-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WMZ8+mnSpAAOWtiVGEac43yi4HHliM6LbUMrRuZfthmku7fDQH/0KACZjStfTADz 7XNOtefjZAzt/5OE0n87jQ== 0000806027-96-000008.txt : 19960306 0000806027-96-000008.hdr.sgml : 19960306 ACCESSION NUMBER: 0000806027-96-000008 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19960305 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVICEMASTER LTD PARTNERSHIP CENTRAL INDEX KEY: 0000806027 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741] IRS NUMBER: 363497008 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-09378 FILM NUMBER: 96531089 BUSINESS ADDRESS: STREET 1: ONE SERVICEMASTER WAY CITY: DOWNERS GROVE STATE: IL ZIP: 60515 BUSINESS PHONE: 7089641300 10-K/A 1 - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A Ammendment of Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act of 1934 For the fiscal year ended December 31, 1994. Commission File number 1-9378 SERVICEMASTER LIMITED PARTNERSHIP (Exact Name of Registrant as Specified in its Certificate) Delaware 36-3497008 ---------- ------------ (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) One ServiceMaster Way, Downers Grove, Illinois 60515-9969 ---------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (708) 271-1300 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class On Which Registered ------------------- --------------------- 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 Non-Affiliates of the Registrant As of March 14, 1995 was $1,891,376,000. DOCUMENTS INCORPORATED BY REFERENCE Certain parts of the Registrant's Annual Report to Shareholders for the year ended December 31, 1994 are incorporated into Part II of this Form 10-K/A. - ------------------------------------------------------------------------ Part II Item 8. Financial Statements and Supplementary Data The consolidated statements of financial position of ServiceMaster as of December 31, 1994 and 1993, and the consolidated statements of income, cash flows and shareholders' equity for the years ended December 31, 1994, 1993 and 1992 and notes to the consolidated financial statements are contained in the FSMD Section of the ServiceMaster Annual Report to Shareholders for 1994 on pages 24 - 34 and are incorporated herein by reference. The report of Arthur Andersen LLP thereon dated January 24, 1995, and the summary of significant accounting policies are contained in the FSMD Section of the ServiceMaster Annual Report to Shareholders for 1994 on page 24 and are hereby incorporated herein by reference. SIGNATURE 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 Date: March 1, 1996 By: /s/ Ernest J. Mrozek ---------------------- Ernest J. Mrozek Senior Vice President and Chief Financial Officer EX-13 2 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 ========= ========= =========
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
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. 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) $5.53-21.75 Total exercisable, December 31, 1993. . . . . . 3,864,500 $2.46-25.75 --- --- Total outstanding, December 31, 1993. . . . . . 3,864,500 $2.46-25.75 871,711 $9.67-21.75 Transactions during 1994: Granted 1,225,000 $ -21.75 4,000 $21.75-25.50 Exercised, paid or vested. . . (368,395) $2.46-25.75 (65,944) $9.67-25.50 Terminated or resigned . . . . (35,129) $5.56-17.33 --- --- Total exercisable, December 31, 1994. . . . . . 4,685,976 $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. See Management Discussion and Analysis of Financial Condition and Results of Operations for additional information 34
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