Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

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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 September 30,2008**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

** **

**Forthe transition periodfrom              to          **

** **

**Commissionfile number 1-14762**

 

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**THE SERVICEMASTER COMPANY**

(Exact name of registrantas specified in its charter)

** **

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

 

**860 RidgeLake Boulevard, Memphis, Tennessee**·**38120**

(Address ofprincipal executive offices)    (Zip Code)

 

**901-597-1400**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes o  No x

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company. See definitions of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” 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 by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Act). Yes  o  No x

 

On July 24, 2007, the registrantcompleted a transaction pursuant to an Agreement and Plan of Merger, dated asof March 18, 2007, among the registrant and two corporations formed toeffect the merger transactions. As a result of the merger transaction, theregistrant became a privately held corporation and its equity shares are nolonger publicly traded. At November 7, 2008, 1,000 shares of theregistrant’s common stock were outstanding, all of which were owned by CDRSVMHolding, Inc.

 

 

 

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Table of Contents

 

**TABLE OFCONTENTS**

 

THE SERVICEMASTER COMPANY (Registrant) -

 
| ** **                                                                                                                                                                                                                                                      | **Page  No.** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------|
|                                                                                                                                                                                                                                                            |          |
| Part I - Financial Information                                                                                                                                                                                                                             | 3             |
|                                                                                                                                                                                                                                                            |          |
| Item 1. Financial Statements (Unaudited)                                                                                                                                                                                                                        | 3             |
|                                                                                                                                                                                                                                                            |          |
| Condensed  Consolidated Statements of Operations for the three months ended  September 30, 2008 (Successor), the period July 25, 2007 to  September 30, 2007 (Successor) and the period July 1, 2007 to  July 24, 2007 (Predecessor)   | 3             |
|                                                                                                                                                                                                                                                            |          |
| Condensed  Consolidated Statements of Operations for the nine months ended  September 30, 2008 (Successor), the period July 25, 2007 to  September 30, 2007 (Successor) and the period January 1, 2007 to  July 24, 2007 (Predecessor) | 4             |
|                                                                                                                                                                                                                                                            |          |
| Condensed  Consolidated Statements of Financial Position as of September 30, 2008  (Successor) and December 31, 2007 (Successor)                                                                                                                      | 5             |
|                                                                                                                                                                                                                                                            |          |
| Condensed Consolidated  Statements of Cash Flows for the nine months ended September 30, 2008  (Successor), the period July 25, 2007 to September 30, 2007  (Successor) and the period January 1, 2007 to July 24, 2007  (Predecessor) | 6             |
|                                                                                                                                                                                                                                                            |          |
| Notes to  Condensed Consolidated Financial Statements                                                                                                                                                                                                           | 7             |
|                                                                                                                                                                                                                                                            |          |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                                                                                                                                            | 31            |
|                                                                                                                                                                                                                                                            |          |
| Item  3. Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                                                        | 55            |
|                                                                                                                                                                                                                                                            |          |
| Item 4T. Controls  and Procedures                                                                                                                                                                                                                               | 56            |
|                                                                                                                                                                                                                                                            |          |
| Part II - Other  Information                                                                                                                                                                                                                               | 57            |
|                                                                                                                                                                                                                                                            |          |
| Item 1. Legal Proceedings                                                                                                                                                                                                                                       | 57            |
|                                                                                                                                                                                                                                                            |          |
| Item 1A. Risk Factors                                                                                                                                                                                                                                           | 57            |
|                                                                                                                                                                                                                                                            |          |
| Item  5. Other Information                                                                                                                                                                                                                                      | 65            |
|                                                                                                                                                                                                                                                            |          |
| Item 6. Exhibits                                                                                                                                                                                                                                                | 67            |
|                                                                                                                                                                                                                                                            |          |
| Signature                                                                                                                                                                                                                                                       | 68            |

 

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Table of Contents

 

**PART I- FINANCIAL INFORMATION**

**ITEM 1.FINANCIAL STATEMENTS**

### **THE SERVICEMASTER COMPANY**

### **Condensed Consolidated Statements of Operations (Unaudited)**

*(In thousands)*

 
| ** **                                                                                  | ** ** | **Successor**                | ** ** | ** **                   | **Predecessor** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|-----------------|------------|
| ** **                                                                                  | ** ** | **Three months**        | ** ** | **July 25, 2007**  | ** **      | ** ** | **July 1, 2007** | ** ** |
| ** **                                                                                  | ** ** | **ended**                    | ** ** | **to**                       | ** **      | ** ** | **to** | ** ** |
| ** **                                                                                  | ** ** | **Sept. 30, 2008** | ** ** | **Sept. 30, 2007** | ** **      | ** ** | **July 24, 2007** | ** ** |
| **Operating Revenue**                                                                  |       | $                            | 948,073    |                         | $               | 690,625    |   |   | $ | 252,158 |   |
|                                                                                        |       |                         |       |                         |            |       |   |   |
| **Operating Costs and Expenses:**                                            |       |                         |       |                         |            |       |   |   |
| Cost of services rendered and products sold                   |       | 559,555                      |       | 420,527                      |            |       | 162,403 |   |
| Selling and administrative expenses                                          |       | 235,172                      |       | 154,457                      |            |       | 66,622 |   |
| Amortization expense                                                                        |       | 40,450                       |       | 56,418                       |            |       | 597 |   |
| Merger related charges                                                                      |       | 412                          |       | 458                          |            |       | 36,097 |   |
| Restructuring charges                                                                       |       | 1,813                        |       | 8,211                        |            |       | 1,601 |   |
| Total operating costs and expenses                                      |       | 837,402                      |       | 640,071                      |            |       | 267,320 |   |
|                                                                                        |       |                         |       |                         |            |       |   |   |
| **Operating Income (Loss)**                                                       |       | 110,671                      |       | 50,554                       |            |       | (15,162 | ) |
|                                                                                        |       |                         |       |                         |            |       |   |   |
| **Non-operating Expense (Income):**                                               |       |                         |       |                         |            |       |   |   |
| Interest expense                                                                       |       | 83,886                       |       | 78,257                       |            |       | 3,500 |   |
| Interest and net  investment income                                          |       | (244                         | )          | (3,890                       | )               |       | (2,440 | ) |
| Other expense, net                                                                |       | 141                          |       | 102                          |            |       | 11 |   |
|                                                                                        |       |                         |       |                         |            |       |   |   |
| **Income  (loss) from Continuing Operations  before Income Taxes** |       | 26,888                       |       | (23,915                      | )               |       | (16,233 | ) |
| Provision  (benefit) for income taxes                                        |       | 8,683                        |       | (9,136                       | )               |       | (1,621 | ) |
|                                                                                        |       |                         |       |                         |            |       |   |   |
| **Income  (loss) from Continuing Operations**                                |       | 18,205                       |       | (14,779                      | )               |       | (14,612 | ) |
|                                                                                        |       |                         |       |                         |            |       |   |   |
| Loss from discontinued operations,  net of  income taxes                                    |       | (1,186                       | )          | (2,590                       | )               |       | (1,467 | ) |
| **Net Income (Loss)**                                                             |       | $                            | 17,019     |                         | $               | (17,369    | )  |    | $ | (16,079 | ) |

 

### ***See accompanying Notes to the CondensedConsolidated Financial Statements***

 

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### **THE SERVICEMASTER COMPANY**

### **Condensed Consolidated Statements of Operations (Unaudited)**

*(In thousands)*

 
| ** **                                                                             | ** ** | **Successor**         | ** ** | ** **                  | **Predecessor** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|-----------------|------------|
| ** **                                                                             | ** ** | **Nine**              | ** ** | **July 25, 2007** | ** **      | ** ** | **Jan. 1, 2007** | ** ** |
| ** **                                                                             | ** ** | **months ended** | ** ** | **to**                      | ** **      | ** ** | **to** | ** ** |
| ** **                                                                             | ** ** | **Sept. 30, 2008**    | ** ** | **Sept. 30, 2007**          | ** **      | ** ** | **July 24, 2007** | ** ** |
| **Operating Revenue**                                                             |       | $                     | 2,577,609  |                        | $               | 690,625    |   |   | $ | 1,934,390 |   |
|                                                                                   |       |                  |       |                        |            |       |   |   |
| **Operating Costs and Expenses:**                                       |       |                  |       |                        |            |       |   |   |
| Cost of services rendered and products sold              |       | 1,566,657             |       | 420,527                     |            |       | 1,196,262 |   |
| Selling and administrative expenses                                     |       | 653,402               |       | 154,457                     |            |       | 530,674 |   |
| Amortization expense                                                                   |       | 133,092               |       | 56,418                      |            |       | 5,172 |   |
| Merger related charges                                                                 |       | 767                   |       | 458                         |            |       | 41,431 |   |
| Restructuring charges                                                                  |       | 9,143                 |       | 8,211                       |            |       | 16,919 |   |
| Total operating costs and expenses                                 |       | 2,363,061             |       | 640,071                     |            |       | 1,790,458 |   |
|                                                                                   |       |                  |       |                        |            |       |   |   |
| **Operating Income**                                                              |       | 214,548               |       | 50,554                      |            |       | 143,932 |   |
|                                                                                   |       |                  |       |                        |            |       |   |   |
| **Non-operating Expense  (Income):**                                              |       |                  |       |                        |            |       |   |   |
| Interest expense                                                                  |       | 256,897               |       | 78,257                      |            |       | 31,643 |   |
| Interest and net  investment loss (income)                              |       | 1,637                 |       | (3,890                      | )               |       | (28,624 | ) |
| Minority interest and other expense, net                      |       | 418                   |       | 102                         |            |       | 3,532 |   |
|                                                                                   |       |                  |       |                        |            |       |   |   |
| **(Loss) income  from Continuing Operations  before Income Taxes** |       | (44,404               | )          | (23,915                     | )               |       | 137,381 |   |
| (Benefit) provision  for income taxes                                        |       | (8,341                | )          | (9,136                      | )               |       | 51,692 |   |
|                                                                                   |       |                  |       |                        |            |       |   |   |
| **(Loss) income  from Continuing Operations**                                |       | (36,063               | )          | (14,779                     | )               |       | 85,689 |   |
|                                                                                   |       |                  |       |                        |            |       |   |   |
| Loss from discontinued  operations, net of  income  taxes                              |       | (4,670                | )          | (2,590                      | )               |       | (4,588 | ) |
| **Net (Loss) Income**                                                             |       | $                     | (40,733    | )                           | $               | (17,369    | )  |    | $ | 81,101 |   |

 

*See accompanying Notes to the CondensedConsolidated Financial Statements*

 

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**THE SERVICEMASTER COMPANY**

## **Condensed Consolidated Statementsof Financial Position (Unaudited)**

*(In thousands, except share data)*

 
| ** **                                                                   | ** ** | **Successor**                          | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                   | ** ** | **As of September 30,** | ** ** | **As of December 31,** | ** ** |
| ** **                                                                   | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| **Assets**                                                                   |       |                                   |       |   |   |
| **Current Assets:**                                                          |       |                                   |       |   |   |
| Cash and cash equivalents                                                    |       | $                                      | 358,899    |   | $ | 207,219 |   |
| Marketable securities                                                        |       | 21,521                                 |       | 108,816 |   |
| Receivables, less allowance of $23,152 and $20,994, respectively             |       | 399,560                                |       | 336,068 |   |
| Inventories                                                                  |       | 81,990                                 |       | 72,352 |   |
| Prepaid expenses and other assets                                            |       | 56,049                                 |       | 26,843 |   |
| Deferred customer acquisition costs                                          |       | 43,639                                 |       | 25,322 |   |
| Deferred taxes                                                               |       | 44,371                                 |       | 48,177 |   |
| Assets of discontinued operations                                            |       | 240                                    |       | 42,474 |   |
| Total Current Assets                                                         |       | 1,006,269                              |       | 867,271 |   |
| **Property and Equipment:**                                                  |       |                                   |       |   |   |
| At cost                                                                      |       | 279,336                                |       | 210,144 |   |
| Less: accumulated depreciation                                               |       | (58,263                                | )          | (22,147 | ) |
| Net property and equipment                                                   |       | 221,073                                |       | 187,997 |   |
|                                                                         |       |                                   |       |   |   |
| **Other Assets:**                                                            |       |                                   |       |   |   |
| Goodwill                                                                     |       | 3,078,038                              |       | 3,049,923 |   |
| Intangible assets, primarily  trade names, service marks and trademarks, net |       | 3,058,996                              |       | 3,185,253 |   |
| Notes receivable                                                             |       | 27,087                                 |       | 26,401 |   |
| Long-term marketable securities                                              |       | 123,131                                |       | 158,939 |   |
| Other assets                                                                 |       | 36,179                                 |       | 30,334 |   |
| Debt issuance costs                                                          |       | 86,519                                 |       | 84,942 |   |
| Total Assets                                                                 |       | $                                      | 7,637,292  |   | $ | 7,591,060 |   |
|                                                                         |       |                                   |       |   |   |
| **Liabilities  and Shareholder’s Equity**                               |       |                                   |       |   |   |
|                                                                         |       |                                   |       |   |   |
| **Current Liabilities:**                                                     |       |                                   |       |   |   |
| Accounts payable                                                             |       | $                                      | 103,109    |   | $ | 103,400 |   |
| Accrued liabilities:                                                         |       |                                   |       |   |   |
| Payroll and related expenses                                                 |       | 92,605                                 |       | 132,054 |   |
| Self-insured claims and related expenses                                     |       | 91,038                                 |       | 84,781 |   |
| Other                                                                        |       | 150,746                                |       | 138,049 |   |
| Deferred revenue                                                             |       | 446,745                                |       | 408,476 |   |
| Liabilities of discontinued operations                                       |       | 5,824                                  |       | 12,983 |   |
| Current portion of long-term debt                                            |       | 221,845                                |       | 53,564 |   |
| Total Current Liabilities                                                    |       | 1,111,912                              |       | 933,307 |   |
|                                                                         |       |                                   |       |   |   |
| **Long-Term Debt**                                                           |       | 4,049,349                              |       | 4,077,247 |   |
|                                                                         |       |                                   |       |   |   |
| **Other Long-Term Liabilities:**                                             |       |                                   |       |   |   |
| Deferred taxes                                                               |       | 1,048,321                              |       | 1,079,500 |   |
| Liabilities of discontinued operations                                       |       | 4,253                                  |       | 7,765 |   |
| Other long-term obligations, primarily self-insured claims                   |       | 163,983                                |       | 189,707 |   |
| Total Other Long-Term Liabilities                                            |       | 1,216,557                              |       | 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                                                   |       | 1,436,537                              |       | 1,431,400 |   |
| Retained deficit                                                             |       | (164,253                               | )          | (123,520 | ) |
| Accumulated other comprehensive loss                                         |       | (12,810                                | )          | (4,346 | ) |
| Total Shareholder’s Equity                                              |       | 1,259,474                              |       | 1,303,534 |   |
| Total Liabilities and Shareholder’s Equity                              |       | $                                      | 7,637,292  |   | $ | 7,591,060 |   |

 

*Seeaccompanying Notes to the Condensed Consolidated Financial Statements*

 

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**THE SERVICEMASTER COMPANY**

## **Condensed Consolidated Statementsof Cash Flows (Unaudited)**

*(In thousands)*

 
| ** **                                                                                                    | ** ** | **Successor**                | ** ** | ** **                           | **Predecessor** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------------|-----------------|------------|
| ** **                                                                                                    | ** ** | **Nine**                     | ** ** | **Period from**                 | ** **      | ** ** | **Period from** | ** ** |
| ** **                                                                                                    | ** ** | **Months ended**        | ** ** | **July 25, 2007**          | ** **      | ** ** | **Jan. 1, 2007** | ** ** |
| ** **                                                                                                    | ** ** | **Sept. 30, 2008** | ** ** | **to Sept. 30, 2007** | ** **      | ** ** | **to July 24, 2007** | ** ** |
| **Cash and Cash Equivalents at  beginning of period**                                                         |       | $                            | 207,219    |                                 | $               | 237,565    |   |   | $ | 123,675 |   |
| **Cash Flows from Operating  Activities from Continuing Operations:**                                         |       |                         |       |                                 |            |       |   |   |
| **Net (Loss) Income**                                                                                         |       | (40,733                      | )          | (17,369                              | )               |       | 81,101 |   |
| Adjustments to reconcile net  (loss)  income to net cash provided  from (used for) operating activities: |       |                         |       |                                 |            |       |   |   |
| Loss (Income) from discontinued  operations                                                                   |       | 4,670                        |       | 2,590                                |            |       | 4,588 |   |
| Depreciation expense                                                                                          |       | 39,215                       |       | 9,202                                |            |       | 27,242 |   |
| Amortization expense                                                                                          | ** ** | 133,092                      |       | 56,418                               |            |       | 5,172 |   |
| Amortization of debt issuance costs                                                                           | ** ** | 23,366                       |       | 7,921                                |            |       | 1,261 |   |
| Deferred income tax (benefit)  provision                                                                      | ** ** | (18,806                      | )          | (7,765                               | )               |       | 30,443 |   |
| Option and restricted stock  expense                                                                          | ** ** | 5,137                        |       | —                               |            |       | 3,415 |   |
| Restructuring charges                                                                                         | ** ** | 9,143                        |       | 8,211                                |            |       | 16,919 |   |
| Cash payments related to  restructuring charges                                                               | ** ** | (18,370                      | )          | (7,239                               | )               |       | (8,236 | ) |
| Merger related charges                                                                                        | ** ** | 767                          |       | 458                                  |            |       | 41,431 |   |
| Change in working capital, net  of acquisitions:                                                              |       |                         |       |                                 |            |       |   |   |
| Receivables                                                                                                   | ** ** | (63,395                      | )          | (3,330                               | )               |       | (66,454 | ) |
| Inventories and other current  assets                                                                         | ** ** | (45,415                      | )          | 1,359                                |            |       | (59,482 | ) |
| Accounts payable                                                                                              | ** ** | 412                          |       | (13,614                              | )               |       | 18,455 |   |
| Deferred revenue                                                                                              | ** ** | 34,773                       |       | (11,739                              | )               |       | 55,070 |   |
| Accrued liabilities                                                                                           | ** ** | (13,905                      | )          | 13,895                               |            |       | 40,635 |   |
| Current income taxes                                                                                          | ** ** | 66                           |       | (6,207                               | )               |       | 951 |   |
| Other, net                                                                                                    | ** ** | 1,692                        |       | 835                                  |            |       | 2,982 |   |
| **Net Cash Provided from  Operating Activities from Continuing Operations**                                   | ** ** | 51,709                       |       | 33,626                               |            |       | 195,493 |   |
| ** **                                                                                                    |       |                         |       |                                 |            |       |   |   |
| **Cash Flows from Investing  Activities from Continuing Operations:**                                         |       |                         |       |                                 |            |       |   |   |
| Property additions                                                                                            | ** ** | (75,194                      | )          | (7,707                               | )               |       | (26,563 | ) |
| Sale of equipment and other  assets                                                                           | ** ** | 5,090                        |       | 610                                  |            |       | 1,091 |   |
| Acquisition of The  ServiceMaster Company                                                                     | ** ** | (26,082                      | )          | (4,890,648                           | )               |       | (4,030 | ) |
| Other business acquisitions,  net of cash acquired                                                            | ** ** | (27,504                      | )          | (3,985                               | )               |       | (25,460 | ) |
| Notes receivable, financial  investments and securities                                                       | ** ** | 97,417                       |       | (35,452                              | )               |       | 38,127 |   |
| **Net Cash Used for Investing  Activities from Continuing Operations**                                        | ** ** | (26,273                      | )          | (4,937,182                           | )               |       | (16,835 | ) |
| ** **                                                                                                    |       |                         |       |                                 |            |       |   |   |
| **Cash Flows from Financing  Activities from Continuing Operations:**                                         |       |                         |       |                                 |            |       |   |   |
| Borrowings of debt                                                                                            | ** ** | 357,000                      |       | —                               |            |       | 415,411 |   |
| Payments of debt                                                                                              | ** ** | (227,312                     | )          | (250,302                             | )               |       | (459,537 | ) |
| Borrowings under senior secured  term loan facility                                                           | ** ** | —                       |       | 2,650,000                            |            |       | — |   |
| Borrowings under senior  unsecured interim loan facility                                                      | ** ** | —                       |       | 1,150,000                            |            |       | — |   |
| Cash equity contributions                                                                                     | ** ** | —                       |       | 1,431,100                            |            |       | — |   |
| Debt issuance costs paid                                                                                      | ** ** | (26,587                      | )          | (100,813                             | )               |       | — |   |
| Shareholders’ dividends                                                                                  | ** ** | —                       |       | —                               |            |       | (70,077 | ) |
| Proceeds from employee share  plans                                                                           | ** ** | —                       |       | —                               |            |       | 36,069 |   |
| **Net Cash Provided from (Used for) Financing  Activities from Continuing Operations**                        | ** ** | 103,101                      |       | 4,879,985                            |            |       | (78,134 | ) |
| ** **                                                                                                    |       |                         |       |                                 |            |       |   |   |
| **Cash Flows from Discontinued  Operations:**                                                                 |       |                         |       |                                 |            |       |   |   |
| Cash provided from (used) for  operating activities                                                           | ** ** | 3,995                        |       | (2,430                               | )               |       | 12,559 |   |
| Cash provided from (used for)  investing activities:                                                          |       |                         |       |                                 |            |       |   |   |
| Proceeds from sale of  businesses                                                                             | ** ** | 19,523                       |       | —                               |            |       | — |   |
| Other investing activities                                                                                    | ** ** | (208                         | )          | (110                                 | )               |       | 988 |   |
| Cash used for financing  activities                                                                           | ** ** | (167                         | )          | (47                                  | )               |       | (181 | ) |
| **Net Cash Provided from (Used  for) Discontinued Operations**                                                | ** ** | 23,143                       |       | (2,587                               | )               |       | 13,366 |   |
| **Cash Increase (Decrease)  During the Period**                                                               | ** ** | 151,680                      |       | (26,158                              | )          |       | 113,890 |   |
| **Cash and Cash Equivalents at  End of Period**                                                               | ** ** | $                            | 358,899    |                                 | $               | 211,407    |   |    | $ | 237,565 |   |

 

*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 financial statementsinclude the accounts of The ServiceMaster Company and its subsidiaries,collectively referred to as the “Company” or “ServiceMaster”.

 

On March 18, 2007, ServiceMaster entered into an Agreement andPlan of Merger (the “Merger Agreement”) with ServiceMaster Global Holdings, Inc.(formerly CDRSVM Topco, Inc.) (“Holdings”) and CDRSVM Acquisition Co., Inc.,an indirect 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 byServiceMaster, Holdings or Acquisition Co. or any of their respectivedirect or indirect wholly-owned subsidiaries was cancelled and retired, and noconsideration was paid 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 theoperations of ServiceMaster for both the Predecessor and Successor periods. Thecondensed consolidated statements of financial position as of September 30,2008 and December 31, 2007, the condensed consolidated statements ofoperations and of cash flows for the nine months ended September 30, 2008and for the period from July 25, 2007 to September 30, 2007 and thecondensed consolidated statement of operations for the three months ended September 30,2008 reflect the financial position, operations and cash flows of theSuccessor. The condensed consolidated statements of operations and of cashflows for the period from January 1, 2007 to July 24, 2007 and thecondensed consolidated statement of operations for the period from July 1,2007 to July 24, 2007 reflect the operations and cash flows of thePredecessor.

 

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 “discontinued operations” in all periods due to theclassification of InStar as held for sale in 2007. The Company completed thesale of InStar in the third quarter of 2008. The results of operations for anyinterim period are not necessarily indicative of the results which might beachieved for a full year.

 

**Note 2. Significant Accounting Policies**

** **

TheCompany has identified the most important accounting policies with respect toits financial position and results of operations. These relate primarily torevenue recognition and the deferral of customer acquisition costs. Thefollowing revenue recognition policies have not changed from those disclosed inthe 2007 Annual Report.

 

Revenuesfrom lawn care and pest control services, as well as liquid and fumigationtermite applications, are recognized as the services are provided. Revenuesfrom landscaping services are recognized as they are earned based upon contractarrangements or when services are performed for non-contractual arrangements.The Company eradicates termites through the use of baiting systems, as well asthrough non-baiting methods (e.g., fumigation or liquid treatments). Termite 

 

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services using baiting systems, termiteinspection and protection contracts, and home warranty services are frequentlysold through annual contracts for a one-time, upfront payment. Direct costs ofthese contracts (service costs for termite contracts and claim costs forwarranty contracts) are expensed as incurred. The Company recognizes revenueover the life of these contracts in proportion to the expected direct costs.Those costs bear a direct relationship to the fulfillment of the Company’sobligations under the contracts and are representative of the relative valueprovided to the customer (proportional performance method). Home warrantycontract revenue is recognized based on the expected emergence of total claimcosts. The Company regularly reviews its estimates of direct costs for itstermite bait and home warranty contracts and adjusts the estimates when appropriate.Revenue from trade name licensing arrangements is recognized whenearned. The Company has franchise agreements in its TruGreen LawnCare,Terminix, ServiceMaster Clean, Merry Maids, AmeriSpec and Furniture Medicbusinesses. Franchise revenue (which in the aggregate represents approximatelyfour percent of consolidated revenue from continuing operations) consistsprincipally of continuing monthly fees based upon the franchisee’s customerlevel revenue. Monthly fee revenue is recognized when the related customerlevel revenue is reported by the franchisee and collectibility is assured.Franchise revenue also includes initial fees resulting from the sale of afranchise. These fees are fixed and are recognized as revenue whencollectibility is assured and all material services or conditions relating tothe sale have been substantially performed. Total profits from the franchisedoperations (excluding trade name licensing) were approximately $15.6 million,$9.0 million and $4.4 million for the three months ended September 30,2008, the Successor Period from July 25, 2007 to September 30, 2007and the Predecessor Period from July 1, 2007 to July 24, 2007,respectively, and consolidated operating income from continuing operations wasapproximately $110.7 million, $50.6 million and ($15.2) million for the threemonths ended September 30, 2008, the Successor Period from July 25,2007 to September 30, 2007 and the Predecessor Period from July 1,2007 to July 24, 2007, respectively. Total profits from the franchisedoperations (excluding trade name licensing) were approximately $47.3 million,$9.0 million and $31.6 million for the nine months ended September 30,2008, the Successor Period from July 25, 2007 to September 30, 2007and the Predecessor Period from January 1, 2007 to July 24, 2007,respectively, and consolidated operating income from continuing operations wasapproximately $214.5 million, $50.6 million and $143.9 million for the ninemonths ended September 30, 2008, the Successor Period from July 25,2007 to September 30, 2007 and the Predecessor Period from January 1,2007 to July 24, 2007, respectively. The portion of total franchise feeincome related to initial fees received from the sale of franchises wasimmaterial to the Company’s consolidated financial statements for all periods.

 

The Company had $447 million and $408 million of deferred revenue at September 30,2008 and December 31, 2007, respectively. Deferred revenue consistsprimarily of payments received for annual contracts relating to home warranty,termite, pest control and lawn care services.

 

Customer acquisition costs, which are incremental and direct costs ofobtaining a customer, are deferred and amortized over the life of the relatedcontract in proportion to revenue recognized. These costs include salescommissions and direct selling costs which can be shown to have resulted in asuccessful sale.

 

TruGreen LawnCare has significant seasonality in its business. In thewinter and spring, this business sells a series of lawn applications tocustomers which are rendered primarily in March through October (theproduction season). This business incurs incremental selling expenses at thebeginning of the year that directly relate to successful sales for which therevenues are recognized in later quarters. On an interim basis, TruGreenLawnCare defers these incremental selling expenses, pre-season advertisingcosts and annual repairs and maintenance procedures that are performedprimarily in the first quarter. These costs are deferred and recognized inproportion to the contract revenue over the production season, and are notdeferred beyond the calendar year-end. Other business segments of the Companyalso defer, on an interim basis, advertising costs incurred early in the year.These costs are deferred and recognized approximately in proportion to revenueover the balance of the year and are not deferred beyond the calendar year-end.

 

The cost of direct-response advertising at Terminix and TruGreenLawnCare, consisting primarily of direct-mail promotions, is capitalized andamortized over its expected period of future benefits.

 

Thefair values of the Company’s financial instruments reflect the amounts thatwould be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date (exitprice). The fair value estimates presented in this report are based oninformation available to the Company as of September 30, 2008 and December 31, 2007.

 

The preparation of the condensed consolidated financial statementsrequires management to make certain estimates and assumptions required underGAAP which may differ from actual results. Disclosures in the 2007 AnnualReport presented the significant areas that require the use of management’s estimatesand discussed how management formed its judgments. The areas discussed includedrevenue recognition; the allowance for uncollectible receivables; accruals forself-insured retention limits related to medical, workers’ compensation, autoand general liability insurance claims; accruals for 

 

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home warranty and termitedamage claims; the possible outcome of outstanding litigation; accruals forincome tax liabilities as well as deferred tax accounts; the deferral andamortization of customer acquisition costs; useful lives for depreciation andamortization expense; and the valuation of tangible and intangible assets.

 

**Note 3. Acquisition of ServiceMaster**

** **

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

 

Immediately following the completion of the Merger, all of theoutstanding capital stock of Holdings, the ultimate parent company of ServiceMaster,was owned by investment funds sponsored by, or affiliates of, Clayton, Dubilier &Rice, Inc. (“CD&R”), Citigroup Private Equity L.P., BAS CapitalFunding Corporation and J.P. Morgan Ventures Corporation (collectively,the “Equity Sponsors”).

 

Equity contributions totaling $1,431 million from the EquitySponsors, together with (i) borrowings under a new $1,150 millionsenior unsecured interim loan facility (“Interim Loan Facility”), (ii) borrowingsunder a new $2,650 million senior secured term loan facility and (iii) cashon hand at ServiceMaster, were used, among other things, to finance theaggregate Merger Consideration, to make payments in satisfaction of otherequity-based interests in ServiceMaster under the Merger Agreement, to settleexisting interest rate swaps, to redeem or provide for the repayment of certainof the Company’s existing indebtedness and to pay related transaction fees andexpenses. In addition, letters of credit issued under a new $150 millionpre-funded letter of credit facility (together with the senior secured termloan facility, the “Term Facilities”) were used to replace and/or secureletters of credit previously issued under a ServiceMaster credit facility thatwas terminated as of the Closing Date. On the Closing Date, the Company alsoentered into, but did not draw under, a new $500 million senior securedrevolving credit facility (the “Revolving Credit Facility”).

 

In connection with the Merger and the related transactions (the “Transactions”),ServiceMaster retired certain of its existing indebtedness, includingServiceMaster’s $179.0 million, 7.875% notes due August 15, 2009 (the“2009 Notes”). On the Closing Date, the 2009 Notes were called for redemptionand they were redeemed on August 29, 2007. Additionally, the Companyutilized a portion of the proceeds from the Term Facilities to repay atmaturity ServiceMaster’s $49.2 million, 6.95% notes due August 15, 2007.

 

TheInterim Loan Facility matured on July 24, 2008. On the maturity date,outstanding amounts under the Interim Loan Facility were converted on a one toone basis into 10.75%/11.50% senior toggle notes maturing in 2015 (“PermanentNotes”). The Permanent Notes were issued pursuant to a refinancing indenture.In connection with the issuance of Permanent Notes, ServiceMaster entered intoa registration rights agreement, pursuant to which ServiceMaster filed with theSEC a registration statement with respect to the resale of the Permanent Noteson October 22, 2008.

 

See Note 14 to the consolidated financial statements in the 2007Annual Report for a description of the Company’s indebtedness.

 

The Company accounted for the Merger in accordance with SFAS No. 141,“Business Combinations”, which requires the cost of the Merger to be allocatedto the assets and liabilities of the Company based on fair value. The Mergerand the allocation of the purchase price have been recorded as of July 25,2007.

 

The excess of the purchase price over the net tangible and intangibleassets acquired was recorded as goodwill. The Company recorded purchaseaccounting adjustments to increase the carrying value of property, to establishintangible assets for trade names, service marks and trademarks (“trade names”),customer relationships, franchise agreements, backlog and lease commitments,among other things, as well as to reduce to fair value deferred revenue anddeferred customer acquisition costs.

 

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Thefinal allocation of the purchase price is as follows:

 
| **(In millions)**                                        | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|
| Purchase consideration                                        |       | $          | 4,896      |   |
| Net assets acquired (historical basis)                        |       | (1,262     | )          |
| Purchase price in excess of historical  assets                |       | $          | 3,634      |   |
| 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                                                      |       | 1,380      |       |
| 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  |       | $          | 3,634      |   |

 

Goodwill and most trade names are indefinite-lived intangible assets.As a result, goodwill and indefinite-lived trade names will not be amortizedbut will be evaluated for impairment at least annually.

 

TheCompany incurred certain costs related to the Merger that are presented as “Mergerrelated charges” in the Condensed Consolidated Statements of Operations and arerecorded in the Other Operations and Headquarters business segment.

 

**Note 4.Restructuring Charges**

** **

The Company is engaged in a reorganization and restructuring of certainof its businesses and support functions (“Fast Forward”). Among the purposes ofFast Forward is to eliminate layers and bureaucracy and simplify work processesin order to better align the Company’s work processes around its operationaland strategic objectives. It is expected that Fast Forward will be effected inphases. The first phase involved, among other things, a reduction in work forceand various process improvements, including the closing of American Home Shield’scall center located in Santa Rosa, California. The second phase is expected toinclude the organization of certain corporate support functions into Centers ofExcellence which are expected to deliver higher quality services to ourbusiness units at lower costs, the outsourcing to third party vendors ofvarious business activities that currently are handled internally, as well asother employee workforce reductions expected to result in cost-savings. Thefirst phase of Fast Forward was substantially completed in the first quarter of2008, and the second phase is under way.

 

In connection with Fast Forward, the Company incurred costs in thethree and nine months ended September 30, 2008 of approximately$2.0 million and $8.7 million, respectively. Such costs includedconsulting fees of approximately $0.6 million and severance, leasetermination and other costs of approximately $1.4 million for the threemonths ended September 30, 2008. These charges included consulting fees ofapproximately $4.4 million and severance, lease termination and other costs ofapproximately $4.3 million for the nine months ended September 30, 2008. Forthe Successor Period from July 25,2007 to September 30, 2007, the Predecessor Period from July 1, 2007to July 24, 2007 and the Predecessor Period from January 1, 2007 to July 24,2007, the Company incurred $3.4 million, $0.2 million and$0.2 million of restructuring charges related to Fast Forward,respectively.

 

The results for the Successor Period ended September 30,2007 and the Predecessor Period ended July 24, 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 Successor Period from July 25, 2007to September 30, 2007, the Company recognized charges of approximately$4.7 million, which consisted of $3.7 million of employee retention andseverance and $1.0 million of recruiting and related costs. In the PredecessorPeriod from July 1, 2007 to July 24, 2007, the Company recognizedcharges of approximately $1.5 million, which consisted of $1.0 million ofemployee retention and severance and $0.5 million of recruiting and relatedcosts. In the Predecessor Period from January 1, 2007 to July 24,2007, the Company recognized charges of approximately $16.8 million, whichconsisted of $12.8 million of employee retention and severance and $4.0 millionof recruiting and related costs. During the three and nine months ended September 30,2008, the Company reversed net expenses of $0.2 million and recorded additionalexpense of $0.4 million, respectively, relating to this relocation, whichincludes additional severance and other costs.

 

Thepretax charges discussed above are reported in the “Restructuring charges” linein the Condensed Consolidated Statements of Operations.

 

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**Note 5. Commitments and Contingencies**

** **

The Company carries insurance policies on insurable risks at levelsthat it believes to be appropriate, including workers’ compensation, auto andgeneral liability risks. The Company purchases insurance from third-partyinsurance carriers. These policies often incorporate deductibles orself-insured retentions. The Company is required to pay all claims that fallbelow the retention limits. As of September 30, 2008 and December 31,2007, the Company had accrued self-insured claims of $151 million and $159million, respectively. During the nine months ended September 30, 2008,the Successor Period from July 25 to September 30, 2007 and thePredecessor Period from January 1, 2007 to July 24, 2007, the Companyrecorded provisions for uninsured claims totaling $28 million, $8 million and$29 million, respectively, and the Company paid claims totaling $37 million, $8million and $33 million, respectively. The Company uses historical claimsexperience to establish both the current year accrual and the underlying provisionfor future losses. This actuarially determined provision and related accrualincludes both known claims, as well as incurred but not reported claims. TheCompany adjusts its estimate of accrued self-insured claims when required toreflect changes based on factors such as changes in health care costs, accidentfrequency and claim severity.

 

Accruals for warranty claims in the American Home Shield business aremade based on the Company’s claims experience and actuarial projections.Termite damage claim accruals are recorded based on both the historical ratesof claims incurred within a contract year and the cost per claim. Currentactivity could differ causing a change in estimates. The Company has certainliabilities with respect to existing or potential claims, lawsuits and otherproceedings. The Company accrues for these liabilities when it is probable thatfuture costs will be incurred and such costs can be reasonably estimated. Anyresulting adjustments, which could be material, are recorded in the period theadjustments 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 September 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 September 30, 2008. Thebalance of the funded amount is treated as operating leases. The Company hasguaranteed the residual value of the properties under the leases up to73 percent of the fair market value at the commencement of the lease. At September 30,2008, the Company’s residual value guarantee related to the leased assetstotaled $53 million for which the Company has recorded the estimated fair valueof this guarantee (approximately $0.1 million) in the CondensedConsolidated Statements of Financial Position. In connection with the closingof the Merger, the Company amended these leases effective July 24, 2007.Among the modifications, the Company extended the lease terms through July 24,2010. The operating lease and capital lease classifications of these leases didnot change 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 84 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 September 30, 2008, therewas approximately $114 million of residual value relating to the Company’sfleet and equipment leases. The fair value of the assets under all of the fleetand equipment leases is expected to substantially mitigate the Company’sguarantee obligations under the agreements. At September 30, 2008, theCompany has recorded the estimated fair value of this guarantee ofapproximately $2.1 million in the Condensed Consolidated Statement ofFinancial Position.

 

The Company has guarantees on certain bonds issued by divestedcompanies, primarily performance type bonds. The maximum payments the Companycould be required to make if the buyers of the divested companies are unable tofulfill their obligations is approximately $4.1 million at September 30,2008. Substantially all of the bonds are scheduled to expire in 2008, but maybe extended depending on the completion of the related projects. The Companybelieves that if it were to incur a loss on any individual bond guarantee, thelikelihood of which the Company believes is remote, such loss would not have amaterial effect on the Company’s business, financial condition, annual resultsof operations or cash flows.

 

In the ordinary course of conducting its business activities, theCompany becomes involved in judicial, administrative and regulatory proceedingsinvolving both private parties and governmental authorities. These proceedingsinclude general and commercial liability and employment actions as well asenvironmental proceedings. The Company does not expect any of these proceedingsto have a material effect on the Company’s business, financial condition,annual results of operations or cash flows.

 

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**Note 6. Goodwill and Intangible Assets**

** **

In accordance with SFAS No. 142, “Goodwilland Other Intangible Assets”, goodwill and intangible assets that are notamortized are subject to assessment for impairment by applying a fair-valuebased test on an annual basis or more frequently if circumstances indicate apotential impairment. The Company’s annual assessment date is October 1.

 

Thetable below summarizes the goodwill balances by segment for continuingoperations:

 
| **(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                       |       | 19,786                 |       | —                       |       | 8,394        |       | —                                 |       | 1,045                                                      |       | 29,225    |       |
| Other(1)                           |       | (143                   | )          | (1,392                       | )          | (153         | )          | (59                                    | )          | 637                                                        |       | (1,110    | )          |
| Balance at September 30, 2008 |       | $                      | 1,163,313  |                         | $          | 46,480       |       | $                                      | 1,332,194  |                                                       | $          | 350,020   |       | $ | 186,031 |   | $ | 3,078,038 |   |

 

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| (1) | Primarily  reflects the tax effect of the amortization of tax deductible goodwill and  the impact of the resolution of certain tax items. Also reflects adjustments  to the preliminary purchase price allocation related to the Merger. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Thetable below summarizes the other intangible asset balances for continuingoperations:

 
| ** **               | ** ** | **As of   September 30,** | ** ** | **As of   December 31,** | ** ** |
|--------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| **(In thousands)**  | ** ** | **2008**                                 | ** ** | **2007**                                | ** ** |
| Trade names(1)           |       | $                                        | 2,468,200  |                                    | $          | 2,468,200 |   |
| Other intangible assets  |       | 856,550                                  |       | 849,715                                 |       |
| Accumulated amortization |       | (265,754                                 | )          | (132,662                                | )          |
| Net other intangibles    |       | 590,796                                  |       | 717,053                                 |       |
| Total                    |       | $                                        | 3,058,996  |                                    | $          | 3,185,253 |   |

 

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| (1) | Not  subject to amortization. |
|-----|-------------------------------|

 

**Note 7. Stock-Based Compensation**

** **

On November 20, 2007, the board ofdirectors of Holdings adopted the ServiceMaster Global Holdings, Inc. StockIncentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan providesfor the sale of shares of Holdings stock to ServiceMaster’s executive officers,other key employees and directors as well as the grant of deferred share unitsand options to purchase shares of Holdings to those individuals. The board ofdirectors of Holdings, or a committee designated by it, selects the officers,employees and directors eligible to participate in the Stock Incentive Plan anddetermines the specific number of shares to be offered or options to be grantedto an individual employee or director. A maximum of 12,445,000 shares ofHoldings stock are reserved for issuance under the Stock Incentive Plan.Holdings currently intends to satisfy any need for shares of common stock ofHoldings associated with the exercise of options issued under the StockIncentive Plan through those shares reserved for issuance or any sharesrepurchased from participants in the Stock Incentive Plan.

 

All option grants under the Stock IncentivePlan will be non-qualified options with a per-share exercise price no less thanthe fair market value of one share of Holdings stock on the grant date. Anystock options granted will generally have a term of ten years and vesting willbe subject to an employee’s continued employment. The board of directors ofHoldings, or a committee designated by it, may accelerate the vesting of anoption at any time. In addition, vesting of options will be accelerated ifHoldings experiences a change in control (as defined in the Stock IncentivePlan) unless options with substantially equivalent terms and economic value aresubstituted for existing options in place of accelerated vesting. Vesting ofoptions will also be accelerated in the event of an employee’s death ordisability (as defined in the Stock Incentive Plan). Upon a termination forcause (as defined in the Stock Incentive Plan), all options held by an employeeare immediately cancelled. Following a termination without cause, vestedoptions will generally remain exercisable through the earliest of theexpiration of their term or three months following termination of employment(one year in the case of death, disability or retirement at normal retirementage).

 

Unless sooner terminated by the board ofdirectors of Holdings, the Stock Incentive Plan will remain in effect until November 20,2017.

 

All options granted will vest in four equalannual installments, subject to an employee’s continued employment. Thefour-year vesting period is the requisite service period over whichcompensation cost will be recognized on a straight-line 

 

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basis for allgrants. The options will be accounted for as equity-classified awards. Thenon-cash stock-based compensation expense associated with the Stock IncentivePlan is pushed down from Holdings and recorded in the financial statements ofServiceMaster.

 

Duringthe Successor three and nine months ended September 30, 2008, stock-basedcompensation expense was approximately $1.7 million ($1.2 million after-tax)and $5.1 million ($4.2 million after-tax), respectively. During the PredecessorPeriod from July 1, 2007 to July 24, 2007 and the Predecessor Periodfrom January 1, 2007 to July 24, 2007, stock-based compensationexpense was approximately $0.4 million ($0.2 million after-tax) and $3.4million ($2.0 million after-tax), respectively. There was no stock-basedcompensation expense during the Successor period from July 25, 2007 to September 30,2007.

 

Asof September 30, 2008, there was approximately $22.8 million of totalunrecognized compensation cost related to non-vested options to purchase sharesof Holdings stock. These remaining costs are expected to be recognized over theremaining 3.2 years of the weighted average four-year requisite service period.

 

**Note 8. Supplemental Cash Flow Information**

 

In the Condensed Consolidated Statements of Cash Flows, the caption “Cashand cash equivalents” includes investments in short-term, highly-liquidsecurities having a maturity of three months or less when purchased.Supplemental information relating to the Condensed Consolidated Statements ofCash Flows for the Successor nine months ended September 30, 2008, theSuccessor Period from July 25 to September 30, 2007 and thePredecessor Period from January 1, 2007 to July 24, 2007 is presentedin the following table:

 
| ** **                                                     | ** ** | **Successor**           | ** ** | **Predecessor**             | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                     | ** ** | **Nine**                | ** ** | **July 25, 2007** | ** ** | **Jan. 1, 2007** | ** ** |
| **(In thousands)**                                        | ** ** | **months ended**   | ** ** | **to**                      | ** ** | **to** | ** ** |
| **Cash paid for or (received from):** | ** ** | **Sept. 30, 2008** | ** ** | **Sept. 30, 2007**          | ** ** | **July 24, 2007** | ** ** |
| Interest expense                                               |       | $                       | 236,812    |                        | $          | 50,198 |   | $ | 27,387 |   |
| Interest and dividend income                                   |       | (10,172                 | )          | (4,857                      | )          | (7,810 | ) |
| Income taxes, net of refunds                                   |       | 8,844                   |       | 2,978                       |       | 17,363 |   |
|                                                                |            |                         |            |                             |            |  |  |  |  |  |

 

**Note 9. Comprehensive Income**

 

Total comprehensive income (loss) was $4 million and ($45) million forthe Successor three and nine months ended September 30, 2008,respectively, and ($20) million, ($16) million and $83 million for the Successor Period from July 25, 2007to September 30, 2007, the Predecessor Period from July 1, 2007 to July 24,2007 and the Predecessor Period from January 1, 2007 to July 24, 2007,respectively. Total comprehensive income primarily includes net income, unrealizedgains (losses) on marketable securities, unrealized gains (losses) onderivative instruments and the effect of foreign currency translation.

 

**Note 10. Receivable Sales**

** **

TheCompany has an arrangement to provide for the ongoing revolving sale of adesignated pool of accounts receivable of TruGreen LawnCare and Terminix to awholly-owned, bankruptcy-remote subsidiary, ServiceMaster Funding Company LLC.ServiceMaster Funding Company LLC has entered into an arrangement pursuant towhich it may transfer, on a revolving basis, an undivided percentage ownershipinterest in a pool of accounts receivable to unrelated third party purchasers.ServiceMaster Funding Company LLC retains an undivided percentage interest inthe pool of accounts receivable and bad debt losses for the entire pool areallocated first to this retained interest. During the third quarter of 2008 aninterest in the pool of accounts receivable was transferred to a third party inexchange for $10 million. During the Successor Period from July 25, 2007 toSeptember 30, 2007, the Predecessor Period from July 1, 2007 to July 24, 2007and the Predecessor Period from January 1, 2007 to July 24, 2007, there were notransfers of interests in the pool of accounts receivables to third partiesunder this arrangement. The arrangement is a 364-day facility that is renewableat the option of ServiceMaster Funding Company LLC, with a final terminationdate of July 17, 2012. The Company may transfer up to $50 million of interestsin its pool of receivables to these purchasers and therefore has immediateaccess to cash proceeds from these transfers. The amount of the eligiblereceivables varies during the year based on seasonality of the business andcould, at times, limit the amount available to the Company from the sale ofthese interests. There are two potential third party purchasers under thearrangement. However, only one purchaser is required to purchase interests inthe pool of receivables under the arrangement. If this purchaser were toexercise its right to terminate its participation in the arrangement, which itmay do in the third quarter of each year, the amount of cash available to theCompany may be reduced or eliminated. The purchaser did not exercise its rightto terminate its participation in the arrangement in the third quarter of 2008.

 

The Company has recorded itsobligation to repay the third party for its interest in the pool of receivablesas long-term debt in these condensed consolidated financial statements. Theinterest rates applicable to the Company’s obligation are based on afluctuating rate of interest measured based on the third party purchaser’spooled commercial paper rate, as defined (4.34% at September 30, 2008).

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**Note 11. Cash and MarketableSecurities**

 

Cash, money market funds and certificates ofdeposits, with maturities of three months or less, are included in theCondensed Consolidated Statements of Financial Position caption “Cash and CashEquivalents.” As of September 30, 2008 and December 31, 2007, theCompany’s investments consist primarily of domestic publicly traded debt of$90.3 million and $130.6 million, respectively and common equitysecurities of $54.4 million and $137.2 million, respectively.

 

The aggregate market value of the Company’sshort-term and long-term investments in debt and equity securities was$144.7 million and $267.8 million and the aggregate cost basis was$147.8 million and $260.8 million at September 30, 2008 and December 31,2007, respectively.

 

Gains and losses on sales of investments, as determined on a specificidentification basis, are included in investment income in the period they arerealized. The Company periodically reviews its portfolio of investments todetermine whether there has been an other than temporary decline in the valueof the investments from factors such as deterioration in the financialcondition of the issuer or the market(s) in which it competes. The Companyrecorded an impairment charge of approximately $0.9 million($0.6 million after-tax) and $9.0 million ($7.3 millionafter-tax) during the three and nine months ended September 30, 2008,respectively, due to other than temporary declines in the value of certaininvestments. The Company recorded an impairment charge of approximately $0.3million ($0.2 million after-tax) and $0.9 million ($0.6 million after-tax)during the Successor Period from July 25, 2007 to September 30, 2007and the Predecessor Period from January 1, 2007 to July 24, 2007, dueto other than temporary declines in the value of certain investments. There wasno impairment charge recorded during the Predecessor Period from July 1,2007 to July 24, 2007 due to other than temporary declines in the value ofcertain investments. The unrealized gains in the investment portfolio wereapproximately $3.6 million and $8.4 million as of September 30,2008 and December 31, 2007, respectively. Unrealized losses were approximately$6.7 million and $1.4 million as of September 30, 2008 and December 31,2007, respectively. The portion of unrealized losses which have been in a lossposition for more than one year at September 30, 2008 was approximately$0.1 million. There were no unrealized losses which have been in a lossposition for more than one year at December 31, 2007. The aggregate fairvalue of the investments with unrealized losses totaled $46.2 million and$20.4 million at September 30, 2008 and December 31, 2007,respectively.

 

**Note 12. Long-Term Debt**

 

Long-term debt at September 30,2008 and December 31, 2007 is summarized in the following table:

 
| **(In thousands)**                                  | ** ** | **As of   September 30,  2008** | ** ** | **As of   December 31,  2007** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| Senior secured term loan facility maturing  in 2014      |       | $                                              | 2,616,875  |                                          | $          | 2,636,750 |   |
| Senior unsecured interim loan facility  maturing in 2008 |       | —                                         |       | 1,150,000                                     |       |
| 10.75%/11.50% Senior Toggle Notes maturing  in 2015      |       | 1,150,000                                      |       | —                                        |       |
| Revolving credit facility maturing in 2013               |       | 165,000                                        |       | —                                        |       |
| 7.10% notes maturing in 2018 (1)                         |       | 61,217                                         |       | 59,772                                        |       |
| 7.45% notes maturing in 2027 (1)                         |       | 144,548                                        |       | 142,457                                       |       |
| 7.25% notes maturing in 2038 (1)                         |       | 58,814                                         |       | 58,206                                        |       |
| Other                                                    |       | 74,740                                         |       | 83,626                                        |       |
| Less current portion                                     |       | (221,845                                       | )          | (53,564                                       | )          |
| Total long-term debt                                     |       | $                                              | 4,049,349  |                                          | $          | 4,077,247 |   |

 

----

| (1) | The increase from the balance at December 31, 2007 reflects the  amortization of fair value adjustments related to purchase accounting, which  increases the effective interest rate from the coupon rates shown above. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

TheInterim Loan Facility matured on July 24, 2008. On the maturity date,outstanding amounts under the Interim Loan Facility were converted on a one toone basis into the Permanent Notes. The Permanent Notes were issued pursuant toa refinancing indenture. In connection with the issuance of Permanent Notes,ServiceMaster entered into a registration rights agreement, pursuant to whichServiceMaster filed with the SEC a registration statement with respect to theresale of the Permanent Notes on October 22, 2008.

 

InFebruary 2008, the Company entered into two 3-year interest rate swapagreements and one 4-year interest rate swap agreement, effective March 3,2008. The total notional amount of the 3-year agreements was $250 millionand the total notional amount of the 4-year swap agreement was$250 million. Under the terms of the agreements, the Company will pay aweighted average fixed rate of interest of approximately 3.15% on the notionalamount of the 3-year swap agreements and 3.48% on the notional amount of the4-year swap agreement. The Company will receive a floating rate of interest(based on 

 

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three month LIBOR) on the notional amount.Therefore, the effective interest rate for $500 million of the term loansis fixed at a rate between 5.90% and 6.23%, including the borrowing margindescribed in Note 14 to the consolidated financial statements in the 2007Annual Report.

 

InAugust 2008, the Company entered into two 3-year interest rate swapagreements effective September 2, 2008. The total notional amount of theswap agreements was $200 million. Under the terms of the agreements, theCompany will pay a weighted average fixed rate of interest of approximately3.83% on the $200 million notional amount of the swap agreements. The Companywill receive a floating rate of interest (based on one month LIBOR) on thenotional amount. Therefore, the effective interest rate for $200 million of theterm loans is fixed at a rate of approximately 6.58%, including the borrowingmargin described in Note 14 to the consolidated financial statements in the2007 Annual Report.

 

InSeptember 2008, the Company entered into a 4-year interest rate swapagreement effective October 1, 2008. The notional amount of the swapagreement was $200 million. Under the terms of the agreement, the Company willpay a weighted average fixed rate of interest of 3.53% on the $200 millionnotional amount of the swap agreement. The Company will receive a floating rateof interest (based on one month LIBOR) on the notional amount. Therefore, theeffective interest rate for $200 million of the term loans is fixed at a rateof approximately 6.28%, including the borrowing margin described in Note 14 tothe consolidated financial statements in the 2007 Annual Report.

 

Inaccordance with SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities”, the interest rate swap agreements referred to above 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. Discontinued Operations**

 

Reported “loss from discontinued operations, net of income taxes” forall periods presented includes the operating results of the sold anddiscontinued businesses noted in the 2007 Annual Report.

 

During the third quarter of 2008, the Company completed the sale ofInStar for $22.9 million, with the payment of $3.0 million of that amountdeferred until November 2011. During the second quarter of 2008, theCompany recorded a pre-tax impairment charge of $6.3 million as a result of achange in our fair value estimate of InStar’s net assets based on changingmarket conditions and the ongoing sales process. Upon the sale of InStar theCompany recorded a loss on sale, net of tax, of $0.6 million. The purchaseprice noted above is subject to a final adjustment based on closing dateworking capital balances at InStar. These closing balances are subject to areview period by the Company and the purchasers of InStar. The loss on salenoted above includes an estimated adjustment for the closing date workingcapital balances. However, this amount could change pending the completion ofthe review in the fourth quarter of 2008. Such changes, if any, would notcurrently be expected to be material to the Company’s consolidated financialstatements. 

** **

Theoperating results and financial position of discontinued operations are asfollows:

 
| ** **                        | ** ** | **Successor**                      | ** ** | ** **                      | **Predecessor** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|---------------------------------|-----------------|------------|
| ** **                        | ** ** | **Three   months ended** | ** ** | **July 25, 2007  to** | ** **      | ** ** | **July 1, 2007   to** | ** ** |
| **(In thousands)**           | ** ** | **Sept. 30, 2008**       | ** ** | **Sept. 30, 2007**    | ** **      | ** ** | **July 24, 2007** | ** ** |
| Operating Results:                |       |                               |       |                            |            |       |   |   |
| Operating revenue                 |       | $                                  | 11,269     |                            | $               | 12,444     |   |   | $ | 3,174 |   |
| Operating loss                    |       | (835                               | )          | (4,304                          | )               |       | (2,440 | ) |
| Interest expense                  |       | (3                                 | )          | (9                              | )               |       | (2 | ) |
| Pretax loss                       |       | (838                               | )          | (4,313                          | )               |       | (2,442 | ) |
| Benefit from income taxes         |       | (239                               | )          | (1,723                          | )               |       | (975 | ) |
| Loss on sale, net of tax          |       | (587                               | )          | —                          |            |       | — |   |
| Loss from discontinued operations |       | $                                  | (1,186     | )                               | $               | (2,590     | ) |   | $ | (1,467 | ) |
| ** **                        | ** ** | ** **                         | ** ** | ** **                      | ** **      | ** ** |
| ** **                        | ** ** | **Successor**                      | ** ** | ** **                      | **Predecessor** | ** ** |
| ** **                        | ** ** | **Nine   months ended**  | ** ** | **July 25, 2007  to** | ** **      | ** ** | **Jan. 1, 2007  to** | ** ** |
| **(In thousands)**           | ** ** | **Sept. 30, 2008**       | ** ** | **Sept. 30, 2007**    | ** **      | ** ** | **July 24, 2007** | ** ** |
| Operating Results:                |       |                               |       |                            |            |       |   |   |
| Operating revenue                 |       | $                                  | 50,909     |                            | $               | 12,444     |   |   | $ | 43,413 |   |
| Operating loss                    |       | (206                               | )          | (4,304                          | )               |       | (7,617 | ) |
| Interest expense                  |       | (73                                | )          | (9                              | )               |       | (38 | ) |
| Impairment charge                 |       | (6,317                             | )          | —                          |            |       | — |   |
| Pretax loss                       |       | (6,596                             | )          | (4,313                          | )               |       | (7,655 | ) |
| Benefit from income taxes         |       | (2,513                             | )          | (1,723                          | )               |       | (3,067 | ) |
| Loss on sale, net of tax          |       | (587                               | )          | —                          |            |       | — |   |
| Loss from discontinued operations |       | $                                  | (4,670     | )                               | $               | (2,590     | ) |   | $ | (4,588 | ) |

 

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| ** **            | ** ** | **As of   September 30,  2008** | ** ** | **As of   December 31,  2007** | ** ** |
|-----------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| Financial Position:   |       |                                           |       |                                          |       |
| Current assets        |       | $                                              | 240        |                                          | $          | 42,474 |   |
| Current liabilities   |       | 5,824                                          |       | 12,983                                        |       |
| Long-term liabilities |       | 4,253                                          |       | 7,765                                         |       |
| Total liabilities     |       | $                                              | 10,077     |                                          | $          | 20,748 |   |

 

Thetable below summarizes the activity during the nine months ended September 30,2008 for the remaining liabilities from operations that were disposed of inyears prior to 2008. The remaining obligations primarily relate to long-termself-insurance claims. The Company believes that the remaining reservescontinue to be adequate and reasonable.

 
| **(In thousands)**                            | ** ** | **Balance at   December 31,  2007** | ** ** | **Cash Payments  or Other** | ** ** | **(Income) /  Expense** | ** ** | **Balance at   September 30,  2008** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------|------------|------------------------------|------------|-----------------------------------------------------|------------|
| Remaining liabilities of discontinued  operations: |       |                                               |       |                                  |       |                         |       |                                                |       |
| ARS/AMS                                            |       | $                                                  | 2,384      |                                  | $          | (311                         | )          | $                                                   | 550        |   | $ | 2,623 |   |
| LandCare Construction                              |       | 1,257                                              |       | (442                                  | )          | 153                          |       | 968                                                 |       |
| LandCare utility line clearing business            |       | 1,350                                              |       | (159                                  | )          | —                       |       | 1,191                                               |       |
| Certified Systems, Inc. and other             |       | 6,721                                              |       | 161                                   |       | (3,270                       | )          | 3,612                                               |       |
|                                                    |            |                                                    |            |                                       |            |                              |            |                                                     |            |  |  |  |  |

 

**Note14. Income Taxes**

 

Asof September 30, 2008 and December 31, 2007, the Company had $16.1million and $13.3 million, respectively, of tax items primarily reflected instate tax returns that had not been recognized for financial reporting (“unrecognizedtax benefits”). If recognized prior to December 31, 2008,$12.3 million ($8.9 million, net of federal and state tax effects) wouldbe recorded as a purchase accounting adjustment to goodwill and$3.8 million ($3.4 million, net of federal and state tax effects) wouldaffect the Company’s effective tax rate.

 

Upto $7.4 million of the Company’s unrecognized tax benefits could berecognized within the next twelve months. The Company recognized approximately$0.5 million of its unrecognized tax benefits during the nine months ended September 30,2008 and approximately $1.7 million and $5.5 million during theSuccessor Period from July 25 to September 30, 2007 and thePredecessor Period from January 1, 2007 to July 24, 2007, respectively.

 

TheCompany files consolidated and separate income tax returns in the United Statesfederal jurisdiction and in many state and foreign jurisdictions. The Companyhas been audited by the United States Internal Revenue Service (“IRS”) through2006 and is no longer subject to state and local or foreign income taxexaminations by tax authorities for years before 2001.

 

Inthe ordinary course, the Company is subject to review by domestic and foreigntaxing authorities, including the IRS. As noted above, the U.S. federal taxreturns filed by the Company through the 2006 return have been reviewed by theIRS. The Company paid $5 million primarily in the first quarter of 2006relating to the resolution of the 2003 and 2004 audits. The IRS completed theaudits of the Company’s tax returns for 2005 and 2006, with no adjustments oradditional payments. The IRS commenced examinations of the Company’s U.S.federal income tax returns for 2007 and 2008 in the first quarter of 2007 andthe third quarter of 2008, respectively. At this time, the outcome of theseaudits is not known and no significant adjustments have been proposed by theIRS pertaining to these audit periods. Five state tax authorities are in theprocess of auditing state income tax returns of various subsidiaries. One stateaudit is at the appeals level. If state authorities were to prevail with theirassessments, the Company does not anticipate that these adjustments would havea material impact on the Company’s financial position, annual results ofoperations or cash flows.

 

TheCompany’s policy is to recognize potential interest and penalties related toits tax positions within the tax provision. During the three and nine monthsended September 30, 2008, the Company recognized interest expense ofapproximately $0.1 million and $0.7 million, respectively, through the taxprovision. During the Successor Period from July 25, 2007 to September 30,2007, the Predecessor Period from July 1, 2007 to July 24, 2007 andthe Predecessor Period from January 1, 2007 to July 24, 2007, theCompany recognized interest expense of approximately $10 thousand, $10 thousandand $0.8 million, respectively, through the tax provision. As of September 30,2008 and December 31, 2007, the Company had accrued for the payment ofinterest and penalties of approximately $3.3 million ($2.0 million, net offederal and state tax effects) and $2.4 million ($1.4 million, net of federaland state tax effects), respectively.

 

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***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 LandCaresegment provides landscaping services primarily to commercial customers. TheTerminix segment 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.*

* *

*Segment information forcontinuing operations is presented below.*

 
| ** **                            | ** ** | **Successor**                | ** ** | ** **                   | **Predecessor** | ** ** | **Successor**               | ** ** | ** **                   | **Predecessor** | ** **                   |
|---------------------------------------|------------|------------------------------|------------|------------------------------|-----------------|------------|-----------------------------|------------|------------------------------|-----------------|------------------------------|
| ** **                            | ** ** | **Three**                    | ** ** | **July 25, 2007**  | ** **      | ** ** | **July 1, 2007**  | ** ** | **Nine**                     | ** **      | **July 25, 2007**  | ** ** | ** ** | **Jan. 1, 2007** | ** ** |
| ** **                            | ** ** | **months ended**        | ** ** | **to**                       | ** **      | ** ** | **to**                      | ** ** | **months ended**        | ** **      | **to**                       | ** ** | ** ** | **to** | ** ** |
| **(In thousands)**               | ** ** | **Sept. 30, 2008** | ** ** | **Sept. 30, 2007** | ** **      | ** ** | **July 24, 2007** | ** ** | **Sept. 30, 2008** | ** **      | **Sept. 30, 2007** | ** ** | ** ** | **July 24, 2007** | ** ** |
| Operating Revenue:                    |       |                         |       |                         |            |       |                        |       |                         |            |                         |   |   |   |   |
| TruGreen LawnCare                     |       | $                            | 364,442    |                         | $               | 273,485    |                        |       | $                            | 88,927          |                         | $ | 876,180 |   | $ | 273,485 |   |   | $ | 597,147 |   |
| TruGreen LandCare                     |       | 78,365                       |       | 76,325                       |            |       | 26,914                      |       | 240,894                      |            | 76,325                       |   |   | 242,154 |   |
| Terminix                              |       | 273,172                      |       | 201,087                      |            |       | 72,200                      |       | 846,594                      |            | 201,087                      |   |   | 645,700 |   |
| American Home Shield                  |       | 177,328                      |       | 99,389                       |            |       | 50,134                      |       | 450,316                      |            | 99,389                       |   |   | 331,361 |   |
| Other Operations and Headquarters     |       | 54,766                       |       | 40,339                       |            |       | 13,983                      |       | 163,625                      |            | 40,339                       |   |   | 118,028 |   |
| Total Operating Revenue               |       | $                            | 948,073    |                         | $               | 690,625    |                        |       | $                            | 252,158         |                         | $ | 2,577,609 |   | $ | 690,625 |   |   | $ | 1,934,390 |   |
| Operating Income   (Loss): (1),(2)    |       |                         |       |                         |            |       |                        |       |                         |            |                         |   |   |   |   |
| TruGreen LawnCare                     |       | $                            | 64,060     |                         | $               | 48,027     |                        |       | $                            | 14,436          |                         | $ | 85,914 |   | $ | 48,027 |   |   | $ | 75,656 |   |
| TruGreen LandCare                     |       | (323                         | )          | (4,434                       | )               |       | (146                        | )          | (925                         | )               | (4,434                       | ) |   | (2,206 | ) |
| Terminix                              |       | 30,696                       |       | 21,661                       |            |       | 2,101                       |       | 133,591                      |            | 21,661                       |   |   | 109,461 |   |
| American Home Shield                  |       | 22,897                       |       | (4,327                       | )               |       | 8,283                       |       | 14,606                       |            | (4,327                       | ) |   | 35,582 |   |
| Other Operations and Headquarters (2) |       | (6,659                       | )          | (10,373                      | )               |       | (39,836                     | )          | (18,638                      | )               | (10,373                      | ) |   | (74,561 | ) |
| Total segment operating income (loss) |       | $                            | 110,671    |                         | $               | 50,554     |                        |       | $                            | (15,162         | )                            | $ | 214,548 |   | $ | 50,554 |   |   | $ | 143,932 |   |

 

----

(1) Presentedbelow is a reconciliation of total segment operating income (loss) to income(loss) from continuing operations before income taxes.

 
| ** **                                                    | ** ** | **Successor**                | ** ** | ** **                   | **Predecessor** | ** ** | **Successor**               | ** ** | ** **                   | **Predecessor** | ** **                   |
|---------------------------------------------------------------|------------|------------------------------|------------|------------------------------|-----------------|------------|-----------------------------|------------|------------------------------|-----------------|------------------------------|
| ** **                                                    | ** ** | **Three**                    | ** ** | **July 25, 2007**  | ** **      | ** ** | **July 1, 2007**  | ** ** | **Nine**                     | ** **      | **July 25, 2007**  | ** ** | ** ** | **Jan. 1, 2007** | ** ** |
| ** **                                                    | ** ** | **months ended**        | ** ** | **to**                       | ** **      | ** ** | **to**                      | ** ** | **months ended**        | ** **      | **to**                       | ** ** | ** ** | **to** | ** ** |
| **(In thousands)**                                       | ** ** | **Sept. 30, 2008** | ** ** | **Sept. 30, 2007** | ** **      | ** ** | **July 24, 2007** | ** ** | **Sept. 30, 2008** | ** **      | **Sept. 30, 2007** | ** ** | ** ** | **July 24, 2007** | ** ** |
| Total segment operating income (loss)                         |       | $                            | 110,671    |                         | $               | 50,554     |                        |       | $                            | (15,162         | )                            | $ | 214,548 |   | $ | 50,554 |   |   | $ | 143,932 |   |
| Non-operating expense (income):                               |       |                         |       |                         |            |       |                        |       |                         |            |                         |   |   |   |   |
| Interest expense                                              |       | 83,886                       |       | 78,257                       |            |       | 3,500                       |       | 256,897                      |            | 78,257                       |   |   | 31,643 |   |
| Interest and net investment (income) loss                     |       | (244                         | )          | (3,890                       | )               |       | (2,440                      | )          | 1,637                        |            | (3,890                       | ) |   | (28,624 | ) |
| Minority interest and other expense, net                      |       | 141                          |       | 102                          |            |       | 11                          |       | 418                          |            | 102                          |   |   | 3,532 |   |
| Income (loss) from Continuing Operations  before Income Taxes |       | $                            | 26,888     |                         | $               | (23,915    | )                           |       | $                            | (16,233         | )                            | $ | (44,404 | ) | $ | (23,915 | ) |   | $ | 137,381 |   |

 

(2)          The results include restructuring charges forseverance, as well as costs associated with Fast Forward, and payments foremployee retention and severance related to the Company’s decision toconsolidate its corporate headquarters into its operations support center inMemphis, Tennessee and close its former headquarters in Downers Grove,Illinois. The restructuring charges totaled $1.8 million and $9.1 millionin the three and nine months ended September 30, 2008, respectively, and$8.2 million, $1.6 million and $16.9 million in the Successor Period from July 25, 2007 to September 30,2007, the Predecessor Period from July 1, 2007 to July 24, 2007 andthe Predecessor Period from January 1, 2007 to July 24, 2007,respectively. The results also include Merger charges related to the purchaseof ServiceMaster by a group of investors led by CD&R. The Merger relatedcharges totaled $0.4 million and $0.8 million in the three and nine monthsended September 30, 2008, respectively, and $0.5 million, $36.1million and $41.4 million in theSuccessor Period from July 25, 2007 to September 30, 2007, thePredecessor Period from July 1, 2007 to July 24, 2007 and thePredecessor Period from January 1, 2007 to July 24, 2007,respectively.

 

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**Note16. Related Party Transactions**

 

Inconnection with the Transactions, the Company entered into a consultingagreement with CD&R under which CD&R provides the Company with on-goingconsulting and management advisory services in exchange for an annualmanagement fee of $2 million. This fee is payable quarterly. The Companyrecorded a management fee of $0.5 million and $1.5 million for the three and nine months ended September 30,2008, respectively. The management fee totaled $0.4 million for the SuccessorPeriod from July 25, 2007 to September 30, 2007. There was nomanagement fee recorded for the Predecessor Period from January 1, 2007 toJuly 24, 2007. The consultingagreement also provides that CD&R may receive future fees in connectionwith certain subsequent financing and acquisition or disposition transactions.

 

**Note 17. Newly Issued Accounting Statementsand Positions**

 

In September 2006, the Financial Accounting Standards Board (“FASB”)issued SFAS 157, “Fair Value Measurement”. This Statement defines fairvalue, establishes a framework for measuring fair value in accordance withGAAP, and expands disclosures about fair value measurements. SFAS No. 157does not require any new fair value measurements. In February 2008, theFASB approved 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 ordisclosed at fair value in the financial statements on a nonrecurring basis forfiscal years beginning after November 15, 2008. The Company has assessedthe impact of this Statement to the Company’s consolidated financial position,results of operations and cash flows. The Company has adopted this Statement forfinancial assets and liabilities (See Note 18). The Company does not expect theadoption of this Statement for non-financial assets and liabilities recognizedat fair value on a nonrecurring basis to have a material effect on theseconsolidated financial statements.

 

InFebruary 2007, the FASB issued SFAS 159, “The Fair Value Option forFinancial Assets and Financial Liabilities”. This Statement permits entities tochoose to measure at fair value many financial instruments and certain otheritems such as investments, debt and derivative instruments. This statement iseffective for financial statements issued for fiscal years beginning after November 15,2007. The Company has elected not to apply the fair value option to any of itsfinancial assets or liabilities.

 

InDecember 2007, the FASB issued SFAS 141(R), “Business Combinations”.This Statement will significantly change the accounting for businesscombinations and is effective for business combinations finalized in fiscalyears beginning after December 15, 2008. SFAS No. 141(R) changesthe method for applying the accounting for business combinations in a number ofsignificant respects including the requirement to expense transaction fees andexpected restructuring costs as incurred, rather than including these amountsin the allocated purchase price; the requirement to recognize the fair value ofcontingent consideration at the acquisition date, rather than the expectedamount when the contingency is resolved; the requirement to recognize the fairvalue of acquired in-process research and development assets at the acquisitiondate, rather than immediately expensing; and the requirement to recognize again in relation to a bargain purchase price, rather than reducing theallocated basis of long-lived assets. Because this standard is generallyapplied prospectively, the effect of adoption on the Company’s financialstatements will depend primarily on specific transactions, if any, completedafter 2008. The Company is currently evaluating the effects that this statementis likely to have on potential post-2008 transactions.

 

InDecember 2007, the FASB issued SFAS 160, “Non-controlling Interestsin Consolidated Financial Statements—An Amendment of ARB No. 51”. ThisStatement establishes new accounting and reporting standards for thenon-controlling interest in a subsidiary and for the deconsolidation of asubsidiary. This Statement is effective for fiscal years beginning after December 15,2008. The Company is currently assessing the impact of this Statement on itsconsolidated financial statements.

 

InMarch 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities — anamendment of FASB Statement No. 133”. This statement requiresadditional disclosures for derivative instruments and hedging activities thatinclude how and why an entity uses derivatives, how these instruments and therelated hedged items are accounted for under SFAS No. 133 and relatedinterpretations, and how derivative instruments and related hedged items 

 

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affect the entity’s financial position,results of operations and cash flows. This statement is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008. The Company is currently assessing the impact of this Statement on itsconsolidated financial statements.

 

In April 2008, the FASB approved FASB Staff Position FAS 142-3, “Determinationof the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends thefactors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 iseffective for financial statements issued for fiscal years beginning after November 15,2008. The Company is currently assessing the impact of adopting FSP 142-3 onits consolidated financial statements.

 

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

 

The Company has estimated the fair value of its financial instrumentsmeasured at fair value on a recurring basis using the market and incomeapproaches. For investments in marketable securities, deferred compensationtrust assets and derivative contracts, which are carried at their fair values,the Company’s fair value estimates incorporate quoted market prices, otherobservable inputs (for example, interest rates) and unobservable inputs (forexample, forward commodity prices) at the balance sheet date.

 

Thecarrying amount, including accrued interest, and estimated fair value ofcertain of the Company’s financial instruments for the periods presentedare as follows:

 
| ** **                           | ** ** | **As of September 30, 2008** | ** ** | ** **                                           | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                           | ** ** | ** **                                       | ** ** | **Estimated Fair Value Measurements** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                                       | ** ** | **Quoted**                                           | ** ** | **Significant ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                                       | ** ** | **Prices In **                             | ** ** | **Other ** | ** ** | **Significant ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                                       | ** ** | **Active **                                     | ** ** | **Observable ** | ** ** | **Unobservable ** | ** ** | **As of December 31, 2007** | ** ** |
| **(In thousands)**              | ** ** | **Carrying  Value**                              | ** ** | **Markets   (Level 1)**                    | ** ** | **Inputs   (Level 2)** | ** ** | **Inputs   (Level 3)** | ** ** | **Carrying   Value** | ** ** | **Estimated   Fair Value** | ** ** |
| **Financial Assets**                 |       |                                             |       |                                                 |       |   |   |   |   |   |   |   |   |
| Deferred compensation trust assets   |       | $                                                | 18,088     |                                                 | $          | 18,088 |   | $ | — |   | $ | — |   | $ | 35,100 |   | $ | 35,100 |   |
| Investments in marketable securities |       | 126,564                                          |       | 58,877                                               |       | 67,687 |   | — |   | 232,655 |   | 232,655 |   |
| Total financial assets               |       | $                                                | 144,652    |                                                 | $          | 76,965 |   | $ | 67,687 |   | $ | — |   | $ | 267,755 |   | $ | 267,755 |   |
|                                 |       |                                             |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Financial Liabilities**            |       |                                             |       |                                                 |       |   |   |   |   |   |   |   |   |
| Fuel swap contracts                  |       | $                                                | 4,432      |                                                 | $          | — |   | $ | — |   | $ | 4,432 |   | $ | — |   | $ | — |   |
| Interest rate swap contracts         |       | 12,957                                           |       | —                                               |       | 12,957 |   | — |   | 16,557 |   | 16,557 |   |
| Total financial liabilities          |       | $                                                | 17,389     |                                                 | $          | — |   | $ | 12,957 |   | $ | 4,432 |   | $ | 16,557 |   | $ | 16,557 |   |

 

Areconciliation of the beginning and ending fair values of financial instrumentsvalued using significant unobservable inputs (Level 3) is presented asfollows:

 
| **(In thousands)**                       | ** ** | **Fuel Swap Contract  Assets (Liabilities)** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------|------------|
| 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 loss          |       | 7,753                                                       |       |
| Settlements, net                              |       | (3,913                                                      | )          |
| Balance at June 30, 2008                 |       | 10,871                                                      |       |
| Total gains (realized/unrealized)             |       |                                                        |       |
| Included in earnings(1)                       |       | 3,882                                                       |       |
| Included in other comprehensive income        |       | (15,303                                                     | )          |
| Settlements, net                              |       | (3,882                                                      | )          |
| Balance at September 30, 2008            |       | $                                                           | (4,432     | ) |

 

----

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

 

The Company uses fuel swap contracts to mitigate the impact offluctuations in fuel prices. The Company’s exposure to market risk for changesin fuel prices relates to the forecasted consumption of fuel by the Company’svehicle fleet in the delivery of services to customers. As of September 30,2008, the Company had fuel swap contracts, designated as cash flow hedges, topay fixed prices for fuel with an aggregate notional amount of $82.3 million,maturing through 2010.

 

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**Note 19. Condensed Consolidating FinancialStatements of The ServiceMaster Company and Subsidiaries**

 

The following condensed consolidatingfinancial statements of the Company and its 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 andunconditional. All other subsidiaries of the Company, either directly orindirectly owned, do not guarantee the Permanent Notes (“Non-Guarantors”).

 

**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**Condensed ConsolidatingStatements of Operations**

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

**(in thousands)**

 
| ** **                                                                               | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                               | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non**        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                               | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating Revenue**                                                                    |       | $                 | —     |           | $          | 747,321        |       | $                | 219,368    |             | $          | (18,616 | ) | $ | 948,073 |   |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Operating Costs and Expenses:**                                                        |       |              |       |           |       |           |       |             |       |             |       |
| Cost of services rendered and products sold                                              |       | —            |       | 481,121        |       | 97,050         |       | (18,616          | )          | 559,555          |       |
| Selling and administrative expenses                                                      |       | 670               |       | 150,925        |       | 83,577         |       | —           |       | 235,172          |       |
| Amortization expense                                                                     |       | 55                |       | 30,777         |       | 9,618          |       | —           |       | 40,450           |       |
| Merger related charges                                                                   |       | 412               |       | —         |       | —         |       | —           |       | 412              |       |
| Restructuring charges                                                                    |       | —            |       | 905            |       | 908            |       | —           |       | 1,813            |       |
| Total operating costs and expenses                                                       |       | 1,137             |       | 663,728        |       | 191,153        |       | (18,616          | )          | 837,402          |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Operating (Loss) Income**                                                              |       | (1,137            | )          | 83,593         |       | 28,215         |       | —           |       | 110,671          |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating Expense (Income):**                                                      |       |              |       |           |       |           |       |             |       |             |       |
| Interest expense (income)                                                                |       | 86,258            |       | 820            |       | (3,192         | )          | —           |       | 83,886           |       |
| Interest and net investment loss (income)                                                |       | 1,464             |       | 648            |       | (2,356         | )          | —           |       | (244             | )          |
| Other expense, net                                                                       |       | —            |       | —         |       | 141            |       |             |       | 141              |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations  before Income Taxes**                        |       | (88,859           | )          | 82,125         |       | 33,622         |       | —           |       | 26,888           |       |
| (Benefit) provision for income taxes                                                     |       | (17,678           | )          | 15,597         |       | 10,764         |       | —           |       | 8,683            |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations**                                             |       | (71,181           | )          | 66,528         |       | 22,858         |       | —           |       | 18,205           |       |
| Loss from businesses held pending sale and discontinued  operations, net of income taxes |       | —            |       | —         |       | (1,186         | )          | —           |       | (1,186           | )          |
| Equity in earnings of subsidiaries (net of  tax)                                         |       | 88,200            |       | 17,895         |       | —         |       | (106,095         | )          | —           |       |
| **Net Income**                                                                           |       | $                 | 17,019     |           | $          | 84,423         |       | $                | 21,672     |             | $          | (106,095 | ) | $ | 17,019 |   |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**Condensed ConsolidatingStatements of Operations**

**For the Successor Period from July 25,2007 to September 30, 2007**

**(in thousands)**

** **
| ** **                                                                               | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                               | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non**        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                               | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating Revenue**                                                                    |       | $                 | —     |           | $          | 573,496        |       | $                | 130,740    |             | $          | (13,611 | ) | $ | 690,625 |   |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Operating Costs and Expenses:**                                                        |       |              |       |           |       |           |       |             |       |             |       |
| Cost of services rendered and products sold                                              |       | —            |       | 366,863        |       | 67,275         |       | (13,611          | )          | 420,527          |       |
| Selling and administrative expenses                                                      |       | 472               |       | 100,805        |       | 53,180         |       | —           |       | 154,457          |       |
| Amortization expense                                                                     |       | 41                |       | 47,792         |       | 8,585          |       | —           |       | 56,418           |       |
| Merger related charges                                                                   |       | 458               |       | —         |       | —         |       | —           |       | 458              |       |
| Restructuring charges                                                                    |       | —            |       | 2,826          |       | 5,385          |       | —           |       | 8,211            |       |
| Total operating costs and expenses                                                       |       | 971               |       | 518,286        |       | 134,425        |       | (13,611          | )          | 640,071          |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Operating (Loss) Income**                                                              |       | (971              | )          | 55,210         |       | (3,685         | )          | —           |       | 50,554           |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating Expense (Income):**                                                      |       |              |       |           |       |           |       |             |       |             |       |
| Interest expense (income)                                                                |       | 76,721            |       | 1,952          |       | (416           | )          | —           |       | 78,257           |       |
| Interest and net investment (income) loss                                                |       | (2,323            | )          | 502            |       | (2,069         | )          | —           |       | (3,890           | )          |
| Other expense, net                                                                       |       | —            |       | —         |       | 102            |       | —           |       | 102              |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations  before Income Taxes**                        |       | (75,369           | )          | 52,756         |       | (1,302         | )          | —           |       | (23,915          | )          |
| (Benefit) provision for income taxes                                                     |       | (23,591           | )          | 9,988          |       | 4,467          |       | —           |       | (9,136           | )          |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations**                                             |       | (51,778           | )          | 42,768         |       | (5,769         | )          | —           |       | (14,779          | )          |
| Loss from businesses held pending sale and  discontinued operations, net of income taxes |       | —            |       | —         |       | (2,590         | )          | —           |       | (2,590           | )          |
| Equity in earnings (losses) of subsidiaries  (net of tax)                                |       | 34,409            |       | (9,669         | )          | —         |       | (24,740          | )          | —           |       |
| **Net (Loss) Income**                                                                    |       | $                 | (17,369    | )              | $          | 33,099         |       | $                | (8,359     | )                | $          | (24,740 | ) | $ | (17,369 | ) |

 

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**THE SERVICEMASTERCOMPANY AND SUBSIDIARIES**

**Condensed ConsolidatingStatements of Operations**

**For the Predecessor Period from July 1,2007 to July 24, 2007**

**(in thousands)**

** **
| ** **                                                                               | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                               | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non**        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                               | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating Revenue**                                                                    |       | $                 | —     |           | $          | 196,504        |       | $                | 60,273     |             | $          | (4,619 | ) | $ | 252,158 |   |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Operating Costs and Expenses:**                                                        |       |              |       |           |       |           |       |             |       |             |       |
| Cost of services rendered and products sold                                              |       | —            |       | 138,614        |       | 28,408         |       | (4,619           | )          | 162,403          |       |
| Selling and administrative expenses                                                      |       | 6                 |       | 41,761         |       | 24,855         |       | —           |       | 66,622           |       |
| Amortization expense                                                                     |       | —            |       | 532            |       | 65             |       | —           |       | 597              |       |
| Merger related charges                                                                   |       | 36,097            |       | —         |       | —         |       | —           |       | 36,097           |       |
| Restructuring charges                                                                    |       | —            |       | —         |       | 1,601          |       | —           |       | 1,601            |       |
| Total operating costs and expenses                                                       |       | 36,103            |       | 180,907        |       | 54,929         |       | (4,619           | )          | 267,320          |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Operating (Loss) Income**                                                              |       | (36,103           | )          | 15,597         |       | 5,344          |       | —           |       | (15,162          | )          |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating Expense (Income):**                                                      |       |              |       |           |       |           |       |             |       |             |       |
| Interest expense (income)                                                                |       | 2,797             |       | 843            |       | (140           | )          | —           |       | 3,500            |       |
| Interest and net investment (income) loss                                                |       | (104              | )          | 154            |       | (2,490         | )          | —           |       | (2,440           | )          |
| Other expense, net                                                                       |       | —            |       | —         |       | 11             |       | —           |       | 11               |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations  before Income Taxes**                        |       | (38,796           | )          | 14,600         |       | 7,963          |       | —           |       | (16,233          | )          |
| (Benefit) provision for income taxes                                                     |       | (7,512            | )          | (1,514         | )          | 7,405          |       | —           |       | (1,621           | )          |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations**                                             |       | (31,284           | )          | 16,114         |       | 558            |       | —           |       | (14,612          | )          |
| Loss from businesses held pending sale and  discontinued operations, net of income taxes |       | —            |       | —         |       | (1,467         | )          | —           |       | (1,467           | )          |
| Equity in earnings (losses) of subsidiaries  (net of tax)                                |       | 15,205            |       | (2,609         | )          | —         |       | (12,596          | )          | —           |       |
| **Net (Loss) Income**                                                                    |       | $                 | (16,079    | )              | $          | 13,505         |       | $                | (909       | )                | $          | (12,596 | ) | $ | (16,079 | ) |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**Condensed ConsolidatingStatements of Operations**

**For the nine months ended September 30,2008 (Successor)**

**(in thousands)**

** **
| ** **                                                                               | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                               | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non**        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                               | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating Revenue**                                                                    |       | $                 | —     |           | $          | 2,069,513      |       | $                | 562,074    |             | $          | (53,978 | ) | $ | 2,577,609 |   |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Operating Costs and Expenses:**                                                        |       |              |       |           |       |           |       |             |       |             |       |
| Cost of services rendered and products sold                                              |       | —            |       | 1,357,873      |       | 262,762        |       | (53,978          | )          | 1,566,657        |       |
| Selling and administrative expenses                                                      |       | 3,929             |       | 412,651        |       | 236,822        |       | —           |       | 653,402          |       |
| Amortization expense                                                                     |       | 166               |       | 100,433        |       | 32,493         |       | —           |       | 133,092          |       |
| Merger related charges                                                                   |       | 767               |       | —         |       | —         |       | —           |       | 767              |       |
| Restructuring charges                                                                    |       | —            |       | 2,299          |       | 6,844          |       | —           |       | 9,143            |       |
| Total operating costs and expenses                                                       |       | 4,862             |       | 1,873,256      |       | 538,921        |       | (53,978          | )          | 2,363,061        |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Operating (Loss) Income**                                                              |       | (4,862            | )          | 196,257        |       | 23,153         |       | —           |       | 214,548          |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating Expense (Income):**                                                      |       |              |       |           |       |           |       |             |       |             |       |
| Interest expense (income)                                                                |       | 257,132           |       | 4,601          |       | (4,836         | )          | —           |       | 256,897          |       |
| Interest and net investment loss (income)                                                |       | 4,913             |       | 1,944          |       | (5,220         | )          | —           |       | 1,637            |       |
| Other expense, net                                                                       |       | —            |       | —         |       | 418            |       | —           |       | 418              |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations  before Income Taxes**                        |       | (266,907          | )          | 189,712        |       | 32,791         |       | —           |       | (44,404          | )          |
| (Benefit) provision for income taxes                                                     |       | (69,191           | )          | 38,101         |       | 22,749         |       | —           |       | (8,341           | )          |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations**                                             |       | (197,716          | )          | 151,611        |       | 10,042         |       | —           |       | (36,063          | )          |
| Loss from businesses held pending sale and  discontinued operations, net of income taxes |       | —            |       | —         |       | (4,670         | )          | —           |       | (4,670           | )          |
| Equity in earnings (losses) of subsidiaries  (net of tax)                                |       | 156,983           |       | (720           | )          | —         |       | (156,263         | )          | —           |       |
| **Net (Loss) Income**                                                                    |       | $                 | (40,733    | )              | $          | 150,891        |       | $                | 5,372      |             | $          | (156,263 | ) | $ | (40,733 | ) |

 

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**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**Condensed ConsolidatingStatements of Operations**

**For the Successor period July 25,2007 to September 30, 2007**

**(in thousands)**

** **
| ** **                                                                               | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                               | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non**        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                               | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating Revenue**                                                                    |       | $                 | —     |           | $          | 573,496        |       | $                | 130,740    |             | $          | (13,611 | ) | $ | 690,625 |   |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Operating Costs and Expenses:**                                                        |       |              |       |           |       |           |       |             |       |             |       |
| Cost of services rendered and products sold                                              |       | —            |       | 366,863        |       | 67,275         |       | (13,611          | )          | 420,527          |       |
| Selling and administrative expenses                                                      |       | 472               |       | 100,805        |       | 53,180         |       | —           |       | 154,457          |       |
| Amortization expense                                                                     |       | 41                |       | 47,792         |       | 8,585          |       | —           |       | 56,418           |       |
| Merger related charges                                                                   |       | 458               |       | —         |       | —         |       | —           |       | 458              |       |
| Restructuring charges                                                                    |       | —            |       | 2,826          |       | 5,385          |       | —           |       | 8,211            |       |
| Total operating costs and expenses                                                       |       | 971               |       | 518,286        |       | 134,425        |       | (13,611          | )          | 640,071          |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Operating (Loss) Income**                                                              |       | (971              | )          | 55,210         |       | (3,685         | )          | —           |       | 50,554           |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating Expense (Income):**                                                      |       |              |       |           |       |           |       |             |       |             |       |
| Interest expense (income)                                                                |       | 76,721            |       | 1,952          |       | (416           | )          | —           |       | 78,257           |       |
| Interest and net investment (income) loss                                                |       | (2,323            | )          | 502            |       | (2,069         | )          | —           |       | (3,890           | )          |
| Other expense, net                                                                       |       | —            |       | —         |       | 102            |       | —           |       | 102              |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations  before Income Taxes**                        |       | (75,369           | )          | 52,756         |       | (1,302         | )          | —           |       | (23,915          | )          |
| (Benefit) provision for income taxes                                                     |       | (23,591           | )          | 9,988          |       | 4,467          |       | —           |       | (9,136           | )          |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations**                                             |       | (51,778           | )          | 42,768         |       | (5,769         | )          | —           |       | (14,779          | )          |
| Loss from businesses held pending sale and  discontinued operations, net of income taxes |       | —            |       | —         |       | (2,590         | )          | —           |       | (2,590           | )          |
| Equity in earnings (losses) of subsidiaries  (net of tax)                                |       | 34,409            |       | (9,669         | )          | —         |       | (24,740          | )          | —           |       |
| **Net (Loss) Income**                                                                    |       | $                 | (17,369    | )              | $          | 33,099         |       | $                | (8,359     | )                | $          | (24,740 | ) | $ | (17,369 | ) |

 

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**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**Condensed ConsolidatingStatements of Operations**

**For the Predecessor Period from January 1,2007 to July 24, 2007**

**(in thousands)**

** **
| ** **                                                                               | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                               | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non**        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                               | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating Revenue**                                                                    |       | $                 | —     |           | $          | 1,565,266      |       | $                | 408,148    |             | $          | (39,024 | ) | $ | 1,934,390 |   |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Operating Costs and Expenses:**                                                        |       |              |       |           |       |           |       |             |       |             |       |
| Cost of services rendered and products sold                                              |       | —            |       | 1,055,793      |       | 179,493        |       | (39,024          | )          | 1,196,262        |       |
| Selling and administrative expenses                                                      |       | 2,185             |       | 330,625        |       | 197,864        |       | —           |       | 530,674          |       |
| Amortization expense                                                                     |       | —            |       | 4,527          |       | 645            |       | —           |       | 5,172            |       |
| Merger related charges                                                                   |       | 41,431            |       | —         |       | —         |       | —           |       | 41,431           |       |
| Restructuring charges                                                                    |       | —            |       | —         |       | 16,919         |       | —           |       | 16,919           |       |
| Total operating costs and expenses                                                       |       | 43,616            |       | 1,390,945      |       | 394,921        |       | (39,024          | )          | 1,790,458        |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Operating (Loss) Income**                                                              |       | (43,616           | )          | 174,321        |       | 13,227         |       | —           |       | 143,932          |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating Expense (Income):**                                                      |       |              |       |           |       |           |       |             |       |             |       |
| Interest expense (income)                                                                |       | 19,293            |       | 11,917         |       | 433            |       | —           |       | 31,643           |       |
| Interest and net investment loss (income)                                                |       | (1,764            | )          | 1,443          |       | (28,303        | )          | —           |       | (28,624          | )          |
| Minority interest and other expense, net                                                 |       | 3,423             |       | —         |       | 109            |       | —           |       | 3,532            |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations  before Income Taxes**                        |       | (64,568           | )          | 160,961        |       | 40,988         |       | —           |       | 137,381          |       |
| (Benefit) provision for income taxes                                                     |       | (14,320           | )          | 25,836         |       | 40,176         |       | —           |       | 51,692           |       |
|                                                                                     |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing Operations**                                             |       | (50,248           | )          | 135,125        |       | 812            |       | —           |       | 85,689           |       |
| Loss from businesses held pending sale and  discontinued operations, net of income taxes |       | —            |       | —         |       | (4,588         | )          | —           |       | (4,588           | )          |
| Equity in earnings (losses) of subsidiaries  (net of tax)                                |       | 131,349           |       | (7,209         | )          | —         |       | (124,140         | )          | —           |       |
| **Net Income (Loss)**                                                                    |       | $                 | 81,101     |           | $          | 127,916        |       | $                | (3,776     | )                | $          | (124,140 | ) | $ | 81,101 |   |

 

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**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**Condensed ConsolidatingStatements of Financial Position**

**As of September 30, 2008**

**(in thousands)**

** **
| ** **                                                                   | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non**        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                   | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Assets**                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Current Assets:**                                                          |       |              |       |           |       |           |       |             |       |             |       |
| Cash and cash equivalents                                                    |       | $                 | 210,530    |           | $          | 18,871         |       | $                | 129,498    |             | $          | — |   | $ | 358,899 |   |
| Marketable securities                                                        |       | —            |       | —         |       | 21,521         |       | —           |       | 21,521           |       |
| Receivables                                                                  |       | —            |       | 188,550        |       | 420,421        |       | (209,411         | )          | 399,560          |       |
| Inventories                                                                  |       | —            |       | 78,849         |       | 3,141          |       | —           |       | 81,990           |       |
| Prepaid expenses and other assets                                            |       | 9,426             |       | 37,499         |       | 9,124          |       |             |       | 56,049           |       |
| Deferred customer acquisition costs                                          |       | —            |       | 20,672         |       | 22,967         |       | —           |       | 43,639           |       |
| Deferred taxes                                                               |       | 6,572             |       | 28,804         |       | 8,995          |       | —           |       | 44,371           |       |
| Assets of businesses held pending sale and  discontinued operations          |       | —            |       | —         |       | 240            |       | —           |       | 240              |       |
| Total Current Assets                                                         |       | 226,528           |       | 373,245        |       | 615,907        |       | (209,411         | )          | 1,006,269        |       |
| **Property and Equipment:**                                                  |       |              |       |           |       |           |       |             |       |             |       |
| At cost                                                                      |       | —            |       | 205,948        |       | 73,388         |       | —           |       | 279,336          |       |
| Less: accumulated depreciation                                               |       | —            |       | (39,921        | )          | (18,342        | )          | —           |       | (58,263          | )          |
| Net property and equipment                                                   |       | —            |       | 166,027        |       | 55,046         |       | —           |       | 221,073          |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Assets:**                                                            |       |              |       |           |       |           |       |             |       |             |       |
| Goodwill                                                                     |       | —            |       | 2,715,466      |       | 362,572        |       | —           |       | 3,078,038        |       |
| Intangible assets, primarily trade names,  service marks and trademarks, net |       | —            |       | 2,172,257      |       | 886,739        |       | —           |       | 3,058,996        |       |
| Notes receivable                                                             |       | 352,460           |       | 1,230          |       | 25,857         |       | (352,460         | )          | 27,087           |       |
| Long-term marketable securities                                              |       | 18,088            |       | —         |       | 105,043        |       | —           |       | 123,131          |       |
| Investments in and advances to subsidiaries                                  |       | 6,006,771         |       | 2,065,118      |       | 154,359        |       | (8,226,248       | )          | —           |       |
| Other assets                                                                 |       | 26,876            |       | 948            |       | 8,355          |       |             |       | 36,179           |       |
| Debt issuance costs                                                          |       | 86,519            |       | —         |       | —         |       | —           |       | 86,519           |       |
| Total Assets                                                                 |       | $                 | 6,717,742  |           | $          | 7,494,291      |       | $                | 2,213,878  |             | $          | (8,788,119 | ) | $ | 7,637,292 |   |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Liabilities and Shareholder’s Equity**                                |       |              |       |           |       |           |       |             |       |             |       |
| **Current Liabilities:**                                                     |       |              |       |           |       |           |       |             |       |             |       |
| Accounts payable                                                             |       | $                 | 523        |           | $          | 55,165         |       | $                | 47,421     |             | $          | — |   | $ | 103,109 |   |
| Accrued liabilities:                                                         |       |              |       |           |       |           |       |             |       |             |       |
| Payroll and related expenses                                                 |       | 1,849             |       | 42,051         |       | 48,705         |       | —           |       | 92,605           |       |
| Self-insured claims and related expenses                                     |       | —            |       | 24,601         |       | 66,437         |       | —           |       | 91,038           |       |
| Other                                                                        |       | 10,331            |       | 56,163         |       | 84,252         |       |             |       | 150,746          |       |
| Deferred revenue                                                             |       | —            |       | 145,917        |       | 300,828        |       | —           |       | 446,745          |       |
| Liabilities of businesses held pending sale  and discontinued operations     |       | —            |       | —         |       | 5,824          |       | —           |       | 5,824            |       |
| Current portion of long-term debt                                            |       | 287,009           |       | 18,043         |       | 126,204        |       | (209,411         | )          | 221,845          |       |
| Total Current Liabilities                                                    |       | 299,712           |       | 341,940        |       | 679,671        |       | (209,411         | )          | 1,111,912        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Long-Term Debt**                                                           |       | 4,005,887         |       | 346,087        |       | 49,835         |       | (352,460         | )          | 4,049,349        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Long-Term Liabilities:**                                             |       |              |       |           |       |           |       |             |       |             |       |
| Deferred taxes                                                               |       | 112,180           |       | 838,507        |       | 97,634         |       |             |       | 1,048,321        |       |
| Intercompany payable                                                         |       | 1,009,837         |       | —         |       | —         |       | (1,009,837       | )          | —           |       |
| Liabilities of businesses held pending sale  and discontinued operations     |       | —            |       | —         |       | 4,253          |       | —           |       | 4,253            |       |
| Other long-term obligations, primarily  self-insured claims                  |       | 30,152            |       | 3,672          |       | 130,159        |       | —           |       | 163,983          |       |
| Total Other Long-Term Liabilities                                            |       | 1,152,169         |       | 842,179        |       | 232,046        |       | (1,009,837       | )          | 1,216,557        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Shareholder’s Equity**                                                |       | 1,259,474         |       | 5,964,085      |       | 1,252,326      |       | (7,216,411       | )          | 1,259,474        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Total Liabilities and Shareholder’s Equity**                          |       | $                 | 6,717,242  |           | $          | 7,494,291      |       | $                | 2,213,878  |             | $          | (8,788,119 | ) | $ | 7,637,292 |   |

 

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**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    |           | $          | 14,999         |       | $                | 91,791     |             | $          | — |   | $ | 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             |       | 33,706         |       | 7,898          |       | —           |       | 48,177           |       |
| Assets of businesses held pending sale and  discontinued operations          |       | —            |       | —         |       | 42,474         |       | —           |       | 42,474           |       |
| Total Current Assets                                                         |       | 107,004           |       | 296,749        |       | 604,303        |       | (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            |       | —         |       | 123,839        |       | —           |       | 158,939          |       |
| Investments in and advances to subsidiaries                                  |       | 5,831,624         |       | 1,992,455      |       | 49,526         |       | (7,873,605       | )          | —           |       |
| Other assets                                                                 |       | 25,816            |       | 751            |       | 3,767          |       | —           |       | 30,334           |       |
| Debt issuance costs                                                          |       | 84,942            |       | —         |       | —         |       | —           |       | 84,942           |       |
| Total Assets                                                                 |       | $                 | 6,447,895  |           | $          | 7,413,272      |       | $                | 2,187,692  |             | $          | (8,457,799 | ) | $ | 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     |       | —            |       | —         |       | 12,983         |       | —           |       | 12,983           |       |
| Current portion of long-term debt                                            |       | 70,749            |       | 23,990         |       | 99,610         |       | (140,785         | )          | 53,564           |       |
| Total Current Liabilities                                                    |       | 88,810            |       | 333,787        |       | 651,495        |       | (140,785         | )          | 933,307          |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Long-Term Debt**                                                           |       | 4,022,185         |       | 395,435        |       | 103,036        |       | (443,409         | )          | 4,077,247        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Long-Term Liabilities:**                                             |       |              |       |           |       |           |       |             |       |             |       |
| Deferred taxes                                                               |       | 143,679           |       | 834,819        |       | 101,002        |       | —           |       | 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         |       | 839,366        |       | 244,198        |       | (839,958         | )          | 1,276,972        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Shareholder’s Equity**                                                |       | 1,303,534         |       | 5,844,684      |       | 1,188,963      |       | (7,033,647       | )          | 1,303,534        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Total Liabilities and Shareholder’s Equity**                          |       | $                 | 6,447,895  |           | $          | 7,413,272      |       | $                | 2,187,692  |             | $          | (8,457,799 | ) | $ | 7,591,060 |   |

 

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**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**Condensed Consolidating Statementof Cash Flows**

**For the nine months ended September 30,2008 (Successor)**

**(in thousands)**

 
| ** **                                                                             | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non**        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                             | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash and Cash Equivalents at Beginning of  Period**                                  |       | $                 | 100,429    |           | $          | 14,999         |       | $                | 91,791     |             | $          | — |   | $ | 207,219 |   |
| **Net Cash Provided from (Used for) Operating  Activities from Continuing Operations** |       | (136,417          | )          | 276,640        |       | 17,906         |       | (106,420         | )          | 51,709           |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Investing Activities from  Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Property additions                                                                     |       | —            |       | (67,585        | )          | (7,609         | )          | —           |       | (75,194          | )          |
| Sale of equipment and other assets                                                     |       | —            |       | 4,999          |       | 91             |       | —           |       | 5,090            |       |
| Acquisition of The ServiceMaster Company                                               |       | (26,082           | )          | —         |       |           |       |             |       | (26,082          | )          |
| Other business acquisitions, net of cash  received                                     |       | —            |       | (27,504        | )          | —         |       | —           |       | (27,504          | )          |
| Notes receivable, financial investments and  securities                                |       | 1,003             |       | —         |       | 96,414         |       | —           |       | 97,417           |       |
| **Net Cash (Used for) Provided from Investing  Activities from Continuing Operations** |       | (25,079           | )          | (90,090        | )          | 88,896         |       | —           |       | (26,273          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Financing Activities from  Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Borrowings of debt                                                                     |       | 347,000           |       | —         |       | 10,000         |       | —           |       | 357,000          |       |
| Payments of debt                                                                       |       | (202,438          | )          | (22,841        | )          | (2,033         | )          | —           |       | (227,312         | )          |
| Debt issuance costs paid                                                               |       | (26,587           | )          | —         |       | —         |       | —           |       | (26,587          | )          |
| Shareholders’ dividends                                                           |       | —            |       | (53,210        | )          | (53,210        | )          | 106,420          |       | —           |       |
| Net intercompany advances                                                              |       | 153,622           |       | (106,627       | )          | (46,995        | )          |             |       | —           |       |
| **Net Cash Provided from (Used for) Financing  Activities from Continuing Operations** |       | 271,597           |       | (182,678       | )          | (92,238        | )          | 106,420          |       | 103,101          |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Discontinued Operations:**                                           |       |              |       |           |       |           |       |             |       |             |       |
| Cash provided from operating activities                                                |       | —            |       | —         |       | 3,995          |       | —           |       | 3,995            |       |
| Cash used for investing activities                                                     |       |              |       |           |       |           |       |             |       |             |       |
| Proceeds from sale of businesses                                                       |       | —            |       | —         |       | 19,523         |       | —           |       | 19,523           |       |
| Other investing activities                                                             |       | —            |       | —         |       | (208           | )          | —           |       | (208             | )          |
| Cash used for financing activities                                                     |       | —            |       | —         |       | (167           | )          | —           |       | (167             | )          |
| **Net Cash Provided from Discontinued  Operations**                                    |       | —            |       | —         |       | 23,143         |       | —           |       | 23,143           |       |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Cash (Decrease) Increase During the Period**                                         |       | 110,101           |       | 3,872          |       | 37,707         |       | —           |       | 151,680          |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash and Cash Equivalents at End of Period**                                         |       | $                 | 210,530    |           | $          | 18,871         |       | $                | 129,498    |             | $          | — |   | $ | 358,899 |   |

 

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**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**Condensed Consolidating Statementof Cash Flows**

**For the Successor period from July 25,2007 to September 30, 2007**

**(in thousands)**

** **
| ** **                                                                             | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non**        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                             | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash and Cash Equivalents at Beginning of  Period**                                  |       | $                 | 79,394     |           | $          | 26,247         |       | $                | 131,924    |             | $          | — |   | $ | 237,565 |   |
| **Net Cash Provided from (Used for) Operating  Activities from Continuing Operations** |       | (140,185          | )          | 93,688         |       | 93,867         |       | (13,744          | )          | 33,626           |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Investing Activities from  Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Property additions                                                                     |       | —            |       | (3,474         | )          | (4,233         | )          | —           |       | (7,707           | )          |
| Sale of equipment and other assets                                                     |       | —            |       | 595            |       | 15             |       | —           |       | 610              |       |
| Acquisition of The ServiceMaster Company                                               |       | (4,890,648        | )          | —         |       | —         |       | —           |       | (4,890,648       | )          |
| Other business acquisitions, net of cash  received                                     |       | —            |       | (3,985         | )          | —         |       | —           |       | (3,985           | )          |
| Notes receivable, financial investments and  securities                                |       | (23,015           | )          | —         |       | (12,437        | )          | —           |       | (35,452          | )          |
| **Net Cash (Used for) Provided from Investing  Activities from Continuing Operations** |       | (4,913,663        | )          | (6,864         | )          | (16,655        | )          | —           |       | (4,937,182       | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Financing Activities from  Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Payments of debt                                                                       |       | (245,962          | )          | (3,915         | )          | (425           | )          | —           |       | (250,302         | )          |
| Borrowings under senior secured term loan  facility                                    |       | 2,650,000         |       | —         |       | —         |       | —           |       | 2,650,000        |       |
| Borrowings under senior unsecured interim  loan facility                               |       | 1,150,000         |       | —         |       | —         |       | —           |       | 1,150,000        |       |
| Cash equity contributions                                                              |       | 1,431,100         |       | —         |       | —         |       | —           |       | 1,431,100        |       |
| Debt issuance costs paid                                                               |       | (100,813          | )          | —         |       | —         |       | —           |       | (100,813         | )          |
| Shareholders’ dividends                                                           |       | —            |       | (6,872         | )          | (6,872         | )          | 13,744           |       | —           |       |
| Net intercompany advances                                                              |       | 172,806           |       | (83,527        | )          | (89,279        | )          | —           |       | —           |       |
| **Net Cash Provided from (Used for) Financing  Activities from Continuing Operations** |       | 5,057,131         |       | (94,314        | )          | (96,576        | )          | 13,744           |       | 4,879,985        |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Discontinued Operations:**                                           |       |              |       |           |       |           |       |             |       |             |       |
| Cash provided from operating activities                                                |       | —            |       | —         |       | (2,430         | )          | —           |       | (2,430           | )          |
| Cash used for investing activities                                                     |       | —            |       | —         |       | (110           | )          | —           |       | (110             | )          |
| Cash used for financing activities                                                     |       | —            |       | —         |       | (47            | )          | —           |       | (47              | )          |
| **Net Cash Provided from Discontinued  Operations**                                    |       | —            |       | —         |       | (2,587         | )          | —           |       | (2,587           | )          |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Cash (Decrease) Increase During the Period**                                         |       | 3,283             |       | (7,490         | )          | (21,951        | )          | —           |       | (26,158          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash and Cash Equivalents at End of Period**                                         |       | $                 | 82,677     |           | $          | 18,757         |       | $                | 109,973    |             | $          | — |   | $ | 211,407 |   |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**Condensed Consolidating Statementof Cash Flows**

**For the Predecessor Period from January 1,2007 to July 24, 2007**

**(in thousands)**

** **
| ** **                                                                             | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non**        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                             | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash and Cash Equivalents at Beginning of  Period**                                  |       | $                 | 20,442     |           | $          | 13,668         |       | $                | 89,565     |             | $          | — |   | $ | 123,675 |   |
| **Net Cash Provided from (Used for) Operating  Activities from Continuing Operations** |       | 203,829           |       | 274,381        |       | 43,548         |       | (326,265         | )          | 195,493          |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Investing Activities from  Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Property additions                                                                     |       | —            |       | (20,289        | )          | (6,274         | )          | —           |       | (26,563          | )          |
| Sale of equipment and other assets                                                     |       | —            |       | 1,091          |       | —         |       | —           |       | 1,091            |       |
| Acquisition of The ServiceMaster Company                                               |       | (4,030            | )          |           |       | —         |       | —           |       | (4,030           | )          |
| Other business acquisitions, net of cash  received                                     |       | —            |       | (25,460        | )          | —         |       | —           |       | (25,460          | )          |
| Notes receivable, financial investments and  securities                                |       | —            |       | —         |       | 38,127         |       | —           |       | 38,127           |       |
| **Net Cash (Used for) Provided from Investing  Activities from Continuing Operations** |       | (4,030            | )          | (44,658        | )          | 31,853         |       | —           |       | (16,835          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Financing Activities from  Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Borrowings of debt                                                                     |       | 415,411           |       | —         |       | —         |       | —           |       | 415,411          |       |
| Payments of debt                                                                       |       | (446,121          | )          | (12,245        | )          | (1,171         | )          | —           |       | (459,537         | )          |
| Shareholders’ dividends                                                           |       | (70,077           | )          | (226,281       | )          | (99,984        | )          | 326,265          |       | (70,077          | )          |
| Proceeds from employee share plans                                                     |       | 36,069            |       | —         |       | —         |       | —           |       | 36,069           |       |
| Net intercompany advances                                                              |       | (76,129           | )          | 21,382         |       | 54,747         |       | —           |       | —           |       |
| **Net Cash Provided from (Used for) Financing  Activities from Continuing Operations** |       | (140,847          | )          | (217,144       | )          | (46,408        | )          | 326,265          |       | (78,134          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Discontinued Operations:**                                           |       |              |       |           |       |           |       |             |       |             |       |
| Cash provided from operating activities                                                |       | —            |       | —         |       | 12,559         |       | —           |       | 12,559           |       |
| Cash used for investing activities                                                     |       | —            |       | —         |       | 988            |       | —           |       | 988              |       |
| Cash used for financing activities                                                     |       | —            |       | —         |       | (181           | )          | —           |       | (181             | )          |
| **Net Cash Provided from Discontinued  Operations**                                    |       | —            |       | —         |       | 13,366         |       | —           |       | 13,366           |       |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Cash (Decrease) Increase During the Period**                                         |       | 58,952            |       | 12,579         |       | 42,359         |       | —           |       | 113,890          |       |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash and Cash Equivalents at End of Period**                                         |       | $                 | 79,394     |           | $          | 26,247         |       | $                | 131,924    |             | $          | — |   | $ | 237,565 |   |

 

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

**Merger Agreement**

 

On March 18, 2007, ServiceMaster entered into the Merger Agreementwith Holdings and Acquisition Co. The Merger Agreement provided that, uponthe terms and subject to the conditions set forth in the Merger Agreement,Acquisition Co. would merge with and into ServiceMaster, withServiceMaster as the surviving corporation.

 

On the Closing Date, the Merger was completed, and each issued andoutstanding share of ServiceMaster common stock, other than shares held byServiceMaster or Holdings or their subsidiaries and shares held by stockholderswho validly perfected their appraisal rights under Delaware law, was convertedinto the right to receive $15.625 in cash. Each share of ServiceMaster commonstock owned by ServiceMaster, Holdings or Acquisition Co. or any of theirrespective direct or indirect wholly-owned subsidiaries was cancelled and retired,and no consideration was paid in exchange for it.

 

Immediately following the completion of the Merger, all of theoutstanding capital stock of Holdings, the ultimate parent company ofServiceMaster, was owned by investment funds sponsored by, or affiliates of,the Equity Sponsors.

 

Equity contributions totaling $1,431 million from the EquitySponsors, together with (i) borrowings under a new $1,150 millionsenior unsecured interim loan facility (“Interim Loan Facility”), (ii) borrowingsunder a new $2,650 million senior secured term loan facility and (iii) cashon hand at ServiceMaster, were used, among other things, to finance theaggregate Merger Consideration, to make payments in satisfaction of otherequity-based interests in ServiceMaster under the Merger Agreement, to settleexisting interest rate swaps, to redeem or provide for the repayment of certainof the Company’s existing indebtedness and to pay related transaction fees andexpenses. In addition, letters of credit issued under a new $150 millionpre-funded letter of credit facility (together with the senior secured termloan facility, the “Term Facilities”) were used to replace and/or secureletters of credit previously issued under a ServiceMaster credit facility thatwas terminated as of the Closing Date. On the Closing Date, the Company alsoentered into, but did not draw under, a new $500 million senior securedrevolving credit facility (the “Revolving Credit Facility”).

 

In connection with the Merger and the related transactions (the “Transactions”),ServiceMaster retired certain of its existing indebtedness, includingServiceMaster’s $179.0 million, 7.875% notes due August 15, 2009 (the“2009 Notes”). On the Closing Date, the 2009 Notes were called for redemptionand they were redeemed on August 29, 2007. Additionally, the Companyutilized a portion of the proceeds from the Term Facilities to repay atmaturity ServiceMaster’s $49.2 million, 6.95% notes due August 15,2007.

 

TheInterim Loan Facility matured on July 24, 2008. On the maturity date,outstanding amounts under the Interim Loan Facility were converted on a one toone basis into the Permanent Notes. The Permanent Notes were issued pursuant toa refinancing indenture. In connection with the issuance of Permanent Notes,ServiceMaster entered into a registration rights agreement, pursuant to whichServiceMaster filed with the SEC a registration statement with respect to theresale of the Permanent Notes on October 22, 2008.

 

**Results of Operations**

 

Although ServiceMaster continued as the same legal entity after theMerger, the accompanying consolidated financial statements are presented fortwo periods, Predecessor and Successor, which relate to the period precedingthe Merger and the period succeeding the Merger, respectively. The separatepresentation is required under GAAP when there is a change in accounting basis,which occurred when purchase accounting was applied to the acquisition of thePredecessor. Purchase accounting requires that the historical carrying value ofthe assets acquired and liabilities assumed be adjusted to fair value, whichmay yield results that are not comparable on a period-to-period basis due tothe different, and sometimes higher, cost basis associated with the allocationof the purchase price. The Company refers to the operations of ServiceMasterfor both the Predecessor and Successor periods. The condensed consolidatedstatements of financial position as of September 30, 2008 and December 31,2007, the condensed consolidated statements of operations and of cash flows forthe nine months ended September 30, 2008 and for the period from July 25,2007 to September 30, 2007 and the condensed consolidated statement ofoperations for the three months ended September 30, 2008 reflect thefinancial position, operations and cash flows of the Successor. The condensedconsolidated statements of operations and of cash flows for the period from January 1,2007 to July 24, 2007 and the condensed consolidated statement ofoperations for the period from July 1, 2007 to July 24, 2007 reflectthe operations and cash flows of the Predecessor.

 

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**Third Quarter 2008 Compared to****the Successor Period from July 25 to September 30, 2007 andthe Predecessor Period from July 1, 2007 to July 24, 2007**

 

The Company reported third quarter 2008 revenue of $948.1 million, a$5.3 million or 0.6 percent increase compared to the combined SuccessorPeriod from July 25 to September 30, 2007 and the Predecessor Periodfrom July 1, 2007 to July 24, 2007. The revenue for the third quarter of 2008 and the SuccessorPeriod from July 25 to September 30, 2007 has been reduced by $0.7 million (non-cash) and $30.8 million(non-cash), respectively, resulting from recording deferred revenue at its fairvalue in connection with purchase accounting. Excluding this impact of purchaseaccounting, revenue for the third quarter of 2008 decreased $24.8 million or2.5 percent from 2007 levels, driven by the results of our business units asdescribed in our “Segment Reviews for the Third Quarter 2008 Compared to theSuccessor Period from July 25 to September 30, 2007 and thePredecessor Period from July 1, 2007 to July 24, 2007”.

 

Operating income was $110.7million in the third quarter of 2008 compared to operating income of$50.6 million and operating loss of $15.2 million in the SuccessorPeriod from July 25 to September 30, 2007 and the Predecessor Periodfrom July 1, 2007 to July 24, 2007, respectively. Income from continuing operations beforeincome taxes was $26.9 million in the third quarter of 2008 compared to a lossfrom continuing operations before income taxes of $23.9 million and $16.2million in the Successor Period from July 25 to September 30,2007 and the Predecessor Period from July 1, 2007 to July 24, 2007,respectively. The increase in incomefrom continuing operations before income taxes of $67.0 million reflects thenet effect of:

 
| **(In millions)**                            | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|------------|------------|
| Non-cash purchase accounting adjustments  (1)     |       | $          | 16.2       |   |
| Increased interest expense (2)                    |       | (2.1       | )          |
| Decreased interest and net investment  income (3) |       | (8.3       | )          |
| Decreased merger related charges (4)              |       | 36.1       |       |
| Decreased restructuring charges (5)               |       | 8.0        |       |
| Improved segment results (6)                      |       | 17.1       |       |
|                                              |       | $          | 67.0       |   |

 

----

(1)           The net favorable impact of non-cash purchase accounting adjustments inthe third quarter of 2008 of $16.2 million consists primarily of decreasedamortization of intangible assets of $16.2 million and a $30.1 million increasein revenue partially offset by increased deferred customer acquisition expenseof $32.1 million.

 

(2)           Represents an increase in interest expense as a result of the new debtstructure entered into upon the completion of the Transactions.

 

(3)           As further described in “Operating and Non-Operating Expenses”,represents a decrease in interest and net investment income primarilyreflecting (1) the unfavorable impact to investment gains and incomerealized on the American Home Shield investment portfolio due to realizedlosses on disposals of securities and other than temporary declines in the value of certain investments and (2) lowerinvestment income resulting from a decrease in the market value of investmentswithin an employee deferred compensation trust (for which there is acorresponding and offsetting decrease in compensation expense within operatingloss (income)).

 

(4)           Represents a decrease in charges related to the Merger which cannot becapitalized as part of the purchase cost for financial reporting purposes.

 

(5)           Represents a decrease in restructuring charges primarily resulting fromFast Forward and the consolidation of the Company’s corporate headquarters intoits operations support center in Memphis, Tennessee.

 

(6)            Represents an increase in income fromcontinuing operations before income taxes, non-cash purchase accountingadjustments, interest expense, interest and net investment income, mergerrelated charges and restructuring charges supported by the improved results at TruGreenLawnCare, Terminix, TruGreen LandCare, American Home Shield and OtherOperations and Headquarters as described in our “Segment Reviews for the ThirdQuarter 2008 Compared to the Successor Period from July 25 to September 30,2007 and the Predecessor Period from July 1, 2007 to July 24, 2007”.

 

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***Operating and Non-Operating Expenses***

 

The Company reported cost ofservices rendered and products sold of $559.6 million for the third quarter of2008 compared to $420.5 million and $162.4 million for theSuccessor Period from July 25 to September 30, 2007 and thePredecessor Period from July 1, 2007 to July 24, 2007, respectively. Excluding the unfavorable non-cashreduction of revenue of $0.7 million for the third quarter of 2008 and $30.8million for the Successor Period from July 25 to September 30,2007 resulting from recording deferredrevenue at its fair value in conjunction with purchase accounting, as apercentage of revenue these costs decreased to 59.0 percent for the threemonths ended September 30, 2008 from 59.2 percent and 64.4 percent for theSuccessor Period from July 25 to September 30, 2007 and thePredecessor Period from July 1, 2007 to July 24, 2007, respectively.This reflects the impact of improved labor efficiency at Terminix and LandCareoffset by increases in fuel, fertilizer and other factor costs throughout theenterprise.

 

The Company reported selling and administrative expenses of $235.2million for the third quarter of 2008 compared to $154.5 million and $66.6million for the Successor Period from July 25 to September 30,2007 and the Predecessor Period from July 1, 2007 to July 24, 2007,respectively. The third quarterof 2008 and the Successor Period from July 25 to September 30,2007 include a $0.1 million (non-cash)and a $25.8 million (non-cash) decrease, respectively, in selling andadministrative expenses resulting from recording deferred customer acquisitioncosts at their fair value in connection with purchase accounting. Excluding theimpact of purchase accounting, these costs decreased as a percentage of revenueto 24.8 percent for the third quarter of 2008 from 25.0 percent and 26.4percent for the Successor Period from July 25 to September 30,2007 and the Predecessor Period from July 1, 2007 to July 24, 2007,respectively. The decrease in sellingand administrative expenses as a percentage of revenue primarily reflects lowerfunctional support costs, improved sales labor efficiency at TruGreen LawnCareand Terminix, and lower compensation charges for the Company resulting from adecrease in the market value of investments within an employee deferredcompensation trust (for which there is a corresponding and offsetting decreasewithin interest and net investment income).

 

Amortization expense was $40.5 million for the third quarter of 2008compared to $56.4 million and $0.6 million for the Successor Periodfrom July 25 to September 30, 2007 and the Predecessor Period from July 1,2007 to July 24, 2007, respectively. The decrease is a result of amortization being included in the periodfrom July 25, 2007 to September 30, 2007 related to finite livedintangible assets recorded in connection with the Merger which had lives of oneyear or less and were fully amortized as of July 24, 2008.

 

The Company reviews goodwill andindefinite-lived intangible assets for impairment annually in the fourthquarter and between annual test dates in certain circumstances. The majority ofthe Company’s goodwill and indefinite- lived intangible assets (mainly tradenames) relate to the Merger. The Company does not believe a triggering eventrequiring the Company to conduct an interim impairment test had occurred as of September 30,2008 and will perform the annual test during the fourth quarter. However, dueto the uncertainty in the credit markets and the recent declines in globalequity markets, the Company believes it is reasonably possible that its fourthquarter analysis will result in a non-cash impairment charge, but cannotreasonably estimate the amount of such charge until it completes its annualevaluation later in the fourth quarter. As of September 30, 2008, thebalances of the Company’s goodwill and indefinite-lived intangible assets were$3.1 billion and $3.1 billion, respectively.

 

Non-operating expense totaled $83.8 million for the third quarterof 2008 compared to $74.5 million and $1.1 million for theSuccessor Period from July 25 to September 30, 2007 and thePredecessor Period from July 1, 2007 to July 24, 2007, respectively. This change includes a $2.1 millionincrease in interest expense for the third quarter of 2008 primarily resultingfrom the increased debt levels related to the Merger and a $6.1 milliondecrease in interest and net investment income for the third quarter of 2008.Interest and net investment income was comprised of the following for the threemonths ended September 30, 2008, the Successor Period from July 25to September 30, 2007 and the Predecessor Period from July 1, 2007 toJuly 24, 2007:

 
| ** **                         | ** ** | **Successor**                | ** ** | ** **                   | **Predecessor** | ** ** |
|------------------------------------|------------|------------------------------|------------|------------------------------|-----------------|------------|
| ** **                         | ** ** | **Three**                    | ** ** | **July 25, 2007**  | ** **      | ** ** | **July 1, 2007** | ** ** |
| ** **                         | ** ** | **months ended**        | ** ** | **to**                       | ** **      | ** ** | **to** | ** ** |
| **(In  millions)**       | ** ** | **Sept. 30, 2008** | ** ** | **Sept. 30, 2007** | ** **      | ** ** | **July 24, 2007** | ** ** |
| Realized gains (1)                 |       | $                            | 1,178      |                         | $               | 606        |   |   | $ | 1,980 |   |
| Impairments (2)                    |       | (867                         | )          | (290                         | )               |       | — |   |
| Deferred compensation trust (3)    |       | (1,220                       | )          | 120                          |            |       | 49 |   |
| Other                              |       | 1,153                        |       | 3,454                        |            |       | 411 |   |
| Interest and net investment income |       | $                            | 244        |                         | $               | 3,890      |   |   | $ | 2,440 |   |

 

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(1)            Represents the net investment gains and theinterest and dividend income realized on the American Home Shield investmentportfolio.

 

(2)            Represents other than temporary declines inthe value of certain investments in the American Home Shield investmentportfolio.

 

(3)            Represents investment income (loss) resultingfrom a change in the market value of investments within an employee deferredcompensation trust (for which there is an offsetting adjustment in compensationexpense within operating loss (income)).

 

The effective tax rate on income (loss) from continuing operations wasan expense of 32.3 percent for the three months ended September 30, 2008compared to a benefit of 38.2 percent and a benefit of 10.0 percent for theSuccessor Period from July 25, 2007 to September 30, 2007 and the PredecessorPeriod from July 1, 2007 to July 24, 2007, respectively. The change in theeffective tax rate between the three months ended September 30, 2008 and thecombined period for the three months ended September 30, 2007 is primarily dueto state tax expense offsetting the annual projected federal benefit in 2008compared to state tax expense increasing the effective annual tax rate in 2007.

 

***Restructuring and Merger RelatedCharges***

 

TheCompany is engaged in a reorganization and restructuring of certain of itsbusinesses and support functions known as Fast Forward. Among the purposes ofFast Forward is to eliminate layers and bureaucracy and simplify work processesin order to better align the Company’s work processes around its operationaland strategic objectives. It is expected that Fast Forward will be effected inphases. The first phase involved, among other things, a reduction in work forceand various process improvements, including the closing of American Home Shield’scall center located in Santa Rosa, California. The second phase is expected toinclude the organization of certain corporate support functions into Centers ofExcellence which are expected to deliver higher quality services to our businessunits at lower costs, the outsourcing to third party vendors of variousbusiness activities that currently are handled internally, as well as otheremployee workforce reductions expected to result in cost-savings. The firstphase of Fast Forward was substantially completed in the first quarter of 2008,and the second phase is underway.

 

Weare currently in the late stages of negotiations with a third party vendor tooutsource certain information technology activities. The remaining negotiationsinclude refining the scope of work, developing service level agreements andnegotiating the terms and conditions of the contract. If the negotiationsconclude successfully, we would anticipate transitioning certain informationtechnology activities to the third party vendor during the first half of 2009.In connection with such transition we would expect to incur cash chargesrelated to, among other things, employee retention and severance costs andtransition fees paid to the third party vendor, and such cash charges would bematerial.

 

In connection with FastForward, the Company incurred costs in the three months ended September 30,2008 of approximately $2.0 million. Such costs include consulting fees ofapproximately $0.6 million and severance, lease termination and othercosts of approximately $1.4 million. For the Successor Period from July 25, 2007to September 30, 2007 and the Predecessor Period from July 1, 2007 toJuly 24, 2007 the Company incurred $3.4 million and$0.2 million of restructuring charges related to Fast Forward,respectively.

 

TheCompany expects that it will incur substantial additional costs in order toimplement the second phase of Fast Forward, but is currently unable to estimatethe aggregate amount or timing of such charges or the anticipated related cashoutlays. The Company is on schedule with respect to realizing its previouslyforecasted savings from Fast Forward. The Company believes that it willultimately realize annualized pretax savings of at least $60 million by the endof 2009. Most of these savings will benefit the selling, general andadministrative line in the statement of operations.

 

The results for the Successor Period ended September 30, 2007 andthe Predecessor Period ended July 24, 2007 include restructuring charges relatedto the Company’s consolidation of its corporate headquarters into itsoperations 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 Successor Period from July 25,2007 to September 

 

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30, 2007, the Company recognized charges ofapproximately $4.7 million, which consisted of $3.7 million of employeeretention and severance and $1.0 million of recruiting and related costs. Inthe Predecessor Period from July 1, 2007 to July 24, 2007, theCompany recognized charges of approximately $1.5 million, which consisted of$1.0 million of employee retention and severance and $0.5 million of recruitingand related costs. During the three months ended September 30, 2008, theCompany reversed net expenses of $0.2 million relating to this relocation.

 

During thethree months ended September 30, 2008, the Successor Period from July 25, 2007to September 30, 2007 and the Predecessor Period from July 1, 2007 toJuly 24, 2007, the Company incurred Merger related charges totaling$0.4 million, $0.5 million and $36.1 million, respectively. These Mergerrelated charges include investment banking, accounting, legal and other costsassociated with the Merger, which cannot be capitalized as part of the purchasecost for financial reporting purposes.

 

**Key Performance Indicators**

 

The table below presents selected operating metrics related to customercounts and customer retention for the three largest profit businesses in theCompany. These measures are presented on a rolling, twelve-month basis in orderto avoid seasonal anomalies.

 
| ** **                           | ** ** | **Key  Performance  Indicators  as of September 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                                             | ** ** | **2007** | ** ** |
| **TruGreen LawnCare—**          |       |                                                                 |       |   |   |
| Growth in Full Program Accounts (1)  |       | 1                                                                    | %          | 1 | % |
| Customer Retention Rate (1)          |       | 68.2                                                                 | %          | 67.5 | % |
| **Terminix—**                   |       |                                                                 |       |   |   |
| Growth in Pest Control Customers     |       | 0                                                                    | %          | 6 | % |
| Pest Control Customer Retention Rate |       | 78.8                                                                 | %          | 78.8 | % |
| Growth in Termite Customers          |       | 1                                                                    | %          | 1 | % |
| Termite Customer Retention Rate      |       | 87.5                                                                 | %          | 87.6 | % |
| **American Home Shield—**       |       |                                                                 |       |   |   |
| Growth in Warranty Contracts         |       | 0                                                                    | %          | 6 | % |
| Customer Retention Rate              |       | 61.5                                                                 | %          | 61.1 | % |

 

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(1) During the thirdquarter of 2008, TruGreen LawnCare changed its definition of Full ProgramAccounts to include sales in the second half of the year with the completion ofthe initial full program to occur in the first half of the following year.Prior to the third quarter of 2008 such sales were reflected as full programaccounts and included in customer retention in the first quarter of the yearfollowing the sale. Growth in Full Program Accounts and Customer Retention Ratefor 2007 have been adjusted to conform to the 2008 definition.

 

**Segment Reviews for the ThirdQuarter 2008 Compared to the Successor Period from July 25 to September 30,2007 and the Predecessor Period from July 1, 2007 to July 24, 2007**

 

The following businesssegment reviews should be read in conjunction with the required footnotedisclosures presented in the Notes to the Condensed Consolidated FinancialStatements. This disclosure provides a reconciliation of segment operating(loss) income to income from continuing operations before income taxes, withnet non-operating expenses as the only reconciling item.

 

The Company uses AdjustedEBITDA and Comparable Operating Performance to facilitate operating performancecomparisons from period to period. Adjusted EBITDA and Comparable OperatingPerformance are supplemental measures of the Company’s performance that are notrequired by, or presented in accordance with, GAAP. Adjusted EBITDA andComparable Operating Performance are not measurements of the Company’sfinancial performance under GAAP and should not be considered as alternativesto net income or any other performance measures derived in accordance with GAAPor as alternatives to net cash provided by operating activities or any othermeasures of the Company’s cash flow or liquidity. “Adjusted EBITDA” means netincome before net income (loss) from discontinued operations; provision (benefit)for income taxes; minority interest and other expense, net; interest expenseand interest and net investment income; and depreciation and amortizationexpense; as well as adding back interest and net investment income. The Companyviews its total interest and investment income as an integral part of itsbusiness model and earnings stream. “Comparable Operating Performance” iscalculated by adding back to Adjusted EBITDA non-cash option and restrictedstock expense and non-cash effects on Adjusted EBITDA attributable to theapplication of purchase accounting in connection with the Merger.

 

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The Company believesAdjusted EBITDA facilitates company-to-company operating performancecomparisons by backing out potential differences caused by variations incapital structures (affecting net interest income and expense), taxation andthe age and book depreciation of facilities and equipment (affecting relativedepreciation expense), which may vary for different companies for reasonsunrelated to operating performance. The Company uses Comparable OperatingPerformance as a supplemental measure to assess the Company’s performancebecause it excludes non-cash option and restricted stock expense and non-casheffects on Adjusted EBITDA attributable to the application of purchaseaccounting in connection with the Merger. The Company presents ComparableOperating Performance because it believes that it is useful for investors andlenders to analyze disclosures of the Company’s operating results on the samebasis as that used by the Company’s management.

 

Adjusted EBITDA andComparable Operating Performance are not necessarily comparable to othersimilarly titled financial measures of other companies due to the potentialinconsistencies in the method of calculation.

 

Adjusted EBITDA andComparable Operating Performance have limitations as analytical tools, andshould not be considered in isolation or as substitutes for analyzing theCompany’s results as reported under GAAP. Some of these limitations are:

 

·                  AdjustedEBITDA and Comparable Operating Performance do not reflect changes in, or cashrequirements for, the Company’s working capital needs;

 

·                  AdjustedEBITDA and Comparable Operating Performance do not reflect the Company’sinterest expense, or the cash requirements necessary to service interest orprincipal payments on the Company’s debt;

 

·                  AdjustedEBITDA and Comparable Operating Performance do not reflect the Company’s taxexpense or the cash requirements to pay the Company’s taxes;

 

·                  AdjustedEBITDA and Comparable Operating Performance do not reflect historical cashexpenditures or future requirements for capital expenditures or contractualcommitments;

 

·                Althoughdepreciation and amortization are non-cash charges, the assets beingdepreciated and amortized will often have to be replaced in the future, andAdjusted EBITDA and Comparable Operating Performance do not reflect any cashrequirements for such replacements; and

 

·                Othercompanies in the Company’s industries may calculate Adjusted EBITDA andComparable Operating Performance differently, limiting their usefulness ascomparative measures.

 

Operatingrevenues and Comparable Operating Performance by operating segment are asfollows:

 
| ** **                                                             | ** ** | **Successor**                | ** ** | ** **                   | **Predecessor** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|-----------------|------------|
| ** **                                                             | ** ** | **Three**                    | ** ** | **July 25, 2007**  | ** **      | ** ** | **July 1, 2007** | ** ** |
| ** **                                                             | ** ** | **months ended**        | ** ** | **to**                       | ** **      | ** ** | **to** | ** ** |
| **(In thousands)**                                                | ** ** | **Sept. 30, 2008** | ** ** | **Sept. 30, 2007** | ** **      | ** ** | **July 24, 2007** | ** ** |
| Operating Revenue:                                                     |       |                         |       |                         |            |       |   |   |
| TruGreen LawnCare                                                      |       | $                            | 364,442    |                         | $               | 273,485    |   |   | $ | 88,927 |   |
| TruGreen LandCare                                                      |       | 78,365                       |       | 76,325                       |            |       | 26,914 |   |
| Terminix                                                               |       | 273,172                      |       | 201,087                      |            |       | 72,200 |   |
| American Home Shield                                                   |       | 177,328                      |       | 99,389                       |            |       | 50,134 |   |
| Other Operations and Headquarters                                      |       | 54,766                       |       | 40,339                       |            |       | 13,983 |   |
| Total Operating Revenue                                                |       | $                            | 948,073    |                         | $               | 690,625    |   |   | $ | 252,158 |   |
| Comparable Operating Performance:                                      |       |                         |       |                         |            |       |   |   |
| TruGreen LawnCare                                                      |       | $                            | 83,838     |                         | $               | 66,357     |   |   | $ | 15,331 |   |
| TruGreen LandCare                                                      |       | 2,133                        |       | (1,600                       | )               |       | 180 |   |
| Terminix                                                               |       | 45,402                       |       | 32,027                       |            |       | 3,229 |   |
| American Home Shield                                                   |       | 34,567                       |       | 26,217                       |            |       | 10,689 |   |
| Other Operations and Headquarters                                      |       | 680                          |       | (2,393                       | )               |       | (38,327 | ) |
| Total Comparable Operating Performance                                 |       | $                            | 166,620    |                         | $               | 120,608    |   |   | $ | (8,898 | ) |
|                                                                   |       |                         |       |                         |            |       |   |   |
| Memo: Items included in Comparable  Operating Performance              |       |                         |       |                         |            |       |   |   |
| Restructuring charges and Merger related  charges (1)                  |       | $                            | 2,225      |                         | $               | 8,669      |   |   | $ | 37,698 |   |
| Management fee(2)                                                      |       | $                            | 500        |                         | $               | 375        |   |   | $ | — |   |
|                                                                   |       |                         |       |                         |            |       |   |   |
| Memo: Items excluded from Comparable  Operating Performance            |       |                         |       |                         |            |       |   |   |
| Comparable Operating Performance of InStar                             |       | $                            | (1,659     | )                            | $               | (3,207     | ) |   | $ | (2,138 | ) |
| Comparable Operating Performance of all  other discontinued operations |       | (824                         | )          | (111                         | )               |       | (76 | ) |
| Comparable Operating Performance of  discontinued operations           |       | $                            | (835       | )                            | $               | (3,318     | ) |   | $ | (2,214 | ) |

 

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(1)           Comparable Operating Performance includes (i) severanceand employee retention costs and costs related to the consolidation of ourcorporate headquarters in Memphis, Tennessee, including the closing of ouroffice in Downers Grove, Illinois, (ii) costs to exit leases and severancepayments related to organizational changes within the TruGreen LandCareoperations, (iii) charges related to Fast Forward and (iv) Mergerrelated charges. Substantially all of the restructuring charges and Mergerrelated charges are included in the Comparable Operating Performance of theOther Operations and Headquarters segment.

 

(2)           Represents a management fee payable toCD&R pursuant to a consulting agreement under which CD&R provides theCompany with on-going consulting and management advisory services for a minimumannual fee of $2 million.

 

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Thefollowing table presents reconciliations of operating (loss) income to AdjustedEBITDA and Comparable Operating Performance for the periods presented.

 
| ** **                                                             | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** **           | ** ** | **Other**        | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|----------------------|------------|------------------|------------|------------|------------|
| ** **                                                             | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** **           | ** ** | **Operations**   | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **TruGreen** | ** ** | **TruGreen** | ** ** | ** **   | ** ** | **American**         | ** ** | **and**          | ** ** | ** ** | ** ** |
| **(In thousands)**                                                | ** ** | **LawnCare** | ** ** | **LandCare** | ** ** | **Terminix** | ** ** | **Home Shield** | ** ** | **Headquarters** | ** ** | **Total**  | ** ** |
| ** **                                                             | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** **           | ** ** | ** **       | ** ** | ** ** | ** ** |
| **Successor three months ended  September 30, 2008**              | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** **           | ** ** | ** **       | ** ** | ** ** | ** ** |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Operating income (loss) (1)                                            |       | $            | 64,060     |         | $          | (323         | )          | $                    | 30,696     |             | $          | 22,897     |       | $ | (6,659 | ) | $ | 110,671 |   |
| Depreciation and amortization expense                                  |       | 19,779       |       | 2,619        |       | 14,720       |       | 11,097               |       | 5,499            |       | 53,714     |       |
| EBITDA before adding back interest and net  investment income          |       | 83,839       |       | 2,296        |       | 45,416       |       | 33,994               |       | (1,160           | )          | 164,385    |       |
| Interest and net investment income (loss)  (2)                         | ** ** | **—**   | ** ** | **—**   | ** ** | **—**   |       | 311                  |       | (67              | )          | 244        |       |
| Adjusted EBITDA                                                        |       | 83,839       |       | 2,296        |       | 45,416       |       | 34,305               |       | (1,227           | )          | 164,629    |       |
| Non-cash option and restricted stock  expense                          | ** ** | **—**   | ** ** | **—**   | ** ** | **—**   | ** ** | **—**           |       | 1,736            |       | 1,736      |       |
| Non-cash (credits) charges attributable to  purchase accounting (3)    |       | (1           | )          | (163         | )          | (14          | )          | 262                  |       | 171              |       | 255        |       |
| Comparable Operating Performance                                       |       | $            | 83,838     |         | $          | 2,133        |       | $                    | 45,402     |             | $          | 34,567     |       | $ | 680 |   | $ | 166,620 |   |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Memo: Items included in Comparable  Operating Performance              |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Restructuring charges and merger related  charges (4)                  |       | $            | (1         | )            | $          | 180          |       | $                    | —     |             | $          | 45         |       | $ | 2,001 |   | $ | 2,225 |   |
| Management fee (5)                                                     | ** ** | **$**        | **—** | ** **   | **$**      | **—**   | ** ** | **$**                | **—** | ** **       | **$**      | **—** |       | $ | 500 |   | $ | 500 |   |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Memo: Items excluded from Comparable  Operating Performance            |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Comparable Operating Performance of InStar                             |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | (1,659 | ) | $ | (1,659 | ) |
| Comparable Operating Performance of all  other discontinued operations |       | —       |       | —       |       | —       |       | —               |       | 824              |       | 824        |       |
| Comparable Operating Performance of  discontinued operations           |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | (835 | ) | $ | (835 | ) |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| **Successor period July 25, 2007 to  September 30, 2007**    | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** **           | ** ** | ** **       | ** ** | ** ** | ** ** |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Operating income (loss) (1)                                            |       | $            | 48,027     |         | $          | (4,434       | )          | $                    | 21,661     |             | $          | (4,327     | )          | $ | (10,373 | ) | $ | 50,554 |   |
| Depreciation and amortization expense                                  |       | 37,683       |       | 2,864        |       | 11,305       |       | 9,363                |       | 4,406            |       | 65,621     |       |
| EBITDA before adding back interest and net  investment income          |       | 85,710       |       | (1,570       | )          | 32,966       |       | 5,036                |       | (5,967           | )          | 116,175    |       |
| Interest and net investment income (2)                                 |       | —       |       | —       |       | —       |       | 316                  |       | 3,574            |       | 3,890      |       |
| Adjusted EBITDA                                                        |       | 85,710       |       | (1,570       | )          | 32,966       |       | 5,352                |       | (2,393           | )          | 120,065    |       |
| Non-cash option and restricted stock  expense                          | ** ** | **—**   | ** ** | **—**   | ** ** | **—**   | ** ** | **—**           |       | —           |       | —     |       |
| Non-cash (credits) charges attributable to  purchase accounting (3)    |       | (19,353      | )          | (30          | )          | (939         | )          | 20,865               |       | —           |       | 543        |       |
| Comparable Operating Performance                                       |       | $            | 66,357     |         | $          | (1,600       | )          | $                    | 32,027     |             | $          | 26,217     |       | $ | (2,393 | ) | $ | 120,608 |   |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Memo: Items included in Comparable  Operating Performance              |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Restructuring charges and merger related  charges (4)                  |       | $            | —     |         | $          | 2,826        |       | $                    | —     |             | $          | —     |       | $ | 5,843 |   | $ | 8,669 |   |
| Management fee (5)                                                     |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | 375 |   | $ | 375 |   |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Memo: Items excluded from Comparable  Operating Performance            |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Comparable Operating Performance of InStar                             |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | (3,207 | ) | $ | (3,207 | ) |
| Comparable Operating Performance of all  other discontinued operations |       | —       |       | —       |       | —       |       | —               |       | (111             | )          | (111       | )          |
| Comparable Operating Performance of  discontinued operations           |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | (3,318 | ) | $ | (3,318 | ) |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| **Predecessor period July 1, 2007 to  July 24, 2007**        |       |         |       |         |       |         |       |                 |       |             |       |       |       |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Operating income (loss) (1)                                            |       | $            | 14,436     |         | $          | (146         | )          | $                    | 2,101      |             | $          | 8,283      |       | $ | (39,836 | ) | $ | (15,162 | ) |
| Depreciation and amortization expense                                  |       | 895          |       | 326          |       | 1,128        |       | 426                  |       | 692              |       | 3,467      |       |
| EBITDA before adding back interest and net  investment income          |       | 15,331       |       | 180          |       | 3,229        |       | 8,709                |       | (39,144          | )          | (11,695    | )          |
| Interest and net investment income (2)                                 |       | —       |       | —       |       | —       |       | 1,980                |       | 460              |       | 2,440      |       |
| Adjusted EBITDA                                                        |       | 15,331       |       | 180          |       | 3,229        |       | 10,689               |       | (38,684          | )          | (9,255     | )          |
| Non-cash option and restricted stock  expense                          |       | —       |       | —       |       | —       |       | —               |       | 357              |       | 357        |       |
| Non-cash charges attributable to purchase  accounting (3)              |       | —       |       | —       |       | —       |       | —               |       | —           |       | —     |       |
| Comparable Operating Performance                                       |       | $            | 15,331     |         | $          | 180          |       | $                    | 3,229      |             | $          | 10,689     |       | $ | (38,327 | ) | $ | (8,898 | ) |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Memo: Items included in Comparable  Operating Performance              |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Restructuring charges and merger related  charges (4)                  |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | 37,698 |   | $ | 37,698 |   |
| Management fee (5)                                                     |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | — |   | $ | — |   |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Memo: Items excluded from Comparable  Operating Performance            |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Comparable Operating Performance of InStar                             |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | (2,138 | ) | $ | (2,138 | ) |
| Comparable Operating Performance of all  other discontinued operations |       | —       |       | —       |       | —       |       | —               |       | (76              | )          | (76        | )          |
| Comparable Operating Performance of  discontinued operations           |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | (2,214 | ) | $ | (2,214 | ) |

 

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(1)                                  Presented below is a reconciliation of total segmentoperating income (loss) to net income (loss).

 
| ** **                                                    | ** ** | **Successor**                | ** ** | ** **                   | **Predecessor** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|------------------------------|-----------------|------------|
| ** **                                                    | ** ** | **Three**                    | ** ** | **July 25, 2007**  | ** **      | ** ** | **July 1, 2007** | ** ** |
| ** **                                                    | ** ** | **months ended**        | ** ** | **to**                       | ** **      | ** ** | **to** | ** ** |
| **(In thousands)**                                       | ** ** | **Sept. 30, 2008** | ** ** | **Sept. 30, 2007** | ** **      | ** ** | **July 24, 2007** | ** ** |
| Total segment operating income (loss)                         |       | $                            | 110,671    |                         | $               | 50,554     |   |   | $ | (15,162 | ) |
| Non-operating expense (income):                               |       |                         |       |                         |            |       |   |   |
| Interest expense                                              |       | 83,886                       |       | 78,257                       |            |       | 3,500 |   |
| Interest and net investment income                            |       | (244                         | )          | (3,890                       | )               |       | (2,440 | ) |
| Other expense, net                                            |       | 141                          |       | 102                          |            |       | 11 |   |
| Income (loss) from Continuing Operations  before income taxes |       | $                            | 26,888     |                         | $               | (23,915    | ) |   | $ | (16,233 | ) |
| Provision (benefit) for income taxes                          |       | 8,683                        |       | (9,136                       | )               |       | (1,621 | ) |
| Income (loss) from Continuing Operations                      |       | $                            | 18,205     |                         | $               | (14,779    | ) |   | $ | (14,612 | ) |
| Loss from discontinued operations, net of  income taxes       |       | (1,186                       | )          | (2,590                       | )               |       | (1,467 | ) |
| Net Income (loss)                                             |       | $                            | 17,019     |                         | $               | (17,369    | ) |   | $ | (16,079 | ) |

 

(2)                                 Interest and net investment income (loss) is primarily comprised of investment incomeand realized gains/losses on our American Home Shield (“AHS”) segmentinvestment portfolio. Cash, short-term and long-term marketable securitiesassociated with regulatory requirements in connection with AHS and for otherpurposes totaled approximately $294 million as of September 30, 2008. Asfurther described in “Operating and Non-Operating Expenses”, AHS interest andnet investment income was $0.3 million for the third quarter of 2008, $0.3million for the Successor period from July 25 to September 30,2007 and $2.0 million for the Predecessor Period from July 1, 2007 to July 24,2007. The balance of interest andinvestment income primarily relates to (i) a portion of the earningsgenerated by ServiceMaster Acceptance Company Limited Partnership, ourfinancing subsidiary exclusively dedicated to providing financing to ourfranchisees and retail customers of our operating units; (ii) investmentincome from our employee deferred compensation trust (for which there is acorresponding and offsetting increase in compensation expense within operatingincome); and (iii) interest income on other cash balances.

 

(3)                                The Merger was accounted for using purchaseaccounting. This adjustment represents the aggregate, non-cash adjustments(other than amortization and depreciation) attributable to the application ofpurchase accounting.

 

(4)                                Includes (i) severance and employee retentioncosts and costs related to the consolidation of our corporate headquarters inMemphis, Tennessee, including the closing of our office in Downers Grove,Illinois, (ii) costs to exit leases and severance payments related toorganizational changes within the TruGreen LandCare operations, (iii) Mergerrelated charges and (iv) charges related to Fast Forward.

 

(5)                                The Company entered into a consultingagreement with CD&R under which CD&R provides the Company with on-goingconsulting and management advisory services in exchange for a minimum annualmanagement fee of $2 million. This fee is payable quarterly.

 

***TruGreen LawnCare Segment***

 

The TruGreen LawnCare segment (“LawnCare”),which includes lawn, tree and shrub care services, reported a 0.6 percent increasein revenue, a 2.6 percent increase in operating income and a 2.6 percentincrease in Comparable Operating Performance for the third quarter of 2008compared to the Successor Period from July 25 to September 30,2007 and the Predecessor Period from July 1, 2007 to July 24, 2007. The modest increase in revenue resultedfrom an improved price realization and increased customer counts. LawnCareexperienced a 34 percent increase in new unit sales and a 70 basis pointincrease in its rolling twelve-month retention rate from last year resulting inan overall 1.3 percent increase in customer counts from last year’s level. Thetrends in new sales and retention were positively affected by an increasedfocus on selling full programs in the third quarter as opposed to focusing onpartial program sales and expended services outside of our peak season.LawnCare remains focused on the overall quality of service delivery, includingthe Lawn Quality Audit (“LQA”) visits initiated during the second half of 2006.LawnCare is seeking to improve customer retention over the next several yearsas it expands the LQA program, focuses its efforts on reducing route managerturnover and continues to improve overall communication with customers.

 

The 2.6 percent increase inComparable Operating Performance for the third quarter of 2008 compared to 2007also reflects increased fuel and fertilizer costs offset, in part, by reducedoverhead spending.

 

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***TruGreen LandCare Segment***

 

The TruGreen LandCaresegment (“LandCare”), which includes landscape maintenance services, reported a24.1 percent decrease in revenue, a 92.9 percent decrease in operating loss anda 250.2 percent increase in Comparable Operating Performance for the thirdquarter of 2008 compared to the Successor Period from July 25 to September 30,2007 and the Predecessor Period from July 1, 2007 to July 24, 2007. The decline in revenue included a 22.5percent decline in base contract maintenance revenue and a 26.2 percentdecrease in enhancement revenue. Third quarter 2008 revenue was adverselyimpacted by branch closures completed during the third quarter of 2007, as wellas the impacts of LandCare’s efforts to improve the profitability of itscustomer base by pruning less profitable accounts, implementing stricterpricing on new sales, and increasing the average size of new proposals. Inaddition, new sales and enhancement revenue trends were adversely impacted bysoft consumer demand in the third quarter of 2008.

 

Comparable OperatingPerformance improved $3.6 million for the third quarter of 2008 compared to2007 and also reflects improved materials and labor management on the base contractmaintenance portfolio and reduced overhead spending. These factors were offset,in part, by increased fuel costs and $0.2 million of restructuring charges inthe third quarter of 2008.

 

***Terminix Segment***

 

The Terminix segment, which includes termite and pest control services,reported comparable revenue for the third quarter of 2008 compared to theSuccessor Period from July 25 to September 30, 2007 and thePredecessor Period from July 1, 2007 to July 24, 2007. Revenue for the third quarter of 2008 and theSuccessor Period from July 25 to September 30, 2007 has been reduced by $0.1 million (non-cash)and $2.7 million (non-cash), respectively, as a result of recording deferredrevenue at its fair value in connection with purchase accounting. Excluding thisimpact of purchase accounting, revenue decreased 1.0 percent for the thirdquarter of 2008. Terminix reported a 29.2 percent increase in operatingincome and a 28.8 percent increase in Comparable Operating Performance forthe third quarter of 2008 compared to the Successor Period from July 25to September 30, 2007 and the Predecessor Period from July 1, 2007 toJuly 24, 2007. The segment’soverall revenue results, excluding purchase accounting, reflected modest growthin pest control revenues offset by a decline in revenue from termite contractrenewals and termite completions. Pest control revenues increased 1.4 percentfor the third quarter of 2008, as the impact of acquisitions and pricerealization more than offset a decrease in new unit sales. A 2.3 percentdecrease in termite renewal revenues for the third quarter of 2008 was impactedby a 10 basis point reduction in termite customer retention offset, in part, byimproved price realization. Revenuefrom termite completions declined 4.6 percent for the third quarter of 2008, asreduced termite swarm activity negatively impacted demand for services and dueto reduced average pricing on new termite treatments.

 

The growth in ComparableOperating Performance also reflects lower termite materials costs, effectivemanagement of seasonal staffing of production and sales labor, lower vehiclefleet counts, and reduced overhead spending, offset, in part, by increased fuelcosts.

 

***American Home Shield Segment***

 

TheAmerican Home Shield segment, which provides home warranties to consumers thatcover heating, ventilation, air conditioning, plumbing and other systems andappliances, reported an 18.6 percent increase in revenue for the third quarterof 2008 compared to the Successor Period from July 25 to September 30,2007 and the Predecessor Period from July 1, 2007 to July 24, 2007. Revenue for the third quarter of 2008 and theSuccessor Period from July 25 to September 30, 2007 has been reduced by $0.6 million (non-cash)and $28.1 million (non-cash), respectively, as a result of recording deferredrevenue at its fair value in connection with purchase accounting. Excludingthis impact of purchase accounting, AHS reported comparable revenue for thethird quarter of 2008 compared to the Successor Period from July 25 to September 30,2007 and the Predecessor Period from July 1, 2007 to July 24, 2007.American Home Shield reported a 478.8 percent increase in operating incomeand a 6.3 percent decrease in Comparable Operating Performance for thethird quarter of 2008 compared to the Successor Period from July 25to September 30, 2007 and the Predecessor Period from July 1, 2007 toJuly 24, 2007. The trend inrevenue, in part, resulted from lower contract costs in the quarter due todifferences between years in the timing of the incidence of warranty claims.American Home Shield recognizes revenue over the contract period in proportionto expected direct costs. Total new contractsales and renewal units, which are reported as earned revenue over thesubsequent twelve-month contract period, declined 1.6 percent in the thirdquarter of 2008 compared with 2007. Contract unit sales from customer renewalsincreased 4.5 percent, reflecting a comparable base of renewable customers anda 40 basis point improvement in retention. American Home Shield’s sales in thereal estate channel were significantly impacted by the 

 

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continued softness in the home resale marketthroughout most of the country with overall unit sales declines of 15.6 percentthrough this channel.

 

Thedecrease in Comparable Operating Performance for the third quarter of 2008 alsoincludes a $2.0 million decrease in interest and net investment income from theAmerican Home Shield investment portfolio (primarily reflecting the unfavorableimpact of realized losses on disposals of securities and other than temporarydeclines in the value of certain investments) as compared to 2007 offset bybeneficial impacts of increases in prices and service fees per claim.

 

***Other Operations and Headquarters Segment***

 

This segment includes theoperations of ServiceMaster Clean and Merry Maids, as well as the Company’sheadquarters functions. The segment reported a 0.8 percent increase in revenue,an 86.7 percent decrease in operating loss and a 101.7 percent increase inComparable Operating Performance for the third quarter of 2008 compared to theSuccessor Period from July 25 to September 30, 2007 and thePredecessor Period from July 1, 2007 to July 24, 2007. The ServiceMaster Clean and Merry Maidsoperations reported a combined 1.2 percent increase in revenue for the thirdquarter of 2008. The growth in revenue resulted from increases in franchiserevenues. The ServiceMaster Clean and Merry Maids operations reported acombined increase in operating income of 15.2 percent and an increase inComparable Operating Performance of 15.4 percent, or $2.3 million, for thirdquarter of 2008. The increase in the segment’s Comparable Operating Performancefor the third quarter of 2008 compared to 2007 of $41.4 million primarilyreflects increased Comparable Operating Performance from the ServiceMasterClean and Merry Maids operations resulting from increased revenue, the decreasein Restructuring and Merger related charges incurred in 2008 and lowerfunctional support costs.

 

***Discontinued Operations***

 

The components of loss fromdiscontinued operations, net of income taxes, and the reconciliation ofoperating loss to Adjusted EBITDA and Comparable Operating Performance for thethree months ended September 30, 2008, the Successor Period from July 25to September 30, 2007 and the Predecessor Period from July 1, 2007 toJuly 24, 2007 are asfollows:

 
| ** **                                                     | ** ** | **Successor**                | ** ** | ** **                   | **Predecessor** | ** ** |
|----------------------------------------------------------------|------------|------------------------------|------------|------------------------------|-----------------|------------|
| ** **                                                     | ** ** | **Three**                    | ** ** | **July 25, 2007**  | ** **      | ** ** | **July 1, 2007** | ** ** |
| ** **                                                     | ** ** | **months ended**        | ** ** | **to**                       | ** **      | ** ** | **to** | ** ** |
| **(In thousands)**                                        | ** ** | **Sept. 30, 2008** | ** ** | **Sept. 30, 2007** | ** **      | ** ** | **July 24, 2007** | ** ** |
| Operating loss                                                 |       | $                            | (835       | )                            | $               | (4,304     | ) |   | $ | (2,440 | ) |
| Interest expense                                               |       | (3                           | )          | (9                           | )               |       | (2 | ) |
| Pretax loss                                                    |       | (838                         | )          | (4,313                       | )               |       | (2,442 | ) |
| Benefit from income taxes                                      |       | (239                         | )          | (1,723                       | )               |       | (975 | ) |
| Loss on sale, net of tax                                       |       | (587                         | )          | —                       |            |       | — |   |
| Loss from discontinued operations, net of  income taxes        |       | $                            | (1,186     | )                            | $               | (2,590     | ) |   | $ | (1,467 | ) |
|                                                           |       |                         |       |                         |            |       |   |   |
| Operating loss                                                 |       | $                            | (835       | )                            | $               | (4,304     | ) |   | $ | (2,440 | ) |
| Depreciation and amortization expense                          |       | —                       |       | 986                          |            |       | 226 |   |
| EBITDA before adding back interest and  investment income, net |       | (835                         | )          | (3,318                       | )               |       | (2,214 | ) |
| Interest and net investment income                             |       | —                       |       | —                       |            |       | — |   |
| Adjusted EBITDA                                                |       | (835                         | )          | (3,318                       | )               |       | (2,214 | ) |
| Non-cash option and restricted stock  expense                  |       | —                       |       | —                       |            |       | — |   |
| Non-cash charges attributable to purchase  accounting          |       | —                       |       | —                       |            |       | — |   |
| Comparable Operating Performance of  discontinued operations   |       | $                            | (835       | )                            | $               | (3,318     | ) |   | $ | (2,214 | ) |

 

During the third quarter of 2008, the Company completed the sale ofInStar for $22.9 million, with the payment of $3.0 million of that amountdeferred until November 2011. During the second quarter of 2008, theCompany recorded a pre-tax impairment charge of $6.3 million as a result of achange in our fair value estimate of InStar’s net assets based on changingmarket conditions and the ongoing sales process. Upon the sale of InStar theCompany recorded a loss on sale, net of tax, of $0.6 million. The purchaseprice noted above is subject to a final adjustment based on closing dateworking capital balances at InStar. These closing balances are subject to areview period by the Company and the purchasers of InStar. The loss on salenoted above includes an estimated adjustment for the closing date workingcapital balances. However, this amount could change pending the completion ofthe review in the fourth quarter of 2008. Such changes, if any, would notcurrently be expected to be material to the Company’s consolidated financialstatements.

 

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**Nine Months Ended September 30, 2008 Compared to****the Successor Period from July 25 to September 30, 2007 andthe Predecessor Period from January 1, 2007 to July 24, 2007**

 

The Company reported revenueof $2,577.6 million for the nine months ended September 30, 2008, a $47.4million or 1.8 percent decrease compared to the combined SuccessorPeriod from July 25 to September 30, 2007 and the Predecessor Periodfrom January 1, 2007 to July 24, 2007. The revenue for the nine months ended September 30, 2008 and theSuccessor Period from July 25 to September 30, 2007 has been reduced by $34.1 million (non-cash)and $30.8 million (non-cash), respectively, resulting from recording deferredrevenue at its fair value in connection with purchase accounting. Excludingthis impact of purchase accounting, revenue for the nine months ended September 30,2008 decreased $44.1 million or 1.7 percent from 2007 levels, driven by theresults of our business units as described in our “Segment Reviews for the NineMonths ended September 30, 2008 Compared to the Successor Periodfrom July 25 to September 30, 2007 and the Predecessor Period from January 1,2007 to July 24, 2007”.

 

Operating income was $214.5 million in the nine months ended September 30,2008 compared to $50.6 million and $143.9 million in the SuccessorPeriod from July 25 to September 30, 2007 and the Predecessor Periodfrom January 1, 2007 to July 24, 2007, respectively. Loss from continuing operations beforeincome taxes was $44.4 million in the nine months ended September 30, 2008compared to a loss from continuing operations before income taxes of$23.9 million and income from continuing operations before income taxes of$137.4 million in the Successor Period from July 25 to September 30,2007 and the Predecessor Period from January 1, 2007 to July 24,2007, respectively. The decrease in(loss) income from continuing operations before income taxes of $157.9 millionprimarily reflects the net effect of:

 
| **(In millions)**                            | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|------------|------------|
| Non-cash purchase accounting adjustments  (1)     |       | $          | (94.1      | ) |
| Increased interest expense (2)                    |       | (147.0     | )          |
| Decreased interest and net investment  income (3) |       | (33.4      | )          |
| Decreased merger related charges (4)              |       | 41.1       |       |
| Decreased restructuring charges (5)               |       | 16.0       |       |
| Improved segment results (6)                      |       | 59.5       |       |
|                                              |       | $          | (157.9     | ) |

 

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(1)           The net unfavorable impact of non-cash purchase accounting adjustmentsin the nine months ended September 30, 2008 of $94.1 million consistsprimarily of increased amortization of intangible assets of $72.0 million, a$3.3 million reduction in revenue and increased deferred customer acquisitionexpense of $18.2 million.

 

(2)           Represents an increase in interest expense as a result of the new debtstructure entered into upon the completion of the Transactions.

 

(3)           As further described in “Operating and Non-Operating Expenses”,represents a decrease in interest and net investment income primarilyreflecting (1) the unfavorable impact to investment gains and incomerealized on the American Home Shield investment portfolio due to realizedlosses on disposals of securities and other than  temporary declines in the value of certaininvestments and (2) lower investment income resulting from a decrease inthe market value of investments within an employee deferred compensation trust(for which there is a corresponding and offsetting decrease in compensationexpense within operating loss (income)).

 

(4)            Represents a decrease in charges related tothe Merger which cannot be capitalized as part of the purchase cost forfinancial reporting purposes.

 

(5)           Represents a decrease in restructuring charges primarily resulting fromFast Forward and the consolidation of the Company’s corporate headquarters intoits operations support center in Memphis, Tennessee.

 

(6)           Represents an increase in income from continuing operations beforeincome taxes, non-cash purchase accounting adjustments, interest expense,interest and net investment income, merger related charges and restructuringcharges supported by the improved results at Terminix, TruGreen LawnCare,TruGreen LandCare, American Home Shield and Other Operations and Headquartersas described in our “Segment Reviews for the Nine Months ended September 30,2008 Compared to the Successor Period from July 25 to September 30,2007 and the Predecessor Period from January 1, 2007 to July 24, 2007”.

 

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***Operating and Non-Operating Expenses***

 

The Company reported cost of services rendered and products sold of$1,566.7 million for the nine months ended September 30, 2008 compared to$420.5 million and $1,196.3 million for the Successor Period from July 25to September 30, 2007 and the Predecessor Period from January 1, 2007to July 24, 2007, respectively.Excluding the unfavorable non-cash reduction of revenue of $34.1 million forthe nine months ended September 30, 2008 and $30.8 million for theSuccessor period from July 25 to September 30, 2007 resulting from recording deferred revenue atits fair value in conjunction with purchase accounting, as a percentage of revenuethese costs decreased to 60.0 percent for the nine months ended September 30,2008 from 59.2 percent and 61.8 percent for the Successor Periodfrom July 25 to September 30, 2007 and the Predecessor Period from January 1,2007 to July 24, 2007, respectively.This decrease primarily reflects the impact of improved labor efficiency atTerminix, offset by increases in fuel, fertilizer and other factor coststhroughout the enterprise.

 

The Company reported selling and administrative expenses of $653.4 millionfor the nine months ended September 30, 2008 compared to$154.5 million and $530.7 million for the Successor Period from July 25to September 30, 2007 and the Predecessor Period from January 1, 2007to July 24, 2007, respectively.The nine months ended September 30, 2008 and the Successor Periodfrom July 25 to September 30, 2007 includes a $14.1 million (non-cash) and $25.8 million (non-cash)decrease, respectively, in selling and administrative expenses resulting fromrecording deferred customer acquisition costs at their fair value in connectionwith purchase accounting. Excluding the impact of purchase accounting, thesecosts decreased as a percentage of revenue to 25.6 percent for the ninemonths ended September 30, 2008 from 25.0 percent and 27.4 percentfor the Successor Period from July 25 to September 30, 2007and the Predecessor Period from January 1, 2007 to July 24, 2007,respectively. The decrease in sellingand administrative expenses as a percentage of revenue primarily reflects lowerfunctional support costs, improved sales labor efficiency at TruGreen LawnCareand Terminix, and lower compensation charges for the Company due primarily to adecrease in the market value of investments within an employee deferredcompensation trust (for which there is a corresponding and offsetting decreasewithin interest and net investment loss (income)).

 

Amortization expense was $133.1 million for the nine months ended September 30,2008 compared to $56.4 million and $5.2 million for the SuccessorPeriod from July 25 to September 30, 2007 and the Predecessor Periodfrom January 1, 2007 to July 24, 2007. The increase reflects $126.6 million and $54.6 million ofamortization for the nine months ended September 30, 2008 and theSuccessor period from July 25 to September 30, 2007, respectively related to recording amortizable intangibleassets of $844 million in purchase accounting in connection with theMerger.

 

The Company reviews goodwill andindefinite-lived intangible assets for impairment annually in the fourthquarter and between annual test dates in certain circumstances. The majority ofthe Company’s goodwill and indefinite- lived intangible assets (mainly tradenames) relate to the Merger. The Company does not believe a triggering eventrequiring the Company to conduct an interim impairment test had occurred as of September 30,2008 and will perform the annual test during the fourth quarter. However, dueto the uncertainty in the credit markets and the recent declines in globalequity markets, the Company believes it is reasonably possible that its fourthquarter analysis will result in a non-cash impairment charge, but cannotreasonably estimate the amount of such charge until it completes its annualevaluation later in the fourth quarter. As of September 30, 2008, thebalances of the Company’s goodwill and indefinite-lived intangible assets were$3.1 billion and $3.1 billion, respectively.

 

Non-operating expense totaled $259.0 million for the nine monthsended September 30, 2008 compared to $74.5 million and $6.6 millionfor the Successor Period from July 25 to September 30, 2007and the Predecessor Period from January 1, 2007 to July 24, 2007. This change includes a $147.0 millionincrease in interest expense for the nine months ended September 30, 2008primarily resulting from the increased debt levels related to the Merger, and a$34.2 million decrease in interest and net investment income for the ninemonths ended September 30, 2008. Interest and net investment income wascomprised of the following for the nine months ended September 30, 2008, theSuccessor Period from July 25 to September 30, 2007 and thePredecessor Period from January 1, 2007 to July 24, 2007:

 
| ** **                                | ** ** | **Successor**                | ** ** | ** **                   | **Predecessor** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|------------------------------|-----------------|------------|
| ** **                                | ** ** | **Nine**                     | ** ** | **July 25, 2007**  | ** **      | ** ** | **Jan. 1, 2007** | ** ** |
| ** **                                | ** ** | **months ended**        | ** ** | **to**                       | ** **      | ** ** | **to** | ** ** |
| **(In  millions)**              | ** ** | **Sept. 30, 2008** | ** ** | **Sept. 30, 2007** | ** **      | ** ** | **July 24, 2007** | ** ** |
| Realized gains (1)                        |       | $                            | 8,379      |                         | $               | 606        |   |   | $ | 25,091 |   |
| Impairments (2)                           |       | (9,030                       | )          | (290                         | )               |       | (928 | ) |
| Deferred compensation trust (3)           |       | (3,907                       | )          | 120                          |            |       | 2,880 |   |
| Other                                     |       | 2,921                        |       | 3,454                        |            |       | 1,581 |   |
| Interest and net investment (loss) income |       | $                            | (1,637     | )                            | $               | 3,890      |   |   | $ | 28,624 |   |

 

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(1)           Represents the net investment gains and the interest and dividendincome realized on the American Home Shield investment portfolio.

 

(2)           Represents other than temporary declines in the value of certaininvestments in the American Home Shield investment portfolio.

 

(3)           Represents investment income (loss) resulting from a change in themarket value of investments within an employee deferred compensation trust (forwhich there is an offsetting adjustment in compensation expense withinoperating loss (income)).

 

The effectivetax rate on (loss) income from continuing operations was a benefit of 18.8percent for the nine months ended September 30, 2008 compared to 38.2 percentand 37.6 percent for the Successor Period from July 25, 2007 to September 30,2007 and the Predecessor Period from January 1, 2007 to July 24, 2007,respectively. The change in the effective tax rate between the nine monthsended September 30, 2008 and the combined period for the nine months endedSeptember 30, 2007 is due to state tax expense offsetting the annual projectedfederal benefit in 2008 compared to state tax expense increasing the effectiveannual tax rate in 2007. In addition, the projected 2008 benefit is reduced byadditional tax reserves and permanent items related to the Merger. Theeffective tax rate for the combined periods for the nine months ended September30, 2007 includes reductions in tax expense resulting from the favorableresolution of state tax items related to a prior non-recurring transaction, aswell as the incremental deferred tax benefits that became recognizable duringthe second quarter of 2007 upon the conversion of the minority equity interestsin Terminix into eight million shares of ServiceMaster common stock. Thesefactors were offset, in part, by the unfavorable impact of merger related bookexpenses that are not deductible for federal income tax reporting purposes.

 

***Restructuring and Merger RelatedCharges***

 

TheCompany is engaged in a reorganization and restructuring of certain of itsbusinesses and support functions under Fast Forward. Among the purposes of FastForward is to eliminate layers and bureaucracy and simplify work processes inorder to better align the Company’s work processes around its operational andstrategic objectives. It is expected that Fast Forward will be effected inphases. The first phase involved, among other things, a reduction in work forceand various process improvements, including the closing of American Home Shield’scall center located in Santa Rosa, California. The second phase is expected toinclude the organization of certain corporate support functions into Centers ofExcellence which are expected to deliver higher quality services to ourbusiness units at lower costs, the outsourcing to third party vendors ofvarious business activities that currently are handled internally, as well asother employee workforce reductions expected to result in cost-savings. Thefirst phase of Fast Forward was substantially completed in the first quarter of2008, and the second phase is underway.

 

Weare currently in the late stages of negotiations with a third party vendor tooutsource certain of our information technology activities. The remainingnegotiations include refining the scope of work, developing service levelagreements and negotiating the terms and conditions of the contract. If thenegotiations conclude successfully, we would anticipate transitioning certain informationtechnology activities to the third party vendor during the first half of 2009.In connection with such transition we would expect to incur cash chargesrelated to, among other things, employee retention and severance costs andtransition fees paid to the third party vendor, and such cash charges would bematerial.

 

Inconnection with Fast Forward, the Company incurred costs in the nine monthsended September 30, 2008 of approximately $8.7 million. Such costsinclude consulting fees of approximately $4.4 million and severance, leasetermination and other costs of approximately $4.3 million. For the Successor Period from July 25, 2007to September 30, 2007 and the Predecessor Period from January 1, 2007to July 24, 2007 the Company incurred $3.4 million and$0.2 million of restructuring charges related to Fast Forward,respectively.

 

The Company expects that itwill incur substantial additional costs in order to implement the second phaseof Fast Forward, but is currently unable to estimate the aggregate amount ortiming of such charges or the anticipated related cash outlays. The Company ison schedule with respect to realizing its previously forecasted savings fromFast Forward. The Company believes that it will ultimately realize annualpretax savings of at least $60 million by the end of 2009. Most of thesesavings will benefit the selling, general and administrative line in thestatement of operations.

 

The resultsfor the Successor and Predecessor Periods ended September 30, 2007 includerestructuring charges related to the Company’s consolidation of its corporateheadquarters into its operations support center in Memphis, Tennessee and theclosing of its headquarters 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 Successor Period from July 25,2007 to September 30, 2007, the

 

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Company recognized charges of approximately$4.7 million, which consisted of $3.7 million of employee retention andseverance and $1.0 million of recruiting and related costs. In the PredecessorPeriod from January 1, 2007 to July 24, 2007, the Company recognizedcharges of approximately $16.8 million, which consisted of $12.8 million ofemployee retention and severance and $4.0 million of recruiting and relatedcosts. During the nine months ended September 30, 2008, the Companyincurred costs of $0.4 million relating to this relocation, which includesadditional severance and other costs.

 

During the nine months ended September 30,2008, theSuccessor Period from July 25, 2007 to September 30, 2007 and thePredecessor Period from January 1, 2007 to July 24, 2007, theCompany incurred Merger related charges totaling $0.8 million, $0.5 million and$41.4 million, respectively. These Merger related charges include investmentbanking, accounting, legal and other costs associated with the Merger, whichcannot be capitalized as part of the purchase cost for financial reportingpurposes.

 

**SegmentReviews for the Nine Months Ended September 30, 2008 Compared to****the Successor Period from July 25 to September 30, 2007 andthe Predecessor Period from January 1, 2007 to July 24, 2007**

 

The following businesssegment reviews should be read in conjunction with the required footnotedisclosures presented in the Notes to the Condensed Consolidated FinancialStatements. This disclosure provides a reconciliation of segment operating(loss) income to income from continuing operations before income taxes, withnet non-operating expenses as the only reconciling item. As noted in segmentreviews for the third quarter 2008 compared to the Successor Period fromJuly 25 to September 30, 2007 and the Predecessor Period from July 1,2007 to July 24, 2007, theCompany uses Adjusted EBITDA and Comparable Operating Performance to facilitateoperating performance comparisons from period to period.

 

Operating revenues andComparable Operating Performance by operating segment are as follows:

 
| ** **                                                             | ** ** | **Successor**                | ** ** | ** **                   | **Predecessor** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|-----------------|------------|
| ** **                                                             | ** ** | **Nine**                     | ** ** | **July 25, 2007**  | ** **      | ** ** | **Jan. 1, 2007** | ** ** |
| ** **                                                             | ** ** | **months ended**        | ** ** | **to**                       | ** **      | ** ** | **to** | ** ** |
| **(In thousands)**                                                | ** ** | **Sept. 30, 2008** | ** ** | **Sept. 30, 2007** | ** **      | ** ** | **July 24, 2007** | ** ** |
| Operating Revenue:                                                     |       |                         |       |                         |            |       |   |   |
| TruGreen LawnCare                                                      |       | $                            | 876,180    |                         | $               | 273,485    |   |   | $ | 597,147 |   |
| TruGreen LandCare                                                      |       | 240,894                      |       | 76,325                       |            |       | 242,154 |   |
| Terminix                                                               |       | 846,594                      |       | 201,087                      |            |       | 645,700 |   |
| American Home Shield                                                   |       | 450,316                      |       | 99,389                       |            |       | 331,361 |   |
| Other Operations and Headquarters                                      |       | 163,625                      |       | 40,339                       |            |       | 118,028 |   |
| Total Operating Revenue                                                |       | $                            | 2,577,609  |                         | $               | 690,625    |   |   | $ | 1,934,390 |   |
| Comparable Operating Performance:                                      |       |                         |       |                         |            |       |   |   |
| TruGreen LawnCare                                                      |       | $                            | 152,437    |                         | $               | 66,357     |   |   | $ | 84,208 |   |
| TruGreen LandCare                                                      |       | 6,764                        |       | (1,600                       | )               |       | 965 |   |
| Terminix                                                               |       | 174,414                      |       | 32,027                       |            |       | 120,057 |   |
| American Home Shield                                                   |       | 76,770                       |       | 26,217                       |            |       | 63,432 |   |
| Other Operations and Headquarters                                      |       | 2,382                        |       | (2,393                       | )               |       | (60,277 | ) |
| Total Comparable Operating Performance                                 |       | $                            | 412,767    |                         | $               | 120,608    |   |   | $ | 208,385 |   |
|                                                                   |       |                         |       |                         |            |       |   |   |
| Memo: Items included in Comparable  Operating Performance              |       |                         |       |                         |            |       |   |   |
| Restructuring charges and Merger related  charges (1)                  |       | $                            | 9,910      |                         | $               | 8,669      |   |   | $ | 58,350 |   |
| Management fee(2)                                                      |       | $                            | 1,500      |                         | $               | 375        |   |   | $ | — |   |
|                                                                   |       |                         |       |                         |            |       |   |   |
| Memo: Items excluded from Comparable  Operating Performance            |       |                         |       |                         |            |       |   |   |
| Comparable Operating Performance of InStar                             |       | $                            | (2,502     | )                            | $               | (3,207     | ) |   | $ | (5,739 | ) |
| Comparable Operating Performance of all  other discontinued operations |       | 2,296                        |       | (111                         | )               |       | 326 |   |
| Comparable Operating Performance of  discontinued operations           |       | $                            | (206       | )                            | $               | (3,318     | ) |   | $ | (5,413 | ) |

 

----

(1)           Comparable Operating Performance includes (i) severanceand employee retention costs and costs related to the consolidation of ourcorporate headquarters in Memphis, Tennessee, including the closing of ouroffice in Downers Grove, Illinois, (ii) costs to exit leases and severancepayments related to organizational changes within the TruGreen LandCareoperations, (iii) charges related to Fast Forward and (iv) Mergerrelated charges. Substantially all of the restructuring charges and Mergerrelated charges are included in the Comparable Operating Performance of theOther Operations and Headquarters segment.

 

(2)           Represents a management fee payable toCD&R pursuant to a consulting agreement under which CD&R provides theCompany with on-going consulting and management advisory services for a minimumannual fee of $2 million.

 

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The following table presentsreconciliations of operating income (loss) to Adjusted EBITDA and ComparableOperating Performance for the periods presented.

 
| ** **                                                             | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** **           | ** ** | **Other**        | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|----------------------|------------|------------------|------------|------------|------------|
| ** **                                                             | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** **           | ** ** | **Operations**   | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **TruGreen** | ** ** | **TruGreen** | ** ** | ** **   | ** ** | **American**         | ** ** | **and**          | ** ** | ** ** | ** ** |
| **(In thousands)**                                                | ** ** | **LawnCare** | ** ** | **LandCare** | ** ** | **Terminix** | ** ** | **Home Shield** | ** ** | **Headquarters** | ** ** | **Total**  | ** ** |
| ** **                                                             | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** **           | ** ** | ** **       | ** ** | ** ** | ** ** |
| **Successor  nine months ended September 30, 2008**               | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** **           | ** ** | ** **       | ** ** | ** ** | ** ** |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Operating income  (loss) (1)                                           |       | $            | 85,914     |         | $          | (925         | )          | $                    | 133,591    |             | $          | 14,606     |       | $ | (18,638 | ) | $ | 214,548 |   |
| Depreciation and  amortization expense                                 |       | 66,490       |       | 8,177        |       | 44,611       |       | 36,539               |       | 16,490           |       | 172,307    |       |
| EBITDA before  adding back interest and net investment income          |       | 152,404      |       | 7,252        |       | 178,202      |       | 51,145               |       | (2,148           | )          | 386,855    |       |
| Interest and net  investment loss (2)                                  | ** ** | **—**   | ** ** | **—**   | ** ** | **—**   |       | (651                 | )          | (986             | )          | (1,637     | )          |
| Adjusted EBITDA                                                        |       | 152,404      |       | 7,252        |       | 178,202      |       | 50,494               |       | (3,134           | )          | 385,218    |       |
| Non-cash option  and restricted stock expense                          | ** ** | **—**   | ** ** | **—**   | ** ** | **—**   | ** ** | **—**           |       | 5,137            |       | 5,137      |       |
| Non-cash charges  (credits) attributable to purchase accounting (3)    |       | 33           |       | (488         | )          | (3,788       | )          | 26,276               |       | 379              |       | 22,412     |       |
| Comparable Operating  Performance                                      |       | $            | 152,437    |         | $          | 6,764        |       | $                    | 174,414    |             | $          | 76,770     |       | $ | 2,382 |   | $ | 412,767 |   |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Memo: Items  included in Comparable Operating Performance              |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Restructuring  charges and merger related charges (4)                  |       | $            | 315        |         | $          | 382          |       | $                    | 57         |             | $          | 493        |       | $ | 8,663 |   | $ | 9,910 |   |
| Management fee  (5)                                                    | ** ** | **$**        | **—** | ** **   | **$**      | **—**   | ** ** | **$**                | **—** | ** **       | **$**      | **—** |       | $ | 1,500 |   | $ | 1,500 |   |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Memo: Items  excluded from Comparable Operating Performance            |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Comparable  Operating Performance of InStar                            |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | (2,502 | ) | $ | (2,502 | ) |
| Comparable  Operating Performance of all other discontinued operations |       | —       |       | —       |       | —       |       | —               |       | 2,296            |       | 2,296      |       |
| Comparable  Operating Performance of discontinued operations           |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | (206 | ) | $ | (206 | ) |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| **Successor  period July 25, 2007 to September 30, 2007**    | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** **           | ** ** | ** **       | ** ** | ** ** | ** ** |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Operating income  (loss) (1)                                           |       | $            | 48,027     |         | $          | (4,434       | )          | $                    | 21,661     |             | $          | (4,327     | )          | $ | (10,373 | ) | $ | 50,554 |   |
| Depreciation and  amortization expense                                 |       | 37,683       |       | 2,864        |       | 11,305       |       | 9,363                |       | 4,406            |       | 65,621     |       |
| EBITDA before  adding back interest and net investment income          |       | 85,710       |       | (1,570       | )          | 32,966       |       | 5,036                |       | (5,967           | )          | 116,175    |       |
| Interest and net  investment income (2)                                |       | —       |       | —       |       | —       |       | 316                  |       | 3,574            |       | 3,890      |       |
| Adjusted EBITDA                                                        |       | 85,710       |       | (1,570       | )          | 32,966       |       | 5,352                |       | (2,393           | )          | 120,065    |       |
| Non-cash option  and restricted stock expense                          | ** ** | **—**   | ** ** | **—**   | ** ** | **—**   | ** ** | **—**           |       | —           |       | —     |       |
| Non-cash  (credits) charges attributable to purchase accounting (3)    |       | (19,353      | )          | (30          | )          | (939         | )          | 20,865               |       | —           |       | 543        |       |
| Comparable  Operating Performance                                      |       | $            | 66,357     |         | $          | (1,600       | )          | $                    | 32,027     |             | $          | 26,217     |       | $ | (2,393 | ) | $ | 120,608 |   |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Memo: Items  included in Comparable Operating Performance              |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Restructuring  charges and merger related charges (4)                  | ** ** | **$**        | **—** |         | $          | 2,826        |       | $                    | —     | ** **       | **$**      | **—** |       | $ | 5,843 |   | $ | 8,669 |   |
| Management fee  (5)                                                    | ** ** | **$**        | **—** | ** **   | **$**      | **—**   | ** ** | **$**                | **—** | ** **       | **$**      | **—** |       | $ | 375 |   | $ | 375 |   |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Memo: Items  excluded from Comparable Operating Performance            |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Comparable  Operating Performance of InStar                            |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | (3,207 | ) | $ | (3,207 | ) |
| Comparable  Operating Performance of all other discontinued operations |       | —       |       | —       |       | —       |       | —               |       | (111             | )          | (111       | )          |
| Comparable  Operating Performance of discontinued operations           |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | (3,318 | ) | $ | (3,318 | ) |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| **Predecessor  period January 1, 2007 to July 24, 2007**     |       |         |       |         |       |         |       |                 |       |             |       |       |       |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Operating income  (loss) (1)                                           |       | $            | 75,656     |         | $          | (2,206       | )          | $                    | 109,461    |             | $          | 35,582     |       | $ | (74,561 | ) | $ | 143,932 |   |
| Depreciation and  amortization expense                                 |       | 8,552        |       | 3,171        |       | 10,596       |       | 3,687                |       | 6,408            |       | 32,414     |       |
| EBITDA before  adding back interest and net investment income          |       | 84,208       |       | 965          |       | 120,057      |       | 39,269               |       | (68,153          | )          | 176,346    |       |
| Interest and net  investment income (2)                                |       | —       |       | —       |       | —       |       | 24,163               |       | 4,461            |       | 28,624     |       |
| Adjusted EBITDA                                                        |       | 84,208       |       | 965          |       | 120,057      |       | 63,432               |       | (63,692          | )          | 204,970    |       |
| Non-cash option  and restricted stock expense                          |       | —       |       | —       |       | —       |       | —               |       | 3,415            |       | 3,415      |       |
| Non-cash charges  attributable to purchase accounting (3)              |       | —       |       | —       |       | —       |       | —               |       | —           |       | —     |       |
| Comparable  Operating Performance                                      |       | $            | 84,208     |         | $          | 965          |       | $                    | 120,057    |             | $          | 63,432     |       | $ | (60,277 | ) | $ | 208,385 |   |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Memo: Items  included in Comparable Operating Performance              |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Restructuring  charges and merger related charges (4)                  |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | 58,350 |   | $ | 58,350 |   |
| Management fee  (5)                                                    |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | — |   | $ | — |   |
|                                                                   |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Memo: Items  excluded from Comparable Operating Performance            |       |         |       |         |       |         |       |                 |       |             |       |       |       |
| Comparable  Operating Performance of InStar                            |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | (5,739 | ) | $ | (5,739 | ) |
| Comparable  Operating Performance of all other discontinued operations |       | —       |       | —       |       | —       |       | —               |       | 326              |       | 326        |       |
| Comparable  Operating Performance of discontinued operations           |       | $            | —     |         | $          | —       |       | $                    | —     |             | $          | —     |       | $ | (5,413 | ) | $ | (5,413 | ) |

 

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(1)                                  Presented below is a reconciliation of totalsegment operating income to net (loss) income.

 
| ** **                                                    | ** ** | **Successor**                | ** ** | ** **                   | **Predecessor** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|------------------------------|-----------------|------------|
| ** **                                                    | ** ** | **Nine**                     | ** ** | **July 25, 2007**  | ** **      | ** ** | **Jan. 1, 2007** | ** ** |
| ** **                                                    | ** ** | **months ended**        | ** ** | **to**                       | ** **      | ** ** | **to** | ** ** |
| **(In thousands)**                                       | ** ** | **Sept. 30, 2008** | ** ** | **Sept. 30, 2007** | ** **      | ** ** | **July 24, 2007** | ** ** |
| Total segment operating income                                |       | $                            | 214,548    |                         | $               | 50,554     |   |   | $ | 143,932 |   |
| Non-operating expense (income):                               |       |                         |       |                         |            |       |   |   |
| Interest expense                                              |       | 256,897                      |       | 78,257                       |            |       | 31,643 |   |
| Interest and net investment loss (income)                     |       | 1,637                        |       | (3,890                       | )               |       | (28,624 | ) |
| Minority interest and other expense, net                      |       | 418                          |       | 102                          |            |       | 3,532 |   |
| (Loss) income from Continuing Operations  before income taxes |       | $                            | (44,404    | )                            | $               | (23,915    | ) |   | $ | 137,381 |   |
| (Benefit) provision for income taxes                          |       | (8,341                       | )          | (9,136                       | )               |       | 51,692 |   |
| (Loss) income from Continuing Operations                      |       | $                            | (36,063    | )                            | $               | (14,779    | ) |   | $ | 85,689 |   |
| Loss from discontinued operations, net of  income taxes       |       | (4,670                       | )          | (2,590                       | )               |       | (4,588 | ) |
| Net (loss) income                                             |       | $                            | (40,733    | )                            | $               | (17,369    | ) |   | $ | 81,101 |   |

 

(2)                                Interest and net investment income isprimarily comprised of investment income and realized gains/losses on our AHSsegment investment portfolio. Cash, short-term and long-term marketablesecurities associated with regulatory requirements in connection with AHS andfor other purposes totaled approximately $294 million as of September 30,2008. As further described in “Operating and Non-Operating Expenses”, AHSinterest and net investment (loss) income was ($0.7) million for the ninemonths ended September 30, 2008, $0.3 million for the SuccessorPeriod from July 25 to September 30, 2007 and $24.2 million for thePredecessor Period from January 1, 2007 to July 24, 2007. The balance of interest and net investmentincome primarily relates to (i) a portion of the earnings generated byServiceMaster Acceptance Company Limited Partnership, our financing subsidiaryexclusively dedicated to providing financing to our franchisees and retailcustomers of our operating units; (ii) investment income from our employeedeferred compensation trust (for which there is a corresponding and offsettingincrease in compensation expense within operating income); and (iii) interestincome on other cash balances.

 

(3)                                The Merger was accounted for using purchaseaccounting. This adjustment represents the aggregate, non-cash adjustments(other than amortization and depreciation) attributable to the application ofpurchase accounting.

 

(4)                                Includes (i) severance and employeeretention costs and costs related to the consolidation of our corporateheadquarters in Memphis, Tennessee, including the closing of our office inDowners Grove, Illinois, (ii) costs to exit leases and severance paymentsrelated to organizational changes within the TruGreen LandCare operations, (iii) Mergerrelated charges and (iv) charges related to Fast Forward.

 

(5)                                The Company entered into a consultingagreement with CD&R under which CD&R provides the Company with on-goingconsulting and management advisory services in exchange for a minimum annualmanagement fee of $2 million. This fee is payable quarterly.

 

***TruGreen LawnCare Segment***

 

LawnCare reported a 0.6 percent increase in revenue, a 30.5 percentdecrease in operating income and a 1.2 percent increase in Comparable OperatingPerformance for the nine months ended September 30, 2008 compared to theSuccessor Period from July 25 to September 30, 2007 and thePredecessor Period from January 1, 2007 to July 24, 2007. The revenue results were favorably impactedby additional seasonal sales of ice-melt materials, improved price realizationand increased customer counts. LawnCare experienced a 2.4 percent decline innew unit sales and a 70 basis point increase in its rolling twelve-monthretention rate from last year resulting in an overall 1.3 percent increase incustomer counts from last year’s level. The trends in new sales and retentionwere adversely impacted by soft consumer demand in the first-half of 2008. Thedecrease in new sales was also impacted by poor weather in early 2008.

 

The1.2 percent increase in Comparable Operating Performance for the nine monthsended September 30, 2008 compared to 2007 also reflects increased fuel andfertilizer costs offset, in part, by reduced overhead spending.

 

***TruGreen LandCare Segment***

 

LandCarereported a 24.4 percent decrease in revenue, an 86.1 percent decrease inoperating loss and a 1,165.2 percent increase in Comparable OperatingPerformance for the nine months ended September 30, 2008 compared to theSuccessor Period from July 25 to September 30, 2007 and thePredecessor Period from January 1, 2007 to July 24, 2007. The decline in revenue included a 22.1percent decline in base contract maintenance revenue, a 23.9 percent decreasein

 

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enhancement revenue, and an$8.0 million decrease in snow removal service revenue. The revenuecomparison was adversely impacted by branch closures completed during the thirdquarter of 2007, as well as the impacts of LandCare’s efforts to improve thequality of its customer base with a better customer mix by pruning lessprofitable jobs, implementing stricter pricing on new sales, and increasing theaverage size of new proposals and sales. In addition, new sales and enhancementrevenue trends were adversely impacted by soft consumer demand in 2008.

 

The Comparable OperatingPerformance improved $7.4 million for the nine months ended September 30,2008 compared to 2007 primarily due to improved materials and labor managementon the base contract maintenance portfolio and reduced overhead spending. Thesefactors were offset, in part, by increased fuel costs.

 

***Terminix Segment***

 

The Terminix segmentreported comparable revenue for the nine months ended September 30, 2008 comparedto the Successor Period from July 25 to September 30, 2007 andthe Predecessor Period from January 1, 2007 to July 24, 2007. Revenue for the nine months ended September 30,2008 and the Successor Period from July 25 to September 30,2007 has been reduced by $3.3 million(non-cash) and $2.7 million (non-cash), respectively, as a result of recordingdeferred revenue at its fair value in connection with purchase accounting.Excluding this impact of purchase accounting, Terminix reported comparable revenuefor the nine months ended September 30, 2008. Terminix reported a1.9 percent increase in operating income and a 14.7 percent increasein Comparable Operating Performance for the nine months ended September 30,2008 compared to the Successor Period from July 25 to September 30,2007 and the Predecessor Period from January 1, 2007 to July 24, 2007. The segment’s overall revenue results,excluding purchase accounting, reflected modest growth in pest control revenuesand termite contract renewals, offset by a decrease in revenue from termitecompletions. Pest control revenues increased 2.3 percent for the nine monthsended September 30, 2008, as the impact of acquisitions and pricerealization more than offset a decrease in new unit sales. A 0.8 percent increasein termite renewal revenues for the nine months ended September 30, 2008was supported by price realization offset by a 10 basis point reduction intermite customer retention. Revenuefrom termite completions declined 4.5 percent for the nine months ended September 30,2008, as reduced termite swarm activity negatively impacted demand for servicesand due to reduced average pricing on new termite treatments.

 

The growth in ComparableOperating Performance also reflects lower termite materials costs, effectivemanagement of seasonal staffing of production and sales labor, lower vehiclefleet counts and reduced overhead spending, offset, in part, by increased fuelcosts.

 

***American Home Shield Segment***

 

The American Home Shieldsegment reported a 4.5 percent increase in revenue for the nine months ended September 30,2008 compared to the Successor Period from July 25 to September 30,2007 and the Predecessor Period from January 1, 2007 to July 24, 2007. Revenue for the nine months ended September 30,2008 and the Successor Period from July 25 to September 30,2007 has been reduced by $30.8 million(non-cash) and $28.1 million (non-cash), respectively, as a result of recordingdeferred revenue at its fair value in connection with purchase accounting.Excluding this impact of purchase accounting, revenue increased4.8 percent for the nine months ended September 30, 2008. AmericanHome Shield reported a 53.3 percent decrease in operating income and a14.4 percent decrease in Comparable Operating Performance for the ninemonths ended September 30, 2008 compared to the Successor Periodfrom July 25 to September 30, 2007 and the Predecessor Period from January 1,2007 to July 24, 2007. Totalnew contract sales and renewal units,which are reported as earned revenue over the subsequent twelve-month contractperiod, decreased 1.3 percent. Contract unit sales from customer renewalsincreased 5.5 percent, reflecting a comparable base of renewable customers anda 40 basis point improvement in retention. American Home Shield’s sales in thereal estate channel were significantly impacted by the continued softness inthe home resale market throughout most of the country with overall unit salesdeclines of 17.9 percent through this channel.

 

The decrease in ComparableOperating Performance for the nine months ended September 30, 2008 alsoincludes a $25.1 million decrease in interest and net investment incomefrom the American Home Shield investment portfolio (primarily reflecting theunfavorable impact of realized losses on disposals of securities and other thantemporary declines in the value of certain investments) as compared to 2007 andincreased provisions for certain legal matters partially offset by thebeneficial impacts of increases in prices and service fees per claim.

 

***Other Operations and Headquarters Segment***

 

The Other Operations andHeadquarters segment reported a 3.3 percent increase in revenue, a 78.1 percentdecrease in operating loss and a 103.8 percent increase in Comparable OperatingPerformance for the nine months ended September 30, 2008 compared to theSuccessor Period from July 25 to September 30, 2007 and thePredecessor Period from January 1, 

 

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2007 to July 24,2007. TheServiceMaster Clean and Merry Maids operations reported a combined 3.8 percentincrease in revenue for the nine months ended September 30, 2008. Thegrowth in revenue resulted from strong increases in disaster restorationservices and franchise revenues, offset in part by decreases in product sales.The ServiceMaster Clean and Merry Maids operations reported a combined increasein operating income of 0.6 percent and an increase in Comparable OperatingPerformance of 14.8 percent, or $6.6 million, for nine months ended September 30,2008. The increase in the segment’s Comparable Operating Performance for thenine months ended September 30, 2008 compared to 2007 of $65.1 millionprimarily reflects the decrease in Restructuring and Merger related chargesincurred in 2008, increased Comparable Operating Performance from theServiceMaster Clean and Merry Maids operations resulting from increased revenueand lower functional support costs.

 

***Discontinued Operations***

 

The components of loss fromdiscontinued operations, net of income taxes, and the reconciliation ofoperating (loss) income to Adjusted EBITDA and Comparable Operating Performancefor the nine months ended September 30, 2008, the Successor Periodfrom July 25 to September 30, 2007 and the Predecessor Period from January 1,2007 to July 24, 2007 areas follows:

 
| ** **                                                     | ** ** | **Successor**                | ** ** | ** **                   | **Predecessor** | ** ** |
|----------------------------------------------------------------|------------|------------------------------|------------|------------------------------|-----------------|------------|
| ** **                                                     | ** ** | **Nine**                     | ** ** | **July 25, 2007**  | ** **      | ** ** | **Jan. 1, 2007** | ** ** |
| ** **                                                     | ** ** | **months ended**        | ** ** | **to**                       | ** **      | ** ** | **to** | ** ** |
| **(In thousands)**                                        | ** ** | **Sept. 30, 2008** | ** ** | **Sept. 30, 2007** | ** **      | ** ** | **July 24, 2007** | ** ** |
| Operating  loss                                                |       | $                            | (206       | )                            | $               | (4,304     | ) |   | $ | (7,617 | ) |
| Interest expense                                               |       | (73                          | )          | (9                           | )               |       | (38 | ) |
| Impairment charge                                              |       | (6,317                       | )          | —                       |            |       | — |   |
| Pretax loss                                                    |       | $                            | (6,596     | )                            | (4,313          | )          |   | (7,655 | ) |
| (Benefit) from income taxes                                    |       | (2,513                       | )          | (1,723                       | )               |       | (3,067 | ) |
| Loss on sale, net of tax                                       |       | (587                         | )          | —                       |            |       | — |   |
| Loss from discontinued operations, net of  income taxes        |       | $                            | (4,670     | )                            | $               | (2,590     | ) |   | $ | (4,588 | ) |
|                                                           |       |                         |       |                         |            |       |   |   |
| Operating loss                                                 |       | $                            | (206       | )                            | $               | (4,304     | ) |   | $ | (7,617 | ) |
| Depreciation and amortization expense                          |       | —                       |       | 986                          |            |       | 2,204 |   |
| EBITDA before adding back interest and  investment income, net |       | (206                         | )          | (3,318                       | )               |       | (5,413 | ) |
| Interest and net investment income                             |       | —                       |       | —                       |            |       | — |   |
| Adjusted EBITDA                                                |       | (206                         | )          | (3,318                       | )               |       | (5,413 | ) |
| Non-cash option and restricted stock  expense                  |       | —                       |       | —                       |            |       | — |   |
| Non-cash charges attributable to purchase  accounting          |       | —                       |       | —                       |            |       | — |   |
| Comparable Operating Performance of  discontinued operations   |       | $                            | (206       | )                            | $               | (3,318     | ) |   | $ | (5,413 | ) |

 

During the third quarter of 2008, the Company completed the sale ofInStar for $22.9 million, with the payment of $3.0 million of that amountdeferred until November 2011. During the second quarter of 2008, theCompany recorded a pre-tax impairment charge of $6.3 million as a result of achange in our fair value estimate of InStar’s net assets based on changingmarket conditions and the ongoing sales process. Upon the sale of InStar theCompany recorded a loss on sale, net of tax, of $0.6 million. The purchaseprice noted above is subject to a final adjustment based on closing dateworking  capital balances at InStar. Theseclosing balances are subject to a review period by the Company and thepurchasers of InStar. The loss on sale noted above includes an estimatedadjustment for the closing date working capital balances. However, this amountcould change pending the completion of the review in the fourth quarter of2008.

 

**FINANCIAL POSITION AND LIQUIDITY**

 

***Cash Flows from Operating Activitiesfrom Continuing Operations***

 

Netcash provided from operating activities from continuing operations was $51.7million in the nine months ended September 30, 2008 compared to $33.6million and $195.5 million in the Successor Period from July 25 to September 30,2007 and the Predecessor Period from January 1, 2007 to July 24, 2007.

 

The principal components (in millions) of thenet decrease for the nine months ended September 30, 2008 were:

 
| Decrease in net income before merger  related charges, restructuring charges and non-cash charges |   | $     | (115.4 | ) |
|---------------------------------------------------------------------------------------------------|--------|-------|--------|---|
| Increase in restructuring payments                                                                |   | (2.9  | )      |
| Increase in working capital requirements                                                          |   | (59.1 | )      |
|                                                                                              |   | $     | (177.4 | ) |

 

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The decrease in net income before merger relatedcharges, restructuring charges and non-cash charges for the nine months ended September 30,2008 was driven by increased interest payments offset by Comparable OperatingPerformance growth at Terminix, TruGreen LandCare, TruGreen LawnCare and OtherOperations and Headquarters. The increase in working capital requirements forthe nine months ended September 30, 2008 was driven primarily by reducedaccruals for bonuses and change in control severance payments related to theMerger and decreased customer prepayments offset by a shift in the timing of advertisingpayments as compared to the 2007 period.

 

***Cash Flows from Investing Activitiesfrom Continuing Operations***

 

Net cash used for investing activities fromcontinuing operations was $26.3 million in the nine months ended September 30,2008. Amounts paid in connection with the Merger decreased $4,868.6 million.Amounts paid in connection with the Merger in 2008 were primarily related topayments under change in control agreements.

 

Capitalexpenditures increased to $75.2 million for the nine months ended September 30,2008 from $7.8 million and $26.6 million in the Successor Period from July 25to September 30, 2007 and the Predecessor Period from January 1, 2007to July 24, 2007, respectively, and included recurring capital needs and information technologyprojects. In addition, the Company paid approximately $49.9 million toacquire assets in connection with exiting certain of its fleet leases. TheCompany has no additional material capital commitments at this time. TheCompany anticipates that capital expenditures for the remainder of 2008 willtotal approximately $10 million to $20 million, reflecting thecontinuation of investments in information systems and productivity enhancingoperating systems.

 

Acquisitions for the nine months ended September 30,2008 totaled $27.5 million, compared with $4.0 million and $25.5 million in theSuccessor Period from July 25 to September 30, 2007 and thePredecessor Period from January 1, 2007 to July 24, 2007,respectively. Consideration paidfor tuck-in acquisitions consisted of cash payments and seller financed debt.The Company expects to continue its tuck-in acquisition program at bothTerminix and LawnCare.

 

The change in notes receivable, financialinvestments and securities for the nine months ended  September 30,2008 includes an increase in the net sale of marketable securities at AmericanHome Shield due in part to lowering the amount of excess reserves over minimumstatutory reserve requirements in certain states in accordance with ourinvestment policy, reduced statutory reserve requirements, and the saleof certain marketable securities and the subsequent investment in repurchaseagreements in an effort to limit our exposure to changing market conditions.

 

***Cash Flows from Financing Activitiesfrom Continuing Operations***

 

During the nine months ended September 30, 2008the Company made borrowings of $347 million and repayments of $182 millionunder our Revolving Credit Facility. In September 2008, the Companyborrowed $165 million under the Revolving Credit Facility and sold $10 million ofinterests under its receivables sales arrangement to increase the Company’scash position to preserve its financial flexibility in light of the currentuncertainty in the credit markets. ServiceMaster invested $150 million of theborrowings in short-term U.S. Government securities. During the ninemonths ended September 30, 2008, the Company paid debt issuance costs of$26.6 million related to the conversion of the amounts outstanding under theInterim Loan Facility into the Permanent Notes. The Company also made scheduledprincipal payments of long-term debt of $45 million in the nine months ended September 30,2008. Borrowings and payments of debt during the Successor Periodfrom July 25 to September 30, 2007 and the Predecessor Period from January 1,2007 to July 24, 2007 wereprimarily related to the funding of seasonal working capital needs through theCompany’s revolving bank credit facility and the proceeds from debt incurred inconnection with the merger, net of issuance costs, of $3,699.2 million. TheCompany also received cash equity contributions in connection with the Mergerof $1,431.1 million.

 

Cash dividends paid to shareholders totaled $70.1million for the Predecessor Period from January 1, 2007 to July 24,2007. No dividends were paid tothe Company’s shareholder in the nine months ended September 30, 2008 andthe Successor Period from July 25 to September 30, 2007. During the Predecessor Period from January 1,2007 to July 24, 2007, the Companyreceived proceeds of $36.1 million under an employee share purchaseplan. The employee share purchase plan was terminated subsequent to theMerger.

 

***Liquidity***

 

The Merger was completed on the Closing Date.Following the completion of the Merger, the Company is highly leveraged, and avery substantial portion of the Company’s liquidity needs arise from debtservice on indebtedness incurred in connection with the Merger and from fundingthe Company’s operations, working capital and capital expenditures. Equity

 

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contributions totaling $1,431 millionfrom the Equity Sponsors, together with (i) borrowings under the $1,150million Interim Loan Facility, (ii) borrowings under a new$2,650 million senior secured term loan facility and (iii) cash onhand at ServiceMaster, were used, among other things, to finance the aggregateMerger Consideration, to make payments in satisfaction of other equity-basedinterests in ServiceMaster under the Merger Agreement, to settle existinginterest rate swaps, to redeem or provide for the repayment of certain of theCompany’s existing indebtedness and to pay related transaction fees andexpenses. In addition, letters of credit issued under a new $150 millionpre-funded letter of credit facility were used to replace and/or secure lettersof credit previously issued under a ServiceMaster credit facility that wasterminated as of the Closing Date. On the Closing Date, the Company alsoentered into, but did not draw under, the $500 million Revolving CreditFacility.

 

The agreements governing the Term Facilities, thePermanent Notes and the Revolving Credit Facility contain certain covenantsthat limit or restrict the incurrence of additional indebtedness, debtrepurchases, liens, sales of assets, certain payments (including dividends) andtransactions with affiliates, subject to certain exceptions. The Company was incompliance with the covenants under these agreements at September 30,2008.

 

TheInterim Loan Facility matured on July 24, 2008. On the maturity date,outstanding amounts under the Interim Loan Facility were converted on a one toone basis into the Permanent Notes. The Permanent Notes were issued pursuant toa refinancing indenture. In connection with the issuance of Permanent Notes,ServiceMaster entered into a registration rights agreement, pursuant to whichServiceMaster filed with the SEC a registration statement with respect to theresale of the Permanent Notes on October 22, 2008.

 

Through July 15, 2011, the Company may, at itsoption prior to the start of any interest period, elect to pay interest onoutstanding amounts under the Permanent Notes entirely in cash (“Cash Interest”),entirely by increasing the principal amount of the outstanding loans (“PIKInterest”), or 50% as Cash Interest and 50% as PIK Interest. Interest payableafter July 15, 2011 is payable entirely as cash interest. The Companyelected to pay interest payable on January 15, 2009 entirely as cashinterest. At the present time, the Company does not plan to elect its option topay PIK Interest through at least 2009.

 

Cashand short-and long-term marketable securities totaled approximately $504million at September 30, 2008, compared with approximately $475 million atDecember 31, 2007. Approximately $294 million of the cash and short- andlong-term marketable securities balance as of September 30, 2008 isassociated with regulatory requirements at American Home Shield and for otherpurposes. For example, the payment of ordinary and extraordinary dividends toServiceMaster by our subsidiaries that are regulated as insurance, homewarranty or similar companies is subject to applicable state law limitations.AHS’s investment portfolio has been invested in a combination of high quality,short duration fixed income securities and equities. The Company closelymonitors the performance of the investments.In the ordinary course of business theCompany reviews the statutory reserve requirements to which its regulatedentities are subject and may adjust its reserves accordingly. These reviews mayresult in identifying excess reserves over minimum statutory reserverequirements or a determination that the Company can satisfy certain regulatoryreserve requirements through alternate financial vehicles, both of which wouldenhance our liquidity.

 

The Company maintains lease facilities with bankstotaling $65 million, which provide for the financing of branch propertiesto be leased by the Company. At September 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 September 30, 2008. Thebalance of the funded amount is treated as operating leases. The Company hasguaranteed the residual value of the properties under the leases up to73 percent of the fair market value at the commencement of the lease. At September 30,2008, the Company’s residual value guarantee related to the leased assetstotaled $53 million for which the Company has recorded the estimated fair valueof this guarantee (approximately $0.1 million) in the CondensedConsolidated Statements of Financial Position. In connection with the closingof the Merger, the Company amended these leases effective July 24, 2007.Among the modifications, the Company extended the lease terms through July 24,2010. The operating lease and capital lease classifications of these leases didnot change as a result of the modifications.

 

Themajority of the Company’s vehicle fleet and some equipment are leased throughoperating leases. The lease terms are non-cancelable for the first twelve-monthterm, and then are month-to-month, cancelable at the Company’s option. Thereare residual value guarantees by the Company (ranging from 70 percent to84 percent of the estimated terminal value at the inception of the leasedepending on the agreement) relative to these vehicles and equipment, whichhistorically have not resulted in significant net payments to the lessors. At September 30,2008, there was approximately $114 million of residual value relating tothe Company’s fleet and equipment leases.

 

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The fair value of the assets under all of thefleet and equipment leases is expected to substantially mitigate the Company’sguarantee obligations under the agreements. At September 30, 2008, theCompany has recorded the estimated fair value of this guarantee ofapproximately $2.1 million in the Condensed Consolidated Statement ofFinancial Position. The Company’s primary vehicle fleet lessor haselected not to renew its current agreement with the Company, which expiresDecember 21, 2008. This election will not affect vehicle leases in placewith this lessor prior to expiration of the agreement. We expect tofulfill our ongoing vehicle fleet needs through alternative financingarrangements, including new leasing agreements with other lessors, or throughdirect purchases of vehicles. The Company’s expected capital requirement forfleet vehicles in 2009 is expected to range from $30 million to $50 million.

 

The Company holds certain financial instruments thatare measured at fair value on a recurring basis. The fair values of theseinstruments are measured using both the market and income approaches. Forinvestments in marketable securities, deferred compensation trust assets andderivative contracts, which are carried at their fair values, the Company’sfair value estimates incorporate quoted market prices, other observable inputs(for example, interest rates) and unobservable inputs (for example, forwardcommodity prices) at the balance sheet date.

 

Under the terms of its fuel swap contracts, theCompany is required to post collateral in the event that the fair value of thecontracts exceeds a certain agreed upon liability level. As of September 30,2008, the fair value of the Company’s fuel swap contracts was a liability of$4.4 million and the Company posted approximately $4.0 million in letters ofcredit as collateral for these contracts. The continued use of letters ofcredit for this purpose could limit the Company’s ability to post letters ofcredit for other purposes and could limit the Company’s borrowing availabilityunder the Revolving Credit Facility. However, the Company does not expect thefair value of its outstanding fuel swap contacts to materially impact itsfinancial position or liquidity.

 

The Company’s ongoing liquidity needs are expectedto be funded by net cash provided by operating activities and, as required,borrowings under the Revolving Credit Facility and receivables salesarrangement. We expect that cash provided from operations and available capacityunder the Revolving Credit Facility and receivables sales arrangement willprovide sufficient funds to operate our business, make expected capitalexpenditures and meet our foreseeable liquidity requirements, including paymentof interest and principal on our debt. As of September 30, 2008, theCompany had $335 million of remaining capacity available under the RevolvingCredit Facility and $40 million of remaining capacity under the receivablessales arrangement.

 

The Company may from time to time repurchaseor otherwise retire the Company’s debt and take other steps to reduce theCompany’s debt or otherwise improve the Company’s balance sheet. These actionsmay include open market repurchases, negotiated repurchases and otherretirements of outstanding debt. The amount of debt that may be repurchased orotherwise retired, if any, will depend on market conditions, trading levels ofthe Company’s debt from time to time, the Company’s cash position and otherconsiderations. Affiliates of the Company may also purchase the Company’s debtfrom time to time, through open market purchases or other transactions. In suchcases, the Company’s debt may not be retired, in which case the Company wouldcontinue to pay interest in accordance with the terms of the debt.

 

In light of the uncertainty in the credit andfinancial markets, in September 2008, we borrowed $165 million under ourexisting $500 million Revolving Credit Facility to increase our cash positionto preserve our financial flexibility. Although we are not currentlyexperiencing any limitation of access to the Revolving Credit Facility and arenot aware of any issues currently impacting the ability of the lenders underthem to honor their commitments to extend credit, there is no assurance thatthe U.S. and global credit crisis will not adversely affect our ability toborrow on the Revolving Credit Facility or otherwise in the future.

 

The Company has an arrangement to provide for theongoing revolving sale of a designated pool of accounts receivable of TruGreenLawnCare and Terminix to a wholly-owned, bankruptcy-remote subsidiary,ServiceMaster Funding Company LLC. ServiceMaster Funding Company LLC hasentered into an arrangement pursuant to which it may transfer, on a revolvingbasis, an undivided percentage ownership interest in a pool of accountsreceivable to unrelated third party purchasers. ServiceMaster Funding CompanyLLC retains an undivided percentage interest in the pool of accounts receivableand bad debt losses for the entire pool are allocated first to this retainedinterest. During the third quarter of 2008 an interest in the pool of accountsreceivable was transferred to a third party in exchange for $10 million toincrease our cash position to preserve our financial flexibility in light ofthe uncertainty in the credit and financial markets. During the SuccessorPeriod from July 25, 2007 to September 30, 2007, the Predecessor Period fromJuly 1, 2007 to July 24, 2007 and the Predecessor Period from January 1, 2007to July 24, 2007, there were no transfers of interests in the pool of accountsreceivables to third parties under this arrangement. The arrangement is a364-day facility that is renewable at the option of ServiceMaster Funding CompanyLLC, with a final termination date of July 17, 2012. The Company may transferup to $50 million of interests in its pool of receivables to these purchasersand therefore has immediate access to cash proceeds from these transfers. Theamount of the eligible receivables varies during the year based on seasonalityof the business and could, at times, limit the amount available to the Companyfrom the sale of these interests. There are two potential third partypurchasers under the arrangement. However, only one purchaser is required topurchase interests in the pool of receivables under the arrangement. If thispurchaser were to exercise its right to terminate its participation in thearrangement, which it may do in the third quarter of each year, the amount ofcash available to the Company may be reduced or eliminated. The purchaser didnot exercise its right to terminate its participation in the arrangement in thethird quarter of 2008.

 

As a holding company, we depend on our subsidiariesto distribute funds to us so that we may pay our obligations and expenses,including our debt service obligations. The ability of our subsidiaries to makedistributions and dividends to us depends on their operating results, cashrequirements and financial condition and general business conditions. Aspreviously described, certain of our subsidiaries are subject to legal andregulatory restrictions on the payment of dividends to us.

 

The Company’s 2007 Annual Report on Form 10-Kincluded disclosure of the Company’s contractual obligations 

 

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and commitments as of December 31, 2007.The Company continues to make the contractually required payments andtherefore, the 2008 obligations and commitments as listed in the December 31,2007 Annual Report on Form 10-K have been reduced by the requiredpayments. Other than the $165 million drawn under the Revolving Credit Facilitydiscussed in Liquidity, there were no material changes outside of ordinarycourse of business in the Company’s previously disclosed contractualobligations and commitments during the nine months ended September 30,2008.

 

***Financial Position—ContinuingOperations***

 

Marketablesecurities decreased from year end levels reflecting the sale of certainmarketable securities and subsequent investment in repurchase agreements, whichare classified as cash and cash equivalents in our condensed consolidatedstatements of financial position, in an effort to limit our exposure tochanging market conditions.

 

Receivables increased from year-end levels as aresult of increased seasonal activity.

 

Inventories increased from year-end levels,reflecting increased seasonal activity. Prepaid expenses and other assetsincreased from year-end primarily reflecting preseason advertising costs atTruGreen LawnCare and other advertising costs of the Company which are incurredearly in the year and deferred on an interim basis and recognized approximatelyin proportion to revenue over the balance of the year. Deferred customeracquisition costs increased, reflecting the seasonality in the lawn careoperations. In the winter and spring, this business sells a series of lawnapplications to customers, which are rendered primarily in March throughOctober. These direct and incremental selling expenses which relate tosuccessful sales are deferred and recognized over the production season and arenot deferred beyond the calendar year-end. The Company capitalizes salescommissions and other direct contract acquisition costs relating to termitebaiting and pest contracts, as well as home warranty agreements. These costsvary with and are directly related to a new sale, and are amortized over thelife of the related contract.

 

Property and equipment increased from year-endlevels due to the payment of $49.9 million to acquire assets in connectionwith exiting certain of its fleet leases. The Company has no additionalmaterial capital commitments at this time.

 

Deferred revenue increased from year-end levels,reflecting the significant amount of customer prepayments recorded in the firstquarter (pre-season) at TruGreen LawnCare, growth in prepaid contracts writtenat American Home Shield, and growth in Termite Inspection and Protection Plancustomers at Terminix.

 

Accrued payroll and related expenses includeprovisions for payments due under change in control and severance agreementsand provisions for litigation reserves. Accrued payroll and related expenseshave decreased from year end levels, reflecting the payment during the firstnine months of incentive compensation related to 2007 performance and thepayment during the first nine months of payments due under change in controland severance agreements.

 

Other long-term obligations, primarily self-insuredclaims, decreased from year-end levels due primarily to reductions in ourobligations under the employee deferred compensation plan and a decrease in thefair value liability of our interest rate swap contracts.

 

Total shareholder’s equity was $1,259 million at September 30,2008 as compared to $1,304 million at December 31, 2007.

 

***Financial Position—DiscontinuedOperations***

 

The assets and liabilities related to discontinuedoperations have been classified in a separate caption on the ConsolidatedStatements of Financial Position. Assets and liabilities from discontinuedoperations have decreased reflecting the sale of the InStar business.

 

As part of the American Residential Services andAmerican Mechanical Services sale agreements, the Company guaranteedobligations to third parties with respect to bonds (primarily performance andlicense type), operating leases for which the Company has been released asbeing the primary obligor, real estate leased and operated by the buyers, andother guarantees of payment. At the present time, the Company does not believeit is probable that the buyers will default on their obligations subject toguarantee. The fair value of the Company’s obligations related to theseguarantees is not significant and no liability has been recorded.

 

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**Information Regarding Forward-Looking Statements**

 

This reportincludes forward-looking statements and cautionary statements. Some of theforward-looking statements can be identified by the use of forward-lookingterms such as “believes,” “expects,” “may,” “will,” “shall”, “should,” “would,”“could,” “seek,” “intends,” “plans,” “estimates,” “anticipates” or othercomparable terms. These forward-looking statements include all matters that arenot historical facts. They appear in a number of places throughout this reportand include, without limitation, statements regarding our intentions, beliefsor current expectations concerning, among other things, our results ofoperations, financial condition, liquidity, debt repurchases, prospects, growthstrategies, the industries in which we operate, customer retention, employeeretention, communications improvements, the continuation of tuck-inacquisitions, our plans and ability to make cash interest payments on our debt,restructurings and reorganizations, including Fast Forward, and cost savingsfrom such restructurings and reorganizations, and any expected charges orsavings.

 

Forward-looking statementsare subject to known and unknown risks and uncertainties, many of which may bebeyond our control. We caution you that forward-looking statements are notguarantees of future performance or outcomes and that actual outcomes andperformances, including, without limitation, our actual results of operations,financial condition and liquidity, and the development of the industries inwhich we operate may differ materially from those made in or suggested by theforward-looking statements contained in this report. In addition, even if ourresults of operations, financial condition and liquidity, and the developmentof the industries in which we operate are consistent with the forward-lookingstatements contained in this report, those results or developments may not beindicative of results or developments in subsequent periods. A number ofimportant factors, including the risks and uncertainties discussed inItem 1A—Risk Factors in Part II of this report, could cause actualresults and outcomes to differ materially from those in the forward-lookingstatements. Factors that could cause actual results and outcomes to differ fromthose reflected in forward-looking statements include, without limitation:

 

· the effects ofour substantial indebtedness and the limitations contained in the agreementsgoverning such indebtedness;

 

· our ability togenerate the significant amount of cash needed to service our debt obligations;

 

· our ability tosecure sources of financing or other funding to allow for the leasing of ourfleet of commercial vehicles;

 

· increases ininterest rates;

 

· weatherconditions and seasonality factors that affect the demand for our services;

 

· changes in thesource and intensity of competition in our markets;

 

· highercommodity prices and lack of availability, including fuel and fertilizer;

 

· increases inoperating costs, such as higher insurance premiums, self-insurance costs andhealth care costs;

 

· employeeretention, labor shortages or increases in compensation and benefits;

 

· the risk thatthe benefits from the Merger or Fast Forward, including any business processoutsourcing, may not be fully realized or may take longer to realize thanexpected;

 

· changes orcontinued softness in general economic, financial and credit conditions in theUnited States and elsewhere (including disruptions in the credit and financialmarkets), especially as they may affect home resales, consumer or businessliquidity, consumer or commercial confidence or spending levels including as aresult of inflation or deflation, unemployment, interest rate fluctuations,mortgage foreclosures or subprime credit dislocations;

 

· changes in thetype or mix of our service offerings or products;

 

· existing andfuture governmental regulation and the enforcement thereof, includingregulation relating to restricting or banning of telemarketing, direct mail orother marketing activities, the Termite Inspection Protection Plan, pesticidesand/or fertilizers;

 

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· the success ofour current restructuring initiatives, including the implementation of Centersof Excellence;

 

· the number,type, outcomes and costs of legal or administrative proceedings;

 

· possible labororganizing activities at the Company or its franchisees;

 

· risks inherentin acquisitions and dispositions;

 

· the timing andstructuring of our business process outsourcing and risks associated with suchoutsourcing; and

 

· other factorsdescribed from time to time in documents that we file with the Securities andExchange Commission.

 

You shouldread this report completely and with the understanding that actual futureresults may be materially different from expectations. All forward-lookingstatements made in this report are qualified by these cautionary statements.These forward-looking statements are made only as of the date of this report,and we do not undertake any obligation, other than as may be required by law,to update or revise any forward-looking statements to reflect changes inassumptions, the occurrence of events, unanticipated or otherwise, changes infuture operating results over time or otherwise.

 

Comparisons of results forcurrent and any prior periods are not intended to express any future trends, orindications of future, performance, unless expressed as such, and should onlybe viewed as historical data.

 

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

***Interest Rate Risk***

 

TheCompany is exposed to the impact of interest rate changes and manages thisexposure through the use of variable-rate and fixed-rate debt and by utilizinginterest rate swaps. The Company does not enter into contracts for trading orspeculative purposes. The market risk associated with debt obligations andother significant instruments as of September 30, 2008 has not materiallychanged from December 31, 2007 (see Item 7A of our 2007 AnnualReport) except as noted below.

 

In February 2008, theCompany entered into two 3-year interest rate swap agreements and one 4-yearinterest rate swap agreement, effective March 3, 2008. The total notionalamount of the 3-year agreements was $250 million and the total notionalamount of the 4-year swap agreement was $250 million. Under the terms ofthe agreements, the Company will pay a weighted average fixed rate of interestof approximately 3.15% on the notional amount of the 3-year swap agreements and3.48% on the notional amount of the 4-year swap agreement. The Company willreceive a floating rate of interest (based on three month LIBOR) on thenotional amount. Therefore, the effective interest rate for $500 millionof the term loans is fixed at a rate between 5.90% and 6.23%, including theborrowing margin described in Note 14 to the consolidated financialstatements in the 2007 Annual Report.

 

In August 2008, theCompany entered into two 3-year interest rate swap agreements effective September 2,2008. The total notional amount of the swap agreements was $200 million. Underthe terms of the agreements, the Company will pay a weighted average fixed rateof interest of approximately 3.83% on the $200 million notional amount of theswap agreements. The Company will receive a floating rate of interest (based onone month LIBOR) on the notional amount. Therefore, the effective interest ratefor $200 million of the term loans is fixed at a rate of approximately 6.58%,including the borrowing margin described in Note 14 to the consolidatedfinancial statements in the 2007 Annual Report.

 

In September 2008, theCompany entered into a 4-year interest rate swap agreement effective October 1,2008. The notional amount of the swap agreement was $200 million. Under theterms of the agreement, the Company will pay a weighted average fixed rate ofinterest of 3.53% on the $200 million notional amount of the swap agreement.The Company will receive a floating rate of interest (based on one month LIBOR)on the notional amount. Therefore, the effective interest rate for $200 millionof the term loans is fixed at a rate of approximately 6.28%, including theborrowing margin described in Note 14 to the consolidated financial statementsin the 2007 Annual Report.

 

In accordance with SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities”, the interestrate swap agreements referred to above are classified as cash flow hedges and,as such, the hedging instruments will be recorded on the balance sheet aseither an asset or liability at fair value, with the effective portion of thechanges in fair value attributable to the hedged risks recorded in othercomprehensive income.

 

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TheInterim Loan Facility matured on July 24, 2008. On the maturity date,outstanding amounts under the Interim Loan Facility were converted on a one toone basis into the Permanent Notes. The Permanent Notes were issued pursuant toa refinancing indenture. In connection with the issuance of Permanent Notes,ServiceMaster entered into a registration rights agreement, pursuant to whichServiceMaster filed with the SEC a registration statement with respect to theresale of the Permanent Notes by the holders thereof on October 22, 2008.

 

The following table summarizes information about theCompany’s debt as of September 30, 2008 (after considering the effect ofthe interest rate swap agreements), including the principal cash payments andrelated weighted-average interest rates by expected maturity dates.

 
| ** **                                       | ** ** | **Expected Year of Maturity** | ** ** | **Fair** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------|------------|----------|------------|
| **As of September 30, 2008** | ** ** | **2008**                                     | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Value** | ** ** |
| ** **                                       | ** ** | **($ in millions)**                | ** ** |
| **Debt:**                                        |       |                                         |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate                                       |       | $                                            | 5          |     | 19         |   | 13 |   | 8 |   | 4 |   | 2,941 |   | 2,990 |   | 1,977 |   |
| Average interest rate                            |       | 5.7                                          | %          | 6.1      | %          | 6.3 | % | 6.5 | % | 7.3 | % | 8.4 | % | 8.4 | % |   |   |
| Variable rate                                    |       | $                                            | 182        |     | 27         |   | 39 |   | 27 |   | 27 |   | 1,072 |   | 1,374 |   | 1,056 |   |
| Average interest rate                            |       | 6.7                                          | %          | 6.7      | %          | 6.8 | % | 6.7 | % | 6.7 | % | 6.7 | % | 6.7 | % |   |   |
|                                             |       |                                         |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest Rate Swaps:**                         |       |                                         |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Receive variable/pay fixed                       |       |                                         |       |     |       | $ | 530 |   | $ | 450 |   | $ | 450 |   |   |   |   |   |   |   |
| Average pay rate                                 |       |                                         |       |     |       | 5.1 | % | 3.5 | % | 3.5 | % |   |   |   |   |   |   |
| Average receive rate                             |       |                                         |       |     |       | 3.9 | % | 4.1 | % | 4.1 | % |   |   |   |   |   |   |
|                                                  |            |                                              |            |          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***FuelPrice Risk***

 

The Company is exposed tomarket risk for changes in fuel prices through the consumption of fuel by itsvehicle fleet in the delivery of services to its customers. The Company usesapproximately 30 million gallons of fuel on an annual basis. A 10% change infuel prices would result in a change of approximately $12 million in theCompany’s annual fuel cost before considering the impact of fuel swapcontracts.

 

The Company uses fuel swapcontracts to mitigate the financial impact of fluctuations in fuel prices. Asof September 30, 2008, the Company had fuel swap contracts to pay fixedprices for fuel with an aggregate notional amount of $82.3 million, maturingthrough 2010. The estimated fair value of these contracts at September 30,2008 was a liability of $4.4 million, substantially all of which relates tocontracts maturing in 2009. These fuel swap contracts provide a fixed price forapproximately 66% of the Company’s estimated fuel usage for the fourth quarterof 2008 and approximately 62% of the Company’s estimated fuel usage for 2009.

 

##### **ITEM 4T. CONTROLS AND PROCEDURES**

##### ** **

**Effectiveness of Disclosure Controls andProcedures.** ServiceMaster’s Chief Executive Officer,J. Patrick Spainhour, and ServiceMaster’s Senior Vice President and ChiefFinancial Officer, Steven J. Martin, have evaluated ServiceMaster’s disclosurecontrols and procedures (as defined in Rule 15d-15(e)) as of the end ofthe period covered by this Quarterly Report on Form 10-Q. ServiceMaster’sdisclosure controls and procedures include a roll-up of financial and non-financialreporting that is consolidated in the principal executive office ofServiceMaster in Memphis, Tennessee. Messrs. Spainhour and Martin haveconcluded that both the design and operation of ServiceMaster’s disclosurecontrols and procedures are effective as of the end of the period covered bythis Quarterly Report on Form 10-Q.

 

**Changes in Internal Control over FinancialReporting.** No change in ServiceMaster’s internalcontrol over financial reporting occurred during the third quarter of 2008 thathas materially affected, or is reasonably likely to materially affect,ServiceMaster’s internal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

***Class Action suits brought against theCompany and CD&R***

 

Following the announcementof the proposed acquisition of ServiceMaster by CD&R, five (5) complaintswere filed against ServiceMaster concerning the proposed merger: *Kaiman v. Spainhour, et al.* (filed inChancery Court in Memphis, Tennessee) (“*Kaiman*”);*Golombuski v. The ServiceMaster Co., etal.* (filed in Circuit Court in Memphis, Tennessee) (“*Golombuski*”); *Sokol and Bowen v. The ServiceMaster Co., et al.* (filedin Circuit Court in Memphis, Tennessee) (“*Sokol*”);*Palmer v. The ServiceMaster Co., et al.*(filed in Cook County Circuit Court in Chicago, Illinois) (“*Palmer*”); and *Smith v. The ServiceMaster Co., et al.* (filed in ChanceryCourt for Newcastle County, Delaware) (“*Smith*”).

 

All of the complaints nameServiceMaster, its Chief Executive Officer and its Board of Directors asdefendants. The *Kaiman*, *Golombuski* and *Smith* complaints additionally name CD&R as a defendantand the *Smith* complaint alsonames the investors in CDRSVM Topco, Inc., CDRSVM Topco, Inc. andCDRSVM Acquisition Co. All of the complaints allege breach of fiduciaryduties and seek injunctive relief. The *Kaiman*complaint also contains a specific count seeking indemnification of costs. The *Golombuski* and *Smith* complaints also allege that CD&R aided and abettedthe individual defendants’ breach of fiduciary duties, while the *Kaiman* complaint generally alleges that “defendants”breached their fiduciary duties or aided and abetted a breach of fiduciaryduty. The *Smith* complaint alsoalleges that there are material omissions in the preliminary proxy statementrelating to the proposed acquisition that the Company filed with the SEC on April 16,2007. All five of the complaints challenged and indicated an intent to enjointhe proposed acquisition of ServiceMaster.

 

After the plaintiff in the *Smith* case filed a motion for expediteddiscovery and for the scheduling of a preliminary injunction hearing, theparties to the *Smith* case reachedan agreement in principle to settle that case on a class wide basis and enteredinto a Memorandum of Understanding reflecting that agreement. The Memorandum ofUnderstanding provides, among other things, for ServiceMaster to includecertain additional disclosures in the final Proxy Statement with respect to theproposed merger (subsequently made) and for a reduction of the Companytermination fee from $100 million to $90.8 million (subsequentlymade). The Memorandum of Understanding stated that if the settlementcontemplated by the Memorandum of Understanding is approved, plaintiff and hiscounsel intend to petition the court for an award of fees and expenses. Itfurther stated that the parties reached no agreement with regard to an appropriateaward of fees to plaintiffs’ counsel, and defendants reserved all rights tooppose any fee application. Confirmatory discovery has been completed and, on July 21,2008, the Stipulation of Settlement was filed with the Court. On September 29,2008, the Court approved the settlement and awarded plaintiffs $500,000 inplaintiffs’ attorneys’ fees. The judgment is now final and non-appealable, and the Company has satisfiedthe payment of the plaintiffs’ attorneys’ fees in November 2008.

 

Notwithstanding the settlementagreement reached in the *Smith*case, the plaintiffs in the other four pending actions nonetheless attempted topursue those actions. The *Kaiman*,*Golombuski* and *Sokol* complaints were consolidated, andthe Tennessee court handling those cases entered an order denying theplaintiffs’ motion for expedited discovery and granting a stay of these actionspending the resolution of the *Smith*case in Delaware. In light of the resolution of the *Smith* case, we expect that these cases will now bedismissed.

 

Notwithstanding thesettlement, the Company believes the various remaining litigation to be withoutmerit and, if the settlement is not fully consummated for any reason, intendsto defend them vigorously.

 

**ITEM 1A. RISK FACTORS**

 

*Our business, operations and financial condition are subjectto various risks. The risks and uncertainties described below are not the onlyones relevant to us. Additional risks and uncertainties not currently known tous or that we currently believe are immaterial may also impair our business,results of operations, financial condition and liquidity. The followinginformation should be read in conjunction with Management’s Discussion andAnalysis of Financial Condition and Results of Operations and the consolidatedfinancial statements and related notes included elsewhere in this Form 10-Q.*

 

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**Risks Related to Our Business andOur Industry**

 

***Weather conditions and seasonality affectthe demand for our services and our results of operations.***

 

The demand for our servicesand our results of operations are affected by weather conditions and by theseasonal nature of our lawn care and landscape maintenance services, termiteand pest control services, home warranty and home inspection services, anddisaster restoration services. For example, in our markets that do not have ayear-round growing season, the demand for our lawn care and landscape maintenanceservices decreases during the winter months. Droughts and late spring or fallsnow storms can adversely impact the demand for lawn care and landscapemaintenance services; above normal temperatures can result in increased servicecalls in the home warranty business; and cooler temperatures can impede thedevelopment of the termite swarm and lead to lower demand for our termiteservices.

 

***Our markets are highly competitive.Competition could reduce our market share and adversely impact our results ofoperations.***

 

We operate in highlycompetitive markets. Changes in the source and intensity of competition in themarkets served by us impact the demand for our services and may result inadditional pricing pressures. The relatively low capital cost of entry tocertain of our businesses has led to strong competitive markets, includingregional and local owner-operated companies. Regional and local competitorsoperating in a limited geographic area may have lower labor, benefits andoverhead costs. The principal methods of competition in our businesses includename recognition, quality and speed of service, pricing, customer satisfactionand reputation. No assurance can be given that we will be able to competesuccessfully against current or future competitors and that the competitivepressures that we face will not result in reduced market share or negativelyimpact our financial performance.

 

***Increases in raw material prices, fuelprices and other operating costs adversely affect our results of operations.***

 

Our financial performance isaffected by the level of our operating expenses, such as fuel, raw materials,wages and salaries, employee benefits, health care, vehicle, self-insurancecosts and other insurance premiums as well as various regulatory compliance costs,all of which may be subject to inflationary pressures. In particular, ourfinancial performance is adversely affected by increases in these operatingcosts. In recent years, fuel prices have fluctuated widely and have generallyincreased, including sharp increases in 2007 and 2008. These fuel priceincreases raise our costs of operating vehicles and equipment. Fuel priceincreases can also result in increases in the cost of fertilizer, chemicals andother materials used in our business. We cannot predict the extent to which wemay experience future increases in fuel costs and other operating costs. In thefirst six months of 2008, increases in fuel, fertilizer and other coststhroughout the Company negatively impacted our cost of services rendered and productssold. To the extent such cost increases continue, we may not be able to fullypass these increased costs through to our existing and prospective customers,and the rates we pay to our subcontractors may increase, any of which couldhave a material adverse impact on our operating results. With respect to fuel,our fleet, which consumes roughly 30 million gallons annually, has beennegatively impacted by significant increases in fuel prices. Each year, wetypically hedge approximately two-thirds of our estimated annual fuel usage. Asof September 30, 2008, a 10% change in fuel prices would result in achange of approximately $12 million in the Company’s annual fuel costbefore considering the impact of fuel swap contracts. A shortage in supply offuel would also adversely affect our business.

 

***Our future success depends on our abilityto attract and retain trained workers and third party contractors.***

 

Our future success andfinancial performance depends substantially on our ability to attract, retainand train workers and attract and retain third party contractors. Our abilityto expand our operations is in part impacted by our ability to increase ourlabor force including on a seasonal basis, which may be adversely impacted by anumber of factors, including a failure of the U.S. Congress to reauthorize thereturning worker exception to the H2B Visa Program, which may negatively impactthe number of foreign nationals available to engage in seasonal employment. Inthe event of a labor shortage, we could experience difficulty in delivering ourservices in a high-quality or timely manner and could be forced to increasewages in order to attract and retain employees, which would result in higheroperating costs and reduced profitability.

 

***We may not successfully implement ourbusiness strategies or realize all of our expected cost savings.***

 

We may not be able to fullyimplement our business strategies or realize, in whole or in part within thetime frames anticipated, the anticipated benefits of our various initiatives,such as our Terminix Termite Inspection and Protection Plan and TruGreenTargeted Lawn Care program and our agreement with Realogy Corporation, or ourexpected cost savings and efficiency improvements, including those related toFast Forward. Our various business strategies and initiatives, including ourproductivity and customer retention initiatives, are subject to significantbusiness, economic and competitive uncertainties and contingencies, many ofwhich are beyond our control. We expect to incur certain costs to achieve ourexpected cost savings and efficiency improvements. These costs may turn out tobe substantially higher than we currently estimate, and we may not fullyachieve our expected cost savings and efficiency improvements. Our ability tosuccessfully realize cost savings and the timing of any realization may beaffected by factors such as the need to ensure continuity in our 

 

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operations, contracts, regulations and/orstatutes governing employee-employer relationships, our ability to renegotiatecontracts or find alternative suppliers and other factors. Our businessstrategy may also change from time to time. As a result, we may not be able toachieve our expected results of operations.

 

***Changes in general economic conditions,especially as they may affect home re-sales or consumer confidence or spendinglevels, may adversely affect the demand for our services.***

 

Changes in general economicconditions and consumer confidence affect the demand for our services.Unfavorable general economic conditions such as those experienced recently,including rising fuel prices, changes in interest rates, continued or furthersoftening of the home resale market, increases in home foreclosures, disruptionof the credit markets and increases in unemployment rates, could reduceconsumer confidence and related spending levels and, in turn, reduce the demandfor our services. These factors could also negatively impact the timing or theultimate collection of accounts receivable, which would negatively impact ouroperating revenues, profitability and cash flow.

 

***Public perceptions that our products andservices are not environmentally friendly or safe may adversely affect thedemand for our services.***

 

In providing our services,we use, among other things, fertilizers, herbicides and pesticides. Publicperception that our products and services are not environmentally friendly orsafe or harmful to humans, whether justified or not, could lead to reduceddemand for our services, impair our reputation, involve us in litigation,damage our brand names and otherwise have a material adverse effect on ourbusiness, financial condition and results of operations.

 

***Changes in the types or mix of our serviceofferings could affect our financial performance.***

 

Our financial performance isaffected by changes in the types or mix of services we offer our customers. Forexample, when Terminix transitioned from offering primarily bait termiteservices to providing both liquid and bait termite services, this transitionrequired the purchase of additional equipment and additional training for ourassociates. The bait and termite service lines also have different price points(for both the initial treatment and for renewals), different ongoing serviceobligations, and different revenue recognition policies. These changes in mixcan also affect the timing of our revenues. An unsuccessful rollout oradjustment of our service offerings could have a material adverse effect on ourfinancial performance.

 

***Government laws and regulations applicableto our businesses could increase our legal and regulatory expenses and affectour financial performance.***

 

Our businesses are subjectto significant federal, state and local laws and regulations. These federal andstate laws include laws relating to consumer protection, wage and hourrequirements, the employment of immigrants, permit and licensing requirements,workers’ safety, the environment, insurance and home warranty, employeebenefits, telemarketing, the application of fertilizers, herbicides, pesticidesand other chemicals, noise and air pollution from power equipment and localregulations, including water management techniques. It is difficult to predictthe future impact of the broad and expanding legislative and regulatoryrequirements affecting our businesses. The laws and regulations applicable toour businesses will likely change in the future and affect our operations andfinancial performance. In addition, if we were to fail to comply with anyapplicable law or regulation, we could be subject to substantial fines ordamages, be involved in litigation, suffer losses to our reputation and sufferthe loss of licenses or penalties that may affect how our business is operated,which, in turn, would have a material adverse effect on our business, financialcondition and results of operations.

 

***The loss of the services of managementpersonnel and other employees as a result of restructuring could adverselyaffect our financial performance.***

 

Among the purposes of FastForward is to eliminate layers and bureaucracy and simplify work processes inorder to better align the Company’s work processes around its operational andstrategic objectives. Fast Forward has resulted in employee workforcereductions as part of the cost-savings to be achieved and may includeadditional workforce reductions in the future. Ultimately, Fast Forward isexpected to enhance our financial performance; however, the loss of managementpersonnel and other employees could affect our success and financialperformance until the Fast Forward process is completed.

 

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***Our business process outsourcinginitiatives may increase our reliance on third-party contractors and expose ourbusiness to harm upon the termination or disruption of our third-party contractorrelationships.***

 

Our strategy to increaseprofitability by reducing our costs of operations includes the consideration ofbusiness process outsourcing initiatives. As a result, our future operationsmay increasingly rely on third-party vendors to provide services that wecurrently perform internally. Any disruption, termination, or substandardperformance of these outsourced services, including possible breaches by thirdparty vendors of their agreements with us, could adversely affect our brands, customerrelationships, operating results and financial condition. Also, if athird-party outsourcing provider relationship is terminated, there is a riskthat we may not be able to enter into a similar agreement with an alternateprovider in a timely manner or on terms that we consider favorable. Inaddition, in the event a third-party outsourcing relationship is terminated andwe are unable to replace it, there is a risk that we may no longer have thecapabilities to perform these services internally.

 

***Laws and regulations regarding the use ofpesticides and fertilizers and claims of personal injury and property damage,as well as other environmental laws and regulations, could result insignificant costs that adversely affect our operating results.***

 

Local, state, federal andinternational laws and regulations relating to environmental, health and safetymatters affect us in several ways. In the United States, all productscontaining pesticides must be registered with the U.S. Environmental ProtectionAgency (“EPA”) (and similar state agencies) before they can be sold or applied.The failure to obtain or the cancellation of any such registration, or theother withdrawal from the market place of such pesticides, could have anadverse effect on our business, the severity of which would depend on theproducts involved, whether other products could be substituted and whether ourcompetitors were similarly affected. The pesticides we use are manufactured byindependent third parties and are evaluated by the EPA as part of its ongoingexposure risk assessment. The EPA may decide that a pesticide we use will belimited or will not be re-registered for use in the United States. We cannotpredict the outcome or the severity of the effect of the EPA’s continuingevaluations.

 

In addition, the use ofcertain pesticides, herbicides and fertilizer products is regulated by variouslocal, state, federal and international environmental and public healthagencies. These regulations may require that only certified or professionalusers apply the product or that certain products be used only on certain typesof locations, may require users to post notices on properties to which productshave been or will be applied, may require notification to individuals in thevicinity that products will be applied in the future or may restrict or ban theuse of certain products. Even if we are able to comply with all suchregulations and obtain all necessary registrations and licenses, we cannotassure you that the products we apply or the manner in which we apply them,particularly pesticide products, will not be alleged to cause injury to theenvironment or to people under any circumstances. The costs of compliance,remediation or products liability lawsuits could materially affect our future operatingresults.

 

Local, state, federal andforeign agencies regulate the disposal, handling and storage of waste, air andwater discharges from our facilities and the investigation and clean-up ofcontaminated sites. We could incur significant costs, including clean-up costs,fines and civil or criminal sanctions and claims by third parties for propertydamage and personal injury, as a result of violations of or liabilities underthese laws and regulations. If there is a significant change in the facts andcircumstances surrounding the assumptions upon which we operate or if we arefound not to be in substantial compliance with applicable environmental andpublic health laws and regulations, it could have a material impact on futureenvironmental capital expenditures and other environmental expenses and ourresults of operations, financial position and cash flows. In addition,potentially significant expenditures could be required to comply withenvironmental laws and regulations, including requirements that may be adoptedor imposed in the future.

 

Local, state, federal andforeign agencies that regulate environmental matters may change environmentallaws, regulations or standards. Changes in any of these or other laws,regulations or standards could materially affect our future operating results.

 

***We may not be able to adequately protectour intellectual property and other proprietary rights that are material to ourbusiness.***

 

Our ability to competeeffectively depends in part on our rights to service marks, trademarks, tradenames and other intellectual property rights we own or license, particularlyour registered brand names, Terminix, TruGreen, TruGreen LawnCare, TruGreenLandCare, Merry Maids, ServiceMaster Clean, American Home Shield, AmeriSpec,Furniture Medic and ServiceMaster. We have not sought to register every one ofour marks either in the United States or in every country in which they areused. Furthermore, because of the differences in foreign trademark, patent andother intellectual property or proprietary rights laws, we may not receive thesame protection in other countries as we would in the United States. If we areunable to protect our proprietary information and brand names, we could suffera material adverse effect on our business, financial condition or results ofoperations.

 

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Litigation may be necessaryto enforce our intellectual property rights and protect our proprietaryinformation, or to defend against claims by third parties that our products orservices infringe their intellectual property rights. Any litigation or claimsbrought by or against us could result in substantial costs and diversion of ourresources. A successful claim of trademark, patent or other intellectualproperty infringement against us, or any other successful challenge to the useof our intellectual property, could subject us to damages or prevent us fromproviding certain services under our recognized brand names, which could have amaterial adverse effect on our business, financial condition or results ofoperations.

 

***Disruptions or security failures in ourinformation technology systems could create liability for us and/or limit ourability to effectively monitor, operate and control our operations andadversely affect our operating results.***

 

Our information technologysystems facilitate our ability to monitor, operate and control our operations.While we have disaster recovery plans in place, any disruption in these plansor the failure of our information technology systems to operate as expectedcould, depending on the magnitude of the problem, adversely affect ouroperating results by limiting, among other things, our capacity to monitor,operate and control our operations effectively. In addition, because oursystems contain information about individuals and businesses, our failure tomaintain the security of the data we hold, whether the result of our own erroror the malfeasance or errors of others, could harm our reputation or give riseto legal liabilities relating to violations of privacy laws or otherwise, whichmay lead to lower revenues, increased costs and other material adverse effectson our results of operations.

 

***We are subject to various restrictivecovenants that could adversely impact our operations.***

 

From time to time, we enterinto noncompetition agreements that restrict us from entering into lines ofbusiness (e.g., heating, ventilation and air conditioning repair andinstallation, electrical repair and installation, plumbing) or operating incertain areas into which we may desire to expand our business. We also aresubject to non-solicitation and no hire covenants that may restrict our abilityto solicit potential customers or employees. To the extent that suchrestrictive covenants prevent us from taking advantage of businessopportunities, our operations may be adversely impacted.

 

***Future acquisitions and our reorganizationefforts could affect our financial performance.***

 

We plan to continue topursue opportunities to expand through selective acquisitions. Our ability tomake acquisitions at reasonable prices and to integrate acquired businesses areimportant factors in our future growth. We cannot assure that we will be ableto manage or integrate acquired businesses successfully and/or retain customersof the acquired businesses. Any inability on our part to consolidate and managegrowth from acquired businesses could have an adverse effect on our financialperformance, and there can be no assurance that any acquisition that we make inthe future will provide us with the benefits that were anticipated whenentering into such acquisition. The process of integrating an acquired businessand/or reorganizing our management and merit processes may create unforeseendifficulties and expenses, including the diversion of resources needed tointegrate new businesses, technologies, products, personnel or systems; theinability to retain employees, customers and suppliers; the assumption ofactual or contingent liabilities; failure to follow internal processes;write-offs or impairment charges relating to goodwill and other intangibleassets; and unanticipated or unknown liabilities relating to acquired businesses.

 

***We are indirectly owned and controlled bythe Equity Sponsors, and their interests as equity holders may conflict withholders of our debt.***

 

We are indirectly owned andcontrolled by the Equity Sponsors (as defined below), who will have the abilityto control our policies and operations. The directors appointed by affiliatesof the Equity Sponsors are able to make decisions affecting our capitalstructure, including decisions to issue or repurchase capital stock, paydividends and incur additional debt. The interests of the Equity Sponsors maynot in all cases be aligned with the interests of the holders of our debt. Forexample, if we encounter financial difficulties or are unable to pay our debtsas they mature, the interests of our Equity Sponsors might conflict with theinterests of holders of our debt. In addition, our Equity Sponsors may have aninterest in pursuing acquisitions, divestitures, financings or othertransactions that, in their judgment, could enhance their equity investments,even though such transaction might involve risks to holders of our debt.Furthermore, the Equity Sponsors may in the future own businesses that directlyor indirectly compete with us. One or more of the Equity Sponsors also maypursue acquisition opportunities that may be complementary to our business, andas a result, those acquisition opportunities may not be available to us.

 

***Recent market events and conditions,including disruptions in the U.S. and international credit markets and otherfinancial systems and the deterioration of the U.S. and global economicconditions, could, among other things, impede access to or increase the cost offinancing, cause our lenders to depart from prior credit industry practice andnot give***

 

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***technical or other waivers under our CreditFacilities to the extent we may seek them in the future, thereby causing us tobe in default under one or more of the Credit Facilities, cause our commercialcustomers to incur liquidity issues that could lead to some of our servicesbeing cancelled and/or result in reduced revenues and lower operating incomeand cash flows, which would have an adverse effect on our financial conditionor results of operations.***

 

In the second half of 2007,the U.S. residential mortgage market began to experience serious disruption dueto credit quality deterioration and delinquencies in a significant portion oforiginated mortgages, particularly subprime and non-prime mortgages;foreclosure activity began to rise; the residential housing market began toexperience a slowing pace of transactions, declining housing prices andincreased cost and reduced availability of mortgages; delinquencies innon-mortgage consumer credit increased; consumer confidence began to declineand credit markets became disrupted and illiquid. These conditions continuedand worsened throughout 2007 and in 2008, expanding into a crisis of confidencein the broader U.S. and global credit and financial markets and resulting ingreater volatility, less liquidity, widening of credit spreads, a lack of pricetransparency, increased credit losses and tighter credit conditions. Securitiesand debt ratings have been downgraded and a number of institutions havedefaulted on their debt, filed for bankruptcy or have been taken over. Concernsabout various financial instruments, banks, investment banks, insurers andother financial institutions caused the broader credit markets to deterioratefurther, notwithstanding various actions by the U.S. and foreign governments.In addition, the unemployment rate has been increasing and economic growth hasbeen slowing. Concerns about adverse developments in the credit and financialmarkets, declining consumer sentiment, increased unemployment and decliningeconomic growth and uncertainty about corporate earnings continue to challengethe U.S. and global financial and credit markets and overall economies.

 

These unprecedented disruptionsin the current credit and financial markets have had a significant materialadverse impact on a number of financial institutions and have limited access tocapital and credit for many companies. These disruptions could, among otherthings, make it more difficult for us to obtain, or increase our cost ofobtaining, financing for our operations or investments or to refinance our debtin the future, cause our lenders to depart from prior credit industry practiceand not give technical or other waivers under our Credit Facilities to theextent we may seek them in the future, thereby causing us to be in defaultunder one or more of the Credit Facilities, and/or cause our commercialcustomers to incur liquidity issues that could lead to some of our servicesbeing cancelled or reduced.

 

In light of the currentuncertainty in the credit and financial markets, in September 2008, weborrowed $165 million under our existing $500 million RevolvingCredit Facility to increase our cash position to preserve our financialflexibility. In addition, during the third quarter of 2008, $10 million ofinterests were sold under our receivables sales arrangement. Although we arenot currently experiencing any limitation of access to the Credit Facilitiesand are not aware of any issues currently impacting the ability of the lendersunder them to honor their commitments to extend credit, there is no assurancethat the U.S. and global credit crisis will not adversely affect our ability toborrow on the Credit Facilities in the future. Liquidity or capital problems atone or more of the lenders on the Revolving Credit Facility could reduce oreliminate the amount available for us to draw under such facility. Our accessto additional capital may not be available on terms acceptable to us or at all.

 

There can beno assurance that these disruptions and turmoil will not get worse over timeand thus impact us more than they have to date. These economic uncertaintiesmake it very difficult for us to accurately forecast and plan future businessactivities. If the current uncertain economic conditions continue ordeteriorate, there could be a material adverse impact on our financialposition, revenues, results of operations and cash flows.

 

**Risks Related to Our Capital Structure and Our Debt**

 

***We have substantial debt and may incursubstantial additional debt, which could adversely affect our financial healthand our ability to obtain financing in the future, react to changes in ourbusiness and satisfy our obligations.***

 

As of September 30, 2008,we had $4,271.2 million of consolidated indebtedness and $335 million ofavailable borrowings under our Revolving Credit Facility. In addition, underthe Permanent Notes, we will have the option to elect to pay interest in theform of PIK Interest. In the event we make a PIK Interest election in eachperiod, our debt will increase by the amount of such PIK Interest.

 

Because of our substantialdebt:

 

· our ability toengage in acquisitions without raising additional equity or obtainingadditional debt financing could become impaired;

 

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· our ability toobtain additional financing for working capital, capital expenditures,acquisitions, debt service requirements or general corporate purposes and ourability to satisfy our obligations with respect to our debt may be impaired inthe future;

 

· a large portionof our cash flow from operations must be dedicated to the payment of principaland interest on our debt, thereby reducing the funds available to us for otherpurposes;

 

· we are exposedto the risk of increased interest rates because a portion of our borrowings,including under the Term Loan Facilities and the Revolving Credit Facility(each as herein defined and, collectively, the “Credit Facilities”), andcertain floating rate operating leases are at variable rates of interest;

 

· it may be moredifficult for us to satisfy our obligations to our creditors, resulting inpossible defaults on, and acceleration of, such debt;

 

· we may be morevulnerable to general adverse economic and industry conditions;

 

· we may be at acompetitive disadvantage compared to our competitors with less debt or withcomparable debt on more favorable terms and that, as a result, they may bebetter positioned to withstand economic downturns;

 

· our ability torefinance debt may be limited or the associated costs may increase; and

 

· our flexibilityto adjust to changing market conditions and ability to withstand competitivepressures could be limited, or we may be prevented from carrying out capitalspending that is necessary or important to our growth strategy and efforts toimprove operating margins of our businesses.

 

***Despite our indebtedness levels, we and oursubsidiaries may be able to incur substantially more debt, including secureddebt. This could further exacerbate the risks associated with our substantialdebt.***

 

We and oursubsidiaries may be able to incur substantial additional debt in the future.The terms of the indentures governing our debt securities do not prohibit us orour subsidiaries from doing so. The Credit Facilities provide us with commitmentsfor additional borrowings of up to $335 million under the Revolving CreditFacility, as of September 30, 2008, and permit additional borrowingsbeyond those commitments under certain circumstances. If new debt is added toour current debt levels, the related risks we face would increase, and we maynot be able to meet all of our debt obligations.

 

***The agreements and instruments governing ourdebt contain restrictions and limitations that could significantly impact ourability to operate our business.***

 

The CreditFacilities contain covenants that, among other things, restrict our ability to:

 

· incur additional debt(including guarantees of other debt);

 

· pay dividends or makeother restricted payments, including investments;

 

· prepay or amend theterms of our other debt;

 

· enter into certaintypes of transactions with affiliates;

 

· sell certain assets,or, in the case of any borrower under the Credit Facilities, consolidate,merge, sell or otherwise dispose of all or substantially all of its assets;

 

· create liens;

 

· in the case of theTerm Loan Facility, enter into agreements restricting dividends or otherdistributions by subsidiaries to ServiceMaster; and

 

· in the case of theRevolving Credit Facility, make acquisitions, enter into agreements restrictingour ability to incur liens securing the Revolving Credit Facility and changeour business or ServiceMaster’s fiscal year.

 

The indenturegoverning the Permanent Notes also contains restrictive covenants that, amongother things, limit our ability and the ability of our restricted subsidiariesto:

 

· incur more debt;

 

· pay dividends, redeemstock or make other distributions;

 

· make investments;

 

· create liens;

 

· transfer or sellassets;

 

· merge or consolidate;and

 

· enter into certaintransactions with our affiliates.

 

Therestrictions in the indenture governing the Permanent Notes, the CreditFacilities and the instruments governing our other debt may prevent us fromtaking actions that we believe would be in the best interest of our businessand may make it difficult for us to execute our business strategy successfullyor effectively compete with companies that are not similarly restricted. We mayalso incur future debt obligations that might subject us to additionalrestrictive covenants that could affect our financial and operational flexibility.We cannot assure you that we will be able to refinance our debt, at maturity orotherwise, on terms acceptable to us, or at all.

 

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Our ability tocomply with the covenants and restrictions contained in the Credit Facilities,the indenture governing the Permanent Notes and the instruments governing ourother debt may be affected by economic, financial and industry conditionsbeyond our control including credit or capital market disruptions. The breachof any of these covenants or restrictions could result in a default that wouldpermit the applicable lenders or noteholders, as the case may be, to declareall amounts outstanding thereunder to be due and payable, together with accruedand unpaid interest. If we are unable to repay debt, lenders having securedobligations, such as the lenders under the Credit Facilities, could proceedagainst the collateral securing the debt. In any such case, we may be unable toborrow under the Credit Facilities and may not be able to repay the amounts dueunder the Credit Facilities and the Permanent Notes. This could have seriousconsequences to our financial condition and results of operations and couldcause us to become bankrupt or insolvent.

 

***Our ability to generate the significantamount of cash needed to pay interest and principal on our debt and our abilityto refinance all or a portion of our debt or obtain additional financingdepends on many factors beyond our control.***

 

As a holdingcompany, we have no independent operations or material assets other than ourownership of equity interests in our subsidiaries, and we will depend on oursubsidiaries to distribute funds to us so that we may pay our obligations andexpenses, including satisfying our obligations under our debt. Our ability tomake scheduled payments on, or to refinance our obligations under, our debtwill depend on the ability of our subsidiaries to make distributions anddividends to us, which, in turn, will depend on their operating results, cashrequirements and financial condition, general business conditions, and anylegal and regulatory restrictions on the payment of dividends to which they maybe subject, many of which may be beyond our control, and as described under ‘‘RisksRelating to Our Business and Our Industry’’ above. The payment of ordinary andextraordinary dividends by our subsidiaries that are regulated as insurance,home warranty, service contract or similar companies is subject to applicablestate law limitations. If we cannot receive sufficient distributions from our subsidiaries, we may not beable to meet our obligations to fund general corporate expenses or service ourdebt obligations.

 

If our cashflow and capital resources are insufficient to fund our debt serviceobligations, we may be forced to reduce or delay capital expenditures, sellassets, seek to obtain additional equity capital or restructure our debt. Inthe future, our cash flow and capital resources may not be sufficient forpayments of interest on and principal of our debt, and such alternativemeasures may not be successful and may not permit us to meet our scheduled debtservice obligations.

 

The RevolvingCredit Facility will mature in 2013 and the Term Loan Facilities will mature in2014. The Permanent Notes will mature on July 24, 2015. We cannot assureyou that we will be able to refinance any of our debt or obtain additionalfinancing, particularly because of our high levels of debt, as well asprevailing market conditions. In the absence of such operating results andresources, we could face substantial liquidity problems and might be requiredto dispose of material assets or operations to meet our debt service and otherobligations. We cannot assure you we will be able to consummate those sales, orif we do, what the timing of the sales will be, whether the proceeds that werealize will be adequate to meet debt service obligations when due or whetherwe would receive fair value for such assets.

 

***Increases in interest rates would increasethe cost of servicing our debt and could reduce our profitability.***

 

A significantportion of our outstanding debt, including under the Credit Facilities, bearsinterest at variable rates. As a result, increases in interest rates wouldincrease the cost of servicing our debt and could materially reduce ourprofitability and cash flows. As of September 30, 2008, each onepercentage point change in interest rates would result in an approximately $12million change in the annual interest expense on our Term Loan Facilities afterconsidering the impact of the interest rate swaps into which we have entered.Assuming all revolving loans were fully drawn, each one  percentage point change in interest rateswould result in a $5 million change in annual interest expense on our RevolvingCredit Facility. We are also exposed to increases in interest rates in respectof our arrangement enabling us to transfer an interest in certain receivablesto unrelated third parties. Assuming all available amounts were transferredunder this arrangement, each one percentage point change in interest rateswould result in a $1 million change in annual interest expense in respect ofthis arrangement. We are also exposed to increases in interest rates in respectof our floating rate leases, and a one percentage point change in interestrates would result in an approximately $2 million change in annual rent expensein respect of such leases. The impact of increases in interest rates could bemore significant for us than it would be for some other companies because ofour substantial debt and floating rate leases.

 

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**Item 5. Other Information.**

 

Deloitte &Touche LLP (“Deloitte”) has served as the independent registered publicaccounting firm with respect to ServiceMaster’s financial statements since May2002.  In September 2008, Deloitteadvised ServiceMaster and the audit committee for ServiceMaster GlobalHoldings, Inc., the indirect parent of ServiceMaster, that Deloitte had learnedthat a former partner, who had been the advisory partner on Deloitte’s clientservice team for ServiceMaster from May 2002 until July 2006, had engaged intrades involving ServiceMaster securities during his period of service on theengagement.  ServiceMaster itself doesnot have an audit committee since it terminated its registration and suspendedits reporting obligations under the Securities Exchange Act of 1934 on August6, 2007.  Instead, the audit committee ofServiceMaster Global Holdings, Inc., includes all of the members ofServiceMaster’s board of directors and acts as the audit committee for ServiceMaster(the “Audit Committee”).

 

Deloitteconcluded that these personal securities transactions violated the SEC’sauditor independence rules, as well as Deloitte’s own policies on auditorindependence.  Deloitte conducted aninternal review and concluded that the former advisory partner’s actions didnot impair Deloitte’s impartiality, objectivity or independence, or that of theengagement team that has conducted ServiceMaster’s audits.  Deloitte’s audit engagement team consisted ofa lead client service partner, who had responsibility for all substantiveissues with respect to the planning, scope and conduct of the audit, anadditional audit partner, a concurring review partner, a senior manager,additional professional staff, as well as the former advisory partner, whofunctioned primarily in a client relationship and assessment role and did nothave a substantive or technical role in the audit.  The former advisory partner attended meetingsof ServiceMaster’s former audit committee, but his primary role was to functionin a client relationship role, including conducting Deloitte’s annual clientservice assessments.  He did notparticipate in the review of any substantive audit matters with the formeraudit committee at these meetings.  Inaddition, while the former advisory partner attended a few annual meetings ofstockholders, neither management nor Deloitte recalled him participating atthose meetings.  Deloitte provided adraft letter on October 15, 2008 to the Audit Committee concluding that theactions of its former advisory partner did not impair Deloitte’s past orcontinuing independence. 

 

The AuditCommittee also conducted its own review with the assistance of external counselengaged specifically for this purpose. The Audit Committee, its externalcounsel and ServiceMaster held frequent meetings with Deloitte. The AuditCommittee held meetings concerning the progress of its review on October 16 and21, 2008.  The review included anexamination of ServiceMaster’s relationship with the former advisory partnerand his role on ServiceMaster’s engagement. Over the course of the review, the external counsel and ServiceMasterexamined a substantial number of documents and communications fromServiceMaster’s and Deloitte’s files, including the former advisory partner’sannual goals and assessments, his communications with the audit engagement teamand with ServiceMaster’s management and members of the former audit committee,his independence certifications, and emails and other documents relating to ServiceMaster’saudit engagement.  The review concludedthat the former advisory partner had functioned in a client relationship roleand had not been involved in the audit or influenced any substantive portion ofany audit or review of ServiceMaster’s financial statements.

 

The AuditCommittee and external counsel also met with ServiceMaster’s financialmanagement team as well as with senior management of Deloitte, including thecurrent and former lead client service partners.  The Audit Committee’s review confirmedDeloitte’s findings that the former advisory partner met with ServiceMaster’sformer audit committee as well as senior ServiceMaster management for thepurpose of enhancing Deloitte’s client service to ServiceMaster rather thanparticipating in the audit or review of ServiceMaster’s financial statements.

 

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Therefore, theAudit Committee concurred in Deloitte’s conclusion, reconfirmed in a report tothe Audit Committee issued October 21, 2008, that Deloitte’s impartiality andobjectivity related to its audits of ServiceMaster’s financial statements hadnot been compromised and thus, notwithstanding the violation of the SEC’sindependence rules, Deloitte's independence was not impaired.  In reaching this conclusion, the AuditCommittee took into consideration several factors, including the following:

 
| ·                                                                                    | the former advisory partner is no longer a partner or otherwise  affiliated with Deloitte;                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ·                                                                                    | the former advisory partner did not disclose his investments to  Deloitte, in contravention of Deloitte’s independence policies;                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ·                                                                                    | the former advisory partner’s role on the audit engagement was  limited and did not involve participation in the scoping or execution of  Deloitte’s audit of ServiceMaster’s annual financial statements, Deloitte’s  review of quarterly financial statements or technical consultations with  Deloitte’s national office regarding ServiceMaster matters;                                                                                                                           |
|                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ·                                                                                    | Deloitte’s conclusion that the former advisory partner performed his  role as advisory partner in a manner that could not have influenced the audit  engagement partners or any other members of the audit engagement team  responsible for the audit in a manner that would impact the engagement team's  objectivity or impartiality;                                                                                                                                                                    |
|                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ·                                                                                    | the review conducted by the external counsel and ServiceMaster  indicated that the nature and extent of interaction between the former  advisory partner and members of management and employees of ServiceMaster and  the members of the former audit committee was limited to matters related to  the relationship between Deloitte and ServiceMaster and did not include  substantive involvement with any significant accounting or financial reporting  positions or the audit scope and related findings; |
|                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ·                                                                                    | a report, dated October 21, 2008, issued by Deloitte to the Audit  Committee reaffirming Deloitte’s independence per the requirements of the  Independence Standards Board’s Standard No. 1; and                                                                                                                                                                                                                                                                                                      |
|                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ·                                                                                    | Deloitte’s representation that it has in place a quality control  system that meets the requirements of the SEC and the Public Company  Accounting Oversight Board, and provides reasonable assurance that the  accounting firm and its employees do not lack independence.                                                                                                                                                                                                                                |
|                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| The Audit Committee and Deloitte separately reported their  conclusions to the SEC Staff. |

 

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**ITEM 6. EXHIBITS**

** **
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                              |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1                  |       | Indenture, dated July 24, 2008, among  The ServiceMaster Company, the Subsidiary Guarantors from time to time  parties thereto and Wilmington Trust FSB, as trustee (incorporated by  reference to Exhibit 4.1 to the registrant’s Current Report on  Form 8-K dated July 24, 2008)                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                              |
| 4.2                  |       | Exchange and Registration Rights Agreement,  dated July 24, 2008, among The ServiceMaster Company, the Subsidiary  Guarantors named therein and JPMorgan Chase Bank, N.A., as administrative  agent (incorporated by reference to Exhibit 4.2 to the registrant’s  Current Report on Form 8-K dated July 24, 2008)       |
|                 |       |                                                                                                                                                                                                                                                                                                                                              |
| 4.3                  |       | First Supplemental Indenture, dated  August 13, 2008, among TruGreen LandCare, The ServiceMaster Company,  each existing Subsidiary Guarantor under the Indenture and Wilmington Trust  FSB (incorporated by reference to Exhibit 4.3 to the registrant’s Registration  Statement on Form S-1 filed on October 22, 2008) |
|                 |       |                                                                                                                                                                                                                                                                                                                                              |
| 10.1                 |       | Term Loan Assumption Agreement, dated as of August 13,  2008, made by TruGreen  LandCare in favor of CitiBank, N.A. (incorporated by reference to Exhibit 10.32 to the registrant’s  Registration Statement on Form S-1 filed on October 22, 2008)                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                              |
| 10.2                 |       | Term Loan Supplemental Agreement, dated as of August 13,  2008, made by TruGreen  LandCare, L.L.C. in favor of CitiBank, N.A., (incorporated by reference to Exhibit 10.33 to the  registrant’s Registration Statement on Form S-1 filed on October 22, 2008)                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                              |
| 10.3                 |       | Term Loan Supplemental Agreement, dated as of August 13,  2008, made by TruGreen  Companies L.L.C. in favor of CitiBank, N.A., (incorporated by reference to Exhibit 10.34 to the  registrant’s Registration Statement on Form S-1 filed on October 22, 2008)                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                              |
| 10.4                 |       | Revolving Credit Assumption Agreement, dated as of August 13,  2008, made by TruGreen LandCare in favor of CitiBank, N.A., (incorporated  by reference to Exhibit 10.35  to the registrant’s Registration Statement on Form S-1 filed on October 22, 2008)                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                              |
| 10.5                 |       | Revolving Credit Supplemental Agreement,  dated as of August 13, 2008, made by TruGreen LandCare, L.L.C. in favor  of CitiBank, N.A., (incorporated by reference to Exhibit 10.36 to the  registrant’s Registration Statement on Form S-1 filed on  October 22, 2008)                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                              |
| 10.6                 |       | Revolving Credit Supplemental Agreement, dated as of August 13,  2008, made by TruGreen Companies L.L.C. in favor of CitiBank, N.A., (incorporated  by reference to Exhibit 10.37  to the registrant’s Registration Statement on Form S-1 filed on October 22, 2008)                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                              |
| 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                                                                                                                                          |

 

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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: November 14, 2008 |                                              |
|-----------------------------------|---------------------------------------------------|
|                              | THE SERVICEMASTER COMPANY                         |
|                              | (Registrant)                                      |
|                              |                                              |
|                              | By:                                               | /s/ Steven J. Martin |
|                              | Steven J. Martin                                  |
|                              | Senior Vice President and Chief Financial Officer |

 

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