MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(All share and per share data reflect the three-for-two share
split in 1993)
1994 Compared to 1993
Revenue increased 8% to approximately $3.0 billion primarily
due to internal growth and, to a lesser degree, the full year
inclusion of VHA Long Term Care, which was acquired in August,
1993. Operating margins improved to 7.2% from 6.3% due to
effective spending controls and ongoing productivity improvements
in the Consumer Services businesses. As shown below, net income
totalled $139.9 million, a 21% increase over the comparable prior
year amount. Earnings per share totalled $1.81, a 20% increase on
that same basis.
For Years Ended December 31,
1994 1993
---- ----
Net income before
unusual gain
on issuance
of subsidiary shares $139,883 $115,747
Per limited
partners' share $ 1.81 $ 1.51
Gain on issuance
of subsidiary shares --- 30,200
--------- --------
Net income $139,883 $145,947
========= ========
Per limited
partners' share $1.81 $1.90
========= ========
The Consumer Services business segment achieved an 11%
increase in revenues and net income growth of 45%, with strong
performances achieved by all units. TruGreen-ChemLawn operations
had strong growth in revenues and profits resulting from a
significant increase in customer base from an excellent response
to its residential marketing program, ongoing cost controls and
productivity improvements. Terminix operations continued to
improve margins, enabling them to achieve solid profit growth
despite unfavorable late winter weather which adversely affected
termite service revenues industry-wide. Merry Maids operations
continued their accelerated rate of growth as a result of new
license sales and increased fees from existing franchises.
American Home Shield achieved very strong improvements in
revenues and operating income, with a strong rebound in new
contract sales in California and increases in other major
geographical areas, as well as continued improvement in the
percentage of contracts renewed. The ServiceMaster
Residential/Commercial operations achieved strong increases in
revenues and profits primarily due to increased demand for heavy
cleaning and disaster restoration services.
Management Services revenue increased 3%, but net income
decreased 3% due to reorganization-related costs. Health care
operations achieved growth in both revenues and profits, despite
industry consolidation and uncertainties regarding reform
legislation. Profits were reduced in the business and industry
unit as a result of customer downsizing. Revenues in the
education market grew at a solid rate, but profits were below
prior year levels due to reorganization costs and profit
shortfalls in the food service business, including a significant
loss at an account started late in 1993 which is being
renegotiated on more favorable terms. In February, 1995, a joint
venture was formed with DAKA International, Inc., which
effectively acquired 80% of the education food service business
for cash, at a modest gain to ServiceMaster.
During the second half of 1994, Management Services
reorganized its operations from a decentralized, geographic-based
structure to a more centralized, market-oriented organization.
These actions were taken to enhance customer focus and reduce
costs. Relocation, severance, and other costs associated with the
implementation of this plan totalled approximately $2.0 million.
Revenues of New Business Development and Parent increased
115% to $120.7 million
17
and operating income almost doubled to
$23.4 million, reflecting the full year inclusion of VHA Long
Term Care (combined with ServiceMaster Home Health Care in 1994
to form ServiceMaster Diversified Health Services). ServiceMaster
Diversified Health Services continued to achieve strong growth in
revenues and profits due to increases in the number of facilities
managed and strong sales growth in ancillary products and
services. International operations achieved solid growth in
royalty fees from existing licensees. Income derived from new
sales of license rights was well below prior year levels as a
result of a strategic decision to participate in certain markets
via direct operations, instead of through licensing arrangements.
Three European pest control businesses were acquired late in the
year and made a modest contribution to net income after
acquisition costs.
Consolidated cost of services rendered and products sold
increased 7.2% over 1993, but declined as a percent of revenue
from 79.5% in 1993 to 78.7% in 1994, reflecting the continued
stronger mix of the higher gross margin Consumer Services and
Diversified Health Services businesses. These businesses incur a
relatively lower level of cost of services but higher selling and
administrative costs than Management Services.
Consolidated selling and administrative expenses increased
7.1% over last year, but decreased as a percentage of revenue
from 14.2% in 1993 to 14.1% in 1994. This improvement reflects
ongoing productivity increases at TruGreen-ChemLawn and Terminix,
as well as the favorable leveraging effects of increased volume
and fixed amortization costs. Overall operating income margins
improved to 7.2% of revenue from 6.3% in 1993.
New borrowings relating to the International acquisitions
were offset by a reduction in previously existing debt from
strong operating cash flows, resulting in a slight decrease in
interest expense. The increase in minority interest ex-pense
reflects the increased ownership interest held by WMX
Technologies, Inc. (WMX) in the Consumer Services segment, as
well as the effect of the significant increase in Consumer
Services earnings. WMX had purchased an additional 5.76% interest
in Consumer Services in June, 1993, which resulted in the
recognition of a $30.2 million gain by ServiceMaster.
1993 Compared to 1992
Revenue increased 11% due to strong internal growth and the
full year inclusion of ChemLawn, which was acquired in May, 1992.
Net income, including the recognition of an unusual gain,
totalled $145.9 million and represented a 20% increase from the
prior year, which also included an unusual net gain. Excluding
these unusual items, which are summarized and explained in the
Notes to the Consolidated Financial Statements, net income
increased 23%:
For Years Ended December 31,
1993 1992 % Change
---- ---- --------
Net income
excluding
unusual items $ 115,747 $94,394 23%
Earnings per share
excluding
unusual items $ 1.51 $ 1.25 21%
Net income growth exceeded the growth in earnings per share
due to the effects of shares issued in acquisitions and the
impact of share price increases on the computation of outstanding
shares.
Revenue and net income increased primarily due to another
year of very strong growth in Consumer Services, continued volume
and profit increases in Management Services, and the recognition
of a gain resulting from the issuance of subsidiary shares.
Consumer Services revenues grew 17% while net income,
excluding the impact of the 1992 restructuring charges, grew 52%.
TruGreen-ChemLawn operations achieved significant profit growth
due to expansion of their customer base, effective spending
controls, and productivity improvements. Terminix operations
continued to achieve good revenue and profit growth through
improvements in productivity and cost controls, despite weather
conditions which adversely impacted the termite swarm season.
Merry Maids operations continued to grow at an accelerated rate
due to both new sales and increased fees from existing
franchises. The ServiceMaster Residential/Commercial business
achieved strong increases in both revenues and profits as a
result of increases in disaster restoration fees and license
sales, and good cost controls. American Home Shield profit
results were slightly below prior year levels, primarily due to
continued softness in California home resales, although revenues
continued to increase in other geographic markets and from
contract renewals.
18
Management Services revenues increased 7%, while net income
increased 6% over comparable prior year amounts. Strong growth in
both revenues and profits was achieved in the education market.
Growth was also achieved in health care revenues and profits,
despite market conditions and uncertainties regarding the nature
of the government's reform proposals. Revenues and profits
increased modestly in the business and industry unit.
Revenues of New Business Development and Parent increased
54% to $56.2 million and net income before unusual items grew 30%
mainly due to the acquisition in late August, 1993, of VHA Long
Term Care. International operations achieved solid growth in both
revenues and profits.
Cost of services rendered and products sold increased 8% and
declined to 79% of revenue in 1993, compared to 82% of revenue in
1992. These results reflect continued growth in Consumer
Services, which operates at a higher gross profit rate, but
incurs higher selling and administrative costs than Management
Services.
Selling and administrative expenses increased 20% and
equaled 14% of revenue, compared to 13% of revenue in 1992. These
changes mirror a shift in the overall business mix, as discussed
above. Overall, operating income margins, excluding unusual
items, improved to 6.3% from 5.7%, primarily due to continuing
profitability improvements in the Consumer Services operating
units.
Debt balances were reduced as a result of strong cash flows
from operations and $68 million of cash received from WMX for an
increased interest in Consumer Services, partially offset by new
borrowings related to the VHA Long Term Care acquisition.
Interest income increased due to higher invested cash balances
throughout the year and gains on the sale of marketable
securities at American Home Shield.
The increase in minority interest expense was attributable
to increased profits and the additional minority ownership
interest in Consumer Services.
1994 Financial Position
Net cash flows from operations increased 50% to $254
million, substantially exceeding net income of $140 million,
enabling the Partnership to fund $90 million of acquisitions,
internal growth, and the repurchase of $41 million of treasury
shares with only a nominal $2 million increase in long-term debt.
Consolidated operating cash flows again significantly exceeded
accounting net income as a result of non-cash charges for
depreciation, amortization and minority interest, combined with
relatively low working capital and fixed asset requirements.
Cash and marketable securities totalled approximately $34.4
million, a slight increase from one year ago. Long-term debt
increased approximately $2 million, while the long-term debt-to-
equity ratio improved to 1.26 to 1 from 1.33 to 1 at the end of
1993. Unused commitments under existing revolving credit
facilities totalled $168 million at December 31, 1994.
Management believes that funds generated from operations and
other existing resources are adequate to satisfy the ongoing
working capital needs of the Partnership.
In August, 1994, the Partnership acquired Peter Cox PLC, a
United Kingdom-based pest control and wood preservation business,
for approximately $22 million in cash. In September, 1994, the
Partnership acquired Protekta/RIWA, a Netherlands-based group of
pest control companies, for approximately $7 million in cash. At
year end, the Partnership acquired Anticimex, a Swedish-based
pest control company, for approximately $45 million in cash.
Accounts and notes receivable increased due to general
business growth and the effect of the above acquisitions.
The increase in land and buildings resulted from general
business growth, building improvements relating to the relocation
of the Consumer Services headquarters to a larger facility, and
acquisitions. Equipment increased primarily due to acquisitions
and purchases made to service new and existing customers. The
Partnership has no material capital commitments at this time.
19
Contract rights, trade names, and other intangible assets
increased primarily due to the three European pest control
acquisitions.
In February, 1994, the Partnership sold its minority
interest in Norrell Corporation for approximately $29 million in
cash. In May, 1994, the Partnership redeemed all of the preferred
shares of a Partnership subsidiary that were formerly held by the
principal shareholder of Norrell Corporation for a combination of
$14.6 million in cash and approximately 373,000 limited
partnership shares.
Payroll and other accrued liabilities each increased due to
general business growth and the effects of acquisitions. Deferred
revenues increased due to increased gross contracts written at
American Home Shield and customer prepayments relating to the
acquired pest control companies.
Long-term debt increased slightly due to $90 million of
acquisitions offset by strong operating cash flows. Proceeds from
the sale of the Norrell investment were more than offset by the
preferred share redemption described above and by increased
treasury share purchases.
Minority interest increased over prior year levels
reflecting normal accruals of minority interest expense and the
effect of the sale of small minority equity interests in the
Partnership's Management Services segment to members of senior
management of that unit. The minority interest increases were
partially offset by the previously described redemption of
preferred shares.
Total shareholders' equity increased by 6.2% to $307.3
million as a result of strong earnings, partially offset by
distributions to shareholders and share repurchases. The rate of
return on average equity for 1994 was 47%, again substantially
above industry norms. The aggregate market value of the
Partnership's outstanding shares totalled approximately $1.9
billion at December 31, 1994.
Cash distributions paid directly to shareholders totalled
$70.5 million or $.92 per share, a 3.4% increase over the prior
year. Total cash distributions, including payments made to the
shareholders' trust described below, increased 13%, to
approximately $89 million.
As discussed in previous years, ServiceMaster has
established a trust for the benefit of Partnership shareholders.
The trust is allocated the portion of the Partnership's taxable
income which exceeds the level of direct cash distributions. The
trust receives cash payments sufficient to pay its income tax
obligations made on behalf of shareholders. These additional cash
distributions totalled $16.3 million during 1994. Therefore, 1994
taxable income per Partnership share will be $.92 for Partnership
shareholders who have held their shares since ServiceMaster
adopted partnership form in 1986. Taxable income per Partnership
share will be less than $.92 per share for Partnership shares
purchased in 1987 and thereafter.
In December, 1994, the Board of Directors of the Partnership
authorized the repurchase of up to an additional $60 million of
Partnership shares in the open market or in privately negotiated
transactions. Shares repurchased under the program are available
for general partnership purposes, including employee benefit
programs and business acquisitions. As of December 31, 1994, $57
million of the total amount authorized had not yet been expended.
The following table presents net income before
interest,taxes, depreciation and amortization (EBITDA), and cash
income. EBITDA is a commonly-used supplemental measurement of a
company's ability to generate cash flow used by many of the
Partnership's investors and lenders. All of the Partnership's
existing debt covenants require the Partnership to maintain
specified levels of EBITDA. Management believes that EBITDA
demonstrates the cash-generating ability of the Partnership's
businesses, including acquired businesses, while highlighting the
potential leveraging effect of the acquisition-related fixed
charges of interest expense, depreciation, and amortization.
20
(In thousands)
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Net income $ 139,883 $ 145,947 $ 122,065 $ 85,982 $ 83,053
Depreciation 32,885 29,674 27,017 21,598 18,281
Amortization 21,323 20,282 19,322 16,581 11,595
Unusual non-cash
charges --- --- 77,635 --- 6,500
Gain on issuance of
subsidiary shares --- (30,200) (105,306) (5,841) (20,000)
-------- -------- -------- -------- --------
Cash income $ 194,091 $ 165,703 $ 140,733 $ 118,320 $ 99,429
Interest expense 31,543 32,483 32,155 31,153 33,745
Taxes 2,755 2,146 1,233 1,426 2,332
-------- -------- -------- -------- --------
EBITDA $ 228,389 $ 200,332 $ 174,121 $ 150,899 $ 135,506
======== ======== ======== ======== ========
Cash income is defined as net income (adjusted to eliminate
non-cash unusual charges and the gain on issuance of subsidiary
shares) plus the non-cash charges of depreciation and
amortization. Cash income represents an indication of the
Partnership's ability to continue to distribute cash to its
Partnership shareholders in amounts sufficient to cover the
income tax liabilities incurred by holding Partnership shares.
EBITDA and cash income should not be used as exclusive
measures of cash flow because they do not consider the impact of
working capital growth, capital expenditures, debt principal
reductions or other sources and uses of cash which are disclosed
in the Consolidated Statements of Cash Flows.
21
ELEVEN YEAR FINANCIAL SUMMARY
(In thousands, except per share and percentage data)
1994 1993 1992
---- ---- ----
Operating Results (excluding all unusual items)
Operating revenue. . . . . . $ 2,985,207 $ 2,758,859 $ 2,488,854
Cost of services rendered
and products sold. . . . . 2,350,011 2,192,684 2,021,010
Selling and administrative
expenses . . . . . . . . . 421,170 393,131 326,477
. . . . . . . . . . . . --------- --------- ---------
Operating income (Note). . . $ 214,026 $ 173,044 $ 141,367
. . . . . . . . . . . . --------- --------- ---------
% of operating revenue. 7.2% 6.3% 5.7%
Non-operating expense
(income) . . . . . . . . . 71,388 55,151 45,740
Provision for income taxes . 2,755 2,146 1,233
. . . . . . . . . . . . --------- --------- ---------
Net income excluding
unusual items (Note) . . . $ 139,883 $ 115,747 $ 94,394
. . . . . . . . . . . . ========= ========= =========
% of operating revenue. 4.7% 4.2% 3.8%
% return on average
shareholder equity . . . . 47% 46% 57%
Per Share
Net income per share
excluding unusual
items (Note) . . . . . . . $ 1.81 $ 1.51 $ 1.25
Cash distributions
to shareholders. . . . . . $ .92 $ .89 $ .87
Share price range:
High price. . . . . . . $ 28.38 $ 31.00 $ 19.88
Low price . . . . . . . $ 21.50 $ 17.63 $ 14.63
Shares used to compute
income per share . . . . . 77,438 76,846 75,688
Financial Position (at year end)
Current assets . . . . . . . $ 331,045 $ 291,325 $ 257,542
Current liabilities. . . . . 304,395 244,552 206,755
Working capital. . . . . . . 26,650 46,773 50,787
Current ratio. . . . . . . . 1.1-1 1.2-1 1.2-1
Total assets . . . . . . . . 1,230,839 1,122,461 1,005,531
Non-current liabilities. . . 483,906 471,177 511,211
Minority interest. . . . . . 135,272 117,513 77,906
Deferred gain. . . . . . . . --- --- ---
Shareholders' equity . . . . 307,266 289,219 209,659
Shares outstanding,
net of treasury shares
and share subscriptions. . 75,976 76,415 75,670
Note: Operating results on a basis which includes prior year
unusual items (i.e. restructuring and unusual charges, gains on
issuance of subsidiary shares, and the change in accounting for
postretirement benefits) are as follows:
Operating income . . . . . . $ 214,026 $ 173,044 $ 62,432
Net income . . . . . . . . . $ 139,883 $ 145,947 $ 122,065
Net income per share . . . . $ 1.81 $ 1.90 $ 1.61
22
1991 1990 1989 1988 1987 1986 1985 1984
---- ---- ---- ---- ---- ---- ---- ----
$2,109,941$1,825,750$1,609,267$1,531,276$1,425,316$1,122,503$1,002,213 $849,734
1,762,700 1,545,527 1,387,448 1,327,128 1,228,885 975,137 869,855 728,979
225,814 177,941 129,035 118,275 116,938 83,216 72,504 65,824
--------- --------- --------- --------- --------- --------- --------- ---------
$121,427 $102,282 $92,784 $85,873 $79,493 $64,150 $59,854 $54,931
--------- --------- --------- --------- --------- --------- --------- ---------
5.8% 5.6% 5.8% 5.6% 5.6% 5.7% 6.0% 6.5%
39,860 30,397 24,016 21,247 19,492 2,235 (1,586) (2,980
1,426 2,332 721 --- --- 29,160 28,735 27,418
--------- --------- --------- --------- --------- --------- --------- ---------
$80,141 $69,553 $68,047 $64,626 $60,001 $32,755 $32,705 $30,493
========= ========= ========= ========= ========= ========= ========= =========
3.8% 3.8% 4.2% 4.2% 4.2% 2.9% 3.3% 3.6%
74% 103% 150% 138% 162% 61% 46% 48%
$1.10 $.98 $.93 $.90 $.85 $.45 $.44 $.41
$.85 $.82 $.78 $.75 $.67 $.38 $.35 $.29
$17.38 $10.50 $10.75 $12.50 $14.13 $11.88 $11.38 $10.63
$9.75 $8.75 $9.38 $9.88 $9.75 $8.88 $7.75 $8.00
72,556 71,207 72,957 71,859 70,883 73,862 73,803 73,688
$217,517 $237,262 $219,661 $203,925 $128,804 $107,047 $82,652 $71,828
157,458 158,046 135,375 76,908 59,993 51,162 42,351 34,184
60,059 79,216 84,286 127,017 68,811 55,885 40,301 37,644
1.4-1 1.5-1 1.6-1 2.7-1 2.1-1 2.1-1 2.0-1 2.1-1
843,660 796,935 593,693 485,492 371,104 340,226 132,758 103,394
376,638 372,052 410,056 346,970 260,267 248,226 14,595 1,333
78,229 55,636 9,174 10,186 8,660 8,732 --- ---
109,354 115,195 --- --- --- --- --- ---
121,981 96,006 39,088 51,428 42,184 32,106 75,812 67,877
72,156 71,982 68,265 70,212 69,917 69,683 73,304 73,256
$121,427 $95,782 $92,784 $85,873 $79,493 $64,150 $59,854 $54,931
$85,982 $83,053 $68,047 $64,626 $60,001 $32,755 $32,705 $30,493
$1.19 $1.17 $.93 $.90 $.85 $.45 $.44 $.41
All share and per share data reflect the three-for-two
share splits in 1993, 1992, and 1985.
23
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation: The consolidated financial statements
include the accounts of ServiceMaster Limited Partnership and its
majority-owned subsidiary partnerships and corporations,
collectively referred to as the Partnership. Intercompany
transactions and balances have been eliminated in consolidation.
Investments in unconsolidated subsidiaries representing ownership
of at least 20% but less than 50% are accounted for under the
equity method. Certain immaterial 1993 and 1992 amounts have been
reclassified to conform with the 1994 presentation.
Revenues: Revenues from termite, pest control, and lawncare
services are recognized as the services are provided. Revenues
from franchised services consist of initial franchise fees
received from the sales of licenses, sales of products to
franchisees, and continuing monthly fees based upon franchise
revenue.
Home service contract fees are recognized as revenues over
the life of the contract. Customers' coverage under home service
contracts is on a "claims made" basis and contract costs are
expensed as incurred.
Revenues from Management Services consist of contract fees
for services rendered and reflect the total price of such
services. Where the Partnership principally uses people who are
employees of the facility, the payroll costs for such employees
are charged to the Partnership by the facility and are included
in "Cost of services rendered and products sold" in the
Consolidated Statements of Income. Receivables from the
facilities are reflected in the Consolidated Statements of
Financial Position at the net amount due, after deducting from
the contract price all amounts chargeable to the Partnership.
Inventory Valuation: Inventories are valued at the lower of cost
(first-in, first-out basis) or market. Inventory costs include
material, labor, and factory overhead and related handling costs.
Raw materials represent approximately 3% of the inventory value
at December 31, 1994. The remaining inventory is finished goods
to be used on the customers' premises or sold to franchisees.
Depreciation and Amortization: Plant and equipment used in the
business are stated at cost and are depreciated over their
estimated useful lives using the straight-line method for
financial reporting purposes. Amortization of contract rights,
trade names, goodwill, and other intangible assets is computed
using the straight-line method over periods ranging from ten to
forty years for financial reporting purposes.
Income Taxes: The Partnership is treated as a publicly-traded
partnership for federal and state income tax purposes for lines
of business existing at December 16, 1987. This tax holiday
expires at the end of 1997, after which the Partnership will be
taxed as a corporation. During the intervening period, all
Partnership shareholders are responsible for federal and state
income taxes on their proportionate share of taxable income and
are entitled to a proportionate share of tax deductions and
credits.
In January, 1992, the Partnership's shareholders approved a
tax-free Plan of Reorganization to return to corporate form on or
before December 31, 1997, at the discretion of the ServiceMaster
Board of Directors.
International operations are subject to local income taxes.
Income Per Share: Income per share is based on the weighted
average number of common and common equivalent shares outstanding
during the year. Shares potentially issuable under option and
subscription plans have been considered common equivalent shares.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of ServiceMaster Limited Partnership
We have audited the accompanying consolidated statements of
financial position of SERVICEMASTER LIMITED PARTNERSHIP
(organized under the laws of the State of Delaware) AND
SUBSIDIARIES, as of December 31, 1994 and 1993, and the related
consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December
31, 1994. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of ServiceMaster Limited Partnership and
Subsidiaries as of December 31, 1994 and 1993, and the
consolidated results of operations and cash flows for each of the
three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 24, 1995
24
STATEMENTS OF INCOME
(In thousands, except per share data)
Years Ended December 31,
1994 1993 1992
---- ---- ----
Operating Revenue $2,985,207$2,758,859$2,488,854
Operating Costs and Expenses:
Cost of services rendered
and products sold . . . . . . . .2,350,011 2,192,684 2,029,710
Selling and administrative
expenses 421,170 393,131 326,477
Restructuring charges --- --- 70,235
--------- --------- ---------
Total operating costs and
expenses 2,771,181 2,585,815 2,426,422
--------- --------- ---------
Operating Income 214,026 173,044 62,432
Non-operating Expense (Income):
Interest expense . . . . . . . . . . . 31,543 32,483 32,155
Interest income (5,389) (5,882) (4,433)
Gain on issuance of subsidiary
shares --- (30,200) (105,306)
Minority interest, including
General Partners' 2%
interest which totalled
$2,829 in 1994,
$2,979 in 1993, and $2,478
in 1992 45,234 28,550 9,218
--------- --------- ---------
Income before Income Taxes . . . . . .142,638 148,093 130,798
Provision for income taxes . . . . . . .2,755 2,146 1,233
--------- --------- ---------
Income before Cumulative
Effect of Change in
Accounting Principle . . . . . . . . .139,883 145,947 129,565
--------- --------- ---------
Cumulative effect of change
in accounting for
postretirement medical
benefits --- --- 7,500
--------- --------- ---------
Net Income $139,883 $145,947 $122,065
========= ========= =========
Net Income Per Share $1.81 $1.90 $1.61
========= ========= =========
Excluding the impact of restructuring and unusual charges, the
gain on issuance of subsidiary shares, and the cumulative effect
of a change in accounting principle, 1994 net income was $139,883
($1.81 per share, the same as shown above), 1993 net income was
$115,747 ($1.51 per share), and 1992 net income was $94,394
($1.25 per share).
Based on 77,438 shares in 1994, 76,846 shares in 1993, and 75,688
shares in 1992. All share and per share data reflect the three-
for-two share splits in 1993 and 1992.
See accompanying Summary of Significant Accounting Policies and
Notes to the Consolidated Financial Statements.
25
STATEMENTS OF FINANCIAL POSITION
(In thousands)
As of December 31,
1994 1993
---- ----
Assets
Current Assets:
Cash and marketable securities,
consisting of:
Cash and cash equivalents of
$14,333 in 1994 and $17,271
in 1993
Marketable securities of $20,111
in 1994 and $15,459 in 1993. . . . $34,444 $32,730
Receivables, less allowances of
$20,114 in 1994 and $19,438
in 1993. . . . . . . . . . . . . . . 211,714 173,278
Inventories. . . . . . . . . . . . . . 36,062 37,870
Prepaid expenses and other assets. . . 48,825 47,447
. . . . . . . . . . . . . . . . . . -------- --------
Total current assets . . . . . . . . 331,045 291,325
. . . . . . . . . . . . . . . . . . -------- --------
Property, Plant, and Equipment, at Cost:
Land and buildings . . . . . . . . . . 45,043 33,088
Equipment. . . . . . . . . . . . . . . 215,144 193,364
. . . . . . . . . . . . . . . . . . -------- --------
. . . . . . . . . . . . . . . . . . 260,187 226,452
Less: Accumulated depreciation . . . . 131,739 110,677
. . . . . . . . . . . . . . . . . . -------- --------
Net property, plant, and equipment . . 128,448 115,775
. . . . . . . . . . . . . . . . . . -------- --------
Other Assets:
Contract rights, trade names,
goodwill, and other, less accumulated
amortization of $105,619 in 1994
and $84,296 in 1993. . . . . . . . . 686,309 604,613
Investment in Norrell Corporation. . . --- 26,948
Notes receivable, long-term securities,
and other assets . . . . . . . . . . 85,037 83,800
. . . . . . . . . . . . . . . . . . -------- --------
Total Assets . . . . . . . . . . . . $1,230,839 $1,122,461
. . . . . . . . . . . . . . . . . . ========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable . . . . . . . . . . . $44,272 $34,154
Accrued liabilities:
Payroll and related expenses . . . . 53,605 47,883
Insurance and related expenses . . . 34,120 32,299
Other. . . . . . . . . . . . . . . . 79,513 58,739
Deferred revenues. . . . . . . . . . . 84,658 66,865
Current portion of long-term
obligations. . . . . . . . . . . . . 8,227 4,612
. . . . . . . . . . . . . . . . . . -------- --------
Total current liabilities. . . . . . 304,395 244,552
. . . . . . . . . . . . . . . . . . -------- --------
Long-Term Debt . . . . . . . . . . . . 386,511 384,509
Other Long-Term Obligations. . . . . . 97,395 86,668
Commitments and Contingencies
(see Notes). . . . . . . . . . . . .
Minority and General Partners' Interests
including General Partners'
interest of $1,516 in 1994
and $1,576 in 1993 . . . . . . . . . 135,272 117,513
Shareholders' Equity:
Limited partners' equity -
78,055 shares issued
in 1994 and 1993 . . . . . . . . . . 364,673 328,320
Treasury shares at cost -
2,033 shares in 1994
and 1,629 shares in 1993 . . . . . . (48,497) (29,571)
Share subscriptions receivable
and restricted shares -
810 shares in 1994
and 872 shares in 1993 . . . . . . . (8,910) (9,530)
. . . . . . . . . . . . . . . . . . -------- --------
Total shareholders' equity . . . . . 307,266 289,219
. . . . . . . . . . . . . . . . . . -------- --------
Total Liabilities and
Shareholders' Equity . . . . . . . . $1,230,839 $1,122,461
. . . . . . . . . . . . . . . . . . ========= =========
All share data reflects the three-for-two share split in 1993.
See accompanying Summary of Significant Accounting Policies and
Notes to the Consolidated Financial Statements.
26
STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Years Ended December 31,
1994 1993 1992
---- ---- ----
Cash and Cash Equivalents
at January 1 $17,271 $27,576 $32,082
Cash Flows from Operations:
Net Income 139,883 145,947 122,065
Adjustments to reconcile net income to
Net cash provided from operations:
Depreciation 32,885 29,674 27,017
Amortization 21,323 20,282 19,322
Gain on issuance of subsidiary
shares (see Notes) --- (30,200) (105,306)
Restructuring charges
(see Notes) --- --- 70,235
Cumulative effect of change
in accounting principle --- --- 7,500
Change in working capital,
net of acquisitions:
Receivables (21,957) (17,468) 11,428
Inventories and other
current assets 1,213 (13,681) 27,111
Accounts payable 5,081 32 (18,795)
Deferred revenues 10,751 20,367 (16,239)
Accrued liabilities 18,254 1,265 (876)
Minority interest and
other, net 46,430 12,885 11,358
--------- --------- ---------
Net Cash Provided from
Operations 253,863 169,103 154,820
--------- --------- ---------
Cash Flows from Investing Activities:
Business acquisitions,
net of cash acquired (90,250) (71,533) (117,262)
Property additions (32,202) (33,113) (25,684)
Investment activity in
Norrell Corporation 29,021 5,524 (1,454)
Notes receivable and
financial investments (9,043) (5,426) (10,782)
Net sales (purchases) of
securities (4,594) (774) (5,463)
Sale of equipment and
other assets 2,229 4,639 602
Payments to sellers of
acquired businesses (2,223) (2,750) (4,836)
--------- --------- ---------
Net Cash Used for Investing
Activities (107,062) (103,433) (164,879)
--------- --------- ---------
Cash Flows from Financing Activities:
Distributions to shareholders
and shareholders' trust (89,153) (79,123) (68,572)
Payment of long-term debt
and other long-term
obligations (77,405) (155,974) (32,004)
Short-term borrowings, net 75,904 111,652 118,949
Purchase of treasury shares (41,266) (11,254) (18,888)
Redemption of preferred
stock (14,650) --- ---
Distributions to holders
of minority interests (13,088) (14,258) (372)
Proceeds from employee
share option plans 5,274 5,341 5,028
Proceeds from issuance of
subsidiary shares --- 68,000 ---
Other 4,645 (359) 1,412
--------- --------- ---------
Net Cash Provided from (Used for)
Financing Activities (149,739) (75,975) 5,553
--------- --------- ---------
Cash Decrease During the Year (2,938) (10,305) (4,506)
--------- --------- ---------
Cash and Cash Equivalents
at December 31 $14,333 $17,271 $27,576
========= ========= =========
See accompanying Summary of Significant Accounting Policies and
Notes to the Consolidated Financial Statements.
27
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
Subscriptions Limited Total
Treasury & Restricted Partners' Shareholders'
Shares Shares Equity Equity
--------- --------- --------- ---------
Balance, December 31, 1991 . . . $ (20,981) $ (14,580) $ 157,542 $ 121,981
Net income 1992. . . . . . . . . 122,065 122,065
Shareholder distributions. . . . (68,572) (68,572)
Shares issued under option,
subscription, and
grant plans, and
other (1,244,418 shares) . . . 2,897 3,931 (2,660) 4,168
Treasury shares purchased
and related costs
(1,094,224 shares) . . . . . . (18,888) (18,888)
Share subscriptions paid or
terminated (10,212 shares) . . (108) 108 ---
Shares issued for acquisition
of Terminix
minority interest. . . . . . . 48,905 48,905
. . . . . . . . . . . . . . . . --------- --------- --------- ---------
Balance, December 31, 1992 . . . $ (37,080) $ (10,541) $ 257,280 $ 209,659
Net income 1993. . . . . . . . . 145,947 145,947
Shareholder distributions. . . . (79,123) (79,123)
Shares issued under option,
subscription, and
grant plans, and
other (294,594 shares) . . . . 8,995 1,011 (3,691) 6,315
Treasury shares purchased
and related costs
(536,592 shares) . . . . . . . (11,254) (11,254)
Shares issued for acquisitions . 9,768 7,907 17,675
. . . . . . . . . . . . . . . . --------- --------- --------- ---------
Balance, December 31, 1993 . . . $ (29,571) $ (9,530) $ 328,320 $ 289,219
Net income 1994. . . . . . . . . 139,883 139,883
Shareholder distributions. . . . (89,153) (89,153)
Shares issued under option,
subscription, and
grant plans, and
other (434,310 shares) . . . . 17,449 620 (15,156) 2,913
Treasury shares purchased
and related costs
(1,704,222 shares) . . . . . . (41,266) (41,266)
Shares issued for acquisitions . 4,891 779 5,670
. . . . . . . . . . . . . . . . --------- --------- --------- ---------
Balance, December 31, 1994 . . . $ (48,497) $ (8,910) $ 364,673 $ 307,266
. . . . . . . . . . . . . . . . ========= ========= ========= =========
All share and per share data reflect the three-for-two share splits
in 1993 and 1992.
See accompanying Summary of Significant Accounting Policies
and Notes to the Consolidated Financial Statements.
28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Business Unit Reporting
The business of the Partnership is conducted through the
ServiceMaster Consumer Services, ServiceMaster Management
Services, and New Business Development and Parent operating
units. The New Business Development unit includes ServiceMaster
Diversified Health Services and the International operations of
the Partnership, which have been grouped with Parent due to the
developmental status of these businesses.
Information relative to the accounting policies used by the
Partnership is described in the Summary of Significant Accounting
Policies. Operating expenses of the business units consist
primarily of direct costs and a royalty payable to Parent based
on the revenues and profitability of the business unit.
Identifiable assets are those used in carrying out the operations
of the business unit and include intangible assets directly
related to its operations. The Partnership's headquarters
facility and other investments are included in the identifiable
assets of New Business Development and Parent.
New Business
Consumer Management Development
Services Services and Parent Other Consolidated
1994 (In thousands)
Operating revenue. $1,041,533 $ 1,822,984 $ 120,690 $ --- $ 2,985,207
. . . . . . . . . --------- --------- --------- --------- ---------
Operating income . 124,752 65,888 23,386 --- 214,026
. . . . . . . . . --------- --------- --------- --------- ---------
Interest expense . 11,900 4,015 15,628 --- 31,543
Interest (income). (1,897) (1,938) (1,554) --- (5,389)
Minority and General
Partners'
interest . . . . 10,984 3,916 (378) 30,712 45,234
Provision for income
taxes. . . . . . 1,337 645 773 --- 2,755
. . . . . . . . . --------- --------- --------- --------- ---------
Net income (loss). $ 102,428 $ 59,250 $ 8,917 $ (30,712) $ 139,883
. . . . . . . . . ========= ========= ========= ========= =========
Identifiable assets at
December 31,
1994 . . . . . . $ 728,986 $ 196,201 $ 305,652 $ 1,230,839
Depreciation and
amortization
expense. . . . . $ 31,831 $ 16,718 $ 5,659 $ 54,208
Capital
expenditures . . $ 7,777 $ 18,424 $ 6,001 $ 32,202
1993 (In thousands)
Operating revenue. $ 939,742 $1,762,883 $ 56,234 $ --- $ 2,758,859
. . . . . . . . .
. . . . . . . . . --------- --------- --------- --------- ---------
Operating income . 92,885 68,257 11,902 --- 173,044
. . . . . . . . . --------- --------- --------- --------- ---------
Interest expense . 18,922 4,854 8,707 --- 32,483
Interest (income). (3,320) (2,136) (426) --- (5,882)
Minority and General
Partners'
interest . . . . 5,712 3,911 (216) 19,143 28,550
Gain on issuance of
subsidiary
shares . . . . . --- --- --- (30,200) (30,200)
Provision for income
taxes. . . . . . 1,019 619 508 --- 2,146
. . . . . . . . . --------- --------- --------- --------- ---------
Net income . . . . $ 70,552 $ 61,009 $ 3,329 $ 11,057 $ 145,947
. . . . . . . . . ========= ========= ========= ========= =========
Identifiable assets at
December 31,
1993 . . . . . . $ 721,948 $ 224,091 $ 176,422 $ 1,122,461
Depreciation and
amortization
expense. . . . . $ 31,929 $ 14,766 $ 3,261 $ 49,956
Capital
expenditures . . $ 4,343 $ 20,845 $ 7,925 $ 33,113
1992 (In thousands)
Operating revenue. $ 800,027 $1,652,295 $ 36,532 $ --- $ 2,488,854
. . . . . . . . . --------- --------- --------- --------- ---------
Restructuring
charges. . . . . 33,810 17,456 18,969 --- 70,235
. . . . . . . . . --------- --------- --------- --------- ---------
Operating income
(loss) . . . . . 35,212 46,980 (19,760) --- 62,432
. . . . . . . . . --------- --------- --------- --------- ---------
Interest expense . 22,205 4,237 5,713 --- 32,155
Interest
(income) . . . . (2,094) (1,908) (431) --- (4,433)
Minority and General
Partners'
interest . . . . (145) 4,370 --- 4,993 9,218
Gain on issuance
of subsidiary
shares . . . . . ---- ---- --- (105,306) (105,306)
Provision for income
taxes. . . . . . 829 345 59 --- 1,233
Cumulative effect
of change in
accounting principle --- --- --- 7,500 7,500
. . . . . . . . . --------- --------- --------- --------- ---------
Net income (Note). $ 14,417 $ 39,936 $ (25,101) $ 92,813 $ 122,065
. . . . . . . . . ========= ========= ========= ========= =========
Identifiable assets at
December 31,
1992 . . . . . . $ 744,355 $ 173,134 $ 88,042 $ 1,005,531
Depreciation and
amortization
expense. . . . . $ 29,241 $ 13,653 $ 3,445 $ 46,339
Capital
expenditures . . $ 3,777 $ 18,141 $ 3,766 $ 25,684
Note: Excluding the impact of the restructuring and unusual
charges, the gain on issuance of subsidiary shares, and the
cumulative effect of a change in accounting principle, 1992 net
income was $46,380 for Consumer Services, $57,392 for Management
Services, $2,568 for New Business Development and Parent, and
$94,394 for the Partnership as a whole.
29
Partnership
ServiceMaster Limited Partnership (the Partnership) holds as
its only asset a 99% interest in the profits, losses, and
distributions of The ServiceMaster Company Limited Partnership,
which through subsidiaries owns and operates the ServiceMaster
business. The Managing General Partner of these two partnerships
is ServiceMaster Management Corporation. The Managing General
Partner holds a 1% interest in the income of both ServiceMaster
Limited Partnership and The ServiceMaster Company Limited
Partnership.
ServiceMaster Management Corporation is owned by thirty-five
ServiceMaster executives who have given their voting rights to
the Board of Directors, a majority of whom are independent
directors. Under certain circumstances, the shareholders of
ServiceMaster Limited Partnership may remove and replace the
Managing General Partner.
ServiceMaster Corporation, a special general partner of the
Partnership, was created as part of the tax-free Plan of
Reorganization approved by the shareholders of the Partnership in
January, 1992. The reorganization is scheduled to become
effective on December 31, 1997, but the Partnership's Board of
Directors has the authority to accelerate the effective date
under certain circumstances, if it deems it to be in the best
interest of a majority of the Partnership shareholders. No shares
of ServiceMaster Corporation are currently outstanding.
Acquisitions and Sales
Acquisitions have been accounted for using the purchase
method, and the results of the acquired businesses have been
included in the Partnership's financial statements since their
dates of acquisition. The Partnership acquired several businesses
during 1994 which were accounted for using the purchase method.
The aggregate consideration paid for those businesses totalled
$90 million. In August, 1993, the Partnership acquired VHA Long
Term Care (VHA-LTC) for approximately $82.5 million. The purchase
was financed primarily through $70 million in long-term
borrowings, with the balance provided from a combination of
Partnership shares, share options, and equity investments made by
certain members of VHA Long Term Care management, who acquired an
11% equity interest in VHA-LTC operations. The assets and
liabilities of VHA-LTC were recorded in the Partnership's
financial statements at their estimated fair market values as of
the acquisition date, including approximately $68 million in
intangible assets which are being amortized on a straight-line
basis over 40 years. In May, 1992, Consumer Services acquired
certain operating assets and liabilities of the ChemLawn Division
of Ecolab, Inc. for approximately $103 million and has integrated
ChemLawn into its TruGreen lawncare business. The acquisition was
financed through long-term borrowings and equity investments by
certain members of TruGreen-ChemLawn management, who acquired a
15% equity interest in the combined lawncare business. The assets
and liabilities of ChemLawn were recorded in the Partnership's
financial statements at their estimated fair market values as of
the acquisition date, including approximately $93 million in
intangible assets which are being amortized on a straight-line
basis, primarily over 40 years.
Supplemental cash flow information regarding the
Partnership's acquisitions is as follows:
(In thousands of dollars)
1994 1993 1992
---- ---- ----
Fair value of assets acquired. $144,710 $106,147 $267,430
Less liabilities assumed . . . (46,867) (13,407) (97,930)
. . . . . . . . . . . . . . . --------- --------- ---------
Net assets acquired. . . . . . 97,843 92,740 169,500
Partnership shares issued. . . (5,670) (18,285) (48,905)
Less cash acquired . . . . . . (1,923) (2,922) (3,333)
. . . . . . . . . . . . . . . --------- --------- ---------
Business acquisitions,
net of cash acquired . . . . $ 90,250 $ 71,533 $ 117,262
. . . . . . . . . . . . . . . ========= ========= =========
In November, 1990, Consumer Services completed a business
combination with WMI Urban Services, Inc., a wholly-owned
subsidiary of WMX Technologies, Inc. (WMX). Consumer Services
acquired certain assets and liabilities of the pest control and
TruGreen lawncare businesses of WMX in exchange for a 22% equity
interest in Consumer Services. The Consumer Services Partnership
Agreement with WMX was amended in June, 1992, giving WMX an
option to acquire an additional 5.76% of Consumer Services. In
June, 1993, WMX exercised its option and acquired this additional
interest in exchange for a $68 million cash payment, thereby
increasing their aggregate ownership interest in Consumer
Services to 27.76%. As a result of this transaction, the
Partnership recognized a $30.2 million gain on the issuance of
subsidiary shares.
In connection with the Partnership's 1991 acquisition of a
minority equity interest in Norrell Corporation, a subsidiary of
the Partnership issued a $14.6 million preferred limited
partnership interest. This obligation and the related
distributions had been treated as minority interest in the
Partnership's consolidated financial statements. An equity
conversion right associated with the preferred interest entitled
the holder to also receive a number of common Partnership shares
at redemption, depending upon the magnitude of subsequent
increases in the market price of Partnership shares. The
Partnership sold its investment
30
in Norrell in February, 1994, for
approximately $29.3 million, which exceeded its carrying value.
In May, 1994, the preferred shares were redeemed for $14.6
million in cash and 372,950 common shares.
In February, 1994, a 10% equity interest in the
Partnership's Management Services subsidiary, determined after
consideration of intercompany debt to Parent, was sold to members
of senior management of that subsidiary at fair market value, as
confirmed by an independent appraisal. The proceeds received by
the Partnership were recorded as additional minority interest in
the consolidated balance sheet. The Partnership and the minority
investors have rights, respectively, to acquire or sell these
minority interests between 1997 and 2002, at then-current fair
market values.
In January, 1995, Consumer Services acquired the 15%
minority interest in TruGreen-ChemLawn. The interest was
purchased through the issuance of 2,824,000 partnership shares
and a contingent right to receive an additional payment in 1997,
depending upon the magnitude of TruGreen-Chemlawn earnings and
the performance of ServiceMaster shares in 1995 and 1996. When
the contingency is resolved, any additional consideration due
will be distributed and recorded.
Restructuring
Management performed a comprehensive strategic and financial
review of its existing business units during the second quarter
of 1992. This occurred as part of its annual planning process,
accentuated by the large number of other significant events which
occurred during the same time period. At the conclusion of this
review, several strategic decisions and financial judgments were
made which resulted in the recording of restructuring and other
charges. A charge was also taken for an accounting change related
to the adoption of Statement of Financial Accounting Standards
No. 106 on postretirement benefits. Additional unusual charges
were included in cost of services rendered and products sold, and
were primarily related to increased self-insurance reserves for
prior years' workers' compensation costs.
Key financial information on a basis which excludes unusual
charges and gains on issuance of subsidiary shares is as follows:
(In thousands of dollars, except per share data)
1994 1993 1992
---- ---- ----
Net income . . . . . . . . . . $139,883 $145,947 $122,065
Gain on issuance of
subsidiary shares. . . . . . --- (30,200) (105,306)
Restructuring charges. . . . . --- --- 70,235
Unusual charges included
in cost of sales . . . . . . --- --- 8,700
Minority interest effects
of the above charges . . . . --- --- (8,800)
Cumulative effect of change
in accounting principle. . . --- --- 7,500
. . . . . . . . . . . . . . . -------- -------- --------
Net income excluding
unusual items. . . . . . . . $139,883 $115,747 $94,394
. . . . . . . . . . . . . . . ======== ======== ========
Percent change from
prior year . . . . . . . . . 21% 23% 18%
Earnings per share excluding
unusual items. . . . . . . . $1.81 $1.51 $1.25
. . . . . . . . . . . . . . . ======== ======== ========
Percent change from prior year 20% 21% 14%
Income Taxes
The Partnership is not directly subject to federal income
taxes. Instead, its taxable income or loss is allocated to the
individual partners. However, the Partnership has certain
subsidiaries which operate in corporate form, including American
Home Shield, its home health care and child care businesses, and
certain international operations.
Additionally, several of the Partnership's subsidiaries are
subject to a variety of state partnership level business taxes
which account for a significant portion of the provision for
income taxes reflected in the Partnership's consolidated income
statement. Deferred income taxes are provided for corporate level
expenses which are deducted for income tax purposes before they
are expensed for financial reporting purposes. Income before
income taxes consists of the following:
(In thousands of dollars)
1994 1993 1992
---- ---- ----
Partnership income not
subject to federal
income taxes . . . . . . . . $145,760 $156,256 $153,533
Income (loss) of subsidiary
corporations subject to
federal income taxes . . . . (3,122) (8,163) (22,735)
. . . . . . . . . . . . . . . -------- -------- --------
Income before income taxes . . $142,638 $148,093 $130,798
. . . . . . . . . . . . . . . ======== ======== ========
31
Effective January 1, 1993, the Partnership adopted Statement
of Financial Accounting Standards No. 109 (SFAS 109), "Accounting
for Income Taxes." SFAS 109 requires companies to apply current
statutory income tax rates to deferred tax assets and liabilities
arising from differences in financial reporting and tax reporting
bases. ServiceMaster is organized as a publicly-traded limited
partnership and is not currently subject to federal income taxes.
However, upon reincorporation, as outlined in the Plan of
Reorganization, ServiceMaster will recognize a step-up in tax
basis which will be amortized against taxable income in future
years. The amount of the step-up will depend upon the price and
trading volume of the Partnership shares prior to
reincorporation. Management believes that the step-up in tax
basis will more than offset any deferred liability that would
otherwise require recognition.
Long-Term Debt and Other Long-Term Obligations
Long-term debt and other long-term obligations include the
following:
(In thousands of dollars, except per share data)
1994 1993
---- ----
Notes Payable:
6.65%, maturing in 2002 - 2004. . . . . $ 70,000 $ ---
7.47%, maturing in 1996 and 1997. . . . 75,000 75,000
8.38%, maturing in 1997 - 2001. . . . . 50,000 50,000
10.57%, maturing in 1996 - 2000 . . . . 45,000 45,000
10.81%, maturing in 2000 - 2002 . . . . 55,000 55,000
9%, convertible at $12.92/share . . . . 18,600 18,600
9%, subordinated, convertible
at $9.63/share. . . . . . . . . . . . 49 5,720
6%, subordinated, convertible
at $18.67/share . . . . . . . . . . . 3,761 3,761
Revolving credit facilities
maturing in 1995 - 1997 . . . . . . . 41,000 110,000
Other . . . . . . . . . . . . . . . . . 36,328 26,040
Less current portions . . . . . . . . . (8,227) (4,612)
. . . . . . . . . . . . . . . . . . . . -------- --------
Total long-term debt. . . . . . . . . . $386,511 $384,509
. . . . . . . . . . . . . . . . . . . . ======== ========
Insurance accruals and other
long-term liabilities . . . . . . . . $ 97,395 $ 86,668
. . . . . . . . . . . . . . . . . . . . ======== ========
Covenants related to the notes include a limitation of total
debt and fixed charges to a multiple of cash flow and a
requirement to maintain positive shareholders' equity. The
revolving credit facilities had $168 million of unused
commitments as of December 31, 1994. Interest paid was $29.6
million in 1994, $31.5 million in 1993, and $27.0 million in
1992. Average rates paid on the revolving credit facilities were
4.33% in 1994 and 3.60% in 1993. Future long-term debt payments
are $34.0 million in 1996, $69.0 million in 1997, $19.0 million
in 1998, and $19.0 million in 1999. Based upon the borrowing
rates currently available to the Partnership for long-term
borrowings with similar terms and maturities, the fair value of
long-term debt is approximately $388 million.
The Partnership and the minority investors in Management
Services, Diversified Health Services, and certain other business
units have rights, respectively, to acquire or sell these
minority interests between 1997 and 2002 at then-current fair
market value. Based on current projections, the aggregate future
payments that the Partnership could be required to make to
purchase the minority interests under these arrangements is
approximately $37 million. These purchases, if made, would be
recorded as the acquisition of minority interest at the time of
payment.
Future long-term noncancelable operating lease payments are
$26.1 million in 1995, $21.7 million in 1996, $18.1 million in
1997, $14.4 million in 1998, $11.3 million in 1999, and $40.6
million thereafter. Rental expense for 1994, 1993, and 1992 was
$55.3 million, $49.7 million, and $40.9 million, respectively.
Shareholders' Equity
As of December 31, 1994, there were 5,789,000 Partnership
shares available for issuance upon the exercise of subscriptions
and options outstanding and future grants.
Share options are issued at a price not less than the fair
market value on the grant date and expire within ten years of the
grant date. Certain options may permit the holder to pay the
option exercise price by tendering Partnership Shares that have
been owned by the holder without restriction for an extended
period. Share subscriptions are issued at a price not less than
32
the fair market value on the grant date with the completion of
the purchase of shares within fifteen years of the grant date.
Share grants carry a vesting period and are restricted as to the
sale or transfer of the shares.
Beginning on January 1, 1998, WMX has a right to convert its
27.76% equity interest in Consumer Services into common stock of
ServiceMaster, based on relative fair market values at the date
of conversion. If WMX exercises the conversion right,
ServiceMaster then has the unilateral option to redeem their
holdings in cash instead of stock. The conversion right expires
if a qualifying initial public offering of Consumer Services
shares has occurred prior to exercise.
Share
Share Price Subscriptions Price
Options Range and Grants Range
-------- -------- -------- --------
Exercised, paid or
vested during 1992 (1,718,695) $5.38-13.33 (398,709) $5.53-16.61
Total exercisable,
December 31, 1992. . . . . . 2,970,696 $5.38-17.33 --- ---
Total outstanding,
December 31, 1992. . . . . . 2,970,696 $5.38-17.33 989,913 $5.53-16.61
Exercised, paid or vested
during 1993. . . . . . . . . (497,105) $2.46-17.33 (143,202) $9.67-21.75
Total exercisable,
December 31, 1993. . . . . . 3,864,500 $2.46-25.75 --- ---
Total outstanding,
December 31, 1993. . . . . . 3,864,500 $2.46-25.75 871,711 $9.67-21.75
Transactions during 1994:
Granted 1,225,000 $21.75-21.75 4,000 $21.75-25.50
Exercised, paid or vested. . . (368,395) $2.46-25.75 (65,944) $9.67-25.50
Terminated or resigned . . . . (35,129) $5.56-17.33 --- ---
Total exercisable,
December 31, 1994. . . . . . 4,685,976 $2.46-25.75 --- ---
Total outstanding,
December 31, 1994. . . . . . 4,685,976 $2.46-25.75 809,767 $9.67-25.50
Cash and Marketable Securities
Marketable securities held at December 31, 1994, and
December 31, 1993, with a maturity of three months or less are
included in the Statements of Financial Position caption "Cash
and Cash Equivalents." Debt securities are stated at amortized
cost and equity securities approximate market value. Interest and
dividend income received on cash and marketable securities was
$2.3 million, $2.5 million, and $2.7 million in 1994, 1993, and
1992, respectively.
Employee Benefit Plans
Contributions to qualified profit sharing plans were made in
the amount of $6.4 million in 1994, $6.6 million in 1993, and
$4.8 million in 1992. Under the Employee Share Purchase Plan, the
Partnership contributed $0.8 million in 1994, $0.8 million in
1993, and $0.5 million in 1992. These funds defrayed part of the
purchase cost of the shares bought by the employees.
In 1992, the Partnership decided to phase out its previously
existing defined benefit arrangements for postretirement health
care benefits. A charge of $7.5 million was reflected in the
financial statements representing the actuarial estimate of
benefits expected to be paid under this defined benefit structure
as it is phased out. Retirees and current employees who had
already satisfied eligibility requirements will continue to
receive benefits but with certain modifications and limitations.
33
Quarterly Operating Results
(Unaudited, in thousands, except per share data)
Quarterly operating results and related growth for the last
three years in revenue, gross profit, net income, and net income
per share are shown in the table below. For interim accounting
purposes, certain costs directly associated with the generation
of lawncare revenues are initially deferred and recognized as
expense as the related revenues are recognized. Full year results
are not affected.
Certain amounts from prior periods have also been
reclassified to conform with the current presentation.
% Incr. % Incr.
1994 1993 '94-'93 1992 '93-'92
---- ---- ------- ---- -------
Operating Revenue:
First Quarter $ 657,638 $ 585,130 12 % $ 523,151 12 %
Second Quarter . . 791,496 728,725 9 634,972 15
Third Quarter. . . 797,015 749,746 6 696,786 8
Fourth Quarter . . 739,058 695,258 6 633,945 10
--------- --------- ---------
$ 2,985,207 $ 2,758,859 8 % $ 2,488,854 11 %
Gross Profit:
First Quarter $ 114,364 $ 93,098 23 % $ 79,691 17 %
Second Quarter . . 180,954 163,809 10 111,567 47
Third Quarter. . . 184,751 167,665 10 146,331 15
Fourth Quarter . . 155,127 141,603 10 121,555 16
--------- --------- ---------
$ 635,196 $ 566,175 12 % $ 459,144 23 %
Net Income:
First Quarter
(Note) $ 24,546 $ 21,232 16 % $ 11,850 79 %
Second Quarter
(Note) . . . . . 40,434 62,059 -35 60,252 3
Third Quarter. . . 38,054 31,632 20 25,464 24
Fourth Quarter . . 36,849 31,024 19 24,499 27
---------- --------- ---------
$ 139,883 $ 145,947 -4 % $ 122,065 20 %
Net Income Per Share:
First Quarter
(Note) $ 0.32 $ 0.28 14 % $ 0.16 75 %
Second Quarter
(Note) . . . . . 0.52 0.81 -36 0.79 3
Third Quarter. . . 0.49 0.41 20 0.33 24
Fourth Quarter . . 0.48 0.40 20 0.32 25
--------- --------- ---------
$ 1.81 $ 1.90 -5 % $ 1.61 18 %
Cash Distributions Per Share:
First Quarter $ 0.23 $ 0.22 5 % $ 0.21 1/3 3 %
Second Quarter . . 0.23 0.22 5 0.21 1/3 3
Third Quarter. . . 0.23 0.22 5 0.22 0
Fourth Quarter . . 0.23 0.23 0 0.22 5
--------- --------- ---------
$ 0.92 $ 0.89 3 % $ 0.86 2/3 3 %
Price Per Share:
First Quarter. . . $ 28.38-22.00 $ 20.00-17.63 $ 18.50-14.63
Second Quarter 26.38-22.63 24.88-17.88 17.50-14.88
Third Quarter 26.50-24.00 25.38-21.75 19.88-17.00
Fourth Quarter 25.38-21.50 31.00-25.13 19.25-15.63
Note: The results for the second quarter of 1993 included the recognition of a $30.2
million gain on the issuance of subsidiary shares. The results for the second quarter of
1992 included the recognition of a similar $105.3 million unusual gain and $77.6 million
of restructuring and other unusual charges. First quarter 1992 results included a $7.5
million charge for the cumulative effect of a change in accounting principle for
postretirement medical benefits. Exclusive of these unusual items, net income and net
income per share were as follows:
Net Income:
First Quarter. . . $ 24,546 $ 21,232 16 % $ 19,350 10 %
Second Quarter . . 40,434 31,859 27 25,081 27
Third Quarter. . . 38,054 31,632 20 25,464 24
Fourth Quarter . . 36,849 31,024 19 24,499 27
--------- --------- ---------
$ 139,883 $ 115,747 21 % $ 94,394 23 %
Net Income Per Share:
First Quarter $ 0.32 $ 0.28 14 % $ 0.25 12 %
Second Quarter . . 0.52 0.42 24 0.34 24
Third Quarter. . . 0.49 0.41 20 0.33 24
Fourth Quarter . . 0.48 0.40 20 0.32 25
--------- --------- ---------
$ 1.81 $ 1.51 20 % $ 1.25 21 %
34