**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

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** **

**FORM 10-Q/A**

** **

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| **x**                                                  | ** ** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES**        |
|--------------------------------------------------------|------------|------------------------------------------------------------------------------------|
|                                                   |       | **EXCHANGE ACT OF 1934**                                                           |
| ** **                                             |
| **For the quarterly period ended June 30,  2008** |
|                                                   |       |                                                                               |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES** |
|                                                   |       | **EXCHANGE ACT OF 1934**                                                           |

** **

**For the transition periodfrom             to          **

** **

**Commissionfile number 1-14762**

 

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**THESERVICEMASTER COMPANY**

(Exact name ofregistrant as specified in its charter)

** **

| **Delaware**                                                                                  | ** ** | **36-3858106**                                   |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (IRS Employer Identification No.) |

** **

**860 Ridge Lake Boulevard, Memphis, Tennessee**•**38120**

(Address of principal executive offices)    (Zip Code)

 

**901-597-1400**

(Registrant’s telephone number, including area code)

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes o  No x

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See definitionsof “large accelerated filer,” “accelerated filer,” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer o                      |   | Accelerated filer o         |
|------------------------------------------------|--------|----------------------------------|
|                                           |   |                             |
| Non-accelerated filer x                        |   | Smaller reporting company o |
| (Do not check if a smaller reporting  company) |   |                             |

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes  o  No x

 

On July 24,2007, the registrant completed a transaction pursuant to an Agreement and Planof Merger, dated as of March 18, 2007, among the registrant and twocorporations formed to effect the merger transactions. As a result of themerger transaction, the registrant became a privately held corporation and itsequity shares are no longer publicly traded. At August 8, 2008, 1,000shares of the registrant’s common stock were outstanding, all of which wereowned by CDRSVM Holding, Inc.

 

 

 

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**EXPLANATORY NOTE**

 

On August 14,2008, The ServiceMaster Company (the “Company”) filed its Quarterly Report on Form 10-Qfor the quarter ended June 30, 2008 (the “10-Q”) with the Securities andExchange Commission. Pursuant to the Indenture, dated July 24, 2008, amongthe Company, the Subsidiary Guarantors from time to time parties thereto andWilmington Trust FSB, as trustee, the Company is providing in this Form 10-Q/A(the “Amendment”) the Condensed Consolidating FinancialStatements of the Company and its subsidiaries by adding Note 20 to Part I, Item 1 of the10-Q. 

 

This Amendment does not reflect any eventsoccurring after the filing of the 10-Q.  Except as set forth herein, no otherchanges are made to the 10-Q.

 

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### **PART I - FINANCIAL INFORMATION**

**ITEM 1.FINANCIAL STATEMENTS**

### **THE SERVICEMASTER COMPANY**

### **Condensed Consolidated Statementsof Operations (Unaudited)**

*(Inthousands)*

 
| ** **                                                                               | ** ** | **Successor**               | ** ** | ** ** | **Predecessor**             | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------|-----------------------------|------------|
| ** **                                                                               | ** ** | **Three**                   | ** ** | ** ** | **Three**                   | ** ** |
| ** **                                                                               | ** ** | **months ended**       | ** ** | ** ** | **months ended**       | ** ** |
| ** **                                                                               | ** ** | **June 30, 2008** | ** ** | ** ** | **June 30, 2007** | ** ** |
| **Operating Revenue**                                                               |       | $                           | 997,305    |       |                        | $          | 1,008,737 |   |
|                                                                                     |       |                        |       |       |                        |       |
| **Operating Costs and Expenses:**                                         |       |                        |       |       |                        |       |
| Cost of services rendered and products sold                |       | 589,734                     |       |       | 590,509                     |       |
| Selling and administrative expenses                                       |       | 247,114                     |       |       | 270,833                     |       |
| Amortization expense                                                                     |       | 41,968                      |       |       | 2,309                       |       |
| Merger related charges                                                                   |       | 305                         |       |       | 2,794                       |       |
| Restructuring charges                                                                    |       | 4,005                       |       |       | 8,260                       |       |
| Total operating costs and expenses                                   |       | 883,126                     |       |       | 874,705                     |       |
|                                                                                     |       |                        |       |       |                        |       |
| **Operating Income**                                                                     |       | 114,179                     |       |       | 134,032                     |       |
|                                                                                     |       |                        |       |       |                        |       |
| **Non-operating Expense (Income):**                                            |       |                        |       |       |                        |       |
| Interest expense                                                                    |       | 83,425                      |       |       | 13,879                      |       |
| Interest and net investment income                                        |       | (4,164                      | )          |       | (18,118                     | )          |
| Minority interest and other expense, net                        |       | 145                         |       |       | 1,472                       |       |
|                                                                                     |       |                        |       |       |                        |       |
| **Income from Continuing Operations  before Income Taxes**      |       | 34,773                      |       |       | 136,799                     |       |
| Provision for income taxes                                                     |       | 13,947                      |       |       | 46,546                      |       |
|                                                                                     |       |                        |       |       |                        |       |
| **Income from Continuing Operations**                                          |       | 20,826                      |       |       | 90,253                      |       |
|                                                                                     |       |                        |       |       |                        |       |
| Loss from businesses held pending sale and discontinued operations,  net of income taxes |       | (2,736                      | )          |       | (1,622                      | )          |
| **Net Income**                                                                      |       | $                           | 18,090     |       |                        | $          | 88,631 |   |

 

*See accompanying Notes to the CondensedConsolidated Financial Statements*

 

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### **THE SERVICEMASTER COMPANY**

### **Condensed Consolidated Statementsof Operations (Unaudited)**

*(Inthousands)*

 
| ** **                                                                                 | ** ** | **Successor**               | ** ** | ** ** | **Predecessor**             | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------|-----------------------------|------------|
| ** **                                                                                 | ** ** | **Six**                     | ** ** | ** ** | **Six**                     | ** ** |
| ** **                                                                                 | ** ** | **months ended**       | ** ** | ** ** | **months ended**       | ** ** |
| ** **                                                                                 | ** ** | **June 30, 2008** | ** ** | ** ** | **June 30, 2007** | ** ** |
| **Operating Revenue**                                                                 |       | $                           | 1,629,536  |       |                        | $          | 1,682,232 |   |
|                                                                                       |       |                        |       |       |                        |       |
| **Operating Costs and Expenses:**                                           |       |                        |       |       |                        |       |
| Cost of services rendered and products sold                  |       | 1,007,102                   |       |       | 1,033,859                   |       |
| Selling and administrative expenses                                         |       | 418,230                     |       |       | 464,052                     |       |
| Amortization expense                                                                       |       | 92,642                      |       |       | 4,575                       |       |
| Merger related charges                                                                     |       | 355                         |       |       | 5,334                       |       |
| Restructuring charges                                                                      |       | 7,330                       |       |       | 15,318                      |       |
| Total operating costs and expenses                                     |       | 1,525,659                   |       |       | 1,523,138                   |       |
|                                                                                       |       |                        |       |       |                        |       |
| **Operating Income**                                                                  |       | 103,877                     |       |       | 159,094                     |       |
|                                                                                       |       |                        |       |       |                        |       |
| **Non-operating Expense (Income):**                                              |       |                        |       |       |                        |       |
| Interest expense                                                                      |       | 173,011                     |       |       | 28,143                      |       |
| Interest and net investment loss (income)                                   |       | 1,881                       |       |       | (26,184                     | )          |
| Minority interest and other expense, net                          |       | 277                         |       |       | 3,521                       |       |
|                                                                                       |       |                        |       |       |                        |       |
| **(Loss) Income from Continuing Operations  before Income Taxes** |       | (71,292                     | )          |       | 153,614                     |       |
| (Benefit) provision for income taxes                                             |       | (17,024                     | )          |       | 53,313                      |       |
|                                                                                       |       |                        |       |       |                        |       |
| **(Loss) Income from Continuing Operations**                                     |       | (54,268                     | )          |       | 100,301                     |       |
|                                                                                       |       |                        |       |       |                        |       |
| Loss from businesses held pending sale and discontinued operations,  net of income taxes   |       | (3,484                      | )          |       | (3,121                      | )          |
| **Net (Loss) Income**                                                                 |       | $                           | (57,752    | )          |                        | $          | 97,180 |   |

 

*See accompanying Notes to the CondensedConsolidated Financial Statements*

 

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**THESERVICEMASTER COMPANY**

## **CondensedConsolidated Statements of Financial Position (Unaudited)**

*(In thousands, except share data)*

 
| ** **                                                                   | ** ** | **Successor**                     | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                   | ** ** | **As of June 30,** | ** ** | **As of December 31,** | ** ** |
| ** **                                                                   | ** ** | **2008**                          | ** ** | **2007** | ** ** |
| **Assets**                                                                   |       |                              |       |   |   |
| **Current Assets:**                                                          |       |                              |       |   |   |
| Cash and cash equivalents                                                    |       | $                                 | 225,366    |   | $ | 207,219 |   |
| Marketable securities                                                        |       | 30,278                            |       | 108,816 |   |
| Receivables, less allowance of $24,136 and  $20,994, respectively            |       | 395,079                           |       | 336,068 |   |
| Inventories                                                                  |       | 83,611                            |       | 72,352 |   |
| Prepaid expenses and other assets                                            |       | 77,407                            |       | 26,843 |   |
| Deferred customer acquisition costs                                          |       | 58,269                            |       | 25,322 |   |
| Deferred taxes                                                               |       | 38,235                            |       | 48,177 |   |
| Assets of businesses held pending sale and  discontinued operations          |       | 31,124                            |       | 42,474 |   |
| Total Current Assets                                                         |       | 939,369                           |       | 867,271 |   |
| **Property and Equipment:**                                                  |       |                              |       |   |   |
| At cost                                                                      |       | 220,478                           |       | 210,144 |   |
| Less: accumulated depreciation                                               |       | (46,144                           | )          | (22,147 | ) |
| Net property and equipment                                                   |       | 174,334                           |       | 187,997 |   |
|                                                                         |       |                              |       |   |   |
| **Other Assets:**                                                            |       |                              |       |   |   |
| Goodwill                                                                     |       | 3,058,314                         |       | 3,049,923 |   |
| Intangible assets, primarily trade names, service marks and  trademarks, net |       | 3,095,382                         |       | 3,185,253 |   |
| Notes receivable                                                             |       | 27,418                            |       | 26,401 |   |
| Long-term marketable securities                                              |       | 134,221                           |       | 152,974 |   |
| Other assets                                                                 |       | 35,520                            |       | 36,299 |   |
| Debt issuance costs                                                          |       | 64,894                            |       | 84,942 |   |
| Total Assets                                                                 |       | $                                 | 7,529,452  |   | $ | 7,591,060 |   |
|                                                                         |       |                              |       |   |   |
| **Liabilities and Shareholder’s Equity**                                |       |                              |       |   |   |
|                                                                         |       |                              |       |   |   |
| **Current Liabilities:**                                                     |       |                              |       |   |   |
| Accounts payable                                                             |       | $                                 | 124,536    |   | $ | 103,400 |   |
| Accrued liabilities:                                                         |       |                              |       |   |   |
| Payroll and related expenses                                                 |       | 90,615                            |       | 132,054 |   |
| Self-insured claims and related expenses                                     |       | 95,590                            |       | 84,781 |   |
| Other                                                                        |       | 142,999                           |       | 138,049 |   |
| Deferred revenue                                                             |       | 499,474                           |       | 408,476 |   |
| Liabilities of businesses held pending sale  and discontinued operations     |       | 14,627                            |       | 12,983 |   |
| Current portion of long-term debt                                            |       | 45,475                            |       | 53,564 |   |
| Total Current Liabilities                                                    |       | 1,013,316                         |       | 933,307 |   |
|                                                                         |       |                              |       |   |   |
| **Long-Term Debt**                                                           |       | 4,055,918                         |       | 4,077,247 |   |
|                                                                         |       |                              |       |   |   |
| **Other Long-Term Liabilities:**                                             |       |                              |       |   |   |
| Deferred taxes                                                               |       | 1,038,608                         |       | 1,079,500 |   |
| Liabilities of businesses held pending sale  and discontinued operations     |       | 5,629                             |       | 7,765 |   |
| Other long-term obligations, primarily  self-insured claims                  |       | 160,614                           |       | 189,707 |   |
| Total Other Long-Term Liabilities                                            |       | 1,204,851                         |       | 1,276,972 |   |
|                                                                         |       |                              |       |   |   |
| **Commitments and Contingencies (See Note 5)**                               |       |                              |       |   |   |
|                                                                         |       |                              |       |   |   |
| **Shareholder’s Equity:**                                               |       |                              |       |   |   |
| Common stock $0.01 par value, authorized  1,000 shares; issued 1,000 shares  |       | —                            |       | — |   |
| Additional paid-in capital                                                   |       | 1,434,800                         |       | 1,431,400 |   |
| Retained deficit                                                             |       | (181,272                          | )          | (123,520 | ) |
| Accumulated other comprehensive income  (loss)                               |       | 1,839                             |       | (4,346 | ) |
| Total Shareholder’s Equity                                              |       | 1,255,367                         |       | 1,303,534 |   |
| Total Liabilities and Shareholder’s Equity                              |       | $                                 | 7,529,452  |   | $ | 7,591,060 |   |

 

*See accompanying Notes to the Condensed Consolidated FinancialStatements*

 

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**THESERVICEMASTER COMPANY**

## **Condensed Consolidated Statements of Cash Flows (Unaudited)**

*(In thousands)*

 
| ** **                                                                                  | ** ** | **Successor**               | ** ** | ** ** | **Predecessor**             | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------|-----------------------------|------------|
| ** **                                                                                  | ** ** | **Six**                     | ** ** | ** ** | **Six**                     | ** ** |
| ** **                                                                                  | ** ** | **months ended**       | ** ** | ** ** | **months ended**       | ** ** |
| ** **                                                                                  | ** ** | **June 30, 2008** | ** ** | ** ** | **June 30, 2007** | ** ** |
| **Cash and Cash Equivalents at Beginning of Period**                                        |       | $                           | 207,219    |       |                        | $          | 123,675 |   |
|                                                                                        |       |                        |       |       |                        |       |
| **Cash Flows from Operating Activities from Continuing Operations:**                        |       |                        |       |       |                        |       |
| **Net (Loss) Income**                                                                       |       | (57,752                     | )          |       | 97,180                      |       |
| Adjustments to reconcile net (loss) income to net cash provided from  operating activities: |       |                        |       |       |                        |       |
| Loss from discontinued operations                                                           |       | 3,484                       |       |       | 3,121                       |       |
| Depreciation expense                                                                        |       | 25,951                      |       |       | 24,372                      |       |
| Amortization expense                                                                        |       | 92,642                      |       |       | 4,575                       |       |
| Amortization of debt issuance costs                                                         |       | 18,269                      |       |       | 1,138                       |       |
| Option and restricted stock expense                                                         |       | 3,401                       |       |       | 3,058                       |       |
| Restructuring charges                                                                       |       | 7,330                       |       |       | 15,318                      |       |
| Cash payments related to restructuring charges                                              |       | (16,236                     | )          |       | (6,012                      | )          |
| Merger related charges                                                                      |       | 355                         |       |       | 5,334                       |       |
| Change in working capital, net of acquisitions:                                             |       |                        |       |       |                        |       |
| Current and deferred income taxes                                                           |       | (22,941                     | )          |       | 34,087                      |       |
| Receivables                                                                                 |       | (59,455                     | )          |       | (68,024                     | )          |
| Inventories and other current assets                                                        |       | (88,273                     | )          |       | (65,180                     | )          |
| Accounts payable                                                                            |       | 22,291                      |       |       | 17,318                      |       |
| Deferred revenue                                                                            |       | 88,910                      |       |       | 64,851                      |       |
| Accrued liabilities                                                                         |       | (4,056                      | )          |       | 3,061                       |       |
| Other, net                                                                                  |       | 4                           |       |       | 2,480                       |       |
| **Net Cash Provided from Operating Activities from Continuing  Operations**                 |       | 13,924                      |       |       | 136,677                     |       |
|                                                                                        |       |                        |       |       |                        |       |
| **Cash Flows from Investing Activities from Continuing Operations:**                        |       |                        |       |       |                        |       |
| Property additions                                                                          |       | (18,121                     | )          |       | (24,239                     | )          |
| Sale of equipment and other assets                                                          |       | 4,560                       |       |       | 1,076                       |       |
| Acquisition of The ServiceMaster Company                                                    |       | (20,957                     | )          |       | (3,546                      | )          |
| Other business acquisitions, net of cash acquired                                           |       | (9,961                      | )          |       | (25,217                     | )          |
| Notes receivable, financial investments and securities                                      |       | 76,987                      |       |       | 49,340                      |       |
| **Net Cash Provided from (Used for) Investing Activities from  Continuing Operations**      |       | 32,508                      |       |       | (2,586                      | )          |
|                                                                                        |       |                        |       |       |                        |       |
| **Cash Flows from Financing Activities from Continuing Operations:**                        |       |                        |       |       |                        |       |
| Borrowings of debt                                                                          |       | 182,000                     |       |       | 415,411                     |       |
| Payments of debt                                                                            |       | (217,288                    | )          |       | (458,245                    | )          |
| Shareholders’ dividends                                                                |       | —                      |       |       | (70,077                     | )          |
| Debt issuance costs paid                                                                    |       | (99                         | )          |       | —                      |       |
| Proceeds from employee share plans                                                          |       | —                      |       |       | 36,277                      |       |
| **Net Cash  Used for Financing Activities from Continuing Operations**                      |       | (35,387                     | )          |       | (76,634                     | )          |
| ** **                                                                                  |       |                        |       |       |                        |       |
| **Cash Flows from Discontinued Operations:**                                                |       |                        |       |       |                        |       |
| Cash provided from operating activities                                                     |       | 7,389                       |       |       | 10,719                      |       |
| Cash (used for) provided from investing activities                                          |       | (191                        | )          |       | 1,006                       |       |
| Cash used for financing activities                                                          |       | (96                         | )          |       | (159                        | )          |
| **Net Cash Provided from Discontinued Operations**                                          |       | 7,102                       |       |       | 11,566                      |       |
|                                                                                        |       |                        |       |       |                        |       |
| **Cash Increase During the Period**                                                         |       | 18,147                      |       |       | 69,023                      |       |
|                                                                                        |       |                        |       |       |                        |       |
| **Cash and Cash Equivalents at End of Period**                                              |       | $                           | 225,366    |       |                        | $          | 192,698 |   |

 

*See accompanying Notes to the CondensedConsolidated Financial Statements*

 

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# **THE SERVICEMASTER COMPANY**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**Note 1. Basis of Presentation**

 

The condensed consolidated financialstatements include the accounts of The ServiceMaster Company and itssubsidiaries, collectively referred to as the “Company” or “ServiceMaster”.

 

On March 18, 2007,ServiceMaster entered into an Agreement and Plan of Merger (the “MergerAgreement”) with ServiceMaster Global Holdings, Inc. (formerly CDRSVMTopco, Inc.) (“Holdings”) and CDRSVM Acquisition Co., Inc., anindirect wholly owned subsidiary of Holdings (“Acquisition Co.”). The MergerAgreement provided that, upon the terms and subject to the conditions set forthin the Merger Agreement, Acquisition Co. would merge with and intoServiceMaster, with ServiceMaster as the surviving corporation (the “Merger”).

 

On July 24, 2007 (the “Closing Date”), the Merger was completed,and each issued and outstanding share of ServiceMaster common stock, other thanshares held by ServiceMaster or Holdings or their subsidiaries and shares heldby stockholders who validly perfected their appraisal rights under Delawarelaw, was converted into the right to receive $15.625 in cash (the “MergerConsideration”). Each share of ServiceMaster common stock owned by ServiceMaster,Holdings or Acquisition Co. or any of their respective direct or indirectwholly-owned subsidiaries was cancelled and retired, and no consideration waspaid in exchange for it.

 

Although ServiceMaster continued as the same legal entity after the Merger, the accompanyingcondensed consolidated financial statements are presented for two periods:Predecessor and Successor, which relate to the period preceding the Merger andthe period succeeding the Merger, respectively. The Company refers to the operationsof ServiceMaster for both the Predecessor and Successor periods. The condensedconsolidated statements of financial position as of June 30, 2008 and December 31,2007, the condensed consolidated statements of operations and of cash flows forthe six months ended June 30, 2008 and the condensed consolidatedstatement of operations for the three months ended June 30, 2008 reflectthe financial position, operations and cash flows of the Successor. Thecondensed consolidated statements of operations and of cash flows for the sixmonths ended June 30, 2007 and the condensed consolidated statement ofoperations for the three months ended June 30, 2007 reflect the operationsand cash flows of the Predecessor.

 

As a result of the consummation of the Merger and the application of purchase accounting described inNote 3, the condensed consolidated financial statements for the Predecessor andSuccessor are not comparable.

 

The condensed consolidated financialstatements have been prepared by the Company in accordance with generallyaccepted accounting principles in the United States (“GAAP”) and pursuant tothe rules and regulations of the Securities and Exchange Commission (“SEC”).The Company recommends that the quarterly condensed consolidated financialstatements be read in conjunction with the consolidated financial statementsand the notes thereto included in the Company’s Annual Report on Form 10-Kfiled with the SEC for the year ended December 31, 2007 (“2007 AnnualReport”). The condensed consolidated financial statements reflect alladjustments which are, in the opinion of management, necessary for the fairpresentation of the financial position, results of operations and cash flowsfor the interim periods presented. All intercompany transactions and balanceshave been eliminated in consolidation. The financial results as well as theassets and liabilities related to InStar have been classified in the financialstatement caption “businesses held pending sale and discontinued operations” inall periods due to the classification of InStar as held for sale in 2007. Theresults of operations for any interim period are not necessarily indicative ofthe results which might be achieved for a full year.

 

**Note 2. Significant Accounting Policies**

 

The Company has identified the most importantaccounting policies with respect to its financial position and results ofoperations. These relate primarily to revenue recognition and the deferral ofcustomer acquisition costs. The following revenue recognition policies have notchanged from those disclosed in the 2007 Annual Report.

 

Revenues from lawn care and pest control services,as well as liquid and fumigation termite applications, are recognized as theservices are provided. Revenues from landscaping services are recognized asthey are earned based upon contract arrangements or when services are performedfor non-contractual arrangements. The Company eradicates termites through theuse of baiting systems, as well as through non-baiting methods (e.g.,fumigation or liquid treatments). Termite services using baiting systems,termite inspection and protection contracts, and home warranty services arefrequently sold 

 

7

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throughannual contracts for a one-time, upfront payment. Direct costs of thesecontracts (service costs for termite contracts and claim costs for warrantycontracts) are expensed as incurred. The Company recognizes revenue over thelife of these contracts in proportion to the expected direct costs. Those costsbear a direct relationship to the fulfillment of the Company’s obligationsunder the contracts and are representative of the relative value provided tothe customer (proportional performance method). Home warranty contract revenueis recognized based on the expected emergence of total claim costs. The Companyregularly reviews its estimates of direct costs for its termite bait and homewarranty contracts and adjusts the estimates when appropriate. Revenuefrom trade name licensing arrangements is recognized when earned. The Companyhas franchise agreements in its TruGreen LawnCare, Terminix, ServiceMasterClean, Merry Maids, AmeriSpec and Furniture Medic businesses. Franchise revenue(which in the aggregate represents approximately four percent of consolidatedrevenue from continuing operations) consists principally of continuing monthlyfees based upon the franchisee’s customer level revenue. Monthly fee revenue isrecognized when the related customer level revenue is reported by thefranchisee and collectibility is assured. Franchise revenue also includesinitial fees resulting from the sale of a franchise. These fees are fixed andare recognized as revenue when collectibility is assured and all materialservices or conditions relating to the sale have been substantially performed.Total profits from the franchised operations (excluding trade name licensing)were approximately $18 million and $15 million for the three months ended June 30,2008 and 2007, respectively, and consolidated operating income from continuingoperations was approximately $114 million and $134 million for the three monthsended June 30, 2008 and 2007, respectively. Total profits from thefranchised operations (excluding trade name licensing) were approximately $32million and $27 million for the six months ended June 30, 2008 and 2007,respectively, and consolidated operating income from continuing operations wasapproximately $104 million and $159 million for the six months ended June 30,2008 and 2007, respectively. The portion of total franchise fee income relatedto initial fees received from the sale of franchises was immaterial to theCompany’s consolidated financial statements for all periods.

 

The Company had $499 million and $408 millionof deferred revenue at June 30, 2008 and December 31, 2007,respectively. Deferred revenue consists primarily of payments received forannual contracts relating to home warranty, termite, pest control and lawn careservices.

 

Customer acquisition costs, which areincremental and direct costs of obtaining a customer, are deferred andamortized over the life of the related contract in proportion to revenuerecognized. These costs include sales commissions and direct selling costswhich can be shown to have resulted in a successful sale.

 

TruGreen LawnCare has significant seasonalityin its business. In the winter and spring, this business sells a series oflawn applications to customers which are rendered primarily in March throughOctober (the production season). This business incurs incremental sellingexpenses at the beginning of the year that directly relate to successful salesfor which the revenues are recognized in later quarters. On an interim basis,TruGreen LawnCare defers these incremental selling expenses, pre-seasonadvertising costs and annual repairs and maintenance procedures that areperformed primarily in the first quarter. These costs are deferred andrecognized in proportion to the contract revenue over the production season,and are not deferred beyond the calendar year-end. Other business segments ofthe Company also defer, on an interim basis, advertising costs incurred earlyin the year. These costs are deferred and recognized approximately inproportion to revenue over the balance of the year, and are not deferred beyondthe calendar year-end.

 

The cost of direct-response advertising atTerminix and TruGreen LawnCare, consisting primarily of direct-mail promotions,is capitalized and amortized over its expected period of future benefits.

 

The fair values of the Company’s financialinstruments reflect the amounts that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participantsat the measurement date (exit price). The fair value estimates presented inthis report are based on information available to the Company as of June 30, 2008 and December 31,2007.

 

The preparation of the condensed consolidatedfinancial statements requires management to make certain estimates andassumptions required under GAAP which may differ from actual results.Disclosures in the 2007 Annual Report presented the significant areas thatrequire the use of management’s estimates and discussed how management formedits judgments. The areas discussed included revenue recognition; the allowancefor uncollectible receivables; accruals for self-insured retention limitsrelated to medical, workers’ compensation, auto and general liability insuranceclaims; accruals for home warranty and termite damage claims; the possibleoutcome of outstanding litigation; accruals for income tax liabilities as wellas deferred tax accounts; the deferral and amortization of customer acquisitioncosts; useful lives for depreciation and amortization expense; and thevaluation of tangible and intangible assets.

 

8

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**Note 3.Acquisition of ServiceMaster**

 

As discussed in Note 1,the Merger was completed on July 24, 2007.

 

Immediately following thecompletion of the Merger, all of the outstanding capital stock of Holdings, theultimate parent company of ServiceMaster, was owned by investment fundssponsored by, or affiliates of, Clayton, Dubilier & Rice, Inc. (“CD&R”),Citigroup Private Equity L.P., BAS Capital Funding Corporation andJ.P. Morgan Ventures Corporation (collectively, the “Equity Sponsors”).

 

Equity contributionstotaling $1,431 million from the Equity Sponsors, together with (i) borrowingsunder a new $1,150 million senior unsecured interim loan facility (“InterimLoan Facility”), (ii) borrowings under a new $2,650 million seniorsecured term loan facility and (iii) cash on hand at ServiceMaster, wereused, among other things, to finance the aggregate Merger Consideration, tomake payments in satisfaction of other equity-based interests in ServiceMasterunder the Merger Agreement, to settle existing interest rate swaps, to redeemor provide for the repayment of certain of the Company’s existing indebtednessand to pay related transaction fees and expenses. In addition, letters ofcredit issued under a new $150 million pre-funded letter of creditfacility (together with the senior secured term loan facility, the “TermFacilities”) were used to replace and/or secure letters of credit previouslyissued under a ServiceMaster credit facility that was terminated as of theClosing Date. On the Closing Date, the Company also entered into, but did notdraw under, a new $500 million senior secured revolving credit facility(the “Revolving Credit Facility”).

 

In connection with theMerger and the related transactions (the “Transactions”), ServiceMaster retiredcertain of its existing indebtedness, including ServiceMaster’s$179.0 million, 7.875% notes due August 15, 2009 (the “2009 Notes”).On the Closing Date, the 2009 Notes were called for redemption and they wereredeemed on August 29, 2007. Additionally, the Company utilized a portionof the proceeds from the Term Facilities to repay at maturity ServiceMaster’s$49.2 million, 6.95% notes due August 15, 2007.

 

The Interim Loan Facility matured on July 24,2008. On the maturity date, outstanding amounts under the Interim Loan Facilitywere converted on a one to one basis into 10.75%/11.50% senior toggle notes due2015 (“Permanent Notes”). The Permanent Notes were issued pursuant to arefinancing indenture. In connection with the issuance of Permanent Notes,ServiceMaster entered into a registration rights agreement, pursuant to whichServiceMaster will be required to file with the SEC a registration statementwith respect to the resale of the Permanent Notes.

 

See Note 14 to theconsolidated financial statements in the 2007 Annual Report for a descriptionof the Company’s indebtedness.

 

The Company accounted forthe Merger in accordance with SFAS No. 141, “Business Combinations”, whichrequires the cost of the Merger to be allocated to the assets and liabilitiesof the Company based on fair value. The Merger and the allocation of thepurchase price have been recorded as of July 25, 2007.

 

The excess of the purchaseprice over the net tangible and intangible assets acquired was recorded asgoodwill. The Company recorded purchase accounting adjustments to increase thecarrying value of property, to establish intangible assets for trade names,service marks and trademarks (“trade names”), customer relationships, franchiseagreements, backlog and lease commitments, among other things, as well as toreduce to fair value deferred revenue and deferred customer acquisition costs.

 

9

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The purchase price has been allocated as follows:

 

| **(In millions)**                                        | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|
| Purchase  consideration                                       |       | $          | 4,893      |   |
| Net assets  acquired (historical basis)                       |       | (1,262     | )          |
| Purchase  price in excess of historical assets                |       | $          | 3,631      |   |
| Identifiable  intangible assets:                              |       |       |       |
| Trade names                                                   |       | $          | 2,484      |   |
| Customer  relationships                                       |       | 652        |       |
| Franchise  agreements                                         |       | 88         |       |
| Backlog                                                       |       | 68         |       |
| Subcontractor  and realtor network                            |       | 10         |       |
| Favorable  lease commitments                                  |       | 10         |       |
| Software                                                      |       | 17         |       |
| Total  identifiable intangible assets                         |       | 3,329      |       |
| Eliminate  historical basis of identifiable intangible assets |       | (249       | )          |
| Net  adjustment to identifiable intangible assets             |       | 3,080      |       |
| Goodwill                                                      |       | 1,377      |       |
| Current  assets (deferred customer acquisition costs)         |       | (68        | )          |
| Current  liabilities (primarily deferred revenue)             |       | 94         |       |
| Fixed assets                                                  |       | 29         |       |
| Fair value  adjustment to existing debt                       |       | 88         |       |
| Other  non-current liabilities                                |       | (5         | )          |
| Historical  debt issuance fees written off                    |       | (16        | )          |
| Deferred  taxes                                               |       | (951       | )          |
| Other                                                         |       | 3          |       |
| Allocation  of purchase price in excess of historical assets  |       | $          | 3,631      |   |

 

Goodwill and most tradenames are indefinite-lived intangible assets. As a result, goodwill and indefinite-livedtrade names will not be amortized but will be evaluated for impairment at leastannually.

 

The Company incurred certain costs related to theMerger that are presented as “Merger related charges” in the CondensedConsolidated Statements of Operations and are recorded in the Other Operationsand Headquarters business segment.

 

**Note 4. Restructuring Charges**

 

The Company is engaged in areorganization and restructuring of certain of its businesses and supportfunctions (“Fast Forward”). Among the purposes of Fast Forward is to eliminatelayers and bureaucracy and simplify work processes in order to better align theCompany’s work processes around its operational and strategic objectives. It isexpected that Fast Forward will be effected in phases. The first phaseinvolved, among other things, a reduction in work force and various processimprovements, including the closing of American Home Shield’s call centerlocated in Santa Rosa, California. The second phase is expected to include theorganization of certain corporate support functions into Centers of Excellencewhich are expected to deliver higher quality services to our business units atlower costs, the outsourcing to third party vendors of various businessactivities that currently are handled internally, as well as other employeeworkforce reductions expected to result in cost-savings. The first phase ofFast Forward was substantially completed in the first quarter of 2008, and thesecond phase is expected to begin implementation in the second half of 2008.

 

In connection with FastForward, the Company incurred costs in the three and six months ended June 30,2008 of approximately $4.1 million and $6.7 million, respectively. Suchcosts included consulting fees of approximately $2.1 million andseverance, lease termination and other costs of approximately $2.0 millionfor the three months ended June 30, 2008. These charges includedconsulting fees of approximately $3.7 million and severance, lease terminationand other costs of approximately $3.0 million for the six months ended June 30,2008. No restructuring charges related to Fast Forward were incurred in thethree and six months ended June 30, 2007.

 

The resultsfor the three and six months ended June 30, 2007 include restructuringcharges related to the Company’s consolidation of its corporate headquartersinto its operations support center in Memphis, Tennessee and the closing of itsheadquarters in Downers Grove, Illinois. The transition to Memphis was substantiallycompleted in 2007. Almost all costs related to the transition were cashexpenditures, and, in accordance with GAAP, these costs were expensedthroughout the transition period. In the three and six months ended June 30,2007, the Company recognized charges of approximately $8.3 million and $15.3million, respectively. These charges consisted of $5.8 million of employeeretention and severance and $2.5 million of recruiting and related costs forthe three months ended June 30, 2007. These charges consisted of $11.4 

 

10

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million of employee retention and severance and $3.9million of recruiting and related costs for the six months ended June 30,2007.

 

During the three and sixmonths ended June 30, 2008, the Company reversed net expenses of $0.1million and recorded additional expenses of $0.6 million, respectively,relating to this relocation, which includes additional severance and othercosts.

 

The pretax charges discussed above are reported inthe “Restructuring charges” line in the Condensed Consolidated Statements ofOperations.

 

**Note 5. Commitments and Contingencies**

 

The Company carries insurance policies oninsurable risks at levels that it believes to be appropriate, including workers’compensation, auto and general liability risks. The Company has bothself-insured retention limits and layers of excess insurance coverage abovesuch self-insured retention limits that is insured by third parties. TheCompany is required to pay all claims that fall below the retention limits. As ofJune 30, 2008 and December 31, 2007, the Company had accruedself-insured claims of $150 million and $159 million, respectively. During thesix months ended June 30, 2008 and 2007, the Company recorded provisionsfor uninsured claims totaling $19 million and $24 million, respectively, andthe Company paid claims totaling $28 million and $32 million, respectively. TheCompany uses historical claims experience to establish both the current yearaccrual and the underlying provision for future losses. This actuariallydetermined provision and related accrual includes both known claims, as well asincurred but not reported claims. The Company adjusts its estimate of accruedself-insured claims when required to reflect changes based on factors such aschanges in health care costs, accident frequency and claim severity.

 

Accruals for warranty claims in the AmericanHome Shield business are made based on the Company’s claims experience andactuarial projections. Termite damage claim accruals are recorded based on boththe historical rates of claims incurred within a contract year and the cost perclaim. Current activity could differ causing a change in estimates. The Companyhas certain liabilities with respect to existing or potential claims, lawsuitsand other proceedings. The Company accrues for these liabilities when it isprobable that future costs will be incurred and such costs can be reasonablyestimated. Any resulting adjustments, which could be material, are recorded inthe period the adjustments are identified.

 

The Company maintains lease facilities with bankstotaling $65 million, which provide for the financing of branch propertiesto be leased by the Company. At June 30, 2008, approximately$65 million was funded under these facilities. Approximately $12 millionof these leases are treated as capital leases and have been included on thebalance sheet as assets with related debt as of June 30, 2008. The balanceof the funded amount is treated as operating leases. The Company has guaranteedthe residual value of the properties under the leases up to 73 percent ofthe fair market value at the commencement of the lease. At June 30, 2008,the Company’s residual value guarantee related to the leased assets totaled $53million for which the Company has recorded the estimated fair value of thisguarantee (approximately $0.1 million) in the Condensed ConsolidatedStatement of Financial Position. In connection with the closing of the Merger,the Company amended these leases effective July 24, 2007. Among themodifications, the Company extended the lease terms through July 24, 2010.The operating lease and capital lease classifications of these leases did notchange as a result of the modifications.

 

The majority of the Company’s vehicle fleet and someequipment are leased through operating leases. The lease terms arenon-cancelable for the first twelve-month term, and then are month-to-month,cancelable at the Company’s option. There are residual value guarantees by theCompany (ranging from 70 percent to 87 percent of the estimatedterminal value at the inception of the lease depending on the agreement)relative to these vehicles and equipment, which historically have not resultedin significant net payments to the lessors. At June 30, 2008, there wasapproximately $161 million of residual value relating to the Company’sfleet and equipment leases. Approximately $52 million of this residual value iswith a lessor that has exercised its option to terminate the lease effective August 2008.The cost of acquiring the assets subject to these leases is expected to amountto approximately $50 million. The fair value of the assets under all ofthe fleet and equipment leases is expected to substantially mitigate theCompany’s guarantee obligations under the agreements. At June 30, 2008,the Company has recorded the estimated fair value of this guarantee ofapproximately $2.9 million in the Condensed Consolidated Statement ofFinancial Position.

 

The Company has guaranteeson certain bonds issued by divested companies, primarily performance typebonds. The maximum payments the Company could be required to make if the buyersof the divested companies are unable to fulfill their obligations isapproximately $2 million at June 30, 2008. Substantially all of thebonds are scheduled to expire in 2008, but may be extended depending onthe completion of the related projects. The Company believes that if it were toincur a loss on 

 

11

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any individual bond guarantee, the likelihood ofwhich the Company believes is remote, such loss would not have a materialeffect on the Company’s business, financial condition, annual results ofoperations or cash flows.

 

In the ordinary course of conducting itsbusiness activities, the Company becomes involved in judicial, administrativeand regulatory proceedings involving both private parties and governmentalauthorities. These proceedings include general and commercial liability andemployment actions as well as environmental proceedings. The Company does notexpect any of these proceedings to have a material effect on the Company’sbusiness, financial condition, annual results of operations or cash flows.

 

**Note 6. Goodwill and Intangible Assets**

 

Inaccordance with SFAS No. 142, “Goodwill and Other Intangible Assets”,goodwill and intangible assets that are not amortized are subject to assessmentfor impairment by applying a fair-value based test on an annual basis or morefrequently if circumstances indicate a potential impairment. The Company’sannual assessment date is October 1.

 

The table below summarizes the goodwill balances bysegment for continuing operations:

 
| **(In  thousands)**            | ** ** | **TruGreen  LawnCare** | ** ** | **TruGreen  LandCare** | ** ** | **Terminix** | ** ** | **American  Home  Shield** | ** ** | **Other  Operations  and  Headquarters** | ** ** | **Total** | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|--------------|------------|----------------------------|------------|------------------------------------------|------------|-----------|------------|
| Balance at Dec. 31,  2007 |       | $                      | 1,143,670  |                   | $          | 47,872       |       | $                          | 1,323,953  |                                     | $          | 350,079   |       | $ | 184,349 |   | $ | 3,049,923 |   |
| Acquisitions                   |       | 6,912                  |       | —                 |       | 4,361        |       | —                     |       | 52                                       |       | 11,325    |       |
| Other(1)                       |       | (1,031                 | )          | (995                   | )          | (1,118       | )          | (423                       | )          | 633                                      |       | (2,934    | )          |
| Balance at June 30,  2008 |       | $                      | 1,149,551  |                   | $          | 46,877       |       | $                          | 1,327,196  |                                     | $          | 349,656   |       | $ | 185,034 |   | $ | 3,058,314 |   |

 

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(1)                        Primarily reflects the tax effect of theamortization of tax deductible goodwill and the impact of the resolution ofcertain tax items. Also reflects adjustments to the preliminary purchase priceallocation related to the Merger.

 

The table below summarizes the other intangibleasset balances for continuing operations:

 
| ** **                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-------------------|------------|-----------------------|------------|
| **(In thousands)**   | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Trade  names(1)           |       | $                 | 2,468,200  |                  | $          | 2,468,200 |   |
| Other  intangible assets  |       | 852,486           |       | 849,715               |       |
| Accumulated  amortization |       | (225,304          | )          | (132,662              | )          |
| Net other  intangibles    |       | 627,182           |       | 717,053               |       |
| Total                     |       | $                 | 3,095,382  |                  | $          | 3,185,253 |   |

 

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(1)                                 Not subject to amortization.

 

**Note 7. Stock-Based Compensation**

 

On November 20,2007, the board of directors of Holdings adopted the ServiceMaster GlobalHoldings, Inc. Stock Incentive Plan (the “Stock Incentive Plan”). TheStock Incentive Plan provides for the sale of shares of Holdings stock toServiceMaster’s executive officers, other key employees and directors as wellas the grant of deferred share units and options to purchase shares of Holdingsto those individuals. The board of directors of Holdings, or a committeedesignated by it, selects the officers, employees and directors eligible toparticipate in the Stock Incentive Plan and determines the specific number ofshares to be offered or options to be granted to an individual employee ordirector. A maximum of 12,445,000 shares of Holdings stock are reserved forissuance under the Stock Incentive Plan. Holdings currently intends to satisfyany need for shares of common stock of Holdings associated with the exercise ofoptions issued under the Stock Incentive Plan through those new shares reservedfor issuance.

 

All optiongrants under the Stock Incentive Plan will be non-qualified options with aper-share exercise price no less than the fair market value of one share ofHoldings stock on the grant date. Any stock options granted will generally havea term of ten years and vesting will be subject to an employee’s continuedemployment. The board of directors of Holdings, or a committee designated byit, may accelerate the vesting of an option at any time. In addition,vesting of options will be accelerated if Holdings experiences a change incontrol (as defined in the Stock Incentive Plan) unless options withsubstantially equivalent terms and economic value are substituted for existingoptions in place of accelerated vesting. Vesting of options will also beaccelerated in the event of an employee’s death or disability (as defined in theStock Incentive Plan). 

 

12

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Upon a termination for cause (as defined inthe Stock Incentive Plan), all options held by an employee are immediatelycancelled. Following a termination without cause, vested options will generallyremain exercisable through the earliest of the expiration of their term orthree months following termination of employment (one year in the case ofdeath, disability or retirement at normal retirement age).

 

Unless soonerterminated by the board of directors of Holdings, the Stock Incentive Plan willremain in effect until November 20, 2017.

 

All optionsgranted will vest in four equal annual installments, subject to an employee’scontinued employment. The four-year vesting period is the requisite serviceperiod over which compensation cost will be recognized on a straight-line basisfor all grants. The options will be accounted for as equity-classified awards.The non-cash stock-based compensation expense associated with the Stock IncentivePlan is pushed down from Holdings and recorded in the financial statements ofServiceMaster.

 

During the Successor threeand six months ended June 30, 2008, stock-based compensation expense wasapproximately $1.7 million ($1.0 million after-tax) and $3.4 million ($2.6million after-tax), respectively. During the Predecessor three and six monthsended June 30, 2007, stock-based compensation expense was approximately$1.5 million ($1.0 million after-tax) and $3.1 million ($2.0 millionafter-tax), respectively.

 

As of June 30, 2008,there was approximately $24.1 million of total unrecognized compensation costrelated to non-vested options to purchase shares of Holdings stock. Theseremaining costs are expected to be recognized over the remaining 3.5 years ofthe four-year requisite service period.

 

**Note 8.Supplemental Cash Flow Information**

 

In thecondensed consolidated statements of cash flows, the caption Cash and CashEquivalents includes investments in short-term, highly-liquid securities havinga maturity of three months or less when purchased. Supplemental informationrelating to the condensed consolidated statements of cash flows for theSuccessor six months ended June 30, 2008 and the Predecessor six monthsended June 30, 2007 is presented in the following table:

 

| ** **                                                     | ** ** | **Successor**               | ** ** | ** ** | **Predecessor**             | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|------------|-----------------------------|------------|
| ** **                                                     | ** ** | **Six**                     | ** ** | ** ** | **Six**                     | ** ** |
| **(In thousands)**                                        | ** ** | **months ended**       | ** ** | ** ** | **months ended**       | ** ** |
| **Cash paid for or (received from):** | ** ** | **June 30, 2008** | ** ** | ** ** | **June 30, 2007** | ** ** |
| Interest expense                                               |       | $                           | 158,012    |       |                        | $          | 27,136 |   |
| Interest and dividend income                                   |       | (7,342                      | )          |       | (6,445                      | )          |
| Income taxes, net of refunds                                   |       | 5,913                       |       |       | 17,221                      |       |
|                                                                |            |                             |            |            |                             |            |  |  |

 

**Note 9. Comprehensive Income**

 

Totalcomprehensive income (loss) was $39 million and ($51) million for the Successorthree and six months ended June 30, 2008, respectively, and $89 millionand $99 million for the Predecessor three and six months ended June 30,2007, respectively. Total comprehensive income primarily includes net income,unrealized gains/(losses) on marketable securities, unrealized gains/(losses)on derivative instruments and the effect of foreign currency translation.

 

**Note 10.Receivable Sales**

 

The Company has anarrangement to provide for the ongoing revolving sale of a designated pool ofaccounts receivable of TruGreen LawnCare and Terminix to a wholly-owned,bankruptcy-remote subsidiary, ServiceMaster Funding Company LLC.ServiceMaster Funding Company LLC has entered into an arrangement pursuantto which it may transfer, on a revolving basis, an undivided percentageownership interest in a pool of accounts receivable to unrelated third partypurchasers. ServiceMaster Funding Company LLC retains an undividedpercentage interest in the pool of accounts receivable and bad debt losses forthe entire pool are allocated first to this retained interest. During theSuccessor three and six months ended June 30, 2008 and the Predecessorthree and six months ended June 30, 2007, there were no receivables soldto third parties under this arrangement. However, the Company may sell itsreceivables in the future which would provide an alternative funding source.The arrangement is a 364-day facility that is renewable at the option ofServiceMaster Funding Company LLC, with a final termination date of July 17,2012. The Company may sell up to $50 million of its receivables tothese purchasers and therefore has immediate access to cash proceeds from thesesales. The amount of the eligible receivables varies during the year based onseasonality of the business and could, at times, limit the amount available tothe Company. There is presently only one purchaser that is required to purchasereceivables under the arrangement. If this purchaser were to 

 

13

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exerciseits right to terminate its participation in the arrangement, which it may doin the third quarter of each year, the amount of cash available to the Company may bereduced or eliminated.

 

**Note 11.Cash and Marketable Securities**

 

Cash, moneymarket funds and certificates of deposits, with maturities of three months orless, are included in the Statements of Financial Position caption “Cash andCash Equivalents.” As of June 30, 2008 and December 31, 2007, theCompany’s investments consist primarily of domestic publicly traded debt of$94.3 million and $130.6 million, respectively and common equitysecurities of $70.2 million and $131.2 million, respectively.

 

The aggregatemarket value of the Company’s short-term and long-term investments in debt andequity securities was $164.5 million and $261.8 million and theaggregate cost basis was $163.9 million and $254.7 million at June 30,2008 and December 31, 2007, respectively.

 

Gains and losses on sales of investments, asdetermined on a specific identification basis, are included in investmentincome in the period they are realized. The Company periodically reviews itsportfolio of investments to determine whether there has been an other thantemporary decline in the value of the investments from factors such asdeterioration in the financial condition of the issuer or the market(s) inwhich it competes. The Company recorded an impairment charge of approximately$3.0 million ($1.8 million after-tax) and $0.3 million($0.2 million after-tax) during the three months ended June 30, 2008and 2007, respectively, due to other than temporary declines in the value of certaininvestments. The Company recorded an impairment charge of approximately $8.2million ($6.2 million after-tax) and $0.9 million ($0.6 million after-tax)during the six months ended June 30, 2008 and 2007, respectively, due toother than temporary declines in the value of certain investments. Theunrealized gains in the investment portfolio were approximately$5.2 million and $8.4 million as of June 30, 2008 and December 31,2007, respectively. Unrealized losses were approximately $5.2 million and$1.4 million as of June 30, 2008 and December 31, 2007,respectively. There were no unrealized losses older than one year at June 30,2008 or December 31, 2007. The aggregate fair value of the investmentswith unrealized losses totaled $52.0 million and $20.4 million at June 30,2008 and December 31, 2007, respectively. The Company’s marketablesecurities consist primarily of corporate bonds and common equity securities.

 

**Note 12.Long-Term Debt**

 

Long-termdebt at June 30, 2008 and December 31, 2007 is summarized in thefollowing table:

 
| **(In thousands)**                                  | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Senior  secured term loan facility maturing in 2014      |       | $                       | 2,623,500  |                        | $          | 2,636,750 |   |
| Senior  unsecured interim loan facility maturing in 2008 |       | 1,150,000               |       | 1,150,000                   |       |
| Revolving  credit facility maturing in 2013              |       | —                  |       | —                      |       |
| 7.10% notes  maturing in 2018 (1)                        |       | 60,736                  |       | 59,772                      |       |
| 7.45% notes  maturing in 2027 (1)                        |       | 143,880                 |       | 142,457                     |       |
| 7.25% notes  maturing in 2038 (1)                        |       | 58,607                  |       | 58,206                      |       |
| Other                                                    |       | 64,670                  |       | 83,626                      |       |
| Less current  portion                                    |       | (45,475                 | )          | (53,564                     | )          |
| Total  long-term debt                                    |       | $                       | 4,055,918  |                        | $          | 4,077,247 |   |

 

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(1)                          Theincrease from the balance at December 31, 2007 reflects the amortizationof fair value adjustments related to purchase accounting, which increases theeffective interest rate from the coupon rates shown above.

 

The Interim Loan Facility matured on July 24,2008. On the maturity date, outstanding amounts under the Interim Loan Facilitywere converted on a one to one basis into 10.75%/11.50% senior toggle notes due2015 (“Permanent Notes”). The Permanent Notes were issued pursuant to arefinancing indenture. In connection with the issuance of Permanent Notes,ServiceMaster entered into a registration rights agreement, pursuant to whichServiceMaster will be required to file with the SEC a registration statementwith respect to the resale of the Permanent Notes.

 

In February 2008, the Company entered into two3-year interest rate swap agreements and one 4-year interest rate swapagreement, effective March 3, 2008. The total notional amount of the3-year agreements was $250 million and the total notional amount of the4-year swap agreement was $250 million. Under the terms of the agreements,the Company will pay a weighted average fixed rate of interest of approximately3.15% on the notional amount of the 3-year swap agreements and 3.48% on thenotional amount of the 4-year swap agreement. The Company will receive afloating rate of interest (based on three month LIBOR) on the notional amount.Therefore, the effective interest rate for $500 million of the term loansis fixed 

 

14

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ata rate between 5.90% and 6.23%, including the borrowing margin described inNote 14 to the consolidated financial statements in the 2007 AnnualReport. In accordance with SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities”, these interest rate swap agreements areclassified as cash flow hedges and, as such, the hedging instruments arerecorded on the balance sheet as either an asset or liability at fair value,with the effective portion of the changes in fair value attributable to thehedged risks recorded in other comprehensive income.

 

**Note 13.Businesses Held Pending Sale and Discontinued Operations**

 

Reported “loss frombusinesses held pending sale and discontinued operations, net of income taxes”for all periods presented include the operating results of the sold anddiscontinued businesses noted in the 2007 Annual Report. During the secondquarter of 2008, the Company recorded a pre-tax impairment charge of $6.3million as a result of a change in our fair value estimate of InStar’s netassets based on changing market conditions and the ongoing sales process.

 

The operating results and financial position ofdiscontinued operations are as follows:

 
| ** **                                                          | ** ** | **Successor**                | ** ** | ** ** | **Predecessor**              | ** ** |
|---------------------------------------------------------------------|------------|------------------------------|------------|------------|------------------------------|------------|
| ** **                                                          | ** ** | **Three  months ended** | ** ** | ** ** | **Three  months ended** | ** ** |
| **(In thousands)**                                             | ** ** | **June 30, 2008**  | ** ** | ** ** | **June 30, 2007**  | ** ** |
| Operating  Results:                                                 |       |                         |       |       |                         |       |
| Operating  revenue                                                  |       | $                            | 21,834     |       |                         | $          | 17,839 |   |
|                                                                |       |                         |       |       |                         |       |
| Operating  income(loss)                                             |       | 1,766                        |       |       | (2,704                       | )          |
| Interest  expense                                                   |       | (29                          | )          |       | (17                          | )          |
| Impairment  charge                                                  |       | (6,317                       | )          |       | —                       |       |
| Pretax loss                                                         |       | (4,580                       | )          |       | (2,721                       | )          |
| Benefit from  income taxes                                          |       | (1,844                       | )          |       | (1,099                       | )          |
| Loss from  businesses held pending sale and discontinued operations |       | $                            | (2,736     | )          |                         | $          | (1,622 | ) |

 
| ** **                                                          | ** ** | **Successor**               | ** ** | ** ** | **Predecessor**             | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------|------------|------------|-----------------------------|------------|
| ** **                                                          | ** ** | **Six  months ended**  | ** ** | ** ** | **Six  months ended**  | ** ** |
| **(In thousands)**                                             | ** ** | **June 30, 2008** | ** ** | ** ** | **June 30, 2007** | ** ** |
| Operating  Results:                                                 |       |                        |       |       |                        |       |
| Operating  revenue                                                  |       | $                           | 39,640     |       |                        | $          | 40,239 |   |
|                                                                |       |                        |       |       |                        |       |
| Operating  income(loss)                                             |       | 629                         |       |       | (5,177                      | )          |
| Interest  expense                                                   |       | (70                         | )          |       | (36                         | )          |
| Impairment  charge                                                  |       | (6,317                      | )          |       | —                      |       |
| Pretax loss                                                         |       | (5,758                      | )          |       | (5,213                      | )          |
| Benefit from  income taxes                                          |       | (2,274                      | )          |       | (2,092                      | )          |
| Loss from  businesses held pending sale and discontinued operations |       | $                           | (3,484     | )          |                        | $          | (3,121 | ) |

 
| ** **             | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Financial  Position:   |       |                    |       |                        |       |
| Current  assets        |       | $                       | 31,124     |                        | $          | 42,474 |   |
| Current  liabilities   |       | 14,627                  |       | 12,983                      |       |
| Long-term  liabilities |       | 5,629                   |       | 7,765                       |       |
| Total  liabilities     |       | $                       | 20,256     |                        | $          | 20,748 |   |

 

The table below summarizes the activity during thesix months ended June 30, 2008 for the remaining liabilities fromoperations that were disposed of in years prior to 2008. The remainingobligations primarily relate to long-term self-insurance claims. The Companybelieves that the remaining reserves continue to be adequate and reasonable.

 
| **(In thousands)**                                 | ** ** | **Balance at  Dec. 31, 2007** | ** ** | **Cash Payments  or Other** | ** ** | **(Income)/  Expense** | ** ** | **Balance at  June 30, 2008** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------|------------|------------------------|------------|----------------------------------------------|------------|
| Remaining  liabilities of discontinued operations: |       |                                         |       |                                  |       |                   |       |                                         |       |
| ARS/AMS                                            |       | $                                            | 2,384      |                                  | $          | (311                   | )          | $                                            | 177        |   | $ | 2,250 |   |
| LandCare  Construction                             |       | 1,257                                        |       | (360                                  | )          | 169                    |       | 1,066                                        |       |
| LandCare  utility line clearing business           |       | 1,350                                        |       | (84                                   | )          | —                 |       | 1,266                                        |       |
| Certified  Systems, Inc. and other            |       | 6,721                                        |       | 220                                   |       | (1,920                 | )          | 5,021                                        |       |
|                                                    |            |                                              |            |                                       |            |                        |            |                                              |            |  |  |  |  |

 

15

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**Note 14. Income Taxes**

 

As of June 30, 2008 and December 31, 2007,the Company had $14.1 million and $13.3 million, respectively, of tax itemsprimarily reflected in state tax returns that had not been recognized forfinancial reporting (“unrecognized tax benefits”). If recognized prior to December 31,2008, $12.5 million ($9.0 million, net of federal and state tax effects)would be recorded as a purchase accounting adjustment to goodwill and$1.6 million ($1.2 million, net of federal and state tax effects) wouldaffect the Company’s effective tax rate.

 

Up to $5.1 million of the Company’sunrecognized tax benefits could be recognized within the next twelve months.The Company recognized approximately $0.3 million of its unrecognized taxbenefits during the Successor six months ended June 30, 2008 andapproximately $6.6 million during the Predecessor six months ended June 30,2007.

 

The Company files consolidated and separate incometax returns in the United States federal jurisdiction and in many state and foreignjurisdictions. The Company has been audited by the United States InternalRevenue Service (“IRS”) through 2006 and is no longer subject to state andlocal or foreign income tax examinations by tax authorities for years before2001.

 

In the ordinary course, the Company is subject toreview by domestic and foreign taxing authorities, including the IRS. As notedabove, the U.S. federal tax returns filed by the Company through the 2006return have been reviewed by the IRS. The Company paid $5 million primarilyin the first quarter of 2006 relating to the resolution of the 2003 and 2004audits. The IRS completed the audits of the Company’s tax returns for 2005 and2006, with no adjustments or additional payments. The IRS commencedexaminations of the Company’s U.S. federal income tax returns for 2007 and 2008in the first quarter of 2007 and the second quarter of 2008, respectively. Atthis time, the outcome of these audits is not known and no significantadjustments have been proposed by the IRS pertaining to these audit periods.Five state tax authorities are in the process of auditing state income taxreturns of various subsidiaries. One state audit is at the appeals level. Ifstate authorities were to prevail with their assessments, the Company does not anticipatethat these adjustments would have a material impact on the Company’s financialposition, annual results of operations or cash flows.

 

The Company’s policy is to recognize potentialinterest and penalties related to its tax positions within the tax provision.During the Successor three and six months ended June 30, 2008, the Companyrecognized interest expense of less than $0.1 million and approximately $0.6million, respectively, through the tax provision. During the Predecessor threeand six months ended June 30, 2007, the Company recognized interestexpense of approximately $0.8 million and $0.7 million, respectively,through the tax provision. As of June 30, 2008 and December 31, 2007,the Company had accrued for the payment of interest and penalties ofapproximately $3.3 million ($2.0 million, net of federal and state taxeffects) and $2.4 million ($1.4 million, net of federal and state tax effects),respectively.

 

***Note15. Business Segment Reporting***

* *

*Thebusiness of the Company is conducted through five reportablesegments: TruGreen LawnCare, TruGreen LandCare, Terminix, American HomeShield and Other Operations and Headquarters. The TruGreen LawnCare segmentprovides residential and commercial lawn care services. The TruGreen LandCare segmentprovides landscaping services primarily to commercial customers. The Terminixsegment provides termite and pest control services to residential andcommercial customers. The American Home Shield segment provides home warrantiesto consumers that cover HVAC, plumbing and other home systems and appliances.The Other Operations and Headquarters segment includes the franchised andCompany-owned operations of ServiceMaster Clean (which includes the operationsof AmeriSpec and Furniture Medic) and Merry Maids, which provide primarilyresidential disaster restoration, commercial cleaning, carpet and upholsterycleaning, home inspection services, furniture repair and maid services. TheOther Operations and Headquarters segment also includes the Company’sheadquarters operations, which provide various technology, marketing, finance,legal and other support services to the business units.*

* *

*16*

----

* *

*Segmentinformation for continuing operations is presented below.*

* *
| ** **                            | ** ** | **Successor**          | ** ** | ** ** | **Predecessor**        | ** ** | **Successor**          | ** ** | ** ** | **Predecessor**        | ** ** |
|---------------------------------------|------------|------------------------|------------|------------|------------------------|------------|------------------------|------------|------------|------------------------|------------|
| ** **                            | ** ** | **Three**              | ** ** | ** ** | **Three**              | ** ** | **Six**                | ** ** | ** ** | **Six**                | ** ** |
| ** **                            | ** ** | **months ended**       | ** ** | ** ** | **months ended**       | ** ** | **months ended**       | ** ** | ** ** | **months ended**       | ** ** |
| **(In thousands)**               | ** ** | **June 30, 2008** | ** ** | ** ** | **June 30, 2007** | ** ** | **June 30, 2008** | ** ** | ** ** | **June 30, 2007** | ** ** |
| Operating  Revenue:                   |       |                   |       |       |                   |       |                   |       |       |                   |       |
| TruGreen LawnCare                     |       | $                      | 377,296    |       |                   | $          | 375,548                |       | $          | 511,738                |       |   | $ | 508,220 |   |
| TruGreen  LandCare                    |       | 83,877                 |       |       | 112,298                |       | 162,529                |       |       | 215,240                |       |
| Terminix                              |       | 311,774                |       |       | 311,328                |       | 573,422                |       |       | 573,500                |       |
| American  Home Shield                 |       | 167,570                |       |       | 156,040                |       | 272,988                |       |       | 281,227                |       |
| Other  Operations and Headquarters    |       | 56,788                 |       |       | 53,523                 |       | 108,859                |       |       | 104,045                |       |
| Total  Operating Revenue              |       | $                      | 997,305    |       |                   | $          | 1,008,737              |       | $          | 1,629,536              |       |   | $ | 1,682,232 |   |
| Operating  Income (Loss):(1),(2)      |       |                   |       |       |                   |       |                   |       |       |                   |       |
| TruGreen  LawnCare                    |       | $                      | 55,913     |       |                   | $          | 72,813                 |       | $          | 21,854                 |       |   | $ | 61, 220 |   |
| TruGreen  LandCare                    |       | (2,693                 | )          |       | (2,126                 | )          | (602                   | )          |       | (2,060                 | )          |
| Terminix                              |       | 59,682                 |       |       | 62,589                 |       | 102,895                |       |       | 107,360                |       |
| American  Home Shield                 |       | 9,401                  |       |       | 20,278                 |       | (8,291                 | )          |       | 27,299                 |       |
| Other  Operations and Headquarters(2) |       | (8,124                 | )          |       | (19,522                | )          | (11,979                | )          |       | (34,725                | )          |
| Total  Operating Income               |       | $                      | 114,179    |       |                   | $          | 134,032                |       | $          | 103,877                |       |   | $ | 159,094 |   |

 

----

(1)          Presented below is a reconciliation of segment operating (loss) incometo (loss) income from continuing operations before income taxes.

 
| ** **                                                    | ** ** | **Successor**          | ** ** | ** ** | **Predecessor**        | ** ** | **Successor**          | ** ** | ** ** | **Predecessor**        | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|------------|------------------------|------------|------------------------|------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **Three**              | ** ** | ** ** | **Three**              | ** ** | **Six**                | ** ** | ** ** | **Six**                | ** ** |
| ** **                                                    | ** ** | **months ended**       | ** ** | ** ** | **months ended**       | ** ** | **months ended**       | ** ** | ** ** | **months ended**       | ** ** |
| **(In thousands)**                                            | ** ** | **June 30, 2008** | ** ** | ** ** | **June 30, 2007** | ** ** | **June 30, 2008** | ** ** | ** ** | **June 30, 2007** | ** ** |
| Segment  Operating Income                                     |       | $                      | 114,179    |       |                   | $          | 134,032                |       | $          | 103,877                |       |   | $ | 159,094 |   |
| Non-operating  expense (income):                              |       |                   |       |       |                   |       |                   |       |       |                   |       |
| Interest  expense                                             |       | 83,425                 |       |       | 13,879                 |       | 173,011                |       |       | 28,143                 |       |
| Interest and  net investment (income) loss                    |       | (4,164                 | )          |       | (18,118                | )          | 1,881                  |       |       | (26,184                | )          |
| Minority  interest and other expense, net                     |       | 145                    |       |       | 1,472                  |       | 277                    |       |       | 3,521                  |       |
| Income  (Loss) from Continuing Operations before Income Taxes |       | $                      | 34,773     |       |                   | $          | 136,799                |       | $          | (71,292                | )          |   | $ | 153,614 |   |

 

(2)          Theresults include restructuring charges for severance, as well as costsassociated with Fast Forward, and payments for employee retention and severancerelated to the Company’s decision to consolidate its corporate headquartersinto its operations support center in Memphis, Tennessee and close its formerheadquarters in Downers Grove, Illinois. The restructuring charges totaled$4.0 million and $8.3 million in the three months ended June 30, 2008and 2007, respectively, and $7.3 million and $15.3 million in the sixmonths ended June 30, 2008 and 2007, respectively. The results alsoinclude Merger charges related to the purchase of ServiceMaster by a group ofinvestors led by CD&R. The Merger related charges totaled $0.3 millionand $2.8 million pretax in the three months ended June 30, 2008 and 2007,respectively, and $0.4 million and $5.3 million pretax in the six monthsended June 30, 2008 and 2007, respectively.

 

**Note 16. Related Party Transactions**

 

In connection with the Transactions, the Companyentered into a consulting agreement with CD&R under which CD&R providesthe Company with on-going consulting and management advisory services inexchange for an annual management fee of $2 million. This fee is payablequarterly. The Company recorded a management fee of $0.5 million and $1.0million for the three and six months ended June 30,2008, respectively. There was no management fee recorded for the three and sixmonths ended June 30, 2007. The consulting agreement also provides thatCD&R may receive future fees in connection with certain subsequentfinancing and acquisition or disposition transactions.

 

**Note 17.Newly Issued Accounting Statements and Positions**

 

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued SFAS 157, “Fair ValueMeasurement”. This Statement defines fair value, establishes a framework formeasuring fair value in accordance with GAAP, and expands disclosures aboutfair value measurements. SFAS No. 157 does not require any new fair value 

 

17

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measurements. In February 2008, the FASBapproved FASB Staff Position FAS 157-2, “Effective Date of FASB Statement No. 157”(“FSP 157-2”), that permits companies to partially defer the effective date ofSFAS No. 157 for one year for non-financial assets and non-financialliabilities that are recognized or disclosed at fair value in the financialstatements on a nonrecurring basis. FSP 157-2 does not permit companies todefer recognition and disclosure requirements for financial assets andfinancial liabilities or for non-financial assets and non-financial liabilitiesthat are re-measured at least annually. SFAS No. 157 therefore iseffective for financial assets and financial liabilities and for non-financialassets and non-financial liabilities that are re-measured at least annually forfiscal years beginning after November 15, 2007. It is effective fornon-financial assets and non-financial liabilities that are recognized or disclosedat fair value in the financial statements on a nonrecurring basis for fiscalyears beginning after November 15, 2008. The Company has assessed theimpact of this Statement to the Company’s consolidated financial position,results of operations and cash flows. The Company has adopted this Statementfor financial assets and liabilities (See Note 18). The Company does not expectthe adoption of this Statement for non-financial assets and liabilitiesrecognized at fair value on a nonrecurring basis to have a material effect onthese consolidated financial statements.

 

In February 2007, the FASB issuedSFAS 159, “The Fair Value Option for Financial Assets and FinancialLiabilities”. This Statement permits entities to choose to measure at fairvalue many financial instruments and certain other items such as investments,debt and derivative instruments. This statement is effective for financialstatements issued for fiscal years beginning after November 15, 2007. TheCompany has elected not to apply the fair value option to any of its financialassets or liabilities.

 

In December 2007, the FASB issuedSFAS 141(R), “Business Combinations”. This Statement will significantlychange the accounting for business combinations and is effective for businesscombinations finalized in fiscal years beginning after December 15, 2008.SFAS No. 141(R) changes the method for applying the accountingfor business combinations in a number of significant respects including therequirement to expense transaction fees and expected restructuring costs asincurred, rather than including these amounts in the allocated purchase price;the requirement to recognize the fair value of contingent consideration at theacquisition date, rather than the expected amount when the contingency is resolved;the requirement to recognize the fair value of acquired in-process research anddevelopment assets at the acquisition date, rather than immediately expensing;and the requirement to recognize a gain in relation to a bargain purchaseprice, rather than reducing the allocated basis of long-lived assets. Becausethis standard is generally applied prospectively, the effect of adoption on theCompany’s financial statements will depend primarily on specific transactions,if any, completed after 2008. The Company is currently evaluating the effectsthat this statement is likely to have on potential post-2008 transactions.

 

In December 2007, the FASB issuedSFAS 160, “Non-controlling Interests in Consolidated FinancialStatements—An Amendment of ARB No. 51”. This Statement establishes newaccounting and reporting standards for the non-controlling interest in asubsidiary and for the deconsolidation of a subsidiary. This Statement iseffective for fiscal years beginning after December 15, 2008. The Companyis currently assessing the impact of this Statement on its consolidatedfinancial statements.

 

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments andHedging Activities – an amendment of FASB Statement No. 133”. Thisstatement requires additional disclosures for derivative instruments andhedging activities that include how and why an entity uses derivatives, howthese instruments and the related hedged items are accounted for under SFAS No. 133and related interpretations, and how derivative instruments and related hedgeditems affect the entity’s financial position, results of operations and cashflows. This statement is effective for financial statements issued for fiscalyears and interim periods beginning after November 15, 2008. The Companyis currently assessing the impact of this Statement on its consolidatedfinancial statements.

 

In April 2008, the FASB approved FASBStaff Position FAS 142-3, “Determination of the Useful Life of IntangibleAssets” (“FSP 142-3”). FSP 142-3 amends the factors that should be consideredin developing renewal or extension assumptions used to determine the usefullife of a recognized intangible asset under SFAS No. 142, “Goodwill andOther Intangible Assets.” FSP 142-3 is effective for financial statementsissued for fiscal years beginning after November 15, 2008. The Company iscurrently assessing the impact of adopting FSP 142-3 on its consolidatedfinancial statements.

 

**Note 18.Fair Value of Financial Instruments**

 

The Company has estimatedthe fair value of its financial instruments measured at fair value on arecurring basis using the market and income approaches. For investments inmarketable securities, deferred compensation trust assets and derivativecontracts, which are carried at their fair values, the Company’s fair valueestimates incorporate quoted market 

 

18

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prices, other observable inputs (for example,interest rates) and unobservable inputs (for example, forward commodity prices)at the balance sheet date.

 

The carrying amount, including accrued interest, andestimated fair value of certain of the Company’s financial instrumentsfor the periods presented are as follows:

 
| ** **                            | ** ** | **June 30, 2008** | ** ** | **December 31, 2007**                             | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------------|------------|
| ** **                            | ** ** | ** **                  | ** ** | **Estimated Fair Value Measurements**        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(In thousands)**               | ** ** | **Carrying  Value**         | ** ** | **Quoted  Prices In  Active  Markets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Carrying  Value** | ** ** | **Estimated  Fair Value** | ** ** |
| **Financial  Assets**                 | ** ** | ** **                  | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deferred  compensation trust assets   |       | $                           | 19,400     |                                                        | $          | 19,400 |   | $ | — |   | $ | — |   | $ | 35,100 |   | $ | 35,100 |   |
| Investments  in marketable securities |       | 145,099                     |       | 73,436                                                      |       | 71,663 |   | — |   | 226,690 |   | 226,690 |   |
| Fuel swap  contracts                  |       | 10,871                      |       | —                                                      |       | — |   | 10,871 |   | — |   | — |   |
| Total  financial assets               |       | $                           | 175,370    |                                                        | $          | 92,836 |   | $ | 71,663 |   | $ | 10,871 |   | $ | 261,790 |   | $ | 261,790 |   |
|                                  |       |                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| **Financial  Liabilities**            | ** ** | ** **                  | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  rate swap contracts         |       | $                           | 9,818      |                                                        | $          | — |   | $ | 9,818 |   | $ | — |   | $ | 16,557 |   | $ | 16,557 |   |
| Total  financial liabilities          |       | $                           | 9,818      |                                                        | $          | — |   | $ | 9,818 |   | $ | — |   | $ | 16,557 |   | $ | 16,557 |   |

 

A reconciliation of the beginning and ending fairvalues of financial instruments valued using significant unobservable inputs(Level 3) is presented as follows:

 

| **(In thousands)**                       | ** ** | **Fuel   Swap Contracts** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|
| Balance at December 31,  2007            |       | $                              | —     |   |
| Gains included  in other comprehensive income |       | 3,118                          |       |
| Balance at March 31,  2008               |       | $                              | 3,118      |   |
| Total gains  (realized/unrealized)            |       |                           |       |
| Included in  earnings(1)                      |       | 3,913                          |       |
| Included in  other comprehensive income       |       | 7,753                          |       |
| Settlements,  net                             |       | (3,913                         | )          |
| Balance at June 30,  2008                |       | $                              | 10,871     |   |
|                                               |            |                                |            |  |  |

 

----

(1)          Gains included in earnings are reported in cost of services rendered andproducts sold.

 

The Company uses fuel swap contracts tomitigate the impact of fluctuations in fuel prices. The Company’s exposure tomarket risk for changes in fuel prices relates to the forecasted consumption offuel by the Company’s vehicle fleet in the delivery of services to customers.As of June 30, 2008, the Company had fuel swap contracts, designated ascash flow hedges, to pay fixed prices for fuel with an aggregate notionalamount of $41.4 million, maturing through 2009.

 

**Note 19.Subsequent Events**

 

In August 2008, the Company entered into two3-year interest rate swap agreements effective September 2, 2008. Thetotal notional amount of the swap agreements was $200 million. Under the termsof the agreements, the Company will pay a weighted average fixed rate ofinterest of approximately 3.83% on the $200 million notional amount of the swapagreements. The Company will receive a floating rate of interest (based on onemonth LIBOR) on the notional amount. Therefore, the effective interest rate for$200 million of the term loans is fixed at a rate of approximately 6.58%,including the borrowing margin described in Note 14 of the 2007 Annual Report.In accordance with SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities”, these interest rate swap agreements are classified ascash flow hedges and, as such, the hedging instruments will be recorded on thebalance sheet as either an asset or liability at fair value, with the effectiveportion of the changes in fair value attributable to the hedged risks recordedin other comprehensive income.

 

19

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**Note 20. Condensed Consolidating FinancialStatements of The ServiceMaster Company and Subsidiaries**

 

The following condensed consolidatingfinancial statements of the Company and subsidiaries have been preparedpursuant to Rule 3-10 of Regulation S-X. These condensed consolidatingfinancial statements have been prepared from the Company’s financialinformation on the same basis of accounting as the condensed consolidatedfinancial statements. Goodwill and other intangible assets have been allocatedto all of the subsidiaries of the Company based on management’s estimates.

 

On July 24, 2008, outstanding amountsunder the Interim Loan Facility converted into the Permanent Notes. The paymentobligations of the Company under the Permanent Notes are jointly and severallyguaranteed on a senior unsecured basis by certain of the Company’s domesticsubsidiaries excluding certain subsidiaries subject to regulatory requirementsin various states (“Guarantors”). Each of the Guarantors is wholly-owned,directly or indirectly, by the Company, and all guarantees are full and unconditional.All other subsidiaries of the Company, either directly or indirectly owned, donot guarantee the Permanent Notes (“Non-Guarantors”).

 

**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**Condensed ConsolidatingStatements of Operations**

**For the three months ended June 30,2008 (Successor)**

**(in thousands)**

 
| ** **                                                                                         | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                         | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                         | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating  Revenue**                                                                             |       | $                 | —     |           | $          | 805,144        |       | $                | 211,100    |             | $          | (18,939 | ) | $ | 997,305 |   |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **Operating  Costs and Expenses:**                                                                 |       |              |       |           |       |           |       |             |       |             |       |
| Cost of  services rendered and products sold                                                       |       | —            |       | 509,084        |       | 99,589         |       | (18,939          | )          | 589,734          |       |
| Selling and  administrative expenses                                                               |       | 1,551             |       | 160,348        |       | 85,215         |       | —           |       | 247,114          |       |
| Amortization  expense                                                                              |       | 56                |       | 30,584         |       | 11,328         |       | —           |       | 41,968           |       |
| Merger  related charges                                                                            |       | 305               |       | —         |       | —         |       | —           |       | 305              |       |
| Restructuring  charges                                                                             |       | —            |       | 1,308          |       | 2,697          |       | —           |       | 4,005            |       |
| Total  operating costs and expenses                                                                |       | 1,912             |       | 701,324        |       | 198,829        |       | (18,939          | )          | 883,126          |       |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **Operating  (Loss) Income**                                                                       |       | (1,912            | )          | 103,820        |       | 12,271         |       | —           |       | 114,179          |       |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating  Expense (Income):**                                                               |       |              |       |           |       |           |       |             |       |             |       |
| Interest  expense (income)                                                                         |       | 83,166            |       | 2,623          |       | (2,364         | )          | —           |       | 83,425           |       |
| Interest and  net investment loss (income)                                                         |       | 564               |       | 648            |       | (5,376         | )          | —           |       | (4,164           | )          |
| Minority interest  and other expense, net                                                          |       | —            |       | —         |       | 145            |       | —           |       | 145              |       |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss)  Income from Continuing Operations before Income Taxes**                                  |       | (85,642           | )          | 100,549        |       | 19,866         |       | —           |       | 34,773           |       |
| (Benefit)  provision for income taxes                                                              |       | (23,638           | )          | 26,095         |       | 11,490         |       | —           |       | 13,947           |       |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss)  Income from Continuing Operations**                                                      |       | (62,004           | )          | 74,454         |       | 8,376          |       | —           |       | 20,826           |       |
| (Loss)  income from businesses held pending sale and discontinued operations, net of  income taxes |       | —            |       | (5,857         | )          | 3,121          |       | —           |       | (2,736           | )          |
| Equity in  earnings (losses) of subsidiaries (net of tax)                                          |       | 80,094            |       | 7,932          |       | —         |       | (88,026          | )          | —           |       |
| **Net  Income (Loss)**                                                                             |       | $                 | 18,090     |           | $          | 76,529         |       | $                | 11,497     |             | $          | (88,026 | ) | $ | 18,090 |   |

 

20

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**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**Condensed ConsolidatingStatements of Operations**

**For the three months ended June 30,2007 (Predecessor)**

**(in thousands)**

 
| ** **                                                                                         | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                         | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                         | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating  Revenue**                                                                             |       | $                 | —     |           | $          | 829,926        |       | $                | 197,513    |             | $          | (18,702 | ) | $ | 1,008,737 |   |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **Operating  Costs and Expenses:**                                                                 |       |              |       |           |       |           |       |             |       |             |       |
| Cost of  services rendered and products sold                                                       |       | —            |       | 526,099        |       | 83,112         |       | (18,702          | )          | 590,509          |       |
| Selling and  administrative expenses                                                               |       | 1,179             |       | 176,284        |       | 93,370         |       | —           |       | 270,833          |       |
| Amortization  expense                                                                              |       | —            |       | 2,018          |       | 291            |       | —           |       | 2,309            |       |
| Merger  related charges                                                                            |       | 2,794             |       | —         |       | —         |       | —           |       | 2,794            |       |
| Restructuring  charges                                                                             |       | —            |       | —         |       | 8,260          |       | —           |       | 8,260            |       |
| Total  operating costs and expenses                                                                |       | 3,973             |       | 704,401        |       | 185,033        |       | (18,702          | )          | 874,705          |       |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **Operating  (Loss) Income**                                                                       |       | (3,973            | )          | 125,525        |       | 12,480         |       | —           |       | 134,032          |       |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating  Expense (Income):**                                                               |       |              |       |           |       |           |       |             |       |             |       |
| Interest  expense (income)                                                                         |       | 8,940             |       | 6,502          |       | (1,563         | )          | —           |       | 13,879           |       |
| Interest and  net investment (income) loss                                                         |       | (1,796            | )          | 648            |       | (16,970        | )          | —           |       | (18,118          | )          |
| Minority  interest and other expense, net                                                          |       | 1,423             |       | —         |       | 49             |       | —           |       | 1,472            |       |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss)  Income from Continuing Operations before Income Taxes**                                  |       | (12,540           | )          | 118,375        |       | 30,964         |       | —           |       | 136,799          |       |
| (Benefit) provision  for income taxes                                                              |       | (3,289            | )          | 27,961         |       | 21,874         |       | —           |       | 46,546           |       |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss)  Income from Continuing Operations**                                                      |       | (9,251            | )          | 90,414         |       | 9,090          |       | —           |       | 90,253           |       |
| (Loss)  income from businesses held pending sale and discontinued operations, net of  income taxes |       | —            |       | (1,949         | )          | 327            |       | —           |       | (1,622           | )          |
| Equity in  earnings (losses) of subsidiaries (net of tax)                                          |       | 97,882            |       | 6,613          |       | —         |       | (104,495         | )          | —           |       |
| **Net  Income (Loss)**                                                                             |       | $                 | 88,631     |           | $          | 95,078         |       | $                | 9,417      |             | $          | (104,495 | ) | $ | 88,631 |   |

 

21

----

 

**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**Condensed ConsolidatingStatements of Operations**

**For the six months ended June 30,2008 (Successor)**

**(in thousands)**

 
| ** **                                                                                         | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                         | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                         | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating  Revenue**                                                                             |       | $                 | —     |           | $          | 1,322,192      |       | $                | 342,706    |             | $          | (35,362 | ) | $ | 1,629,536 |   |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **Operating  Costs and Expenses:**                                                                 |       |              |       |           |       |           |       |             |       |             |       |
| Cost of  services rendered and products sold                                                       |       | —            |       | 876,994        |       | 165,470        |       | (35,362          | )          | 1,007,102        |       |
| Selling and  administrative expenses                                                               |       | 3,259             |       | 261,828        |       | 153,143        |       | —           |       | 418,230          |       |
| Amortization  expense                                                                              |       | 111               |       | 69,656         |       | 22,875         |       | —           |       | 92,642           |       |
| Merger  related charges                                                                            |       | 355               |       | —         |       | —         |       | —           |       | 355              |       |
| Restructuring  charges                                                                             |       | —            |       | 1,394          |       | 5,936          |       | —           |       | 7,330            |       |
| Total operating  costs and expenses                                                                |       | 3,725             |       | 1,209,872      |       | 347,424        |       | (35,362          | )          | 1,525,659        |       |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **Operating  (Loss) Income**                                                                       |       | (3,725            | )          | 112,320        |       | (4,718         | )          | —           |       | 103,877          |       |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating  Expense (Income):**                                                               |       |              |       |           |       |           |       |             |       |             |       |
| Interest  expense (income)                                                                         |       | 170,874           |       | 6,119          |       | (3,982         | )          | —           |       | 173,011          |       |
| Interest and  net investment loss (income)                                                         |       | 3,449             |       | 1,296          |       | (2,864         | )          | —           |       | 1,881            |       |
| Minority  interest and other expense, net                                                          |       | —            |       | —         |       | 277            |       | —           |       | 277              |       |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss)  Income from Continuing Operations before Income Taxes**                                  |       | (178,048          | )          | 104,905        |       | 1,851          |       | —           |       | (71,292          | )          |
| (Benefit)  provision for income taxes                                                              |       | (51,513           | )          | 21,886         |       | 12,603         |       | —           |       | (17,024          | )          |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss)  Income from Continuing Operations**                                                      |       | (126,535          | )          | 83,019         |       | (10,752        | )          | —           |       | (54,268          | )          |
| (Loss) income  from businesses held pending sale and discontinued operations, net of income  taxes |       | —            |       | (6,335         | )          | 2,851          |       | —           |       | (3,484           | )          |
| Equity in  earnings (losses) of subsidiaries (net of tax)                                          |       | 68,783            |       | (10,216        | )          | —         |       | (58,567          | )          | —           |       |
| **Net  (Loss) Income**                                                                             |       | $                 | (57,752    | )              | $          | 66,468         |       | $                | (7,901     | )                | $          | (58,567 | ) | $ | (57,752 | ) |

 

22

----

 

 

**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**Condensed ConsolidatingStatements of Operations**

**For the six months ended June 30,2007 (Predecessor)**

**(in thousands)**

 
| ** **                                                                                         | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                         | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                         | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating  Revenue**                                                                             |       | $                 | —     |           | $          | 1,368,762      |       | $                | 347,875    |             | $          | (34,405 | ) | $ | 1,682,232 |   |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **Operating  Costs and Expenses:**                                                                 |       |              |       |           |       |           |       |             |       |             |       |
| Cost of  services rendered and products sold                                                       |       | —            |       | 917,585        |       | 150,679        |       | (34,405          | )          | 1,033,859        |       |
| Selling and  administrative expenses                                                               |       | 2,179             |       | 289,011        |       | 172,862        |       | —           |       | 464,052          |       |
| Amortization  expense                                                                              |       | —            |       | 3,995          |       | 580            |       | —           |       | 4,575            |       |
| Merger  related charges                                                                            |       | 5,334             |       | —         |       | —         |       | —           |       | 5,334            |       |
| Restructuring  charges                                                                             |       | —            |       | —         |       | 15,318         |       | —           |       | 15,318           |       |
| Total  operating costs and expenses                                                                |       | 7,513             |       | 1,210,591      |       | 339,439        |       | (34,405          | )          | 1,523,138        |       |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **Operating  (Loss) Income**                                                                       |       | (7,513            | )          | 158,171        |       | 8,436          |       | —           |       | 159,094          |       |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating  Expense (Income):**                                                               |       |              |       |           |       |           |       |             |       |             |       |
| Interest  expense (income)                                                                         |       | 16,496            |       | 13,606         |       | (1,959         | )          | —           |       | 28,143           |       |
| Interest and  net investment (income) loss                                                         |       | (1,660            | )          | 1,289          |       | (25,813        | )          | —           |       | (26,184          | )          |
| Minority  interest and other expense, net                                                          |       | 3,423             |       | —         |       | 98             |       | —           |       | 3,521            |       |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss)  Income from Continuing Operations before Income Taxes**                                  |       | (25,772           | )          | 143,276        |       | 36,110         |       | —           |       | 153,614          |       |
| (Benefit)  provision for income taxes                                                              |       | (6,808            | )          | 26,487         |       | 33,634         |       | —           |       | 53,313           |       |
|                                                                                               |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss)  Income from Continuing Operations**                                                      |       | (18,964           | )          | 116,789        |       | 2,476          |       | —           |       | 100,301          |       |
| (Loss)  income from businesses held pending sale and discontinued operations, net of  income taxes |       | —            |       | (3,369         | )          | 248            |       | —           |       | (3,121           | )          |
| Equity in  earnings (losses) of subsidiaries (net of tax)                                          |       | 116,144           |       | 991            |       | —         |       | (117,135         | )          | —           |       |
| **Net  Income (Loss)**                                                                             |       | $                 | 97,180     |           | $          | 114,411        |       | $                | 2,724      |             | $          | (117,135 | ) | $ | 97,180 |   |

 

23

----

 

**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**Condensed ConsolidatingStatements of Financial Position**

**As of June 30, 2008**

**(in thousands)**

 
| ** **                                                                   | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                   | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Assets**                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Current  Assets:**                                                         |       |              |       |           |       |           |       |             |       |             |       |
| Cash and  cash equivalents                                                   |       | $                 | 53,302     |           | $          | 17,799         |       | $                | 154,265    |             | $          | — |   | $ | 225,366 |   |
| Marketable  securities                                                       |       | —            |       | —         |       | 30,278         |       | —           |       | 30,278           |       |
| Receivables                                                                  |       | 37                |       | 194,189        |       | 365,860        |       | (165,007         | )          | 395,079          |       |
| Inventories                                                                  |       | —            |       | 79,850         |       | 3,761          |       | —           |       | 83,611           |       |
| Prepaid  expenses and other assets                                           |       | 8,935             |       | 59,771         |       | 8,701          |       | —           |       | 77,407           |       |
| Deferred  customer acquisition costs                                         |       | —            |       | 34,357         |       | 23,912         |       | —           |       | 58,269           |       |
| Deferred  taxes                                                              |       | 6,590             |       | 27,996         |       | 3,649          |       | —           |       | 38,235           |       |
| Assets of  businesses held pending sale and discontinued operations          |       | —            |       | 30,861         |       | 263            |       | —           |       | 31,124           |       |
| Total  Current Assets                                                        |       | 68,864            |       | 444,823        |       | 590,689        |       | (165,007         | )          | 939,369          |       |
| **Property  and Equipment:**                                                 |       |              |       |           |       |           |       |             |       |             |       |
| At cost                                                                      |       | —            |       | 149,552        |       | 70,926         |       | —           |       | 220,478          |       |
| Less:  accumulated depreciation                                              |       | —            |       | (31,000        | )          | (15,144        | )          | —           |       | (46,144          | )          |
| Net property  and equipment                                                  |       | —            |       | 118,552        |       | 55,782         |       | —           |       | 174,334          |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other  Assets:**                                                           |       |              |       |           |       |           |       |             |       |             |       |
| Goodwill                                                                     |       | —            |       | 2,696,645      |       | 361,669        |       | —           |       | 3,058,314        |       |
| Intangible  assets, primarily trade names, service marks and trademarks, net |       | —            |       | 2,198,754      |       | 896,628        |       | —           |       | 3,095,382        |       |
| Notes  receivable                                                            |       | 349,395           |       | 1,299          |       | 66,120         |       | (389,396         | )          | 27,418           |       |
| Long-term  marketable securities                                             |       | 19,400            |       | —         |       | 114,821        |       | —           |       | 134,221          |       |
| Investments  in and advances to subsidiaries                                 |       | 5,878,222         |       | 2,063,420      |       | 20,251         |       | (7,961,893       | )          | —           |       |
| Other assets                                                                 |       | 25,536            |       | 722            |       | 9,262          |       | —           |       | 35,520           |       |
| Debt  issuance costs                                                         |       | 64,894            |       | —         |       | —         |       | —           |       | 64,894           |       |
| Total Assets                                                                 |       | $                 | 6,406,311  |           | $          | 7,524,215      |       | $                | 2,115,222  |             | $          | (8,516,296 | ) | $ | 7,529,452 |   |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Liabilities  and Shareholder’s Equity**                               |       |              |       |           |       |           |       |             |       |             |       |
| **Current  Liabilities:**                                                    |       |              |       |           |       |           |       |             |       |             |       |
| Accounts  payable                                                            |       | $                 | 497        |           | $          | 68,777         |       | $                | 55,262     |             | $          | — |   | $ | 124,536 |   |
| Accrued  liabilities:                                                        |       |              |       |           |       |           |       |             |       |             |       |
| Payroll and  related expenses                                                |       | 1,764             |       | 40,891         |       | 47,960         |       | —           |       | 90,615           |       |
| Self-insured  claims and related expenses                                    |       | —            |       | 21,708         |       | 73,882         |       | —           |       | 95,590           |       |
| Other                                                                        |       | 12,596            |       | 52,594         |       | 77,809         |       | —           |       | 142,999          |       |
| Deferred  revenue                                                            |       | —            |       | 201,324        |       | 298,150        |       | —           |       | 499,474          |       |
| Liabilities  of businesses held pending sale and discontinued operations     |       | —            |       | 10,647         |       | 3,980          |       | —           |       | 14,627           |       |
| Current  portion of long-term debt                                           |       | 80,550            |       | 15,571         |       | 114,361        |       | (165,007         | )          | 45,475           |       |
| Total  Current Liabilities                                                   |       | 95,407            |       | 411,512        |       | 671,404        |       | (165,007         | )          | 1,013,316        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Long-Term  Debt**                                                          |       | 4,011,349         |       | 387,044        |       | 46,921         |       | (389,396         | )          | 4,055,918        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other  Long-Term Liabilities:**                                            |       |              |       |           |       |           |       |             |       |             |       |
| Deferred  taxes                                                              |       | 110,895           |       | 831,535        |       | 96,178         |       | —           |       | 1,038,608        |       |
| Intercompany  payable                                                        |       | 905,305           |       | —         |       | —         |       | (905,305         | )          | —           |       |
| Liabilities  of businesses held pending sale and discontinued operations     |       | —            |       | —         |       | 5,629          |       | —           |       | 5,629            |       |
| Other  long-term obligations, primarily self-insured claims                  |       | 27,988            |       | 3,965          |       | 128,661        |       | —           |       | 160,614          |       |
| Total Other  Long-Term Liabilities                                           |       | 1,044,188         |       | 835,500        |       | 230,468        |       | (905,305         | )          | 1,204,851        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Shareholder’s  Equity**                                               |       | 1,255,367         |       | 5,890,159      |       | 1,166,429      |       | (7,056,588       | )          | 1,255,367        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Total  Liabilities and Shareholder’s Equity**                         |       | $                 | 6,406,311  |           | $          | 7,524,215      |       | $                | 2,115,222  |             | $          | (8,516,296 | ) | $ | 7,529,452 |   |

 

24

----

 

**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**Condensed ConsolidatingStatements of Financial Position**

**As of December 31, 2007**

**(in thousands)**

 
| ** **                                                                   | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                   | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Assets**                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Current  Assets:**                                                         |       |              |       |           |       |           |       |             |       |             |       |
| Cash and  cash equivalents                                                   |       | $                 | 100,429    |           | $          | 13,983         |       | $                | 92,807     |             | $          | — |   | $ | 207,219 |   |
| Marketable  securities                                                       |       | —            |       | —         |       | 108,816        |       | —           |       | 108,816          |       |
| Receivables                                                                  |       | 2                 |       | 154,811        |       | 322,040        |       | (140,785         | )          | 336,068          |       |
| Inventories                                                                  |       | —            |       | 69,212         |       | 3,140          |       | —           |       | 72,352           |       |
| Prepaid  expenses and other assets                                           |       | —            |       | 14,410         |       | 12,433         |       | —           |       | 26,843           |       |
| Deferred  customer acquisition costs                                         |       | —            |       | 9,611          |       | 15,711         |       | —           |       | 25,322           |       |
| Deferred  taxes                                                              |       | 6,573             |       | 38,833         |       | 2,771          |       | —           |       | 48,177           |       |
| Assets of  businesses held pending sale and discontinued operations          |       | —            |       | 42,143         |       | 331            |       | —           |       | 42,474           |       |
| Total  Current Assets                                                        |       | 107,004           |       | 343,003        |       | 558,049        |       | (140,785         | )          | 867,271          |       |
| **Property  and Equipment:**                                                 |       |              |       |           |       |           |       |             |       |             |       |
| At cost                                                                      |       | —            |       | 141,933        |       | 68,211         |       | —           |       | 210,144          |       |
| Less:  accumulated depreciation                                              |       | —            |       | (14,404        | )          | (7,743         | )          | —           |       | (22,147          | )          |
| Net property  and equipment                                                  |       | —            |       | 127,529        |       | 60,468         |       | —           |       | 187,997          |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other  Assets:**                                                           |       |              |       |           |       |           |       |             |       |             |       |
| Goodwill                                                                     |       | —            |       | 2,689,231      |       | 360,692        |       | —           |       | 3,049,923        |       |
| Intangible  assets, primarily trade names, service marks and trademarks, net |       | —            |       | 2,265,350      |       | 919,903        |       | —           |       | 3,185,253        |       |
| Notes  receivable                                                            |       | 363,409           |       | 41,207         |       | 65,194         |       | (443,409         | )          | 26,401           |       |
| Long-term  marketable securities                                             |       | 35,100            |       | —         |       | 117,874        |       | —           |       | 152,974          |       |
| Investments  in and advances to subsidiaries                                 |       | 5,831,624         |       | 2,016,718      |       | 59,528         |       | (7,907,870       | )          | —           |       |
| Other assets                                                                 |       | 25,816            |       | 751            |       | 9,732          |       | —           |       | 36,299           |       |
| Debt  issuance costs                                                         |       | 84,942            |       | —         |       |           |       | —           |       | 84,942           |       |
| Total Assets                                                                 |       | $                 | 6,447,895  |           | $          | 7,483,789      |       | $                | 2,151,440  |             | $          | (8,492,064 | ) | $ | 7,591,060 |   |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Liabilities  and Shareholder’s Equity**                               |       |              |       |           |       |           |       |             |       |             |       |
| **Current  Liabilities:**                                                    |       |              |       |           |       |           |       |             |       |             |       |
| Accounts  payable                                                            |       | $                 | 973        |           | $          | 45,879         |       | $                | 56,548     |             | $          | — |   | $ | 103,400 |   |
| Accrued  liabilities:                                                        |       |              |       |           |       |           |       |             |       |             |       |
| Payroll and  related expenses                                                |       | 1,785             |       | 48,173         |       | 82,096         |       | —           |       | 132,054          |       |
| Self-insured  claims and related expenses                                    |       | —            |       | 16,498         |       | 68,283         |       | —           |       | 84,781           |       |
| Other                                                                        |       | 15,303            |       | 49,024         |       | 73,722         |       | —           |       | 138,049          |       |
| Deferred  revenue                                                            |       | —            |       | 150,223        |       | 258,253        |       | —           |       | 408,476          |       |
| Liabilities  of businesses held pending sale and discontinued operations     |       | —            |       | 9,035          |       | 3,948          |       | —           |       | 12,983           |       |
| Current  portion of long-term debt                                           |       | 70,749            |       | 23,990         |       | 99,610         |       | (140,785         | )          | 53,564           |       |
| Total  Current Liabilities                                                   |       | 88,810            |       | 342,822        |       | 642,460        |       | (140,785         | )          | 933,307          |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Long-Term  Debt**                                                          |       | 4,022,185         |       | 461,855        |       | 36,616         |       | (443,409         | )          | 4,077,247        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other  Long-Term Liabilities:**                                            |       |              |       |           |       |           |       |             |       |             |       |
| Deferred  taxes                                                              |       | 143,679           |       | 829,881        |       | 105,940        |       | —           |       | 1,079,500        |       |
| Intercompany  payable                                                        |       | 839,958           |       | —         |       | —         |       | (839,958         | )          | —           |       |
| Liabilities  of businesses held pending sale and discontinued operations     |       | —            |       | —         |       | 7,765          |       | —           |       | 7,765            |       |
| Other  long-term obligations, primarily self-insured claims                  |       | 49,729            |       | 4,547          |       | 135,431        |       | —           |       | 189,707          |       |
| Total Other  Long-Term Liabilities                                           |       | 1,033,366         |       | 834,428        |       | 249,136        |       | (839,958         | )          | 1,276,972        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Shareholder’s  Equity**                                               |       | 1,303,534         |       | 5,844,684      |       | 1,223,228      |       | (7,067,912       | )          | 1,303,534        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Total  Liabilities and Shareholder’s Equity**                         |       | $                 | 6,447,895  |           | $          | 7,483,789      |       | $                | 2,151,440  |             | $          | (8,492,064 | ) | $ | 7,591,060 |   |

 

25

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**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**Condensed Consolidating Statementof Cash Flows**

**For the six months ended June 30,2008 (Successor)**

**(in thousands)**

 
| ** **                                                                             | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                             | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash and  Cash Equivalents at Beginning of Period**                                  |       | $                 | 100,429    |           | $          | 13,983         |       | $                | 92,807     |             | $          | — |   | $ | 207,219 |   |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Net Cash  Provided from (Used for) Operating Activities from Continuing Operations** |       | (76,190           | )          | 184,022        |       | (7,166         | )          | (86,742          | )          | 13,924           |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash  Flows from Investing Activities from Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Property  additions                                                                    |       | —            |       | (13,300        | )          | (4,821         | )          | —           |       | (18,121          | )          |
| Sale of  equipment and other assets                                                    |       | —            |       | 4,505          |       | 55             |       | —           |       | 4,560            |       |
| Acquisition  of The ServiceMaster Company                                              |       | (20,957           | )          | —         |       | —         |       | —           |       | (20,957          | )          |
| Other  business acquisitions, net of cash received                                     |       | —            |       | (9,847         | )          | (114           | )          | —           |       | (9,961           | )          |
| Notes  receivable, financial investments and securities                                |       | 1,003             |       | —         |       | 75,984         |       | —           |       | 76,987           |       |
| **Net Cash  (Used for) Provided from Investing Activities from Continuing Operations** |       | (19,954           | )          | (18,642        | )          | 71,104         |       | —           |       | 32,508           |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash  Flows from Financing Activities from Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Borrowings  of debt                                                                    |       | 182,000           |       | —         |       | —         |       | —           |       | 182,000          |       |
| Payments of  debt                                                                      |       | (195,625          | )          | (19,858        | )          | (1,805         | )          | —           |       | (217,288         | )          |
| Shareholder’s  dividends                                                          |       | —            |       | (43,371        | )          | (43,371        | )          | 86,742           |       | —           |       |
| Debt  issuance costs paid                                                              |       | (99               | )          | —         |       | —         |       | —           |       | (99              | )          |
| Net  intercompany advances                                                             |       | 62,741            |       | (104,624       | )          | 41,883         |       | —           |       | —           |       |
| **Net Cash  Provided from (Used for) Financing Activities from Continuing Operations** |       | 49,017            |       | (167,853       | )          | (3,293         | )          | 86,742           |       | (35,387          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash  Flows from Discontinued Operations:**                                          |       |              |       |           |       |           |       |             |       |             |       |
| Cash  provided from operating activities                                               |       | —            |       | 6,576          |       | 813            |       | —           |       | 7,389            |       |
| Cash used  for investing activities                                                    |       | —            |       | (191           | )          | —         |       | —           |       | (191             | )          |
| Cash used  for financing activities                                                    |       | —            |       | (96            | )          | —         |       | —           |       | (96              | )          |
| **Net Cash  Provided from Discontinued Operations**                                    |       | —            |       | 6,289          |       | 813            |       | —           |       | 7,102            |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash  (Decrease) Increase During the Period**                                        |       | (47,127           | )          | 3,816          |       | 61,458         |       | —           |       | 18,147           |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash and  Cash Equivalents at End of Period**                                        |       | $                 | 53,302     |           | $          | 17,799         |       | $                | 154,265    |             | $          | — |   | $ | 225,366 |   |

 

26

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**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**Condensed Consolidating Statementof Cash Flows**

**For the six months ended June 30,2007 (Predecessor)**

**(in thousands)**

 
| ** **                                                                             | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                             | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash and  Cash Equivalents at Beginning of Period**                                  |       | $                 | 20,442     |           | $          | 12,454         |       | $                | 90,779     |             | $          | — |   | $ | 123,675 |   |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Net Cash  Provided from (Used for) Operating Activities from Continuing Operations** |       | 65,855            |       | 149,024        |       | (38,138        | )          | (40,064          | )          | 136,677          |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash  Flows from Investing Activities from Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Property  additions                                                                    |       | —            |       | (17,710        | )          | (6,529         | )          | —           |       | (24,239          | )          |
| Sale of  equipment and other assets                                                    |       | —            |       | 1,076          |       | —         |       | —           |       | 1,076            |       |
| Acquisition  of The ServiceMaster Company                                              |       | (3,546            | )          | —         |       | —         |       | —           |       | (3,546           | )          |
| Other  business acquisitions, net of cash received                                     |       | 753               |       | (25,970        | )          | —         |       | —           |       | (25,217          | )          |
| Notes  receivable, financial investments and securities                                |       | 155               |       | —         |       | 49,185         |       | —           |       | 49,340           |       |
| **Net Cash  Used for (Provided from) Investing Activities from Continuing Operations** |       | (2,638            | )          | (42,604        | )          | 42,656         |       | —           |       | (2,586           | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash  Flows from Financing Activities from Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Borrowings  of debt                                                                    |       | 415,411           |       | —         |       | —         |       | —           |       | 415,411          |       |
| Payments of  debt                                                                      |       | (445,860          | )          | (11,096        | )          | (1,289         | )          | —           |       | (458,245         | )          |
| Shareholder’s  dividends                                                          |       | (70,077           | )          | (20,032        | )          | (20,032        | )          | 40,064           |       | (70,077          | )          |
| Proceeds  from employee share plans                                                    |       | 36,277            |       | —         |       | —         |       | —           |       | 36,277           |       |
| Net  intercompany advances                                                             |       | 46,795            |       | (85,138        | )          | 38,343         |       | —           |       | —           |       |
| **Net Cash  Used for Financing Activities from Continuing Operations**                 |       | (17,454           | )          | (116,266       | )          | 17,022         |       | 40,064           |       | (76,634          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash  Flows from Discontinued Operations:**                                          |       |              |       |           |       |           |       |             |       |             |       |
| Cash  provided from operating activities                                               |       | —            |       | 10,679         |       | 40             |       | —           |       | 10,719           |       |
| Cash  provided from investing activities                                               |       | —            |       | 1,006          |       | —         |       | —           |       | 1,006            |       |
| Cash used  for financing activities                                                    |       | —            |       | (159           | )          | —         |       | —           |       | (159             | )          |
| **Net Cash  Provided from Discontinued Operations**                                    |       | —            |       | 11,526         |       | 40             |       | —           |       | 11,566           |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash  Increase During the Period**                                                   |       | 45,763            |       | 1,680          |       | 21,580         |       | —           |       | 69,023           |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash and  Cash Equivalents at End of Period**                                        |       | $                 | 66,205     |           | $          | 14,134         |       | $                | 112,359    |             | $          | — |   | $ | 192,698 |   |

 

27

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                     |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                 |       | Certification of Chief Executive Officer  Pursuant to Rule 15d – 14(a), as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                             |
|                 |       |                                                                                                                                                                                                     |
| 31.2                 |       | Certification of Chief Financial Officer  Pursuant to Rule 15d – 14(a), as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                             |
|                 |       |                                                                                                                                                                                                     |
| 32.1                 |       | Certification of Chief Executive Officer  Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States  Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |
|                 |       |                                                                                                                                                                                                     |
| 32.2                 |       | Certification of Chief Financial Officer  Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States  Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |

 

28

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**SIGNATURE**

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| Date: August 29, 2008 |                                              |                 |
|---------------------------------|---------------------------------------------------|----------------------|
|                            | THE SERVICEMASTER COMPANY                         |                 |
|                            | (Registrant)                                      |                 |
|                            |                                              |                 |
|                            | By:                                               | /s/ Steven J. Martin |
|                            | Steven J. Martin                                  |
|                            | Senior Vice President and Chief Financial Officer |
|                                 |                                                   |                      |  |

 

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