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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
__X__ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
------------------
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
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Commission file number 1-9378
SERVICEMASTER LIMITED PARTNERSHIP
(Exact name of registrant as specified in charter)
Delaware 36-3497008
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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Commission file number 333-32167
SERVICEMASTER COMPANY LIMITED PARTNERSHIP
(Exact name of registrant as specified in charter)
Delaware 36-3482710
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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One ServiceMaster Way, Downers Grove, Illinois 60515
(Address of principal executive offices) (Zip Code)
630-271-1300
(Registrant's telephone number, including area code)
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 .
Indicate the number of shares outstanding of each of the issuer's classes of
shares: 183,063,542 shares on November 7, 1997. (This reflects the repurchase of
40.7 million (post split) shares from WMX Technologies Inc. on April 1, 1997 and
the three-for-two share split declared May 9, 1997 and paid to shareholders of
record as of June 11, 1997.)
This document consists of 14 pages, including the cover page.
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TABLE OF CONTENTS
SERVICEMASTER LIMITED PARTNERSHIP (Registrant) -
SERVICEMASTER COMPANY LIMITED PARTNERSHIP (Registrant) -
The ServiceMaster Company Limited Partnership is the only direct subsidiary of
the ServiceMaster Limited Partnership. Included in the footnotes of this filing
is the summarized unaudited financial information for the ServiceMaster Company
Limited Partnership as of and for each of the nine month periods ended September
30, 1997 and September 30, 1996. The information is substantially the same as
the corresponding information reported for the ServiceMaster Limited Partnership
because (i) ServiceMaster Limited Partnership does not itself conduct any
operations but rather operations of the ServiceMaster enterprise are conducted
by ServiceMaster Company Limited Partnership and the direct and indirect
subsidiaries of ServiceMaster Company Limited Partnership; (ii) the
ServiceMaster Limited Partnership has no material assets other than
substantially all of the ownership interest in the ServiceMaster Company Limited
Partnership; and (iii) substantially all of the assets and liabilities shown in
the consolidated financial statements for the ServiceMaster Limited Partnership
are located at the ServiceMaster Company Limited Partnership and at the direct
and indirect subsidiaries of the ServiceMaster Company Limited Partnership.
This Form 10-Q filing has been prepared to satisfy the filing requirements of
both Registrants.
Page
No.
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Part I. Financial Information
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Consolidated Statements of Income for the three and
nine months ended September 30, 1997 and September 30, 1996 2
Consolidated Statements of Financial Position
as of September 30, 1997 and December 31, 1996 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and September 30, 1996 4
Notes to Consolidated Financial Statements 5
Management Discussion and Analysis of Financial
Position and Results of Operations 7
Part II. Other Information
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Exhibit 11 - Exhibit Regarding Detail of Income
Per Share Computation 12
Signature 13
1
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
SERVICEMASTER LIMITED PARTNERSHIP
Consolidated Statements of Income
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating Revenue...................... $ 1,090,114 $ 927,227 $ 2,918,044 $ 2,584,457
Operating Costs and Expenses:
Cost of services rendered
and products sold................... 832,665 708,100 2,243,344 2,001,709
Selling and administrative expenses... 159,434 137,094 419,648 367,470
------- ------- ------- --------
Total operating costs and expenses.... 992,099 845,194 2,662,992 2,369,179
------- ------- --------- ---------
Operating Income...................... 98,015 82,033 255,052 215,278
Non-operating Expense (Income):
Interest expense...................... 22,566 9,836 53,758 28,658
Interest and investment income........ (5,096) (2,335) (10,409) (7,465)
Minority interest*.................... 2,033 3,623 6,196 8,221
------- ------- ------- -------
Income before Income Taxes............ 78,512 70,909 205,507 185,864
Provision for income.................. 2,753 2,109 7,181 5,287
------- ------ ------- -------
Net Income............................ $ 75,759 $ 68,800 $ 198,326 $ 180,577
============ ============= ========== ==========
Net Income Per Share.................. $ .40 $ .32 $ 1.00 $ .83
====== ========== ========== =========
Cash Distributions Per Share.......... $ .12 $ .11 1/3 $ .34 2/3 $ .32 2/3
====== ========== ========== =========
Net income per share is based on 188,290 shares and 216,738 shares for the three
months ended September 30, 1997 and 1996, respectively, and 198,617 shares and
216,793 shares for the nine months ended September 30, 1997 and 1996,
respectively. All share and per share data have been restated to reflect the
three-for-two share split declared May 9, 1997 and paid to shareholders of
record as of June 11, 1997.
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 required to pay taxes. A reincorporation
plan has been approved by the shareholders and the Partnership currently expects
to reincorporate, on a tax-free basis to shareholders, by December 31, 1997. It
is currently estimated that the effective tax rate upon reincorporation will be
approximately 40 percent of pretax earnings. This estimate is necessarily
subject to change based on changes in circumstances, statutory tax rates, etc.
Pro forma earnings per share would be $.24 and $.19 for the three months ended
September 30, 1997 and 1996, respectively and $.62 and $.51 for the nine months
ended September 30, 1997 and 1996, respectively, assuming reincorporation had
occurred at the beginning of each respective year.
* Includes General Partners' interest of $1,539 and $1,395 for the three months
ended September 30, 1997 and 1996, respectively, and $4,028 and $3,666 for the
nine months ended September 30, 1997 and 1996, respectively.
</TABLE>
See Notes to Consolidated Financial Statements
2
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<TABLE>
<CAPTION>
SERVICEMASTER LIMITED PARTNERSHIP
Consolidated Statements of Financial Position
(In thousands)
As of
September 30, December 31,
1997 1996
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Assets
<S> <C> <C>
Current Assets:
Cash and marketable securities, including cash and
cash equivalents of $54,705 and $72,009, respectively............. $ 110,505 $ 114,413
Accounts and notes receivable, less allowances of $33,750
and $26,287, respectively......................................... 324,146 270,401
Inventories.......................................................... 49,449 43,529
Prepaid expenses and other assets.................................... 96,045 70,991
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Total current assets............................................. 580,145 499,334
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Property and Equipment:
At cost........................................................... 351,770 320,713
Less: accumulated depreciation................................... 195,965 174,313
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Net property and equipment....................................... 155,805 146,400
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Intangible assets, primarily trade names and goodwill,
net of accumulated amortization of $206,562
and $170,623, respectively........................................ 1,461,626 1,098,466
Notes receivable, long-term securities, and other assets............. 124,636 102,641
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Total assets.....................................................$ 2,322,212 $ 1,846,841
============ =============
Liabilities And Shareholders' Equity
Current Liabilities:
Accounts payable.....................................................$ 73,048 $ 66,025
Accrued liabilities.................................................. 264,492 205,567
Deferred revenues.................................................... 155,817 138,339
Current portion of long-term obligations............................. 16,201 15,621
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Total current liabilities........................................ 509,558 425,552
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Long-Term Debt....................................................... 1,221,386 482,315
Other Long-Term Obligations.......................................... 154,130 125,299
Commitments and Contingencies .......................................
Minority and General Partners' Interest
includes General Partners' interest of
$1,845 in 1997 and $1,604 in 1996................................. 3,089 16,908
Shareholders' Equity................................................. 434,049 796,767
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Total liabilities and shareholders' equity.......................$ 2,322,212 $ 1,846,841
============ =============
</TABLE>
See Notes to Consolidated Financial Statements
3
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<TABLE>
<CAPTION>
SERVICEMASTER LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
September 30,
1997 1996
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<S> <C> <C>
Cash and Cash Equivalents at January 1................................ $ 72,009 $ 23,113
Cash Flows from Operations:
Net Income............................................................ 198,326 180,577
Adjustments to reconcile net income
to net cash flows from operations:
Depreciation................................................... 33,899 30,613
Amortization................................................... 35,939 28,826
Change in working capital, net of acquisitions:
Receivables.................................................. (44,306) (40,273)
Inventories and other current assets......................... (18,332) (24,000)
Accounts payable............................................. (1,595) 3,541
Deferred revenues............................................ 10,983 1,893
Accrued liabilities.......................................... 18,901 23,872
Minority interest and other, net............................... (652) 3,339
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Net Cash Provided from Operations..................................... 233,163 208,388
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Cash Flows from Investing Activities:
Business acquisitions, net of cash acquired....................... (184,608) (40,550)
Property additions................................................ (39,480) (33,795)
Notes receivable and financial investments........................ (10,855) (6,631)
Net purchases of investment securities............................ (4,088) (17,218)
Payments to sellers of acquired businesses........................ (3,306) (2,307)
Sale of equipment and other assets ............................... 3,197 1,399
Proceeds from sale of businesses.................................. - 4,526
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Net Cash Used for Investing Activities................................ (239,140) (94,576)
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Cash Flows from Financing Activities:
Borrowings, net................................................... 771,386 129,573
Payments of borrowings and other obligations...................... (47,876) (53,975)
Purchase of Partnership shares.................................... (646,876) (60,093)
Distributions to shareholders and shareholders' trust............. (93,520) (107,930)
Proceeds from employee share option plans......................... 6,101 3,974
Distributions to holders of minority interests.................... (542) (3,025)
Other............................................................. - 698
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Net Cash Used for Financing Activities................................ (11,327) (90,778)
-------------- -------------
Cash Increase (Decrease) during the Period............................ (17,304) 23,034
------------- ------------
Cash and Cash Equivalents at September 30............................. $ 54,705 $ 46,147
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
4
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SERVICEMASTER LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: The consolidated financial statements include the accounts of the
ServiceMaster Limited Partnership and its significant subsidiaries, collectively
referred to as "the Partnership". Intercompany transactions and balances have
been eliminated in consolidation.
Note 2: The consolidated financial statements included herein have been prepared
by the Partnership pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Partnership believes that the disclosures are adequate
to make the information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Partnership's latest Annual
Report to shareholders and the Annual Report to the Securities and Exchange
Commission on Form 10-K for the year-ended December 31, 1996. In the opinion of
the Partnership, all adjustments, consisting only of normal and recurring
adjustments, necessary to present fairly the financial position of ServiceMaster
Limited Partnership as of September 30, 1997 and December 31, 1996, and the
results of operations for the three month and nine month periods ended September
30, 1997 and 1996, and the cash flows for the nine months ended September 30,
1997 and 1996 have been included. The results of operations for any interim
period are not necessarily indicative of the results which might be obtained for
a full year.
Note 3: 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. All such costs are fully
recognized within the fiscal year in which they are incurred.
Note 4: On May 9, 1997, the Partnership's Board of Directors declared a
three-for-two share split effective June 25, 1997, for shareholders of record on
June 11, 1997. All share and per share data have been restated for all periods
presented to reflect this three-for-two split.
Note 5: The ServiceMaster Company Limited Partnership is the only direct
subsidiary of the ServiceMaster Limited Partnership. Its financial information
is substantially the same as the corresponding information reported for the
ServiceMaster Limited Partnership because (i) ServiceMaster Limited Partnership
does not itself conduct any operations but rather operations of the
ServiceMaster enterprise are conducted by ServiceMaster Company Limited
Partnership and the direct and indirect subsidiaries of ServiceMaster Company
Limited Partnership; (ii) the ServiceMaster Limited Partnership has no material
assets other than substantially all of the ownership interest in the
ServiceMaster Company Limited Partnership; and (iii) substantially all of the
assets and liabilities shown in the consolidated financial statements for the
ServiceMaster Limited Partnership are located at the ServiceMaster Company
Limited Partnership and at the direct and indirect subsidiaries of the
ServiceMaster Company Limited Partnership. The following table presents the
summarized unaudited financial information for the ServiceMaster Company Limited
Partnership.
5
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<TABLE>
<CAPTION>
Balance Sheet Data: As of
(in millions) September 30, December 31,
1997 1996
------- --------
<S> <C> <C>
Current assets ........................... $ 580 $ 499
Noncurrent assets ........................ 1,742 1,348
Current liabilities ...................... 510 426
Noncurrent liabilities.................... 1,419 651
Minority interests ....................... 2 16
</TABLE>
<TABLE>
<CAPTION>
Income Statement Data: Nine Months Ended
(in millions) September 30,
1997 1996
----------- -----------
<S> <C> <C>
Operating revenue ........................................ $2,918 $2,584
Cost of sales ............................................ 2,243 2,002
Selling and administrative ............................... 420 367
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Total operating costs .................................... 2,663 2,369
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Operating income ......................................... 255 215
Net income ............................................... 200 182
</TABLE>
Note 6: In February 1997, the FASB issued Statement No. 128, "Earnings Per
Share" (SFAS 128). SFAS 128 is effective for financial statements for periods
ending after December 15, 1997. Therefore, the Partnership will adopt this
Statement and reflect its disclosure in the Company's 1997 annual report. SFAS
128 requires dual presentation of basic and diluted earnings per share. Basic
earnings per share includes no dilution from options, debentures or other
financial instruments and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could participate in the earnings of an entity. This Statement requires
that prior period earnings per share data presented be restated. Earnings per
share data on a restated basis would reflect basic earnings per share of $.42
and $1.03 for the three and nine months ended September 30, 1997, respectively
and $.33 and $.85 for the three and nine months ended September 30, 1996,
respectively, and diluted earnings per share of $.40 and $.98 for the three and
nine months ended September 30, 1997, respectively and $.31 and $.82 for the
three and nine months ended September 30, 1996, respectively.
Note 7: In the Consolidated Statements of Cash Flows, the caption Cash and Cash
Equivalents includes investments in short-term, highly-liquid securities having
a maturity of three months or less. Supplemental information relating to the
Consolidated Statements of Cash Flows for the nine months ended September 30,
1997 and 1996 is presented in the following table. The increase in interest paid
in 1997 from 1996 is primarily due to overall higher debt balances reflecting
the WMX share repurchase and acquisitions.
(In thousands)
1997 1996
---------- ----------
Cash paid or received for:
- --------------------------
Interest expense........................................ $ 38,712 $ 24,295
Interest and investment income.......................... $ 6,117 $ 5,640
6
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SERVICEMASTER LIMITED PARTNERSHIP
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996
- -------------------------------------------------
Revenues increased 18 percent to $1.1 billion in the third quarter of 1997,
reflecting growth from base operations, the impact of existing service line
acquisitions and the purchase of Certified Systems, Inc. (CSI), a professional
employer organization. CSI added approximately $60 million in revenues for the
quarter and had little impact on profits. Operating income increased 19 percent
to $98 million while margins improved to 9 percent of revenue. This improvement
in margins reflects the continued strong growth of our higher margin businesses,
productivity improvements, and the integration of the acquired Barefoot
operations offset in part by the effect of the CSI acquisition. Operating
margins before the inclusion of CSI would have increased 70 basis points to
9.5%. Net income was $75.8 million, reflecting a 10 percent increase over one
year ago, while net income per share was $.40, representing an increase of 25
percent. Earnings per share grew at a higher rate than net income due to the
transaction with WMX Technologies, Inc. (WMX) in which the Partnership
repurchased WMX's 19 percent ownership interest (40.7 million shares) for $626
million on April 1, 1997. This transaction served to increase interest expense
significantly and reduce shares outstanding.
The Consumer Services business unit achieved a 15 percent increase in revenues
and even stronger profitability growth. This reflects the successful integration
of the Barefoot business and good growth from base operations. The
TruGreen-ChemLawn operations achieved strong double digit growth in revenues and
profits reflecting the benefits of the Barefoot acquisition and internal
customer growth, including strong sales of ancillary products, along with
improved branch efficiencies. Terminix achieved modest growth in revenues and
profits. Strong increases in the renewal of termite control contracts,
productivity improvements, and cost reductions offset the effects of unfavorable
weather conditions and higher remediation costs. American Home Shield achieved
very strong double digit increases in both revenues and profits. These increases
were achieved despite the lack of current year growth in the real estate market
and were achieved through excellent increases in contract renewals and direct to
consumer sales. Residential/Commercial reported revenue and profit growth
reflecting an increase in Company owned distributors and solid increases in fee
income. Merry Maids achieved solid increases in revenues, primarily due to
acquired branch operations, with modest overall profit growth despite the impact
of the extraordinarily tight labor markets.
The Management Services business unit achieved a double digit increase in
revenues reflecting the Premier acquisition and growth in the base business,
with lower profitability levels reported compared to the prior year. The health
care market achieved solid revenue increases driven by growth in Diversified
Health Services and Integrated Service, a comprehensive service solution for
clients which has been targeted for its growth potential. This market
experienced reduced profits resulting from increased investments in people and
technology and from the recognition of favorable items in the third quarter last
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year, including profits on large accounts which had been deferred from earlier
quarters. The business and industry group achieved strong revenue and profit
growth resulting from the successful integration of the Premier acquisition as
well as strong growth in aviation services. The education market experienced
declines in revenues and profits due to the termination of certain large
contracts and associated wind down costs which were partially offset by good
cost controls.
International operations achieved growth in fees from licensed businesses and
certain direct-to-consumer operations and a gain relating to the joint ventures,
which was offset by unfavorable currency exchange rates and profit pressures in
preservation services at Terminix Europe.
Cost of services rendered and products sold increased 18 percent due to the CSI
acquisition and general business growth and remained constant as a percentage of
revenue at 76.4 percent. This constant percentage primarily reflects the
acquisition of CSI which operates at significantly lower margins than the
majority of the Company. Excluding CSI, this percentage would have improved by
1.1 percent reflecting the changing mix of the business as Consumer Services
becomes a larger portion of the overall business of the Partnership as well as
productivity improvements and the successful integration of acquisitions. The
Consumer Services companies generally operate at higher gross margin levels than
the other major business units but also incur somewhat higher selling and
administrative expenses.
Selling and administrative expenses increased 16 percent due to general business
growth and acquisitions and decreased to 14.6 percent of revenue in 1997 from
14.8 percent in 1996. This decrease as a percentage of revenue is primarily
attributable to the acquisition of CSI offset in part by the changing business
mix of the Partnership.
Interest expense increased over the prior year primarily due to increased debt
levels associated with the repurchase of Partnership shares held by WMX and
acquisitions. Interest and investment income reflect good increases in
investment returns and the gain associated with the International joint venture.
The increase in the provision for taxes is attributable to strong growth at
American Home Shield (which is organized in corporate form and subject to
taxes).
NINE MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED TO SEPTEMBER 30, 1996
- ----------------------------------------------------------------------
Revenues for the nine months increased 13 percent over 1996 to $2.9 billion
reflecting solid growth from base operations and the effect of both existing
service line acquisitions and CSI. Operating income increased 18 percent to $255
million while margins improved to 8.7 percent of revenue from 8.3 percent in
1996, reflecting the continued strong growth of our higher margin businesses,
productivity improvements, and the integration of the Barefoot operations offset
in part by the acquisition of CSI. Operating income margins excluding CSI
increased 60 basis points. Net income was $198.3 million, an increase of 10
percent over one year ago while net income per share was $1.00, representing an
increase of 20 percent. The disparity between net income and earnings per share
8
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growth reflects the share repurchase from WMX which increased interest expense
and reduced the number of shares outstanding.
The Consumer Services business unit continued to achieve double digit increases
in revenues and profits. The TruGreen-ChemLawn operations realized double digit
increases in revenues and profits during the first nine months of the year
reflecting internal growth and the successful integration of the Barefoot
customers. The lawncare operations experienced favorable weather conditions
throughout many parts of the country resulting in increased production, as well
as improved efficiencies and growth in ancillary products. Terminix achieved
solid growth in revenues and profitability for the nine months. Strong growth in
renewals and cost reductions offset the adverse weather conditions and increased
remediation costs. The weather, which was favorable for the lawncare business,
provided challenges in the termite operations as the cool weather produced lower
termite activity. American Home Shield achieved very strong double digit
increases in both revenues and profits, with good increases in gross contracts
written, as well as continued growth in contract renewals.
Residential/Commercial and Merry Maids reported modest profit growth for the
nine months but achieved solid revenue growth, reflecting the conversion of
franchises and distributors to company owned operations.
The Management Services business unit achieved strong revenue growth for the
nine months primarily related to the Premier acquisition as well as modest
growth in the base business. This unit reported profits consistent with last
year, after excluding non-recurring gains recorded last year at Diversified
Health Services. Actual reported profits were lower than the prior year level.
The health care market reported a solid increase in revenues and modest profit
growth with improved customer retention and facility margins. The business and
industry group achieved significant revenue and profit growth, resulting from
the Premier acquisition as well as increased margins at several accounts. The
gains achieved in the health care and business and industry markets were
partially offset by challenges faced in the education market where the
discontinuation of a large contract and margin pressures in certain other
accounts negatively impacted revenues and profits.
The International operations achieved growth in fees from licensed businesses
and certain direct to consumer operations which was offset by unfavorable
currency exchange rates and profit pressures in the Terminix Europe preservation
services business.
Cost of services rendered and products sold increased 12 percent due to the
acquisition of CSI and general business growth, but decreased as a percentage of
revenue to 76.9 percent in 1997 from 77.5 percent in 1996. This decrease
primarily reflects the changing mix of the business as Consumer Services becomes
a larger portion of the overall business of the Partnership as well as
productivity improvements and the successful integration of acquisitions. The
Consumer Services companies generally operate at higher gross profit levels than
the other major business units but also incur somewhat higher selling and
administrative expenses.
Selling and administrative expenses increased 14 percent due to general business
growth and increased to 14.4 percent of revenue from 14.2 percent in 1996. As
9
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described above, this increase as a percentage of revenue is primarily
attributable to the changing business mix of the Partnership. Interest expense
increased over the prior year primarily due to increased debt levels associated
with the repurchase of Partnership shares held by WMX and acquisitions. Interest
and investment income increased due to higher investment balances of marketable
securities at American Home Shield and the realized gain relating to the
International joint venture. Income taxes increased from the prior year
reflecting strong growth at American Home Shield and increases in certain state
taxes.
FINANCIAL POSITION
- -------------------
Net cash provided from operations of $233.2 million grew 12 percent compared to
the first nine months of 1996, reflecting growth in net income, increased
prepayments for services in the lawncare operations and the favorable timing of
the Barefoot acquisition. Due to the seasonality of the lawncare and pest
control operating cycles, the Partnership's working capital needs are
proportionally higher during the first nine months of the year than for the year
as a whole, with a corresponding impact on funds provided from operations.
Management believes that funds generated from operations and other existing
resources will continue to be adequate to satisfy the ongoing working capital
needs of the Partnership.
On April 1, 1997, ServiceMaster repurchased the entire 19 percent ownership
interest that WMX had held in the Partnership for approximately $626 million.
WMX had owned 40.7 million restricted shares of ServiceMaster and also had an
option to purchase an additional 2.8 million shares which was canceled as part
of the transaction. This transaction was immediately additive to earnings per
share and will provide significant, incremental tax benefits to the company. The
transaction was financed with a new $1 billion multi-currency revolving credit
agreement, which provides a 364 day revolving credit facility of $250 million
with a one-year term loan option (two year total term) and a five-year revolving
credit facility of $750 million.
On July 28, 1997, ServiceMaster filed a Form S-3 shelf registration statement
with the Securities and Exchange Commission providing for the sale of up to $950
million in either unsecured senior debt securities or equity interests. On
August 15, 1997, the Company completed a $300 million dual-tranche debt offering
consisting of $100 million, 6.95 percent notes due August 15, 2007 and $200
million, 7.45 percent notes due August 15, 2027. The net proceeds were used to
refinance borrowings under bank credit facilities, thereby reducing the
Company's exposure to short term interest rate fluctuations. Proceeds from
future offerings will be used for general corporate purposes, which may include
repayment of debt, repurchase of shares, acquisitions, capital expenditures and
working capital requirements. No decision has been made relating to the
potential future sale of other securities from the shelf. Any future decisions
will depend on the Company's capital needs and market conditions at the time.
On August 11, 1997, the Company acquired Certified Systems, Inc. (CSI) one of
the nation's largest professional employer organizations. CSI provides clients
with administrative processing of payroll, workers' compensation insurance,
health and unemployment insurance and other employee benefits.
10
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The increase in accounts and notes receivable over year-end levels reflects
traditional seasonal buildups in the Consumer Services business and general
business growth, as well as the impact from the Barefoot acquisition. The
increase in inventories is a result of normal seasonal build-ups in the pest
control and lawncare businesses.
Prepaid expenses and other assets have increased from year-end due to strong
growth at American Home Shield, where initial direct contract costs are
capitalized and expensed over the life of the service contract and the effects
of acquisitions. Deferred revenues also increased, reflecting the strong growth
in warranty contracts written at American Home Shield.
Property and equipment increased primarily due to business growth in the
Consumer and Management Services business units as well as the acquisition of
Barefoot in the first quarter of 1997. The Partnership has no material capital
commitments at this time. Notes receivable, long term securities and other
assets increased from year-end reflecting acquired assets and to a lesser degree
increased financing note and investment balances.
Intangible assets increased from year-end, primarily reflecting the effect of
the acquisition of Barefoot, CSI, and other smaller companies.
Accounts payable and other liabilities increased from year-end reflecting
seasonal activity in the Consumer Services businesses, acquisitions and general
business growth. Debt levels increased due to the repurchase of WMX's 19 percent
ownership interest in the Partnership and the cash portion of acquisitions,
including Barefoot and CSI. 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.
Total shareholders' equity decreased to $434 million at September 30, 1997 from
$797 million at December 31, 1996, reflecting the repurchase of WMX's
Partnership shares and other share repurchases and distributions, partially
offset by strong growth in earnings as well as the shares issued to acquire
Barefoot. The Partnership continues to repurchase shares in the open market or
in privately negotiated transactions pursuant to the authorization previously
granted by the Board of Directors. Total distributions to shareholders,
including the shareholder trust, were $94 million, down $14 million for the nine
month period but are expected to be greater than last year's level by year-end.
Cash distributions paid directly to shareholders for the nine months ended
September 30, 1997, totalled $67 million or $.34 2/3 per share, an increase of 6
percent per share. Distributions to the shareholders' trust were lower than last
year's level, reflecting differences in the timing of payments.
11
<PAGE>
<TABLE>
<CAPTION>
Part II. OTHER INFORMATION
SERVICEMASTER LIMITED PARTNERSHIP
Exhibit 11
EXHIBIT REGARDING DETAIL OF INCOME PER SHARE COMPUTATION
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income................................................. $ 75,759 $ 68,800 $198,326 $180,577
Interest on convertible debentures......................... 465 465 1,396 1,403
-------- -------- -------- --------
Net income for fully diluted calculation................... $ 76,224 $ 69,265 $199,722 $181,980
======== ======== ======== ========
Shares used for computing
primary earnings per share
Shares outstanding on weighted
average basis............................................. 182,041 211,068 193,237 211,528
Equivalent shares --
options and subscriptions outstanding..................... 6,249 5,670 5,380 5,265
----- ----- ----- -----
Weighted average and
equivalent shares for primary calculation................. 188,290 216,738 198,617 216,793
======= ======= ======= =======
Primary earnings per ...................................... $ .40 $ .32 $ 1.00 $ .83
======== ====== ====== ======
Shares used for computing fully
diluted earnings per share--
Shares outstanding
(weighted average basis with
options and subsciptions)................................. 188,888 217,188 200,087 217,649
Equivalent shares--
Shares issuable upon conversion of
convertible debentures.................................... 3,627 3,627 3,627 3,627
----- ----- ----- -----
Weighted average and equivalent shares
for fully diluted......................................... 192,515 220,815 203,714 221,276
======= ======= ======= =======
Fully diluted earnings per share........................... $ .40 $ .31 $ .98 $ .82
======== ====== ====== ======
All share and per share data have been restated to reflect the three-for-two
share split declared May 9, 1997 and paid to shareholders of record as of June
11, 1997.
</TABLE>
12
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
Date: November 14, 1997
SERVICEMASTER LIMITED PARTNERSHIP
(Registrant)
By: /s/Steven C. Preston
------------------------------
Steven C. Preston
Senior Vice President and Chief Financial Officer
SERVICEMASTER COMPANY LIMITED PARTNERSHIP
(Registrant)
By: /s/Steven C. Preston
-----------------------------
Steven C. Preston
Senior Vice President and Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM SERVICEMASTER'S QUARTERLY REPORT TO SHAREHOLDERS
FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 54,705
<SECURITIES> 55,800
<RECEIVABLES> 357,896
<ALLOWANCES> 33,750
<INVENTORY> 49,449
<CURRENT-ASSETS> 580,145
<PP&E> 351,770
<DEPRECIATION> 195,965
<TOTAL-ASSETS> 2,322,212
<CURRENT-LIABILITIES> 509,558
<BONDS> 1,221,386
0
0
<COMMON> 0
<OTHER-SE> 434,049
<TOTAL-LIABILITY-AND-EQUITY> 2,322,212
<SALES> 0
<TOTAL-REVENUES> 2,918,044
<CGS> 0
<TOTAL-COSTS> 2,243,344
<OTHER-EXPENSES> 419,648
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,758
<INCOME-PRETAX> 205,507
<INCOME-TAX> 7,181
<INCOME-CONTINUING> 198,326
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 198,326
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 0.98
</TABLE>
