Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

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**x****      QUARTERLY REPORT UNDER SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2010**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from                   to                    **

 

**Commission file number 1-14762**

 

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**THESERVICEMASTER COMPANY**

(Exact name of registrant as specified in its charter)

 

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

 

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

(Address of principal executive offices) (Zip Code)

 

**901-597-1400**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes o  No x

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting 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) |   |                             |

 

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

 

Theregistrant is a privately held corporation and its equity shares are notpublicly traded. At May 13, 2010, 1,000 shares of the registrant’s commonstock were outstanding, all of which were owned by CDRSVM Holding, Inc.

 

TheServiceMaster Company is not required to file this Quarterly Report on Form 10-Qwith the Securities and Exchange Commission and is doing so on a voluntarybasis.

 

 

 

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**TABLE OFCONTENTS**

 
| ** **                                                                                                                           | ** ** | **Page  No.** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|
| Part I. Financial Information                                                                                                   |       | 3             |
|                                                                                                                                 |       |          |
| Item 1. Financial Statements                                                                                                         |       | 3             |
|                                                                                                                                 |       |          |
| Condensed  Consolidated Statements of Operations for the three months ended March 31,  2010 and March 31, 2009 (Unaudited) |       | 3             |
| ** **                                                                                                                           | ** ** | ** **    |
| Condensed Consolidated Statements of Financial  Position as of March 31, 2010 (Unaudited) and December 31, 2009  (Audited) |       | 4             |
| ** **                                                                                                                           | ** ** | ** **    |
| Condensed Consolidated Statements of Cash Flows for  the three months ended March 31, 2010 and March 31, 2009  (Unaudited) |       | 5             |
|                                                                                                                                 |       |          |
| Notes to Condensed Consolidated Financial Statements                                                                                 |       | 6             |
| ** **                                                                                                                           | ** ** | ** **    |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                  |       | 25            |
| ** **                                                                                                                           | ** ** | ** **    |
| Item 3. Quantitative and Qualitative Disclosures  About Market Risk                                                             |       | 39            |
| ** **                                                                                                                           | ** ** | ** **    |
| Item  4. Controls and Procedures                                                                                                     |       | 40            |
| ** **                                                                                                                           | ** ** | ** **    |
| Part II.  Other Information                                                                                                     |       | 40            |
| ** **                                                                                                                           | ** ** | ** **    |
| Item  1. Legal Proceedings                                                                                                           |       | 40            |
| ** **                                                                                                                           | ** ** | ** **    |
| Item 6. Exhibits                                                                                                                     |       | 40            |
|                                                                                                                                 |       |          |
| Signature                                                                                                                            |       | 41            |

 

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**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

**THE SERVICEMASTER COMPANY**

**Condensed Consolidated Statementsof Operations (Unaudited)**

*(In thousands)*

 
| ** **                                                                | ** ** | **Three months ended********March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Operating Revenue                                                    |       | $                                            | 639,408    |   | $ | 645,927 |   |
|                                                                      |       |                                         |       |   |   |
| Operating Costs and Expenses:                              |       |                                         |       |   |   |
| Cost of services rendered and products sold |       | 402,520                                      |       | 394,400 |   |
| Selling and administrative expenses                        |       | 183,875                                      |       | 173,763 |   |
| Amortization expense                                                      |       | 40,442                                       |       | 40,309 |   |
| Restructuring and Merger related charges                                  |       | 3,924                                        |       | 8,777 |   |
| Total operating costs and expenses                    |       | 630,761                                      |       | 617,249 |   |
|                                                                      |       |                                         |       |   |   |
| Operating Income                                                     |       | 8,647                                        |       | 28,678 |   |
|                                                                      |       |                                         |       |   |   |
| Non-operating Expense (Income):                                 |       |                                         |       |   |   |
| Interest expense                                                     |       | 72,681                                       |       | 76,666 |   |
| Interest and net investment (income) loss                       |       | (2,502                                       | )          | 4,761 |   |
| Gain on extinguishment of debt                                            |       | —                                       |       | (46,106 | ) |
| Other expense                                                        |       | 171                                          |       | 200 |   |
|                                                                      |       |                                         |       |   |   |
| Loss from Continuing Operations  before Income Taxes  |       | (61,703                                      | )          | (6,843 | ) |
| Benefit for income taxes                                        |       | (29,420                                      | )          | (7,555 | ) |
|                                                                      |       |                                         |       |   |   |
| (Loss) Income from Continuing Operations                        |       | (32,283                                      | )          | 712 |   |
|                                                                      |       |                                         |       |   |   |
| Loss from discontinued operations, net of income taxes                    |       | (377                                         | )          | (163 | ) |
| Net (Loss) Income                                                    |       | $                                            | (32,660    | ) | $ | 549 |   |

 

*Seeaccompanying Notes to the Condensed Consolidated Financial Statements*

 

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**THESERVICEMASTER COMPANY**

**Condensed Consolidated Statementsof Financial Position**

*(Inthousands, except share data)*

 
| ** **                                                                   | ** ** | **As  of********March 31, 2010** | ** ** | **As  of********December 31,********2009** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                   | ** ** | **(Unaudited)**                       | ** ** | **(Audited)**                                   | ** ** |
| Assets                                                                       |       |                                  | ** ** | ** **                                      | ** ** |
| Current Assets:                                                              |       |                                  |       |                                            |       |
| Cash and cash equivalents                                                    |       | $                                     | 203,043    |                                            | $          | 253,463 |   |
| Marketable securities                                                        |       | 19,566                                |       | 21,120                                          |       |
| Receivables, less allowance  of $20,773 and $20,314, respectively            |       | 351,642                               |       | 348,655                                         |       |
| Inventories                                                                  |       | 82,834                                |       | 76,592                                          |       |
| Prepaid expenses and other  assets                                           |       | 98,649                                |       | 36,564                                          |       |
| Deferred customer acquisition  costs                                         |       | 62,088                                |       | 36,070                                          |       |
| Deferred taxes                                                               |       | 26,321                                |       | 21,595                                          |       |
| Assets of discontinued  operations                                           |       | 22                                    |       | 42                                              |       |
| Total Current Assets                                                         |       | 844,165                               |       | 794,101                                         |       |
| Property and Equipment:                                                      |       |                                  |       |                                            |       |
| At cost                                                                      |       | 360,707                               |       | 345,100                                         |       |
| Less: accumulated  depreciation                                              |       | (148,086                              | )          | (132,965                                        | )          |
| Net property and equipment                                                   |       | 212,621                               |       | 212,135                                         |       |
|                                                                         |       |                                  |       |                                            |       |
| Other Assets:                                                                |       |                                  |       |                                            |       |
| Goodwill                                                                     |       | 3,126,444                             |       | 3,119,754                                       |       |
| Intangible assets, primarily  trade names, service marks and trademarks, net |       | 2,749,445                             |       | 2,787,237                                       |       |
| Notes receivable                                                             |       | 23,025                                |       | 23,490                                          |       |
| Long-term marketable  securities                                             |       | 117,053                               |       | 111,066                                         |       |
| Other assets                                                                 |       | 29,954                                |       | 31,799                                          |       |
| Debt issuance costs                                                          |       | 63,157                                |       | 66,807                                          |       |
| Total Assets                                                                 |       | $                                     | 7,165,864  |                                            | $          | 7,146,389 |   |
|                                                                         |       |                                  |       |                                            |       |
| Liabilities and Shareholder’s Equity                                    |       |                                  |       |                                            |       |
| Current Liabilities:                                                         |       |                                  |       |                                            |       |
| Accounts payable                                                             |       | $                                     | 93,933     |                                            | $          | 73,471 |   |
| Accrued liabilities:                                                         |       |                                  |       |                                            |       |
| Payroll and related expenses                                                 |       | 69,503                                |       | 74,385                                          |       |
| Self-insured claims and  related expenses                                    |       | 84,902                                |       | 87,332                                          |       |
| Other                                                                        |       | 133,059                               |       | 156,649                                         |       |
| Deferred revenue                                                             |       | 516,680                               |       | 449,746                                         |       |
| Liabilities of discontinued  operations                                      |       | 2,853                                 |       | 2,806                                           |       |
| Current portion of long-term  debt                                           |       | 63,098                                |       | 64,395                                          |       |
| Total Current Liabilities                                                    |       | 964,028                               |       | 908,784                                         |       |
|                                                                         |       |                                  |       |                                            |       |
| Long-Term Debt                                                               |       | 3,913,680                             |       | 3,910,549                                       |       |
|                                                                         |       |                                  |       |                                            |       |
| Other Long-Term Liabilities:                                                 |       |                                  |       |                                            |       |
| Deferred taxes                                                               |       | 944,186                               |       | 957,077                                         |       |
| Liabilities of discontinued  operations                                      |       | 4,101                                 |       | 4,145                                           |       |
| Other long-term obligations                                                  |       | 183,222                               |       | 179,503                                         |       |
| Total Other Long-Term  Liabilities                                           |       | 1,131,509                             |       | 1,140,725                                       |       |
|                                                                         |       |                                  |       |                                            |       |
| Commitments and Contingencies (See Note 4)                                   |       |                                  |       |                                            |       |
|                                                                         |       |                                  |       |                                            |       |
| Shareholder’s Equity:                                                   |       |                                  |       |                                            |       |
| Common stock $0.01 par value, authorized 1,000 shares;  issued 1,000 shares  |       | —                                |       | —                                          |       |
| Additional paid-in capital                                                   |       | 1,448,687                             |       | 1,446,529                                       |       |
| Retained deficit                                                             |       | (269,084                              | )          | (236,424                                        | )          |
| Accumulated other  comprehensive loss                                        |       | (22,956                               | )          | (23,774                                         | )          |
| Total Shareholder’s Equity                                              |       | 1,156,647                             |       | 1,186,331                                       |       |
| Total Liabilities and  Shareholder’s Equity                             |       | $                                     | 7,165,864  |                                            | $          | 7,146,389 |   |

 

*Seeaccompanying Notes to the Condensed Consolidated Financial Statements*

 

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**THESERVICEMASTER COMPANY**

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

*(Inthousands)*

 
| ** **                                                                             | ** ** | **Three months ended********March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                             | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Cash and Cash Equivalents at Beginning of Period                                       |       | $                                            | 253,463    |   | $ | 405,587 |   |
|                                                                                   |       |                                         |       |   |   |
| Cash Flows from Operating Activities from Continuing  Operations:                      |       |                                         |       |   |   |
| Net (Loss) Income                                                                      |       | (32,660                                      | )          | 549 |   |
| Adjustments to reconcile net (loss) income to net cash  used for operating activities: |       |                                         |       |   |   |
| Loss from discontinued operations                                                      |       | 377                                          |       | 163 |   |
| Depreciation expense                                                                   |       | 15,808                                       |       | 15,614 |   |
| Amortization expense                                                                   |       | 40,442                                       |       | 40,309 |   |
| Amortization of debt issuance costs                                                    |       | 3,650                                        |       | 3,768 |   |
| Gain on extinguishment of debt                                                         |       | —                                       |       | (46,106 | ) |
| Deferred income tax benefit                                                            |       | (16,971                                      | )          | (2,280 | ) |
| Stock-based compensation expense                                                       |       | 2,158                                        |       | 1,934 |   |
| Restructuring and Merger related charges                                               |       | 3,924                                        |       | 8,777 |   |
| Cash payments related to restructuring charges                                         |       | (4,036                                       | )          | (4,296 | ) |
| Change in working capital, net of acquisitions:                                        |       |                                         |       |   |   |
| Current income taxes                                                                   |       | (17,048                                      | )          | (3,026 | ) |
| Receivables                                                                            |       | (2,032                                       | )          | 6,001 |   |
| Inventories and other current assets                                                   |       | (77,589                                      | )          | (87,560 | ) |
| Accounts payable                                                                       |       | 13,476                                       |       | 26,548 |   |
| Deferred revenue                                                                       |       | 66,817                                       |       | 58,033 |   |
| Accrued liabilities                                                                    |       | (29,003                                      | )          | (75,177 | ) |
| Other, net                                                                             |       | 3,176                                        |       | 9,141 |   |
| Net Cash Used for Operating Activities from Continuing  Operations                     |       | (29,511                                      | )          | (47,608 | ) |
|                                                                                   |       |                                         |       |   |   |
| Cash Flows from Investing Activities from Continuing  Operations:                      |       |                                         |       |   |   |
| Property additions                                                                     |       | (8,905                                       | )          | (18,608 | ) |
| Sale of equipment and other assets                                                     |       | 596                                          |       | 362 |   |
| Acquisition of The ServiceMaster Company                                               |       | (156                                         | )          | (486 | ) |
| Other business acquisitions, net of cash acquired                                      |       | (8,363                                       | )          | (4,871 | ) |
| Notes receivable, financial investments and  securities, net                           |       | (1,921                                       | )          | 3,536 |   |
| Net Cash Used for Investing Activities from Continuing  Operations                     |       | (18,749                                      | )          | (20,067 | ) |
|                                                                                   |       |                                         |       |   |   |
| Cash Flows from Financing Activities from Continuing  Operations:                      |       |                                         |       |   |   |
| Borrowings of debt                                                                     |       | 10,000                                       |       | — |   |
| Payments of debt                                                                       |       | (11,532                                      | )          | (47,504 | ) |
| Debt issuance costs paid                                                               |       | (30                                          | )          | (198 | ) |
| Net  Cash Used for Financing Activities from Continuing Operations                     |       | (1,562                                       | )          | (47,702 | ) |
|                                                                                   |       |                                         |       |   |   |
| Cash Flows from Discontinued Operations:                                               |       |                                         |       |   |   |
| Cash used for operating activities                                                     |       | (598                                         | )          | (980 | ) |
| Cash used for investing activities                                                     |       | —                                       |       | (914 | ) |
| Net Cash Used for Discontinued Operations                                              |       | (598                                         | )          | (1,894 | ) |
|                                                                                   |       |                                         |       |   |   |
| Cash Decrease During the Period                                                        |       | (50,420                                      | )          | (117,271 | ) |
|                                                                                   |       |                                         |       |   |   |
| Cash and Cash Equivalents at End of Period                                             |       | $                                            | 203,043    |   | $ | 288,316 |   |

 

*Seeaccompanying Notes to the Condensed Consolidated Financial Statements*

 

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**THE SERVICEMASTER COMPANY**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**Note 1.Basis of Presentation**

 

The ServiceMaster Company isa national company serving both residential and commercial customers. Its productsand services include lawn care, landscape maintenance, termite and pestcontrol, home service contracts, cleaning and disaster restoration, housecleaning, furniture repair and home inspection. ServiceMaster provides theseservices through a network of company-owned locations and franchise licensesoperating under the following leading brands: TruGreen, TruGreen LandCare,Terminix, American Home Shield, ServiceMaster Clean, Merry Maids, FurnitureMedic and AmeriSpec. ServiceMaster is organized into six principal reportablesegments: TruGreen LawnCare, TruGreen LandCare, Terminix, American Home Shield,ServiceMaster Clean, and Other Operations and Headquarters.

 

The condensedconsolidated financial statements include the accounts of The ServiceMasterCompany and its majority owned subsidiary partnerships, limited liabilitycompanies and corporations, collectively referred to as “ServiceMaster”,the “Company”, “we”, “us” or “our”.

 

The condensedconsolidated financial statements have been prepared by the Company inaccordance with generally accepted accounting principles in the United States (“GAAP”)and pursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”). The Company recommends that the quarterly condensedconsolidated financial statements be read in conjunction with the consolidatedfinancial statements and the notes thereto included in the Company’s AnnualReport on Form 10-K filed with the SEC for the year ended December 31,2009. The condensed consolidated financial statements reflect all adjustmentswhich are, in the opinion of management, necessary for the fair presentation ofthe financial position, results of operations and cash flows for the interimperiods presented. All intercompany transactions and balances have beeneliminated in consolidation. The results of operations for any interim periodare not necessarily indicative of the results which might be achieved for afull year.

 

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

 

On July 24,2007 (the “Closing Date”), the Merger was completed, and, immediately followingthe completion of the Merger, all of the outstanding capital stock of Holdings,the ultimate parent company of ServiceMaster, was owned by investment fundssponsored by, or affiliated with, Clayton, Dubilier & Rice, Inc.(now operated as Clayton, Dublier & Rice, LLC, “CD&R”), CitigroupPrivate Equity LP (together with its affiliate, Citigroup AlternativeInvestments LLC, “Citigroup”) BAS Capital Funding Corporation (“BAS”) and J.P.Morgan Ventures Corporation (“JP Morgan”) (collectively, the “Equity Sponsors”).

 

Equity contributions totaling $1,431.1 millionfrom the Equity Sponsors, together with (i) borrowings under a new$1,150.0 million senior unsecured interim loan facility (“Interim Loan Facility”),(ii) borrowings under a new $2,650.0 million senior secured term loanfacility and (iii) cash on hand at ServiceMaster, were used, among otherthings, to finance the aggregate merger consideration, to make payments insatisfaction of other equity-based interests in ServiceMaster under the MergerAgreement, to settle existing interest rate swaps, to redeem or provide for therepayment of certain of the Company’s existing indebtedness and to pay relatedtransaction fees and expenses. In addition, letters of credit issued under anew $150.0 million pre-funded letter of credit facility (together with thesenior secured term loan facility, the “Term Facilities”) were used to replaceand/or secure letters of credit previously issued under a ServiceMaster creditfacility that was terminated as of the Closing Date. On the Closing Date, theCompany also entered into, but did not then draw under, a new$500.0 million senior secured revolving credit facility (the “RevolvingCredit Facility”).

 

The Interim Loan Facility matured on July 24,2008. On the maturity date, outstanding amounts under the Interim Loan Facilitywere converted on a one to one basis into 10.75%/11.50% senior toggle notesmaturing in 2015 (the “Permanent Notes”). The Permanent Notes were issuedpursuant to a refinancing indenture. In connection with the issuance of thePermanent Notes, ServiceMaster entered into a registration rights agreement(the “Registration Rights Agreement”), pursuant to which ServiceMaster filedwith the Securities and Exchange Commission (“SEC”) a registration statementwith respect to the resale of the Permanent Notes, which was declared effectiveon January 16, 2009. ServiceMaster deregistered the Permanent Notes inaccordance with the terms of the Registration Rights Agreement, and theeffectiveness of the registration statement was terminated on November 19,2009.

 

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**Note 2.Significant Accounting Policies**

 

TheCompany’s significant accounting policies are included in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2009. Thefollowing selected accounting policies should be read in conjunction with thatAnnual Report on Form 10-K.

 

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 uponcontractual arrangements or when services are performed for non-contractualarrangements. The Company eradicates termites through the use of baitingsystems, as well as through non-baiting methods (e.g., fumigation or liquidtreatments). Termite services using baiting systems, termite inspection andprotection contracts, as well as home service contracts, are frequently soldthrough annual contracts for a one-time, upfront payment. Direct costs of thesecontracts (service costs for termite contracts and claim costs for home servicecontracts) are expensed as incurred. The Company recognizes revenue over thelife of these contracts in proportion to the expected direct costs. Those costsbear a direct relationship to the fulfillment of the Company’s obligationsunder the contracts and are representative of the relative value provided tothe customer (proportional performance method). The Company regularly reviewsits estimates of direct costs for its termite bait and home service contractsand adjusts the estimates when appropriate. Revenue from trade name licensingarrangements is recognized when earned.

 

TheCompany has franchise agreements in its TruGreen LawnCare, Terminix,ServiceMaster Clean, AmeriSpec, Furniture Medic and Merry Maids businesses.Franchise revenue (which in the aggregate represents approximately four percentof consolidated revenue from continuing operations) consists principally ofcontinuing monthly fees based upon the franchisee’s customer level revenue.Monthly fee revenue is recognized when the related customer level revenue isreported by the franchisee and collectability is reasonably assured. Franchiserevenue also includes initial fees resulting from the sale of a franchise.These fees are fixed and are recognized as revenue when collectability isreasonably assured and all material services or conditions relating to the salehave been substantially performed. Total profits from the franchised operations(excluding trade name licensing) were $15.3 million**and$15.8 million for the three months ended March 31, 2010 and 2009,respectively, and consolidated operating income from continuing operations was$8.6 million and $28.7 million for the three months ended March 31, 2010and 2009, respectively. The Company evaluates the performance of its franchisebusinesses based primarily on operating profit before corporate general andadministrative expenses, interest expense and amortization of intangibleassets. The portion of total franchise fee income related to initial feesreceived from the sale of franchises was immaterial to the Company’s condensedconsolidated financial statements for all periods.

 

TheCompany had $516.7 million and $449.7 million of deferred revenue at March 31,2010 and December 31, 2009, respectively. Deferred revenue consistsprimarily of payments received for annual contracts relating to home servicecontracts, termite baiting, termite inspection, pest control and lawn careservices.

 

Customeracquisition costs, which are incremental and direct costs of obtaining acustomer, are deferred and amortized over the life of the related contract inproportion to revenue recognized. These costs include sales commissions anddirect selling costs which can be shown to have resulted in a successful sale.

 

TruGreenLawnCare has significant seasonality in its business. In the winter and spring,this business sells a series of lawn applications to customers which arerendered primarily in March through October (the production season).This business incurs incremental selling expenses at the beginning of the yearthat directly relate to successful sales for which the revenues are recognizedin later quarters. On an interim basis, TruGreen LawnCare defers theseincremental selling expenses, pre-season advertising costs and annual repairsand maintenance procedures that are performed primarily in the first quarter.These costs are deferred and recognized in proportion to the contract revenueover the production season and are not deferred beyond the calendar year-end.Other business segments of the Company also defer, on an interim basis,advertising costs incurred early in the year. These pre-season costs aredeferred and recognized approximately in proportion to revenue over the balanceof the year and are not deferred beyond the calendar year-end.

 

Thecost of direct-response advertising at Terminix and TruGreen LawnCare,consisting primarily of direct-mail promotions, is capitalized and amortizedover its expected period of future benefits.

 

Thepreparation of the condensed consolidated financial statements requiresmanagement to make certain estimates and assumptions required under GAAP whichmay differ from actual results. Disclosures in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2009 presented the significant areas thatrequire the use of management’s estimates and discussed how management formedits judgments. The areas discussed included revenue recognition; the allowancefor uncollectible receivables; accruals for self-insured retention limitsrelated to medical, workers’ compensation, auto and general liability insuranceclaims; accruals for home service contracts and termite damage claims; thepossible outcome of outstanding litigation; accruals for 

 

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income tax liabilities aswell as deferred tax accounts; the deferral and amortization of customeracquisition costs; useful lives for depreciation and amortization expense; thevaluation of marketable securities; and the valuation of tangible andintangible assets.

 

**Note 3.Restructuring and Merger Related Charges**

 

TheCompany incurred restructuring and Merger related charges of $3.9 million ($2.4million, net of tax) and $8.8 million ($5.4 million, net of tax) for the threemonths ended March 31, 2010 and 2009, respectively. Restructuring andMerger related charges were comprised of the following:

 
| ** **                                             | ** ** | **Three  months ended********March 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|
| **(In thousands)**                                | ** ** | **2010**                                           | ** ** | **2009** | ** ** |
| TruGreen LawnCare reorganization  and restructuring(1) |       | $                                                  | 3,023      |   | $ | — |   |
| Information technology outsourcing(2)                  |       | —                                             |       | 5,274 |   |
| Terminix branch optimization(3)                        |       | 46                                                 |       | 3,219 |   |
| Merger related charges(4)                              |       | 131                                                |       | 294 |   |
| Other                                                  |       | 724                                                |       | (10 | ) |
| Total restructuring and Merger  related charges        |       | $                                                  | 3,924      |   | $ | 8,777 |   |

 

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(1)           Represents restructuring charges relatedto a reorganization of field leadership and a restructuring of branchoperations. For the three months ended March 31, 2010, these costs includedconsulting fees of $1.9 million and severance, lease termination and othercosts of $1.1 million.

 

(2)           On December 11, 2008, the Companyentered into an agreement with International Business Machines Corporation (“IBM”)pursuant to which IBM will provide information technology operations andapplications development services to the Company. These services were phased induring the first half of 2009. For the three months ended March 31, 2009,these costs included transition fees paid to IBM of $3.8 million, employeeretention and severance costs of $0.9 million and consulting and other costs of$0.6 million.

 

(3)           Represents restructuring charges relatedto a branch optimization project. For the three months ended March 31,2010, these costs included adjustments to lease termination reserves. For thethree months ended March 31, 2009, these costs included lease terminationcosts of $2.9 million and severance costs of $0.3 million.

 

(4)           Includes legalfees, legal settlements and other costs associated with the Merger.

 

Thepretax charges discussed above are reported in the “Restructuring and Mergerrelated charges” line in the condensed consolidated statement of operations.

 

A reconciliation of thebeginning and ending balances of accrued restructuring charges is presented asfollows:

 
| **(In thousands)**                 | ** ** | **Accrued  Restructuring********and Merger Related********Charges** | ** ** |
|------------------------------------|------------|---------------------------------------------------------------------|------------|
| Balance at  December 31, 2009 |       | $                                                                   | 12,083     |   |
| Costs incurred                     |       | 3,924                                                               |       |
| Costs paid or otherwise  settled   |       | (8,791                                                              | )          |
| Balance at March 31,  2010    |       | $                                                                   | 7,216      |   |

 

**Note 4. Commitments and Contingencies**

 

Aportion 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. Thefair value of the assets under all of the fleet and equipment leases isexpected to substantially mitigate the Company’s guarantee obligations underthe agreements. At March 31, 2010, the Company’s residual value guaranteesrelated to the leased assets totaled $71.4 million for which the Company hasrecorded a liability for the estimated fair value of these guarantees ofapproximately $1.5 million in the condensed consolidated statement of financialposition.

 

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TheCompany maintains lease facilities with banks totaling $65.2 million,which provide for the financing of branch properties to be leased by theCompany. At March 31, 2010, approximately $65.2 million was fundedunder these facilities, including $12.5 million of leases that are accountedfor as capital leases and are included on the condensed consolidated statementof financial position as assets with related debt. The balance of the fundedamount is accounted for as operating leases. In connection with the closing ofthe Merger, the Company amended these leases effective July 24, 2007.Among the modifications, the Company extended the lease terms through July 24,2010 and made a $22.0 million investment in the lease facilities. This $22.0million investment is included in other assets in the condensed consolidatedstatement of financial position. The operating lease and capital leaseclassifications of these leases did not change as a result of themodifications. No later than 120 days prior to the end of the lease term, theCompany was required to exercise one of the following three options related tothe leased properties: (1) negotiate an extension to the current leasingarrangement; (2) return the properties to the lessor; or (3) purchasethe properties for $65.2 million, the total amount funded under the leasefacilities. If the properties were returned to the lessor, the lessor wouldsell the properties and the Company would be obligated to pay the lessor forany shortfall between the sales proceeds and the amount funded under the leasefacilities up to 73 percent of fair market value of the properties at thecommencement of the lease pursuant to a residual value guarantee. In March 2010,the Company elected the third option noted above and will purchase theproperties for $65.2 million on or before July 24, 2010. The Company’s $22.0million investment in the lease facilities will be returned to the Company uponpurchase, resulting in a net cash payment of $43.2 million.

 

In thethird quarter of 2009, the Company determined that it was probable that thefair value of the real properties under operating leases would be below thetotal amount funded under the lease facilities at the end of the lease term.The Company’s current estimate of this shortfall is $15.8 million, which willbe expensed over the remainder of the lease term. The Company recorded chargesof $5.5 million in 2009 and $5.1 million in the first quarter of 2010 relatedto this shortfall. The remaining $5.2 million will be recorded over theremainder of the lease term, which expires July 24, 2010.

 

TheCompany carries insurance policies on insurable risks at levels that itbelieves to be appropriate, including workers’ compensation, auto and generalliability risks. The Company purchases insurance policies from third partyinsurance carriers, which typically incorporate significant deductibles or self-insuredretentions. The Company is responsible for all claims that fall below theretention limits. As of March 31, 2010 and December 31, 2009, theCompany had accrued self-insured claims of $134.1 million and $131.3 million,respectively. During the three months ended March 31, 2010 and 2009, theCompany recorded provisions for uninsured claims totaling $9.9 million and $9.2million, respectively, and the Company paid claims totaling $7.1 million and$12.2 million, respectively. In determining the Company’s accrual forself-insured claims, the Company uses historical claims experience to establishboth the current year accrual and the underlying provision for future losses.This actuarially determined provision and related accrual includes knownclaims, as well as incurred but not reported claims. The Company adjusts itsestimate of accrued self-insured claims when required to reflect changes basedon factors such as changes in health care costs, accident frequency and claimseverity.

 

Accrualsfor home service contract claims in the American Home Shield business are madebased on the Company’s claims experience and actuarial projections. Termitedamage claim accruals are recorded based on both the historical rates of claimsincurred within a contract year and the cost per claim. Current activity coulddiffer causing a change in estimates. The Company has certain liabilities withrespect to existing or potential claims, lawsuits and other proceedings. TheCompany accrues for these liabilities when it is probable that future costswill be incurred and such costs can be reasonably estimated. Any resultingadjustments, which could be material, are recorded in the period theadjustments are identified.

 

Aspart of the American Residential Services and American Mechanical Services saleagreements in 2006, the Company continues to be obligated to third parties withrespect to operating leases for which the Company has been released as beingthe primary obligor, as well as certain real estate leased and operated by thebuyers. The Company’s obligations under these agreements may be limited interms of time and or amount, and in some cases, the Company may have recourseagainst the buyers for potential future payments made by the Company. At thepresent time, the Company does not believe it is probable that the buyers willdefault on their obligations subject to guarantee. The fair value of theCompany’s obligations related to these guarantees is not significant and noliability has been recorded.

 

In theordinary course of conducting business activities, the Company and itssubsidiaries become involved in judicial, administrative and regulatoryproceedings involving both private parties and governmental authorities. Theseproceedings include, on an individual, collective and class action basis,regulatory, insured and uninsured employment, general, and commercial liabilityactions and environmental proceedings. Additionally, the Company has enteredinto settlement agreements in certain cases, including putative class actions,which are subject to court approval. If one or more of these settlements arenot finally approved, the Company could have additional or different exposure. Atthis time, the Company does not expect any of these proceedings to have amaterial effect on its financial position, results of operations or cash flows;however, the Company can give no assurance that the results of any suchproceedings may not be material to its financial position, results ofoperations and cash flows for any period in which costs, if any, arerecognized.

 

**Note 5.Goodwill and Intangible Assets**

 

In accordance with applicable accounting standards,goodwill and intangible assets that are not amortized are subject to assessmentfor impairment by applying a fair-value based test on an annual basis or morefrequently if circumstances indicate a 

 

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potentialimpairment. The Company’s annual assessment date is October 1. There wasno impairment recorded in the three months ended March 31, 2010.

 

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

 
| **(In  thousands)**           | ** ** | **TruGreen  LawnCare** | ** ** | **TruGreen  LandCare** | ** ** | **Terminix** | ** ** | **American  Home  Shield** | ** ** | **ServiceMaster  Clean** | ** ** | **Other  Operations &  Headquarters** | ** ** | **Total** | ** ** |
|-------------------------------|------------|------------------------|------------|------------------------|------------|--------------|------------|----------------------------|------------|--------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Balance at Dec. 31, 2009 |       | $                      | 1,178,436  |                   | $          | 43,901       |       | $                          | 1,361,698  |                     | $          | 348,010                                        |       | $         | 135,713    |   | $ | 51,996 |   | $ | 3,119,754 |   |
| Acquisitions                  |       | 1,124                  |       | —                 |       | 6,280        |       | —                     |       | —                   |       | —                                         |       | 7,404     |       |
| Other(1)                      |       | (151                   | )          | (456                   | )          | (163         | )          | (62                        | )          | 156                      |       | (38                                            | )          | (714      | )          |
| Balance at Mar. 31, 2010 |       | $                      | 1,179,409  |                   | $          | 43,445       |       | $                          | 1,367,815  |                     | $          | 347,948                                        |       | $         | 135,869    |   | $ | 51,958 |   | $ | 3,126,444 |   |

 

----

(1)           Reflects the impact of the amortizationof tax deductible goodwill and foreign exchange rate changes.

 

The table below summarizes the other intangible assetbalances for continuing operations:

 
| ** **             | ** ** | **As of********March 31, 2010** | ** ** | **As of********December 31, 2009** | ** ** |
|------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| **(In thousands)**     | ** ** | **Gross**                            | ** ** | **Accumulated  Amortization**           | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Trade names(1)         |       | $                                    | 2,380,100  |                                    | $          | — |   | $ | 2,380,100 |   | $ | 2,380,100 |   | $ | — |   | $ | 2,380,100 |   |
| Customer relationships |       | 672,231                              |       | (388,807                                | )          | 283,424 |   | 669,581 |   | (352,605 | ) | 316,976 |   |
| Franchise agreements   |       | 88,000                               |       | (28,632                                 | )          | 59,368 |   | 88,000 |   | (26,418 | ) | 61,582 |   |
| Other                  |       | 49,630                               |       | (23,077                                 | )          | 26,553 |   | 49,630 |   | (21,051 | ) | 28,579 |   |
| Total                  |       | $                                    | 3,189,961  |                                    | $          | (440,516 | ) | $ | 2,749,445 |   | $ | 3,187,311 |   | $ | (400,074 | ) | $ | 2,787,237 |   |

 

----

(1)           Not subject to amortization.

 

**Note 6.Stock-Based Compensation**

 

Forthe three months ended March 31, 2010 and 2009, the Company recognizedstock-based compensation expense of $2.2 million ($1.3 million, net of tax) and$1.9 million ($1.1 million, net of tax), respectively. As of March 31,2010, there was $17.0 million of total unrecognized compensation cost relatedto non-vested stock options granted by Holdings under the ServiceMaster GlobalHoldings, Inc. Stock Incentive Plan. These remaining costs are expected tobe recognized over a weighted-average period of 2.1 years.

 

**Note 7. Supplemental Cash Flow Information**

 

Supplemental information relating to the condensedconsolidated statement of cash flows for the three months ended March 31,2010 and 2009 is presented in the following table:

 
| ** **                                                 | ** ** | **Three  months ended********March 31,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------|------------|
| **(In thousands)**                                    | ** ** | **2010**                                           | ** ** | **2009** | ** ** |
| Cash paid for or (received from): |       |                                               |       |   |   |
| Interest expense                                           |       | $                                                  | 103,005    |   | $ | 127,710 |   |
| Interest and dividend income                               |       | (1,327                                             | )          | (2,368 | ) |
| Income taxes, net of refunds                               |       | 3,856                                              |       | (864 | ) |
|                                                            |            |                                                    |            |  |  |  |  |

 

**Note 8.Comprehensive Income**

 

Totalcomprehensive (loss) income was ($31.8) million and $0.1 million for the threemonths ended March 31, 2010 and 2009, respectively. Total comprehensive (loss) income primarily includes netincome (loss), unrealized gain (loss) on marketable securities, unrealized gain(loss) on derivative instruments and the effect of foreign currency translation.

 

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**Note 9. Receivable Sales**

 

The Company has entered into an accounts receivablesecuritization arrangement under which TruGreen LawnCare and Terminix may sellcertain eligible trade accounts receivable to ServiceMaster FundingCompany LLC (“Funding”), the Company’s wholly owned, bankruptcy-remotesubsidiary, which is consolidated for financial reporting purposes. Funding, inturn, may transfer, on a revolving basis, an undivided percentage ownershipinterest of up to $50.0 million in the pool of accounts receivable to oneor both of the unrelated purchasers who are parties to the accounts receivablesecuritization arrangement (“Purchasers”). The amount of the eligiblereceivables varies during the year based on seasonality of the businesses andcould, at times, limit the amount available to the Company from the sale ofthese interests.

 

During the three monthsended March 31, 2010, there were no transfers of interests in the pool oftrade accounts receivables to Purchasers under this arrangement. As of March 31,2010 and December 31, 2009, the Company had $10.0 million outstandingunder the arrangement and, as of March 31, 2010, had approximately $31.8million of eligible receivables and $21.8 million of remaining capacityavailable under the trade accounts receivable securitization arrangement.

 

The accounts receivablesecuritization arrangement is a 364-day facility that is renewable annually atthe option of Funding, with a final termination date of July 17, 2012.Only one of the Purchasers is required to purchase interests under thearrangement. If this Purchaser were to exercise its right to terminate itsparticipation in the arrangement, which it may do in the third quarter of eachyear, the amount of cash available to the Company under this agreement may bereduced or eliminated. As part of the annual renewal of the facility, whichlast occurred on July 21, 2009, this Purchaser agreed to continue itsparticipation in the arrangement at least through July 20, 2010.

 

The Company has recordedits obligation to repay the third party for its interest in the pool ofreceivables as long-term debt in these condensed consolidated financialstatements. The interest rates applicable to the Company’s obligation are basedon a fluctuating rate of interest measured based on the third party Purchaser’spooled commercial paper rate (0.23% at March 31, 2010). In addition, theCompany pays usage fees on its obligations and commitment fees on undrawnamounts committed by the Purchasers. All obligations under the accountsreceivable securitization arrangement must be repaid by July 17, 2012, thefinal termination date of the arrangement.

 

**Note 10. Cash and MarketableSecurities**

 

Cash, money market fundsand certificates of deposits, with maturities of three months or less whenpurchased, are included in the condensed consolidated statement of financialposition caption “Cash and cash equivalents”. As of March 31, 2010 and December 31,2009, the Company’s investments consist primarily of domestic publicly tradeddebt and certificates of deposit totaling $96.6 million and$93.9 million, respectively, and common equity securities of$40.0 million and $38.3 million, respectively.

 

The aggregate marketvalue of the Company’s short-term and long-term investments in debt and equitysecurities was $136.6 million and $132.2 million, and the aggregatecost basis was $129.7 million and $126.7 million at March 31,2010 and December 31, 2009, respectively.

 

Gains and losses on salesof investments, as determined on a specific identification basis, are includedin investment income in the period they are realized. The Company periodicallyreviews its portfolio of investments to determine whether there has been another than temporary decline in the value of the investments from factors suchas deterioration in the financial condition of the issuer or the market(s) inwhich the issuer competes. The Company recorded gross realized gains resultingfrom sales of available-for-sale securities of $0.5 million ($0.3 million, netof tax) and $0.6 million ($0.4 million, net of tax) for the three months ended March 31,2010 and 2009, respectively. The Company recorded gross realized lossesresulting from sales of available-for-sale securities of $1.2 million ($0.8million, net of tax) for the three months ended March 31, 2009. TheCompany recorded impairment charges of $5.4 million ($3.4 million, net of tax)for the three months ended March 31, 2009 due to other than temporarydeclines in the value of certain investments. The Company had no such realizedlosses or impairments for the three months ended March 31, 2010.Unrealized gains in the investment portfolio were $8.8 million and$7.7 million as of March 31, 2010 and December 31, 2009,respectively. Unrealized losses were $1.9 million and $2.2 million asof March 31, 2010 and December 31, 2009, respectively. The portion ofunrealized losses which had been in a loss position for more than one year at March 31,2010 and December 31, 2009 was approximately $0.6 million and $0.7million, respectively. The aggregate fair value of the investments withunrealized losses totaled $19.2 million and $26.8 million at March 31,2010 and December 31, 2009, respectively.

 

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**Note 11. Long-Term Debt**

 

Long-term debt at March 31,2010 and December 31, 2009 is summarized in the following table:

 
| **(In thousands)**                             | ** ** | **As of********March 31,********2010** | ** ** | **As of********December 31,  2009** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|------------------------------------------|------------|
| Senior secured term loan facility maturing in 2014  |       | $                                           | 2,577,125  |                                     | $          | 2,583,750 |   |
| 10.75% /11.50% senior toggle notes maturing in 2015 |       | 1,061,000                                   |       | 1,061,000                                |       |
| Revolving credit facility maturing in 2013          |       | —                                      |       | —                                   |       |
| 7.10% notes maturing in 2018(1)                     |       | 64,105                                      |       | 63,624                                   |       |
| 7.45% notes maturing in 2027(1)                     |       | 148,553                                     |       | 147,885                                  |       |
| 7.25% notes maturing in 2038(1)                     |       | 60,026                                      |       | 59,824                                   |       |
| Other                                               |       | 65,969                                      |       | 58,861                                   |       |
| Less current portion                                |       | (63,098                                     | )          | (64,395                                  | )          |
| Total long-term debt                                |       | $                                           | 3,913,680  |                                     | $          | 3,910,549 |   |

 

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| (1) | The increase in  the balance from December 31, 2009 to March 31, 2010 reflects the  amortization of fair value adjustments related to purchase accounting, which  effectively increases the stated coupon interest rates. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The Company had $35.2million and $70.2 million of accrued interest at March 31, 2010 and December 31,2009, respectively. Accrued interest is included in Accrued Liabilities — Otheron the condensed consolidated statements of financial position.

 

**Note 12. Discontinued Operations**

 

Reported “loss fromdiscontinued operations, net of income taxes” for all periods presentedincludes the operating results of the sold businesses noted in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2009. Theoperating results and financial position of discontinued operations are asfollows:

 
| ** **                                              | ** ** | **Three months ended********March 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Operating Results:                                      |       |                                         |       |   |   |
| Operating revenue                                       |       | $                                            | —     |   | $ | — |   |
| Operating loss                                          |       | (618                                         | )          | (264 | ) |
| Interest expense                                        |       | —                                       |       | — |   |
| Loss from discontinued operations, before income  taxes |       | (618                                         | )          | (264 | ) |
| Benefit from income taxes                               |       | (241                                         | )          | (101 | ) |
| Loss from discontinued operations, net of income  taxes |       | $                                            | (377       | ) | $ | (163 | ) |

 
| **(In thousands)**    | ** ** | **As of********March 31, 2010** | ** ** | **As of********December 31,  2009** | ** ** |
|-----------------------|------------|--------------------------------------|------------|------------------------------------------|------------|
| Financial Position:   |       |                                 |       |                                     |       |
| Current assets        |       | $                                    | 22         |                                     | $          | 42 |   |
| Total assets          |       | $                                    | 22         |                                     | $          | 42 |   |
| Current liabilities   |       | $                                    | 2,853      |                                     | $          | 2,806 |   |
| Long-term liabilities |       | 4,101                                |       | 4,145                                    |       |
| Total liabilities     |       | $                                    | 6,954      |                                     | $          | 6,951 |   |

 

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Thetable below summarizes the activity for the three months ended March 31,2010 for the remaining liabilities from operations that were disposed of inyears prior to 2010. The remaining obligations primarily relate to long-termself-insurance claims. The Company believes that the remaining reservescontinue to be adequate and reasonable.

 
| **(In thousands)**                                | ** ** | **As of********December 31,********2009** | ** ** | **Cash Payments  or Other** | ** ** | **(Income)/  Expense** | ** ** | **As of  March 31, 2010** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| Remaining liabilities of discontinued operations: |       |                                           |       |                                  |       |                   |       |                           |       |
| ARS/AMS                                           |       | $                                              | 2,921      |                                  | $          | (633                   | )          | $                              | 608        |   | $ | 2,896 |   |
| LandCare Construction                             |       | 722                                            |       | (24                                   | )          | (8                     | )          | 690                            |       |
| LandCare utility line clearing business           |       | 911                                            |       | (43                                   | )          | —                 |       | 868                            |       |
| Certified Systems, Inc. and other            |       | 2,149                                          |       | 108                                   |       | —                 |       | 2,257                          |       |
| InStar                                            |       | 248                                            |       | (23                                   | )          | 18                     |       | 243                            |       |
| Total liabilities of discontinued operations      |       | $                                              | 6,951      |                                  | $          | (615                   | )          | $                              | 618        |   | $ | 6,954 |   |

 

**Note 13.Income Taxes**

 

At March 31,2010 and December 31, 2009, the Company had $15.4 million of tax benefitsprimarily reflected in state tax returns that had not been recognized forfinancial reporting purposes (“unrecognized tax benefits”). The Companycurrently estimates that, as a result of pending tax settlements and expirationof statutes of limitations, the amount of unrecognized tax benefits could bereduced by approximately $6.1 million during the next 12 months.

 

**Note 14. Business Segment Reporting**

 

The business of the Company is conducted through sixreportable segments: TruGreen LawnCare, TruGreen LandCare, Terminix,American Home Shield, ServiceMaster Clean and Other Operations andHeadquarters.

 

In accordance with accounting standards forsegments, the Company’s reportable segments are strategic business units thatoffer different services. The TruGreen LawnCare segment provides residentialand commercial lawn care services. The TruGreen LandCare segment provideslandscaping services primarily to commercial customers. The Terminix segmentprovides termite and pest control services to residential and commercialcustomers. The American Home Shield segment provides home service contracts toconsumers that cover heating, ventilation, air conditioning, plumbing and otherhome systems and appliances. The ServiceMaster Clean segment providesresidential and commercial disaster restoration and cleaning services primarilyunder the ServiceMaster and ServiceMaster Clean brand names, on-site furniturerepair and restoration services primarily under the Furniture Medic brand nameand home inspection services primarily under the AmeriSpec brand name. TheOther Operations and Headquarters segment includes the franchised andCompany-owned operations of Merry Maids, which provides house cleaningservices. The Other Operations and Headquarters segment also includes TheServiceMaster Acceptance Company Limited Partnership (“SMAC”), our financing subsidiary exclusivelydedicated to providing financing to our franchisees and retail customers of ouroperating units, and the Company’s headquarters operations, whichprovide various technology, marketing, finance, legal and other supportservices to the business units.

 

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Segment information for continuing operations ispresented below.

 
| ** **                        | ** ** | **Three months ended** | ** ** |
|-----------------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **March 31,**     | ** ** |
| **(In thousands)**           | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Operating Revenue:                |       |                   |       |   |   |
| TruGreen LawnCare                 |       | $                      | 124,082    |   | $ | 134,666 |   |
| TruGreen LandCare                 |       | 58,800                 |       | 66,885 |   |
| Terminix                          |       | 270,917                |       | 263,161 |   |
| American Home Shield              |       | 133,205                |       | 130,868 |   |
| ServiceMaster Clean               |       | 32,262                 |       | 30,156 |   |
| Other Operations and Headquarters |       | 20,142                 |       | 20,191 |   |
| Total Operating Revenue           |       | $                      | 639,408    |   | $ | 645,927 |   |
| Operating (Loss) Income:(1),(2)   |       |                   |       |   |   |
| TruGreen LawnCare                 |       | $                      | (40,566    | ) | $ | (19,387 | ) |
| TruGreen LandCare                 |       | 1,284                  |       | 5,696 |   |
| Terminix                          |       | 49,901                 |       | 46,491 |   |
| American Home Shield              |       | 4,920                  |       | 5,454 |   |
| ServiceMaster Clean               |       | 12,118                 |       | 11,504 |   |
| Other Operations and Headquarters |       | (19,010                | )          | (21,080 | ) |
| Total Operating Income            |       | $                      | 8,647      |   | $ | 28,678 |   |

 

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(1)          Presented below is areconciliation of segment operating income to loss from continuing operationsbefore income taxes.

 
| ** **                                                | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **March 31,**     | ** ** |
| **(In thousands)**                                   | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Total Segment Operating Income                            |       | $                      | 8,647      |   | $ | 28,678 |   |
| Non-operating expense (income):                           |       |                   |       |   |   |
| Interest expense                                          |       | 72,681                 |       | 76,666 |   |
| Interest and net investment (income) loss                 |       | (2,502                 | )          | 4,761 |   |
| Gain on extinguishment of debt                            |       | —                 |       | (46,106 | ) |
| Other expense                                             |       | 171                    |       | 200 |   |
| Loss from Continuing Operations before Income  Taxes |       | $                      | (61,703    | ) | $ | (6,843 | ) |

 

(2)            Includes (i) restructuringcharges related to a reorganization of field leadership and a restructuring ofbranch operations at TruGreen LawnCare, a branch optimization project atTerminix and information technology outsourcing at Other Operations and Headquartersand (ii) Merger related charges. Presented below is a summary ofrestructuring and Merger related charges by segment.

 
| ** **                                     | ** ** | **Three months ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **March 31,**     | ** ** |
| **(In thousands)**                        | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Restructuring and Merger related charges       |       |                   |       |   |   |
| TruGreen LawnCare                              |       | $                      | 3,023      |   | $ | — |   |
| TruGreen LandCare                              |       | 571                    |       | (30 | ) |
| Terminix                                       |       | 46                     |       | 3,219 |   |
| American Home Shield                           |       | (127                   | )          | 39 |   |
| ServiceMaster Clean                            |       | —                 |       | — |   |
| Other Operations and Headquarters              |       | 411                    |       | 5,549 |   |
| Total restructuring and Merger related charges |       | $                      | 3,924      |   | $ | 8,777 |   |

 

**Note 15.Related Party Transactions**

 

Inconnection with the Merger and the related transactions, the Company enteredinto a consulting agreement with CD&R, which was subsequently amended,under which CD&R provided the Company with on-going consulting and managementadvisory services in exchange for an annual management fee of $2.0 million,which was payable quarterly. On July 30, 2009, the annual management feepayable under the consulting agreement with CD&R was increased from $2.0million to $6.25 million in order to align our fee structure with currentmarket rates. Under this agreement, the Company recorded a management fee of$1.6 million for 

 

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the three months ended March 31,2010 and $0.5 million for the three months ended March 31, 2009. The fullyear management fee was applied in 2009, and the incremental fees relating tothe first three quarters of 2009 were paid to CD&R in the third quarter of2009. The amended consulting agreement alsoprovides that CD&R may receive additional fees in connection with certainsubsequent financing and acquisition or disposition transactions.

 

In addition, in August 2009, the Companyentered into consulting agreements with Citigroup, BAS and JPMorgan, each ofwhich is an Equity Sponsor or an affiliate of an Equity Sponsor. Under theconsulting agreements, Citigroup, BAS and JPMorgan each will provide theCompany with on-going consulting and management advisory services until June 30,2016 or the earlier termination of the existing consulting agreement betweenthe Company and CD&R. The Company will pay annual management fees of $0.5million, $0.5 million and $0.25 million to Citigroup, BAS and JPMorgan,respectively. TheCompany recorded consulting fees related to these agreements of $0.3 millionfor the three months ended March 31,2010. The full year management fee was applied in 2009, and theincremental fees relating to the first three quarters of 2009 were paid to Citigroup, BASand JPMorgan in thethird quarter of 2009.

 

Between the Merger and March 31,2010, Holdings has completed open market purchases totaling $65.0 millionin face value of the Permanent Notes for a cost of $21.4 million. The debtacquired by Holdings has not been retired, and the Company has continued to payinterest in accordance with the terms of the debt. The Company recordedinterest expense of $1.7 million for the three months ended March 31, 2010and 2009 related to the Permanent Notes held by Holdings. The Company made cashpayments to Holdings of $3.5 million and $3.0 million during the three monthsended March 31, 2010 and 2009, respectively. Interest accrued by theCompany and payable to Holdings as of March 31, 2010 and December 31,2009 amounted to $1.5 million and $3.2 million, respectively.

 

**Note 16. Newly Issued Accounting Statements andPositions**

 

In September 2009, theFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update(“ASU”) 2009-13, “Multiple-Deliverable Revenue Arrangements”, which amends themultiple-element arrangement guidance under ASC 605, “Revenue Recognition”.This standard amends the criteria for separating consideration received forproducts or services in multiple-deliverable arrangements. This standardestablishes a selling price hierarchy for determining the selling price of adeliverable, eliminates the residual method of allocation, and requires thattotal arrangement consideration be allocated at the inception of thearrangement to all deliverables using the relative selling price method. Inaddition, this standard significantly expands required disclosures related to avendor’s multiple-deliverable revenue arrangements. This standard is effectiveprospectively for revenue arrangements entered into or materially modified infiscal years beginning on or after June 15, 2010 (calendar year 2011). TheCompany is currently evaluating the effect of this standard on its condensedconsolidated financial statements.

 

In December 2009, theFASB issued ASU 2009-17, “Accounting by Enterprises Involved with VariableInterest Entities” (“ASU 2009-17”). ASU 2009-17 formally incorporates into theFASB Codification amendments to FASB Interpretation No. 46(R) made byStatement of Financial Accounting Standards (“SFAS “) 167 to require that acomprehensive qualitative analysis be performed to determine whether a holderof variable interests in a variable interest entity also has a controllingfinancial interest in that entity. In addition, the amendments require that thesame type of analysis be applied to entities that were previously designated asqualifying special-purpose entities. This standard applies prospectively forfiscal years beginning on or after November 15, 2009. The Company appliedthe provisions of this standard to these condensed consolidated financialstatements and there was no material effect from that application.

 

In January 2010, theFASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements”,which amends ASC 820 to add new requirements for disclosures about transfersinto and out of Level 1 and 2 measurements and separate disclosures aboutpurchases, sales, issuances and settlements relating to Level 3 measurements.The ASU also clarifies existing fair value disclosure requirements about thelevel of disaggregation and about inputs and valuation techniques used tomeasure fair value. Further, the ASU amends guidance on employers’ disclosuresabout postretirement benefit plan assets under ASC 715 to require thatdisclosures be provided by classes of assets instead of by major categories ofassets. This standard is effective for the first reporting period (includinginterim periods) beginning after December 15, 2009, except for the requirementto provide the Level 3 activity of purchases, sales, issuances, and settlementson a gross basis, which will be effective for fiscal years beginning after December 15,2010, and for interim periods within those fiscal years. The Company applied therequired provisions of this standard to these condensed consolidated financialstatements (see Note 17).

 

**Note 17.Fair Value of Financial Instruments**

 

The period end carrying amounts of receivables,accounts payable and accrued liabilities approximate fair value because of theshort maturity of these instruments. The period end carrying amounts oflong-term notes receivables approximate fair value as the effective interestrates for these instruments are comparable to market rates at period end. The periodend carrying amounts of current 

 

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and long-term marketable securities also approximate fair value, withunrealized gains and losses reported net-of-tax as a component of accumulatedcomprehensive income (loss), or, for certain unrealized losses, reported ininterest and net investment income in the condensed consolidated statement ofoperations if the decline in value is other than temporary. The carrying amountof total debt was $3,976.8 million and $3,974.9 million and the estimatedfair value was $3,978.9 million and $3,716.5 million at March 31,2010 and December 31, 2009, respectively. The fair values of the Company’sfinancial instruments reflect the amounts that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date (exit price). The fair value estimatespresented in this report are based on information available to the Company asof March 31, 2010 and December 31, 2009.

 

 The Company hasestimated the fair value of its financial instruments measured at fair value ona recurring basis using the market and income approaches. For investments inmarketable securities, deferred compensation trust assets and derivativecontracts, which are carried at their fair values, the Company’s fair valueestimates incorporate quoted market prices, other observable inputs (forexample, forward interest rates) and unobservable inputs (for example, forwardcommodity prices) at the balance sheet date.

 

Interest rate swap contracts are valued usingforward interest rate curves obtained from third party market dataproviders.  The fair value of eachcontract is the sum of the expected future settlements between the contractcounterparties, discounted to present value. The expected future settlements are determined by comparing the contractinterest rate to the expected forward interest rate as of each settlement dateand applying the difference between the two rates to the notional amount ofdebt in the interest rate swap contracts.

 

Fuel swap contracts are valued using the forwardfuel price curves obtained from third party market data providers.  The fair value of each contract is the sum ofthe expected future settlements between the contract counterparties, discountedto present value.  The expected futuresettlements are determined by comparing the contract fuel price to the expectedforward fuel price as of each settlement date and applying the differencebetween the contract and expected prices to the notional gallons in the fuelswap contracts.

 

The carrying amount and estimated fair value of theCompany’s financial instruments that are recorded at fair value for the periodspresented are as follows:

 
| ** **                              | ** ** | ** **                                                 | ** ** | **As of  March 31, 2010** | ** ** | **As of  December 31, 2009**                           | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                              | ** ** | ** **                                                 | ** ** | ** **                     | ** ** | **Estimated Fair Value Measurements**        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(In thousands)**                 | ** ** | **Balance Sheet Locations**                                | ** ** | **Carrying  Value**            | ** ** | **Quoted  Prices In  Active  Markets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Carrying  Value** | ** ** | **Estimated  Fair Value** | ** ** |
| Financial Assets:                       |       |                                                       |       |                           |       |                                                        |       |   |   |   |   |   |   |   |   |
| Deferred compensation trust assets |       | Long-term  marketable securities                           |       | $                              | 10,750     |                                                        | $          | 10,750 |   | $ | — |   | $ | — |   | $ | 9,985 |   | $ | 9,985 |   |
| Investments in marketable securities    |       | Marketable  securities and Long-term marketable securities |       | 125,869                        |       | 47,245                                                      |       | 78,624 |   | — |   | 122,201 |   | 122,201 |   |
| Fuel swap contracts:                    |       |                                                       |       |                           |       |                                                        |       |   |   |   |   |   |   |   |   |
| Current                                 |       | Prepaid expenses  and other assets                         |       | 8,821                          |       | —                                                      |       | — |   | 8,821 |   | 7,840 |   | 7,840 |   |
| Noncurrent                              |       | Other assets                                               |       | 203                            |       | —                                                      |       | — |   | 203 |   | — |   | — |   |
| Total financial assets                  |       |                                                       |       | $                              | 145,643    |                                                        | $          | 57,995 |   | $ | 78,624 |   | $ | 9,024 |   | $ | 140,026 |   | $ | 140,026 |   |
|                                    |       |                                                       |       |                           |       |                                                        |       |   |   |   |   |   |   |   |   |
| Financial Liabilities:                  |       |                                                       |       |                           |       |                                                        |       |   |   |   |   |   |   |   |   |
| Fuel swap contracts:                    |       |                                                       |       |                           |       |                                                        |       |   |   |   |   |   |   |   |   |
| Current                                 |       | Other accrued  liabilities                                 |       | $                              | 530        |                                                        | $          | — |   | $ | — |   | $ | 530 |   | $ | 924 |   | $ | 924 |   |
| Interest rate swap contracts            |       | Other long-term  obligations                               |       | 56,944                         |       | —                                                      |       | 56,944 |   | — |   | 54,120 |   | 54,120 |   |
| Total financial liabilities             |       |                                                       |       | $                              | 57,474     |                                                        | $          | — |   | $ | 56,944 |   | $ | 530 |   | $ | 55,044 |   | $ | 55,044 |   |

 

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

 
| **(In thousands)**                        | ** ** | **Fuel Swap Contract********Assets (Liabilities)** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|
| Balance at December 31, 2009              |       | $                                                  | 6,916      |   |
| Total gains (losses) (realized and unrealized) |       |                                               |       |
| Included in earnings(1)                        |       | 856                                                |       |
| Included in other comprehensive income         |       | 1,578                                              |       |
| Settlements, net                               |       | (856                                               | )          |
| Balance at March 31, 2010                 |       | $                                                  | 8,494      |   |

 
| **(In thousands)**                        | ** ** | **Fuel Swap Contract********Assets (Liabilities)** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|
| Balance at December 31, 2008              |       | $                                                  | (24,924    | ) |
| Total gains (losses) (realized and unrealized) |       |                                               |       |
| Included in earnings(1)                        |       | (6,577                                             | )          |
| Included in other comprehensive income         |       | 3,678                                              |       |
| Settlements, net                               |       | 6,577                                              |       |
| Balance at March 31, 2009                 |       | $                                                  | (21,246    | ) |

 

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(1)                                Gains (losses) included in earnings arereported in cost of services rendered and products sold.

 

The Companyuses derivative financial instruments to manage risks associated with changesin fuel prices and interest rates. The Company does not hold or issuederivative financial instruments for trading or speculative purposes. Indesignating its derivative financial instruments as hedging instruments underaccounting standards for derivative instruments, the Company formally documentsthe relationship between the hedging instrument and the hedged item, as well asthe risk management objective and strategy for the use of the hedginginstrument. This documentation includes linking the derivatives to forecastedtransactions. The Company assesses at the time a derivative contract is enteredinto, and at least quarterly thereafter, whether the derivative item is effectivein offsetting the projected changes in cash flows of the associated forecastedtransactions. All of the Company’s designated hedging instruments areclassified as cash flow hedges.

 

TheCompany has historically hedged a significant portion of its annual fuelconsumption of approximately 25 million gallons. The Company has also hedgedthe interest payments on a portion of its variable rate debt through the use ofinterest rate swap agreements. Substantially all of the Company’s fuel swapcontracts and interest rate swap contracts are classified as cash flow hedges,and, as such, the hedging instruments are recorded on the condensedconsolidated statement of financial position as either an asset or liability atfair value, with the effective portion of changes in the fair valueattributable to the hedged risks recorded in other comprehensive income. Anychange in the fair value of the hedging instrument resulting fromineffectiveness, as defined by accounting standards, is recognized in currentperiod earnings. Cash flows related to fuel and interest rate derivatives areclassified as operating activities in the condensed consolidated statement ofcash flows.

 

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The effect of derivativeinstruments on the condensed consolidated statement of operations and othercomprehensive income for the three months ended March 31, 2010 and 2009,respectively, is presented as follows:

 
| **(In  thousands)**                                                | ** ** | **Effective Portion of  Gain (Loss) Recognized in  Accumulated Other** | ** ** | **Effective Portion of Gain (Loss)  Reclassified from  Accumulated Other** | ** ** | ** **                                 | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Derivatives designated as  Cash Flow Hedge** | ** ** | **Comprehensive Income  (Loss)**                                                                     | ** ** | **Comprehensive Income  (Loss) into Income**                                              | ** ** | **Location of Gain (Loss)** | ** ** |
| **Relationships**                                                  | ** ** | **Three months ended March 31, 2010**                                            | ** ** | **included in Income**                                                                         | ** ** |
|                                                               |       |                                                                                                 |       |                                                                                                     |       |                                       |       |
| Fuel  swap contracts                                               |       | $                                                                                                    | 1,578      |                                                                                                     | $          | 856                                        |       | Cost of services  rendered and products sold |   |
| Interest  rate swap contracts                                      |       | $                                                                                                    | (2,824     | )                                                                                                        | $          | (13,660                                    | )          | Interest expense |   |

 
| **Derivatives designated as  Cash Flow Hedge** | ** ** | **Effective Portion of  Gain (Loss) Recognized in  Accumulated Other  Comprehensive Income  (Loss)** | ** ** | **Effective Portion of Gain (Loss)  Reclassified from********Accumulated  Other  Comprehensive Income********(Loss)  into Income** | ** ** | **Location of Gain (Loss)** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Relationships**                                                  | ** ** | **Three months ended March 31,  2009**                                                                         | ** ** | **included in Income**                                                                                                                                 | ** ** |
|                                                               |       |                                                                                                                               |       |                                                                                                                                                             |       |                                       |       |
| Fuel  swap contracts                                               |       | $                                                                                                                                  | 3,678      |                                                                                                                                                             | $          | (6,577                                     | )          | Cost of services  rendered and products sold |   |
| Interest  rate swap contracts                                      |       | $                                                                                                                                  | 3,622      |                                                                                                                                                             | $          | (11,044                                    | )          | Interest expense |   |

 

Ineffective portions ofderivative instruments designated in accordance with accounting standards ascash flow hedge relationships were insignificant during the three months ended March 31,2010. As of March 31, 2010, the Company had fuel swap contracts to payfixed prices for fuel with an aggregate notional amount of $48.8 million,maturing through 2011. Under the terms of its fuel swap contracts, theCompany is required to post collateral in certain circumstances, including inthe event that the fair value of the contracts exceeds a certain agreed uponliability level. As of March 31,2010, the Company had posted $2.5 million in letters of credit as collateralfor these contracts, none of which were issued under the Company’s RevolvingCredit Facility. Asof March 31, 2010, the Company had interest rate swap contracts to payfixed rates for interest on long-term debt with an aggregate notional amount of$1.43 billion, maturing through 2012.

 

Theeffective portion of the gain or loss on derivative instruments designated andqualifying as cash flow hedging instruments is recorded in other comprehensiveincome. These amounts are reclassified into earnings in the same period orperiods during which the hedged forecasted debt interest settlement or the fuelsettlement affects earnings. The amount expected to be reclassified intoearnings during the next 12 months includes unrealized gains and losses relatedto open fuel hedges and interest rate swaps. Specifically, as the underlyingforecasted transactions occur during the next 12 months, the hedging gains andlosses in accumulated other comprehensive income expected to be recognized inearnings is a loss of $21.3 million, netof tax, at March 31, 2010. The amounts that are ultimately reclassifiedinto earnings will be based on actual interest rates and fuel prices at thetime the positions are settled and may differ materially from the amount notedabove.

 

**Note 18.Condensed Consolidating Financial Statements of The ServiceMaster Company andSubsidiaries**

 

Thefollowing condensed consolidating financial statements of the Company and itssubsidiaries have been prepared pursuant to Rule 3-10 of Regulation S-X.These condensed consolidating financial statements have been prepared from theCompany’s financial information on the same basis of accounting as thecondensed consolidated financial statements. Goodwill and other intangibleassets have been allocated to all of the subsidiaries of the Company based onmanagement’s estimates.

 

Thepayment obligations of the Company under the Permanent Notes are jointly andseverally guaranteed on a senior unsecured basis by certain of the Company’sdomestic subsidiaries excluding certain subsidiaries subject to regulatoryrequirements in various states (“Guarantors”). Each of the Guarantors is whollyowned, 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”).

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Operations**

**Forthe Three Months Ended March 31, 2010 (Unaudited)**

**(Inthousands)**

 
| ** **                                                        | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                        | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating Revenue**                                             |       | $                 | —     |           | $          | 496,945        |       | $                | 159,088    |             | $          | (16,625 | ) | $ | 639,408 |   |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Operating Costs and Expenses:**                                 |       |              |       |           |       |           |       |             |       |             |       |
| Cost of services rendered and products sold                       |       | —            |       | 346,818        |       | 72,327         |       | (16,625          | )          | 402,520          |       |
| Selling and administrative expenses                               |       | 2,263             |       | 104,902        |       | 76,710         |       | —           |       | 183,875          |       |
| Amortization expense                                              |       | 55                |       | 31,423         |       | 8,964          |       | —           |       | 40,442           |       |
| Restructuring and Merger related charges                          |       | 131               |       | 3,640          |       | 153            |       | —           |       | 3,924            |       |
| Total operating costs and expenses                                |       | 2,449             |       | 486,783        |       | 158,154        |       | (16,625          | )          | 630,761          |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Operating (Loss) Income**                                       |       | (2,449            | )          | 10,162         |       | 934            |       | —           |       | 8,647            |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating Expense (Income):**                               |       |              |       |           |       |           |       |             |       |             |       |
| Interest expense (income)                                         |       | 49,580            |       | 26,215         |       | (3,114         | )          | —           |       | 72,681           |       |
| Interest and net investment loss (income)                         |       | 651               |       | 1,197          |       | (4,350         | )          | —           |       | (2,502           | )          |
| Other expense                                                     |       | —            |       | —         |       | 171            |       | —           |       | 171              |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing  Operations before Income Taxes** |       | (52,680           | )          | (17,250        | )          | 8,227          |       | —           |       | (61,703          | )          |
| (Benefit) provision for income taxes                              |       | (21,617           | )          | (19,939        | )          | 12,136         |       | —           |       | (29,420          | )          |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing  Operations**                     |       | (31,063           | )          | 2,689          |       | (3,909         | )          | —           |       | (32,283          | )          |
| Income (loss) from discontinued operations, net of  income taxes  |       | —            |       | 221            |       | (598           | )          | —           |       | (377             | )          |
| Equity in losses of subsidiaries (net of tax)                     |       | (1,597            | )          | (4,508         | )          | —         |       | 6,105            |       | —           |       |
| **Net Loss**                                                      |       | $                 | (32,660    | )              | $          | (1,598         | )          | $                | (4,507     | )                | $          | 6,105 |   | $ | (32,660 | ) |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Operations**

**Forthe Three Months Ended March 31, 2009 (Unaudited)**

**(Inthousands)**

** **
| ** **                                                        | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                        | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating Revenue**                                             |       | $                 | —     |           | $          | 506,936        |       | $                | 156,284    |             | $          | (17,293 | ) | $ | 645,927 |   |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Operating Costs and Expenses:**                                 |       |              |       |           |       |           |       |             |       |             |       |
| Cost of services rendered and products sold                       |       | —            |       | 342,774        |       | 68,919         |       | (17,293          | )          | 394,400          |       |
| Selling and administrative expenses                               |       | 998               |       | 99,157         |       | 73,608         |       | —           |       | 173,763          |       |
| Amortization expense                                              |       | 55                |       | 31,248         |       | 9,006          |       | —           |       | 40,309           |       |
| Restructuring and Merger related charges                          |       | 294               |       | 3,190          |       | 5,293          |       | —           |       | 8,777            |       |
| Total operating costs and expenses                                |       | 1,347             |       | 476,369        |       | 156,826        |       | (17,293          | )          | 617,249          |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Operating (Loss) Income**                                       |       | (1,347            | )          | 30,567         |       | (542           | )          | —           |       | 28,678           |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating Expense (Income):**                               |       |              |       |           |       |           |       |             |       |             |       |
| Interest expense (income)                                         |       | 76,859            |       | 3,201          |       | (3,394         | )          | —           |       | 76,666           |       |
| Interest and net investment loss                                  |       | 1,484             |       | 2,075          |       | 1,202          |       | —           |       | 4,761            |       |
| Gain on extinguishment of debt                                    |       | (46,106           | )          | —         |       | —         |       | —           |       | (46,106          | )          |
| Other expense                                                     |       | —            |       | —         |       | 200            |       | —           |       | 200              |       |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing  Operations before Income Taxes** |       | (33,584           | )          | 25,291         |       | 1,450          |       | —           |       | (6,843           | )          |
| (Benefit) provision for income taxes                              |       | (23,206           | )          | 15,009         |       | 642            |       | —           |       | (7,555           | )          |
|                                                              |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing  Operations**                     |       | (10,378           | )          | 10,282         |       | 808            |       | —           |       | 712              |       |
| Loss from discontinued operations, net of income  taxes           |       | —            |       | —         |       | (163           | )          | —           |       | (163             | )          |
| Equity in earnings of subsidiaries (net of tax)                   |       | 10,927            |       | 1,399          |       | —         |       | (12,326          | )          | —           |       |
| **Net Income**                                                    |       | $                 | 549        |           | $          | 11,681         |       | $                | 645        |             | $          | (12,326 | ) | $ | 549 |   |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Financial Position (Unaudited)**

**Asof March 31, 2010**

**(Inthousands)**

** **
| ** **                                                                   | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                   | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Assets**                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Current Assets:**                                                          |       |              |       |           |       |           |       |             |       |             |       |
| Cash and cash equivalents                                                    |       | $                 | 58,843     |           | $          | 17,764         |       | $                | 126,436    |             | $          | — |   | $ | 203,043 |   |
| Marketable securities                                                        |       | —            |       | —         |       | 19,566         |       | —           |       | 19,566           |       |
| Receivables                                                                  |       | 1,233             |       | 146,573        |       | 389,260        |       | (185,424         | )          | 351,642          |       |
| Inventories                                                                  |       | —            |       | 80,360         |       | 2,474          |       | —           |       | 82,834           |       |
| Prepaid expenses and other assets                                            |       | 23,686            |       | 54,955         |       | 20,008         |       | —           |       | 98,649           |       |
| Deferred customer acquisition costs                                          |       | —            |       | 37,982         |       | 24,106         |       | —           |       | 62,088           |       |
| Deferred taxes                                                               |       | —            |       | 24,445         |       | 4,253          |       | (2,377           | )          | 26,321           |       |
| Assets of discontinued operations                                            |       | —            |       | 8              |       | 14             |       | —           |       | 22               |       |
| Total Current Assets                                                         |       | 83,762            |       | 362,087        |       | 586,117        |       | (187,801         | )          | 844,165          |       |
| **Property and Equipment:**                                                  |       |              |       |           |       |           |       |             |       |             |       |
| At cost                                                                      |       | —            |       | 276,806        |       | 83,901         |       | —           |       | 360,707          |       |
| Less: accumulated depreciation                                               |       | —            |       | (105,617       | )          | (42,469        | )          | —           |       | (148,086         | )          |
| Net property and equipment                                                   |       | —            |       | 171,189        |       | 41,432         |       | —           |       | 212,621          |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Assets:**                                                            |       |              |       |           |       |           |       |             |       |             |       |
| Goodwill                                                                     |       | —            |       | 2,762,068      |       | 364,376        |       | —           |       | 3,126,444        |       |
| Intangible assets, primarily trade names, service  marks and trademarks, net |       | —            |       | 1,963,888      |       | 785,557        |       | —           |       | 2,749,445        |       |
| Notes receivable                                                             |       | 1,982,658         |       | 633            |       | 43,790         |       | (2,004,056       | )          | 23,025           |       |
| Long-term marketable securities                                              |       | 10,750            |       | —         |       | 106,303        |       | —           |       | 117,053          |       |
| Investments in and advances to subsidiaries                                  |       | 3,575,323         |       | 1,381,888      |       | —         |       | (4,957,211       | )          | —           |       |
| Other assets                                                                 |       | 111,021           |       | 3,929          |       | 2,292          |       | (87,288          | )          | 29,954           |       |
| Debt issuance costs                                                          |       | 63,157            |       | —         |       | —         |       | —           |       | 63,157           |       |
| Total Assets                                                                 |       | $                 | 5,826,671  |           | $          | 6,645,682      |       | $                | 1,929,867  |             | $          | (7,236,356 | ) | $ | 7,165,864 |   |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Liabilities and Shareholder’s  Equity**                               |       |              |       |           |       |           |       |             |       |             |       |
| **Current Liabilities:**                                                     |       |              |       |           |       |           |       |             |       |             |       |
| Accounts payable                                                             |       | $                 | 1,014      |           | $          | 57,831         |       | $                | 35,088     |             | $          | — |   | $ | 93,933 |   |
| Accrued liabilities:                                                         |       |              |       |           |       |           |       |             |       |             |       |
| Payroll and related expenses                                                 |       | 2,229             |       | 36,384         |       | 30,890         |       | —           |       | 69,503           |       |
| Self-insured claims and related expenses                                     |       | —            |       | 22,692         |       | 62,210         |       | —           |       | 84,902           |       |
| Other                                                                        |       | 35,097            |       | 53,753         |       | 46,586         |       | (2,377           | )          | 133,059          |       |
| Deferred revenue                                                             |       | —            |       | 201,190        |       | 315,490        |       | —           |       | 516,680          |       |
| Liabilities of discontinued operations                                       |       | —            |       | 243            |       | 2,610          |       | —           |       | 2,853            |       |
| Current portion of long-term debt                                            |       | 146,060           |       | 26,158         |       | 76,304         |       | (185,424         | )          | 63,098           |       |
| Total Current Liabilities                                                    |       | 184,400           |       | 398,251        |       | 569,178        |       | (187,801         | )          | 964,028          |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Long-Term Debt**                                                           |       | 3,905,697         |       | 1,997,917      |       | 14,122         |       | (2,004,056       | )          | 3,913,680        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Long-Term Liabilities:**                                             |       |              |       |           |       |           |       |             |       |             |       |
| Deferred taxes                                                               |       | —            |       | 731,051        |       | 300,423        |       | (87,288          | )          | 944,186          |       |
| Intercompany payable                                                         |       | 498,736           |       | —         |       | 44,275         |       | (543,011         | )          | —           |       |
| Liabilities of discontinued operations                                       |       | —            |       | —         |       | 4,101          |       | —           |       | 4,101            |       |
| Other long-term obligations                                                  |       | 81,191            |       | 2,047          |       | 99,984         |       | —           |       | 183,222          |       |
| Total Other Long-Term Liabilities                                            |       | 579,927           |       | 733,098        |       | 448,783        |       | (630,299         | )          | 1,131,509        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Shareholder’s Equity**                                                |       | 1,156,647         |       | 3,516,416      |       | 897,784        |       | (4,414,200       | )          | 1,156,647        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Total Liabilities and  Shareholder’s Equity**                         |       | $                 | 5,826,671  |           | $          | 6,645,682      |       | $                | 1,929,867  |             | $          | (7,236,356 | ) | $ | 7,165,864 |   |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Financial Position (Audited)**

**Asof December 31, 2009**

**(Inthousands)**

 
| ** **                                                                   | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                   | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Assets**                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Current Assets:**                                                          |       |              |       |           |       |           |       |             |       |             |       |
| Cash and cash equivalents                                                    |       | $                 | 124,674    |           | $          | 15,796         |       | $                | 112,993    |             | $          | — |   | $ | 253,463 |   |
| Marketable securities                                                        |       | —            |       | —         |       | 21,120         |       | —           |       | 21,120           |       |
| Receivables                                                                  |       | 1,162             |       | 133,866        |       | 424,395        |       | (210,768         | )          | 348,655          |       |
| Inventories                                                                  |       | —            |       | 74,041         |       | 2,551          |       | —           |       | 76,592           |       |
| Prepaid expenses and other assets                                            |       | 7,840             |       | 15,239         |       | 13,485         |       | —           |       | 36,564           |       |
| Deferred customer acquisition costs                                          |       | —            |       | 13,759         |       | 22,311         |       | —           |       | 36,070           |       |
| Deferred taxes                                                               |       | —            |       | 22,481         |       | 996            |       | (1,882           | )          | 21,595           |       |
| Assets of discontinued operations                                            |       | —            |       | 15             |       | 27             |       | —           |       | 42               |       |
| Total Current Assets                                                         |       | 133,676           |       | 275,197        |       | 597,878        |       | (212,650         | )          | 794,101          |       |
| **Property and Equipment:**                                                  |       |              |       |           |       |           |       |             |       |             |       |
| At cost                                                                      |       | —            |       | 262,223        |       | 82,877         |       | —           |       | 345,100          |       |
| Less: accumulated depreciation                                               |       | —            |       | (94,423        | )          | (38,542        | )          | —           |       | (132,965         | )          |
| Net property and equipment                                                   |       | —            |       | 167,800        |       | 44,335         |       | —           |       | 212,135          |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Assets:**                                                            |       |              |       |           |       |           |       |             |       |             |       |
| Goodwill                                                                     |       | —            |       | 2,755,813      |       | 363,941        |       | —           |       | 3,119,754        |       |
| Intangible assets, primarily trade names, service  marks and trademarks, net |       | —            |       | 1,992,843      |       | 794,394        |       | —           |       | 2,787,237        |       |
| Notes receivable                                                             |       | 1,992,857         |       | 707            |       | 22,783         |       | (1,992,857       | )          | 23,490           |       |
| Long-term marketable securities                                              |       | 9,985             |       | —         |       | 101,081        |       | —           |       | 111,066          |       |
| Investments in and advances to subsidiaries                                  |       | 3,586,670         |       | 1,392,095      |       | 7,934          |       | (4,986,699       | )          | —           |       |
| Other assets                                                                 |       | 105,761           |       | 3,889          |       | 4,292          |       | (82,143          | )          | 31,799           |       |
| Debt issuance costs                                                          |       | 66,807            |       | —         |       | —         |       | —           |       | 66,807           |       |
| Total Assets                                                                 |       | $                 | 5,895,756  |           | $          | 6,588,344      |       | $                | 1,936,638  |             | $          | (7,274,349 | ) | $ | 7,146,389 |   |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Liabilities and Shareholder’s  Equity**                               |       |              |       |           |       |           |       |             |       |             |       |
| **Current Liabilities:**                                                     |       |              |       |           |       |           |       |             |       |             |       |
| Accounts payable                                                             |       | $                 | 1,046      |           | $          | 42,325         |       | $                | 30,100     |             | $          | — |   | $ | 73,471 |   |
| Accrued liabilities:                                                         |       |              |       |           |       |           |       |             |       |             |       |
| Payroll and related expenses                                                 |       | 2,185             |       | 33,687         |       | 38,513         |       | —           |       | 74,385           |       |
| Self-insured claims and related expenses                                     |       | —            |       | 21,727         |       | 65,605         |       | —           |       | 87,332           |       |
| Other                                                                        |       | 51,391            |       | 41,716         |       | 65,424         |       | (1,882           | )          | 156,649          |       |
| Deferred revenue                                                             |       | —            |       | 138,691        |       | 311,055        |       | —           |       | 449,746          |       |
| Liabilities of discontinued operations                                       |       | —            |       | 248            |       | 2,558          |       | —           |       | 2,806            |       |
| Current portion of long-term debt                                            |       | 141,230           |       | 27,226         |       | 106,707        |       | (210,768         | )          | 64,395           |       |
| Total Current Liabilities                                                    |       | 195,852           |       | 305,620        |       | 619,962        |       | (212,650         | )          | 908,784          |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Long-Term Debt**                                                           |       | 3,889,574         |       | 1,999,226      |       | 14,606         |       | (1,992,857       | )          | 3,910,549        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Long-Term Liabilities:**                                             |       |              |       |           |       |           |       |             |       |             |       |
| Deferred taxes                                                               |       | —            |       | 754,531        |       | 284,689        |       | (82,143          | )          | 957,077          |       |
| Intercompany payable                                                         |       | 545,995           |       | —         |       | —         |       | (545,995         | )          | —           |       |
| Liabilities of discontinued operations                                       |       | —            |       | —         |       | 4,145          |       | —           |       | 4,145            |       |
| Other long-term obligations                                                  |       | 78,004            |       | 2,284          |       | 99,215         |       | —           |       | 179,503          |       |
| Total Other Long-Term Liabilities                                            |       | 623,999           |       | 756,815        |       | 388,049        |       | (628,138         | )          | 1,140,725        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Shareholder’s Equity**                                                |       | 1,186,331         |       | 3,526,683      |       | 914,021        |       | (4,440,704       | )          | 1,186,331        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Total Liabilities and Shareholder’s  Equity**                         |       | $                 | 5,895,756  |           | $          | 6,588,344      |       | $                | 1,936,638  |             | $          | (7,274,349 | ) | $ | 7,146,389 |   |

 

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Cash Flows (Unaudited)**

**Forthe Three Months Ended March 31, 2010**

**(Inthousands)**

 
| ** **                                                                             | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                             | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash and Cash Equivalents at  Beginning of Period**                                  |       | $                 | 124,674    |           | $          | 15,796         |       | $                | 112,993    |             | $          | — |   | $ | 253,463 |   |
| **Net Cash (Used for) Provided from  Operating Activities from Continuing Operations** |       | (72,701           | )          | 36,441         |       | 29,835         |       | (23,086          | )          | (29,511          | )          |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Investing Activities  from Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Property additions                                                                     |       | —            |       | (7,339         | )          | (1,566         | )          | —           |       | (8,905           | )          |
| Sale of equipment and other assets                                                     |       | —            |       | 510            |       | 86             |       | —           |       | 596              |       |
| Acquisition of The ServiceMaster Company                                               |       | (156              | )          | —         |       | —         |       | —           |       | (156             | )          |
| Other business acquisitions, net of cash acquired                                      |       | —            |       | (8,252         | )          | (111           | )          | —           |       | (8,363           | )          |
| Notes receivable, financial investments and  securities, net                           |       | —            |       | —         |       | (1,921         | )          | —           |       | (1,921           | )          |
| **Net Cash Used for Investing  Activities from Continuing Operations**                 |       | (156              | )          | (15,081        | )          | (3,512         | )          | —           |       | (18,749          | )          |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Financing  Activities from Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Borrowings of debt                                                                     |       | —            |       | —         |       | 10,000         |       | —           |       | 10,000           |       |
| Payments of debt                                                                       |       | (6,813            | )          | (4,429         | )          | (290           | )          | —           |       | (11,532          | )          |
| Debt issuance costs paid                                                               |       | —            |       | —         |       | (30            | )          | —           |       | (30              | )          |
| Shareholders’ dividends                                                           |       | —            |       | (11,543        | )          | (11,543        | )          | 23,086           |       | —           |       |
| Net intercompany advances                                                              |       | 13,839            |       | (3,420         | )          | (10,419        | )          | —           |       | —           |       |
| **Net Cash Provided from (Used for)  Financing Activities from Continuing Operations** |       | 7,026             |       | (19,392        | )          | (12,282        | )          | 23,086           |       | (1,562           | )          |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Discontinued  Operations:**                                          |       |              |       |           |       |           |       |             |       |             |       |
| Cash used for operating activities                                                     |       | —            |       | —         |       | (598           | )          | —           |       | (598             | )          |
| **Net Cash Used for Discontinued  Operations**                                         |       | —            |       | —         |       | (598           | )          | —           |       | (598             | )          |
| **Cash (Decrease) Increase During  the Period**                                        |       | (65,831           | )          | 1,968          |       | 13,443         |       | —           |       | (50,420          | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash and Cash Equivalents at End  of Period**                                        |       | $                 | 58,843     |           | $          | 17,764         |       | $                | 126,436    |             | $          | — |   | $ | 203,043 |   |

 

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**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**CondensedConsolidating Statement of Cash Flows (Unaudited)**

**Forthe Three Months Ended March 31, 2009**

**(Inthousands)**

 
| ** **                                                                             | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                             | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash and Cash Equivalents at  Beginning of Period**                                  |       | $                 | 300,362    |           | $          | 12,105         |       | $                | 93,120     |             | $          | — |   | $ | 405,587 |   |
| **Net Cash (Used for) Provided from  Operating Activities from Continuing Operations** |       | (105,026          | )          | 73,126         |       | 4,148          |       | (19,856          | )          | (47,608          | )          |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Investing  Activities from Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Property additions                                                                     |       | —            |       | (15,865        | )          | (2,743         | )          | —           |       | (18,608          | )          |
| Sale of equipment and other assets                                                     |       | —            |       | 345            |       | 17             |       | —           |       | 362              |       |
| Acquisition of The ServiceMaster Company                                               |       | (486              | )          | —         |       | —         |       | —           |       | (486             | )          |
| Other business acquisitions, net of cash acquired                                      |       | —            |       | (4,871         | )          | —         |       | —           |       | (4,871           | )          |
| Notes receivable, financial investments and  securities, net                           |       | —            |       | —         |       | 3,536          |       | —           |       | 3,536            |       |
| **Net Cash (Used for) Provided from  Investing Activities from Continuing Operations** |       | (486              | )          | (20,391        | )          | 810            |       | —           |       | (20,067          | )          |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Financing  Activities from Continuing Operations:**                  |       |              |       |           |       |           |       |             |       |             |       |
| Payments of debt                                                                       |       | (42,571           | )          | (4,655         | )          | (278           | )          | —           |       | (47,504          | )          |
| Debt issuance costs paid                                                               |       | (198              | )          | —         |       | —         |       | —           |       | (198             | )          |
| Shareholders’ dividends                                                           |       | —            |       | (9,928         | )          | (9,928         | )          | 19,856           |       | —           |       |
| Net intercompany advances                                                              |       | 15,159            |       | (32,630        | )          | 17,471         |       | —           |       | —           |       |
| **Net Cash (Used for) Provided from  Financing Activities from Continuing Operations** |       | (27,610           | )          | (47,213        | )          | 7,265          |       | 19,856           |       | (47,702          | )          |
| ** **                                                                             |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Discontinued  Operations:**                                          |       |              |       |           |       |           |       |             |       |             |       |
| Cash used for operating activities                                                     |       | —            |       | —         |       | (980           | )          | —           |       | (980             | )          |
| Cash used for investing activities                                                     |       | —            |       | —         |       | (914           | )          | —           |       | (914             | )          |
| **Net Cash Used for Discontinued  Operations**                                         |       | —            |       | —         |       | (1,894         | )          | —           |       | (1,894           | )          |
| **Cash (Decrease) Increase During  the Period**                                        |       | (133,122          | )          | 5,522          |       | 10,329         |       | —           |       | (117,271         | )          |
|                                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Cash and Cash Equivalents at End  of Period**                                        |       | $                 | 167,240    |           | $          | 17,627         |       | $                | 103,449    |             | $          | — |   | $ | 288,316 |   |

 

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**ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Merger Agreement**

 

On March 18, 2007, ServiceMaster entered into theMerger Agreement with Holdings and Acquisition Co., and the Merger wascompleted on July 24, 2007. Immediately following the completion of theMerger, all of the outstanding capital stock of Holdings, the ultimate parentcompany of ServiceMaster, was owned by investment funds sponsored by, oraffiliated with, the Equity Sponsors.

 

Equity contributions totaling $1,431.1 millionfrom the Equity Sponsors, together with (i) borrowings under the InterimLoan Facility, (ii) borrowings under a new $2,650.0 million seniorsecured term loan facility and (iii) cash on hand at ServiceMaster, wereused, among other things, to finance the aggregate merger consideration, tomake payments in satisfaction of other equity-based interests in ServiceMasterunder the Merger Agreement, to settle existing interest rate swaps, to redeemor provide for the repayment of certain of the Company’s existing indebtednessand to pay related transaction fees and expenses. In addition, letters ofcredit issued under a new $150.0 million pre-funded letter of creditfacility were used to replace and/or secure letters of credit previously issuedunder a ServiceMaster credit facility that was terminated as of the ClosingDate. On the Closing Date, the Company also entered into, but did not then drawunder, the Revolving Credit Facility.

 

On July 24, 2008, outstanding amounts under theInterim Loan Facility were converted on a one to one basis into the PermanentNotes. The Permanent Notes were issued pursuant to a refinancing indenture. Inconnection with the issuance of Permanent Notes, ServiceMaster entered into aRegistration Rights Agreement, pursuant to which ServiceMaster filed with theSEC a registration statement with respect to the resale of the Permanent Notes,which was declared effective on January 16, 2009. ServiceMasterderegistered the Permanent Notes in accordance with the terms of theRegistration Rights Agreement, and the effectiveness of the registrationstatement was terminated on November 19, 2009.

 

**Results of Operations**

 

**First Quarter 2010 Compared to 2009**

 

The Company reported first quarter 2010 revenue of$639.4 million, a $6.5 million or 1.0 percent decrease compared to 2009. Therevenue decrease was driven by the results of our business units as describedin “Segment Reviews for the First Quarter 2010 Compared to 2009”.

 

Operating income was $8.6 million for the firstquarter of 2010 compared to $28.7 million for the first quarter of 2009.Loss from continuing operations before income taxes was $61.7 million for thefirst quarter of 2010 compared to $6.8 million for the first quarter of2009. The increase in loss from continuing operations before income taxes of$54.9 million reflects the net effect of:

 
| **(In millions)**                           | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| Interest expense(1)                         |       | $          | 4.0        |   |
| Interest and net investment income(2)       |       | 7.3        |       |
| Restructuring and Merger related charges(3) |       | 4.9        |       |
| Gain on extinguishment of debt(4)           |       | (46.1      | )          |
| Management fee(5)                           |       | (1.4       | )          |
| Residual value guarantee charge(6)          |       | (5.1       | )          |
| Segment results(7)                          |       | (18.5      | )          |
|                                        |       | $          | (54.9      | ) |

 

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(1)           Represents a decrease in interest expenseas a result of decreases in our weighted average long-term debt balances ascompared to the first quarter of 2009.

 

(2)           As further described in “Operating andNon-Operating Expenses”, represents an increase in interest and net investmentincome.

 

(3)           Represents the net effect of (i) anincrease in restructuring charges relating to a reorganization of fieldleadership and a restructuring of branch operations at TruGreen LawnCare, (ii) adecrease in restructuring charges relating to a branch optimization project atTerminix and information technology outsourcing at Other Operations andHeadquartersand (iii) a decrease in Merger related charges.

 

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(4)           Represents thegain on extinguishment of debt recorded in the three months ended March 31,2009 related to the completion of open market purchases of $89.0 million inface value of the Company’s Permanent Notes. There were no open marketpurchases of Permanent Notes by the Company in the three months ended March 31,2010.

 

(5)           Represents anincrease in management and consulting fees payable to certain related parties.A management fee is payable to CD&R pursuant to a consulting agreementunder which CD&R provides the Company with on-going consulting andmanagement advisory services in exchange for an annual management fee of$6.25 million, which is payable quarterly. On July 30, 2009, theannual management fee payable under the consulting agreement with CD&R wasincreased from $2.0 million to $6.25 million in order to align thefee structure with current market rates. Under this agreement, the Company recorded amanagement fee of $1.6 million for the three months ended March 31, 2010and $0.5 million for the three months ended March 31, 2009. The full yearmanagement fee was applied in 2009, and the incremental fees relating to thefirst three quarters of 2009 were paid to CD&R in the third quarter of 2009.

 

In addition, in August 2009,the Company entered into consulting agreements with Citigroup, BAS andJPMorgan, each of which is an Equity Sponsor or an affiliate of an EquitySponsor. Under the consulting agreements, Citigroup, BAS and JPMorgan each willprovide the Company with on-going consulting and management advisory servicesuntil June 30, 2016 or the earlier termination of the existing consultingagreement between the Company and CD&R. The Company will pay annualmanagement fees of $0.5 million, $0.5 million and $0.25 millionto Citigroup, BAS and JPMorgan, respectively. The Company recorded consultingfees related to these agreements of $0.3 million for the three monthsended March 31, 2010. The full year management fee was applied in 2009, and the incrementalfees relating to the first three quarters of 2009 were paid to Citigroup, BASand JPMorgan in thethird quarter of 2009.

 

(6)           Representsresidual value guarantee charges related to a synthetic lease for operatingproperties that do not result in additional cash payments to exit the facilityat the end of the lease term. In the third quarter of 2009, the Companydetermined that it was probable that the fair value of certain properties underoperating leases would be below the guaranteed residual value at the end of thelease term. The Company’s current estimate of this shortfall is$15.8 million, which will be expensed over the remainder of the leaseterm. The Companyrecorded charges of $5.5 million in 2009 and $5.1 million in the first quarterof 2010 related to this shortfall. The remaining $5.2 million will be recordedover the remainder of the lease term, which expires July 24, 2010.

 

(7)           Represents a net decrease in (loss)income from continuing operations before income taxes, non-cash purchaseaccounting adjustments, interest expense, interest and net investment income,gain on extinguishment of debt, restructuring and Merger related charges,residual value guarantee charge and management fee supported by the decline inresults at TruGreen LawnCare, TruGreen LandCare, American Home Shield and OtherOperations and Headquarters, offset, in part, by improved results at Terminixand ServiceMaster Clean as described in “Segment Reviews for the First Quarter2010 Compared to 2009”.

 

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

 

The Company reported cost of services rendered andproducts sold of $402.5 million for the first quarter of 2010 compared to$394.4 million for the first quarter of 2009. As a percentage of revenue,these costs increased to 63.0 percent for the three months ended March 31,2010 from 61.1 percent for the three months ended March 31, 2009. This primarily reflects decreased laborefficiency at TruGreen LawnCare as a result of weather related productiondelays, increased frequency of contract claims costs at American Home Shield,increased provisions for certain legal matters at Terminix, and the impact ofresidual value guarantee charges at TruGreen LawnCare, offset, in part, by favorable termitedamage claim trends at Terminix, reduced fertilizer costs at TruGreen LawnCare,and lower vehicle fleet counts and reduced fuel costs throughout theenterprise.

 

The Company reported selling and administrativeexpenses of $183.9 million for the first quarter of 2010 compared to $173.8million for the first quarter of 2009. As a percentage of revenue,these costs increased to 28.8 percent for the three months ended March 31,2010 from 26.9 percent for the three months ended March 31, 2009. This primarily reflects investments insales labor at TruGreen LawnCare, increased management fees related to theconsulting agreements executed in 2009 and increased provisions for incentivecompensation at Other Operations and Headquarters.

 

Amortization expense was $40.4 million for the firstquarter of 2010 compared to $40.3 million for the first quarter of 2009.

 

Non-operating expense totaled $70.4 million for thefirst quarter of 2010 compared to $35.5 million for the first quarter of2009. This change is primarily due to a $46.1 million gain on extinguishment ofdebt recorded in the first quarter of 2009, offset, in part, by a$4.0 million decrease in interest expense primarily resulting fromdecreases in our weighted average long-term debt 

 

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balances, as well as a $7.3 million increase ininterest and net investment income. Interest and net investment income (loss)was comprised of the following for the three months ended March 31, 2010and 2009:

 
| ** **                                | ** ** | **Three months ended********March 31,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------|------------|
| **(In thousands)**                        | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Realized gains(1)                         |       | $                                            | 1,625      |   | $ | 620 |   |
| Impairments of securities(2)              |       | —                                       |       | (5,385 | ) |
| Deferred compensation trust(3)            |       | 437                                          |       | (701 | ) |
| Other(4)                                  |       | 440                                          |       | 705 |   |
| Interest and net investment income (loss) |       | $                                            | 2,502      |   | $ | (4,761 | ) |

 

----

(1)           Represents the net investment gains andthe interest and dividend income realized on the American Home Shieldinvestment portfolio.

 

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

 

(3)           Represents investment income (loss)resulting from a change in the market value of investments within an employeedeferred compensation trust (for which there is a corresponding and offsettingchange in compensation expense within (loss) income from continuing operationsbefore income taxes).

 

(4)           Represents a portion of the earningsgenerated by SMAC, our financing subsidiary exclusively dedicated to providingfinancing to our franchisees and retail customers of our operating units, andinterest income on other cash balances.

 

The effective tax rate on (loss) income fromcontinuing operations was a benefit of 47.7 percent for the first quarter of2010 compared to a benefit of 110.4 percent for the first quarter of 2009. Thechange in the effective tax rate is primarily due to the release of liabilityrelated to federal and state uncertain tax positions reflected in the firstquarter of 2009.

 

***Restructuring andMerger Related Charges***

 

The Companyincurred restructuring and Merger related charges of $3.9 million and $8.8million for the three months ended March 31, 2010 and 2009, respectively.Restructuring and Merger related charges were comprised of the following:

 
| ** **                                             | ** ** | **Three  months ended********March 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|
| **(In thousands)**                                | ** ** | **2010**                                           | ** ** | **2009** | ** ** |
| TruGreen LawnCare reorganization  and restructuring(1) |       | $                                                  | 3,023      |   | $ | — |   |
| Information technology outsourcing(2)                  |       | —                                             |       | 5,274 |   |
| Terminix branch optimization(3)                        |       | 46                                                 |       | 3,219 |   |
| Merger related charges(4)                              |       | 131                                                |       | 294 |   |
| Other                                                  |       | 724                                                |       | (10 | ) |
| Total restructuring and Merger  related charges        |       | $                                                  | 3,924      |   | $ | 8,777 |   |

 

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(1)           Represents restructuring charges relatedto a reorganization of field leadership and a restructuring of branchoperations. For the three months ended March 31, 2010, these costs includedconsulting fees of $1.9 million and severance, lease termination and othercosts of $1.1 million. In connection with the restructuring of branchoperations, we expect to incur cash charges through the fourth quarter of 2010related to, among other things, employee retention, severance costs andconsulting fees. Such charges are expected to amount to an additional $6.8million, pre-tax, and will be recorded as restructuring charges in thecondensed consolidated statement of operations as incurred.

 

(2)           On December 11, 2008, the Companyentered into an agreement with IBM pursuant to which IBM will provideinformation technology operations and applications development services to theCompany. These services were phased in during the first half of 2009. For thethree months ended March 31, 2009, these costs included transition feespaid to IBM of $3.8 million, employee retention and severance costs of $0.9million and consulting and other costs of $0.6 million.

 

(3)           Represents restructuring charges relatedto a branch optimization project. For the three months ended March 31,2010, these costs included adjustments to lease termination reserves. For thethree months ended March 31, 2009, these costs included lease terminationcosts of $2.9 million and severance costs of $0.3 million.

 

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(4)           Includes legalfees, legal settlements and other costs associated with the Merger.

 

**Key Performance Indicators**

 

The table below presents selected operating metricsrelated to customer counts and customer retention for the three largest revenuegenerating businesses in the Company. These measures are presented on arolling, twelve-month basis in order to avoid seasonal anomalies.

 
| ** **                                   | ** ** | **Key Performance Indicators  as of March 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2010**                                                       | ** ** | **2009** | ** ** |
| **TruGreen LawnCare—**                  |       |                                                           |       |   |   |
| Growth (Reduction) in Full Program Accounts  |       | 3                                                              | %          | (3 | )% |
| Customer Retention Rate                      |       | 70.6                                                           | %          | 66.3 | % |
| **Terminix—**                           |       |                                                           |       |   |   |
| Growth in Pest Control Customers             |       | 1                                                              | %          | 3 | % |
| Pest Control Customer Retention Rate         |       | 79.0                                                           | %          | 77.9 | % |
| Reduction in Termite Customers               |       | (1                                                             | )%         | (1 | )% |
| Termite Customer Retention Rate              |       | 85.9                                                           | %          | 86.3 | % |
| **American Home Shield—**               |       |                                                           |       |   |   |
| Growth (Reduction) in Home Service Contracts |       | 3                                                              | %          | (2 | )% |
| Customer Retention Rate                      |       | 64.5                                                           | %          | 62.2 | % |

 

**Segment Reviews for the First Quarter2010 Compared to 2009**

 

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 operatingincome to (loss) 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 (loss) before net income (loss) from discontinued operations; provision(benefit) for income taxes; other expense; gain on extinguishment of debt;interest expense and interest and net investment loss (income); anddepreciation and amortization expense; as well as adding back interest and netinvestment loss (income) and residual value guarantee charges. “ComparableOperating Performance” is calculated by adding back to Adjusted EBITDA non-cashstock-based compensation expense and non-cash effects on Adjusted EBITDAattributable to the application of purchase accounting in connection with theMerger.

 

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. In addition, the Company excludes residualvalue guarantee charges that do not result in additional cash payments to exitthe facility at the end of the lease term. The Company uses ComparableOperating Performance as a supplemental measure to assess the Company’sperformance because it excludes non-cash stock-based compensation expense andnon-cash effects 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,analysts and other interested parties in their analysis of the Company’soperating results.

 

The Company believes Comparable OperatingPerformance, which excludes the impact of purchase accounting and non-cash stock-basedcompensation expense adjustments, is useful to investors. The exclusion of theimpact of these items facilitates a comparison of operating results fromperiods pre-dating the Merger transaction with the Equity Sponsors with periodssubsequent to the Merger. The purchase accounting charges were not presentprior to the Merger. In addition, charges relating to non-cash stock-basedcompensation expense prior to the Merger were computed under different plansand formulas than charges subsequent to the Merger. Moreover, such charges arenon-cash and the exclusion of the impact of these items from ComparableOperating Performance allows investors to understand the current period resultsof operations of the business on a comparable basis with previous periods and,secondarily, gives the investors added insight into cash earnings available toservice the Company’s debt. We believe this to be of 

 

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particularimportance to the Company’s public investors, which are debt holders. TheCompany also believes that the exclusion of the impact of purchase accountingand non-cash stock-based compensation expense may provide an additional meansfor comparing the Company’s performance to the performance of other companiesby eliminating the impact of differently structured equity-based long-termincentive plans (although care must be taken in making any such comparison, asthere may be inconsistencies among companies in the manner of computingsimilarly titled financial measures).

 

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:

 

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

 

·      Adjusted EBITDAand Comparable Operating Performance do not reflect the Company’s interestexpense or the cash requirements necessary to service interest or principalpayments on the Company’s debt;

 

·      Adjusted EBITDAand Comparable Operating Performance do not reflect the Company’s tax expenseor the cash requirements to pay the Company’s taxes;

 

·      Adjusted EBITDAand 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;

 

·      Other companiesin the Company’s industries may calculate Adjusted EBITDA and ComparableOperating Performance differently, limiting their usefulness as comparativemeasures; and

 

·      Comparable Operating Performance does notinclude the impact of purchase accounting and non-cashstock-based compensation expense, the latter exclusion may causethe overall compensation cost of the business to be understated.

 

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Operating revenues and Comparable OperatingPerformance by operating segment are as follows:

 
| ** **                                                   | ** ** | **Three months ended********March, 31** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------|------------|
| **(In thousands)**                                      | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| Operating Revenue:                                           |       |                                    |       |   |   |
| TruGreen LawnCare                                            |       | $                                       | 124,082    |   | $ | 134,666 |   |
| TruGreen LandCare                                            |       | 58,800                                  |       | 66,885 |   |
| Terminix                                                     |       | 270,917                                 |       | 263,161 |   |
| American Home Shield                                         |       | 133,205                                 |       | 130,868 |   |
| ServiceMaster Clean                                          |       | 32,262                                  |       | 30,156 |   |
| Other Operations and Headquarters                            |       | 20,142                                  |       | 20,191 |   |
| Total Operating Revenue                                      |       | $                                       | 639,408    |   | $ | 645,927 |   |
| Comparable Operating Performance:                            |       |                                    |       |   |   |
| TruGreen LawnCare                                            |       | $                                       | (14,119    | ) | $ | 2,197 |   |
| TruGreen LandCare                                            |       | 3,906                                   |       | 8,426 |   |
| Terminix                                                     |       | 65,858                                  |       | 62,113 |   |
| American Home Shield                                         |       | 16,808                                  |       | 10,973 |   |
| ServiceMaster Clean                                          |       | 14,376                                  |       | 13,530 |   |
| Other Operations and Headquarters                            |       | (12,385                                 | )          | (15,721 | ) |
| Total Comparable Operating Performance                       |       | $                                       | 74,444     |   | $ | 81,518 |   |
|                                                         |       |                                    |       |   |   |
| Memo: Items included in Comparable Operating  Performance:   |       |                                    |       |   |   |
| Restructuring and Merger related charges(1)                  |       | $                                       | 3,924      |   | $ | 8,777 |   |
| Management fee(2)                                            |       | $                                       | 1,875      |   | $ | 500 |   |
|                                                         |       |                                    |       |   |   |
| Memo: Items excluded from Comparable Operating  Performance: |       |                                    |       |   |   |
| Comparable Operating Performance of discontinued  operations |       | $                                       | (618       | ) | $ | (264 | ) |

 

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(1)           Represents (i) restructuring chargesrelated to a reorganization of field leadership and a restructuring of branchoperations atTruGreen LawnCare, a branch optimization project at Terminix and informationtechnology outsourcing at Other Operations and Headquarters and (ii) Merger related charges.

 

(2)           Represents management and consulting feespayable to certain related parties. See Note 15 to the condensed consolidatedfinancial statements for further information on management and consulting fees.

 

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Thefollowing table presents reconciliations of operating income, the most directlycomparable financial measure under GAAP, to Adjusted EBITDA and Comparable OperatingPerformance for the periods presented.

 
| **(in  thousands)**                                                | ** ** | **TruGreen  LawnCare** | ** ** | **TruGreen  LandCare** | ** ** | **Terminix** | ** ** | **American  Home  Shield** | ** ** | **ServiceMaster  Clean** | ** ** | **Other  Operations  and  Headquarters** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------|------------|----------------------------|------------|--------------------------|------------|------------------------------------------|------------|-----------|------------|
| **Three Months Ended March 31,  2010**                        |       |                   |       |                   |       |         |       |                       |       |                     |       |                                     |       |      |       |
| Operating (loss) income(1)                                         |       | $                      | (40,566    | )                      | $          | 1,284        |       | $                          | 49,901     |                     | $          | 4,920                                    |       | $         | 12,118     |   | $ | (19,010 | ) | $ | 8,647 |   |
| Depreciation and amortization expense                              |       | 21,928                 |       | 2,780                  |       | 16,020       |       | 10,263                     |       | 1,786                    |       | 3,473                                    |       | 56,250    |       |
| EBITDA                                                             |       | (18,638                | )          | 4,064                  |       | 65,921       |       | 15,183                     |       | 13,904                   |       | (15,537                                  | )          | 64,897    |       |
| Interest and net investment income (2)                             |       | —                 |       | —                 |       | —       |       | 1,625                      |       | —                   |       | 877                                      |       | 2,502     |       |
| Residual value guarantee charge(3)                                 |       | 4,534                  |       | —                 |       | —       |       | —                     |       | 472                      |       | 117                                      |       | 5,123     |       |
| Adjusted EBITDA                                                    |       | (14,104                | )          | 4,064                  |       | 65,921       |       | 16,808                     |       | 14,376                   |       | (14,543                                  | )          | 72,522    |       |
| Non-cash stock-based compensation expense                          |       | —                 |       | —                 |       | —       |       | —                     |       | —                   |       | 2,158                                    |       | 2,158     |       |
| Non-cash credits attributable to purchase  accounting(4)           |       | (15                    | )          | (158                   | )          | (63          | )          | —                     |       | —                   |       | —                                   |       | (236      | )          |
| Comparable Operating Performance                                   |       | $                      | (14,119    | )                      | $          | 3,906        |       | $                          | 65,858     |                     | $          | 16,808                                   |       | $         | 14,376     |   | $ | (12,385 | ) | $ | 74,444 |   |
| Memo: Items included in Comparable Operating  Performance          |       |                   |       |                   |       |         |       |                       |       |                     |       |                                     |       |      |       |
| Restructuring and Merger related charges(5)                        |       | $                      | 3,023      |                   | $          | 571          |       | $                          | 46         |                     | $          | (127                                     | )          | $         | —     |   | $ | 411 |   | $ | 3,924 |   |
| Management fee(6)                                                  |       | $                      | —     |                   | $          | —       |       | $                          | —     |                     | $          | —                                   |       | $         | —     |   | $ | 1,875 |   | $ | 1,875 |   |
| Memo: Items excluded from Comparable Operating  Performance        |       |                   |       |                   |       |         |       |                       |       |                     |       |                                     |       |      |       |
| Comparable Operating Performance of discontinued  operations(7)    |       | $                      | —     |                   | $          | —       |       | $                          | —     |                     | $          | —                                   |       | $         | —     |   | $ | (618 | ) | $ | (618 | ) |
|                                                               |       |                   |       |                   |       |         |       |                       |       |                     |       |                                     |       |      |       |
| **Three Months Ended March 31,  2009**                        |       |                   |       |                   |       |         |       |                       |       |                     |       |                                     |       |      |       |
| Operating (loss) income(1)                                         |       | $                      | (19,387    | )                      | $          | 5,696        |       | $                          | 46,491     |                     | $          | 5,454                                    |       | $         | 11,504     |   | $ | (21,080 | ) | $ | 28,678 |   |
| Depreciation and amortization expense                              |       | 21,613                 |       | 2,893                  |       | 15,564       |       | 10,403                     |       | 2,026                    |       | 3,421                                    |       | 55,920    |       |
| EBITDA                                                             |       | 2,226                  |       | 8,589                  |       | 62,055       |       | 15,857                     |       | 13,530                   |       | (17,659                                  | )          | 84,598    |       |
| Interest and net investment (loss) income(2)                       |       | —                 |       | —                 |       | —       |       | (4,765                     | )          | —                   |       | 4                                        |       | (4,761    | )          |
| Adjusted EBITDA                                                    |       | 2,226                  |       | 8,589                  |       | 62,055       |       | 11,092                     |       | 13,530                   |       | (17,655                                  | )          | 79,837    |       |
| Non-cash stock-based compensation expense                          |       | —                 |       | —                 |       | —       |       | —                     |       | —                   |       | 1,934                                    |       | 1,934     |       |
| Non-cash (credits) charges attributable to purchase  accounting(4) |       | (29                    | )          | (163                   | )          | 58           |       | (119                       | )          | —                   |       | —                                   |       | (253      | )          |
| Comparable Operating Performance                                   |       | $                      | 2,197      |                   | $          | 8,426        |       | $                          | 62,113     |                     | $          | 10,973                                   |       | $         | 13,530     |   | $ | (15,721 | ) | $ | 81,518 |   |
| Memo: Items included in Comparable Operating  Performance          |       |                   |       |                   |       |         |       |                       |       |                     |       |                                     |       |      |       |
| Restructuring and Merger related charges(5)                        |       | $                      | —     |                   | $          | (30          | )          | $                          | 3,219      |                     | $          | 39                                       |       | $         | —     |   | $ | 5,549 |   | $ | 8,777 |   |
| Management fee(6)                                                  |       | $                      | —     |                   | $          | —       |       | $                          | —     |                     | $          | —                                   |       | $         | —     |   | $ | 500 |   | $ | 500 |   |
| Memo: Items excluded from Comparable Operating  Performance        |       |                   |       |                   |       |         |       |                       |       |                     |       |                                     |       |      |       |
| Comparable Operating Performance of discontinued  operations(7)    |       | $                      | —     |                   | $          | —       |       | $                          | —     |                     | $          | —                                   |       | $         | —     |   | $ | (264 | ) | $ | (264 | ) |

 

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(1)                                  Presented below is a reconciliation oftotal segment operating income to net (loss) income.

 
| ** **                                              | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Total Segment Operating  Income                         |       | $                                      | 8,647      |   | $ | 28,678 |   |
| Non-operating Expense  (Income):                        |       |                                   |       |   |   |
| Interest expense                                        |       | 72,681                                 |       | 76,666 |   |
| Interest and net investment  (income) loss              |       | (2,502                                 | )          | 4,761 |   |
| Gain on extinguishment of  debt                         |       | —                                 |       | (46,106 | ) |
| Other expense                                           |       | 171                                    |       | 200 |   |
| Loss from Continuing  Operations before Income Taxes    |       | (61,703                                | )          | (6,843 | ) |
| Benefit for income taxes                                |       | (29,420                                | )          | (7,555 | ) |
| (Loss) Income from  Continuing Operations               |       | (32,283                                | )          | 712 |   |
| Loss from discontinued  operations, net of income taxes |       | (377                                   | )          | (163 | ) |
| Net (Loss) Income                                       |       | $                                      | (32,660    | ) | $ | 549 |   |

 

(2)                                 Interest and net investment income (loss)is primarily comprised of investment income and realized gain (loss) on ourAmerican Home Shield segment investment portfolio. Cash, short-term andlong-term marketable securities associated with regulatory requirements inconnection with American Home Shield and for other purposes totaled $285.6million as of March 31, 2010. American Home Shield interest and netinvestment income (loss) was $1.6 million and ($4.8) million for the firstquarter of 2010 and 2009, respectively. The balance of interest and netinvestment income (loss) primarily relates to (i) a 

 

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portionof the earnings generated by SMAC, (ii) investment income (loss) from ouremployee deferred compensation trust (for which there is a corresponding andoffsetting change in compensation expense within (loss) income from continuingoperations before income taxes) and (iii) interest income on other cashbalances.

 

(3)                                 Representsresidual value guarantee charges related to a synthetic lease for operatingproperties that do not result in additional cash payments to exit the facilityat the end of the lease term. In the third quarter of 2009, the Companydetermined that it was probable that the fair value of certain properties underoperating leases would be below the guaranteed residual value at the end of thelease term. The Company’s current estimate of this shortfall is$15.8 million, which will be expensed over the remainder of the leaseterm. The Companyrecorded charges of $5.5 million in 2009 and $5.1 million in the first quarterof 2010 related to this shortfall. The remaining $5.2 million will be recordedover the remainder of the lease term, which expires July 24, 2010.

 

(4)                                The Merger was accounted for usingpurchase accounting. This adjustment represents the aggregate, non-cashadjustments (other than amortization and depreciation) attributable to theapplication of purchase accounting.

 

(5)                                 Represents (i) restructuring chargesrelated to a reorganization of field leadership and a restructuring of branchoperations atTruGreen LawnCare, a branch optimization project at Terminix and informationtechnology outsourcing at Other Operations and Headquarters and (ii) Merger related charges.

 

(6)                                 Represents management and consulting feespayable to certain related parties. See Note 15 to the condensed consolidatedfinancial statements for further information on management and consulting fees.

 

(7)                                 There are noadjustments necessary to reconcile operating loss from discontinued operations,the most directly comparable financial measure under GAAP, to Adjusted EBITDAor Comparable Operating Performance from discontinued operations for the threemonths ended March 31, 2010 and 2009.

 

***TruGreen LawnCareSegment***

 

The TruGreen LawnCare segment, which includes lawn,tree and shrub care services, reported a 7.9 percent decrease in revenue, a109.2 percent increase in operating loss and a 742.6 percent decline inComparable Operating Performance for the first quarter of 2010 compared to2009. The revenue results reflect a 3.3 percent increase in customer counts,which was more than offset by the impact of unfavorable weather conditions,which delayed service delivery in almost all areas of the country. The increasein customer counts was driven by a 430 basis point improvement in the customerretention rate driven by a reduction in the number of cancelled accounts,offset, in part, by a decrease in new unit sales. New unit sales were adverselyimpacted by the unfavorable weather conditions but such impact was offset, inpart, by an increase in new accounts generated in our neighborhood sellingchannel.  Customer service remains the key focus for TruGreen LawnCare todrive continued improvement in customer retention rates in 2010.

 

TruGreen LawnCare’s Comparable Operating Performancedeclined $16.3 million for the first quarter of 2010 compared to 2009, whichincludes the impact of a $3.0 million increase in restructuring charges relatedto a reorganization of field leadership and a restructuring of branchoperations. TruGreen LawnCare’s Comparable Operating Performance also reflectsdecreased labor efficiency as a result of weather related production delays andinvestments in sales labor, offset, in part, by lower vehicle fleet counts andreduced fuel and fertilizer costs.

 

***TruGreen LandCareSegment***

 

The TruGreen LandCare segment, which includeslandscape maintenance services, reported a 12.1 percent decrease in revenue, a77.5 percent decrease in operating income and a 53.6 percent decline inComparable Operating Performance for the first quarter of 2010 compared to2009. The decline in revenue included a 13.3 percent decline in base contractmaintenance revenue and a 17.5 percent decline in enhancement revenue. Revenuetrends were primarily impacted by contract cancellations and pricingconcessions granted in 2009 to offset the impacts of a difficult economicenvironment.

 

TruGreen LandCare’s Comparable Operating Performancedeclined $4.5 million for the first quarter of 2010 compared to 2009, whichincludes the impacts of a $0.6 million increase in restructuring chargesrelated to adjustments to lease termination reserves. TruGreen LandCare’sComparable Operating Performance also reflects improved sales labor management,lower vehicle fleet counts and reduced fuel costs.

 

***Terminix Segment***

 

The Terminix segment, which includes termite and pestcontrol services, reported a 2.9 percent increase in revenue, a 7.3 percentincrease in operating income and a 6.0 percent increase in Comparable OperatingPerformance for the first quarter of 2010 

 

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compared to 2009. The segment’s overall revenueresults reflected increased sales of products and modest growth in pest controlrevenues and revenue from termite completions, offset, in part, by a decline inrevenue from termite contract renewals. Pest control revenues increased 1.8percent for the first quarter of 2010 compared to 2009, reflecting animprovement in customer counts and an improvement in price realization. Theincrease in customer counts was driven by a 110 basis point improvement incustomer retention. A 0.6 percent decrease in termite renewal revenues for thefirst quarter of 2010 compared to 2009 was due to a 40 basis point decline intermite customer retention. Revenue from termite completions increased 1.5 percentfor the first quarter of 2010 compared to 2009, due to increased averagepricing on new termite treatments and an increase in units sold.

 

Terminix’s Comparable Operating Performance improved$3.7 million for the first quarter of 2010 compared to 2009, which includes theimpact of a $3.2 million decrease in restructuring charges related to a branchoptimization program completed in 2009. Terminix’s Comparable OperatingPerformance also reflects favorable termite damage claim trends and reducedfuel costs, offset, in part, by increased provisions for certain legal matters.

 

***American HomeShield Segment***

 

The American Home Shield segment, which provides homeservice contracts to consumers that cover heating, ventilation, airconditioning, plumbing and other systems and appliances, reported a 1.8 percentincrease in revenue, a 9.8 percent decrease in operating income and a 53.2percent improvement in Comparable Operating Performance for the first quarterof 2010 compared to 2009. The increase in revenue reflects an improvement inprice realization and an increase in customer counts. The increase in customercounts was driven by an increase in new unit sales and a 230 basis pointimprovement in customer retention.

 

American Home Shield’s Comparable Operating Performanceincreased $5.8 million for the first quarter of 2010 compared to 2009, whichincludes a $6.4 million increase in interest and net investment income from theAmerican Home Shield investment portfolio (primarily reflecting reductions inimpairments of securities). American Home Shield’s Comparable OperatingPerformance also reflects increased contract claims costs.

 

***ServiceMaster Clean Segment***

 

The ServiceMaster Cleansegment, which provides residential and commercial disaster restoration andcleaning services through franchisees primarily under the ServiceMaster andServiceMaster Clean brand names, on-site furniture repair and restorationservices primarily under the Furniture Medic brand name and home inspectionservices primarily under the AmeriSpec brand name, reported a 7.0 percent increase inrevenue, a 5.3 percentincrease in operating income and a 6.3 percent improvement in Comparable OperatingPerformance for the first quarter of 2010 compared to 2009. Trends in revenuereflect an increase in product sales, primarily to franchisees, and an increasein other franchise revenues.

 

ServiceMaster Clean’sComparable Operating Performance increased $0.8 million for the first quarter of 2010compared to 2009, reflecting the impact of increased revenues.

 

***Other Operationsand Headquarters Segment***

 

This segment includes the operations of Merry Maids,SMAC and the Company’s headquarters functions. The segment reported comparablerevenue, a 9.8 percent improvement in operating loss and a 21.2 percent improvementin Comparable Operating Performance for the first quarter of 2010 compared to2009. The Merry Maids operations reported comparable revenue,a 30.0 percentincrease in operating income and a 20.9 percent improvement in ComparableOperating Performance for the first quarter of 2010 compared to 2009.

 

The segment’s Comparable Operating Performance improved $3.3 millionfor the first quarter of 2010 compared to 2009, which includes the impact of a$5.1 million decrease in restructuring and Merger related charges, offset, inpart, by a $1.4 million increase in management fees related to the consultingagreements executed in 2009. Comparable Operating Performance for Merry Maidsincreased $0.8 million for the first quarter of 2010 compared to 2009, which reflectsreduced overhead spending.

 

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***DiscontinuedOperations***

 

The components of loss from discontinued operations, netof income taxes for the three months ended March 31, 2010 and 2009 are asfollows:

 
| ** **                                              | ** ** | **Three months ended********March 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Operating Loss                                          |       | $                                            | (618       | ) | $ | (264 | ) |
| Interest expense                                        |       | —                                       |       | — |   |
| Loss from discontinued operations, before income  taxes |       | (618                                         | )          | (264 | ) |
| Benefit for income taxes                                |       | (241                                         | )          | (101 | ) |
| Loss from discontinued operations, net of income  taxes |       | $                                            | (377       | ) | $ | (163 | ) |

 

There are no adjustments necessary to reconcileoperating loss from discontinued operations to Adjusted EBITDA or ComparableOperating Performance from discontinued operations for the three months ended March 31,2010 and 2009.

 

**FINANCIALPOSITION AND LIQUIDITY**

 

***Cash Flows from Operating Activities from ContinuingOperations***

 

Netcash used for operating activities from continuing operations decreased $18.1million to $29.5 million for the three months ended March 31, 2010compared to $47.6 million for the three months ended March 31, 2009.

 

Net cash used for operating activities forthe three months ended March 31, 2010 was comprised of a $42.2 million increase incash required for working capital and $4.0 million in cash payments related torestructuring charges, offset, in part, by $16.7 million in earnings adjusted fornon-cash charges. Theincrease in working capital requirements for the three months ended March 31,2010 was driven primarily by seasonal activity, incentive compensation paymentsrelated to 2009 performance and the timing of interest payments on thePermanent Notes.

 

Net cash used for operating activities forthe three months ended March 31, 2009 was comprised of a $66.0 million increase incash required for working capital and $4.3 million in cash payments related torestructuring charges, offset, in part, by $22.7 million in earnings adjusted for non-cashcharges. The increasein working capital requirements for the three months ended March 31, 2009was driven primarily by seasonal activity, incentive compensation paymentsrelated to 2008 performance, reductions in reserve levels under certain of ourself-insurance programs and the timing of interest payments on the PermanentNotes and Term Facilities.

 

***Cash Flows from Investing Activities from ContinuingOperations***

 

Netcash used for investing activities from continuing operations was $18.7 millionfor the three months ended March 31, 2010 compared to $20.1 millionfor the three months ended March 31, 2009.

 

Capitalexpenditures decreased to $8.9 million for the three months ended March 31,2010 from $18.6 million for the three months ended March 31, 2009 andincluded vehicle purchases of $2.3 million, recurring capital needs andinformation technology projects. The Company anticipates that capitalexpenditures, excluding vehicle fleet purchases, for 2010 will range from $55.0million to $65.0 million, reflecting recurring needs and the continuation ofinvestments in information systems and productivity enhancing operatingsystems. The Company’s capital requirement for fleet vehicles for 2010 isexpected to range from $50.0 million to $60.0 million. The Company will makenet cash payments of $43.2 million in 2010 in connection with exiting certainreal estate leases. The Company has no additional material capital commitmentsat this time.

 

Cashpayments for acquisitions, excluding the Merger, for the three months ended March 31,2010 totaled $8.4 million, compared with $4.9 million for the three monthsended March 31, 2009. Consideration paid for acquisitions consisted ofcash payments and debt payable to sellers. The Company expects to continue itsacquisition program at Terminix, TruGreen LawnCare and Merry Maids.

 

Thechange in notes receivable, financial investments and securities for the threemonths ended March 31, 2010 compared to December 31, 2009 reflects adecrease in net sales of certain marketable securities.

 

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***Cash Flows from Financing Activities from ContinuingOperations***

 

Netcash used for financing activities from continuing operations was$1.6 million for the three months ended March 31, 2010 compared to$47.7 million for the three months ended March 31, 2009. During thethree months ended March 31, 2010, the Company had borrowings of $10.0million and made scheduled principal payments of long-term debt of $11.5million. During the three months ended March 31, 2009, the Companycompleted open market purchases of $89.0 million in face value of the PermanentNotes for a cost of $41.0 million, of which $79.0 million in face value for acost of $36.0 million settled during the quarter. The Company also madescheduled principal payments of long-term debt of $11.5 million during thethree months ended March 31, 2009.

 

***Liquidity***

 

TheCompany is highly leveraged, and a very substantial portion of the Company’sliquidity needs arise from debt service on indebtedness incurred in connectionwith the Merger and from funding the Company’s operations, working capital andcapital expenditures.

 

Theagreements governing the Term Facilities, the Permanent Notes and the RevolvingCredit Facility contain certain covenants that limit or restrict the incurrenceof additional indebtedness, debt repurchases, liens, sales of assets, certainpayments (including dividends) and transactions with affiliates, subject tocertain exceptions. The Company was in compliance with the covenants underthese agreements at March 31, 2010.

 

ThroughJuly 15, 2011, the Company may, at its option prior to the start of anyinterest period, elect to pay interest on outstanding amounts under thePermanent Notes entirely in cash (“Cash Interest”), entirely by increasing theprincipal amount of the outstanding loans (“PIK Interest”), or 50 percent asCash Interest and 50 percent as PIK Interest. Interest payable after July 15,2011 is payable entirely as Cash Interest. All interest payments due through January 2010were paid entirely as Cash Interest. The Company elected to pay all interestpayable in 2010 entirely as Cash Interest.

 

Cashand short- and long-term marketable securities totaled $339.7 million at March 31,2010, compared with $385.6 million at December 31, 2009. As of March 31,2010 and December 31, 2009, $285.6 million and $256.5 million, respectively, ofthe cash and short- and long-term marketable securities balance are associatedwith regulatory requirements at American Home Shield and for other purposes.American Home Shield’s investment portfolio has been invested in a combinationof high quality, short duration fixed income securities and equities. TheCompany closely monitors the performance of the investments. From time to time,the Company reviews the statutory reserve requirements to which its regulatedentities are subject and any changes to such requirements. These reviews mayresult in identifying current reserve levels above or below minimum statutoryreserve requirements, in which case the Company may adjust its reserves. Thereviews may also identify opportunities to satisfy certain regulatory reserverequirements through alternate financial vehicles, which could enhance ourliquidity.

 

Aportion 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. Thefair value of the assets under all of the fleet and equipment leases isexpected to substantially mitigate the Company’s guarantee obligations underthe agreements. At March 31, 2010, the Company’s residual value guaranteesrelated to the leased assets totaled $71.4 million for which the Company hasrecorded a liability for the estimated fair value of these guarantees ofapproximately $1.5 million in the condensed consolidated statement of financialposition.

 

TheCompany maintains lease facilities with banks totaling $65.2 million,which provide for the financing of branch properties to be leased by theCompany. At March 31, 2010, approximately $65.2 million was fundedunder these facilities, including $12.5 million of leases that are accountedfor as capital leases and are included on the condensed consolidated statementof financial position as assets with related debt. The balance of the fundedamount is accounted for as operating leases. In connection with the closing ofthe Merger, the Company amended these leases effective July 24, 2007.Among the modifications, the Company extended the lease terms through July 24,2010 and made a $22.0 million investment in the lease facilities. This $22.0million investment is included in other assets in the condensed consolidatedstatement of financial position. The operating lease and capital leaseclassifications of these leases did not change as a result of themodifications. No later than 120 days prior to the end of the lease term, theCompany was required to exercise one of the following three options related tothe leased properties: (1) negotiate an extension to the current leasingarrangement; (2) return the properties to the lessor; or (3) purchasethe properties for $65.2 million, the total amount funded under the leasefacilities. If the properties were returned to the lessor, the lessor wouldsell the properties and the Company would be obligated to pay the lessor forany shortfall between the sales proceeds and the amount funded under the leasefacilities up to 73 percent of fair market value of the properties at thecommencement of the lease pursuant to a residual value guarantee. In March 2010,the Company elected the third option noted above and will purchase theproperties for $65.2 million on or before July 24, 2010. The 

 

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Company’s $22.0 millioninvestment in the lease facilities will be returned to the Company uponpurchase, resulting in a net cash payment of $43.2 million.

 

In thethird quarter of 2009, the Company determined that it was probable that thefair value of the real properties under operating leases would be below thetotal amount funded under the lease facilities at the end of the lease term.The Company’s current estimate of this shortfall is $15.8 million, which willbe expensed over the remainder of the lease term. The Company recorded chargesof $5.5 million in 2009 and $5.1 million in the first quarter of 2010 relatedto this shortfall. The remaining $5.2 million will be recorded over theremainder of the lease term, which expires July 24, 2010.

 

TheCompany holds certain financial instruments that are measured at fair value ona recurring basis. The fair values of these instruments are measured using boththe market and income approaches. For investments in marketable securities,deferred compensation trust assets and derivative contracts, which are carriedat their fair values, the Company’s fair value estimates incorporate quotedmarket prices, other observable inputs (for example, forward interest rates)and unobservable inputs (for example, forward commodity prices) at the balancesheet date.

 

Underthe terms of its fuel swap contracts, the Company is required to postcollateral in certain circumstances, including in the event that the fair valueof the contracts exceeds a certain agreed upon liability level. As of March 31,2010, the fair value of the Company’s fuel swap contracts was an asset of $8.5million, and the Company posted approximately $2.5 million in letters of creditas collateral for these contracts, none of which were issued under the Company’sRevolving Credit Facility. The continued use of letters of credit for thispurpose could limit the Company’s ability to post letters of credit for otherpurposes and could limit the Company’s borrowing availability under theRevolving Credit Facility. However, the Company does not expect the fair valueof its outstanding fuel swap contacts to materially impact its financialposition or liquidity.

 

TheCompany’s ongoing liquidity needs are expected to be funded by cash on hand,net cash provided by operating activities and, as required, borrowings underthe Revolving Credit Facility and accounts receivable securitizationarrangement (discussed below). We expect that cash provided from operations andavailable capacity under the Revolving Credit Facility and accounts receivablesecuritization arrangement will provide sufficient funds to operate ourbusiness, make expected capital expenditures and meet our liquidityrequirements for the following 12 months, including payment of interest andprincipal on our debt. As of March 31, 2010, the Company had $500.0million of remaining capacity available under the Revolving Credit Facility and$21.8 million of remaining capacity under the accounts receivablesecuritization arrangement.

 

The Company may from time to time repurchase orotherwise retire the Company’s debt and take other steps to reduce the Company’sdebt or otherwise improve the Company’s financial position. These actions mayinclude open market debt repurchases, negotiated repurchases, other retirementsof outstanding debt and opportunistic refinancing of debt. The amount of debtthat may be repurchased or otherwise retired, if any, will depend on marketconditions, trading levels of the Company’s debt, the Company’s cash position,compliance with debt covenants and other considerations. Affiliates of theCompany may also purchase the Company’s debt from time to time, through openmarket purchases or other transactions. In such cases, the Company’s debt maynot be retired, in which case the Company would continue to pay interest inaccordance with the terms of the debt, and the Company would continue toreflect the debt as outstanding in its condensed consolidated statement offinancial position.

 

Between the Merger and March 31,2010, Holdings has completed open market purchases totaling $65.0 millionin face value of the Permanent Notes for a cost of $21.4 million. The debtacquired by Holdings has not been retired, and the Company has continued to payinterest in accordance with the terms of the debt. The Company recordedinterest expense of $1.7 million for the three months ended March 31, 2010and 2009 related to the Permanent Notes held by Holdings. The Company made cashpayments to Holdings of $3.5 million and $3.0 million during the three monthsended March 31, 2010 and 2009, respectively. Interest accrued by theCompany and payable to Holdings as of March 31, 2010 and December 31,2009 amounted to $1.5 million and $3.2 million, respectively.

 

The Company has entered into an accounts receivablesecuritization arrangement under which TruGreen LawnCare and Terminix may sellcertain eligible trade accounts receivable to Funding, the Company’s whollyowned, bankruptcy-remote subsidiary, which is consolidated for financialreporting purposes. Funding, in turn, may transfer, on a revolving basis, anundivided percentage ownership interest of up to $50.0 million in the poolof accounts receivable to one or both of the Purchasers. The amount of theeligible receivables varies during the year based on seasonality of thebusinesses and could, at times, limit the amount available to the Company fromthe sale of these interests.

 

During the three monthsended March 31, 2010, there were no transfers of interests in the pool oftrade accounts receivables to Purchasers under this arrangement. As of March 31,2010 and December 31, 2009, the Company had $10.0 million outstandingunder the arrangement and, as of March 31, 2010, had approximately $31.8million of eligible receivables and $21.8 million of remaining capacity availableunder the trade accounts receivable securitization arrangement.

 

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The accounts receivablesecuritization arrangement is a 364-day facility that is renewable annually atthe option of Funding, with a final termination date of July 17, 2012.Only one of the Purchasers is required to purchase interests under thearrangement. If this Purchaser were to exercise its right to terminate itsparticipation in the arrangement, which it may do in the third quarter of eachyear, the amount of cash available to the Company under this arrangement may bereduced or eliminated. As part of the annual renewal of the facility, whichlast occurred on July 21, 2009, this Purchaser agreed to continue itsparticipation in the arrangement at least through July 20, 2010.

 

As aholding company, we depend on our subsidiaries to distribute funds to us sothat we may pay our obligations and expenses, including our debt serviceobligations. The ability of our subsidiaries to make distributions anddividends to us depends on their operating results, cash requirements andfinancial condition and general business conditions. Our insurancesubsidiaries and home services and similar subsidiaries (through which weconduct our American Home Shield business) are subject to significantregulatory restrictions under the laws and regulations of the states in whichthey operate. Among other things, such laws and regulations require certainsuch subsidiaries to maintain minimum capital and net worth requirements andmay limit the amount of ordinary and extraordinary dividends and other paymentsthat these subsidiaries can pay to us. For example, certain states prohibitpayment by these subsidiaries to the Company of dividends in excess of 10percent of their capital as of the most recent year end, as determined inaccordance with prescribed insurance accounting practices in those states. Ofthe $285.6 million as of March 31, 2010, which we identify as beingpotentially unavailable to be paid to the Company by its subsidiaries,approximately $220.1 million is held by our home services and insurancesubsidiaries and is subject to these regulatory limitations on the payment offunds to us. Such limitations will be in effect throughout 2010, and similarlimitations will be re-computed as of December 31, 2010 and will be ineffect in 2011. The remainder of the $285.6 million, or $65.5 million, isrelated to amounts that the Company’s management does not consider readilyavailable to be used to service the Company’s indebtedness due, among otherreasons, to the Company’s cash management practices and working capital needsat various subsidiaries.

 

TheCompany’s Annual Report on Form 10-K for the year ended December 31,2009 included disclosure of the Company’s contractual obligations andcommitments as of December 31, 2009. The Company continues to make thecontractually required payments and, therefore, the 2010 obligations andcommitments as listed in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2009 have been reduced by the required payments.There were no material changes outside of the ordinary course of business inthe Company’s previously disclosed contractual obligations and commitmentsduring the three months ended March 31, 2010.

 

***Off-Balance Sheet Arrangements***

 

TheCompany has off-balance sheet arrangements in the form of guarantees asdiscussed in Note 4 of the condensed consolidated financial statements.

 

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**InformationRegarding Forward-Looking Statements**

 

This report includesforward-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, the degree and timingof economic recovery; our liquidity; cash flows; results of operations;financial condition; prospects; growth strategies; future impairments; capitalexpenditures and requirements; customer retention; the continuation of tuck-inacquisitions; other acquisitions; the impact of interest rate hedges and fuelswaps; the cost savings from restructurings and reorganizations and expectedcharges related to such restructurings and reorganizations; and the impact ofprevailing economic conditions.

 

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 of important factors, includingthe risks and uncertainties discussed in Item 1A—Risk Factors in Part Iin the Company’s Annual Report on Form 10-K for the year ended December 31,2009, could cause actual results and outcomes to differ materially from thosein the forward-looking statements. Additional factors thatcould cause actual results and outcomes to differ from those reflected inforward-looking statements include, without limitation:

 

·                  the effects of oursubstantial indebtedness and the limitations contained in the agreementsgoverning such indebtedness;

 

·                  our ability to generate thesignificant amount of cash needed to fund our operations and service our debtobligations and debt repurchases;

 

·                  changes in interest rates;

 

·                  our ability to securesources of financing or other funding to allow for direct purchases ofcommercial vehicles;

 

·                  changes in the source andintensity of competition in our market segments;

 

·                  weather conditions andseasonality factors that affect the demand for our services, including anyimpact from climate change factors, known and unknown;

 

·                  higher commodity prices andlack of availability, including fuel and fertilizers;

 

·                  increases in operatingcosts, such as higher insurance premiums, self-insurance costs and health carecosts;

 

·                  employee retention, laborshortages, including shortages due to immigration legislation, or increases incompensation and benefits costs, including costs related to the comprehensivehealth care reform law enacted in the first quarter of 2010;

 

·                  epidemics, pandemics orother public health concerns or crises;

 

·                  a continuation or change ingeneral economic, financial and credit conditions in the United States andelsewhere (including further deterioration or disruption in the credit andfinancial markets), especially as such may affect home sales, consumer orbusiness liquidity, bank failures, consumer or commercial confidence orspending levels including as a result of inflation or deflation, unemployment,interest rate fluctuations, mortgage foreclosures and subprime creditdislocations;

 

·                  a failure of any insurancecompany that provides insurance to us;

 

·                  changes in the type or mixof our service offerings or products;

 

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·                  existing and futuregovernmental regulation and the enforcement thereof, including regulationrelating to restricting or banning of telemarketing, door-to-door solicitation,direct mail or other marketing activities, the Termite Inspection ProtectionPlan, pesticides and/or fertilizers;

 

·                  laws and regulationsrelating to financial reform and the use of derivative instruments, includingby companies such as ServiceMaster;

 

·                  the success of and costsassociated with restructuring initiatives;

 

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

 

·                  possible labor organizingactivities at the Company or its franchisees;

 

·                  risks associated withacquisitions and dispositions;

 

·                  risks associated with budgetdeficits at federal, state and local levels resulting from deterioratingeconomic conditions, which could result in federal, state and local governmentsdecreasing their purchasing of our products or services and/or increasing taxeson businesses to generate more tax revenues, which could adversely impact ourrevenue, earnings, tax payments and cash flows, as applicable;

 

·                  the timing and structuringof our business process outsourcing, including any current or futureoutsourcing of all or portions of our information technology, call center andother corporate functions, and risks associated with such outsourcing; and

 

·                  other factors described fromtime to time in documents that we file with the SEC.

 

You should read this reportcompletely and with the understanding that actual future results may bematerially different from expectations. All forward-looking statements made inthis report are qualified by these cautionary statements. These forward-lookingstatements are made only as of the date of this report, and we do not undertakeany obligation, other than as may be required by law, to update or revise anyforward-looking statements to reflect changes in assumptions, the occurrence ofevents, unanticipated or otherwise, changes in future operating results overtime 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 only beviewed as historical data.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

*InterestRate 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 these contracts fortrading or speculative purposes. The market risk associated with debtobligations and other significant instruments as of March 31, 2010 has notmaterially changed from December 31, 2009 (see Item 7A of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2009).

 

*Fuel Price Risk*

 

TheCompany is exposed to market risk for changes in fuel prices through theconsumption of fuel by its vehicle fleet in the delivery of services to itscustomers. The Company uses approximately 25 million gallons of fuel on anannual basis. A 10 percent change in fuel prices would result in a change ofapproximately $6.4 million in the Company’s annual fuel cost before consideringthe impact of fuel swap contracts.

 

TheCompany uses fuel swap contracts to mitigate the financial impact offluctuations in fuel prices. As of March 31, 2010, the Company had fuelswap contracts to pay fixed prices for fuel with an aggregate notional amountof $48.8 million, maturing through 2011. The estimated fair value of thesecontracts at March 31, 2010 was an asset of $8.5 million. These fuel swapcontracts provide a fixed price for approximately 83.7 percent and 6.9 percentof the Company’s estimated fuel usage for the remainder of 2010 and 2011,respectively.

 

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##### **ITEM4. CONTROLS AND PROCEDURES**

##### ** **

##### **Effectiveness of Disclosure Controls and Procedures.**ServiceMaster’s ChiefExecutive Officer, J. Patrick Spainhour, and ServiceMaster’s Senior VicePresident and Chief Financial Officer, Steven J. Martin, have evaluatedServiceMaster’s disclosure controls and procedures (as defined in Rule 15d-15(e))as of the end of the period covered by this Quarterly Report on Form 10-Q.ServiceMaster’s disclosure controls and procedures include a roll-up offinancial and non-financial reporting that is consolidated in the principalexecutive office of ServiceMaster in Memphis, Tennessee. Messrs. Spainhourand Martin have concluded that both the design and operation of ServiceMaster’sdisclosure controls and procedures are effective.

##### ** **

##### **Changes in Internal Control over Financial Reporting.**No change inServiceMaster’s internal control over financial reporting occurred during thefirst quarter of 2010 that has materially affected, or is reasonably likely tomaterially affect, ServiceMaster’s internal control over financial reporting.

##### ** **

**PART II.OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

** **

***Squires v. The ServiceMaster Company and Clayton, Dubilier &Rice, Inc.***

 

On March 11, 2008, alawsuit was filed by Vernon Squires, the Company’s former General Counsel, onbehalf of himself and a putative class, against the Company and CD&R, inthe Chancery Court of Shelby County, Tennessee. The complaint alleges that, inconnection with the acquisition of the Company by the Equity Sponsors, thedefendants improperly cancelled out-of-the-money stock options that had beenpreviously granted to individuals in connection with certain stock optionplans. On March 30, 2010, the Court approved a settlement agreement thatcalls for the Company to pay monies into a settlement fund that will be used topay all claims asserted, or arising, from cancellation of the stock options,including claims for attorney fees related thereto. The amount to be paid intothe settlement fund is not material to the Company’s financial condition orresults of operations.

 

**ITEM 6. EXHIBITS**

** **
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                      |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                      |
| 10                   |       | Form of  Employee Stock Subscription Agreement under the ServiceMaster Global  Holdings, Inc. Stock Incentive Plan related to stock option exercises.                                           |
|                 |       |                                                                                                                                                                                                      |
| 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**

** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

Date: May 13,2010

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

 

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