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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant To Section 13 Or
15(d) Of The Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1996.
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 (I.R.S. Employer
Jurisdiction of Identification No.)
Incorporation or
Organization)
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: (630) 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
The Aggregate Market Value of Shares Held by
NonAffiliates of the Registrant As of March 25, 1997 was
$3,865,041,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Registrant's Annual
Report to Shareholders for the year ended December 31,
1996 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 are wholly
owned.
All subsidiaries of ServiceMaster Consumer Services
L.P. are wholly owned and 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 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"). A Delaware corporation (the
"Successor Corporation") 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-forone basis into new shares of common
stock of the Successor Corporation. As a result of these
conversions, the Successor Corporation 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.
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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.
June 1996 Share Split
In June 1996, the Registrant completed a 3-for-2 split of
its limited partner shares. When transactions in or
tabulations of the Registrant's shares are set forth in
subsequent sections of this Form 10-K, effect has been
given to the share split.
1995 and 1997 Transactions with WMX Technologies, Inc.
1995 Transaction. 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 27,160,714 unregistered limited partner
shares of the Registrant and an option to purchase an
additional 1,875,000 shares of the Registrant's limited
partner shares at a price of $22.00 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 142,800,000. 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.
The shares which WMUS received on December 31, 1995
together with the shares which WMUS could acquire under
the option were not registered under the Securities Act
of 1933 and were made subject to a number of other
restrictions on transfer, including 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 retained a first refusal right by which the
Registrant could elect to acquire, at then current
prices, any shares that WMX or WMUS might desire to sell.
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.
1997 Transaction. On February 18, 1997, WMX, WMUS
and the Registrant entered into an agreement under which
the Registrant agreed to purchase from WMUS, for the sum
of $625,978,141 all of the 27,160,714 restricted shares
of the Registrant owned by WMUS and the option to
purchase an additional 1,875,000 shares of the
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Registrant. The agreement provides that this transaction
is to be closed not earlier than April 1, 1997 and not
later than April 14, 1997. The option will be canceled
as part of this transaction. The Registrant intends to
initially finance the share and option repurchase with
short-term bank financing. The Registrant currently
anticipates that, subject to market conditions,
approximately 50% of the costs of the transaction with
WMUS and WMX and the acquisition of the stock of Barefoot
Inc. (hereinafter described) will be refinanced through
equity issuances within the next two years.
The foregoing is a brief summary of the 1997 transaction
with WMUS and WMX. Such transaction is described in
further detail in the Registrant's Form 8-K dated
February 18, 1997 and filed with the Securities and
Exchange Commission on February 19, 1997. The contents
of such Form 8-K and the exhibit 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 37 of
the ServiceMaster Annual Report to Shareholders for 1996
(the "1996 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
seven companies: TruGreen L.P. ("TruGreen-ChemLawn"); The
Terminix International Company L.P. ("Terminix");
ServiceMaster Residential/Commercial Services L.P.
("Res/Com"); Merry Maids L.P. ("Merry Maids"); American
Home Shield Corporation ("American Home Shield" or
"AHS"); AmeriSpec, Inc. ("AmeriSpec"); and Furniture
Medic L.P. ("Furniture Medic"). The services provided by
these companies include: lawn care, tree and shrub
services and indoor plant maintenance services under the
"TruGreen", "ChemLawn" and "Barefoot" 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; home inspection services under the
"AmeriSpec" service mark; and on-site furniture repair
and restoration under the "Furniture Medic" service mark.
The services provided by the seven 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 domestic customers served by
ServiceMaster Consumer Services has increased from fewer
than one million customers to more than 6.5 million
customers.
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The International unit is primarily responsible for
overseeing the Consumer Services businesses which are
conducted in foreign markets.
TruGreen-ChemLawn. TruGreen-ChemLawn is a wholly
owned subsidiary of ServiceMaster Consumer Services L.P.
As of March 21, 1997, TruGreen-ChemLawn had 198 company
owned branches and 126 franchised branches (determined
after giving effect to the Barefoot transaction described
below). With over 3 million residential and commercial
customers, TruGreen-ChemLawn is the leading provider of
lawn care services in the United States. TruGreen-
ChemLawn also provides lawn, tree and shrub care services
in Saudi Arabia through a licensing arrangement and in
Canada through an affiliate. TruGreen-ChemLawn also
provides interior plantscape services to commercial
customers. The TruGreen-ChemLawn businesses are seasonal
in nature.
On February 24, 1997, the Registrant, for the benefit of
TruGreen-ChemLawn, completed the acquisition of 99.38% of
the outstanding stock of Barefoot Inc.("Barefoot")
through a tender offer. On February 26, 1997, the
remaining 0.62% of the Barefoot stock was acquired
through a statutory merger. In these transactions,
Barefoot stockholders collectively received approximately
$84,800,000 in cash and 5,747,370 limited partner shares
of the Registrant. For purposes of these transactions,
the Barefoot stock was valued at $16.00 per share and the
Registrant's shares were valued at $25.40833 per share.
The aggregate value of the Barefoot transaction
(including the amount paid in redemption of the Barefoot
shareholders rights plan) was approximately $232,000,000.
At the time of the transaction, Barefoot was the second
largest provider of professional lawn care services in
the United States.
Terminix. Terminix is a wholly owned subsidiary of
ServiceMaster Consumer Services L.P. With over 3 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 1996, Terminix was
providing these services through 316 company-owned
branches in 41 states and Mexico and through 250
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 licensees. It provides the same
services through subsidiaries in Belgium, the
Netherlands, Norway, Sweden, Ireland, the United Kingdom,
Germany 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 United
States in the residential and commercial cleaning field.
Res/Com provides carpet and upholstery cleaning and
janitorial services, disaster restoration services and
window cleaning services to over 1.6 million residential
and commercial customers worldwide through a network of
over 4,500 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, Finland, Lebanon, the Philippines, Spain,
Thailand, 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 225,000 customers, Merry
Maids is the leading provider of domestic house cleaning
services in the United States. As of December 31, 1996,
these services were provided through 27 company-owned
branches in 18 states and through 836 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, Lebanon and Australia through
licensing arrangements with local service providers.
American Home Shield. As a result of the merger of
SVM Holding Corp., a wholly owned subsidiary of
ServiceMaster Consumer Services L.P., into AHS on
December 31, 1996, AHS became on that date 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
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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,
1996, AHS was providing services to approximately 503,000
homes through approximately 13,000 independent repair
maintenance contractors in 49 states and the District of
Columbia, with operations in California, Texas and
Arizona accounting for 25%, 24% and 7%, respectively, of
AHS' gross contracts written. AHS also provides home
service warranty contracts in Japan, Lebanon and Saudi
Arabia through licensing arrangements with local service providers.
AmeriSpec. AmeriSpec is a wholly owned subsidiary
of AHS. AHS acquired AmeriSpec in February 1996.
AmeriSpec is a leading provider of home inspection
services in the United States. During 1996, AmeriSpec
conducted 85,000 home inspections in 41 states and
Canada, with operations in California, Illinois and New
York accounting for 23%, 5%, and 5%, respectively, of
AmeriSpec's gross number of inspections. AmeriSpec
provides home inspection services in Canada through
licensing arrangements with local service providers.
Furniture Medic. Furniture Medic is a wholly owned
subsidiary of ServiceMaster Consumer Services L.P.
Consumer Services acquired Furniture Medic in July 1996.
Furniture Medic provides on-site furniture repair and
restoration services in all 50 states. As of December
31, 1996, these services were provided through 549
licensees. Furniture Medic also provides its services in
Brazil and France through licensing arrangements with
local service providers and in Canada through an
affiliate.
Management Services
ServiceMaster pioneered the providing of supportive
management services to health care facilities by
instituting housekeeping management services in 1962.
Since then, ServiceMaster has expanded its management
services business such that it now provides a variety of
supportive management services to health care, education
and business and industrial customers (including the
management of housekeeping, plant operations and
maintenance, laundry and linen, grounds and landscaping,
clinical equipment maintenance, food service, energy
management, and total facility management).
ServiceMaster's general programs and systems free the
customer to focus on its core business activity with
confidence that the support services are being managed
and performed in an efficient manner.
Management Services is organized 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, 1996, 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. Outside of the United States,
ServiceMaster was providing management
services through a subsidiary in Japan, through
affiliated companies in Canada, Japan, Germany, Mexico,
and the United Kingdom, and through licensees in Korea,
Australia, Austria, New Zealand, Singapore, Taiwan, Hong
Kong, Czech Republic, Slovakia, Switzerland, Chile,
Japan, Malaysia, the Philippines, Spain and several
countries in the Middle East. The International unit is
responsible for overseeing the management services which
are provided in foreign
markets.
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, 1997,
ServiceMaster Healthcare Services was serving
approximately 1,800 customers.
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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 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; the sale of various medical products and
supplies, and pharmacy management. As of December 31,
1996, the ServiceMaster Diversified Health Services
Companies had management services contracts with over 140
facilities in 27 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
The International unit oversees the performance of
supportive management services and consumer services in
international markets through licensing arrangements,
ownership of foreign operating companies acquired by
ServiceMaster and joint ventures.
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 and
thereafter, TMX-Europe currently owns controlling
interests in Terminix Peter Cox Ltd., a leading pest
control and wood preservation company in the United
Kingdom; Terminix Protekta B.V. and Riwa B.V., each a
leading pest control company in the Netherlands;
Anticimex Development AB, a holding company for the
leading pest control company in Sweden; and the Stenglein
group of pest control companies in Germany.
ServiceMaster is a 50% partner in joint ventures in
England and Germany. The English joint venture
(Tarmac/ServiceMaster) was established in January 1995 to
provide facility management services in the United
Kingdom. The German joint venture (Raab
Karcher/ServiceMaster) was established in April 1996 to
provide facility management services in Germany, Austria
and Switzerland.
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 Fund. In August 1995, the Registrant
established ServiceMaster Venture Fund L.L.C. (the
"Fund") with the objective of establishing a mechanism
within the ServiceMaster enterprise to 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. At December 31, 1996, the
Fund had invested a total of $6.385 million in three
companies.
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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. TruGreenChemLawn is
the leading national lawn care company within this
market. In 1995, TruGreenChemLawn 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 TruGreenChemLawn) 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.
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
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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 8.0 million calls in 1996.
Home Inspection Services. AmeriSpec (acquired by AHS in
February 1996) is the leading provider of home inspection
services in the United States. Competition within this
market is strong, coming mainly from regional and local,
independently owned firms.
Furniture Repair Services. The market for on-site
furniture repair services is relatively new.
ServiceMaster believes that Furniture Medic (acquired by
Consumer Services in July 1996) maintains a favorable
position in its industry due to its patented
environmentally sensitive procedure for repairing
furniture in the customer's home.
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, 1996, ServiceMaster was serving in
approximately 1,800 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. 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, 1996, ServiceMaster was serving in approximately 300
educational facilities. ServiceMaster believes there is
potential for expansion in the education market due to
its current relatively low penetration of that market and
the trend of educational facilities to consider
outsourcing more of their service requirements. However,
a majority of the educational facilities continue to
assume direct responsibility for managing their support
functions.
Business and Industry. ServiceMaster is a leading
provider of plant operations and maintenance, custodial
and grounds management services to business and
industrial customers. 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, 1996,
ServiceMaster was serving in approximately 200 business
or industrial facilities.
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Diversified Health Services
At December 31, 1996, 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, 1996, 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 B.V.)
give ServiceMaster a significant participation in the
pest control business in the European market.
ServiceMaster believes that there is potential for
expansion of this business 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, 1996, ServiceMaster had a total of
approximately 39,900 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 1996 Annual Report.
9
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STRUCTURE OF SERVICEMASTER
[See Graphics Appendix, p. 69]
10
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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.
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 and
ServiceMaster Incorporated of Delaware)
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, 1997, no shares of stock of
ServiceMaster Corporation had been issued and the
corporation remains dormant. Also as a result of the
approval of the Reorganization Package on January 13,
1992, ServiceMaster Incorporated of Delaware was created
to serve as the successor to the Registrant following the
Reincorporating Merger. When the successor corporation is
activated, which is expected to occur at the end of 1997,
it will become the publicly traded parent company for the
ServiceMaster enterprise.
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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, American
Home Shield, AmeriSpec and Furniture Medic.
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 wholly
owned subsidiaries.
SMMS has two general partners, ServiceMaster
Management Services, Inc., and The ServiceMaster Company
and, until December 31, 1996, SMMS had 43 limited
partners in two classes: Class A and Class B. The sole
Class B limited partner was The ServiceMaster Company.
Forty-two Class A limited partners, all of whom were
senior members of SMMS management, collectively owned
9.29% of the equity of SMMS (with equity determined for
this purpose after allowing for $505.6 million of
intercompany debt to The ServiceMaster Company). On
December 31, 1996, the Registrant acquired all of the
Class A limited partner interests in SMMS based on their
fair market value as confirmed by an independent
appraisal in exchange for a combination of cash and
shares of the Registrant totalling approximately $12.5
million. As a result of the foregoing transaction,
effective January 1, 1997, the Registrant and The
ServiceMaster Company together own 100% of SMMS.
Organization and Structure of Diversified Health Services
The ServiceMaster Company holds all of the equity
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 ("DHS") consist of a limited partnership and
its general partner and their respective subsidiaries.
Until December 31, 1996, The ServiceMaster Company owned
89% of the equity of DHS, with members of senior DHS
management owning the remaining 11% of such equity. On
December 31, 1996, the Registrant acquired all of the
equity interests of DHS management based on their fair
market value as confirmed by an independent appraisal in
exchange for shares of the Registrant having a value of
$12.8 million. As a result of the foregoing transaction,
effective January 1, 1997, the Registrant and The
ServiceMaster Company together own 100% of DHS.
ServiceMaster Home Health Care Services Inc. is
wholly owned by The ServiceMaster Company.
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Organization and Structure of International
International operations are carried out through
subsidiaries, licensing, joint venture or affiliation
arrangements, all of which are coordinated and supervised
by the International division of the ServiceMaster
Company. The ServiceMaster Company, through its
Netherlands subsidiary, TMXEurope B.V., owns pest control
businesses in the United Kingdom, Ireland, the
Netherlands, Sweden and Germany.
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
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 T.
Note D--ServiceMaster Management Corporation (Managing
General Partner)
ServiceMaster Management Corporation is the managing
general partner of ServiceMaster Limited Partnership and
The ServiceMaster Company Limited Partnership
(collectively referred to in this Note D as the
"Partnerships"). ServiceMaster Management Corporation is
governed by a board of directors which, at December 31,
1996, consisted of 17 persons. 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 1996, 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
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themselves are trustees with discretionary power to vote
the stock. These arrangements enable the incumbent
members of the Board of Directors to choose the persons
elected to the Board each year.
On January 31, 1992, as contemplated by the 1992
Reorganization, all individuals who were then serving as
general partners of the Partnership withdrew as general
partners and became stockholders of ServiceMaster
Management Corporation with stock interests therein which
indirectly represented their former general partner
carried interests. Their general partner carried
interests were transferred to ServiceMaster Management
Corporation as part of these adjustments.
ServiceMaster Management Corporation does not employ
any significant number of persons or own any office space
or other equipment used to conduct the day-to-day
management of ServiceMaster; rather, the employees and
assets necessary to manage the ServiceMaster business are
based within The 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 1996, 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 1996 was
$5,190,376. 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,
$5,024,751, 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,
1996, such persons included Messrs. Cantu, Pollard,
Oxley, Keith and Mrozek, whose participations within the
1.99% total carried interest of ServiceMaster Management
Corporation at the end of 1996 were, respectively,
14.94%, 14.94%, 5.50%, 5.50%, and 3.23%.
At December 31, 1996, the stock of ServiceMaster
Management Corporation was owned by 33 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. Effective January 1, 1997, the number of
stockholders of ServiceMaster Management Corporation was
increased to 38.
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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 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 SMMS.
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
has been offset and eliminated in preparing the
consolidated financial statements of the Registrant. As
previously discussed, at the end of 1996, all Class A
interests were acquired by the Registrant.
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 100% owned by the Registrant and
The ServiceMaster Company collectively (see Note P) and
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
International is a division of The ServiceMaster
Company. 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.
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 4,236,093 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. A nominal amount was
paid in February 1997 in respect of the contingent
payment right.
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<PAGE>
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.
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 SMCS.
Note N--AmeriSpec, Inc.
AmeriSpec, Inc. is a wholly owned subsidiary of AHS.
Note O--Furniture Medic
Furniture Medic Limited Partnership is a wholly owned
subsidiary of SMCS.
Note P--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"). Until
December 31, 1996, LTCS was 89% owned by The
ServiceMaster Company and 11% by members of senior
management of the ServiceMaster Diversified Health
Services Companies. As previously discussed, at the end
of 1996, all minority interests in DHS were acquired by
the Registrant.
Note Q--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.
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<PAGE>
Note R--TMX-Europe
TMX-Europe B.V., a Netherlands limited company, is a
wholly owned subsidiary of The ServiceMaster Company.
TMXEurope serves as the holding company for
ServiceMaster's European pest control companies.
Note S--Other Subsidiaries
Other subsidiaries include Premier Manufacturing Support
Services L.P., a wholly owned subsidiary of ServiceMaster
Management Services L.P. ("SMMS") (acquired by SMMS in
October 1996); ServiceMaster Aviation Services L.P., a
wholly owned subsidiary of SMMS; CMI Group, Inc., a
wholly owned subsidiary of SMMS; and miscellaneous
operating and name protection entities. Reference is made
to Exhibit 21 for a complete list of the subsidiaries of
the Registrant.
Note T--ServiceMaster SGP Trust
On January 1, 1993, the limited partnership
agreement of The ServiceMaster Company was amended to
admit a trust as a Special General Partner of The
ServiceMaster Company (the "SGP Trust"). The
beneficiaries of the SGP Trust are the limited partners
of the Registrant as constituted from time to time. 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 ServiceMaster Management
Services and International, 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.
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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, AmeriSpec and Furniture Medic.
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 17 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), Georgia (1 property), and Texas
(4 properties).
American Home Shield has retained some leased space
in the building at 90 South E Street, Santa Rosa,
California for administrative and sales operations.
Certain of American Home Shield's service and data
processing departments are located in premises owned by
the company in Carroll, Iowa. This facility consists of
a 43,000 square foot building on a seven-acre site.
American Home Shield owns approximately 98 acres of
land in Santa Rosa, California, of which 43 acres are
under a contract for sale to occur in mid to late 1997.
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
is in the process of constructing a new headquarters
facilities in Memphis, Tennessee and expects to relocate
to such facility in the Fall of 1997. DHS leases other
administrative facilities in Plymouth Meeting,
Pennsylvania; Dallas, Texas; and Atlanta, Georgia. As of
December 31, 1996, 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 20,
1997, 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 remained in disagreement
with the EPA over the most appropriate
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remediation procedures to be followed at the site and
they were 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. Two of the defendant parties settled
their disagreement with the EPA but, until March 20,
1997, Terminix had not resolved its disagreement with the
other two defendant parties as to Terminix's proper
participation. However, on March 20, 1997, Terminix
settled this matter with the other two parties as to all
past cots and agreed to arbitrate any allocation of
future costs. The aggregate financial commitment of
Terminix is well within
the parameters set forth in the discussions of this
matter in previous Form 10-Ks and such amount is not
material to Terminix's 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 1996
under the captions "Shareholders' Equity" (page 36) and
"Cash Distributions Per Share" and "Price Per Share" in
the Quarterly Operating Results table (page 42) 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 14,
1997, the Registrant's shares were held of record by
approximately 67,000 persons.
Item 6. Selected Financial Data
The portion of the ServiceMaster Annual Report to
Shareholders for 1996 in the Financial Statements and
Management Discussion section ("FSMD Section") under the
caption "Eleven Year Financial Summary" (pages 30-31)
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, 1996, is contained in the FSMD Section
of the ServiceMaster Annual Report to Shareholders for
1996 on pages 25-29 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, 1996 and 1995, and the
consolidated statements of income, cash flows and
shareholders' equity for the years ended December 31,
1996, 1995 and 1994 and notes to the consolidated
financial statements are contained in the FSMD Section of
the ServiceMaster Annual Report to Shareholders for 1996
on pages 33-42 are incorporated herein by reference. The
report of Arthur Andersen LLP thereon dated January 22,
1997 (February 24, 1997, as to the pending transaction
with WMX Technologies, Inc. and the acquisition of
Barefoot Inc. which are discussed in the footnotes to the
financial statements) and the summary of significant
accounting policies are contained in the FSMD Section of
the ServiceMaster Annual Report to Shareholders for 1996
on page 32 and are hereby incorporated herein by
reference.
Item 9. Disagreements on Accounting and Financial
Disclosure
None.
20
<PAGE>
PART III
Item 10. Directors and Executive Officers of the
Corporate General Partner of Registrant and The
ServiceMaster Company
The following section of this Item 10 shows: (i) the
names and ages (as of March 21, 1997) 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.
1997 Class
Paul W. Berezny, age 62, 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 55, has been a
director since August 1992. He is a member of the
Executive Committee and the Nominating 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 47, 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 was employed by Herman Miller, Inc., an
office furniture manufacturer, and during the period from
July 1990 to July 1993 she served as the company's
Corporate Vice President for People and Quality.
Gunther H. Knoedler, age 67, has been a director
since 1979. He is a member of the Executive Committee,
the Management Services and Diversified Health Services
Committee, and the Audit Committee (of which he is the
Chairman). Mr. Knoedler is a retired Executive Vice
President and Director Emeritus of Bell Federal Savings &
Loan Association, Chicago, Illinois.
Vincent C. Nelson, age 55, 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
Audit Committee (of which he is the Chairman), the
Employee Share Purchase Plan Administrative Committee and
the Share Option Committee. Mr. Nelson is a business
investor.
Dallen W. Peterson, age 60, 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.
21
<PAGE>
1998 Class
Henry O. Boswell, age 67, 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 (of which he
is the Chairman). 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.
Carlos H. Cantu, age 63, 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 First Tennessee National Corporation since
April 16, 1996 and a director of Haggar Corporation, a
clothing manufacturing company in Dallas, Texas, since
February 9, 1995.
James D. McLennan, age 60, 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 has been President of McLennan
Company, a full service real estate company, since 1981.
Mr. McLennan is a director of The Loewen Group Inc., a
provider of funeral services, Burnaby, B.C., Canada, a
director of NBD Bank of Park Ridge, Illinois, and a
director of Advocate Health Systems, a health care
provider, Oak Brook, Illinois. He is also the Chairman
of the Advocate Health Care Foundation.
Burton E. Sorensen, age 67, has been a director
since May 1984. He is a member of the Executive Committee
and the Finance Committee. He is the owner of Lord
Securities Corporation. He served as Chairman, President
and Chief Executive Officer of the corporation from
December 1984 to December 1995. Mr. Sorensen is a
director of Provident Companies, Inc., Chattanooga,
Tennessee.
Charles W. Stair, age 56, 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 and 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 45, has been a director since
March 1987. He is a member of the Executive Committee,
the Nominating Committee, and the Management Services and
Diversified Health Services 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.
22
<PAGE>
1999 Class
Sidney E. Harris, age 47, has been a director since
December 10, 1994. He is a member of the Management
Services and Diversified Health Services Committee. He
is Professor of Management at the Peter F. Drucker
Graduate Management Center at the Claremont Graduate
School, Claremont, California, when he served as Dean
from September 1991 to July 1996. He is a cofounder 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 60, 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 (of which he is the Chairman), and the
Compensation 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 58, 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 was 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, and a director of VanCom Incorporated, Oak Brook
Terrace, Illinois, a transportation company.
C. William Pollard, age 58, 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 52, 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 Chairman of FNBC of LaGrange,
Inc., a multi-bank holding company. He is on the Boards
of Directors of Illinois Tool Works, Inc., Urban Shopping
Centers, Inc. and the University of Notre Dame. He is
Chairman of Chicago Sister Cities and a member of the
Finance Council of the Archdiocese of Chicago. He is
Founder of the Rooney Heart Institute of Hinsdale
Hospital, Hinsdale, Illinois. From May 1996 to February
17, 1997 he was President and Chief Executive Officer of
WMX Technologies, Inc. ("WMX"). From November 1984 to
May 1996, he was President and Chief Operating Officer of
WMX.
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.
23
<PAGE>
The Board of Directors has appointed the persons listed
below as Senior Management Advisers effective as of the
1996 annual meeting of shareholders to serve in such
capacity until the annual meeting of shareholders in 1997 or until
otherwise determined by the Board of Directors.
Robert D. Erickson, age 53, is the President and
Chief Operating Officer of the ServiceMaster
International business unit. Mr. Erickson was a director
of ServiceMaster from May 1987 to May 1993. He
previously served as a director of ServiceMaster from May
1981 to June 1984. He is a non-director member of the
Consumer Services and International and New Business
Development Committee and is a member of the Profit
Sharing, Savings and Retirement Plan Administrative
Committee (of which he is the Chairman), and the Employee
Share Purchase Plan Administrative Committee (of which he
is the Chairman). He served as Executive Vice President
and Chief Operating Officer of the International division
of ServiceMaster from November 1992 to October 1993 and
as Executive Vice President and Chief Operating Officer,
People Services, from January 1990 to October 1992. Mr.
Erickson is a director of VanCom Incorporated, Oak Brook
Terrace, Illinois, a transportation company.
Donald K. Karnes, age 46, 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. He is a nondirector member of the Consumer
Services and International and New Business Development
Committee.
Robert F. Keith, age 40, became President and Chief
Operating Officer of ServiceMaster Management Services,
effective January 1, 1997. He served as President and
Chief Operating Officer, ServiceMaster Consumer Services
from July 1994 to December 31, 1996 and as Group
President, ServiceMaster Consumer Services, from November
1992 to July 1994. He was Vice President, Treasurer and
Chief Financial Officer of The ServiceMaster Company from
November 1989 to October 1992. He is a non-director
member of the Management Services and Diversified Health
Services Committee.
Jerry D. Mooney, age 43, became President,
Healthcare New Business Initiatives, effective January 1,
1996. Prior to that time he was the President and Chief
Executive Officer of ServiceMaster Diversified Health
Services, Inc. He is a nondirector 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 43, became President and Chief
Operating Officer, ServiceMaster Consumer Services, on
January 1, 1997. He served as Senior Vice President and
Chief Financial Officer of the Registrant from January
1, 1995 to December 31, 1996. He served as Vice
President and Chief Financial Officer of the Registrant
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. He is a nondirector member of the Consumer
Services and International and New Business Development
Committee.
Brian D. Oxley, age 46, was elected Executive Vice
President, New Business Initiatives, effective January 1,
1997. He served as President and Chief Operating Officer
of ServiceMaster Management Services and ServiceMaster
Healthcare Services from January 1994 to December 31,
1996. 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
Consumer Services and International and New Business
Development Committee.
24
<PAGE>
Executive Officers of ServiceMaster
The following table shows: (i) the names and ages (as of
March 21, 1997) of the present (except as otherwise
noted) executive officers of the Registrant, The
ServiceMaster Company and ServiceMaster Management
Corporation; (ii) all positions presently held by each
officer; and (iii) the year each person became an
officer. Each person named has
served as an officer of the Registrant continuously
since the year shown. There are no arrangements or
understandings between any executive officer and any
other person pursuant to which the officer was or is to
be selected as an officer.
First Became
Name Age Present Position An Officer
- ------------------ --- ---------------- ----------
C. William Pollard 58 Chairman and Director 1977
Carlos H. Cantu 63 President and 1986
Chief Executive Officer and
Director
Charles W. Stair 56 Vice Chairman and Director 1973
Ernest J. Mrozek 43 President and Chief Operating 1987
Officer, Consumer Services, and
a Senior Management Adviser
Robert F. Keith 40 President and 1986
Chief Operating Officer,
Management Services, and a Senior
Management Adviser
Robert D. Erickson 53 President and Chief Operating 1976
Officer, International, and a Senior
Management Adviser
Brian D. Oxley 46 Executive Vice President and a 1983
Senior Management Adviser 1983
Vernon T. Squires 62 Senior Vice President and 1987
General Counsel
Steven C. Preston (1) 36 Senior Vice President and 1997
Chief Financial Officer
Eric R. Zarnikow 37 Vice President and Treasurer 1994
Deborah A. O'Connor 34 Vice President and Controller 1993
__________________
(1) Elected to the indicated position effective April 1, 1997.
25
<PAGE>
Messrs. Pollard, Cantu and Stair are also Directors
of ServiceMaster Management Corporation. Messrs.
Mrozek, Keith, Erickson and Oxley are Senior Management
Advisers. See page 24 for biographical information with
respect to these executive officers.
Vernon T. Squires, age 62, has served as Senior
Vice President and General Counsel since January 1, 1988.
He served as Vice President and General Counsel from
April 1, 1987 until December 31, 1987. He was 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.
Steven C. Preston, age 36, was elected Senior Vice
President and Chief Financial Officer on March 21, 1997,
to take office on April 1, 1997. From August 1993 to
March 7, 1997, he was Senior Vice President and Corporate
Treasurer for First Data Corporation, Atlanta, GA. From
October 1985 to August 1993, he served as an investment
banker at Lehman Brothers, New York, New York.
Eric R. Zarnikow, age 37, has served as Vice
President and Treasurer since 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.
Deborah A. O'Connor, age 34, has served as Vice
President and Controller since 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 1996, ServiceMaster received
Section 16(a) forms from such officers and directors. As
of January 1, 1997, 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
Form 5 was required for those persons, ServiceMaster
believes that during 1996, its officers and directors
complied with applicable filing requirements, except that
one report, covering one March 1996 transaction for
34,911 shares, was filed late by Mr. Peterson.
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 1996.
Each of the listed persons was holding the office indicated in the table on
the last day of December 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
-------------------------------------------------
ANNUAL COMPENSATION (A) Awards Payouts
-------------------------------- ----------------------- -------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted Securities
Other Stock Underlying LTIP All Other
Salary Bonus Annual Awards Options/SARs Payouts Compensation
Name and Compensation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
- -------------------- ---- -------- --------- ----- ------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carlos H. Cantu 1996 $388,000 $679,000 - - 75,000 - -
President and 1995 $380,000 $665,000 - - 112,500 - -
Chief Executive Officer 1994 $350,000 $612,500 - - 112,500 - -
C. William Pollard 1996 $300,000 $300,000 - - 75,000 - -
Chairman 1995 $300,000 0 - - 150,000 - -
1994 $300,000 0 - - 112,500 - -
Brian D. Oxley 1996 $281,667 $293,300 - - 52,500 - -
President, Management 1995 $270,000 $200,000 - - 90,000 - -
Services 1994 $260,000 $ 65,000 - - 0 - -
Robert F. Keith 1996 $255,000 $281,000 - - 52,500 - -
President, 1995 $240,000 $276,000 - - 75,000 - -
Consumer Services 1994 $200,000 $225,000 - - 52,500 - -
Ernest J. Mrozek 1996 $220,000 $264,000 - - 37,500 - -
Sr. Vice President 1995 $208,000 $299,600 - - 22,500 - -
and Chief Financial 1994 $190,000 $228,000 - - 52,500 - -
Officer
</TABLE>
Notes:
(A) The Summary Compensation Table does not include the
cash distributions made by ServiceMaster Management
Corporation (the managing general partner of the
Registrant and The ServiceMaster Company) to the
persons listed in the table in their capacity as
stockholders of ServiceMaster Management
Corporation. Such distributions are dividends and
represent a return on the investment made by such
persons in the corporation. (See Note D, page 13).
The source of these dividends are the cash
distributions made to ServiceMaster Management
Corporation by the Registrant and The ServiceMaster
Company on the 1% carried interests held by
ServiceMaster Management Corporation in each of
these two partnerships. As part of the
Reincorporating Merger to be completed at the end of
1997 (described on pages 1 and 2), ServiceMaster
Management Corporation will be dissolved, the
requirement for direct investments by senior
management in a managing general partner of the
parent entity will no longer exist and the foregoing
dividend payments will be terminated. After
reincorporation, the Company will institute a long-
term incentive plan that will be performance based.
This plan will have less of a negative impact on
earnings per share than would the ServiceMaster
Management Corporation arrangement if it were
continued beyond 1997. The following table has been
prepared as an extension of the Summary Compensation
Table in order to show both the 1996 payments
reflected in the Summary Compensation Table and the
ServiceMaster Management Corporation dividends paid
to the persons listed in the Summary Compensation
Table for the year 1996.
27
<PAGE>
Note (A) (continued)
<TABLE>
<CAPTION>
1996 Summary Compensation and
ServiceMaster Management
Corporation Dividend Table
(Supplement to the Summary Compensation Table)
(a) (b) (c) (d) (e)
Total Annual ServiceMaster Long-Term
Compensation- Management Total of Compensation
Name and 1996 (from Com- Corporation Columns (from Compen-
Principal Position pensation Table) Dividends (b) and (c) sation Table)*
- ------------------- ---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Carlos H. Cantu 1,067,000 745,413 1,812,413 75,000
President and
Chief Executive Officer
C. William Pollard 600,000 745,413 1,345,413 75,000
Chairman
Brian D. Oxley 574,967 274,255 849,222 52,500
President, Management
Services
Robert F. Keith 536,000 274,255 810,255 52,500
President,
Consumer Services
Ernest J. Mrozek 484,000 161,306 645,306 37,500
Sr. Vice President and
Chief Financial Officer
* Securities underlying options awarded in 1996.
</TABLE>
(End of Note (A))
28
<PAGE>
The following table summarizes the number and terms of the
stock options (if any) granted during the year 1996 to the
named executive officers.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN 1996
Individual Grants
---------------------------------------------------
(a) (b) (c) (d) (e) (f)
Number of
Securities % of Total
Underlying Options/SARs
Options/SARs Granted to Exercise or Grant
Granted Employees Base Price Expiration Date
Name (#) 1996 ($/Sh) Date Value (A)
--------------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Carlos H. Cantu,
Chief Executive
Officer 75,000 4.5% $24.25 10-03-2006 $545,250
C. William Pollard 75,000 4.5% $24.25 10-03-2006 $545,250
Brian D. Oxley 52,500 3.1% $20.83 02-16-2006 $276,150
Robert F. Keith 52,500 3.1% $20.83 02-16-2006 $276,150
Ernest J. Mrozek 37,500 2.2% $20.83 02-16-2006 $197,250
</TABLE>
Notes:
(A) Each of the options listed in column (b) is subject to
a vesting schedule under which the option becomes
exercisable in 20% increments on the 1st, 2nd, 3rd, 4th
and 5th anniversaries of grant date. In accordance with
Item 402(c)(2)(vi)(B) of Regulation S-K of the Securities
and Exchange Commission, the grant date value of each of
these options has been estimated based on the Black-
Scholes option pricing model by an independent consulting
firm using the following assumptions: In the case of
the options which expire on 10-03-2006, a risk-free rate
of interest of 6.52%, a volatility rate of 28.60%, a
3.2% distribution yield, and an expected life of seven years;
and in the case of the options which expire on 02-16-
2006, a risk-free interest rate of 5.55%,
a volatility rate of 27.35%, a 3.2% distribution yield, and an
expected life of seven years. The values of the options which are shown
in the table are theoretical and do not necessarily
reflect the actual values which the option holders may
eventually realize. Such actual values will depend on
the extent to which the market value of the Registrant's
shares at a future date exceeds the exercise price of the
options.
29
<PAGE>
The following table summarizes the exercises of
stock options during the year 1996 by the named
executive officers and the number of, and the spread on,
unexercised options held by such officers at December
31, 1996.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN 1996 AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs
at FY-End(#) FY-End($)
--------------- -------------
Shares Acquired Value
on Exercise Realized Exercisable/ Exercisable/
Name (#) (A) ($)(B) Unexercisable Unexercisable
--------------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Carlos H. Cantu, 93,824 $2,392,512 0/75,000 $0/$1,959,375
Chief Executive
Officer
C. William Pollard 213,125 $5,434,688 0/75,000 $0/$1,959,375
Brian D. Oxley 69,775 $1,779,263 0/52,500 $0/$1,338,750
Robert F. Keith 62,033 $1,581,842 41,087/52,500 $1,047,719/$1,338,750
Ernest J. Mrozek 54,172 $1,381,386 6,803/37,500 $173,477/$956,250
</TABLE>
Notes:
(A) The issuance of the shares shown in column (b) was
supported by the assignment of the option. The number of
shares issued was based upon the product of the number of
shares for which the options could be exercised times the
difference between the fair market value on the date of
the assignment ($25.50 per option share) and the exercise
price per option share. Each of the listed persons held
unrestricted ServiceMaster shares in a number sufficient
to cover the exercise price of the option. All shares
listed in column (b) are subject to certain restrictions
on transfer, including a restriction that the shares may
not be transferred for a period of four years from the
date of issuance.
(B) The amounts shown in column (c) are equal to
the fair market value at the date of assignment ($25.50
per share) times the number of shares received in the
transaction described in Note (A). The amounts listed in
column (c) have been calculated without giving effect to
the diminution in value attributable to the restriction
referred to in Note (A).
A table for long-term incentive plan awards is
omitted because no long-term incentive plan awards were
granted to any of the named officers during the year
1996.
Compensation of Directors
During the year 1996, directors of ServiceMaster
Management Corporation who were not officers
("independent directors") received $3,000 for each
meeting of the Board of Directors and each meeting of a
Committee which they attended. In addition, independent
directors each received an annual stipend of $12,000. The
Chairman of the Audit Committee received an additional
annual stipend of $2,000. In 1997, the annual stipend for
independent directors will be $12,000.
Each independent 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 fiveyear 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
an independent director or attainment of age 70,
whichever occurs first, the director will receive the
amount for his or her deferred fee account in a lump sum
or in installments or in shares of ServiceMaster Limited
Partnership, depending on which deferral plan the
director has elected.
30
<PAGE>
The ServiceMaster 1994 Non-Employee Directors Share
Option Plan (the "Directors Option Plan") provides that
options to purchase shares of the Registrant may be
granted from time to time by the Board of Directors to
those members of the Board who are not employees of any
ServiceMaster entity. The exercise price of options
granted under the Directors Option Plan is the fair
market value of the shares at the time of the grant. In
1996, options were granted to each of 15 independent
directors in the amount of 4,500 shares.
Employment Contracts and Termination of Employment
ServiceMaster enters into one-year employment
contracts with each of its executive officers to cover
the officer's employment during the ensuing twelve
months. These contracts are executed either in December
or on an anniversary date of the executive officer's
employment. 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
31
<PAGE>
activated to modify the terms of the Plan and to exempt
any particular takeover from operation of the Plan or to
terminate the Plan, but no such notification exemption or
termination can be made after activation.
Employees are entitled to compensation under the
Plan in connection with any takeover to which the Plan
applies only if their employment terminates within the
"Shakeout Period" beginning at the time such takeover
occurs and ending on the second anniversary of the date
on which the Plan is activated with respect to that
particular takeover.
The Plan is expressly intended to be a severance pay
plan for purposes of the Employee Retirement Income
Security Act of 1974 ("ERISA") and ServiceMaster
employees are expressly entitled to the protection
afforded by ERISA to participants in a severance pay
plan.
The Plan is designed to put any organization which
may at any time consider taking over ServiceMaster on
notice in advance that it may be required to compensate
individuals who have made significant career investments
in ServiceMaster if those individuals are disadvantaged
by the takeover. At the same time, the Plan is intended
to serve the best interests of those who invest in
ServiceMaster for the long term by (i) improving the
ability of the ServiceMaster enterprise to recruit and
retain employees, (ii) increasing the willingness of
employees to risk working for long-term rewards rather
than seeking to maximize 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 1996 are Henry O. Boswell (Chairman),
Herbert P. Hess and Phillip B. Rooney. 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 21, 1997. The Compensation Committee consists of
three members of the Board of Directors, all of whom are
independent directors. As used in the report, the term
"salary year" means the calendar year.
REPORT OF THE COMPENSATION COMPENSATION COMMITTEE
To: The Board of Directors
The Compensation Committee (the "Committee") hereby
submits its report to the Board of Directors for the
year 1996.
The Committee met four times during the year 1996
and has held one meeting to date in 1997. At its July
1996 meeting, the Committee adopted the following
charter for its activities:
The charter of the Compensation Committee of The
ServiceMaster Company Limited Partnership is to review
matters of compensation and benefits and to report to
the Executive Committee of the Board of Directors. This
committee is appointed by the Executive Committee and
the Board of Directors:
32
<PAGE>
1. To recommend the compensation of the Chief
Executive Officer and the Chairman of the Board
of Directors;
2. To review and approve the recommendations of the
Chief Executive Officer on other compensation
matters, including base salaries, annual and
longterm incentive plans and payments, option
planning and employee benefits.
3. To certify or report on compensation performance
and payments as needed for compliance with
current regulations.'
At each of its meetings during the year 1996, the
Committee considered an incentive compensation plan to be
activated at the beginning of the year 1998, at which time
ServiceMaster's status
as a partnership will be terminated and the company will
convert to corporate form. Among other things, this means
that the investment by senior management in the stock of
ServiceMaster Management Corporation will terminate, as
will the dividends which have been paid to the
stockholders of ServiceMaster Management Corporation since
1987. The Committee concluded that this
investment/dividend arrangement should be replaced by a
new performance-based compensation plan for senior
management. The Committee's studies showed that the new
compensation plan has the potential to generate
approximately the same flow of income to senior management
as has occurred in past years through the Management
Corporation. However, the new plan is different in that
it is performance based.
At its December 1996 meeting, the Committee reviewed the
compensation levels of senior members of management,
evaluatesd the performance of management and recommendsed
a base salary for each member of senior management for the
next salary year. This review and recommendation process
includesd 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 determiness part of this review, the Committee
determined whether adjustments should be made in the
compensation of an executive as established by his or
hesenior executives as established by their base salaries
and the existing Incentive Reward Compensation Plan. The
Compensation Committee takesook option grants to senior
members of management into account in the reviews and
recommendations described above.
At its February 1997 meeting, the Committee approved
and recommended grants of options in 1997 for up to
2,500,000 shares. This recommendation was thereafter
approved by the Executive Committee.
Summary of Compensation Policies. The compensation
policies applicable to all executive officers are as
follows: (1) a base level of compensation is established
by reference to the standards described below; (2)
bonuses are paid in accordance with the Company's
Incentive Reward Compensation Plan, under which bonuses
are determined by the extent to which the actual
performance of the Company (or the relevant division
thereof) achieved budget objectives; and (3) such year-
end adjustments as the Compensation Committee may
consider to be warranted.
The standards for determining the base compensation
in any given year for the Chief Executive Officer (and
for all other officers whose salaries are subject to
Compensation Committee approval) are: performance by the
officer in the discharge of his or her responsibilities,
financial performance of the Company for the immediately
preceding year, and the base salary levels and bonuses of
comparable officers in comparable companies.
Five Highest Paid Officers. The base compensation
of each of the highest paid officers for 19956 (including
the Chief Executive Officer) was in the amount
recommended by the Compensation Committee in December
19945 and approved by the Board of Directors in the same
month. This base compensation was further reviewed at
the end of 1995. The Compensation6. The Committee
unanimously agreesd that these base levels were
reasonable at the time established and reasonable in the
context of the performance of the Company in 19956 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 1996 was
established at the beginning of the year at $3808,000 and
remained at that amount throughout the year. Because the
Company's results of operations for 1996 exceededwere
satisfactory relative to the 1996 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 1996 equal to 175% of
his 1996 base compensation. The base compensation of the
Chief Executive Officer for the year 1997 was set at
$450,000. This amount reflects an increase of $62,000
over his base compensation for the year 1996. Any
material difference between the Chief Executive Officer's
total compensation for 1997 compared to 1996 will be
determined by the Company's performance in 1997.
The Compensation Committee notes that the Chief Executive
Officer was granted an option for 75,000 shares in
October 1996.
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 21, 1997
Henry O. Boswell, Chairman
Herbert P. Hess
Phillip B. Rooney
(Compensation Committee)
34
<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]
[See Graphics Appendix, p. 69]
35
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners
and Management
The following table sets forth as of March 21, 1997,
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 29,035,714 (1) 0 29,035,714 19%
</TABLE>
Notes:
(1) The shares shown in this table include the 1,875,000
shares which are the subject of an option granted to
WMI Urban Services, Inc. on December 31, 1995. Such
option became exercisable on January 1, 1997. On
February 18, 1997, WMI Urban Services, Inc.
("WMUS"), WMX Technologies, Inc. (the parent of
WMUS) and the Registrant entered into an agreement
under which the Registrant will purchase all of the
27,160,714 shares of the Registrant currently owned
by WMUS and the option for 1,875,000 shares
currently owned by WMUS in each case by not later
than April 14, 1997. Reference is made to the
discussion on pages 2-3 for further details of this
transaction.
(Item 12 is continued on the next page.)
36
<PAGE>
The following table sets forth as of March 21, 1997
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 Investment Total Percent
Beneficial Owner and Power Other Ownership Ownership
- -------------------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Paul W. Berezny (3)(4)6)(8) 36,577 550,173 586,750 0.396%
Henry O. Boswell (2)(4) 27,475 46,010 73,485 0.050%
Carlos H. Cantu (4)(5)(12) 229,280 1,104,988 1,334,268 0.900%
Robert D. Erickson (4)(5)(6)(7) 491,649 70,193 561,842 0.379%
Brian Griffiths (4) 900 0 900 0.001%
Sidney E. Harris (4) 900 750 1,650 0.001%
Herbert P. Hess (4)(8) 104,809 13,500 119,209 0.080%
Michele M. Hunt 900 0 900 0.001%
Donald K. Karnes (4) 849,248 0 849,248 0.573%
Robert F. Keith (4)(5) 231,099 63,016 294,115 0.198%
Gunther H. Knoedler (4)(6) 36,321 0 36,321 0.025%
James D. McLennan (4) 17,880 0 17,880 0.012%
Jerry D. Mooney (3)(4)(16) 124,513 336,347 460,860 0.311%
Ernest J. Mrozek (4)(5) 156,792 63,016 219,808 0.148%
Vincent C. Nelson (4)(8)(9)(10) 25,035 198,160 223,195 0.151%
Kay A. Orr (4) 10,388 0 10,388 0.007%
Brian D. Oxley (3)(4)(5) 255,948 155,275 411,223 0.277%
Dallen W. Peterson (4) 84,473 0 84,473 0.057%
C. William Pollard (4)(5)(11) 646,937 112,377 759,314 0.512%
Phillip B. Rooney (4) 96,719 0 96,719 0.065%
Burton E. Sorensen (4) 9,521 0 9,521 0.006%
Charles W. Stair (5)(6)(13) 523,240 76,988 600,228 0.405%
David K. Wessner (3)(4)(8)(14) 76,744 1,393,985 1,470,729 0.992%
(15)
All directors and officers
as a group (133 persons)
(17) 11,037,546 5,353,186 16,390,732 10.920%
</TABLE>
Notes:
(1) The shares owned by each person and by all directors
and officers as a group, and the shares included in the
total number of shares, have been adjusted, and the
percentage ownership figures have been computed, in
accordance with Rule 13d-3(d)(1)(i).
(2) Shares in column (3) include 45,935 shares owned by
spouse as to which beneficial ownership is disclaimed.
(3) Shares in column (3) include shares held by spouse
and/or other family members.
(4) Shares in column (2) include shares which may be
acquired within sixty days under options granted
under the ServiceMaster Share Option Plan, under the
ServiceMaster 10Plus Option Plan and/or the
Directors Option Plan.
37
<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 48,186 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 20,575 shares in trust
for the benefit of family members as to which
beneficial ownership is disclaimed. Shares in
column (3) include 6,922 shares held in trust for
the benefit of family members as to which beneficial
ownership is disclaimed.
(10) Shares in column (3) include 2,587 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 24,020 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 15,301 shares in trust for the benefit of
family members.
(12) Shares in column (3) include 15,250 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 16,050 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 675,000 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 309,165 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 1,897,971 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 10Plus Option Plan. This
figure includes shares purchasable by the persons
identified in Item 11 as follows: Mr. Cantu - 0
shares; Mr. Pollard - 0 shares; Mr. Oxley - 10,500
shares; Mr. Keith - 51,587 shares; Mr. Mrozek -
14,303 shares; and all executive officers as a group
138,340 shares.
38
<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 1996
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 1996. 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 1996 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 1996; the figure in
parentheses is the amount of such indebtedness
outstanding on March 15, 1997: Charles W. Stair $500,000
($0); Brian D. Oxley $2,459,651 ($32,683); Robert F.
Keith - $83,067 ($54,855); and Ernest J. Mrozek - $79,411
($57,819). 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.
39
<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
and Analysis section of the ServiceMaster
Annual Report to Shareholders for 1996, on
pages 25-42 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, 1996,
1995 and 1994
Consolidated Statements of Financial
Position as of December 31, 1996 and 1995
Consolidated Statements of Cash Flows
for the three years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Shareholders'
Equity for the three years ended December
31, 1996, 1995 and 1994
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 39.
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.
40
<PAGE>
3. Exhibits
The exhibits filed with this report are listed
on pages 64-68 herein (the "Exhibits Index").
The following entries in the Exhibits Index are
management contracts or compensatory plans in
which a director or any of the named executive
officers of the Registrant does or may
participate. Reference is made to the Exhibits
Index for the filing with the Commission which
contains such contract or plan.
<TABLE>
<CAPTION>
Exhibit Contract or Plan
------- -------------------------------
<C> <S>
10.1 1987 ServiceMaster Option Plan.
10.3 Deferred Compensation and Salary
Continuation Agreement for Officers.
10.4 Deferred Directors Fee Agreement.
10.5 ServiceMaster Executive Share
Subscription Program.
10.6 Incentive Reward Compensation Plan.
10.9 ServiceMaster Profit
Sharing, Savings & Retirement Plan as
amended and restated effective
January 1, 1987.
10.10 Share Grant Award Plan.
10.14 ServiceMaster 10-Plus Plan. See also Item 10.19.
10.16 Directors Deferred Fees Plan
(ServiceMaster Shares Alternative).
10.19 ServiceMaster 10-Plus Plan as
amended September 3, 1991.
10.21 ServiceMaster 1994 Non-Employee
Directors Share Option Plan.
10.28 ServiceMaster 1997 Share Option Plan
</TABLE>
(b) Reports on Form 8-K
None in the last quarter of the period covered
by this Report on Form 10-K.
41
<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.
42
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of Federal income tax
matters describes the material consequences to the non-
corporate U.S. shareholders of ServiceMaster Limited
Partnership (the "Public Partnership") and to the Public
Partnership as sole common limited partner of The ServiceMaster Company
Limited Partnership (the "Principal Subsidiary
Partnership"). (These two partnerships are together
referred to as the "Principal Partnerships".) This
discussion does not consider state, local and foreign tax
issues, nor does it separately describe (except where
noted) the consequences to shareholders who received
their shares as a form of compensation (or in exchange
for ServiceMaster stock issued in prior years as
compensation), or which are corporations, tax-exempt
entities, or non-resident alien individuals.
THIS DISCUSSION MAY NOT BE DIRECTLY APPLICABLE TO
ANY PARTICULAR SHAREHOLDER, DEPENDING ON THAT
SHAREHOLDER'S UNIQUE CIRCUMSTANCES. SHAREHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE
FEDERAL INCOME TAX TREATMENT IN THEIR SPECIFIC TAX
SITUATIONS, INCLUDING THE APPLICATION AND EFFECT OF THE
STATE, LOCAL AND FOREIGN LAWS WHICH MIGHT APPLY TO A
SPECIFIC SHAREHOLDER.
The following discussion is based on provisions of
the Internal Revenue Code of 1986 (the "Code"), as
amended, existing and proposed regulations promulgated
thereunder, judicial deci sions, legislative history, and
current administrative rulings and practices. For a
number of Code sections the Internal Revenue Service (the
"IRS") has been directed or authorized by statute to
issue regulations that may materially affect the tax
consequences of holding an interest in ServiceMaster. As
of the date hereof, certain of these regulations have not
yet been promulgated. Moreover, any of the statutes, regulations,
rulings, practices, or judicial precedents upon which
this discussion is based could be changed, perhaps
retroactively, with adverse tax consequences.
The Federal income tax treatment of shareholders, as
described below, depends in some instances on
interpretation by ServiceMaster Management Corporation
(the "Managing General Partner") of complex provisions of
the Federal income tax law for which no clear precedent
or authority may be available. In determining basis
adjustments, allocations, asset valuations and taxable
income of the Principal Partnerships, the Managing
General Partner must make determinations that will affect
a shareholder in various ways depending on such factors
as the date a shareholder purchased shares of the Public
Partnership.
Possible Legislative Changes. Congress has
considered from time to time 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 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 the partnership's
43
<PAGE>
current and accumulated earnings and profits) or, to the
extent distributions exceed the partnership's earnings
and profits, (b) a non-taxable return of capital (to the
extent of a shareholder's basis for his or her shares) or
(c) taxable capital gain. In sum, classification of
either of the Principal Partner ships as an association
taxable as a corporation would result in a material
reduction in the anticipated cash flow and after-tax
return to shareholders from holding Public Partnership
shares. 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.
The IRS has issued regulations, effective January 1,
1997, which provide that an unincorporated entity will
automatically be classified as a partnership unless it affirmatively
elects to be treated as a corporation. The Principal
Partnerships will not make such an election. See
ServiceMaster Limited Partnership's 1995 Form 10-K for a
discussion of the classification rules for partnerships
as the law existed prior to January 1, 1997.
Publicly Traded Partnerships Treated as
Corporations; Exceptions for Certain Publicly Traded
Partnerships. 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 intends to continue 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 not later than
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. Such an
acceleration of the effective date of the reincorporating
merger could adversely impact some shareholders in the
Public Partnership. The board of directors does not
presently plan to accelerate the effective date of the
merger to a date materially earlier than December 31,
1997.
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.
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Tax Consequences of Partnership Share Ownership
General. The Public Partnership is not subject to
Federal income tax as an entity. Rather, subject to the
limitations prescribed in Code Section 469, each partner
is required to report on his or her Federal and state
income tax returns his or her allocable share of the
income, gains, losses, deductions and credits (and, for
alternative minimum tax purposes, tax preference items)
of the Public Partnership for the taxable year of the
Public Partnership ending with or within his or her
taxable year and will be taxable directly on his or her
allocable share of the Public Partnership's taxable
income. The Public Partnership's taxable income includes
its allocable share of the income, gains, losses,
deductions and credits (and, for alternative minimum tax
purposes, tax preference items) of the Principal
Subsidiary Partnership which, in turn, includes its
allocable share of such items of subsidiary partnerships.
The beneficial owners of Partnership Shares are treated
as partners of the Public Partnership for Federal income
tax purposes. Thus, if Partnership Shares are held by a
nominee, the beneficial owner of the Partnership Shares
will be taxed on income and loss of the Public
Partnership. Subject to the discussion set forth in the
next five paragraphs, because shareholders are required
to include Public Partnership income in their income for
tax purposes without regard to whether they receive cash
distributions of that income, shareholders may be liable
for Federal income taxes with respect to Public
Partnership income even though they have not received
cash distributions from the Public Partnership sufficient
to pay such taxes. However, throughout the period from
January 1, 1987 to December 31, 1996, 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 T, page 17). As stated in Note T, the
beneficiaries of the SGP Trust are the limited partners
of the Public Partnership as constituted from time to
time. On the date on which ServiceMaster converts back to
corporate form pursuant to the Reincorporating Merger
approved on January 16, 1992, the SGP Trust will be
assimilated into ServiceMaster Incorporated of Delaware,
the successor corporate holding company for the
ServiceMaster enterprise.
The beneficial interests held by the beneficiaries
of the SGP Trust are not assignable or transferable
separately, but only by and in connection with the
transfer of shares in the Public Partnership. Every
assignment, sale or transfer of any interest in shares in
the Public Partnership prior to the date on which the SGP
Trust terminates will include a proportional undivided
beneficial interest in the SGP Trust.
Since January 1, 1993 the SGP Trust has been
allocated that amount of the taxable income (determined
without regard to section 743(b) adjustments) of the
Principal Subsidiary Partnership which exceeds the
aggregate cash distributions made by the Public
Partnership to its limited partners. The effect of this
arrangement is that the cash distributions made by the
Public Partnership to its limited partners will always
equal or exceed the taxable income of the Public
Partnership which is directly allocated to its limited
partners. With respect to the additional taxable income
which is allocated to the SGP Trust, the Principal
Subsidiary Partnership makes cash distributions to the
SGP Trust from time to time in the amounts required by
the SGP Trust to discharge its federal and state income
tax liabilities. The SGP Trust does not receive any
other allocations of income or cash distributions.
The formation of the SGP Trust was not a taxable event
to the Principal Partnerships or the shareholders, and
the creation of the Class T Partnership Interest was not
a taxable event to either the SGP Trust or the Principal
Subsidiary Partnership or to the Public Partnership. The
distribution of funds to the SGP Trust by the Principal
Subsidiary Partnership is not 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.
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If the SGP Trust were to distribute its income to its
beneficiaries, such distributions would be taxable to the
beneficiaries. However, because it is not anticipated
that the SGP Trust will make any distributions to its
beneficiaries, the shareholders of the Public Partnership
will not recognize any taxable income on account of the
establishment of, and the allocations to, the SGP Trust.
Accounting Method and Tax Information. The Public
Partnership uses the accrual method of accounting in
reporting income and computes income on the basis of a
taxable year ending on December 31. The Public
Partnership will prepare and furnish to each shareholder
of record during any taxable year the information
necessary for the preparation of the shareholder's
Federal, state and other tax returns required as a result
of the operations of the Public Partnership for that
year.
Tax Basis of Partnership Shares. The tax basis of a
share holder in his or her Partnership Shares is
significant because (i) basis is used in measuring the
gain or loss recognized for tax purposes either upon the
receipt of cash distributions from the Public Partnership
or upon a partial or complete disposition of Partnership
Shares by the shareholder and (ii) a shareholder may
deduct his or her allocable share of Public Partnership
losses only to the extent of his or her tax basis in his
or her shares. See "Tax Consequences of Partnership Share
Ownership Taxation of Partners on Public Partnership
Distributions" and "Sale or Other Disposition of Shares."
Taxation of Partners on Public Partnership
Distributions. If the cash distributions to a shareholder
by the Public Partner ship in any year exceed his or her
allocable share of the Public Partnership's taxable
income for that year, the excess will constitute a return
of capital to the shareholder to the extent of the
shareholder's basis in his or her Partnership Shares.
This situation is expected to occur for shareholders
whose taxable income is determined by reference to the
Section 754 election (see "Section 754 Election", page
52). A return of capital will not be reportable as taxable income by a
shareholder for Federal income tax purposes, but will
reduce the tax basis of his or her Partnership Shares.
If a shareholder's tax basis were reduced to zero, then
any further cash distribution to the shareholder for any
year in excess of his or her allocable share of the
Public Partnership's taxable income for that year would
be taxable to him or her as though it were gain on the
sale or exchange of his or her Partnership Shares. All
or a portion of such excess cash distribution could be
treated as ordinary income as the result of the
application of the recapture provisions of the Code. See
"Sale or Other Disposition of Shares."
Limitation on Losses. No investor should invest in
the Public Partnership with the expectation that an
investment in the Public Partnership will result in tax
losses that may be applied to offset an investor's income
from other sources. To the extent that the Principal
Partnerships' operations result in losses for tax
purposes in any calendar year, a shareholder generally
will be entitled to use his or her allocable share of
such losses to the extent of his or her tax basis in his
or her Partnership Shares at the end of the year, subject
to the limitations prescribed in Code Section 469.
Code Section 469 limits a taxpayer's ability to use
losses or credits generated by limited partnerships and
other business activities in which such taxpayer does not
materially participate ("passive activities"). In
general, losses from passive activities will not offset
earned income (salary and bonus) or portfolio income
(interest, dividends and royalties). Such losses will
generally only offset income from other passive
activities. Similarly, tax credits from passive
activities will only reduce income tax attributable to
income from passive activities. Losses and credits from
a passive activity which cannot be used in a given year
are generally carried forward. These deferred losses and
credits, if not usable sooner, will generally be allowed
in full when the taxpayer disposes of his or her entire
interest in the activity.
Section 469 applies separately to each publicly
traded partnership. Thus, passive activity losses and
credits attribut able to a limited partner's interest in
a publicly traded partner ship (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
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applied against other income. Income attributable to a
limited partner's interest in a publicly traded
partnership (such as the Public Partnership) cannot be
offset by losses or credits from the limited partner's
other passive activities.
Substantially all of any losses or credits generated
by the Public Partnership will likely be subject to the
limitations prescribed in Section 469. The limitations
prescribed in Section 469 generally apply to individuals,
estates, trusts, personal service corporations and, with
certain modifications, closely-held corporations.
Under current law, a partner who is subject to the
"atrisk" 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 unex pected
distribution (or specified adjustments or allocations) to
a partner that results in a deficit balance in such
partner's capital account, there must be an allocation of
income or gain to the distributee that eliminates the
resulting capital account deficit as quickly as possible.
In order for the "economic effect" of an allocation
to be considered "substantial," the regulations require
that the alloca tion must have a "reasonable possibility"
of "substantially" affecting the dollar amounts to be
received by the partners, inde pendent of tax
consequences. The regulations provide that the "economic
effect" of an allocation
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will be presumed to be insub stantial if it merely shifts
tax consequences within a partnership taxable year or is
transitory, i.e., likely to be offset by other
allocations in subsequent taxable years. The regulations
state, however, that adjustments to the tax basis in
property will be presumed to be matched by corresponding
changes in the fair market value of the property. Thus,
the regulations conclude that there will not be a strong
likelihood that an allocation of deductions attributable
to depreciation will be transitory due to a provision for
a subsequent corresponding allocation of gain
attributable to the disposition of that property.
In addition to the regulations described above, the
Treasury has issued regulations which address the effect
of nonrecourse liabilities upon partnership allocations.
Under the regulations, if (i) the partnership maintains
capital accounts in accordance with specific rules set
forth in the regulations and allocations are reflected
through an increase or decrease in partners' capital
accounts and (ii) liquidating distributions are required
to be made in accordance with partners' respective
positive capital account balances by the end of the
taxable year (or, if later, within 90 days after the date
of liquidation), then a partner may be allocated
nonrecourse deductions that cause his or her capital
account to fall below zero, provided (among other
requirements) that the deficit produced by the allocation
is not in excess of the minimum gain that would be
allocated to the partner in the event the partnership
property securing the nonrecourse liability were disposed
of in a taxable transaction in full satisfaction of such
liability. The regulations further provide that in the
event there is a decrease in such partnership's minimum
gain for a partnership taxable year, the partners must be
allocated items of partnership income and gain for such
year (and, if necessary, for subsequent years) in
proportion to, and to the extent of, an amount equal to
such partner's share of the net decrease in partnership
minimum gain during such year.
The Principal Partnership Agreements provide that a
capital account is to be maintained for each partner,
that the capital accounts are to be maintained in
accordance with applicable prin ciples set forth in the
regulations, and that all allocations to a partner are to
be reflected in the partner's capital account. In
addition, distributions upon liquidation of the Principal
Partnerships are to be made in accordance with respective
capital account balances. The Principal Partnership
Agreements do not require the limited partners to restore
any deficit balance in their capital accounts upon
liquidation of the Principal Partnerships. However, the
Principal Partnership Agreements contain a "minimum gain"
allocation for nonrecourse deductions and a "qualified
income offset" provision. Pursuant to the Principal
Partnership Agreements, tax income and gain will be
allocated in a manner consistent with the book income and
gain allocations associated with the minimum gain and
qualified income offset provisions.
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 18. 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
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be allocated among the partners in a manner consistent
with Code Section 704(c). In addition, the Principal
Partnership Agreements provide that partnership income,
gain, loss and deductions attributable to Adjusted
Property shall be allocated for Federal income tax
purposes in accordance with Section 704(c) principles.
Pursuant to Section 704(c), items of partnership income,
gain, loss and deduction with respect to Contributed
Property are to be shared among the partners pursuant to
regulations so as to take account of the differences
between the Principal Subsidiary Partnership's basis for
the property and the fair market value of the property at
the time of the contribution (i.e., a Book-Tax
Disparity).
The IRS has issued final regulations under Section
704(c) which provide that these allocations of
partnership income, gain, loss and deduction to account
for the BookTax 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
Part nerships will allocate their taxable income and
losses among the shareholders of record in proportion to
the number of Partnership Shares owned by them based on
the number of months during the year for which each
shareholder was record owner of the shares. The Principal
Partnerships' taxable income and loss allocable to each
month will be determined by allocating such income or
loss pro rata to each month in the year. With respect to
any Partnership Share that is transferred during any
calendar month, the Principal Partnerships will treat a
shareholder who becomes the record owner of such share on
or before the close of business on the fifteenth day of
the month as having been the owner of such share for the
entire month if he or she holds such share for the
remainder of such month. Conversely, a shareholder who
becomes the record owner of a Partnership Share during
such month but after the fifteenth day of a calendar
month will be allocated the
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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 10, 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
Part nership 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 dispo sition and his adjusted tax
basis for his Partnership Shares. See "Tax Consequences
of Partnership Share Ownership" -- "Tax Basis of
Partnership Shares." For these purposes, a shareholder's
share (as determined for purposes of Code Section 752) of
any Principal Partnership indebtedness attributable to
the transferred Part nership Shares will be included in
the amount realized on the disposition.
Generally, under current law, gain recognized by a
share holder on the sale or exchange of shares that have
been held for more than twelve months will be taxable as
long-term capital gain, taxable at a maximum rate of 28%
in the case of taxpayers other than corporations.
However, that portion of the gain attributable to
"substantially appreciated inventory items" and
"unrealized receivables" of the Principal Partnerships,
as those terms are defined in the Code, will be treated
as ordinary income. Ordinary income attributable to
unrealized receivables and inventory items may exceed the
net taxable gain realized upon the sale and may be
recognized even if there is a net tax loss realized upon
the sale. "Unrealized receivables" include, among other
things, the shareholder's proportionate share of the
amounts that would be recaptured as ordinary income if
the Principal Partnerships were to have sold their assets
at fair market value at the time the shareholder
transferred his shares. See "Depreciation; 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' indebt edness allocable to the
transferred Partnership Shares. See "Tax Consequences of
Partnership Share Ownership" -- "Tax Basis of Partnership
Shares." Such shareholder would therefore recognize gain
(but not loss) on making a gift of Partnership Shares if
the shareholder's basis had declined so that it were less
than such amount deemed realized. In the case of a
deductible gift to a charitable organization the donor's
basis is apportioned between the value deemed contributed
and the deemed sale price. Any gain recognized more
likely than not would be subject to the same rules
(described above) which apply to gain recognized on a
sale of a Partnership Share, so that some portion could
be treated as ordinary income.
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
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
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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 iden tifying the name,
address and taxpayer identification number of the nominee
and such other person and providing information regarding
acquisitions and transfers of Partnership Shares
(including information regarding acquisition cost and net
sale proceeds) made by the nominee on behalf of such
other person during such taxable year.
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 $15 per
share ($22 per share before the June 1996 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
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.
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Other Section 754-Related Matters. If a
shareholder's adjusted basis in his or her Partnership
Shares is less than his or her proportionate share of
adjusted basis of the Principal Partnerships' property at
the time of acquisition of such Partnership Shares, such
shareholder's share of adjusted basis of the Principal
Partnerships' property must be reduced to equal his or
her basis in the Partnership Shares, resulting in adverse
con sequences to such shareholder.
A proper allocation of the adjustment among the
various assets deemed purchased for purposes of Section
743(b) requires a determination of the relative value of
the Principal Partnerships' assets at such time. The IRS
may challenge any such allocations.
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
Part nership as well. In view of the fact that
Partnership Shares will be publicly traded, it is
possible that shares representing 50% or more
of the Public Partnership's capital and profits interests
might be sold or exchanged within a single 12-month
period. However, a share that changes hands several times
during a 12-month period would only be counted once for
purposes of determining whether a termination has
occurred. If the Principal Partnerships should terminate
for tax purposes, they would be deemed to have
distributed their assets to their partners, who would
then be deemed to have contributed the assets to new
partnerships. The Principal Partnerships would have a
new basis in their non-cash assets equal to the aggregate
basis of the shareholders in their Partnership Shares
prior to the termination plus any gain recognized by the
shareholders in the termination, less any cash deemed
distributed to the shareholders in connection with the
termination. Accordingly, if the basis of the
shareholders in their Partnership Shares is more or less
than the Principal Partnerships' aggregate basis in their
assets immediately prior to the termination, the
Principal Partnerships' basis in their non-cash assets
following the termination might have to be reallocated
among those assets to reflect the relative fair market
values of those assets at the time of termination. Such a
reallocation may be favorable or unfavorable, depending
on the circumstances.
Generally, a shareholder would not recognize any
taxable gain or loss as a result of the deemed pro rata
distribution of Principal Partnership assets incident to
a termination of the Principal Partnerships. A
shareholder, however, would recognize gain to the extent,
if any, that the shareholder's pro rata share of the
Principal Partnerships' cash (and the reduction, if any
in the shareholder's share of the Principal Partnerships'
indebtedness as determined for purposes of Code Section
752) at the date of termination exceeded the adjusted tax
basis of his Partnership Shares. Also, the Principal
Partnerships' taxable years would terminate. If the
shareholder's taxable year were other than the calendar
year, the inclusion of more than one year of the
Principal Partnerships' income in a single taxable year
of the shareholder could result. Also, new tax elections
would be required to be made by the reconstituted
partnerships. Finally, a termination of the Principal
Partnerships may cause the Principal Partnerships or
their assets to become subject to unfavorable statutory
or regulatory changes enacted prior to the termination
but previously not applicable to the Principal
Partnerships or their assets because of protective
"transitional" rules. However, a constructive termination
under Code Section 708 should not cause the Partnership
to lose the benefits of the upto-10year 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."
The IRS has issued proposed regulations which
provide that a termination of a partnership would be
treated as a contribution by the terminated partnership
of all of its assets and
liabilities to a new partnership in exchange for all the
interests in the new partnership. The terminated
partnership would then be deemed to distribute the
interests in the new partnership to the new partner and
all remaining partners in liquidation of the terminated
partnership. These
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proposed regulations would eliminate (i) any reallocation
of basis among the non-cash assets of the Public
Partnership and (ii) the potential for gain recognizable
by the shareholders upon a termination of the Public
Partnership. However, the Public Partnership's taxable
year would still end; it would need to file new elections
with the IRS and the termination could subject the Public
Partnership or its assets to unfavorable statutory or
regulatory changes enacted prior to the termination but
previously not applicable to the Public Partnership or
its assets because of protective transitional rules.
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 share holder holds through
Partnership Shares. Thus, the amount of a shareholder's
net passive income, if any, from the Public Part nership
generally will be reduced on account of a portion of any
interest incurred by the shareholder to finance the
acquisition of Partnership Shares.
Noncorporate shareholders are urged to consult their
tax advisors with regard to the specific effect that
limitations on the deduction of investment interest would
have on their investment in the Public Partnership.
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Tax-Exempt Entities, Individual Retirement Accounts and
Regulated Investment Companies
Unrelated Business Taxable Income. Tax-exempt
entities (including IRAs and trusts that hold assets of
employee benefit or retirement plans) are subject to tax
on certain income derived from a business regularly
carried on by the entity that is unre lated to its exempt
activities (i.e., "unrelated business taxable income"
("UBTI")). It is anticipated that nearly all of any
taxexempt 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 52
would be subject to tax on any UBTI to the extent that
the sum of such UBTI (i.e., gross income net of
deductions), if any, from their Partnership Shares and
from other sources were to exceed $1,000 in any
particular year. Moreover, even if their UBTI does not
exceed $1,000 so that tax-exempt shareholders do not
incur a Federal income tax liability, they nevertheless
will be required to file income tax returns if their
gross income included in computing such UBTI is $1,000 or
more for any tax year.
Investment Company Income. For purposes of
determining whether a shareholder is a regulated
investment company (within the meaning of Code Section
851), the shareholder's income derived from the Principal
Partnerships will be treated as income from dividends,
interest and gains from the sale or other disposition of
securities only to the extent the shareholder's income is
attributable to such dividends, interest and gains
realized by the Principal Partnerships.
Administrative Matters
Information to Shareholders and Assignees. In
addition to the required Schedule K1 to be furnished by
the Public Part nership to holders of Partnership Shares
during a particular taxable year, the Public Partnership
intends to furnish detailed instructions and explanations
advising recipients of the Schedule K1 as to how to fill
out their own income tax returns. The 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.
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
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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 corpora tion or a personal holding company) or
10% of the tax required to be shown on the return for the
year. As a general rule, the penalty will not be imposed
with respect to underpayments attributable to items for
which (i) there is or was substantial authority for the
tax treatment afforded such items by the taxpayer, or
(ii) the relevant facts affecting the treatment of such
items are adequately disclosed in the taxpayer's return or in
a statement attached to the return and there was a reasonable basis
for the position. The penalty will not apply with
respect to any portion of a tax underpayment attributable
to a substantial understatement of income tax if it is
shown that there was a reasonable cause for such portion
and that the taxpayer acted in good faith with respect to
such portion. There can be no assurance that a
shareholder will not have a substantial understatement of
income tax as a result of the treatment of items of
income, gain, loss, deduction and credit resulting from
his investment in the Public Partnership or that the IRS
will not contend that there is not substantial authority
for the treatment on the shareholder's return of certain
items of income, gain, loss, deduction and credit. If
the IRS should challenge the treatment by the Principal
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.
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Interest on Deficiencies. The Code provides that
interest accrues on all tax deficiencies at a rate based
on the Federal short-term rate plus 3 percentage points
(5 percentage points in certain cases involving
underpayment by a C corporation of tax amounting to more
than $100,000) and compounded daily. This interest
applies to penalties as well as tax deficiencies.
Backup Withholding. Distributions to shareholders
whose Partnership Shares are held on their behalf by a
broker may con stitute reportable payments subject to
backup withholding. Backup withholding, however, would
apply only if the shareholder (i) failed to furnish his
Social Security number or other taxpayer identification
number to the person subject to the backup withholding
requirement (e.g., the broker) or
(ii) furnished an incorrect Social Security number or
taxpayer identification number. If backup withholding
were applicable to a shareholder, the person subject to
the backup withholding requirement would be required to
withhold 31% of each distribution to such shareholder and
to pay such amount to the IRS on behalf of such
shareholder. Amounts withheld under the backup
withholding provisions are allowable as a refundable
credit against a taxpayer's Federal income tax.
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 with a U.S.
trade or business. The legislative history of Code
Section 884 indicates that the branch profits tax is
intended to apply to foreign corporations that are
partners in partnerships which have a U.S. trade or
business. Thus, foreign corporations which own shares in
the Public Partnership may be subject to the branch
profits tax on earnings and profits attributable to the
Principal Partnerships' income as well as federal income
tax on their share of Partnership income. The earnings
and profits (which are subject to branch profits tax)
attributable to Partnership Shares held by a foreign
corporation will, of course, reflect a reduction for
Federal income taxes paid by the foreign corporate
shareholder on its share of Partnership income.
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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 (corporations,
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.
58
<PAGE>
SCHEDULE VIII
<TABLE>
<CAPTION>
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, 1996:
Allowance for doubtful accounts--
Accounts receivable (current) $18,029 20,517 --- 14,429 $24,117
Notes receivable (current) $ 2,439 59 --- 328 $ 2,170
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
</TABLE>
59
<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 22,
1997. 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 22, 1997
(February 24, 1997, as to the pending transaction with
WMX Technologies, Inc. and the acquisition of Barefoot
Inc. which are discussed in the footnotes to the
financial statements.)
60
<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 21, 1997 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
- ------------------------- ------------------------- --------------
<C> <S> <C>
/s/ C. WILLIAM POLLARD Chairman and Director March 21, 1997
C. William Pollard
/s/ CARLOS H. CANTU President and Chief Executive March 21, 1997
Carlos H. Cantu Officer and Director
/s/ CHARLES W. STAIR Vice Chairman and Director March 21, 1997
Charles W. Stair
/s/ ERNEST J. MROZEK Senior Vice President and March 21, 1997
Ernest J. Mrozek Chief Financial Officer
(Principal Financial Officer)
/s/ PAUL W. BEREZNY, JR. Director March 21, 1997
Paul W. Berezny, Jr.
61
<PAGE>
/s/ HENRY O. BOSWELL Director March 21, 1997
Henry O. Boswell
/s/ BRIAN GRIFFITHS Director March 21, 1997
Brian Griffiths
/s/ SIDNEY E. HARRIS Director March 21, 1997
Sidney E. Harris
/s/ HERBERT P. HESS Director March 21, 1997
Herbert P. Hess
/s/ MICHELE M. HUNT Director March 21, 1997
Michele M. Hunt
/s/ GUNTHER H. KNOEDLER Director March 21, 1997
Gunther H. Knoedler
/s/ JAMES D. McLENNAN Director March 21, 1997
James D. McLennan
/s/ VINCENT C. NELSON Director March 21, 1997
Vincent C. Nelson
/s/ KAY A. ORR Director March 21, 1997
Kay A. Orr
/s/ DALLEN W. PETERSON Director March 21, 1997
Dallen W. Peterson
62
<PAGE>
/s/ PHILLIP B. ROONEY Director March 21, 1997
Phillip B. Rooney
/s/ BURTON E. SORENSEN Director March 21, 1997
Burton E. Sorensen
/s/ DAVID K. WESSNER Director March 21, 1997
David K. Wessner
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS INDEX
Exhibit No. Description of Exhibit
- ----------- --------------------------------------------
<C> <S> <C> <C> <S>
2.1 Acquisition Agreement dated December 5, 1996 by and
among ServiceMaster Limited Partnership,
ServiceMaster Acquisition Corporation and Barefoot
Inc. is incorporated by reference to Annex A-1 to
the Offering Circular/Prospectus included as part of
the Registration Statement on Form S-4 as filed by
ServiceMaster Limited Partnership on January 17,
1997 (SEC Registration No. 33317759).
2.2 Plan and Agreement of Merger dated December 5, 1996 by
and among ServiceMaster Limited Partnership,
ServiceMaster Acquisition Corporation and Barefoot
Inc. is incorporated by reference to Annex A-2 to
the Offering Circular/Prospectus included as part of
the Registration Statement on Form S-4 as filed by
ServiceMaster Limited Partnership on January 17,
1997 (SEC Registration No. 33317759).
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 10K").
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 10K").
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. 19378) (the "1992 10-K").
4.7 The ServiceMaster Company Limited Partnership Agreement
of Limited Partnership, as Amended and Restated on
December 30, 1986 (the "Amended and Restated
ServiceMaster Company Limited Partnership
Agreement"), is incorporated by reference to
Exhibit 4.2 to the 1986 10K.
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 10K.
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 10K.
64
<PAGE>
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. 03168) (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 10K.
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 Form of the Share Grant Award Plan is incorporated by
reference to Exhibit 10.12 to the 1987 10-K.
10.11 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.
10.12 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.
10.13 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.
65
<PAGE>
10.14 ServiceMaster 10-Plus Plan is incorporated by
reference to Exhibit 4.2 to the ServiceMaster
Limited Partnership Registration Statement on Form
S8 (No. 33-39148) filed with the SEC on February
26, 1991 (the "10-Plus Registration Statement").
10.15 Form of Option Agreement for the
ServiceMaster 10-Plus Plan is incorporated by
reference to Exhibit 4.3 to the 10-Plus
Registration Statement.
10.16 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")
10.17 Form of Directors Deferred Fees Agreement
(ServiceMaster Shares Alternative) is incorporated
by reference to Exhibit 10.19 of the 1990 10-K.
10.18 Form of ServiceMaster Deferred Fees Plan Trust is
incorporated by reference to Exhibit 10.20 of the
1990 10K.
10.19 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").
10.20 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 10K.
10.21 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").
10.22 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.
10.23 $300,000 Credit Agreement between ServiceMaster
and certain Lenders dated August 31, 1995 and
amendment there to dated October 15, 1996 is
incorporated by reference to Exhibit 10.33 to the
Registration Statement on Form S-4 as filed by
ServiceMaster Limited Partnership on January 17,
1997 (SEC Registration No. 333-17759).
10.24 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").
10.25 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.
10.26 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.
66
<PAGE>
10.27 Share and Option Repurchase Agreement between
ServiceMaster Limited Partnership, WMX
Technologies, Inc. and WMUS Urban Services, Inc.
dated February 18, 1997 is incorporated by
reference to Exhibit 99.1 to the Current Report on
Form 8K as filed by ServiceMaster Limited
Partnership on February 19, 1997 (the "February 19,
1997 8K").
10.28 ServiceMaster 1997 Share Option Plan
10.29 Form of Option Agreement for the ServiceMaster 1997
Share Option Plan
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, 1996 (the "1996 Annual
Report"). The parts of the 1996 Annual Report
which are expressly incorporated into this report
by reference shall be deemed filed with this
report. All other parts of the 1996 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 10K.
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.
67
<PAGE>
99.7 Merger and Reorganization Agreement dated December
10, 1991, by and among ServiceMaster Incorporated
of Delaware, ServiceMaster Limited Partnership,
ServiceMaster Corporation, ServiceMaster
Management Corporation, NewSub A, Inc., and NewSub
B, Inc., is incorporated by reference to Annex D
to the December 1991 Proxy Statement/Prospectus.
99.8 Amended and Restated Agreement of Limited
Partnership of ServiceMaster Management Services
Limited Partnership dated December 1991 is
incorporated by reference to Exhibit 28.10 to the
1991 10-K.
99.9 Amended and Restated Certificate of Incorporation of
ServiceMaster Incorporated of Delaware as filed on
December 17, 1991 is incorporated by reference to
Exhibit 28.11 to the 1992 10-K.
99.10 Amended and Restated Agreement of Limited
Partnership of ServiceMaster Consumer Services
Limited Partnership effective June 30, 1992 is
incorporated by reference to Exhibit 28.12 to the
1992 10-K.
99.11 Amended and Restated Certificate of Incorporation
of ServiceMaster Incorporated of Delaware as filed
in January, 1993 is incorporated by reference to
Exhibit 28.13 to the 1992 10-K.
99.12 Agreement of Trust (T Trust) between The
ServiceMaster Company Limited Partnership, as
grantor, and Continental Bank National Association,
as trustee, dated January 1, 1993 is incorporated
by reference to Exhibit 28.14 to the 1992 10-K.
99.13 Agreement of Trust (A Trust) between The
ServiceMaster Company Limited Partnership, as
grantor, and Continental Bank National Association,
as trustee, dated January 1, 1993 is incorporated
by reference to Exhibit 28.15 to the 1992 10-K.
</TABLE>
68
<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 pages 13-17 for a further explanation
of the diagram.
A Performance Graph is set forth on page 35 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, 1992 to
December 31, 1996. The chart shows that
ServiceMaster outperformed both indices in 1992,
1993, 1994, 1995 and 1996 by wide margins over the
last four years.
69
<PAGE>
SERVICEMASTER 1997 SHARE OPTION PLAN
1. INTRODUCTION
1.1 Title . The plan described herein shall be known
as the "ServiceMaster 1997 Share Option Plan". It is
hereinafter referred to as the "Plan".
1.2 Purpose. (a) The purpose of the Plan is to
enhance employee and director ownership of ServiceMaster
Limited Partnership by providing both selected employees of
The ServiceMaster Company and its subsidiaries and non-
employee members of the Board of Directors of the Managing
General Partner of the Company with the opportunity to
acquire shares of ServiceMaster Limited Partnership.
(b) The term "Company" as used in this Part 1 and
elsewhere in this Plan means ServiceMaster Limited
Partnership or any successor entity which has acquired,
directly or indirectly, all or substantially all of the
assets of the Company and which has agreed to assume the
obligations of the Company under this Plan.
1.3 Adoption of the Plan. The Plan was approved and
adopted on February 26, 1997, effective February 13, 1997 by
the Executive Committee of the Board of Directors of the
Managing General Partner of the Company.
1.4 Defined Terms. Certain terms used in this Plan
have the meaning set forth in the section in which they are
defined or as set forth in Section 2.1 or Section 11.1
hereof.
1
<PAGE>
2. ADMINISTRATION
2.1 Certain Definitions. As used in this Part 2 and
elsewhere in this Plan, the following terms have the
indicated meanings:
"Board of Directors" and "Board" means the board
of directors of the Managing General Partner, provided,
that if any entity other than ServiceMaster Limited
Partnership becomes the "Company" for purposes of this
Plan, then the
term "Board of Directors" and "Board" shall mean the
board of directors or other group responsible for the
governance of such entity.
"Committee" means the Compensation Committee of
the Board of Directors.
"Executive Committee" means the Executive
Committee of the Board of Directors.
"Managing General Partner" means ServiceMaster
Management Corporation, the corporate general partner
of the Company and of The ServiceMaster Company Limited
Partnership, except that if ServiceMaster Management
Corporation is replaced as the managing general partner
of the Company, then the term "Managing General
Partner" means the person thereafter authorized to act
as the managing general partner of the Company.
2
<PAGE>
2.2 Administration by the Committee. (a) The Plan
shall be administered by the Committee except as otherwise
provided in Section 2.2(b).
(b) Notwithstanding paragraph (a) above, the Board of
Directors or the Executive Committee may administer this
Plan in whole or in part at any time and However, in lieu of
establishing the Committee, and subject to Section 2.2, the
Board of Directors may decide to administer this Plan
itselffrom time to time. In such circumstances all of the
powers and duties established herein with respect to the
Committee shall be applicable to the Board of Directors and
to the Executive Committee.
2.3 Powers of the Committee. (a) The Plan shall be
administered by the Committee in accordance with the
provisions of this instrument.
(b) The Committee shall have the power and authority to
adopt, amend and rescind rules and procedures governing the
administration of the Plan.
(c) All actions of the Committee which are within the
scope of the authority granted to the Committee by this Plan
or delegated to the Committee by the Board of Directors
shall be binding on all persons.
2.4 Committee Procedures. (a) The Committee shall
hold meetings at such times and places as it may determine.
The Committee may make such rules and regulations for the
3
<PAGE>
conduct of its business as it deems advisable. Unless the
Board of Directors or the Committee shall expressly decide
to the contrary, a majority of the members of the Committee
shall constitute a quorum. Any action taken by a majority of
the Committee members at a meeting at which a quorum of
Committee members is present shall be deemed to be an act of
the Committee.
(b) Any member or members of the Committee may
participate in a meeting of the Committee by means of a
conference telephone or similar communications equipment by
means of which all persons participating in the meeting can
hear each other.
(c) Any action required or permitted to be taken at
any meeting of the Committee may be taken without a meeting
if all of the members of the Committee execute a consent to
such action in writing (which may be in counterparts) and
the writing or writings are filed with the records of the
Committee.
2.5 Indemnification. (a) No member of the Committee
shall be liable, in the absence of bad faith, for any act or
omission with respect to his or her service on the
Committee.
(b) Service on the Committee shall constitute service
as
a member of the Board of Directors so that the members of
the Committee shall be entitled to indemnification and
reimbursement as members of the Board of Directors for any
4
<PAGE>
action or any failure to act in connection with service on
the
Committee to the full extent provided for or permitted by
the Certificate of Incorporation or the Bylaws of the
Managing General Partner or by the Partnership Agreement of
the Company or by any insurance policy or other agreement
intended for the benefit of the directors of the Managing
General partner or by any applicable law.
3. PERSONS ELIGIBLE TO RECEIVE OPTIONS
3.1 Eligibility Requirements. (a) A person shall be
eligible to be granted an option under this Plan only if, on
the proposed Granting Date for such option, such person is
either (i) a "qualified employee" or (ii) a member of the
Board of Directors.
(b) A "qualified employee" means a person who meets all
of the following standards:
(i) He or she is employed either by the Company,
The ServiceMaster Company Limited
Partnership, the Managing General Partner or
a Subsidiary; and
(ii) He or she has managerial, supervisory or
similar responsibilities;
4. GRANT OF OPTIONS
4.1 Powers of the Committee with Respect to the
Granting of Options. The Committee is authorized --
5
<PAGE>
(a) To select the qualified employees and directors to
whom options shall be granted under this Plan and to
determine the number of Shares to be subject to each option
granted under the Plan, the number of options to be awarded
to each qualified employee or director and the Granting Date
(as defined in Section 4.2 below) for each option;
(b) Except as otherwise expressly provided in this
Plan, to determine, at the time of the grant of each option,
all terms and conditions governing the rights and obligations of
the holder with respect to such option, including but not
limited to: (i) the exercise price per Share or the method
by which the exercise price per Share shall be determined;
(ii) the length of the period during which the option may be
exercised and any limitations on the number of shares
purchasable with the option at any time during such period;
(iii) the times at which the option may be exercised; (iv)
any conditions precedent to be satisfied before the option
may be exercised; (v) any restrictions on resale of any
Shares purchased upon exercise of the option; and (vi)
whether the Company will retain a right to repurchase Shares
sold upon exercise of such option and, if so, the terms
governing such repurchase right; and
(c) To grant at any time to any qualified employee and
to any director an option to purchase Shares from the
Company on such terms, and subject to such conditions as are
6
<PAGE>
consistent with the provisions of this Plan, as the
Committee may establish on or prior to the date on which the
option is granted.
4.2 Granting Date. An option shall be deemed to have
been granted under this Plan on the date (the "Granting
Date") designated by the Committee as the Granting Date at
the time it approves such option.
5. TERMS APPLICABLE TO ALL OPTIONS
5.1 Exercise Price. (a) Except as otherwise provided
in Part 9, the price at which each Share may be purchased
upon exercise of an option granted under this Plan shall be
the amount equal to the fair market value of the Share on
the Granting Date.
(b) The Committee may determine fair market value
based on the closing price of the Shares on the New York
Stock Exchange on the trading day occurring on or
immediately preceding the Granting Date or by such other
means as the Committee reasonably determines. The
Committee's determination of fair market value shall be
binding for all purposes.
5.2 Option Agreement. No person shall have any rights
under any option granted under this Plan unless and until
the Company and the person to whom such option has been
granted have executed and delivered an agreement which
expressly grants the option to such person and sets forth
the terms of the option.
7
<PAGE>
5.3 Ten Year Maximum Term; Expiration Date. No option
may be granted under this Plan which may be exercised more
than ten years after the Granting Date of such option. The
term "expiration date" as applied to any option under this
Plan means the earlier of the tenth anniversary of the
Granting Date for such option or the expiration date
specified in the Term Sheet for such option.
5.4 Modification of Option After Grant. Each option
granted under this Plan may be modified after the date of
its grant by express agreement between the Company and its
holder, provided, that any such change shall not be
inconsistent with the terms of this Plan and shall be
approved by the Committee.
5.5 Limitations on Transfer. (a) As used in this
Section 5.5 and elsewhere in this Plan, the term "Option
Holder" means the original grantee of the option, such
person's guardian or legal representative if, while the
grantee is alive, the option has been transferred to such
guardian or legal representative, and, after the death of
the original grantee, the person to whom the original
grantee's right have passed by reason of the original
grantee's death.
(b) No option granted under this Plan shall be
transferable otherwise than by law or by will or by the laws
of
descent and distribution.
(c) Each option granted under this Plan may be
exercised only by the Option Holder.
8
<PAGE>
5.6 Taxes. The Company shall be entitled, if the
Committee deems it necessary or desirable, to withhold (or
secure payment from the Option Holder in lieu of
withholding) the amount of any withholding or other tax due
from the Company with respect to any amount payable and/or
Shares issuable under any option granted under this Plan.
The Company may defer such payment or issuance unless
indemnified to its satisfaction against any liability for
any such tax.
5.7 No Right to Employment Conferred. Nothing in this
Plan or, in the absence of any express provision to the
contrary, in any option granted pursuant to this Plan, shall
confer on any person any rights to continue in the
employment of the Company or any subsidiary or interfere in
any way with the right of the Managing General Partner, the
Company or any subsidiary of the Company to terminate such
person's employment at any time.
5.8 Plan Provisions Control Option Terms. The
provisions of this Plan shall govern all options granted
under this Plan. In no event shall the Committee have the
power to grant any option under this Plan which is contrary
to any of the provisions of this Plan. If any provision of
any option granted under this Plan shall conflict with any
provision of this Plan as in effect on the Granting Date of
such option, such provision in this Plan shall control.
Except as provided in Part 9, the terms of any option
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granted under this Plan may not be changed after the
Granting Date of such option without the express approval of
the option holder.
6. PROVISIONS GOVERNING THE EXERCISE OF OPTIONS
6.1 Normal Option Term. Except as otherwise provided
in Sections 6.3 and 6.4, the right to exercise any option
granted under this Plan shall terminate at the expiration date of
the option.
6.2 Acceleration of Exercise Time. The Committee in
its sole discretion shall have the right (but shall not in
any case be obligated) to permit purchase of Shares under
any option prior to the time such Shares are purchasable
under the terms of the agreement granting the option.
6.3 Exercise After Termination of Employment. (a) As
used in this Section 6.3 and elsewhere in this Plan, the
term "Original Grantee" means the person to whom an option
is granted.
(b) Subject to paragraph (c) and except as otherwise
provided in Section 6.4, if the Original Grantee ceases to
be employed by the Company, the Managing General Partner or
any subsidiary of the Company, all options granted to the
Original Grantee may not be exercised more than six months
after such cessation of employment occurs. If the exercise
of an option is subject to a vesting schedule, the right to
exercise such option within the foregoing six-month period
shall be limited in accordance with such vesting schedule.
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(c) Notwithstanding the provisions of paragraph (b),
no option may be exercised after its expiration date.
(d) If and to the extent that an option has not been
exercised at the expiration of the period described in
paragraph (b) or paragraph (c), whichever is applicable, the
option shall lapse and be of no further effect and all
Shares then subject to such option shall again become
available for use under the Plan.
6.4 Death of Original Grantee. (a) Upon the death of
an Original Grantee while the Original Grantee has a right
to exercise an option, the person or persons to whom the
Original Grantee's rights under the option pass by reason of the
Original Grantee's death may exercise the option with
respect to any or all of the Shares subject to the option
until the earlier of (i) six months after the date of the
Original Grantee's death or (ii) the expiration date of the
option. If the exercise of an option is subject to a vesting
schedule, the right to exercise such option within the
foregoing six-month period shall be limited in accordance
with such vesting schedule.
(b) If and to the extent that an option is not
exercised at the expiration of the applicable period
described in paragraph (a) above, the option shall lapse and
all Shares then subject to such option shall again become
available for use under the Plan.
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(c) Notwithstanding the provisions of paragraphs (a)
and (b) above, no option may be exercised after its
expiration date.
6.5 Exercise Procedures. Each option granted under
this Plan shall be exercised by written notice to the
Company. An option holder shall not have any rights with
respect to Shares issuable under any option granted under
this Plan or be deemed to be a limited partner or
shareholder in the Company by reason of such option until
the exercise of that option with respect to those Shares.
6.6 Option Surrender. Any option granted under this
Plan may, in the discretion of the Committee, be surrendered
to the Company on such terms as the Committee and the Option
Holder agree, including (but not limited to) terms which
provide that upon such surrender the Company will pay to
such holder cash or Shares, or a combination of cash or
Shares, having a value equal to the difference between (i)
the value of the Shares subject to the option on the date
the option is surrendered and (ii) the exercise price under
the option.
7. PROVISIONS CONCERNING THE COMPANY'S FIRST REFUSAL
RIGHT.
7.1 Definitions. As used in this Section 7, the
following terms have the indicated meanings:
"Permitted Transfer" means a transfer of Shares in any
of the following circumstances: (i) the transfer is to a
person described in Section 5.6(a); or (ii) the transfer
constitutes a bona fide gift to the transferee; or (iii) the
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transfer is approved in writing by the Committee; or (iv)
the transfer is to any person if the Company has elected not
to exercise its First Refusal Right in respect of such
Shares after having had the opportunity to do so pursuant to
the provisions of this Section 7.
"Restricted Transfer" means any transfer of Shares
which is not a Permitted Transfer.
"Subject Shares" -- see Section 7.2
"Subject Shareholder" means any holder of Subject
Shares.
"First Refusal Right" means the right of the
Company to purchase Subject Shares from a Subject
Shareholder as set forth in Section 7.2.
"First Refusal Notice" means the notice
described in Section 7.3.
"First Refusal Term" means the period which
commences on the date of issuance of such Shares and
ends on the fifth anniversary of such date.
"Acceptance Notice" means the notice described
in Section 7.4.
"First Refusal Price" -- see Section 7.2
7.2 First Refusal Right. If a holder of Shares issued
pursuant to an Option granted pursuant to this Plan
proposes to sell or otherwise dispose of such Shares at any
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time during the First Refusal Term and the proposed sale or
other form of disposition is not a Permitted Transfer, such
Shares shall thereupon become "Subject Shares" and (a) the
holder of the Subject Shares shall have the duty to notify
the Company of the proposed sale or other form of
disposition of the Subject Shares in the manner described in
Section 7.3 and (b) the Company shall have the right to
purchase such Subject Shares from the holder at the First
Refusal Price. In each such case the First Refusal Price
shall be the value of the Subject Shares as determined by
taking the average price of the Shares on the New York Stock
Exchange (or in the principal market in which the Shares are
traded, if the Shares are not then traded on the New York
Stock Exchange) over the five business days immediately
preceding the date on which the Company receives the First
Refusal Notice described in Section 7.3.
7.3 First Refusal Notice. (a) A holder of Shares
which have become Subject Shares shall immediately notify
the Company, in writing, of his or her desire to sell or
otherwise dispose of such Shares. Such notice is
hereinafter referred to as the "First Refusal Notice".
(b) If an Option Holder proposes to transfer Shares
concurrently or soon after the exercise of his or her
Option, the First Refusal Notice may accompany the
optionee's Notice of Exercise.
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(c) Each First Refusal Notice given hereunder shall
constitute an offer by the person giving the notice to sell
the Subject Shares to the Company at the First Refusal
Price.
7.4 Company's Time to Accept; Acceptance Notice. (a)
The Company shall have ten business days from the date on
which it receives a First Refusal Notice to determine
whether to exercise its First Refusal Right in respect of
the Subject Shares covered by such notice. If the Company
elects to exercise its First Refusal Right, the Company
shall give the Subject Shareholder a notice in writing to
that effect (the "Acceptance Notice"). The Acceptance
Notice shall be delivered
by not later than the end of the period described above.
(b) Each Acceptance Notice given hereunder shall
constitute an acceptance of the offer made by the Subject
Shareholder and shall commit the Subject Shareholder to sell
and deliver the Subject Shares to the Company and, subject
to the condition set forth in Section 7.5, shall commit the
Company to purchase the Subject Shares and to pay the First
Refusal Price therefor.
7.5 Closing Procedures. (a) The sale and purchase of
the Subject Shares resulting from the offer and acceptance
procedures described above shall be closed on or before the
fifth business day following the date of the Company's
Acceptance Notice. At the Closing, the Subject Shareholder
shall deliver the certificate or certificates for the
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<PAGE>
Subject Shares, duly assigned to the Company or accompanied
by a duly executed stock power and the Company shall deliver
its check for the First Refusal Price for the Subject
Shares.
(b) The delivery of the certificate or certificates
for the Subject Shares shall constitute a representation and
warranty by the Subject Shareholder that he or she is the
owner of the Subject Shares, that he or she has the capacity
and authority to transfer the Subject Shares to the Company,
and when the Subject Shares are transferred to the Company
the Company will thereupon have full ownership of the
Subject Shares free and clear of any liens or encumbrances.
(c) If the Subject Shareholder can not validly make
any of the representations and warranties described in
paragraph (b) above, the Company shall not be obligated to
accept delivery of the Subject Shares or to pay the First
Refusal Price therefor, the Acceptance Notice
notwithstanding. In this event, the decision of the Company
not to accept delivery of the Subject Shares shall not
constitute an election not to exercise its First Refusal
Right in respect of such Shares.
7.6 Legend. Each certificate for Shares issued
pursuant to this Plan shall bear a legend which shall state
that the Shares represented by such certificate are subject
to the First Refusal Right.
7.7 Effect of Making a Restricted Transfer. Any
transfer of Shares to a person other than the Company which
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<PAGE>
is a Restricted Transfer as defined in this Section 7 shall
be ineffective to transfer any interest in such Shares as
against the Company, and the Company shall be entitled to
continue to recognize as the sole owner of such Shares the
person shown on its books and records to be the owner of the
Shares without giving effect to the transfer.
7.8 Effect of Making a Permitted Transfer. A transfer
of Shares which is a Permitted Transfer by virtue of clause
(i) or clause (ii) of the definition of a Permitted Transfer
shall not cause the provisions of this Section 7 to be
inapplicable to such Shares in the hands of the transferee.
A transfer of Shares which is a Permitted Transfer by virtue
of clause (iii) or clause (iv) of the definition of a
Permitted Transfer shall cause the provisions of this
Section to be inapplicable to such Shares in the hands of
the transferee and all subsequent transferees.
8. SHARES SUBJECT TO THIS PLAN
8.1 Number of Shares Limited to 2,500,000. (a) Except
as otherwise provided in Part 9, the number of Shares which
have been purchased by the exercise of options plus the
number of Shares which are subject to purchase through the
exercise of outstanding options shall not exceed 2,500,000.
(b) If any option which has been granted under this
Plan is surrendered to the Company, is terminated, or
expires before it has been fully exercised, then all Shares
17
<PAGE>
which were subject to such option and as to which the option
was not exercised shall be available for any option or
options subsequently
granted in accordance with the provisions of this Plan.
9. ADJUSTMENTS TO REFLECT CAPITAL CHANGES
9.1 Share Splits, Etc. (a) The Committee is
authorized to adjust the number and kind of shares subject
to outstanding options, and the price for which Shares may
be purchased under such options, the number and kind of
shares available for options subsequently granted under this
Plan and the number of Shares and the purchase price per
share under any call right granted to the Company in Option
Agreements made in connection with this Plan, to the extent
the Committee, in its sole discretion, deems necessary to
compensate for any of the following capital changes
("Capital Changes"): (i) any change in the Company's
outstanding Shares which the Committee deems to have an
effect analogous to a stock split; (ii) any reclassification
of the Company's outstanding Shares; (iii) any transaction
in which anything other than cash is distributed to the
holders of the Company's outstanding Shares; (iv) any merger
or other transaction in which the Company's outstanding
Shares are converted into or replaced by anything else; or
(v) any other occurrence which the Committee believes should
lead to an adjustment under this Part 9 for reasons
analogous to the reasons which lead to an adjustment on
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<PAGE>
account of any of the occurrences specifically anticipated
in the foregoing clauses (i) - (v).
(b) Any adjustment made by the Committee which the
Committee reasonably believes to be within the scope of
authority delegated by this Part 9 shall be binding on all
parties concerned.
10. AMENDMENT AND TERMINATION OF THIS PLAN
10.1 Amendment. The Board of Directors shall have
complete power and authority to amend this Plan at any time
and no approval by the Company's shareholders or by any
other person, committee or other entity of any kind shall be
required to make any amendment approved by the Board effective,
provided, that no termination or amendment of this Plan may,
without the consent of the holder of an option outstanding
at or prior to the time of such amendment or termination,
adversely affect the rights of such holder.
10.2 Termination. The Board of Directors shall have
the right and power to terminate this Plan at any time. No
options shall be granted under this Plan after termination
of this Plan, but the termination of this Plan shall not
have any other effect and any option outstanding at the time
of termination of this Plan may be exercised after
termination of this Plan at any time prior to the expiration
date of such option to the same extent such option would be
exercisable had this Plan not been terminated.
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11. INTERPRETATION OF THIS PLAN
11.1 Certain Definitions. The following terms have
the meanings set forth in this Section 11.1 wherever such
terms are used in this Plan. (Certain other defined terms
are set forth in other sections of this Plan).
"Exercise Price" as applied to any option granted
under this Plan means the price at which Shares may be
purchased upon exercise of such option as established
pursuant to this Plan.
"Option" means any option granted under this Plan.
"Share" means the basic unit used to measure the
quantity of the entire undivided limited partners'
investment in ServiceMaster Limited Partnership which
is held by any particular limited partner, provided,
that if as a result of any adjustment under Part 9 the
property obtainable with an option is changed to shares
of common stock issuable by a corporate successor to
the ServiceMaster Limited Partnership, then the term
"Share" shall mean the equivalent unit of corporate
stock.
"Subsidiary" means (i) any entity in which the
Company owns, directly or indirectly, an interest in
the entity which entitles the Company and/or one or
more of its Subsidiaries to receive at least 50% of the
profits generated by such entity or (ii) any entity in
which the Company owns, directly or indirectly, a debt
20
<PAGE>
instrument issued by such entity which is convertible
into an equity interest in the entity and the
conversion of which would then entitle the Company
and/or one or more of its Subsidiaries to receive at
least 50% of the profits generated by such entity.
11.2 Captions. The captions used in this Plan are for
convenience only. They do not constitute a part of this
Plan and shall not be deemed to limit, characterize or
affect in any way any provisions of this Plan.
11.3 Severability. Whenever possible, each provision
in this Plan and every option at any time granted under this
Plan shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this
Plan or any option at any time granted under this Plan shall
be held to be prohibited by or invalid under applicable law,
then such provision shall be deemed amended to accomplish
the objectives of the provision as originally written to the
fullest extent permitted by law and all other provisions of
this Plan and every other option at any time granted under
this Plan shall remain in full force and effect.
11.4 No Strict Construction. No rule of strict
construction shall be implied against the Company, the
Committee, the Chairman or any other person in the
interpretation of any of the terms of this Plan, any option
21
<PAGE>
granted under this Plan or any rule or procedure established
by the Committee.
11.5 Choice of Law. Every option at any time granted
under this Plan shall be deemed to be a contract made under
the laws of the State of Delaware. For all purposes, both
this Plan and every option granted under this Plan shall be
construed in accordance with and governed by the laws of the
State of Delaware.
11.6 Committee's Interpretations Conclusive. The
Committee shall have full power and authority to interpret
the terms of this Plan, the terms of options granted under
this Plan, and the rules and procedures established by the
Committee. Any determination made by the Committee as to
the meaning of or requirements imposed by or right of any
persons under this Plan, any option granted under this Plan,
or any rule or procedure established by the Committee shall
be binding upon all persons concerned.
-o0o-
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This instrument constitutes part of a prospectus covering
securities that have been registered under the Securities Act
of 1933.
OPTION AGREEMENT
For Option Granted Under the
ServiceMaster 1997 Share Option Plan
ServiceMaster Limited Partnership, a Delaware limited
partnership (the "Company") and ~ (the "Optionee") hereby agree
as follows:
Part 1. Option Terms
1.1 Definitions. As used in this Agreement, the
following terms have the indicated meanings:
"Company" means ServiceMaster Limited Partnership, a
Delaware limited partnership.
"First Refusal Right" means the duty of the holder of
Shares issued pursuant to an Option to offer such Shares for
sale to the Company, and the correlative right of the Company
to purchase such Shares, under certain circumstances as set
forth in Section 7 of the Plan.
"Grant Date" means the date set forth in the Term Sheet as
the date on which the option which is the subject of this
agreement was granted.
"Plan" means the ServiceMaster 1997 Share Option Plan as
constituted on the Grant Date and, subject to the limitations
set forth in Section 10.1 of the Plan, as amended from time to
time thereafter.
"Shares" means the units of limited partner interest
1
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of the Company, or any successor organization
to the Company (as more fully set forth in the Plan).
"Term Sheet" means the document which is referenced to
and delivered concurrently with this Agreement and which sets
forth certain terms and conditions of the option granted
hereunder.
1.2 Grant. (a) The Company hereby grants to the Optionee
an option (the "Option") under the Plan which entitles the
Optionee to purchase from the Company the Shares which are
subject to the Option on the terms and subject to the
conditions specified in the Term Sheet, this Agreement and the
Plan.
(b) Various terms governing this option, including the
Grant Date, the consideration payable for the option, and the
exercise price under the option, are set forth in the Term
Sheet. The Term Sheet has been signed by the Company and must
be signed by the Optionee before the optionee may have any
rights under this agreement.
(c) Upon execution of the Term Sheet, the Optionee shall
immediately make a cash payment to the Company in the amount of
the Option Acquisition Price as specified in the Term Sheet.
1.3 Number of Shares Purchasable. Unless and until an
adjustment is made pursuant to Part 9 of the Plan, the number
of Shares which are subject to the Option is the number
specified in the Term Sheet.
1.4 Option Exercise Price. Unless and until an
adjustment is made pursuant to Part 9 of the Plan, the price at
which the Shares which may be purchased from the Company upon
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<PAGE>
any exercise of this Option shall be the original exercise
price specified in the Term Sheet.
1.5 First Refusal Right; Legend. (a) Each Share issued
pursuant to an exercise of the option granted by this Agreement
shall be subject to the Company's First Refusal Right.
(b) All certificates for Shares issued pursuant to an
exercise of the option granted by this Agreement shall contain
a legend which refers to the First Refusal Right.
Part 2: Exercise
2.1 Time of Exercise. (a) During the period on the
Grant Date and ending on the fifth anniversary of the Grant
Date, this Option may be exercised only in installments of 20%
each which mature, respectively, on the first, second, third,
fourth and fifth anniversaries of the Grant Date. Such
installments shall cumulate over the foregoing five-year
period. The foregoing limitation shall operate as shown in the
following schedule, provided, that in no event may this Option
be exercised in a manner or to an extent contrary to the
provisions of this Agreement or the Plan:
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<PAGE>
Grant Date Cumulative
Anniversary Percent Per Cent
----------- ------- ----------
1st 20% 20%
2nd 20% 40%
3rd 20% 60%
4th 20% 80%
5th 20% 100%
(b) After the fifth anniversary of the Grant Date, this
Option may be exercised in whole or in part and at such time or
times as the person entitled to exercise the Option may desire
with respect to all Shares then available under this Option,
provided, that in no event may the Option be exercised after
the expiration date set forth in the Term Sheet or in a manner
or to an extent contrary to the provisions of this Agreement or
the Plan.
2.2 Manner of Exercise. (a) The person entitled to
exercise this Option may do so by giving the Company a written
notice (the "Exercise Notice") which shall --
(i) identify the Option;
(ii) specify the number of Shares with respect to
which the Option is then being exercised;
(iii)state the price at which the shares will be
purchased;
(iv) identify the Exercise Date which shall govern
such exercise; and
(v) state that the person signing the Exercise
agrees to purchase the Shares so specified at the
price and on the terms established in this Agreement
and the Plan;
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(vi) be signed by the person entitled to exercise the
Option.
A form of Exercise Notice which will be deemed satisfactory by
the Company is attached to this Agreement as Exhibit A.
2.3 Exercise Date. (a) This Option shall be deemed to
have been exercised on the date (the "Exercise Date") on which
the Exercise Notice, completed as required by Section 2.2 (or
completed in such other form or manner as the Company's
Secretary or the Committee shall approve), is delivered to the
office of the Secretary of the Company or at such other place
as may have been designated by the Secretary or the Committee
at the time of such exercise as a place to which notices of
exercise of options granted under the Plan may be delivered.
(b) Delivery of the Exercise Notice may be made by
personal delivery or by United States mail.
2.4 Manner of Payment. The price which is payable for
the Shares to be purchased upon the exercise of any option
granted under this Plan shall be paid to the Company in full
and in cash by the Optionee at the time of the delivery of the
Exercise Notice.
2.5 Termination of Option. (a) The Option shall
terminate on whichever of the following dates occurs first: (i)
the Expiration Date as specified in the Term Sheet or (ii) any
other date established under any of the provisions of the Plan
as the date after which the option may not be exercised. The
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<PAGE>
applicable date under this Section 2.5(a) is hereinafter
referred to as the "Termination Date".
(b) The Option may not be exercised after its Termination
Date. Thus, the Option does not convey any right to purchase
any Shares which Optionee (or other holder of the Option) has
not agreed to purchase in an Exercise Notice delivered to the
Company on or prior to the Termination Date in accordance with
the requirements of the preceding sections of this Part 2.
Part 3: The Plan Terms
3.1 Plan Terms Control. The Option has been granted
under the Plan as constituted at the Grant Date. The terms of
the Plan as constituted at the Grant Date are incorporated into
this Agreement by reference and shall control the rights and
obligations of the Company and the Optionee under this
Agreement.
3.2 Effect of Subsequent Changes in the Plan. No change in
the Plan which shall be made after the Grant Date shall
adversely affect the rights of the Optionee under this
Agreement unless the Optionee shall have agreed in writing to
such change. No change in the Plan after the Grant Date shall
inure to the benefit of the Optionee except to the extent
expressly permitted by the Committee.
Part 4. Call Right.
4.1 The Company's Call Right. (a) If the Optionee
terminates his or her employment with the Company or any
subsidiary of the Company and within five years after the date
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of such termination of employment the Optionee becomes employed
by an organization and the Optionee's responsibilities with
that organization place the Optionee in competition with any
one or more of the businesses then being conducted by the
Company or any subsidiary of the Company, the Company shall
have the right (the "Call Right") to purchase Shares from the
Optionee in a number equal to the number of the Shares which
the Optionee had purchased within five years prior to the
initial competitive activity by the Optionee. The amount
payable by the Company for the Shares to be delivered by the
Optionee pursuant to this
Section 4.1 shall be the Optionee's Investment (as defined in
paragraph (b) below) in the Shares purchased under the Option.
If and to the extent that the Optionee can not deliver the
Shares which were purchased under the Option because the
Optionee has previously disposed of all or some of such Shares,
then the Optionee agrees to obtain substitute Shares in the
number needed to comply with the Optionee's delivery obligation
under this Section 4.1 by purchasing Shares in the market or by
any other lawful means, and the Optionee shall deliver such
substitute Shares to the Company.
(b) As used in this Section 4.1, the term "Optionee's
Investment" means, as to each Share purchased under the Option,
the sum of the Option Acquisition Price Per Share and the
Exercise Price Per Share, each as shown in the Term Sheet. The
figure representing the Optionee's Investment shall be
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<PAGE>
appropriately adjusted in the event of Capital Changes as
provided in Section 5.1.
(c) The judgement of the Committee as to whether, for
purposes of applying Section 4.1(a), the Optionee is in
competition with the Company and/or any of its business units
shall be conclusive and binding, unless the Optionee can show
by clear and convincing evidence that no such competition has
occurred.
4.2 Call Right Exercise Period. The Call Right may be
exercised by the Company at any time on or prior to the date
(the "Call Deadline") which occurs three months after the
Committee has first actually become aware that the Optionee has
become employed by another organization and, as an employee of
such organization, become engaged in activities which place the
Optionee in competition with the Company as described in
Section 4.1.
4.3 Exercise of Call Right. The Company's Call Right
shall be exercised by delivery by the Company of a written
notice of
such exercise to the Optionee at the most recent address for
the Optionee as shown on the records of the Company.
4.4 Consummation of the Company's Purchase. Within five
business days after the Company has exercised its Call Right
pursuant to Section 4.3, the Optionee shall deliver to the
Company: (i) certificate(s) representing Shares in the number
required to be delivered under Section 4.1; (ii) transfer
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<PAGE>
instruments reasonably satisfactory to the Company to vest
immediately in the Company absolute ownership of such Shares
free of any adverse interest of any kind; and (iii) such
evidence and assurances as the Company shall reasonably request
to establish the power of the Optionee to convey ownership of
such Shares and the person(s) entitled to receive payment for
such Shares. Upon receipt of all the items deliverable under
the preceding sentence, the Company shall pay the purchase
price for such Shares as established pursuant to Section 4.1.
If the Optionee does not deliver the Shares at the time
required under the preceding sentence, the Company shall have
the right to obtain payment from the Optionee for an amount
equal to the difference between the greater of the market price
at the time the Call Right is exercised or the time the payment
is made and the Optionee's Investment plus interest from
exercise of the Call Right at the prime rate plus two
percentage points and collection costs.
4.5 Call Right Lapse. If the Company fails to exercise
its Call Right on or prior to the Call Deadline, then
immediately after the Call Deadline the Optionee shall be
relieved of any further obligation to deliver any Shares under
this Part 4.
Part 5. General Provisions
5.1 Capital Changes. The Committee shall have the right
to determine the effect of each Capital Change upon the
parties' respective rights and obligations under this
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<PAGE>
Agreement, including but not limited to (i) the nature and
quantity of property purchasable by the Company under Part 4
after giving effect to such Capital Change and (ii) the price
payable by the Company for such property upon exercise by the
Company of rights granted in Part 4.
5.2 Securities Law Compliance. The Optionee shall not
offer, sell or otherwise dispose of any of the Shares acquired
by reason of any exercise of the Option in any manner which
would violate the Securities Act of 1933 or any other state or
federal law or require the Company to make any fling or take
any action to avoid such a violation.
5.3 Terms Defined in the Plan. Every term which is
defined or given a special meaning in the Plan has the same
meaning whenever it is used in this Agreement.
5.4 Binding Agreement. (a) Each party acknowledges that
it is intended that the other party may rely on the rights
granted by this Agreement and that this Agreement is supported
by adequate consideration and is binding on each party in
accordance with its terms.
(b) This Agreement shall also be binding upon and inure to
the benefit of any successor of the Company.
5.5 Complete Agreement. This Agreement, the Term Sheet
and the Plan together contain the complete agreement of the
parties relating to the Option. The rights and obligations of
the parties evidenced by this Agreement, the Term Sheet and the
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<PAGE>
Plan supersede any prior understandings, agreements or
representations by or between the parties which may have
related to such subject matter in any way.
5.6 Amendments and Waivers. The provisions of this
Agreement may be amended, and a person may take any action
which is prohibited herein or omit to perform any action
required to be performed by such person, only if such
amendment, act or omission has been approved in writing by the
parties to the Agreement. No course of dealing or any delay in
exercising any rights hereunder
shall operate as a waive of any rights of any person under this
Agreement. A waiver upon any one occasion shall not be
construed as a bar or waiver of any right or remedy on any
future occasion.
5.7 Counterparts. This Agreement and the Term Sheet may
be
executed in one or more counterparts, each of which shall be an
original but all of which together shall constitute one and the
same instrument.
5.8 Notices. Any notice to the Company required or
permitted by the terms of this Agreement shall not be deemed to
have been given unless is it in writing and shall be deemed to
have been given at (but not before) the time it has been
delivered in writing to the office of the Secretary of the
Company or to such other place as the Company may designate in
writing from time to time.
5.9 Captions. The captions used in this Agreement are
for
11
<PAGE>
convenience only, do not constitute a part of this Agreement,
and shall not be deemed to limit, characterize, or in any way
affect any provision of this Agreement.
5.10 Execution. The parties have executed the Term Sheet
to
evidence their intention to be bound by every provision of this
Agreement.
-o0o-
12
SERVICEMASTER LIMITED PARTNERSHIP EXHIBIT REGARDING
DETAIL OF INCOME PER SHARE COMPUTATION
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Number of shares used in computing
income per share and equivalent shares--
Shares outstanding on weighted
average basis 141,058 115,725 113,622
Equivalent shares--
Options and subscriptions outstanding 3,381 3,245 2,535
Total weighted average and equivalent shares144,439 118,970 116,157
Primary earnings per share $1.70 $1.45 $1.20
Net income $245,140 $172,019 $139,883
Interest on convertible debentures 1,869 1,901 2,078
Adjusted net income $247,009 $173,920 $141,961
Weighted average number of common
shares outstanding 145,068 120,122 116,484
Other potentially dilutive securities 2,130 2,164 2,172
Total weighted average number
of shares 147,198 122,286 118,656
Fully diluted earnings per share $1.68 $1.42 $1.20
</TABLE>
<PAGE>
Management Discussion and Analysis
of Financial Condition and Results of Operations
(All share and per share data reflect
the three-for-two share split in June 1996)
1996 Compared to 1995
Revenues increased 8 percent to $3.5 billion primarily due to internal
growth, with the effects of acquisition activity at both the
Consumer Services and Management Services segments offsetting the
disposition of the Education Food Service line in early 1995.
Operating income increased 17 percent to $295 million, while
margins increased to 8.5 percent of revenue from 7.9 percent in 1995,
reflecting the combined effects of the continued rapid growth of
our higher margin business units and the favorable effects of overhead
leveraging throughout the enterprise. Net income was $245 million,
reflecting a 43 percent increase over 1995, while earnings per share
totalled $1.70, an increase of 17 percent. The net income and
earnings per share growth rates both reflect the December 1995
acquisition of WMX Technologies, Inc.'s (WMX) minority ownership
interest in Consumer Services. This transaction reduced minority
interest expense, while increasing the number of shares outstanding by
approximately 27 million (on a post-split basis).
The Consumer Services business segment achieved a 13 percent increase
in revenues and net income growth of 23 percent. TruGreen-ChemLawn
operations had strong growth in revenues and profits despite unfavorable
weather conditions throughout the year. Continued strong growth in
residential services and strong commercial sales, combined with the
favorable effects of new service initiatives, such as interior
plantscaping and home fertilizer delivery, helped offset the weather-related
adversities. Terminix achieved solid growth in revenues as a result of
increases in pest control sales and termite completions. Profits also
increased but at a less rapid pace due to changes in the sales mix and higher
production costs. American Home Shield achieved very strong increases in
warranty contracts written, earned revenues and profits, primarily as a
result of strong internal growth, small acquisitions and continued increases
in contract renewals. The ServiceMaster Residential/Commercial operations
continued to achieve growth in revenues and profits, reflecting the continued
repurchase of distributors, as well as steady internal growth which offset
a decline in large disaster recovery projects. The Merry Maids business
achieved solid increases in revenues and profits as a result of strong
growth from existing franchisees, as well as the expansion of company-owned
branch operations.
The Management Services business segment achieved 11 percent overall growth
in net income for the year. This growth is due to strong cost controls and
improved customer retention, as well as the elimination of losses incurred
in 1995 from the discontinued Education Food Service business. Net income
from continuing operations increased 5 percent. Revenues grew 3 percent over
the prior year as improvements in Education and Business & Industry
were offset by slight reductions in Healthcare. Revenues generated from the
fourth quarter acquisition of Premier Manufacturing Support Services
(Premier) offset the effect of the disposition of Education Food Service in
February 1995. The Healthcare business within Management Services, which
primarily serves the acute care sector of the health care market, recorded
profits that were consistent with the prior year level. Strong cost
controls and efficiency gains offset a slight decline in revenues,
reflecting continuing competitive pressures and industry
consolidations. Diversified Health Services which serves primarily the long-
term care sector of the health care market, is included in the New
Business Development segment. As noted later, they continue to achieve
excellent growth in revenues and profits. The Education market experienced
solid revenue growth with an improved customer retention rate. Profits
decreased as a result of lower margins on a higher mix of large school
district contracts. The Business & Industry unit achieved double-digit
increases in both revenues and profits, with a substantial increase in
services to the aviation industry. In addition, the
25
<PAGE>
segment's new initiative, Global Facilities Solutions, a total
facilities management outsourcing package designed for multifacility
customers located throughout the world, achieved their first sales during
the fourth quarter of the year, with annualized revenues exceeding $10
million.
Revenues in New Business Development and Parent increased 15 percent to
$307 million, and operating income increased 18 percent to $39.4 million,
reflecting strong growth at ServiceMaster Diversified Health Services
and in the Partnership's International operations. ServiceMaster
Diversified Health Services continued to achieve excellent growth in
revenues and profits, reflecting strong growth in management
services, improvements in the
rehabilitation operations which were started in 1995, and a significant
increase in transaction-related fees and gains. The business unit
acquired DTEC and Comprehensive Pharmacy Services in 1996, both pharmacy
management companies, expanding the scope of services available to the
Partnership's customer base. The International operations achieved strong
growth in the European pest control businesses and continued improvement in
royalty fees from existing licensees. Net income was adversely affected by a
nonrecurring charge associated with a joint venture.
On a consolidated basis, cost of services rendered and products sold
increased 7 percent but continued to decline as a percentage of revenue to
77.5 percent in
1996 from 78.1 percent 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 7 percent over
the prior year, but, as a percentage of revenue, decreased from 14.1 percent
in 1995 to 13.9 percent in 1996, reflecting good cost controls and
improved efficiencies.
Overall operating income margins continue to reflect effective leveraging
and rapid growth in higher margin businesses, improving to 8.5
percent of revenues compared to 7.9 percent in 1995.
Interest income increased over prior year levels due to growth in
the investment portfolio at American Home Shield, as well as gains
realized on several sales of marketable securities during the year.
Interest expense increased over the prior year reflecting increased
borrowings relating to acquisitions and treasury share purchases. The
decrease in minority interest expense primarily reflects the purchase from
WMX of the minority interest in the Consumer Services business segment in
December 1995. Income taxes increased over 1995 levels reflecting strong
growth at American Home Shield, which is already organized in corporate form
and hence subject to corporate taxes.
1995 Compared to 1994
Revenues increased 7 percent 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
Services business in February 1995. Operating income increased 18
percent to $252 million, while margins increased to 7.9 percent of revenue
from 7.2 percent 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 percent increase over 1994, while earnings
per share totalled $1.45, an increase of 21 percent. Earnings per share
reflect the issuance of 4.2 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 percent increase
in revenues and net income growth of 33 percent, 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 warranty 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
26
<PAGE>
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 percent 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
percent 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 health care increased over prior
year levels, primarily due to strong sales of management support services
to long-term care facilities. 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 the
reorganization in 1994, as well as other cost control efforts. The Business
& 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 percent
to $265.8 million and operating income increased 30 percent 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 6 percent but continued to decline as a percentage of revenue, from
78.9 percent in 1994 to 78.1 percent 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 9 percent 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 13.9 percent in 1994 to 14.1 percent 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 percent of
revenue. 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.
1996 Financial Position
The Partnership continued to exhibit outstanding cash generating ability,
with cash flows from operations increasing 15 percent to $341 million,
and free operating cash flows (defined as cash from operations less property
additions) increasing 18 percent to over $298 million. Free operating cash
flow is a key measurement for understanding the growing value of the
Partnership. It represents the cash available for enhancing shareholder
value (acquisitions, dividends and share repurchases) after financing the
growth of existing business units. For many companies, free operating
cash flow is less than reported earnings because of the high incremental
investment in working capital and fixed assets required to grow their
existing businesses. This is not the case for ServiceMaster, as free
operating cash flow has consistently exceeded net income as a result of
relatively low working capital and fixed asset requirements, combined
with the effects of noncash charges for amortization and minority
interest.
27
<PAGE>
Cash and marketable securities totalled approximately $114 million, and
there were no borrowings under existing bank revolving credit
facilities. The Partnership had $300 million of unused commitments at
December 31, 1996. 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 October 1996, the Management Services business unit acquired Premier,
a company that specializes in paint shop cleaning, materials management,
and manufacturing support services to customers in the automotive
industry. In addition, throughout the year, the Partnership acquired
several other smaller companies, predominantly pest control and lawn care
businesses.
In December 1996, the Partnership agreed to acquire Barefoot Inc., the
second largest professional residential lawn care service company in the
United States, for a price of $16 per share in either cash or an
equivalent amount of Partnership shares. The aggregate value of this
transaction was approximately $232 million. Approximately 63 percent of
Barefoot stockholders elected to receive Partnership shares. This
transaction was finalized in February 1997.
In February 1997, the Partnership and WMX reached an agreement in which
the Partnership would buy from WMX its entire ownership interest in
ServiceMaster for approximately $626 million. This agreement will result in
the Partnership acquiring the 27.2 million Partnership shares held by WMX
and cancelling WMX's option to purchase an additional 1.88 million
Partnership shares. This transaction is expected to be completed in April
1997. The Partnership intends to initially finance the repurchase with
short-term bank financing. Management is evaluating a number of long-term
financing alternatives for both this transaction and the cash portion of
the Barefoot acquisition. Subject to market conditions, the Partnership
currently anticipates that approximately 50 percent of the $858 million
combined value of the WMX and Barefoot transactions will be ultimately
refinanced through equity issuances within the next two years. The
transaction with WMX is expected to be immediately additive to earnings
per share and will provide significant, incremental tax benefits to
ServiceMaster.
The increase in accounts and notes receivable reflects general business
growth and the acquisition of Premier, partially offset by the collection of
short-term notes receivable from specific financing projects. The increase in
expenses and other assets have increased primarily due to the strong growth
at American Home Shield, where initial direct contract costs are
capitalized and expensed over the life of the service contract.
Property and equipment increased primarily due to general business
growth. Except as previously described, the Partnership does not have any
material capital commitments at this time.
The increase in intangible assets is primarily attributable to the
acquisition of Premier, as well as the other acquisitions previously
described.
Accounts payable and other liabilities increased due to general
business growth and the effects of acquisitions. Deferred revenues increased
primarily as a result of strong growth in warranty contracts written at
American Home Shield.
Debt levels increased, reflecting treasury share purchases and
acquisitions, partially offset by strong operating cash flows. In the third
quarter of 1996, the Partnership completed a $125 million private
placement of debt at an interest rate of 7.4 percent, with the proceeds used
to repay floating rate bank debt.
Total shareholders' equity increased to $797 million in 1996 from $747
million in 1995, reflecting strong earnings partially offset by
shareholder distributions and treasury share purchases.
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. As of December
31, 1996, approximately $77 million of the total amount authorized had been
repurchased (covering approximately 3.5 million shares at an average price
of $22.30 per share) with the remaining $73 million expected to be repurchased
in 1997. At year end, the aggregate market value of the Partnership's
outstanding shares totalled $3.7 billion. An investor who held their shares
for the entire year realized a total return on their investment of 33
percent in 1996, exceeding market averages. ServiceMaster shareholders
have also experienced compounded total returns exceeding 20 percent annually
over the last five-, 10and 20-year periods.
Cash distributions paid directly to shareholders totalled $94 million, or $.66
per share, in comparison to $74 million in 1995, a 4 percent
28
<PAGE>
per share increase over the prior year. However, the total amount of cash
distributions, including payments made to the shareholders' trust described
below, increased 15 percent to approximately $147 million. This reflects
the increase in direct distributions per share described above, the higher
number of shares outstanding, and a slight increase in payments to the
shareholders' trust, consistent with expectations. The portion of this
increase that related to the higher number of outstanding shares has been
partially offset by a substantial decline in distributions to holders of
minority interests, reflecting the change in the status of WMX from a minority
partner in the Consumer Services business unit to a shareholder in the overall
ServiceMaster enterprise.
Several years ago, the Partnership adopted a pattern of $.02 to $.03
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 common stock.
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 in amounts sufficient to pay its income tax
obligations on this allocated taxable income. The trust has no residual
resources or obligations, and will be terminated when the Partnership
returns to corporate form. Cash distributions made to the trust totalled
$50 million in 1996 and $49 million in 1995. For the remaining term of the
Partnership, overall taxable income is expected to increase at a faster
rate than the level of direct distributions to
shareholders.
The Partnership's return to corporate form is not expected to
materially impact the enterprise's future liquidity and capital
resources. As a corporation, the Company will be responsible for the
payment of corporate federal and state income taxes. The increased cash
requirements related to corporate income taxes will be significantly offset
by the elimination of cash payments to the Partnership's shareholder trust
and the annual cash benefit resulting from the tax deductible step-up in
basis in the enterprise's assets upon reincorporation.
Taxable income per Partnership share in 1996 will be $.66 for
those shareholders who have held their shares since ServiceMaster adopted
partnership form in 1986. Taxable income per Partnership share will be less
than $.66 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>
1996 1995 1994 1993 1992
-------- -------- -------- -------- ------
- --
<S> <C> <C> <C> <C> <C>
(In thousands, except percentage data)
Net income................................ $245,140 $172,019 $139,838 $145,947 $122,065
Depreciation.............................. 41,658 38,332 32,885 29,674 27,017
Amortization.............................. 37,348 27,656 21,323 20,282 19,322
Unusual noncash charges................... --- --- --- --- 77,635
Gain on issuance of subsidiary
shares.................................. --- --- --- (30,200) (105,306)
-------- -------- -------- -------- --------
Cash income............................... $324,146 $238,007 $194,091 $165,703 $140,733
Interest expense.......................... 38,298 35,855 31,543 32,483 32,155
Taxes..................................... 7,257 5,588 2,755 2,146 1,233
-------- --------- -------- -------- --------
EBITDA.................................... $369,701 $279,450 $228,389 $200,332 $174,121
======== ========== ======== ======== ========
Growth over prior period.................. 32% 22% 14% 15% 15%
</TABLE>
EBITDA should not be considered an alternative to net income in measuring the
Partnership's performance, or used as an exclusive measure of cash flow
because it does not consider the impact of working capital growth, capital
expenditures, debt principal reductions or other sources and uses of cash
which are disclosed in the Consolidated Statements of Cash Flows.
29
<PAGE>
Eleven Year Financial Summary
<TABLE>
<CAPTION>
(In thousands, except per share and percentage data) 1996 1995 1994
---------- ---------- --------
- --
<S> <C> <C> <C>
Operating Results (excluding unusual items)
Operating revenue.......................................... $3,458,328 $3,202,504 $2,985,207
Cost of services rendered and products sold................ 2,681,008 2,499,700 2,356,435
Selling and administrative expenses........................ 482,102 450,937 414,746
---------- ---------- ----------
Operating income (Note).................................... 295,218 251,867 214,026
---------- ---------- ----------
Percentage of operating revenue........................ 8.5% 7.9% 7.2%
Non-operating expense...................................... 42,821 74,260 71,388
Provision for income taxes................................. 7,257 5,588 2,755
---------- ---------- ----------
Net income excluding unusual items (Note).................. $ 245,140 $ 172,019 $139,883
========== ========== ==========
Percentage of operating revenue....................... 7.1% 5.4% 4.7%
Percentage return on weighted average shareholders'equity.. 32% 46% 47%
Per Share
Net income per share excluding unusual items (Note)........ $ 1.70 $ 1.45 $ 1.20
Cash distributions to shareholders......................... $ 0.66 $ 0.63 $ 0.61
Share price range:
High price............................................. $ 26.63 $ 20.25 $ 18.92
Low price.............................................. $ 19.38 $ 14.33 $ 14.33
Shares used to compute net income per share................ 144,439 118,970 116,157
Financial Position (at year end)
Current assets............................................. $ 499,334 $ 393,239 $ 331,045
Current liabilities........................................ 425,552 372,930 304,395
Working capital............................................ 73,782 20,309 26,650
Current ratio.............................................. 1.2-1 1.1-1 1.1-1
Total assets............................................... 1,846,841 1,649,890 1,230,839
Non-current liabilities.................................... 607,614 517,603 483,906
Minority interest.......................................... 16,908 12,697 135,272
Deferred gain.............................................. --- --- ---
Shareholders'equity........................................ 796,767 746,660 307,266
Shares outstanding, net of treasury shares and share
subscriptions......................................... 142,398 142,818 113,964
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 for
1996, 1995 or 1994):
Operating income........................................... $ 295,218 $ 251,867 $
214,026
Net income................................................. $ 245,140 $ 172,019 $
139,883
Net income per share....................................... $ 1.70 $ 1.45 $
1.20
All share and per share data reflect the three-for-two share splits in 1996, 1993 and 1992.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988 1987 1986
- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<C> <C> <C> <C> <C> <C> <C> <C>
$2,758,859 $2,488,854 $2,109,941 $1,825,750 $1,609,267 $1,531,276 $1,425,316 $1,122,503
2,192,684 2,021,010 1,762,700 1,545,527 1,387,448 1,327,128 1,228,885 975,137
393,131 326,477 225,814 177,941 129,035 118,275 116,938
83,216
- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
173,044 141,367 121,427 102,282 92,784 85,873 79,493
64,150
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
6.3% 5.7% 5.8% 5.6% 5.8% 5.6%
5.6% 5.7%
55,151 45,740 39,860 30,397 24,016 21,247 19,492
2,235
2,146 1,233 1,426 2,332 721 --- --
- - 29,160
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 115,747 $ 94,394 $ 80,141 $ 69,553 $ 68,047 $ 64,626 $ 60,001 $ 32,755
========== ========== ========== ========== ========== ========== ==========
==========
4.2% 3.8% 3.8% 3.8% 4.2% 4.2%
4.2% 2.9%
46% 54% 74% 130% 139% 135%
166% 48%
$ 1.00 $ 0.83 $ 0.74 $ 0.65 $ 0.62 $ 0.60 $
0.56 $ 0.30
$ 0.59 $ 0.58 $ 0.57 $ 0.55 $ 0.52 $ 0.50 $
0.45 $ 0.25
$ 20.67 $ 13.25 $ 11.59 $ 7.00 $ 7.17 $ 8.33 $
9.42 $ 7.92
$ 11.75 $ 9.75 $ 6.50 $ 5.83 $ 6.25 $ 6.59 $
6.50 $ 5.92
115,269 113,532 108,834 106,811 109,436 107,789 106,325
110,793
$ 291,325 $ 257,542 $ 217,517 $ 237,262 $ 219,661 $ 203,925 $ 128,804 $
107,047
244,552 206,755 157,458 158,046 135,375 76,908
59,993 51,162
46,773 50,787 60,059 79,216 84,286 127,017 68,811
55,885
1.2-1 1.2-1 1.4-1 1.5-1 1.6-1 2.7-1
2.1-1 2.1-1
1,122,461 1,005,531 843,660 796,935 593,693 485,492 371,104
340,226
471,177 511,211 376,638 372,052 410,056 346,970 260,267
248,226
117,513 77,906 78,229 55,636 9,174 10,186
8,660 8,732
--- --- 109,354 115,195 --- ---
- --- ---
289,219 209,659 121,981 96,006 39,088 51,428
42,184 32,106
114,623 113,505 108,234 107,973 102,398 105,318 104,876
104,525
$ 173,044 $ 62,432 $ 121,427 $ 95,782 $ 92,784 $ 85,873 $ 79,493 $
64,150
$ 145,947 $ 122,065 $ 85,982 $ 83,053 $ 68,047 $ 64,626 $ 60,001 $
32,755
$ 1.27 $ 1.08 $ 0.79 $ 0.78 $ 0.62 $ 0.60 $
0.56 $ 0.30
</TABLE>
31
<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 percent, but less than 50 percent, are accounted
for under the equity method. Certain immaterial 1995 and 1994 amounts have
been reclassified to conform with the 1996 presentation. The preparation of
the consolidated financial statements requires management to make certain
estimates and assumptions required under generally accepted accounting
principles which may differ from the actual results.
Revenues: Revenues from lawn care, termite and pest control services
are recognized as the services are provided. Revenues from franchised
services (which in aggregate represent less than 10 percent of
consolidated totals) consist of initial franchise fees received from the
sales of licenses, sales of products to franchisees, and continuing
monthly fees based upon franchise revenue.
Home warranty contract fees are recognized as revenues ratably over the
life of the contract. 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 percent of the inventory value at December 31, 1996. 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 ($190 million),
covenants not to compete ($18 million) and goodwill ($880 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, state, and foreign 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, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated results of operations and
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
January 22, 1997
(February 24, 1997, as to the pending transaction with WMX Technologies,
Inc. and the acquisition of Barefoot Inc. which are discussed in the
footnotes to the financial statements.)
32
<PAGE>
<TABLE>
<CAPTION>
Statements of Income
(In thousands, except per share data)
Years Ended December 31,
1996 1995 1994
----------- ------------ ----------
- -
<S> <C> <C> <C>
Operating Revenue..................... $ 3,458,328 $ 3,202,504 $
2,985,207
Operating Costs and Expenses:
Cost of services rendered and products
sold.................................. 2,681,008 2,499,700
2,356,435
Selling and administrative
expenses.............................. 482,102 450,937
414,746
-------- -------- ------
- -
Total operating costs and
expenses.............................. 3,163,110 2,950,637
2,771,181
---------- ---------- --------
- -
Operating Income...................... 295,218 251,867
214,026
Non-operating Expense (Income):
Interest expense...................... 38,298 35,855
31,543
Interest and investment income........ (10,183) (7,310)
(5,389)
Minority interest, including General
Partners' 2 percent interest which
totalled $4,977 in 1996, $3,505 in
1995, and $2,829 in 1994.............. 14,706 45,715
45,234
------- ------- ----
- --
Income before Income Taxes............ 252,397 177,607
142,638
Provision for income taxes(1)......... 7,257 5,588
2,755
------ ------ ---
- --
Net Income............................ $ 245,140 $ 172,019 $
139,883
=========== ==========
=========
Net Income Per Share(1 and 2)......... $ 1.70 $1.45
$1.20
====== ======
=====
(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
reincorporating 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. Proforma earnings per share would
be $1.04 in 1996, $0.89 in 1995, and $0.73 in 1994, assuming reincorporation
had occurred at the beginning of each respective year.
(2) Based on 144,439 shares in 1996, 118,970 in 1995, and 116,157 shares
in 1994. All share and per share data reflect the three-for-two share split in
June 1996.
(3) See accompanying Summary of Significant Accounting Policies and Notes to
Consolidated Financial Statements.
</TABLE>
33
<PAGE>
Statements of Financial Position
<TABLE>
<CAPTION>
As of December 31,
(In thousads) 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and marketable securities, consisting of:
Cash and cash equivalents of $72,009 in 1996 and $23,113 in 1995
Marketable securities of $42,404 in 1996 and $26,316 in 1995..... $ 114,413 $ 49,429
Receivables, less allowances of $26,287 in 1996 and $20,468 in 1995 270,401 243,649
Inventories........................................................ 43,529 40,583
Prepaid expenses and other assets.................................. 70,991 59,578
----------- --------
Total current assets. ........................................... 499,334 393,239
Property, Plant, and Equipment, at Cost:
Land and buildings................................................. 47,536 47,621
Equipment.......................................................... 273,177 244,662
----------- --------
320,713 292,283
Less: Accumulated depreciation.................................... 174,313 146,431
---------- ---------
Net property, plant, and equipment................................. 146,400 145,852
---------- ---------
Other Assets:
Intangible assets, primarily trade names and goodwill,
less accumulated amortization of $170,623 in 1996 and
$133,275 in 1995................................................. 1,088,444
1,021,050 Notes receivable, long-term securities, and other assets...........
112,663 89,749
---------- --------
-Total Assets.................................................... $1,846,841
$1,649,890
==========
==========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable................................................... 66,025
50,456
Accrued liabilities:
Payroll and related expenses..................................... 69,136
69,808
Insurance and related expenses .................................. 43,675
39,924
Other............................................................ 92,756
84,067
Deferred revenues.................................................. 138,339
115,244
Current portion of long-term obligations........................... 15,621
13,431
---------- ----------
Total current liabilities........................................ 425,552 372,930
---------- ---------
Long-Term Debt..................................................... 482,315 411,903
Other Long-Term Obligations........................................ 125,299 105,700
Commitments and Contingencies (see Notes)
Minority and General Partners' Interests
including General Partners' interest of $1,604 in 1996
and $1,392 in 1995.............................................. 16,908 12,697
Shareholders' Equity............................................... 796,767 746,660
---------- ----------
Total Liabilities and Shareholders' Equity...................... $1,846,841 $1,649,890
========== ==========
See accompanying Summary of Significant Accounting Policies and Notes to the Consolidated
Financial Statements.
</TABLE>
34
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------<S>
<C> <C> <C>
Cash and Cash Equivalents at January 1............. $ 23,113 $ 14,333 $ 17,271
Cash Flows from Operations:
Net Income......................................... 245,140 172,019 139,883
Adjustments to reconcile net income to net cash
provided from operations:
Depreciation................................ 41,658 38,332 32,885
Amortization................................ 37,348 27,656 21,323
Change in working capital, net of acquisitions:
Receivables................................. (19,084) (28,503) (21,957)
Inventories and other current assets........ (12,666) (16,209) 1,213
Accounts payable............................ 10,302 10,773 5,081
Deferred revenues........................... 17,602 19,691 10,751
Accrued liabilities......................... 13,140 24,287 18,254
Minority interest and other, net............... 7,946 49,379 46,430
-------- -------- -------Net
Cash Provided from Operations.................. 341,386 297,425 253,863
========= ========== ==========
Cash Flows from Investing Activities:
Property additions............................. (42,952) (44,624) (32,202)
Business acquisitions, net of cash acquired.... (58,473) (42,763) (90,250)
Net purchases of investment securities......... (20,075) (6,820) (4,594)
Proceeds from sale of businesses............... 4,526 23,255 29,021
Notes receivable and financial investments..... 3,304 (12,250) (9,043)
Payments to sellers of acquired businesses..... (3,742) (2,908) (2,223)
Sale of equipment and other assets............. 2,664 2,250 2,229
--------- --------- ---------
Net Cash Used for Investing Activities............. (114,748) (83,860) (107,062)
--------- --------- ---------
Cash Flows from Financing Activities:
Borrowings, net................................ 123,732 96,067 75,904
Payment of borrowings and other obligations.... (82,857) (85,945) (77,405)
Distributions to shareholders and shareholders'
trust....................................... (146,520) (127,070) (89,153)
Distributions to holders of minority interests. (3,074) (32,794) (13,088)
Purchase of treasury shares.................... (76,556) (58,500) (41,266)
Redemption of preferred stock.................. ---- ---- (14,650)
Proceeds from employee share option plans...... 6,835 3,183 5,274
Other.......................................... 698 274 4,645
--------- --------- ---------
Net Cash Used for Financing Activities............. (177,742) (204,785) (149,739)
--------- --------- --------
Cash Increase (Decrease) During the Year........... 48,896 8,780 (2,938)
--------- --------- ---------
Cash and Cash Equivalents at December 31 .......... $ 72,009 $ 23,113 $ 14,333
========= ========= ==========
See accompanying Summary of Significant Accounting Policies and Notes to the
Consolidated Financial Statements.
</TABLE>
35
<PAGE>
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Limited
Total
Treasury Restricted Partners'
Shareholders'
(In thousands, except share data) Shares Shares Equity Equity
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 (651,465 shares)....... 17,449 620 (15,156) 2,913
Treasury shares purchased and related costs
(2,556,333 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 (290,327 shares)... 2,431 1,361 13,965
17,757
Treasury shares purchased and related costs
(3,255,305 shares)....................... (58,500)
(58,500)
Shares issued for the acquisition of Consumer
Services minority interest (27,160,715
shares).................................. 91,161 265,227
356,388
Shares issued for the acquisition of the
TruGreen-ChemLawn minority interest
(4,236,093 shares) and other acquisitions. 78,800 78,800
-------- -------- --------- -------
Balance, December 31, 1995.................... $ (13,405) $ (7,549) $ 767,614 $ 746,660
Net income 1996............................... 245,140 245,140
Shareholder distributions..................... (146,520) (146,520)
Shares issued under option, subscription, and
grant plans and other (1,635,469 shares).. 2,506 1,691 (6,713) (2,516)
Treasury shares purchased and related costs
(3,437,938 shares)........................ (76,556) (76,556)
Shares issued for acquisitions................ 27,455 3,104 30,559
------- -------- --------- ----------
Balance, December 31, 1996.................... $ (60,000) $ (5,858) $ 862,625 $ 796,767
======== ======= ======== ========
All share data reflect the three-for-two share split in June 1996.
See accompanying Summary of Significant Accounting Policies and Notes to the Consolidated
Financial Statements.
</TABLE>
36
<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,
as well as comprehensive facilities management services to commercial
accounts. The New Business Development and Parent 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 services of
the enterprise which are provided in foreign markets.Eliminations and Other
includes minority interest expense and 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
(In thousands) Services Services and Parent and Other Consolidated
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Operating revenue................ $1,335,390 $1,815,965 $306,973 $ ---- $ 3,458,328
---------- ---------- -------- -------- ----------
Operating income................. 179,971 78,828 39,446 (3,027) 295,218
---------- ---------- -------- -------- ----------
Interest expense................. 13,314 2,220 22,764 ----- 38,298
Interest and investment income... (6,007) (1,448) (2,728) ----- (10,183)
Minority and General Partners'
interest..................... ----- 4,590 2,248 7,868 14,706
Provision for income taxes....... 6,164 961 132 ----- 7,257
---------- --------- -------- -------- ----------
Net income $ 166,500 $ 72,505 $ 17,030 $(10,895) $ 245,140
========== ========== ======== ======== ==========
Identifiable assets at
December 31,1996............. $1,242,386 $ 202,986 $401,469 $ ---- $1,846,841
Depreciation and amortization
expense...................... $ 46,883 $ 19,841 $ 12,282 $ ---- $ 79,006
Capital expenditures............. $ 16,097 $ 18,837 $ 8,018 $ ---- $ 42,952
1995
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 and 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
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 and 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... $ 31,831 $ 16,718 $ 5,659 $
54,208
Capital expenditures............ $ 7,777 $ 18,424 $ 6,001 $
32,202
</TABLE>
37
<PAGE>
Notes to the Consolidated Financial Statements
Partnership
ServiceMaster Limited Partnership (the Partnership) holds as its only asset
a 99 percent 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 percent interest in the income of both
ServiceMaster Limited Partnership and The ServiceMaster Company Limited
Partnership.
ServiceMaster Management Corporation is owned by 38 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
ServiceMaster Incorporated was created as part of the Plan of
Reorganization approved by the shareholders of the Partnership in
January 1992. The reorganization is currently expected to become effective
by December 31, 1997. 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 (before
consideration of any additional step-up in tax basis that results from the
Partnership's planned repurchase of WMX's ownership interest).
Reincorporation will have no impact on the "book basis" of ServiceMaster's
assets, which is reflected in the accompanying audited financial statements.
The tax basis step-up will result in the recognition of a deferred tax asset
in the Company's balance sheet and a corresponding unusual gain in the
Company's audited income statement in the period of reincorporation. The exact
amount of the tax basis step-up (and the deferred tax asset and unusual
gain that will result therefrom) will depend in part on the price and
trading volume of the Partnership shares, as well as shares transactions,
prior to reincorporation.
Management currently estimates that upon reincorporation the effective
tax rate reflected in the Company's income statement will be
approximately 40 percent. Proforma earnings per share would be $1.04 in
1996, $0.89 in 1995 and $0.73 in 1994, 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.
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 and foreign tax payments which account for a significant portion of
the provision for income taxes that is currently reflected in the
Partnership's consolidated income statement. Income before income taxes
consists of the following:
<TABLE>
<CAPTION>
(in thousands)
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Partnership income not subject to federal or foreign
income taxes ......................................... $241,591 $174,312
$145,760
Income (loss) of subsidiary corporations subject to
income taxes.......................................... 10,806 3,295
(3,122)
-------- -------- -------
- -Income before taxes $252,397 $177,607
$142,638
======== ========
========
</TABLE>
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.
During 1996, the Partnership acquired Premier, a provider of management
services to the automotive industry, and several other smaller companies,
predominately pest control, lawn care and pharmacy management businesses. The
aggregate fair value of assets acquired less liabilities assumed was $91
million. The assets and liabilities of these businesses were recorded
38
<PAGE>
in the Partnership's financial statements at their estimated fair market
values as of the acquisition dates, including approximately $96 million of
intangible assets which are being amortized on a straight-line basis over 40
years.
On December 5, 1996, the Partnership announced that it had reached
an agreement to acquire Barefoot Inc., the second largest professional
residential lawn care services company in the United States. The transaction
was consummated on February 24, 1997, with the Partnership paying $16 per
share, or an aggregate value of approximately $232 million consisting of
$146 million in Partnership shares and $86 million in cash.
In December 1995, the Partnership issued 27.2 million unregistered
Partnership shares, representing approximately 19 percent of the adjusted
total number of shares then outstanding, in exchange for WMX's 27.76 percent
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
1.88 million shares at $22.00 per share. The unregistered shares and the
option included a number of voting and trading restrictions, including
significant limitations on open market sales, with ServiceMaster retaining a
right of first refusal. WMX also agreed not to initiate any action that
would increase its ownership interest in ServiceMaster to more than 21
percent.
The shares issued to WMX were valued based upon the average market price
of unrestricted Partnership 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 $239 million in intangible assets,
primarily trade names and goodwill, which are being amortized on a straight-
line basis over 40 years.
The following schedule represents the unaudited proforma consolidated
results of operations as if the WMX minority interest was acquired at the
beginning of each period indicated:
<TABLE>
<CAPTION>
1995 1994
(in thousands, except per share data) ---------- --------
- -<S> <C> <C>
Operating revenue........................... $3,202,504
$2,985,207 Net income.................................. $ 203,038
$ 161,748 Net income per share $ 1.39 $
1.13
</TABLE>
On February 19, 1997, the Partnership and WMX announced that the two
companies had reached an agreement under which ServiceMaster would buy
WMX's entire ownership interest in ServiceMaster for approximately $626
million. This transaction, which is expected to be completed in April 1997,
will result in the Partnership acquiring the 27.2 million Partnership
shares held by WMX and cancelling WMX's option to purchase an additional
1.88 million Partnership shares. The repurchase will be initially financed
with short-term bank financing. Management is currently evaluating a number of
long-term financing alternatives for this transaction and the Barefoot
acquisition, which would potentially include equity issuances within the next
two years.
In January 1995, Consumer Services acquired the 15 percent minority
interest in TruGreen-ChemLawn in exchange for Partnership shares valued at
$71 million. This consideration represented 4.2 million Partnership shares
valued at the quoted market price of the shares at the time of the
transaction. 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 percent 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 the end of 1995. The gain realized on the sale was not
material to the overall results for the year.
In late 1994, the Partnership acquired three European 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 statements at their estimated fair market values as of their
respective 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.
39
<PAGE>
Supplemental cash flow information regarding the Partnership's acquisitions is
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- ------
- --
(In thousands)
<S> <C> <C> <C>
Fair value of assets acquired ..... $134,377 $502,430 $144,710
Less liabilities assumed .......... (43,781) (24,246)
(46,867)
-------- -------- --------
Net assets acquired................ 90,596 478,184 97,843
Less Partnership shares issued..... (30,559) (435,188)
(5,670)
Less cash acquired................. (1,564) (233)
(1,923)
-------- -------- --------
Business acquisitions,
net of cash acquired............. $ 58,473 $ 42,763 $ 90,250
======== ======== ========
</TABLE>
Long-Term Debt and Other Long-Term Obligations
Long-term debt and other long-term obligations include the following
<TABLE>
<CAPTION>
1996 1995
----------- -------------
(In thousands, except per share data)
<S> <C> <C>
Notes Payable:
7.40%, maturing in 2006..................$ 125,000 $ --
7.47%, maturing in 1997.................. 50,000 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 1997 - 2000.......... 36,000 45,000
10.81%, maturing in 2000 - 2002.......... 55,000 55,000
9%, convertible at $8.61 per share....... 18,300 18,600
6%, subordinated, convertible at
$12.45 per share..................... 3,581 3,581
Revolving credit facilities ............. --- 50,000
Other.................................... 90,055 58,153
Less current portions.................... (15,621)
(13,431)
-------- --------
Total long-term debt.....................$ 482,315 $ 411,903
========= =========
Insurance accruals and other long-term
liabilities $ 125,299 $ 105,700
========= =========
</TABLE>
The Partnership is 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 has been and currently is in
compliance with the covenants related to these debt agreements.
In September 1996, the Partnership completed a $125 million private
placement of debt at an overall interest rate of 7.4 percent. Proceeds were
used to pay down the revolving credit facility.
The Partnership has a five-year, multi-currency, revolving credit
agreement under which the Partnership can borrow up to $300 million from a
group of 13 banks. The line of credit can be used for general Partnership
purposes. The revolving credit facility had $300 million of unused
commitments as of December 31, 1996. Approximately $69 million of notes
payable are expected to be refinanced by the long-term revolving credit
facility in 1997 and therefore are not considered current liabilities.
The acquisition of Barefoot in February 1997 resulted in additional
borrowings of approximately $80 million under the revolving credit facility.
In addition, the repurchase of Partnership shares from WMX, expected to be
completed in April 1997, will be financed on a short-term basis while
management evaluates a number of long-term financing alternatives for both
transactions.
Interest paid was $34 million in 1996, $34 million in 1995, and $30 million
in 1994. Average rates paid on the revolving credit facilities were 5.62
percent in 1996 and 6.20 percent in 1995. Future scheduled long-term debt
payments are $19 million in 1998, $19 million in 1999, $37 million in 2000
and $28 million in 2001.
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 $508 million.
The Partnership and the minority investors in Management Services
and Diversified Health Services had rights, respectively, to acquire or sell
these minority interests at then-current fair market value. In early
1997, the Partnership purchased the minority interests for a combination
of cash and Partnership shares, totalling $25 million. These minority
interest acquisitions recorded in 1997 resulted in approximately $11 million
of intangible assets.
Future long-term noncancelable operating lease payments are $27.9 million
in 1997, $21.7 million in 1998, $16.2 million in 1999, $10.8 million in 2000,
$6.0 million in 2001, and $9.4 million thereafter. Rental expense for 1996,
1995, and 1994 was $74.8 million, $65.4 million, and $55.3 million,
respectively.
Employee Benefit Plans
Contributions to qualified profit sharing plans were made in the amount
of $6.9 million in 1996, $6.2 million in 1995, and $6.4 million in 1994.
Under the Employee Share Purchase Plan, the Partnership contributed $1.0
million in 1996 and $.08 million per year in 1995 and 1994. These funds
defrayed part of the cost of the share purchased by employees.
Shareholders' Equity
As of December 31, 1996 there were 9,520,000 Partnership shares available
for issuance upon the exercise of employee options outstanding, the WMX
option and future grants. Share options are issued at a price not less than
the fair market value
40
<PAGE>
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.
In 1995, as part of the acquisition of the minority ownership interest
in Consumer Services, WMX received a five-year option to purchase 1.88
million shares at $22.00 per share. This option, which first became
exercisable in 1997, will be cancelled as part of the agreement reached in
February 1997 between the Partnership and WMX in which the Partnership agreed
to repurchase WMX's entire ownership interest in ServiceMaster.
The Partnership accounts for employee share options under APB Opinion 25,
as permitted under generally accepted accounting principles.
Accordingly, no compensation cost has been recognized in the accompanying
financial statements related to these options. Had compensation cost for
these plans been determined consistent with SFAS 123, which is an accounting
alternative that is permitted but not required, the Partnership's net
income and net income per share would reflect the following:
<TABLE>
<CAPTION>
1996
----------
(in thousands, except per share data)
<S> <C>
Net Income: As Reported.......... $245,140
Proforma............. $243,549
Net Income Per Share: As Reported.......... $ 1.70
Proforma............. $ 1.69
</TABLE>
Since SFAS 123 does not apply to options granted prior to 1995, the
proforma disclosure is not likely to be indicative of proforma results
which may be expected in future years. This primarily relates to the fact
that options vest over several years and proforma compensation cost is
recognized as the options vest; another factor is that additional awards
may also be granted in those years.
The fair value of each option is estimated on the date of grant based on
the Black-Scholes option pricing model with the following weighted-
average assumptions: a risk-free interest rate of 5.6 percent; a volatility
rate of 27 percent; a 3.2 percent distribution yield; and an average
expected life of 7 years. The options granted to employees in 1996 have a
weighted-average fair value of $5.40 and vest ratably over five years. The
Partnership has estimated the value of these options assuming a single
weighted-average expected life for the entire award.
<TABLE>
<CAPTION>
Weighted-Average
Share Options Price Range Exercise Price Share Grants Price
Range ---------------------------------------------------------------------------------------------------------------
- -------<S> <C> <C> <C> <C> <C>
Total exercisable and outstanding
December 31, 1993 5,796,750 $ 1.64 - 17.17 $10.22 1,307,567 $ 6.45 - 14.50
Transaction during 1994:
Granted to employees 1,852,500 $ 14.50 $14.50 6,000 $14.50 - 17.00
Exercised, paid , or vested (552,593) $ 1.64 - 17.17 $ 7.36 (98,916) $ 6.45 - 17.00
Terminated or resigned (52,693) $ 3.71 - 11.55 $10.42 ---- $ ----
Total exercisable and outstanding
December 31, 1994 7,043,964 $ 1.64 - 17.17 $12.33 1,214,651 $ 6.45 - 17.00
Transactions during 1995:
Granted to employees ----- $ ----- $ ---- 9,750 $15.25 - 17.92
Issued to WMX Technologies, Inc. 1,875,000 $ 22.00 $22.00 ---- $ ---
Exercised, paid , or vested (624,001) $ 1.64 - 17.17 $ 9.05 (211,857) $ 6.45 - 17.92
Terminated or resigned (182,780) $ 2.96 - 17.17 $ 8.50 (32,216) $ 6.67 - 6.85
Total exercisable, December 31, 1995 6,237,183 $ 1.64 - 17.17 $12.28 ---- $ ---
Total outstanding, December 31, 1995 8,112,183 $ 1.64 - 22.00 $14.53 980,328 $ 6.45 - 17.92
Transactions during 1996
Granted to employees 1,846,500 $ 20.83 - 24.25 $21.16 ----- $ -----
Exercised, paid , or vested (2,431,398) $ 1.64 - 17.17 $12.50 (177,332) $ 6.45 - 17.92
Terminated or resigned (160,122) $ 6.29 - 17.17 $ 8.75 ----- $ -----
Total exercisable, December 31, 1996 3,645,663 $ 1.64 - 17.17 $12.36 ----- $ -----
Total outstanding, December 31, 1996 7,367,163 $ 1.64 - 24.25 $17.02 802,996 $ 6.45 - 17.92
</TABLE>
<TABLE>
<CAPTION>
Options outstanding at December 31, 1996:
Number
Range of outstanding Remaining Weighted-Average Number exercisable Weighted-Average
Exercise Prices at 12/ 31/96 Life Exercise Price at 12/31/96 Exercise Price
- --------------- ------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 1.64 - $5.07 312,192 6.5 years $ 3.34 312,192 $
3.34
$ 6.29 - $11.56 1,373,143 5.0 years $ 9.41 1,373,143 $
9.41
$14.50 - $24.25 5,681,828 7.0 years $19.61 1,960,328
$15.86
--------- --------- ------ --------- ------
$1.64 - $24.25 7,367,163 6.5 years $17.02 3,645,663 $12.36
</TABLE>
41
<PAGE>
Notes to the Consolidated Financial Statements
Cash and Marketable Securities
Marketable securities held at December 31, 1996 and 1995, with a maturity of
three months or less, are included in the Statements of Financial
Position caption "Cash and Cash Equivalents". Marketable securities are
designated as available for sale and recorded at current market value, with
unrealized gains and losses reported in a separate component of shareholders'
equity. Marketable securities available for current operations are
classified as current assets while securities held for noncurrent uses are
classified as long-term. The Partnership's investments consist primarily of
publicly-traded debt and common equity securities. As of December 31, 1996,
the aggregate market value of the Partnership's short- and long-term
investments in equity securities was $69 million and the aggregate cost
basis was $62 million. There has been no material participation in derivative
trading securities in 1996 or 1995. Gains and losses
on sales of investments, as determined on a specific identification basis, are
included in investment income in the period they are realized. Gross gains
and losses on such sales were not material in 1996, 1995 or 1994.
Interest and dividend income received on cash and marketable securities
was $8.0 million, $6.8 million, and $5.4 million in 1996, 1995, and
1994, respectively.
Quarterly Operating Results
Quarterly operating results and related growth for the last three years
in revenues, gross profit, net income, and net income per share are shown in
the table below. For interim accounting purposes, certain costs directly
associated with the generation of lawn care revenues are initially deferred
and recognized as expense as the related revenues are recognized. Full year
results are not affected.
Certain amounts from prior periods have been reclassified to conform with the
current presentation.
<TABLE>
<CAPTION>
(Unaudited, in thousands, except per share data)
Percent
Percent
Incr. Incr.
1996 '96-'95 1995 '95-'94 1994
----------- -------- ------------ --------- --------
- -<S> <C> <C> <C> <C> <C>
Operating Revenue:
First Quarter $ 740,299 5% $ 707,764 8% $
657,638
Second Quarter 916,931 8 852,791 8
791,496
Third Quarter 927,227 9 854,383 7
797,015
Fourth Quarter 873,871 11 787,566 7
739,058
---------- --- ----------- --- --------
- --
$3,458,328 8% $ 3,202,504 7%
$2,985,207
Gross Profit:
First Quarter $ 142,116 6% $ 133,458 17% $
114,364
Second Quarter 221,505 10 200,728 11
180,954
Third Quarter 219,127 10 199,684 9
183,392
Fourth Quarter 194,572 15 168,934 13
150,062
---------- --- ---------- --- --------
- --
$ 777,320 11% $ 702,804 12% $
628,772
Net Income:
First Quarter $ 40,513 40% $ 28,880 18% $ 24,546
Second Quarter 71,264 42 50,160 24 40,434
Third Quarter 68,800 44 47,750 25
38,054
Fourth Quarter 64,563 43 45,229 23
36,849
----------- --- ---------- --- ---------
- -
$ 245,140 43% $ 172,019 23% $
139,883
Net Income Per Share:
First Quarter $ 0.28 17% $ 0.24 14% $
0.21
Second Quarter 0.49 17 0.42 20
0.35
Third Quarter 0.48 20 0.40 21
0.33
Fourth Quarter 0.45 18 0.38 19
0.32
----------- --- ----------- --- ---------
- -
$ 1.70 17% $ 1.45 21% $
1.20
Cash Distributions Per Share:
First Quarter $ 0.16 4% $ 0.15 0% $
0.15
Second Quarter 0.16 0 0.16 4
0.15
Third Quarter 0.17 6 0.16 4
0.15
Fourth Quarter 0.17 6 0.16 4
0.15
----------- --- ---------- --- ---------
- --
$ 0.66 4% $ 0.63 3% $ 0.61
Price Per Share:
First Quarter $22.33 - 19.38 $16.67 - 14.33 $18.92 -
14.67
Second Quarter 23.50 - 20.63 18.17 - 15.75 17.59 -
15.09
Third Quarter 24.75 - 21.50 19.25 - 17.67 17.67 -
16.00
Fourth Quarter 26.63 - 23.75 20.25 - 18.42 16.92 -
14.33
All share and per share data reflect the three-for-two share split in June 1996.
</TABLE>
42
SUBSIDIARIES OF THE REGISTRANT
As of March 21, 1997, ServiceMaster had the following
subsidiaries:
<TABLE>
<CAPTION>
State or Country
of Incorporation
or Organization
Subsidiary
- ---------- -----------------
<S> <C>
The ServiceMaster Company Limited Partnership Delaware
ServiceMaster Consumer Services Limited Partnership Delaware
ServiceMaster Consumer Services, Inc. Delaware
TruGreen Limited Partnership Delaware
TruGreen, Inc. Delaware
Barefoot Inc. Delaware
Barefoot Grass Lawn Services, Inc. Delaware
Barefoot Services L.L.C. 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
American Home Shield Corporation (2) Delaware
ServiceMaster Direct Distributor Company Limited Partnership Delaware
ServiceMaster DDC, Inc. Delaware
AmeriSpec, Inc. Delaware
Furniture Medic Limited Partnership Delaware
Furniture Medic, Inc. Delaware
ServiceMaster Management Services Limited Partnership Delaware
ServiceMaster Management Services, Inc. Delaware
ServiceMaster Aviation Services Limited Partnership Delaware
ServiceMaster Aviation Management Corporation Delaware
Premier Manufacturing Support Services Limited
Partnership (3) Delaware
CMI Group, Inc. Wisconsin
The ServiceMaster Acceptance Company Limited Partnership Delaware
ServiceMaster AM Limited Partnership Delaware
ServiceMaster Acceptance 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
Terminix Peter Cox Ltd. United Kingdom
Terminix Protekta B.V. The Netherlands
Riwa B.V. The Netherlands
Anticimex Development AB (4) Sweden
TMX-Schadlingsbekampfungsgesellschaft mbH (5) Germany
LTCS Investment Limited Partnership Delaware
ServiceMaster Home Health Care Services Inc. Delaware
ServiceMaster Diversified Health Services, Inc. (6) Delaware
ServiceMaster Diversified Health Services Limited
Partnership (7) Tennessee
We Serve America, Inc. Delaware
TSSGP Limited Partnership Delaware
TSSGP, Inc. Delaware
ServiceMaster Aviation LLC Illinois
</TABLE>
_______________________________
2 American Home Shield Corporation has 17 subsidiaries
through which it carries on its business in the various
states in which it markets its products.
3 Premier Manufacturing Support Services Limited
Partnership has 7 subsidiaries through which it carries on
its business outside of the United States.
4 Anticimex Development AB has 5 subsidiaries.
5 The Stenglein group includes 2 subsidiaries.
6 ServiceMaster Diversified Health Services, Inc. has 4
subsidiaries.
7 ServiceMaster Diversified Health Services, L. P. has 21
subsidiaries.
<PAGE>
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 22, 1997 (February 24, 1997, as
to the pending transaction with WMX Technologies, Inc. and
the acquisition of Barefoot Inc. which are discussed in the
footnotes to the financial statements) included in the
ServiceMaster Limited Partnership Annual Report to
Shareholders for the year ended December 31, 1996.
Arthur Andersen LLP
Chicago, Illinois
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 72,009
<SECURITIES> 42,404
<RECEIVABLES> 296,688
<ALLOWANCES> 26,287
<INVENTORY> 43,529
<CURRENT-ASSETS> 499,334
<PP&E> 320,713
<DEPRECIATION> 174,313
<TOTAL-ASSETS> 1,846,841
<CURRENT-LIABILITIES> 425,552
<BONDS> 482,315
0
0
<COMMON> 0
<OTHER-SE> 796,767
<TOTAL-LIABILITY-AND-EQUITY> 1,846,841
<SALES> 0
<TOTAL-REVENUES> 3,458,328
<CGS> 0
<TOTAL-COSTS> 2,681,008
<OTHER-EXPENSES> 482,102
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,298
<INCOME-PRETAX> 252,397
<INCOME-TAX> 7,257
<INCOME-CONTINUING> 245,140
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 245,140
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 1.68
</TABLE>
