,123)
Short-term borrowings, net 96,067 75,904 111,652
Payment of borrowings and other obligations (85,945) (77,405) (155,974)
Purchase of treasury shares (58,500) (41,266) (11,254)
Redemption of preferred stock --- (14,650) ---
Distributions to holders
of minority interests (32,794) (13,088) (14,258)
Proceeds from employee share option plans 3,183 5,274 5,341
Proceeds from issuance of subsidiary shares --- --- 68,000
Other 274 4,645 (359)
------- ------- -------
Net Cash Used for Financing Activities (204,785) (149,739) (75,975)
------- ------- -------
Cash Increase (Decrease) During the Year 8,780 (2,938) (10,305)
------- ------- -------
Cash and Cash Equivalents at December 31 $ 23,113 $ 14,333 $ 17,271
======= ======= =======
</TABLE>
See accompanying Summary of Significant Accounting Policies and Notes
to the Consolidated Financial Statements.
37
<PAGE>
<TABLE>
<CAPTION>
Statements of Shareholders' Equity
(In thousands, except share data)
Limited Total
Treasury Restricted Partners' Shareholders'
Shares Shares Equity Equity
------ ------ ------ ------
<S> <C> <C> <C> <C>
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
Net income 1995 172,019 172,019
Shareholder distributions (127,070) (127,070)
Shares issued under option, subscription, and
grant plans, and other (193,551 shares) 2,431 1,361 13,965 17,757
Treasury shares purchased and related
costs (2,170,203 shares) (58,500) (58,500)
Shares issued for the acquisition of Consumer
Services minority interest (18,107,143 shares) 91,161 265,227 356,388
Shares issued for the acquisition of TruGreen-
ChemLawn minority interest (2,824,062 shares)
and other acquisitions 78,800 78,800
------- ------- ------- -------
Balance, December 31, 1995 $ (13,405) $ (7,549) $ 767,614 $ 746,660
======= ======= ======= =======
</TABLE>
All share data reflect the three-for-two share split in 1993.
See accompanying Summary of Significant Accounting Policies and Notes to
the Consolidated Financial Statements.
38
<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 Consumer
Services unit provides a variety of specialty services to residential
and commercial facilities. The Management Services unit provides a
variety of supportive management services to health care, education
and commercial accounts. The New Business Development unit includes
ServiceMaster Diversified Health Services, which provides management
services and other products and services to the long term care
industry, and the International operations of the Partnership, which
have been grouped with Parent due to the developmental status of these
businesses. The International operations are responsible for
overseeing the Consumer and Management Services which are provided in
foreign markets. Eliminations and Other includes minority interest
expense and the gain on issuance of subsidiary shares in 1993, as well
as eliminations made in preparing the consolidated financial
statements.
Information regarding 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
or profits of the business unit. Identifiable assets are those used
in carrying out the operations of the business unit and include
intangible assets directly related to its operations. The
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 Eliminations
Services Services and Parent and Other Consolidated
-------- -------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
1995 (In thousands)
Operating revenue $ 1,180,378 $ 1,756,316 $ 265,810 $ --- $ 3,202,504
Operating income 147,828 72,005 33,402 (1,368) 251,867
Interest expense 11,606 2,533 21,716 --- 35,855
Interest & investment income (3,113) (1,488) (2,709) --- (7,310)
Minority and General Partners' interest --- 4,644 (1,674) 42,745 45,715
Provision for income taxes 3,443 815 1,330 --- 5,588
Net income $ 135,892 $ 65,501 $ 14,739 $ (44,113) $ 172,019
Identifiable assets at December 31, 1995 $ 1,101,418 $ 188,583 $ 359,889 $ 1,649,890
Depreciation and amortization expense $ 36,719 $ 18,438 $ 10,831 $ 65,988
Capital expenditures $ 12,524 $ 17,497 $ 14,603 $ 44,624
1994 (In thousands)
Operating revenue $ 1,039,867 $ 1,822,984 $ 122,356 $ --- $ 2,985,207
Operating income 124,752 65,888 25,655 (2,269) 214,026
Interest expense 11,900 4,015 15,628 --- 31,543
Interest & investment 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 $ 102,428 $ 59,250 $ 11,186 $ (32,981) $ 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 $ 938,529 $ 1,762,883 $ 57,447 $ --- $ 2,758,859
Operating income 92,885 68,257 13,837 (1,935) 173,044
Interest expense 18,922 4,854 8,707 --- 32,483
Interest & investment 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 $ 5,264 $ 9,122 $ 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
</TABLE>
39
<PAGE>
Notes to the Consolidated Financial Statements
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.
Plan of Reincorporation and Taxes
ServiceMaster Incorporated was created as part of the 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 doing so to be in the best interest of a majority of the
Partnership's shareholders. No shares of ServiceMaster Incorporated are
currently outstanding and there are no plans to issue stock of
ServiceMaster Incorporated at the present time.
The reorganization has been structured as a merger in which
ServiceMaster Incorporated will become the successor entity through
which the public will invest in ServiceMaster after the reincorporation.
At the time of reincorporation, outstanding Partnership shares will be
converted on a one-for-one basis into new shares of common stock to be
issued by ServiceMaster Incorporated. No federal income tax will be
imposed on the shareholders of the Partnership as a result of the
reincorporation.
During the process of reincorporation, ServiceMaster will be entitled
to recognize a step-up in the tax basis of its assets, which will be
amortized against the taxable income of the surviving enterprise (i.e.
ServiceMaster Incorporated) in future years, resulting in an annual cash
benefit currently estimated at between $10 and $15 million. The exact
amount of the step-up will primarily depend upon the price and trading
volume of the Partnership shares prior to reincorporation. Management
currently estimates that upon reincorporation the effective tax rate
reflected in the Company's income statement will be approximately 40%.
Proforma earnings per share would be $1.33 in 1995, $1.10 in 1994 and
$0.91 in 1993, assuming reincorporation had occurred at the beginning of
each year. These estimates are necessarily subject to change based on
changes in circumstances, statutory tax rates, etc.
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.
In 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 1993.
In December, 1995, the Partnership issued 18.1 million unregistered
Partnership shares, representing approximately 19% of the adjusted total
number of shares outstanding, in exchange for WMX's 27.76% ownership
interest in Consumer Services. This transaction represented a
negotiated acceleration of a conversion right previously held by WMX
that was first exercisable beginning in 1998. WMX also received a five
year option to purchase an additional 1.25 million shares at $33.00 per
share. The unregistered shares and the option include a number of
voting and trading restrictions, including significant limitations on
open market sales, with ServiceMaster retaining a right of first
refusal. WMX has also agreed not to initiate any action that would
increase its ownership interest in ServiceMaster to more than 21%.
The shares issued to WMX were valued based upon the average market
price of the Partnership's shares at the time the transaction was agreed
to and announced, adjusted to reflect the significant voting and trading
restrictions on the shares, and other considerations. The valuation of
the restricted shares issued to WMX was determined in part based on a
review performed by an international investment banking firm. The
acquisition resulted in approximately $235 million in intangible assets,
primarily trade names and goodwill, which will be amortized on a
straight-line basis over 40 years. The following schedule represents
unaudited proforma consolidated results of operations as if the WMX
minority interest was acquired at the beginning of each period
indicated:
(in thousands, except per share data) 1995 1994
--------- ---------
Operating revenue $ 3,202,504 $ 2,985,207
Net income $ 203,038 $ 161,748
Net income per share $ 2.08 $ 1.69
40
<PAGE>
Notes to the Consolidated Financial Statements
These proforma results have been prepared for comparative purposes
only and do not purport to be indicative of what would have occurred
had the acquisition taken place at the beginning of each year, or the
results which may occur in the future.
In January, 1995, Consumer Services acquired the 15% minority
interest in TruGreen-ChemLawn in exchange for Partnership shares
valued at $70.6 million. This consideration represents 2.8 million
partnership shares valued at a price of $25 per share, which
approximated the quoted market price of the shares at the time of the
transaction. In addition, the Partnership provided 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. Related to this transaction, approximately
$59 million of intangible assets, primarily trade names and goodwill,
were recorded and are being amortized on a straight-line basis over 40
years.
In February, 1995, the Partnership sold 80% of the Education Food
Service business to DAKA International, Inc. for $10 million in cash
and a secured short-term note of
approximately $10.25 million which was fully collected by year end.
The gain realized on the sale was not material to the overall results
for the year.
In late 1994, the Partnership acquired three international pest
control companies: Anticimex Development AB (a Swedish pest control
company), Peter Cox, plc (a provider of pest control and wood
preservation services in the United Kingdom), and Protekta/Riwa (a
provider of pest control and property care in the Netherlands). The
aggregate cash consideration paid for these businesses totalled $72
million. The assets and liabilities of these businesses were recorded
in the Partnership's financial statement at their estimated fair
market values as of the acquisition dates, including approximately $78
million in intangible assets, primarily trade names ($28 million) and
goodwill ($50 million), which are being amortized on a straight-line
basis over 40 years.
In August, 1993, the Partnership acquired VHA Long Term Care (VHA-
LTC) for approximately $82.5 million. Equity investments were also
made by certain members of VHA Long Term Care management, who acquired
an 11% equity interest in VHA-LTC operations as part of the
transaction. 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 goodwill which is being amortized on a straight-line basis over 40
years.
The Partnership also made several small acquisitions, predominately
pest control and lawncare businesses, in 1995, 1994, and 1993, valued
at $51 million, $26 million, and $10 million, respectively.
Supplemental cash flow information regarding the Partnership's
acquisitions is as follows:
(In thousands) 1995 1994 1993
---- ---- ----
Fair value of assets acquired $ 502,430 $ 144,710 $ 106,147
Less liabilities assumed (24,246) (46,867) (13,407)
Net assets acquired 478,184 97,843 92,740
Less Partnership shares issued (435,188) (5,670) (18,285)
Less cash acquired (233) (1,923) (2,922)
Business acquisitions, net of cash acquired $ 42,763 $ 90,250 $ 71,533
The Partnership sold its minority equity investment in Norrell
Corporation in February, 1994, for approximately $29.3 million, which
exceeded its carrying value. In May, 1994, related 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.
Income Taxes
The Partnership is not directly subject to income taxes. Instead,
its taxable income or loss is allocated to its partners. However, the
Partnership has certain subsidiaries which operate in corporate form,
including American Home Shield, its home health 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:
(In thousands) 1995 1994 1993
---- ---- ----
Partnership income not subject to federal
income taxes $ 174,312 $ 145,760 $ 156,256
Income (loss) of subsidiary corporations
subject to income taxes 3,295 (3,122) (8,163)
Income before income taxes $ 177,607 $ 142,638 $ 148,093
41
<PAGE>
Notes to the Consolidated Financial Statements
Long-Term Debt and Other Long-Term Obligations
Long-term debt and other long-term obligations include the following:
(In thousands, except per share data) 1995 1994
---- ----
Notes Payable:
7.47%, maturing in 1996 and 1997 $ 75,000 $ 75,000
6.65%, maturing in 2002 - 2004 70,000 70,000
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
6%, subordinated, convertible at $18.67/share 3,581 3,761
Revolving credit facilities 50,000 41,000
Other 58,153 36,377
Less current portions (13,431) (8,227)
Total long-term debt $ 411,903 $ 386,511
Insurance accruals and other
long-term liabilities $ 105,700 $ 97,395
The Partnership is a party to a number of long-term debt agreements
which require it to maintain compliance with certain financial
covenants, including limitations on indebtedness, restricted payments,
fixed charge coverage ratios and net worth. The Partnership is in
compliance with the covenants related to these debt agreements. In
August, 1995, the Partnership entered into a five-year, multi-currency,
revolving credit agreement under which the Partnership can borrow up to
$300 million from a group of thirteen banks. The line of credit can be
used for general Partnership purposes. The revolving credit facility
had $250 million of unused commitments as of December 31, 1995.
Approximately $34 million of notes payable are expected to be
refinanced by the revolving credit facility in 1996.
Interest paid was $34.3 million in 1995, $29.6 million in 1994, and
$31.5 million in 1993. Average rates paid on the revolving credit
facilities were 6.20% in 1995 and 4.33% in 1994. Future scheduled long-
term debt payments are $69.0 million in 1997, $19.0 million in 1998,
$19.0 million in 1999 and $37.3 in 2000. 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 $442 million.
The Partnership and the minority investors in Management Services,
Diversified Health Services, and certain other small 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 $35 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 $24.9
million in 1996, $19.7 million in 1997, $15.0 million in 1998, $11.5
million in 1999, $7.6 million in 2000, and $12.9 million thereafter.
Rental expense for 1995, 1994, and 1993 was $65.4 million, $55.3
million, and $49.7 million, respectively.
42
<PAGE>
Notes to the Consolidated Financial Statements
Shareholders' Equity
As of December 31, 1995, there were 5,507,000 Partnership shares
available for issuance upon the exercise of employee options
outstanding and future grants.
Share options are issued at a price not less than the fair market
value on the grant date and expire within ten years of the grant date.
Certain options may permit the holder to pay the option exercise price
by tendering Partnership shares that have been owned by the holder
without restriction for an extended period. Share grants carry a
vesting period and are restricted as to the sale or transfer of the
shares.
As part of the acquisition of the minority interest ownership in
Consumer Services, WMX received a five-year option to purchase 1.25
million shares at $33.00 per share.
<TABLE>
<CAPTION>
Share Price Share Price
Options Range Grants Range
------- ----- ------ -----
<S> <C> <C> <C> <C>
Exercised, paid or vested during 1993 (497,105) $ 2.46-17.33 (143,202) $ 5.53-21.75
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
Transaction During 1994:
Granted 1,235,000 $ 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 4,695,976 $ 2.46-25.75 --- $ ---
Total outstanding, December 31, 1994 4,695,976 $ 2.46-25.75 809,767 $ 9.67-25.50
Transactions during 1995:
Granted to employees --- $ --- 6,500 $22.88-26.88
Issued to WMX Technologies, Inc. 1,250,000 $ 33.00 --- $ ---
Exercised, paid or vested (416,001) $ 2.46-25.75 (141,238) $ 9.67-26.88
Terminated or resigned (121,853) $ 4.44-25.75 (21,477) $10.00-10.28
Total exercisable, December 31, 1995 4,158,122 $ 2.46-25.75 --- $ ---
Total outstanding, December 31, 1995 5,408,122 $ 2.46-33.00 653,552 $ 9.67-26.88
</TABLE>
Cash and Marketable Securities
Marketable securities held at December 31, 1995, and December 31,
1994, with a maturity of three months or less, are included in the
Statements of Financial Position caption "Cash and Cash Equivalents".
Marketable securities with maturities in excess of three months are
stated at market value. Interest and dividend income received on cash
and marketable securities was $6.8 million, $5.4 million, and $4.2
million in 1995, 1994, and 1993, respectively.
Employee Benefit Plans
Contributions to qualified profit sharing plans were made in the
amount of $7.4 million in 1995, $6.4 million in 1994, and $6.6 million
in 1993. Under the Employee Share Purchase Plan, the Partnership
contributed $0.8 million per year in 1995, 1994, and 1993. These
funds defrayed part of the cost of the shares purchased by employees.
43
<PAGE>
Notes to the Consolidated Financial Statements
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 been reclassified to conform
with the current presentation.
% Incr. % Incr.
1995 '95-'94 1994 '94-'93 1993
---- ------- ---- ------- ----
Operating Revenue:
First Quarter $ 707,764 8% $ 657,638 12% $ 585,130
Second Quarter 852,791 8 791,496 9 728,725
Third Quarter 854,383 7 797,015 6 749,746
Fourth Quarter 787,566 7 739,058 6 695,258
$ 3,202,504 7% $2,985,207 8% $2,758,859
Gross Profit:
First Quarter $ 135,952 19% $ 114,364 23% $ 93,098
Second Quarter 203,300 12 180,954 10 163,809
Third Quarter 207,556 12 184,751 10 167,665
Fourth Quarter 169,404 9 155,127 10 141,603
$ 716,212 13% $ 635,196 12% $ 566,175
Net Income:
First Quarter $ 28,880 18% $ 24,546 16% $ 21,232
Second Quarter (Note) 50,160 24 40,434 -35 62,059
Third Quarter 47,750 25 38,054 20 31,632
Fourth Quarter 45,229 23 36,849 19 31,024
$ 172,019 23% $ 139,883 -4% $ 145,947
Net Income Per Share:
First Quarter $ 0.37 16% $ 0.32 14% $ 0.28
Second Quarter (Note) 0.63 21 0.52 -36 0.81
Third Quarter 0.60 22 0.49 20 0.41
Fourth Quarter 0.57 19 0.48 20 0.40
$ 2.17 20% $ 1.81 -5% $ 1.90
Cash Distributions Per Share:
First Quarter $ 0.23 0% $ 0.23 5% $ 0.22
Second Quarter 0.24 4 0.23 5 0.22
Third Quarter 0.24 4 0.23 5 0.22
Fourth Quarter 0.24 4 0.23 0 0.23
$ 0.95 3% $ 0.92 3% $ 0.89
Price Per Share:
First Quarter $25.00-21.50 $28.38-22.00 $20.00-17.63
Second Quarter 27.25-23.63 26.38-22.63 24.88-17.88
Third Quarter 28.88-26.50 26.50-24.00 25.38-21.75
Fourth Quarter 30.38-27.63 25.38-21.50 31.00-25.13
Note: The results for the second quarter of 1993 included the recognition
of a $30.2 million unusual gain on the issuance of subsidiary shares. See
Management Discussion and Analysis of Financial Condition and Results of
Operations for additional information.
44
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
As of March 15, 1996, ServiceMaster had the following subsidiaries:
State or Country
of
Incorporation
Subsidiary or Organization
- ---------- ----------------
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
FCIC Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Illinois
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 Limited. . . . . . . . . . . . . . . . . . . . . . .United Kingdom
ServiceMaster Operations Germany GmbH. . . . . . . . . . . . . . . . . . Germany
ServiceMaster Japan, Inc.. . . . . . . . . . . . . . . . . . . . . . . Japan
TMX-Europe B.V.. . . . . . . . . . . . . . . . . . . . . . . . . The Netherlands
Peter Cox Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . .United Kingdom
Protekta B.V.. . . . . . . . . . . . . . . . . . . . . . . . . . The Netherlands
Riwa B.V.. . . . . . . . . . . . . . . . . . . . . . . . . . . . The Netherlands
- --------------------
(1) American Home Shield Corporation has 17 subsidiaries through which it
carries on its business in the various states in which it markets its products.
<PAGE>
State or Country
of
Incorporation
Subsidiary or Organization
- ---------- ----------------
Anticimex Development AB (2) . . . . . . . . . . . . . . . . . . . . . Sweden
Hellmut Stenglein Handelsgesellschaft mbH (3). . . . . . . . . . . . . Germany
LTCS Investment Limited Partnership. . . . . . . . . . . . . . . . . . Delaware
ServiceMaster Home Health Care Services Inc. . . . . . . . . . . . . . Delaware
ServiceMaster Diversified Health Services, Inc. (4). . . . . . . . . . Delaware
ServiceMaster Diversified Health Services Limited Partnership (5). . . Tennessee
We Serve America, Inc. . . . . . . . . . . . . . . . . . . . . . . . . Delaware
TSSGP Limited Partnership. . . . . . . . . . . . . . . . . . . . . . . Delaware
TSSGP, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
ServiceMaster Aviation LLC . . . . . . . . . . . . . . . . . . . . . . Illinois
- --------------------
(2) Anticimex Development AB has 5 subsidiaries.
(3) The Stenglein group includes 6 subsidiaries.
(4) ServiceMaster Diversified Health Services, Inc. has 7 subsidiaries.
(5) ServiceMaster Diversified Health Services, L.P. has 14 subsidiaries.
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, 1996, included in the ServiceMaster Limited
Partnership Annual Report to Shareholders for the year ended
December 31, 1995.
Arthur Andersen LLP
Chicago, Illinois
March 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 23,113
<SECURITIES> 26,316
<RECEIVABLES> 264,117
<ALLOWANCES> 20,468
<INVENTORY> 40,583
<CURRENT-ASSETS> 393,239
<PP&E> 292,283
<DEPRECIATION> 146,431
<TOTAL-ASSETS> 1,649,890
<CURRENT-LIABILITIES> 372,930
<BONDS> 411,903
0
0
<COMMON> 0
<OTHER-SE> 746,660
<TOTAL-LIABILITY-AND-EQUITY> 1,649,890
<SALES> 0
<TOTAL-REVENUES> 3,202,504
<CGS> 0
<TOTAL-COSTS> 2,486,292
<OTHER-EXPENSES> 464,345
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,855
<INCOME-PRETAX> 177,607
<INCOME-TAX> 5,588
<INCOME-CONTINUING> 172,019
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 172,019
<EPS-PRIMARY> 2.17
<EPS-DILUTED> 2.13
</TABLE>
