**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 September 30, 2009**

 

**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 ofincorporation 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 x  No o

 

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 (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required 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

 

The registrant is aprivately held corporation and its equity shares are not publicly traded. At November 12,2009, 1,000 shares of the registrant’s common stock were outstanding, all ofwhich were owned by CDRSVM Holding, Inc.

 

 

 

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**TABLE OFCONTENTS**

 
| ** **                                                                                                                       | ** ** | **Page  No.** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|---------------|
| THE SERVICEMASTER COMPANY (Registrant) -                                                                                         |       |          |
|                                                                                                                             |       |          |
| Part I. Financial Information                                                                                               |       |          |
|                                                                                                                             |       |          |
| Item 1: Financial Statements (Unaudited)                                                                                         |       |          |
|                                                                                                                             |       |          |
| Condensed Consolidated Statements of Operations  for the three months ended September 30, 2009 and September 30,  2008 |       | 3             |
| ** **                                                                                                                       | ** ** | ** **    |
| Condensed Consolidated Statements of Operations  for the nine months ended September 30, 2009 and September 30, 2008   |       | 4             |
| ** **                                                                                                                       | ** ** | ** **    |
| Condensed Consolidated Statements of Financial  Position as of September 30, 2009 and December 31, 2008                |       | 5             |
| ** **                                                                                                                       | ** ** | ** **    |
| Condensed Consolidated Statements of Cash Flows  for the nine months ended September 30, 2009 and September 30, 2008   |       | 6             |
|                                                                                                                             |       |          |
| Notes to Condensed Consolidated Financial  Statements                                                                            |       | 7             |
| ** **                                                                                                                       | ** ** | ** **    |
| Item 2: Management’s Discussion and Analysis of  Financial Condition and Results of Operations                              |       | 30            |
| ** **                                                                                                                       | ** ** | ** **    |
| Item 3: Quantitative and Qualitative  Disclosures About Market Risk                                                         |       | 53            |
| ** **                                                                                                                       | ** ** | ** **    |
| Item 4T: Controls and Procedures                                                                                                 |       | 53            |
| ** **                                                                                                                       | ** ** | ** **    |
| Part II. Other Information                                                                                                  |       | 54            |
| ** **                                                                                                                       | ** ** | ** **    |
| Item 6: Exhibits                                                                                                                 |       | 54            |
|                                                                                                                             |       |          |
| Signature                                                                                                                        |       | 55            |

 

2

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**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

**THESERVICEMASTER COMPANY**

**CondensedConsolidated Statements of Operations (Unaudited)**

*(Inthousands)*

 
| ** **                                                                 | ** ** | **Three months ended********September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Operating Revenue                                                     |       | $                                                | 920,514    |   | $ | 948,073 |   |
|                                                                       |       |                                             |       |   |   |
| Operating Costs and Expenses:                               |       |                                             |       |   |   |
| Cost of services rendered and products sold  |       | 527,445                                          |       | 559,555 |   |
| Selling and administrative expenses                         |       | 249,302                                          |       | 235,172 |   |
| Amortization expense                                                       |       | 40,429                                           |       | 40,450 |   |
| Merger related charges                                                     |       | 786                                              |       | 412 |   |
| Restructuring charges                                                      |       | 7,712                                            |       | 1,813 |   |
| Total operating costs and expenses                     |       | 825,674                                          |       | 837,402 |   |
|                                                                       |       |                                             |       |   |   |
| Operating Income                                                      |       | 94,840                                           |       | 110,671 |   |
|                                                                       |       |                                             |       |   |   |
| Non-operating Expense (Income):                                  |       |                                             |       |   |   |
| Interest expense                                                      |       | 74,216                                           |       | 83,886 |   |
| Interest and net investment income                               |       | (4,558                                           | )          | (244 | ) |
| Other expense                                                         |       | 176                                              |       | 141 |   |
|                                                                       |       |                                             |       |   |   |
| Income from Continuing Operations  before Income Taxes |       | 25,006                                           |       | 26,888 |   |
| Provision for income taxes                                       |       | 4,102                                            |       | 8,683 |   |
|                                                                       |       |                                             |       |   |   |
| Income from Continuing Operations                                |       | 20,904                                           |       | 18,205 |   |
|                                                                       |       |                                             |       |   |   |
| Loss from discontinued operations, net of income taxes                     |       | (396                                             | )          | (1,186 | ) |
| Net Income                                                            |       | $                                                | 20,508     |   | $ | 17,019 |   |

 

*Seeaccompanying Notes to the Condensed Consolidated Financial Statements*

 

3

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**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

**THESERVICEMASTER COMPANYCondensed Consolidated Statements of Operations (Unaudited)**

*(Inthousands)*

* *
| ** **                                                                              | ** ** | **Nine months ended********September 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| Operating Revenue                                                                  |       | $                                               | 2,523,733  |   | $ | 2,577,609 |   |
|                                                                                    |       |                                            |       |   |   |
| Operating Costs and Expenses:                                            |       |                                            |       |   |   |
| Cost of services rendered and products sold               |       | 1,475,218                                       |       | 1,566,657 |   |
| Selling and administrative expenses                                      |       | 662,994                                         |       | 653,402 |   |
| Amortization expense                                                                    |       | 121,139                                         |       | 133,092 |   |
| Merger related charges                                                                  |       | 2,234                                           |       | 767 |   |
| Restructuring charges                                                                   |       | 20,625                                          |       | 9,143 |   |
| Total operating costs and expenses                                  |       | 2,282,210                                       |       | 2,363,061 |   |
|                                                                                    |       |                                            |       |   |   |
| Operating Income                                                                   |       | 241,523                                         |       | 214,548 |   |
|                                                                                    |       |                                            |       |   |   |
| Non-operating Expense (Income):                                               |       |                                            |       |   |   |
| Interest expense                                                                   |       | 225,538                                         |       | 256,897 |   |
| Interest and net investment (income)  loss                               |       | (3,192                                          | )          | 1,637 |   |
| Gain on extinguishment of debt                                                          |       | (46,106                                         | )          | — |   |
| Other expense                                                                      |       | 555                                             |       | 418 |   |
|                                                                                    |       |                                            |       |   |   |
| Income  (Loss) from Continuing Operations  before Income Taxes |       | 64,728                                          |       | (44,404 | ) |
| Provision (Benefit) for income taxes                                          |       | 20,720                                          |       | (8,341 | ) |
|                                                                                    |       |                                            |       |   |   |
| Income (Loss) from Continuing Operations                                      |       | 44,008                                          |       | (36,063 | ) |
|                                                                                    |       |                                            |       |   |   |
| Loss from discontinued operations, net of income taxes                                  |       | (666                                            | )          | (4,670 | ) |
| Net Income (Loss)                                                                  |       | $                                               | 43,342     |   | $ | (40,733 | ) |

 

*Seeaccompanying Notes to the Condensed Consolidated Financial Statements*

 

4

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**THESERVICEMASTER COMPANY**

**CondensedConsolidated Statements of Financial Position**

*(Inthousands, except share data)*

 
| ** **                                                                   | ** ** | **As  of********September 30,********2009** | ** ** | **As  of********December 31,********2008** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                   | ** ** | **(Unaudited)**                                  | ** ** | **(Audited)**                                   | ** ** |
| Assets                                                                       |       |                                             | ** ** | ** **                                      | ** ** |
| Current Assets:                                                              |       |                                             |       |                                            |       |
| Cash and cash equivalents                                                    |       | $                                                | 207,873    |                                            | $          | 405,587 |   |
| Marketable securities                                                        |       | 18,544                                           |       | 22,928                                          |       |
| Receivables, less allowance of $22,620 and $21,138,  respectively            |       | 394,349                                          |       | 335,927                                         |       |
| Inventories                                                                  |       | 77,936                                           |       | 80,018                                          |       |
| Prepaid expenses and other assets                                            |       | 46,066                                           |       | 37,648                                          |       |
| Deferred customer acquisition costs                                          |       | 40,666                                           |       | 36,514                                          |       |
| Deferred taxes                                                               |       | 34,890                                           |       | 42,945                                          |       |
| Assets of discontinued operations                                            |       | 56                                               |       | 412                                             |       |
| Total Current Assets                                                         |       | 820,380                                          |       | 961,979                                         |       |
| Property and Equipment:                                                      |       |                                             |       |                                            |       |
| At cost                                                                      |       | 334,977                                          |       | 287,818                                         |       |
| Less: accumulated depreciation                                               |       | (118,833                                         | )          | (72,189                                         | )          |
| Net property and equipment                                                   |       | 216,144                                          |       | 215,629                                         |       |
|                                                                         |       |                                             |       |                                            |       |
| Other Assets:                                                                |       |                                             |       |                                            |       |
| Goodwill                                                                     |       | 3,110,492                                        |       | 3,093,909                                       |       |
| Intangible assets, primarily trade names, service  marks and trademarks, net |       | 2,852,525                                        |       | 2,967,984                                       |       |
| Notes receivable                                                             |       | 24,083                                           |       | 25,628                                          |       |
| Long-term marketable securities                                              |       | 111,204                                          |       | 110,134                                         |       |
| Other assets                                                                 |       | 33,581                                           |       | 35,350                                          |       |
| Debt issuance costs                                                          |       | 70,446                                           |       | 83,014                                          |       |
| Total Assets                                                                 |       | $                                                | 7,238,855  |                                            | $          | 7,493,627 |   |
|                                                                         |       |                                             |       |                                            |       |
| Liabilities  and Shareholder’s Equity                                   |       |                                             |       |                                            |       |
|                                                                         |       |                                             |       |                                            |       |
| Current Liabilities:                                                         |       |                                             |       |                                            |       |
| Accounts payable                                                             |       | $                                                | 82,805     |                                            | $          | 89,242 |   |
| Accrued liabilities:                                                         |       |                                             |       |                                            |       |
| Payroll and related expenses                                                 |       | 79,990                                           |       | 83,036                                          |       |
| Self-insured claims and related expenses                                     |       | 81,877                                           |       | 91,923                                          |       |
| Other                                                                        |       | 128,298                                          |       | 202,174                                         |       |
| Deferred revenue                                                             |       | 442,518                                          |       | 443,426                                         |       |
| Liabilities of discontinued operations                                       |       | 2,449                                            |       | 4,870                                           |       |
| Current portion of long-term debt                                            |       | 104,851                                          |       | 221,269                                         |       |
| Total Current Liabilities                                                    |       | 922,788                                          |       | 1,135,940                                       |       |
|                                                                         |       |                                             |       |                                            |       |
| Long-Term Debt                                                               |       | 3,917,874                                        |       | 4,044,823                                       |       |
|                                                                         |       |                                             |       |                                            |       |
| Other Long-Term Liabilities:                                                 |       |                                             |       |                                            |       |
| Deferred taxes                                                               |       | 987,981                                          |       | 981,746                                         |       |
| Liabilities of discontinued operations                                       |       | 4,027                                            |       | 4,077                                           |       |
| Other long-term obligations, primarily self-insured  claims                  |       | 201,639                                          |       | 194,682                                         |       |
| Total Other Long-Term Liabilities                                            |       | 1,193,647                                        |       | 1,180,505                                       |       |
|                                                                         |       |                                             |       |                                            |       |
| 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                                                   |       | 1,444,424                                        |       | 1,438,432                                       |       |
| Retained deficit                                                             |       | (206,577                                         | )          | (249,919                                        | )          |
| Accumulated other comprehensive loss                                         |       | (33,301                                          | )          | (56,154                                         | )          |
| Total Shareholder’s Equity                                              |       | 1,204,546                                        |       | 1,132,359                                       |       |
| Total Liabilities and Shareholder’s Equity                              |       | $                                                | 7,238,855  |                                            | $          | 7,493,627 |   |

 

*Seeaccompanying Notes to the Condensed Consolidated Financial Statements*

 

5

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**THE SERVICEMASTERCOMPANY**

**CondensedConsolidated Statements of Cash Flows (Unaudited)**

*(Inthousands)*

 
| ** **                                                                                  | ** ** | **Nine months ended********September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| Cash and Cash Equivalents at Beginning of Period                                            |       | $                                               | 405,587    |   | $ | 207,219 |   |
|                                                                                        |       |                                            |       |   |   |
| Cash Flows from Operating Activities from Continuing  Operations:                           |       |                                            |       |   |   |
| Net Income (Loss)                                                                           |       | 43,342                                          |       | (40,733 | ) |
| Adjustments to reconcile net income (loss) to net cash  provided from operating activities: |       |                                            |       |   |   |
| Loss from discontinued operations                                                           |       | 666                                             |       | 4,670 |   |
| Depreciation expense                                                                        |       | 48,781                                          |       | 39,215 |   |
| Amortization expense                                                                        |       | 121,139                                         |       | 133,092 |   |
| Amortization of debt issuance costs                                                         |       | 10,989                                          |       | 23,366 |   |
| Gain on extinguishment of debt                                                              |       | (46,106                                         | )          | — |   |
| Deferred income tax provision (benefit)                                                     |       | 6,887                                           |       | (18,806 | ) |
| Option and restricted stock expense                                                         |       | 5,992                                           |       | 5,137 |   |
| Restructuring charges                                                                       |       | 20,625                                          |       | 9,143 |   |
| Cash payments related to restructuring charges                                              |       | (19,805                                         | )          | (18,370 | ) |
| Merger related charges                                                                      |       | 2,234                                           |       | 767 |   |
| Change in working capital, net of acquisitions:                                             |       |                                            |       |   |   |
| Current income taxes                                                                        |       | 12,933                                          |       | 66 |   |
| Receivables                                                                                 |       | (56,039                                         | )          | (63,395 | ) |
| Inventories and other current assets                                                        |       | (16,533                                         | )          | (45,415 | ) |
| Accounts payable                                                                            |       | (9,214                                          | )          | 412 |   |
| Deferred revenue                                                                            |       | (2,919                                          | )          | 34,773 |   |
| Accrued liabilities                                                                         |       | (63,185                                         | )          | (13,905 | ) |
| Other, net                                                                                  |       | 9,417                                           |       | 1,692 |   |
| Net Cash Provided from Operating Activities from  Continuing Operations                     |       | 69,204                                          |       | 51,709 |   |
|                                                                                        |       |                                            |       |   |   |
| Cash Flows from Investing Activities from Continuing  Operations:                           |       |                                            |       |   |   |
| Property additions                                                                          |       | (50,470                                         | )          | (75,194 | ) |
| Sale of equipment and other assets                                                          |       | 2,756                                           |       | 5,090 |   |
| Acquisition of The ServiceMaster Company                                                    |       | (1,482                                          | )          | (26,082 | ) |
| Other business acquisitions, net of cash acquired                                           |       | (20,730                                         | )          | (27,504 | ) |
| Notes receivable, financial investments and  securities, net                                |       | 8,032                                           |       | 97,417 |   |
| Net Cash Used for Investing Activities from Continuing  Operations                          |       | (61,894                                         | )          | (26,273 | ) |
|                                                                                        |       |                                            |       |   |   |
| Cash Flows from Financing Activities from Continuing  Operations:                           |       |                                            |       |   |   |
| Borrowings of debt                                                                          |       | —                                          |       | 357,000 |   |
| Payments of debt                                                                            |       | (201,371                                        | )          | (227,312 | ) |
| Debt issue costs paid                                                                       |       | (410                                            | )          | (26,587 | ) |
| Net  Cash (Used for) Provided from Financing Activities from Continuing Operations          |       | (201,781                                        | )          | 103,101 |   |
|                                                                                        |       |                                            |       |   |   |
| Cash Flows from Discontinued Operations:                                                    |       |                                            |       |   |   |
| Cash (used for) provided from operating activities                                          |       | (2,329                                          | )          | 3,995 |   |
| Cash (used for) provided from investing activities                                          |       | (914                                            | )          | 19,315 |   |
| Cash used for financing activities                                                          |       | —                                          |       | (167 | ) |
| Net Cash (Used for) Provided from Discontinued  Operations                                  |       | (3,243                                          | )          | 23,143 |   |
|                                                                                        |       |                                            |       |   |   |
| Cash (Decrease) Increase During the Period                                                  |       | (197,714                                        | )          | 151,680 |   |
|                                                                                        |       |                                            |       |   |   |
| Cash and Cash Equivalents at End of Period                                                  |       | $                                               | 207,873    |   | $ | 358,899 |   |

 

*See accompanyingNotes to the Condensed Consolidated Financial Statements*

 

6

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**THESERVICEMASTER COMPANY**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**Note 1.Basis of Presentation**

 

The condensedconsolidated financial statements include the accounts of The ServiceMasterCompany and its subsidiaries, collectively referred to as the “Company” or “ServiceMaster”.

 

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

 

On July 24,2007 (the “Closing Date”), the Merger was completed, and each issued andoutstanding share of ServiceMaster common stock, other than shares held byServiceMaster or Holdings or their subsidiaries and shares held by stockholderswho validly perfected their appraisal rights under Delaware law, was convertedinto the right to receive $15.625 in cash (the “Merger Consideration”). Eachshare of ServiceMaster common stock owned by ServiceMaster, Holdings orAcquisition Co. or any of their respective direct or indirect wholly-ownedsubsidiaries was cancelled and retired, and no consideration was paid inexchange for it.

 

Immediatelyfollowing the completion of the Merger, all of the outstanding capital stock ofHoldings, the ultimate parent company of ServiceMaster, was owned by investmentfunds sponsored by, or affiliated with, Clayton, Dubilier & Rice, Inc.(“CD&R”), Citigroup Alternative Investments LLC (formerly known asCitigroup Private Equity L.P., “Citigroup”) BAS Capital FundingCorporation (“BAS”) and JP Morgan Chase (formerly known as J.P. MorganVentures Corporation, “JP Morgan”) (collectively, the “Equity Sponsors”).

 

Equitycontributions totaling $1,431.1 million from the Equity Sponsors, togetherwith (i) borrowings under a new $1,150.0 million senior unsecured interimloan facility (“Interim Loan Facility”), (ii) borrowings under a new$2,650.0 million senior secured term loan facility and (iii) cash onhand at ServiceMaster, were used, among other things, to finance the aggregateMerger Consideration, to make payments in satisfaction of other equity-basedinterests in ServiceMaster under the Merger Agreement, to settle existinginterest rate swaps, to redeem or provide for the repayment of certain of theCompany’s existing indebtedness and to pay related transaction fees andexpenses. In addition, letters of credit issued under a new $150.0 millionpre-funded letter of credit facility (together with the senior secured term loanfacility, the “Term Facilities”) were used to replace and/or secure letters ofcredit previously issued under a ServiceMaster credit facility that wasterminated as of the Closing Date. On the Closing Date, the Company alsoentered into, but did not draw under, a new $500.0 million senior securedrevolving credit facility (the “Revolving Credit Facility”).

 

The Interim LoanFacility matured on July 24, 2008. On the maturity date, outstandingamounts under the Interim Loan Facility were converted on a one to one basisinto 10.75%/11.50% senior toggle notes maturing in 2015 (“Permanent Notes”).The Permanent Notes were issued pursuant to a refinancing indenture. Inconnection with the issuance of Permanent Notes, ServiceMaster entered into aregistration rights agreement (the “Registration Rights Agreement”), pursuantto which ServiceMaster filed with the Securities and Exchange Commission (“SEC”)a registration statement with respect to the resale of the Permanent Notes,which was declared effective on January 16, 2009. ServiceMasterderegistered the Permanent Notes and terminated the effectiveness of theregistration statement on November 12, 2009 in accordance with the termsof the Registration Rights Agreement.

 

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 SEC. The Companyrecommends that the quarterly condensed consolidated financial statements beread in conjunction with the consolidated financial statements and the notesthereto included in the Company’s Annual Report on Form 10-K filed withthe SEC for the year ended December 31, 2008. The condensed consolidatedfinancial statements reflect all adjustments which are, in the opinion ofmanagement, necessary for the fair presentation of the financial position,results of operations and cash flows for the interim periods presented. Allintercompany transactions and balances have been eliminated in consolidation.The results of operations for any interim period are not necessarily indicativeof the results which might be achieved for a full year.

 

TheCompany has evaluated subsequent events through the date the accompanyingfinancial statements were issued, which was November 16, 2009.

 

7

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**Note 2. Significant AccountingPolicies**

 

The Company’s significantaccounting policies are included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008. The following selected accountingpolicies should be read in conjunction with that Annual Report on Form 10-K.

 

Revenues from lawn careand pest control services, as well as liquid and fumigation termiteapplications, are recognized as the services are provided. Revenues fromlandscaping services are recognized as they are earned based upon contractarrangements or when services are performed for non-contractual arrangements.The Company eradicates termites through the use of baiting systems, as well asthrough non-baiting methods (e.g., fumigation or liquid treatments). Termiteservices using baiting systems, termite inspection and protection contracts, aswell as home warranty services, are frequently sold through annual contractsfor a one-time, upfront payment. Direct costs of these contracts (service costsfor termite contracts and claim costs for home service contracts) are expensedas incurred. The Company recognizes revenue over the life of these contracts inproportion to the expected direct costs. Those costs bear a direct relationshipto the fulfillment of the Company’s obligations under the contracts and arerepresentative of the relative value provided to the customer (proportionalperformance method). Home service contract revenue is recognized based on theexpected emergence of total claim costs. The Company regularly reviews itsestimates of direct costs for its termite bait and home service contracts andadjusts the estimates when appropriate. Revenue from trade name licensingarrangements is recognized when earned.

 

The Company has franchiseagreements in its TruGreen LawnCare, Terminix, ServiceMaster Clean, MerryMaids, AmeriSpec and Furniture Medic businesses. Franchise revenue (which inthe aggregate represents approximately four percent of consolidated revenuefrom continuing operations) consists principally of continuing monthly feesbased upon the franchisee’s customer level revenue. Monthly fee revenue isrecognized when the related customer level revenue is reported by thefranchisee and collectibility is reasonably assured. Franchise revenue alsoincludes initial fees resulting from the sale of a franchise. These fees arefixed and are recognized as revenue when collectibility is reasonably assuredand all material services or conditions relating to the sale have beensubstantially performed. Total profits from the franchised operations(excluding trade name licensing) were approximately $20.3 million**and $15.6 million for the three months ended September 30,2009 and 2008, respectively, and consolidated operating income from continuingoperations was approximately $94.8 million and $110.7 million for the threemonths ended September 30, 2009 and 2008, respectively. Total profits fromthe franchised operations (excluding trade name licensing) were approximately$49.9 million**and $47.3 million for the ninemonths ended September 30, 2009 and 2008, respectively, and consolidatedoperating income from continuing operations was approximately $241.5 millionand $214.5 million for the nine months ended September 30, 2009 and 2008,respectively. We evaluate the performance of our franchise businesses basedprimarily on operating profit before corporate general and administrativeexpenses, interest expense and amortization of intangible assets. The portionof total franchise fee income related to initial fees received from the sale offranchises was immaterial to the Company’s condensed consolidated financialstatements for all periods.

 

The Company had $442.5million and $443.4 million of deferred revenue at September 30, 2009 and December 31,2008, respectively. Deferred revenue consists primarily of payments receivedfor annual contracts relating to home service contracts, termite baiting,termite inspection, pest control and lawn care services.

 

Customer acquisitioncosts, which are incremental and direct costs of obtaining a customer, aredeferred and amortized over the life of the related contract in proportion torevenue recognized. These costs include sales commissions and direct sellingcosts which can be shown to have resulted in a successful sale.

 

TruGreen LawnCare hassignificant seasonality in its business. In the winter and spring, thisbusiness sells a series of lawn applications to customers which are renderedprimarily in March through October (the production season). Thisbusiness incurs incremental selling expenses at the beginning of the year thatdirectly relate to successful sales for which the revenues are recognized inlater quarters. On an interim basis, TruGreen LawnCare defers these incrementalselling expenses, pre-season advertising costs and annual repairs andmaintenance procedures that are performed primarily in the first quarter. Thesecosts are deferred and recognized in proportion to the contract revenue overthe production season, and are not deferred beyond the fiscal year-end. Otherbusiness segments of the Company also defer, on an interim basis, advertisingcosts incurred early in the year. These pre-season costs are deferred and recognizedapproximately in proportion to revenue over the balance of the year and are notdeferred beyond the fiscal year-end.

 

The cost ofdirect-response advertising at Terminix and TruGreen LawnCare, consistingprimarily of direct-mail promotions, is capitalized and amortized over itsexpected period of future benefits.

 

8

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The fair values of theCompany’s financial instruments reflect the amounts that would be received tosell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date (exit price). The fairvalue estimates presented in this reportare based on information available to the Company as of September 30, 2009and December 31, 2008.

 

The preparation of thecondensed consolidated financial statements requires management to make certainestimates and assumptions required under GAAP which may differ from actualresults. Disclosures in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2008 presented the significant areas that requirethe use of management’s estimates and discussed how management formed itsjudgments. The areas discussed included revenue recognition; the allowance foruncollectible receivables; accruals for self-insured retention limits relatedto medical, workers’ compensation, auto and general liability insurance claims;accruals for home service contract and termite damage claims; the possibleoutcome of outstanding litigation; accruals for income tax liabilities as wellas deferred tax accounts; the deferral and amortization of customer acquisitioncosts; useful lives for depreciation and amortization expense; the valuation ofmarketable securities; and the valuation of tangible and intangible assets andgoodwill.

 

**Note 3. Restructuring Charges**

 

The Company is engaged ina reorganization and restructuring of certain of its businesses and supportfunctions known as Fast Forward. Among the purposes of Fast Forward is toeliminate layers and bureaucracy and simplify work processes in order to betteralign the Company’s work processes around its operational and strategicobjectives. Fast Forward is being implemented in phases. The first phaseinvolved, among other things, a reduction in work force and various processimprovements, including the closing of American Home Shield’s call centerlocated in Santa Rosa, California. The second phase includes, among otherthings, the organization of certain corporate support functions into centers ofexcellence which are expected to deliver higher quality services to ourbusiness units at lower costs, the outsourcing to third party vendors ofvarious business activities that currently are handled internally, as well asother employee workforce reductions expected to result in cost-savings. Thefirst phase of Fast Forward was substantially completed in the first quarter of2008, and the second phase is underway.

 

As part of the secondphase of Fast Forward, on December 11, 2008, the Company entered into anagreement with International Business Machines Corporation (“IBM”) pursuant towhich IBM will provide information technology operations and applicationsdevelopment services to the Company. The initial term of the agreement is sevenyears. The agreement commenced on December 11, 2008 and the services werephased in during the first half of 2009. In connection with the agreement, theCompany eliminated approximately 275 positions. As a result of the eliminationof positions and the transition of information technology services to IBM, theCompany incurred charges related to, among other things, employee retention andseverance costs, transition fees paid to IBM and other consulting fees. Almostall charges related to the agreement were cash charges and were expensedthroughout the transition period. Such charges amounted to approximately $3.5million, pre-tax, during 2008 and approximately $9.5 million, pre-tax, duringthe first nine months of 2009. These charges were recorded as restructuringcharges in the condensed consolidated statement of operations as incurred. 

 

In connection with FastForward, the Company incurred costs of approximately $1.5 million ($1.1million after-tax) and $11.3 million ($7.1 million after-tax) for the three andnine months ended September 30, 2009, respectively, which included thecosts described above. For the three months ended September 30, 2009, suchcosts included consulting fees of approximately $1.1 million and severance,lease termination and other costs of approximately $0.4 million. For the ninemonths ended September 30, 2009, these charges included transition feespaid to IBM of approximately $7.2 million, consulting fees of approximately$2.4 million and severance, lease termination and other costs of approximately$1.7 million. In the three and nine months ended September 30, 2008, theCompany incurred costs of approximately $2.0 million ($1.3 millionafter-tax) and $8.7 million ($5.4 million after-tax), respectively, inconnection with Fast Forward. The results for the three months ended September 30,2008 included consulting fees of approximately $0.6 million and severance,lease termination and other costs of approximately $1.4 million. For the ninemonths ended September 30, 2008, these charges included consulting fees ofapproximately $4.4 million and severance, lease termination and other costs ofapproximately $4.3 million.

 

For both the three andnine months ended September 30, 2009, TruGreen LawnCare recordedrestructuring costs of approximately $6.0 million ($3.7 million after-tax)relating to a reorganization of field leadership, which included acentralization of core field functions, and a restructuring of branchoperations, which will allow branch managers to focus on sales and service bycentralizing certain administrative functions. For both the three and ninemonths ended September 30, 2009, these costs included approximately $4.1million of consulting fees, approximately $0.7 million of severance andapproximately $1.2 million of lease termination and other costs. In connectionwith the restructuring of branch operations, we would expect to incur cashcharges through the fourth quarter of 2010 related to, among other things,employee retention and severance costs and consulting fees, and such chargescould be material. The Company is currently unable to estimate the aggregateamount or timing of such charges or the anticipated related cash outlays.

 

9

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For the three and ninemonths ended September 30, 2009, Terminix recorded restructuring costs ofapproximately $0.2 million ($0.2 million after-tax) and $3.3 million ($2.1million after-tax), respectively, relating to a branch optimization project.These costs included approximately $0.2 million of lease termination costs forthe three months ended September 30, 2009, and approximately $3.0 millionof lease termination costs and approximately $0.3 million of severance costsfor the nine months ended September 30, 2009.

 

The results for the threeand nine months ended September 30, 2008 include restructuring chargesrelated to the Company’s consolidation of its corporate headquarters into itsoperations support center in Memphis, Tennessee and the closing of itsheadquarters in Downers Grove, Illinois. The transition to Memphis was substantiallycompleted in 2007. Almost all costs related to the transition were cashexpenditures and were expensed throughout the transition period. During thethree and nine months ended September 30, 2008, the Company reversed netexpenses of $0.2 million ($0.1 million after-tax) and recorded additionalexpenses of approximately $0.4 million ($0.3 million after-tax), respectively,relating to this relocation.

 

The pretax chargesdiscussed above are reported in the “Restructuring charges” line in the condensedconsolidated statements of operations.

 

**Note 4. Commitments andContingencies**

 

A portion of the Company’svehicle fleet and some equipment are leased through operating leases. The leaseterms are non-cancelable for the first twelve-month term, and then aremonth-to-month, cancelable at the Company’s option. There are residual valueguarantees by the Company (ranging from 70 percent to 84 percent ofthe estimated terminal value at the inception of the lease depending on theagreement) relative to these vehicles and equipment, which historically havenot resulted in significant net payments to the lessors. The fair value of theassets under all of the fleet and equipment leases is expected to substantiallymitigate the Company’s guarantee obligations under the agreements. At September 30,2009, the Company’s residual value guarantees related to the leased assetstotaled $85.9 million for which the Company has recorded the estimated fairvalue of these guarantees of approximately $1.7 million in the condensedconsolidated statement of financial position.

 

The Company maintainslease facilities with banks totaling $65.2 million, which provide for thefinancing of branch properties to be leased by the Company. At September 30,2009, approximately $65.2 million was funded under these facilities.Approximately $12.5 million of these leases are treated as capital leases andhave been included on the balance sheet as assets with related debt as of September 30,2009. The balance of the funded amount is treated as operating leases. Inconnection with the closing of the Merger, the Company amended these leaseseffective July 24, 2007. Among the modifications, the Company extended thelease terms through July 24, 2010 and made a $22.0 million investment inthe lease facilities. This $22.0 million investment is included in other assetsin the condensed consolidated statements of financial position, and will bereturned to the Company at the end of the lease term. The operating lease andcapital lease classifications of these leases did not change as a result of themodifications. At the end of the lease term, the Company may exercise any ofthe following three options related to the leased properties: (1) negotiatean extension to the current leasing arrangement; (2) return the propertiesto the lessor; or (3) purchase the properties for $65.2 million, the totalamount funded under the lease facilities. If the properties are returned to thelessor, the lessor will sell the properties and the Company will be obligatedto pay the lessor for any shortfall between the sales proceeds and the amountfunded under the lease facilities up to 73 percent of fair market value at thecommencement of the lease pursuant to a residual value guarantee.

 

In the third quarter of2009, the Company determined that it was probable that the fair value of theproperties under operating leases would be below the total amount funded underthe lease facilities at the end of the lease term. The Company’s currentestimate of this shortfall is approximately $11.8 million, which will berecorded over the remainder of the lease term. The Company recorded a charge of$2.7 million in the third quarter of 2009 related to this shortfall.  There was no similar charge in any priorperiod.

 

The Company carries insurancepolicies on insurable risks at levels that it believes to be appropriate,including workers’ compensation, auto and general liability risks. The Companypurchases insurance policies from third-party insurance carriers, whichtypically incorporate significant deductibles or self-insured retentions. TheCompany is required to pay all claims that fall below the retention limits. Asof September 30, 2009 and December 31, 2008, the Company had accruedself-insured claims of $138.7 million and $146.2 million, respectively. Duringthe nine months ended September 30, 2009 and 2008, the Company recordedprovisions for uninsured claims totaling $27.2 million and $27.8 million,respectively, and the Company paid claims totaling $34.7 million and $36.5million, respectively. In determining the Company’s accrual for self-insuredclaims, the Company uses historical claims experience to establish both thecurrent year accrual and the underlying provision for future losses. Thisactuarially determined provision and related accrual includes both knownclaims, as well as incurred but not reported claims. The Company adjusts itsestimate of accrued self-

 

10

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insured claims whenrequired to reflect changes based on factors such as changes in health carecosts, accident frequency and claim severity.

 

Accruals for home servicecontract claims in the American Home Shield business are made based on theCompany’s claims experience and actuarial projections. Termite damage claim accrualsare recorded based on both the historical rates of claims incurred within acontract year and the cost per claim. Current activity could differ causing achange in estimates. The Company has certain liabilities with respect toexisting or potential claims, lawsuits and other proceedings. The Companyaccrues for these liabilities when it is probable that future costs will beincurred and such costs can be reasonably estimated. Any resulting adjustments,which could be material, are recorded in the period the adjustments areidentified.

 

In the ordinary course ofconducting its business activities, the Company becomes involved in judicial,administrative and regulatory proceedings involving both private parties andgovernmental authorities. These proceedings include general and commercialliability and employment actions as well as environmental proceedings. TheCompany does not expect any of these proceedings to have a material effect onthe Company’s business, financial condition, annual results of operations orcash flows.

 

**Note 5. Goodwill and IntangibleAssets**

 

Inaccordance with accounting standards for goodwill and other intangibles,goodwill and intangible assets that are not amortized are subject to assessmentfor impairment by applying a fair-value based test on an annual basis or morefrequently if circumstances indicate a potential impairment. The Company’sannual assessment date is October 1.

 

The table belowsummarizes the goodwill balances by segment for continuing operations:

 
| **(In thousands)**                  | ** ** | **TruGreen  LawnCare** | ** ** | **TruGreen  LandCare** | ** ** | **Terminix** | ** ** | **American  Home********Shield** | ** ** | **Other********Operations &  Headquarters** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------------|------------|--------------|------------|----------------------------------|------------|------------------------------------------------------|------------|-----------|------------|
| Balance  at Dec. 31, 2008      |       | $                      | 1,161,507  |                   | $          | 45,782       |       | $                                | 1,352,799  |                                                 | $          | 348,309   |       | $ | 185,512 |   | $ | 3,093,909 |   |
| Acquisitions                        |       | 14,417                 |       | —                 |       | 3,411        |       | —                           |       | 932                                                  |       | 18,760    |       |
| Other(1)                            |       | (551                   | )          | (1,419                 | )          | (596         | )          | (225                             | )          | 614                                                  |       | (2,177    | )          |
| Balance  at September 30, 2009 |       | $                      | 1,175,373  |                   | $          | 44,363       |       | $                                | 1,355,614  |                                                 | $          | 348,084   |       | $ | 187,058 |   | $ | 3,110,492 |   |

 

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(1)                                 Primarily reflects the amortization oftax deductible goodwill

 

The table belowsummarizes the other intangible asset balances for continuing operations:

 
| ** **              | ** ** | **As of********September 30, 2009** | ** ** | **As of********December 31, 2008** | ** ** |
|-------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| **(In thousands)**      | ** ** | **Gross**                                | ** ** | **Accumulated  Amortization**           | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Trade  names(1)         |       | $                                        | 2,408,100  |                                    | $          | — |   | $ | 2,408,100 |   | $ | 2,408,100 |   | $ | — |   | $ | 2,408,100 |   |
| Customer  relationships |       | 666,048                                  |       | (316,465                                | )          | 349,583 |   | 660,677 |   | (209,485 | ) | 451,192 |   |
| Franchise  agreements   |       | 88,000                                   |       | (23,881                                 | )          | 64,119 |   | 88,000 |   | (16,270 | ) | 71,730 |   |
| Other                   |       | 49,630                                   |       | (18,907                                 | )          | 30,723 |   | 49,395 |   | (12,433 | ) | 36,962 |   |
| Total                   |       | $                                        | 3,211,778  |                                    | $          | (359,253 | ) | $ | 2,852,525 |   | $ | 3,206,172 |   | $ | (238,188 | ) | $ | 2,967,984 |   |

 

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(1)                                 Not subject to amortization.

 

**Note 6. Stock-Based Compensation**

 

During the three and ninemonths ended September 30, 2009, the Company recognized stock-based compensationcost of approximately $2.1 million ($1.7 million after-tax) and $6.0 million($4.1 million after-tax), respectively. During the three and nine months ended September 30,2008, the Company recognized stock-based compensation cost of approximately $1.7million ($1.2 million after-tax) and $5.1 million ($4.2 million after-tax),respectively. As of September 30, 2009, there was approximately $20.1million of total unrecognized compensation cost related to non-vested stockoptions granted by Holdings under the ServiceMaster Global Holdings, Inc.Stock Incentive Plan. These remaining costs are expected to be recognized overa weighted-average period of 2.5 years.

 

11

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**Note 7.Supplemental Cash Flow Information**

 

In the condensedconsolidated statements of cash flows, the caption “Cash and cash equivalents”includes investments in short-term, highly-liquid securities having a maturityof three months or less when purchased. Supplemental information relating to thecondensed consolidated statements of cash flows for the nine months ended September 30,2009 and 2008 is presented in the following table:

 
| ** **                                                 | ** ** | **Nine months ended********September 30,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(In thousands)**                                    | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Cash paid for or (received from): |       |                                                 |       |   |   |
| Interest expense                                           |       | $                                                    | 266,943    |   | $ | 236,812 |   |
| Interest and dividend income                               |       | (5,193                                               | )          | (10,172 | ) |
| Income taxes, net of refunds                               |       | 1,457                                                |       | 8,844 |   |
|                                                            |            |                                                      |            |  |  |  |  |

 

**Note 8.Comprehensive Income**

 

Totalcomprehensive income was $24.5 million and $66.2 million for the three and ninemonths ended September 30, 2009, respectively. Total comprehensive income (loss) was $2.4 million and($49.2) million for the three and nine months ended September 30, 2008,respectively. Total comprehensive income (loss) primarily includes net income(loss), unrealized gain (loss) on marketable securities, unrealized gain (loss)on derivative instruments and the effect of foreign currency translation.

 

**Note 9. Receivable Sales**

 

The Company hasentered into an accounts receivable securitization arrangement under whichTruGreen LawnCare and Terminix may sell certain eligible trade accountsreceivable to ServiceMaster Funding Company LLC (“Funding”), the Company’swholly-owned, 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 unrelated purchasers who areparties to the accounts receivable securitization arrangement (“Purchasers”).The amount of the eligible receivables varies during the year based onseasonality of the businesses and could, at times, limit the amount availableto the Company from the sale of these interests.

 

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 thereunder may be reduced oreliminated. As part of the annual renewal of the facility, which occurred on July 21,2009, this Purchaser agreed to continue its participation in the arrangement atleast through July 2010.

 

During the three and ninemonths ended September 30, 2009, there were no transfers of interests inthe pool of accounts receivables to Purchasers under this arrangement. Duringthe third quarter of 2008 an interest in the pool of accounts receivable wastransferred to a third party in exchange for $10.0 million. As of September 30,2009 and December 31, 2008, the Company had $10.0 million outstandingunder the arrangement and had $34.2 million and $25.7 million, respectively, ofremaining capacity available under the accounts receivable securitizationarrangement.

 

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, as defined (0.24% at September 30, 2009). Inaddition, the Company pays usage fees on its obligations and commitment fees onundrawn amounts 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 statements of financialposition caption “Cash and cash equivalents.” As of September 30, 2009 andDecember 31, 2008, the Company’s investments consist primarily of domesticpublicly traded debt of $92.0 million and $90.1 million,respectively, and common equity securities of $37.7 million and$43.0 million, respectively.

 

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The aggregate marketvalue of the Company’s short-term and long-term investments in debt and equitysecurities was $129.7 million and $133.1 million, and the aggregatecost basis was $123.6 million and $134.9 million at September 30,2009 and December 31, 2008, 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 it competes. The Company recorded an impairment charge of approximately$5.9 million ($4.0 million after-tax) during the nine months ended September 30,2009, due to other than temporary declines in the value of certain investments.The Company did not record an impairment charge during the three months ended September 30,2009. The Company recorded an impairment charge of approximately$0.9 million ($0.6 million after-tax) and $9.0 million($7.3 million after-tax) during the three and nine months ended September 30,2008, respectively, due to other than temporary declines in the value ofcertain investments. The unrealized gains in the investment portfolio wereapproximately $8.0 million and $4.2 million as of September 30,2009 and December 31, 2008, respectively. Unrealized losses wereapproximately $1.9 million and $6.0 million as of September 30,2009 and December 31, 2008, respectively. The portion of unrealized losseswhich have been in a loss position for more than one year at September 30,2009 and December 31, 2008 was approximately $0.6 million and $0.4million, respectively. The aggregate fair value of the investments withunrealized losses totaled $16.4 million and $26.8 million at September 30,2009 and December 31, 2008, respectively.

 

**Note 11. Long-Term Debt**

 

Long-term debt at September 30,2009 and December 31, 2008 is summarized in the following table:

 
| **(In thousands)**                                 | ** ** | **As of********September 30,********2009** | ** ** | **As of********December 31,  2008** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| Senior  secured term loan facility maturing in 2014     |       | $                                               | 2,590,375  |                                     | $          | 2,610,250 |   |
| 10.75%  /11.50% senior toggle notes maturing in 2015(1) |       | 1,061,000                                       |       | 1,150,000                                |       |
| Revolving  credit facility maturing in 2013             |       | 40,000                                          |       | 165,000                                  |       |
| 7.10%  notes maturing in 2018(2)                        |       | 63,142                                          |       | 61,698                                   |       |
| 7.45%  notes maturing in 2027(2)                        |       | 147,218                                         |       | 145,215                                  |       |
| 7.25%  notes maturing in 2038(2)                        |       | 59,622                                          |       | 59,016                                   |       |
| Other                                                   |       | 61,368                                          |       | 74,913                                   |       |
| Less  current portion                                   |       | (104,851                                        | )          | (221,269                                 | )          |
| Total  long-term debt                                   |       | $                                               | 3,917,874  |                                     | $          | 4,044,823 |   |

 

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| (1)    | During the first  quarter of 2009, the Company completed open market purchases of  $89.0 million in face value of our Permanent Notes for a cost of  $41.0 million. The debt acquired by the Company has been retired, and  the Company has discontinued the payment of interest. The Company recorded a  gain on extinguishment of debt of $46.1 million in its condensed  consolidated statement of operations for the nine months ended  September 30, 2009 related to these retirements. Included in the gain on  extinguishment of debt are write-offs of unamortized debt issuance costs  related to the extinguished debt of $1.9 million. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (2)    | The increase in the  balance from December 31, 2008 to September 30, 2009 reflects the  amortization of fair value adjustments related to purchase accounting, which  effectively increases the stated coupon interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

**Note 12. Discontinued Operations**

 

Reported “loss fromdiscontinued operations, net of income taxes” for all periods presentedincludes the operating results of the sold and discontinued businesses noted inthe Company’s Annual Report on Form 10-K for the year ended December 31,2008.

 

13

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Theoperating results and financial position of discontinued operations are asfollows:

 
| ** **                                              | ** ** | **Three months ended********September 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Operating  Results:                                     |       |                                             |       |   |   |
| Operating  revenue                                      |       | $                                                | 6          |   | $ | 11,269 |   |
| Operating  loss                                         |       | (609                                             | )          | (835 | ) |
| Interest  expense                                       |       | —                                           |       | (3 | ) |
| Loss  from discontinued operations, before income taxes |       | (609                                             | )          | (838 | ) |
| Benefit  from income taxes                              |       | (213                                             | )          | (239 | ) |
| Loss  on sale, net of tax                               |       | —                                           |       | (587 | ) |
| Loss  from discontinued operations, net of income taxes |       | $                                                | (396       | ) | $ | (1,186 | ) |

 
| ** **                                              | ** ** | **Nine months ended********September 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| Operating  Results:                                     |       |                                            |       |   |   |
| Operating  revenue                                      |       | $                                               | 62         |   | $ | 50,909 |   |
| Operating  loss                                         |       | (1,050                                          | )          | (206 | ) |
| Interest  expense                                       |       | —                                          |       | (73 | ) |
| Impairment  charge                                      |       | —                                          |       | (6,317 | ) |
| Loss  from discontinued operations, before income taxes |       | (1,050                                          | )          | (6,596 | ) |
| Benefit  for income taxes                               |       | (384                                            | )          | (2,513 | ) |
| Loss  on sale, net of tax                               |       | —                                          |       | (587 | ) |
| Loss  from discontinued operations, net of income taxes |       | $                                               | (666       | ) | $ | (4,670 | ) |

 
| **(In thousands)**     | ** ** | **As of********September 30,********2009** | ** ** | **As of********December 31,  2008** | ** ** |
|------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| Financial  Position:   |       |                                            |       |                                     |       |
| Current  assets        |       | $                                               | 56         |                                     | $          | 412 |   |
| Total  assets          |       | $                                               | 56         |                                     | $          | 412 |   |
| Current  liabilities   |       | $                                               | 2,449      |                                     | $          | 4,870 |   |
| Long-term  liabilities |       | 4,027                                           |       | 4,077                                    |       |
| Total  liabilities     |       | $                                               | 6,476      |                                     | $          | 8,947 |   |

 

The table belowsummarizes the activity for the nine months ended September 30, 2009 forthe remaining liabilities from operations that were disposed of in years priorto 2009. The remaining obligations primarily relate to long-term self-insuranceclaims. The Company believes that the remaining reserves continue to beadequate and reasonable.

 
| **(In thousands)**                                 | ** ** | **As of********December 31,********2008** | ** ** | **Cash Payments  or Other** | ** ** | **(Income)/  Expense** | ** ** | **As of  September 30,********2009** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------|------------|------------------------|------------|-------------------------------------------|------------|
| Remaining  liabilities of discontinued operations: |       |                                           |       |                                  |       |                   |       |                                      |       |
| ARS/AMS                                            |       | $                                              | 2,331      |                                  | $          | (181                   | )          | $                                         | 190        |   | $ | 2,340 |   |
| LandCare  Construction                             |       | 869                                            |       | (138                                  | )          | (57                    | )          | 674                                       |       |
| LandCare  utility line clearing business           |       | 1,099                                          |       | (152                                  | )          | —                 |       | 947                                       |       |
| Certified  Systems, Inc. and other            |       | 3,558                                          |       | (1,338                                | )          | —                 |       | 2,220                                     |       |
| InStar                                             |       | 1,090                                          |       | (795                                  | )          | —                 |       | 295                                       |       |
| Total  liabilities of discontinued operations      |       | $                                              | 8,947      |                                  | $          | (2,604                 | )          | $                                         | 133        |   | $ | 6,476 |   |

 

**Note 13. Income Taxes**

 

At December 31,2008, the Company had $14.2 million of tax benefits primarily reflected instate tax returns that had not been recognized for financial reporting purposes(“unrecognized tax benefits”). During the three and nine months ended September 30,2009, unrecognized tax benefits increased by $2.9 million and $0.1 million,respectively. In addition, accrued estimated tax interest and penaltiesincreased by $0.9 million and $0.7 million for the three and nine months ended September 30,2009, respectively. The Company currently estimates that, as a result ofpending tax settlements and expiration of statutes of limitations, the amountof unrecognized tax benefits could be reduced by approximately $3.9 millionduring the next 12 months.

 

14

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During the third quarterof 2009, the Company refined the calculation for state deferred income taxesrelated to its operations in various state taxing jurisdictions. As a result ofthis review, the Company recorded an income tax benefit of approximately $12.1million in the third quarter of 2009, reflecting the revised estimated incometax rate used for the computation of state deferred income taxes.

 

In the first quarter of2009, the IRS completed the audit of the Company’s tax return for the yearended December 31, 2007 with no adjustments or additional payments.

 

**Note 14. Business SegmentReporting**

 

The business of the Companyis conducted through five reportable segments: TruGreen LawnCare, TruGreenLandCare, Terminix, American Home Shield and Other Operations and Headquarters.

 

In accordance withaccounting standards for segments, the Company’s reportable segments arestrategic business units that offer different services. The TruGreen LawnCaresegment provides residential and commercial lawn care services. The TruGreenLandCare segment provides landscaping services primarily to commercialcustomers. The Terminix segment provides termite and pest control services to residentialand commercial customers. The American Home Shield segment provides homeservice contracts to consumers that cover HVAC, plumbing and other home systemsand appliances. The Other Operations and Headquarters segment includes thefranchised and Company-owned operations of ServiceMaster Clean, AmeriSpec,Furniture Medic and Merry Maids, which provide primarily residential disasterrestoration, commercial cleaning, carpet and upholstery cleaning, homeinspection services, furniture repair and house cleaning services. The OtherOperations and Headquarters segment also includes the Company’s headquartersoperations, which provide various technology, marketing, finance, legal andother support services to the business units.

 

Segment information forcontinuing operations is presented below.

 
| ** **                            | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|---------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(In thousands)**               | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Operating  Revenue:                   |       |                   |       |                   |       |   |   |   |   |
| TruGreen  LawnCare                    |       | $                      | 351,830    |                   | $          | 364,442 |   | $ | 834,899 |   | $ | 876,180 |   |
| TruGreen  LandCare                    |       | 63,244                 |       | 78,365                 |       | 199,562 |   | 240,894 |   |
| Terminix                              |       | 272,598                |       | 273,172                |       | 843,134 |   | 846,594 |   |
| American  Home Shield                 |       | 179,617                |       | 177,328                |       | 490,308 |   | 450,316 |   |
| Other  Operations and Headquarters    |       | 53,225                 |       | 54,766                 |       | 155,830 |   | 163,625 |   |
| Total  Operating Revenue              |       | $                      | 920,514    |                   | $          | 948,073 |   | $ | 2,523,733 |   | $ | 2,577,609 |   |
| Operating  Income (Loss):(1),(2),(3)  |       |                   |       |                   |       |   |   |   |   |
| TruGreen  LawnCare                    |       | $                      | 50,393     |                   | $          | 64,060 |   | $ | 70,519 |   | $ | 85,914 |   |
| TruGreen  LandCare                    |       | (2,014                 | )          | (323                   | )          | 2,203 |   | (925 | ) |
| Terminix                              |       | 34,868                 |       | 30,696                 |       | 143,531 |   | 133,591 |   |
| American  Home Shield                 |       | 22,998                 |       | 22,897                 |       | 55,059 |   | 14,606 |   |
| Other  Operations and Headquarters(2) |       | (11,405                | )          | (6,659                 | )          | (29,789 | ) | (18,638 | ) |
| Total  Operating Income               |       | $                      | 94,840     |                   | $          | 110,671 |   | $ | 241,523 |   | $ | 214,548 |   |

 

----

(1)   Presented belowis a reconciliation of segment operating income to income (loss) fromcontinuing operations before income taxes.

 

15

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| ** **                                                         | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(In thousands)**                                            | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Total  Segment Operating Income                                    |       | $                      | 94,840     |                   | $          | 110,671 |   | $ | 241,523 |   | $ | 214,548 |   |
| Non-operating  expense (income):                                   |       |                   |       |                   |       |   |   |   |   |
| Interest  expense                                                  |       | 74,216                 |       | 83,886                 |       | 225,538 |   | 256,897 |   |
| Interest  and net investment (income) loss                         |       | (4,558                 | )          | (244                   | )          | (3,192 | ) | 1,637 |   |
| Gain  on extinguishment of debt                                    |       | —                 |       | —                 |       | (46,106 | ) | — |   |
| Other  expense                                                     |       | 176                    |       | 141                    |       | 555 |   | 418 |   |
| Income  (Loss) from Continuing Operations before Income Taxes |       | $                      | 25,006     |                   | $          | 26,888 |   | $ | 64,728 |   | $ | (44,404 | ) |

 

(2)          The results includerestructuring charges related to (i) Fast Forward, (ii) areorganization of field leadership and a restructuring of branch operations atTruGreen LawnCare, (iii) a branch optimization project at Terminix and (iv) theCompany’s decision to consolidate its corporate headquarters into itsoperations support center in Memphis, Tennessee and close its formerheadquarters in Downers Grove, Illinois. The restructuring charges totaled $7.7million and $20.6 million in the three and nine months ended September 30,2009, respectively, and $1.8 million and $9.1 million for the three and ninemonths ended September 30, 2008, respectively. Presented below is asummary of restructuring charges by reportable segment.

 
| ** **                         | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(In thousands)**            | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Restructuring  charges             |       |                   |       |                   |       |   |   |   |   |
| TruGreen  LawnCare                 |       | $                      | 5,951      |                   | $          | — |   | $ | 5,951 |   | $ | 315 |   |
| TruGreen  LandCare                 |       | 184                    |       | 180                    |       | 133 |   | 382 |   |
| Terminix                           |       | 214                    |       | —                 |       | 3,364 |   | 57 |   |
| American  Home Shield              |       | 30                     |       | 45                     |       | 105 |   | 493 |   |
| Other  Operations and Headquarters |       | 1,333                  |       | 1,588                  |       | 11,072 |   | 7,896 |   |
| Total  Restructuring charges       |       | $                      | 7,712      |                   | $          | 1,813 |   | $ | 20,625 |   | $ | 9,143 |   |

 

(3)          The results include Merger chargesrelated to the purchase of ServiceMaster by a group of investors led byCD&R. The Merger related charges totaled $0.8 million and $2.2 millionfor the three and nine months ended September 30, 2009, respectively, and$0.4 million and $0.8 million for the three and nine months ended September 30,2008, respectively. All Merger related charges are included in the OtherOperations and Headquarters segment.

 

**Note 15. Related PartyTransactions**

 

In connection with theMerger and the related transactions, the Company entered into a consultingagreement with CD&R under which CD&R provided the Company with on-goingconsulting and management advisory services in exchange for an annualmanagement fee of $2.0 million, which was payable quarterly. On July 30,2009, the annual management fee payable under the consulting agreement withCD&R was increased from $2.0 million to $6.25 million in order to align ourfee structure with current market rates. The full year management fee willapply in 2009. The Company recorded a management fee of $3.7 million and $4.7million for the three and nine months endedSeptember 30, 2009, respectively, and $0.5 million and $1.5 million for thethree and nine months ended September 30, 2008, respectively. Theconsulting agreement also provides that CD&R may receive additional fees inconnection with certain subsequent financing and acquisition or dispositiontransactions.

 

InAugust 2009, the Company entered into consulting agreements withCitigroup, BAS and JPMorgan, each of which is an Equity Sponsor or an affiliateof an Equity Sponsor. Under the consulting agreements, Citigroup, BAS andJPMorgan, each will provide the Company with on-going consulting and managementadvisory services until June 30, 2016 or the earlier termination of theexisting consulting agreement between the Company and CD&R. The Companywill pay annual management fees of $0.5 million, $0.5 million and $0.25million, respectively, to Citigroup, BAS and JPMorgan. The full year managementfees will apply in 2009. The Company recorded consulting fees related to these agreements of$0.9 million and $0.9 million for the threeand nine months ended September 30, 2009, respectively.

 

The Company wasadvised by Holdings that, during the first quarter of 2009, Holdings completedopen market purchases of $11.0 million in face value of our Permanent Notes fora cost of $4.5 million. Holdings did not complete any additional openmarket purchases of our Permanent Notes in the second or third quarters of2009. As of September 30, 2009, Holdings has completed open 

 

16

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marketpurchases totaling $65.0 million in face value of our Permanent Notes fora cost of $21.4 million. As of September 30, 2008, Holdings had notcompleted any open market purchases of our Permanent Notes. The debt acquiredby Holdings has not been retired, and the Company has continued to pay interestin accordance with the terms of the debt. The Company recorded interest expenseof $1.7 million and $5.2 million during the three and nine months ended September 30,2009, respectively. The Company made cash payments for interest to Holdings of$3.5 million and $6.5 million during the three and nine months ended September 30,2009, respectively. Interest accrued by the Company and payable to Holdings asof September 30, 2009 and December 31, 2008 amounted to $1.5 millionand $0.4 million, respectively.

 

**Note 16.Newly Issued Accounting Statements and Positions**

 

**Accounting Standards Codification****TM**** (“ASC”)**

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS 168”), “TheFASB Accounting Standards CodificationTM and the Hierarchy of Generally AcceptedAccounting Principles—a replacement of FASB Statement No. 162” (codified in ASC Topic 105, “GenerallyAccepted Accounting Principles”). The Codification will become the source ofauthoritative GAAP recognized by the FASB to be applied by nongovernmentalentities. Rules and interpretive releases of the SEC under authority offederal securities laws are also sources of authoritative GAAP for SECregistrants. On the effective date of this standard, the Codification will supersedeall then-existing non-SEC accounting and reporting standards. All othernon-grandfathered non-SEC accounting literature not included in theCodification will become non-authoritative. This standard is effective forfinancial statements issued for interim and annual periods ending after September 15,2009. The Company adopted this standard during the third quarter of 2009. Theadoption of this standard did not have a material impact on the Company’scondensed consolidated financial statements.

 

**Other Pronouncements**

 

In September 2006,the FASB issued SFAS 157, “Fair Value Measurement” (codified in ASC Topic 820,“Fair Value Measurements”). This Statement defines fair value, establishes aframework for measuring fair value in accordance with GAAP, and expandsdisclosures about fair value measurements. SFAS No. 157 does not requireany new fair value measurements. In February 2008, the FASB approved FASBStaff Position FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP157-2) (codified in ASC Topic 820, “Fair Value Measurements”), that permitscompanies to partially defer the effective date of SFAS No. 157 for oneyear for non-financial assets and non-financial liabilities that are recognizedor disclosed at fair value in the financial statements on a nonrecurring basis.FSP 157-2 does not permit companies to defer recognition and disclosurerequirements for financial assets and financial liabilities or fornon-financial assets and non-financial liabilities that are re-measured atleast annually. SFAS No. 157 therefore is effective for financial assetsand financial liabilities and for non-financial assets and non-financialliabilities that are re-measured at least annually for fiscal years beginningafter November 15, 2007. It is effective for non-financial assets andnon-financial liabilities that are recognized or disclosed at fair value in thefinancial statements on a nonrecurring basis for fiscal years beginning after November 15,2008. In October 2008, the FASB approved FASB Staff Position FAS 157-3,“Determining the Fair Value of a Financial Asset When the Market for That AssetIs Not Active” (“FSP 157-3”) (codified in ASC Topic 820, “Fair ValueMeasurements”), which clarified the application of SFAS No. 157 in caseswhere the market for the asset is not active. FSP 157-3 was effective uponissuance. The Company considered the guidance provided by FSP 157-3 in thepreparation of the accompanying condensed consolidated financial statements.The Company has assessed the impact of this Statement to the Company’scondensed consolidated financial position, results of operations and cashflows. The Company adopted this Statement for financial assets and liabilitiesin 2008 and for non-financial assets and liabilities in the first quarter of2009. The adoption of this Statement for non-financial assets and liabilitiesrecognized at fair value on a nonrecurring basis did not have a material effecton these condensed consolidated financial statements. In April 2009, theFASB issued FASB Staff Position FAS 157-4, “Determining Fair Value When theVolume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly”(“FSP 157-4”)(codified in ASC Topic 820, “Fair Value Measurements”), which providesadditional guidance for estimating fair value in accordance with SFAS No. 157,when the volume and level of activity for the asset or liability havesignificantly decreased and also includes guidance on identifying circumstancesthat indicate a transaction is not orderly. FSP 157-4 is effective for interimand annual reporting periods ending after June 15, 2009. The Companyadopted FSP 157-4 during the second quarter of 2009, and its application had noimpact on the Company’s condensed consolidated financial statements.

 

In December 2007, the FASB issued SFAS 141(R),“Business Combinations” (codified in ASC Topic 805, “Business Combinations”).This Statement significantly changes the accounting for business combinationsand is effective for business combinations finalized in fiscal years beginningafter December 15, 2008. This standard changes the method forapplying the accounting for business combinations in a number of significantrespects including the requirement to expense transaction fees and expectedrestructuring costs as incurred, rather than including these amounts in theallocated purchase price; the requirement to recognize the fair value ofcontingent consideration at the acquisition date, rather than the expectedamount when the contingency is resolved; the requirement to recognize the fairvalue of acquired in-process research and development assets at the acquisitiondate, rather than immediately expensing; and the requirement to recognize again in relation to a bargain purchase price, rather than reducing theallocated basis of long-lived assets. In addition, this standard requiresthat changes in the amount of acquired tax 

 

17

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attributes be included in the Company’s results ofoperations, rather than adjusting the allocated purchase price. Thisstandard was effective on January 1, 2009 and is being appliedprospectively to business combinations that have an acquisition date on orafter January 1, 2009. While this standard applies only to businesscombinations with an acquisition date after its effective date, the amendmentsto SFAS No. 109, “Accounting for Income Taxes,” (codified in ASC Topic740, “Income Taxes”) with respect to deferred tax asset valuation allowancesand liabilities for income tax uncertainties, will be applied to all deferredtax valuation allowances and liabilities for income tax uncertaintiesrecognized in prior business combinations. In April 2009, the FASB issuedFASB Staff Position FAS 141(R)-1, “Accounting for Assets Acquired andLiabilities Assumed in a Business Combination That Arise from Contingencies”(codified in ASC Topic 805, “Business Combinations)”, which amends andclarifies business combination accounting guidance to address application oninitial recognition and measurement, subsequent measurement and accounting, anddisclosure of assets and liabilities arising from contingencies in a businesscombination. The provisions of the above accounting standards for businesscombinations will not impact the Company’s condensed consolidated financialstatements for prior periods. The Company adopted the above standards duringthe first quarter of 2009. The adoption of these standards did not have amaterial affect on the Company’s condensed consolidated financial statements.

 

In December 2007,the FASB issued SFAS 160, “Non-controlling Interests in Consolidated FinancialStatements—An Amendment of ARB No. 51” (codified in ASC Topic 810,“Consolidation”). This standard establishes new accounting and reportingstandards for the non-controlling interest in a subsidiary and for thedeconsolidation of a subsidiary. This Statement is effective for fiscal yearsbeginning after December 15, 2008, with presentation and disclosurerequirements applied retrospectively to comparative financial statements. TheCompany adopted the provisions of this standard in the first quarter of 2009.The adoption of this standard did not have a material effect on the Company’scondensed consolidated financial statements.

 

In March 2008, the FASB issued SFAS 161,“Disclosures about Derivative Instruments and Hedging Activities—an amendmentof FASB Statement No. 133” (codified in ASC Topic 815, “Derivatives andHedging”). This standard requires additional disclosures for derivativeinstruments and hedging activities that include how and why an entity usesderivatives, how these instruments and the related hedged items are accountedfor under accounting standards for derivative instruments and relatedinterpretations, and how derivative instruments and related hedged items affectthe entity’s financial position, results of operations and cash flows. Thisstatement is effective for financial statements issued for fiscal years andinterim periods beginning after November 15, 2008. The Company adopted thisstandard in the first quarter of 2009 (See Note 17).

 

In April 2008, the FASB approved FASB StaffPosition FAS 142-3, “Determination of the Useful Life of Intangible Assets”(codified in ASC Topic 350, “General Intangibles Other than Goodwill”). This standardamends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder the intangible asset accounting standards. This standard is effective forfinancial statements issued for fiscal years beginning after November 15,2008. The Company adopted this standard in the first quarter of 2009. Theadoption of this standard did not have a material effect on the Company’scondensed consolidated financial statements.

 

In April 2009, theFASB issued FASB Staff Position FAS 115-2 and FAS 124-2, “Recognition andPresentation of Other-Than-Temporary Impairments” (codified in ASC Topic 320,“Investments — Debt and Equity Securities”), which changes existing guidancefor determining whether an impairment of debt securities is other thantemporary. This standard requires other than temporary impairments to beseparated into the amount representing the decrease in cash flows expected tobe collected from a security (referred to as credit losses) which is recognizedin earnings and the amount related to other factors which is recognized inother comprehensive income. This noncredit loss component of the impairment mayonly be classified in other comprehensive income if the holder of the securityconcludes that it does not intend to sell and it is more likely than not thatit will not be required to sell the security before it recovers its value. Ifthese conditions are not met, the noncredit loss must also be recognized inearnings. When adopting this standard, an entity is required to record acumulative effect adjustment as of the beginning of the period of adoption toreclassify the noncredit component of a previously recognized other thantemporary impairment from retained earnings to accumulated other comprehensiveincome. This standard is effective for interim and annual periods ending after June 15,2009. The Company adopted this standard during the second quarter of 2009. Theadoption of this standard did not have a material impact on the Company’scondensed consolidated financial statements (See Note 17).

 

In April 2009, theFASB issued FASB Staff Position 107-1 and Accounting Principles Board Opinion No. 28-1,“Interim Disclosures about Fair Value of Financial Instruments” (codified inASC Topic 825, “Financial Instruments”). This standard amends accountingguidance related to fair value disclosers of financial instruments to requiredisclosures about the fair value of financial instruments in interim financialstatements as well as in annual financial statements. It also amends interimfinancial reporting accounting guidance to require those disclosures in allinterim financial statements. The Company adopted this standard in the secondquarter of 2009 (See Note 17).

 

In May 2009, theFASB issued SFAS No. 165, “Subsequent Events” (codified in ASC Topic 855,“Subsequent Events”), which establishes general standards of accounting for anddisclosure of events that occur after the balance sheet date but before the 

 

18

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financial statements areissued or are available to be issued. This standard provides guidance on theperiod after the balance sheet date during which management of a reportingentity should evaluate events or transactions that may occur for potentialrecognition or disclosure in the financial statements, the circumstances underwhich an entity should recognize events or transactions occurring after thebalance sheet date in its financial statements and the disclosures that anentity should make about events or transactions that occurred after the balancesheet date. The Company adopted this standard during the second quarter of2009, and its application had no impact on the Company’s condensed consolidatedfinancial statements.

 

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

 

The period endcarrying amounts of receivables, accounts payable, and accrued liabilitiesapproximate fair value because of the short maturity of these instruments. Theperiod end carrying amounts of long-term notes receivables approximate fairvalue as the effective interest rates for these instruments are comparable tomarket rates at period end. The period end carrying amounts of current andlong-term marketable securities also approximate fair value, with unrealizedgains 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 statements of operations if thedecline in value is other than temporary. The carrying amount of total debt was$4,022.7 million and $4,266.1 million and the estimated fair value wasapproximately $3,717.8 million and $2,165.7 million at September 30,2009 and December 31, 2008. The fair values of the Company’s financialinstruments reflect the amounts that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participantsat the measurement date (exit price). The fair value estimates presented in thisreport are based on information available to the Company as of September 30,2009 and December 31, 2008.

 

 The Company has estimated the fair value of itsfinancial instruments measured at fair value on a recurring basis using themarket 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, interest rates) andunobservable inputs (for example, forward commodity prices) at the balancesheet date.

 

The carryingamount and estimated fair value of the Company’s financial instruments that arerecorded at fair value for the periods presented are as follows:

 
| ** **                               | ** ** | ** **                                                 | ** ** | **As of  September 30, 2009** | ** ** | **As of  December 31, 2008**                      | ** ** |
|------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                               | ** ** | ** **                                                 | ** ** | ** **                              | ** ** | **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                           |       | $                                       | 9,608      |                                                        | $          | 9,608 |   | $ | — |   | $ | — |   | $ | 9,901 |   | $ | 9,901 |   |
| Investments  in marketable securities    |       | Marketable securities  and Long-term marketable securities |       | 120,140                                 |       | 46,250                                                      |       | 73,890 |   | — |   | 123,161 |   | 123,161 |   |
| Fuel  swap contracts:                    |       |                                                       |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |   |
| Current                                  |       | Prepaid expenses and  other assets                         |       | 4,626                                   |       | —                                                      |       | — |   | 4,626 |   | — |   | — |   |
| Noncurrent                               |       | Other assets                                               |       | 1,207                                   |       | —                                                      |       | — |   | 1,207 |   | — |   | — |   |
| Total  financial assets                  |       |                                                       |       | $                                       | 135,581    |                                                        | $          | 55,858 |   | $ | 73,890 |   | $ | 5,833 |   | $ | 133,062 |   | $ | 133,062 |   |
|                                     |       |                                                       |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |   |
| Financial  Liabilities:                  |       |                                                       |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |   |
| Fuel  swap contracts:                    |       |                                                       |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |   |
| Current                                  |       | Other accrued  liabilities                                 |       | $                                       | 5,884      |                                                        | $          | — |   | $ | — |   | $ | 5,884 |   | $ | 23,607 |   | $ | 23,607 |   |
| Noncurrent                               |       | Other Long-term  obligations                               |       | 289                                     |       | —                                                      |       | — |   | 289 |   | 1,317 |   | 1,317 |   |
| Interest  rate swap contracts            |       | Other Long-term  obligations                               |       | 62,604                                  |       | —                                                      |       | 62,604 |   | — |   | 59,852 |   | 59,852 |   |
| Total  financial liabilities             |       |                                                       |       | $                                       | 68,777     |                                                        | $          | — |   | $ | 62,604 |   | $ | 6,173 |   | $ | 84,776 |   | $ | 84,776 |   |

 

19

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A reconciliation of thebeginning and ending fair values of financial instruments valued usingsignificant unobservable inputs (Level 3) for the nine months ended September 30,2009 and September 30, 2008, respectively, is presented as follows:

 
| **(In thousands)**                         | ** ** | **Fuel Swap Contract********Assets (Liabilities)** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|
| Balance  at December 31, 2008              |       | $                                                  | (24,924    | ) |
| Total  gains (losses) (realized and unrealized) |       |                                               |       |
| Included  in earnings(1)                        |       | (20,881                                            | )          |
| Included  in other comprehensive income         |       | 24,584                                             |       |
| Settlements,  net                               |       | 20,881                                             |       |
| Balance  at September 30, 2009             |       | $                                                  | (340       | ) |

 
| **(In thousands)**                         | ** ** | **Fuel  Swap Contract********Assets (Liabilities)** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| Balance at  December 31, 2007              |       | $                                                   | —     |   |
| Total gains  (losses) (realized and unrealized) |       |                                                |       |
| Included in  earnings(1)                        |       | 7,795                                               |       |
| Included in  other comprehensive income         |       | (4,432                                              | )          |
| Settlements, net                                |       | (7,795                                              | )          |
| Balance at  September 30, 2008             |       | $                                                   | (4,432     | ) |

 

----

(1)                                Gains included in earnings are reportedin cost of services rendered and products sold.

 

The Company usesderivative financial instruments to manage risks associated with changes infuel prices and interest rates. The Company does not hold or issue derivativefinancial instruments for trading or speculative purposes. In designating itsderivative financial instruments as hedging instruments under accountingstandards for derivative instruments, the Company formally documents therelationship between the hedging instrument and the hedged item, as well as therisk management objective and strategy for the use of the hedging instrument.This documentation includes linking the derivatives to forecasted transactions.The Company assesses at the time a derivative contract is entered into, and atleast quarterly thereafter, whether the derivative item is effective inoffsetting the projected changes in cash flows of the associated forecastedtransactions. All of the Company’s designated hedging instruments areclassified as cash flow hedges.

 

The Company hashistorically hedged a significant portion of its annual fuel consumption ofapproximately 28 million gallons. The Company has also hedged the interestpayments on a portion of its variable rate debt through the use of interestrate swap agreements. In accordance with accounting standards, all of theCompany’s fuel hedges and interest rate swap agreements are classified as cashflow hedges, and, as such, the hedging instruments are recorded on the balancesheet as either an asset or liability at fair value, with the effective portionof changes in the fair value attributable to the hedged risks recorded in othercomprehensive income. Any change in the fair value of the hedging instrumentresulting from ineffectiveness, as defined by accounting standards isrecognized in current period earnings. Cash flows related to fuel and interestrate derivatives are classified as operating activities in the condensedconsolidated statements of cash flows.

 

The effect of derivativeinstruments on the condensed consolidated statement of operations and othercomprehensive income for the nine months ended September 30, 2009 and September 30,2008, respectively, is presented as follows:

 
| **Derivatives designated as  Cash Flow Hedge** | ** ** | **Effective Portion of   Gain (Loss) Recognized in  Accumulated Other  Comprehensive Loss** | ** ** | **Effective Portion of Gain (Loss)  Reclassified from   Accumulated Other  Comprehensive Income  (AOCI) into Income** | ** ** | **Location of Gain (Loss)** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Relationships**                                                  | ** ** | **Nine months ended September 30, 2009**                                                                   | ** ** | **included in Income**                                                                                                                                        | ** ** |
|                                                               |       |                                                                                                                                |       |                                                                                                                                                                    |       |                                       |       |
| Fuel  swap contracts                                               |       | $                                                                                                                                   | 24,584     |                                                                                                                                                                    | $          | (20,881                                    | )          | Cost of services  rendered and products sold |   |
| Interest  rate swap contracts                                      |       | $                                                                                                                                   | (2,752     | )                                                                                                                                                                       | $          | (36,841                                    | )          | Interest Expense |   |

 
| **Derivatives designated as  Cash Flow Hedge** | ** ** | **Effective Portion of   Gain (Loss) Recognized in  Accumulated Other  Comprehensive Loss** | ** ** | **Effective Portion of Gain (Loss)  Reclassified from AOCI  into Income** | ** ** | **Location of Gain (Loss)** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Relationships**                                                  | ** ** | **Nine months ended September 30, 2008**                                                                   | ** ** | **included in Income**                                                                             | ** ** |
|                                                               |       |                                                                                                                                |       |                                                                                                         |       |                                       |       |
| Fuel  swap contracts                                               |       | $                                                                                                                                   | (4,432     | )                                                                                                            | $          | 7,795                                      |       | Cost of services  rendered and products sold |   |
| Interest  rate swap contracts                                      |       | $                                                                                                                                   | 3,600      |                                                                                                         | $          | (10,026                                    | )          | Interest Expense |   |

 

20

----

 

Ineffective portions ofderivative instruments designated in accordance with accounting standards ascash flow hedge relationships were insignificant during three and nine monthsended September 30, 2009. As of September 30, 2009, the Company hadfuel swap contracts to pay fixed prices for fuel with an aggregate notionalamount of $72.9 million, maturing through 2010. Under the terms of its fuelswap contracts, the Company is required to post collateral in the event thatthe fair value of the contracts exceeds a certain agreed upon liability level.As of September 30, 2009, theCompany posted approximately $3.5 million in letters of credit as collateralfor these contracts, none of which were posted under the Company’s RevolvingCredit Facility. Asof September 30, 2009, the Company had interest rate swap contracts to payfixed rates for interest on long-term debt with an aggregate notional amount of$1.430 billion, maturing through 2012.

 

The effective portion of thegain or loss on derivative instruments designated and qualifying as cash flowhedging instruments is recorded in other comprehensive income. These amountsare reclassified into earnings in the same period or periods during which thehedged forecasted debt interest settlement or the fuel settlement affectsearnings. The amount expected to be reclassified into earnings during the nexttwelve months includes unrealized gains and losses related to open fuel hedgesand interest rate swaps. Specifically, as the underlying forecastedtransactions occur during the next 12 months, the hedging gains and losses inaccumulated other comprehensive income expected to be recognized in earnings isa loss of $27.3 million, after-tax, at September 30, 2009. The amountsthat are ultimately reclassified into earnings will be based on actual interestrates and fuel prices at the time the positions are settled and may differmaterially from the amount noted above.

 

**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.

 

On July 24,2008, outstanding amounts under the Interim Loan Facility converted into thePermanent Notes. The payment obligations of the Company under the PermanentNotes are jointly and severally guaranteed on a senior unsecured basis by certainof the Company’s domestic subsidiaries excluding certain subsidiaries subjectto regulatory requirements in various states (“Guarantors”). Each of theGuarantors is wholly-owned, directly or indirectly, by the Company, and allguarantees are full and unconditional. All other subsidiaries of the Company,either directly or indirectly owned, do not guarantee the Permanent Notes (“Non-Guarantors”).

 

21

----

 

**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Operations**

**Forthe Three Months Ended September 30, 2009**

**(inthousands)**

 
| ** **                                                        | ** ** | **The  ServiceMaster  Company** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| **Operating Revenue**                                             |       | $                               | —     |           | $          | 719,387              |       | $                | 219,992    |             | $          | (18,865 | ) | $ | 920,514 |   |
| ** **                                                        |       |                            |       |           |       |                 |       |             |       |             |       |
| **Operating Costs and Expenses:**                                 |       |                            |       |           |       |                 |       |             |       |             |       |
| Cost of services rendered and products sold                       |       | —                          |       | 448,203        |       | 98,107               |       | (18,865          | )          | 527,445          |       |
| Selling and administrative expenses                               |       | 5,171                           |       | 159,575        |       | 84,556               |       | —           |       | 249,302          |       |
| Amortization expense                                              |       | 55                              |       | 31,431         |       | 8,943                |       | —           |       | 40,429           |       |
| Merger related charges                                            |       | 786                             |       | —         |       | —               |       | —           |       | 786              |       |
| Restructuring charges                                             |       | —                          |       | 6,349          |       | 1,363                |       | —           |       | 7,712            |       |
| Total operating costs and expenses                                |       | 6,012                           |       | 645,558        |       | 192,969              |       | (18,865          | )          | 825,674          |       |
|                                                              |       |                            |       |           |       |                 |       |             |       |             |       |
| **Operating (Loss) Income**                                       |       | (6,012                          | )          | 73,829         |       | 27,023               |       | —           |       | 94,840           |       |
| ** **                                                        |       |                            |       |           |       |                 |       |             |       |             |       |
| **Non-operating Expense (Income):**                               |       |                            |       |           |       |                 |       |             |       |             |       |
| Interest expense (income)                                         |       | 72,226                          |       | 5,597          |       | (3,607               | )          | —           |       | 74,216           |       |
| Interest and net investment (income) loss                         |       | (40                             | )          | (2,290         | )          | (2,228               | )          | —           |       | (4,558           | )          |
| Other expense                                                     |       | —                          |       | —         |       | 176                  |       | —           |       | 176              |       |
|                                                              |       |                            |       |           |       |                 |       |             |       |             |       |
| **(Loss) Income from Continuing  Operations before Income Taxes** |       | (78,198                         | )          | 70,522         |       | 32,682               |       | —           |       | 25,006           |       |
| (Benefit) provision for income taxes                              |       | (53,727                         | )          | 41,660         |       | 16,169               |       | —           |       | 4,102            |       |
|                                                              |       |                            |       |           |       |                 |       |             |       |             |       |
| **(Loss) Income from Continuing  Operations**                     |       | (24,471                         | )          | 28,862         |       | 16,513               |       | —           |       | 20,904           |       |
| Loss from discontinued operations, net of income  taxes           |       | —                          |       | —         |       | (396                 | )          | —           |       | (396             | )          |
|                                                              |       |                            |       |           |       |                 |       |             |       |             |       |
| Equity in earnings of subsidiaries (net of tax)                   |       | 44,979                          |       | 10,736         |       | —               |       | (55,715          | )          | —           |       |
| **Net Income**                                                    |       | $                               | 20,508     |           | $          | 39,598               |       | $                | 16,117     |             | $          | (55,715 | ) | $ | 20,508 |   |

 

22

----

 

**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Operations**

**Forthe Three Months Ended September 30, 2008**

**(inthousands)**

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

 

23

----

 

**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Operations**

**Forthe Nine Months Ended September 30, 2009**

**(inthousands)**

 
| ** **                                                        | ** ** | **The  ServiceMaster  Company** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| **Operating Revenue**                                             |       | $                               | —     |           | $          | 1,984,354            |       | $                | 594,683    |             | $          | (55,304 | ) | $ | 2,523,733 |   |
| ** **                                                        |       |                            |       |           |       |                 |       |             |       |             |       |
| **Operating Costs and Expenses:**                                 |       |                            |       |           |       |                 |       |             |       |             |       |
| Cost of services rendered and products sold                       |       | —                          |       | 1,263,312      |       | 267,210              |       | (55,304          | )          | 1,475,218        |       |
| Selling and administrative expenses                               |       | 7,178                           |       | 419,898        |       | 235,918              |       | —           |       | 662,994          |       |
| Amortization expense                                              |       | 165                             |       | 94,032         |       | 26,942               |       | —           |       | 121,139          |       |
| Merger related charges                                            |       | 2,234                           |       | —         |       | —               |       | —           |       | 2,234            |       |
| Restructuring charges                                             |       | —                          |       | 9,449          |       | 11,176               |       | —           |       | 20,625           |       |
| Total operating costs and expenses                                |       | 9,577                           |       | 1,786,691      |       | 541,246              |       | (55,304          | )          | 2,282,210        |       |
|                                                              |       |                            |       |           |       |                 |       |             |       |             |       |
| **Operating (Loss) Income**                                       |       | (9,577                          | )          | 197,663        |       | 53,437               |       | —           |       | 241,523          |       |
| ** **                                                        |       |                            |       |           |       |                 |       |             |       |             |       |
| **Non-operating Expense (Income):**                               |       |                            |       |           |       |                 |       |             |       |             |       |
| Interest expense (income)                                         |       | 233,326                         |       | 2,116          |       | (9,904               | )          | —           |       | 225,538          |       |
| Interest and net investment loss (income)                         |       | 1,123                           |       | 2,142          |       | (6,457               | )          | —           |       | (3,192           | )          |
| Gain on extinguishment of debt                                    |       | (46,106                         | )          | —         |       | —               |       | —           |       | (46,106          | )          |
| Other expense                                                     |       | —                          |       | —         |       | 555                  |       | —           |       | 555              |       |
|                                                              |       |                            |       |           |       |                 |       |             |       |             |       |
| **(Loss) Income from Continuing  Operations before Income Taxes** |       | (197,920                        | )          | 193,405        |       | 69,243               |       | —           |       | 64,728           |       |
| (Benefit) provision for income taxes                              |       | (110,795                        | )          | 66,307         |       | 65,208               |       | —           |       | 20,720           |       |
|                                                              |       |                            |       |           |       |                 |       |             |       |             |       |
| **(Loss) Income from Continuing  Operations**                     |       | (87,125                         | )          | 127,098        |       | 4,035                |       | —           |       | 44,008           |       |
| Loss from discontinued operations, net of income  taxes           |       | —                          |       | —         |       | (666                 | )          | —           |       | (666             | )          |
|                                                              |       |                            |       |           |       |                 |       |             |       |             |       |
| Equity in earnings of subsidiaries (net of tax)                   |       | 130,467                         |       | (5,148         | )          | —               |       | (125,319         | )          | —           |       |
| **Net Income**                                                    |       | $                               | 43,342     |           | $          | 121,950              |       | $                | 3,369      |             | $          | (125,319 | ) | $ | 43,342 |   |

 

24

----

 

**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Operations**

**Forthe Nine Months Ended September 30, 2008**

**(inthousands)**

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

 

25

----

 

**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Financial Position**

**Asof September 30, 2009**

**(inthousands)**

 
| ** **                                                                   | ** ** | **The  ServiceMaster  Company** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                                   |       |                            |       |           |       |                 |       |             |       |             |       |
| **Current Assets:**                                                          |       |                            |       |           |       |                 |       |             |       |             |       |
| Cash and cash equivalents                                                    |       | $                               | 81,918     |           | $          | 15,651               |       | $                | 110,304    |             | $          | — |   | $ | 207,873 |   |
| Marketable securities                                                        |       | —                          |       | —         |       | 18,544               |       | —           |       | 18,544           |       |
| Receivables                                                                  |       | 1,125                           |       | 167,127        |       | 429,594              |       | (203,497         | )          | 394,349          |       |
| Inventories                                                                  |       | —                          |       | 74,894         |       | 3,042                |       | —           |       | 77,936           |       |
| Prepaid expenses and other assets                                            |       | 4,626                           |       | 26,167         |       | 15,273               |       | —           |       | 46,066           |       |
| Deferred customer acquisition costs                                          |       | —                          |       | 19,378         |       | 21,288               |       | —           |       | 40,666           |       |
| Deferred taxes                                                               |       | 467                             |       | 26,866         |       | 7,557                |       |             |       | 34,890           |       |
| Assets of discontinued operations                                            |       | —                          |       | 12             |       | 44                   |       | —           |       | 56               |       |
| Total Current Assets                                                         |       | 88,136                          |       | 330,095        |       | 605,646              |       | (203,497         | )          | 820,380          |       |
| **Property and Equipment:**                                                  |       |                            |       |           |       |                 |       |             |       |             |       |
| At cost                                                                      |       | —                          |       | 253,734        |       | 81,243               |       | —           |       | 334,977          |       |
| Less: accumulated depreciation                                               |       | —                          |       | (84,227        | )          | (34,606              | )          | —           |       | (118,833         | )          |
| Net property and equipment                                                   |       | —                          |       | 169,507        |       | 46,637               |       | —           |       | 216,144          |       |
|                                                                         |       |                            |       |           |       |                 |       |             |       |             |       |
| **Other Assets:**                                                            |       |                            |       |           |       |                 |       |             |       |             |       |
| Goodwill                                                                     |       | —                          |       | 2,747,012      |       | 363,480              |       | —           |       | 3,110,492        |       |
| Intangible assets, primarily trade names, service  marks and trademarks, net |       | —                          |       | 2,044,051      |       | 808,474              |       | —           |       | 2,852,525        |       |
| Notes receivable                                                             |       | 1,998,100                       |       | 753            |       | 23,330               |       | (1,998,100       | )          | 24,083           |       |
| Long-term marketable securities                                              |       | 9,608                           |       | —         |       | 101,596              |       | —           |       | 111,204          |       |
| Investments in and advances to subsidiaries                                  |       | 3,959,634                       |       | 1,730,473      |       | 43,946               |       | (5,734,053       | )          | —           |       |
| Other assets                                                                 |       | 112,750                         |       | 3,821          |       | 4,849                |       | (87,839          | )          | 33,581           |       |
| Debt issuance costs                                                          |       | 70,446                          |       | —         |       | —               |       | —           |       | 70,446           |       |
| Total Assets                                                                 |       | $                               | 6,238,674  |           | $          | 7,025,712            |       | $                | 1,997,958  |             | $          | (8,023,489 | ) | $ | 7,238,855 |   |
|                                                                         |       |                            |       |           |       |                 |       |             |       |             |       |
| **Liabilities and Shareholder’s  Equity**                               |       |                            |       |           |       |                 |       |             |       |             |       |
| **Current Liabilities:**                                                     |       |                            |       |           |       |                 |       |             |       |             |       |
| Accounts payable                                                             |       | $                               | 1,165      |           | $          | 49,384               |       | $                | 32,256     |             | $          | — |   | $ | 82,805 |   |
| Accrued liabilities:                                                         |       |                            |       |           |       |                 |       |             |       |             |       |
| Payroll and related expenses                                                 |       | 2,104                           |       | 43,949         |       | 33,937               |       | —           |       | 79,990           |       |
| Self-insured claims and related expenses                                     |       | —                          |       | 23,391         |       | 58,486               |       | —           |       | 81,877           |       |
| Other                                                                        |       | 22,163                          |       | 43,035         |       | 63,100               |       | —           |       | 128,298          |       |
| Deferred revenue                                                             |       | —                          |       | 137,466        |       | 305,052              |       | —           |       | 442,518          |       |
| Liabilities of discontinued operations                                       |       | —                          |       | 295            |       | 2,154                |       | —           |       | 2,449            |       |
| Current portion of long-term debt                                            |       | 172,027                         |       | 27,655         |       | 108,666              |       | (203,497         | )          | 104,851          |       |
| Total Current Liabilities                                                    |       | 197,459                         |       | 325,175        |       | 603,651              |       | (203,497         | )          | 922,788          |       |
|                                                                         |       |                            |       |           |       |                 |       |             |       |             |       |
| **Long-Term Debt**                                                           |       | 3,895,037                       |       | 2,000,816      |       | 20,121               |       | (1,998,100       | )          | 3,917,874        |       |
| ** **                                                                   |       |                            |       |           |       |                 |       |             |       |             |       |
| **Other Long-Term Liabilities:**                                             |       |                            |       |           |       |                 |       |             |       |             |       |
| Deferred taxes                                                               |       | —                          |       | 793,405        |       | 282,415              |       | (87,839          | )          | 987,981          |       |
| Intercompany payable                                                         |       | 853,073                         |       | —         |       | —               |       | (853,073         | )          | —           |       |
| Liabilities of discontinued operations                                       |       | —                          |       | —         |       | 4,027                |       | —           |       | 4,027            |       |
| Other long-term obligations, primarily self-  insured claims                 |       | 88,559                          |       | 2,508          |       | 110,572              |       | —           |       | 201,639          |       |
| Total Other Long-Term Liabilities                                            |       | 941,632                         |       | 795,913        |       | 397,014              |       | (940,912         | )          | 1,193,647        |       |
|                                                                         |       |                            |       |           |       |                 |       |             |       |             |       |
| **Shareholder’s Equity**                                                |       | 1,204,546                       |       | 3,903,808      |       | 977,172              |       | (4,880,980       | )          | 1,204,546        |       |
| ** **                                                                   |       |                            |       |           |       |                 |       |             |       |             |       |
| **Total Liabilities and Shareholder’s  Equity**                         |       | $                               | 6,238,674  |           | $          | 7,025,712            |       | $                | 1,997,958  |             | $          | (8,023,489 | ) | $ | 7,238,855 |   |

 

26

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Financial Position**

**Asof December 31, 2008**

**(inthousands)**

 
| ** **                                                                   | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                   | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Assets**                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Current Assets:**                                                          |       |              |       |           |       |           |       |             |       |             |       |
| Cash  and cash equivalents                                                   |       | $                 | 300,362    |           | $          | 12,105         |       | $                | 93,120     |             | $          | — |   | $ | 405,587 |   |
| Marketable  securities                                                       |       | —            |       | —         |       | 22,928         |       | —           |       | 22,928           |       |
| Receivables                                                                  |       | 1,100             |       | 138,623        |       | 387,271        |       | (191,067         | )          | 335,927          |       |
| Inventories                                                                  |       | —            |       | 77,740         |       | 2,278          |       | —           |       | 80,018           |       |
| Prepaid  expenses and other assets                                           |       | 11,130            |       | 16,687         |       | 9,831          |       | —           |       | 37,648           |       |
| Deferred  customer acquisition costs                                         |       | —            |       | 14,576         |       | 21,938         |       | —           |       | 36,514           |       |
| Deferred  taxes                                                              |       | 10,249            |       | 27,755         |       | 4,941          |       | —           |       | 42,945           |       |
| Assets  of discontinued operations                                           |       | —            |       | —         |       | 412            |       | —           |       | 412              |       |
| Total  Current Assets                                                        |       | 322,841           |       | 287,486        |       | 542,719        |       | (191,067         | )          | 961,979          |       |
| **Property and Equipment:**                                                  |       |              |       |           |       |           |       |             |       |             |       |
| At  cost                                                                     |       | —            |       | 213,036        |       | 74,782         |       | —           |       | 287,818          |       |
| Less:  accumulated depreciation                                              |       | —            |       | (50,917        | )          | (21,272        | )          | —           |       | (72,189          | )          |
| Net  property and equipment                                                  |       | —            |       | 162,119        |       | 53,510         |       | —           |       | 215,629          |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Assets:**                                                            |       |              |       |           |       |           |       |             |       |             |       |
| Goodwill                                                                     |       | —            |       | 2,732,432      |       | 361,477        |       | —           |       | 3,093,909        |       |
| Intangible  assets, primarily trade names, service marks and trademarks, net |       | —            |       | 2,133,376      |       | 834,608        |       | —           |       | 2,967,984        |       |
| Notes  receivable                                                            |       | 323,688           |       | 778            |       | 24,850         |       | (323,688         | )          | 25,628           |       |
| Long-term  marketable securities                                             |       | 9,901             |       | —         |       | 100,233        |       | —           |       | 110,134          |       |
| Investments  in and advances to subsidiaries                                 |       | 5,515,710         |       | 1,579,274      |       | 138,363        |       | (7,233,347       | )          | —           |       |
| Other  assets                                                                |       | 93,283            |       | 933            |       | 7,494          |       | (66,360          | )          | 35,350           |       |
| Debt  issuance costs                                                         |       | 83,014            |       | —         |       | —         |       | —           |       | 83,014           |       |
| Total  Assets                                                                |       | $                 | 6,348,437  |           | $          | 6,896,398      |       | $                | 2,063,254  |             | $          | (7,814,462 | ) | $ | 7,493,627 |   |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Liabilities and Shareholder’s Equity**                                |       |              |       |           |       |           |       |             |       |             |       |
| **Current Liabilities:**                                                     |       |              |       |           |       |           |       |             |       |             |       |
| Accounts  payable                                                            |       | $                 | 370        |           | $          | 44,096         |       | $                | 44,776     |             | $          | — |   | $ | 89,242 |   |
| Accrued  liabilities:                                                        |       |              |       |           |       |           |       |             |       |             |       |
| Payroll  and related expenses                                                |       | 1,888             |       | 34,515         |       | 46,633         |       | —           |       | 83,036           |       |
| Self-insured  claims and related expenses                                    |       | —            |       | 21,257         |       | 70,666         |       | —           |       | 91,923           |       |
| Other                                                                        |       | 95,582            |       | 38,259         |       | 68,333         |       | —           |       | 202,174          |       |
| Deferred  revenue                                                            |       | —            |       | 147,421        |       | 296,005        |       | —           |       | 443,426          |       |
| Liabilities  of discontinued operations                                      |       | —            |       | —         |       | 4,870          |       | —           |       | 4,870            |       |
| Current  portion of long-term debt                                           |       | 285,365           |       | 17,538         |       | 109,433        |       | (191,067         | )          | 221,269          |       |
| Total  Current Liabilities                                                   |       | 383,205           |       | 303,086        |       | 640,716        |       | (191,067         | )          | 1,135,940        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Long-Term Debt**                                                           |       | 4,000,424         |       | 347,301        |       | 20,786         |       | (323,688         | )          | 4,044,823        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Long-Term Liabilities:**                                             |       |              |       |           |       |           |       |             |       |             |       |
| Deferred  taxes                                                              |       | —            |       | 769,146        |       | 278,960        |       | (66,360          | )          | 981,746          |       |
| Intercompany  payable                                                        |       | 749,800           |       | —         |       | —         |       | (749,800         | )          | —           |       |
| Liabilities  of discontinued operations                                      |       | —            |       | —         |       | 4,077          |       | —           |       | 4,077            |       |
| Other  long-term obligations, primarily self-insured claims                  |       | 82,649            |       | 3,381          |       | 108,652        |       | —           |       | 194,682          |       |
| Total  Other Long-Term Liabilities                                           |       | 832,449           |       | 772,527        |       | 391,689        |       | (816,160         | )          | 1,180,505        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Shareholder’s Equity**                                                |       | 1,132,359         |       | 5,473,484      |       | 1,010,063      |       | (6,483,547       | )          | 1,132,359        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Total Liabilities and Shareholder’s Equity**                          |       | $                 | 6,348,437  |           | $          | 6,896,398      |       | $                | 2,063,254  |             | $          | (7,814,462 | ) | $ | 7,493,627 |   |

 

27

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**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Cash Flows**

**Forthe Nine Months Ended September 30, 2009**

**(inthousands)**

 
| ** **                                                                             | ** ** | **The  ServiceMaster  Company** | ** ** | **Guarantors** | ** ** | **Non-  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** |       | (129,660                        | )          | 259,507        |       | (17,009              | )          | (43,634          | )          | 69,204           |       |
| ** **                                                                             |       |                            |       |           |       |                 |       |             |       |             |       |
| **Cash Flows from Investing  Activities from Continuing Operations:**                  |       |                            |       |           |       |                 |       |             |       |             |       |
| Property additions                                                                     |       | —                          |       | (43,915        | )          | (6,555               | )          | —           |       | (50,470          | )          |
| Sale of equipment and other assets                                                     |       | —                          |       | 2,651          |       | 105                  |       | —           |       | 2,756            |       |
| Acquisition of The ServiceMaster Company                                               |       | (1,482                          | )          | —         |       | —               |       | —           |       | (1,482           | )          |
| Other business acquisitions, net of cash acquired                                      |       | —                          |       | (20,730        | )          | —               |       | —           |       | (20,730          | )          |
| Notes receivable, financial investments and  securities, net                           |       | —                          |       | —         |       | 8,032                |       | —           |       | 8,032            |       |
| **Net Cash (Used for) Provided from  Investing Activities from Continuing Operations** |       | (1,482                          | )          | (61,994        | )          | 1,582                |       | —           |       | (61,894          | )          |
| ** **                                                                             |       |                            |       |           |       |                 |       |             |       |             |       |
| **Cash Flows from Financing  Activities from Continuing Operations:**                  |       |                            |       |           |       |                 |       |             |       |             |       |
| Payments of debt                                                                       |       | (186,448                        | )          | (12,704        | )          | (2,219               | )          | —           |       | (201,371         | )          |
| Shareholders’ dividends                                                           |       | —                          |       | (21,817        | )          | (21,817              | )          | 43,634           |       | —           |       |
| Debt issuance costs paid                                                               |       | (410                            | )          | —         |       | —               |       | —           |       | (410             | )          |
| Net intercompany advances                                                              |       | 99,556                          |       | (159,446       | )          | 59,890               |       | —           |       | —           |       |
| **Net Cash (Used for) Provided from  Financing Activities from Continuing Operations** |       | (87,302                         | )          | (193,967       | )          | 35,854               |       | 43,634           |       | (201,781         | )          |
| ** **                                                                             |       |                            |       |           |       |                 |       |             |       |             |       |
| **Cash Flows from Discontinued  Operations:**                                          |       |                            |       |           |       |                 |       |             |       |             |       |
| Cash used for operating activities                                                     |       | —                          |       | —         |       | (2,329               | )          | —           |       | (2,329           | )          |
| Cash used for investing activities                                                     |       | —                          |       | —         |       | (914                 | )          | —           |       | (914             | )          |
| **Net Cash Used for Discontinued  Operations**                                         |       | —                          |       | —         |       | (3,243               | )          | —           |       | (3,243           | )          |
| ** **                                                                             |       |                            |       |           |       |                 |       |             |       |             |       |
| **Cash (Decrease) Increase During  the Period**                                        |       | (218,444                        | )          | 3,546          |       | 17,184               |       | —           |       | (197,714         | )          |
| ** **                                                                             |       |                            |       |           |       |                 |       |             |       |             |       |
| **Cash and Cash Equivalents at End  of Period**                                        |       | $                               | 81,918     |           | $          | 15,651               |       | $                | 110,304    |             | $          | — |   | $ | 207,873 |   |

 

28

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**THE SERVICEMASTER COMPANY ANDSUBSIDIARIES**

**CondensedConsolidating Statement of Cash Flows**

**Forthe Nine Months Ended September 30, 2008**

**(inthousands)**

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

 

29

----

 

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

 

**MergerAgreement**

 

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

 

On the ClosingDate, the Merger was completed, and each issued and outstanding share ofServiceMaster common stock, other than shares held by ServiceMaster or Holdingsor their subsidiaries and shares held by stockholders who validly perfectedtheir appraisal rights under Delaware law, was converted into the right toreceive $15.625 in cash. Each share of ServiceMaster common stock owned byServiceMaster, Holdings or Acquisition Co. or any of their respectivedirect or indirect wholly-owned subsidiaries was cancelled and retired, and noconsideration was paid in exchange for it.

 

Immediatelyfollowing the completion of the Merger, all of the outstanding capital stock ofHoldings, the ultimate parent company of ServiceMaster, was owned by investmentfunds sponsored by, or affiliated with, the Equity Sponsors.

 

Equitycontributions totaling $1,431.1 million from the Equity Sponsors, togetherwith (i) borrowings under the Interim Loan Facility, (ii) borrowingsunder a new $2,650.0 million senior secured term loan facility and (iii) cashon hand at ServiceMaster, were used, among other things, to finance theaggregate Merger Consideration, to make payments in satisfaction of otherequity-based interests in ServiceMaster under the Merger Agreement, to settleexisting interest rate swaps, to redeem or provide for the repayment of certainof the Company’s existing indebtedness and to pay related transaction fees andexpenses. In addition, letters of credit issued under a new $150.0 millionpre-funded letter of credit facility were used to replace and/or secure lettersof credit previously issued under a ServiceMaster credit facility that wasterminated as of the Closing Date. On the Closing Date, the Company alsoentered into, but did not draw under, the Revolving Credit Facility.

 

The Interim LoanFacility matured on July 24, 2008. On the maturity date, outstandingamounts under the Interim Loan Facility were converted on a one to one basisinto the Permanent Notes. The Permanent Notes were issued pursuant to arefinancing indenture. In connection with the issuance of Permanent Notes, ServiceMasterentered into a Registration Rights Agreement, pursuant to which ServiceMasterfiled with the SEC a registration statement with respect to the resale of thePermanent Notes, which was declared effective on January 16, 2009.ServiceMaster deregistered the Permanent Notes and terminated the effectivenessof the registration statement on November 12, 2009 in accordance with theterms of the Registration Rights Agreement.

 

**Resultsof Operations**

 

**ThirdQuarter 2009 Compared to 2008**

 

The Companyreported third quarter 2009 revenue of $920.5 million, a $27.6 million or 2.9percent decrease compared to 2008. Revenue for the third quarter of 2008 hasbeen reduced by $0.7 million (non-cash) resulting from recording deferredrevenue at its fair value in connection with purchase accounting. Excludingthis impact of purchase accounting, revenue for the third quarter of 2009decreased $28.3 million, or 3.0 percent, from 2008 levels, driven by theresults of our business units as described in our “Segment Reviews for theThird Quarter 2009 Compared to 2008”.

 

Operating incomewas $94.8 million for the third quarter of 2009 compared to $110.7 millionfor the third quarter of 2008. Income from continuing operations before incometaxes was $25.0 million for the third quarter of 2009 compared to$26.9 million for the third quarter of 2008. The decline in income fromcontinuing operations before income taxes of $1.9 million reflects the neteffect of:

 
| **(In millions)**                                      | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------|------------|
| Non-cash  purchase accounting adjustments(1)           |       | $          | 1.3        |   |
| Decreased  interest expense(2)                         |       | 9.7        |       |
| Increased  interest and net investment income(3)       |       | 4.3        |       |
| Increased  restructuring and Merger related charges(4) |       | (6.3       | )          |
| Decline  in segment results(5)                         |       | (10.9      | )          |
|                                                   |       | $          | (1.9       | ) |

 

30

----

 

----

(1)           The net favorable impact of non-cashpurchase accounting adjustments for the third quarter of 2009 compared to 2008of $1.3 million consists primarily of decreased amortization of intangibleassets of $0.5 million and a $0.7 million increase in revenue resulting fromrecording deferred revenue at its fair value in conjunction with purchaseaccounting partially offset by increased deferred customer acquisition expenseof $0.1 million.

 

(2)           Represents a decrease in interest expenseas a result of decreases in our weighted average interest rates and decreasesin our weighted average long-term debt balances as compared to the thirdquarter of 2008.

 

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

 

(4)           Represents (i) an increase inrestructuring charges primarily resulting from a reorganization of fieldleadership and a restructuring of branch operations at TruGreen LawnCare and (ii) anincrease in Merger related charges primarily related to certain legal matters.

 

(5)           Represents a net decrease in income fromcontinuing operations before income taxes, non-cash purchase accountingadjustments, interest expense, interest and net investment loss, gain onextinguishment of debt, Merger related charges and restructuring chargesresulting from a decline in results at TruGreen LawnCare, TruGreen LandCare,American Home Shield and Other Operations and Headquarters partially offset byimproved results at Terminix as described in our “Segment Reviews for the ThirdQuarter 2009 Compared to 2008”.

 

***Operating andNon-Operating Expenses***

 

The Company reported cost of services rendered andproducts sold of $527.4 million for the third quarter of 2009 compared to$559.6 million for the third quarter of 2008. Excluding the unfavorablenon-cash reduction of revenue of $0.7 million for the third quarter of 2008resulting from recording deferred revenue at its fair value in conjunction withpurchase accounting, as a percentage of revenue, these costs decreased to 57.3percent for the third quarter of 2009 from 59.0 percent for the third quarterof 2008. This primarily reflects the impact of reduced fertilizer costs,favorable termite damage claim trends, lower vehicle counts, reduced fuel costsand the favorable impact of acquiring assets in connection with exiting certainfleet leases in 2008, partially offset by a residual value guarantee charge.

 

The Companyreported selling and administrative expenses of $249.3 million for the thirdquarter of 2009 compared to $235.2 million for the third quarter of 2008. Thethird quarter of 2008 includes a $0.1 million (non-cash) decrease in sellingand administrative expenses resulting from recording deferred customeracquisition costs at their fair value in connection with purchase accounting.Excluding the impact of purchase accounting, these costs increased, as apercentage of revenue, to 27.1 percent for the third quarter of 2009 from24.8 percent for the third quarter of 2008. This primarily reflects decreasedleverage of selling and administrative expenses at TruGreen LawnCare, increasedcompensation charges for the Company resulting from a change in the marketvalue of investments within an employee deferred compensation trust (for whichthere is a corresponding and offsetting change within interest and netinvestment income), increased provisions for certain legal matters andincreased management fees, offset, in part, by lower overhead charges andreduced provisions for incentive compensation.

 

Amortizationexpense was $40.4 million for the third quarter of 2009 compared to$40.5 million for the third quarter of 2008.

 

The Companyreviews goodwill and indefinite-lived intangible assets for impairment annuallyin the fourth quarter and between annual test dates in certain circumstances.The majority of the Company’s goodwill and indefinite-lived intangible assets(mainly trade names) relate to the Merger. The Company does not believe atriggering event requiring the Company to conduct an interim impairment testhad occurred as of September 30, 2009. However, due to the potential forprolonged economic softness in the markets in which we operate, the Companybelieves it is reasonably possible that we will record a non-cash impairmentcharge in the fourth quarter. As of September 30, 2009, the balances ofthe Company’s goodwill and indefinite-lived intangible assets were $3.1 billionand $2.9 billion, respectively.

 

Non-operatingexpense totaled $69.8 million for the third quarter of 2009 compared to$83.8 million for the third quarter of 2008. This change includes a$9.7 million decrease in interest expense primarily resulting fromdecreases in our weighted average interest rates and decreases in our weightedaverage long-term debt balances, as well as a $4.3 million increase in interestand net investment income. Interest and net investment income was comprised ofthe following for the three months ended September 30, 2009 and 2008:

 

31

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| ** **                          | ** ** | **Three months ended********September 30,** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| **(In millions)**                   | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Realized  gains(1)                  |       | $                                                | 2.8        |   | $ | 1.2 |   |
| Impairments  of securities(2)       |       | —                                           |       | (0.9 | ) |
| Deferred  compensation trust(3)     |       | 1.2                                              |       | (1.2 | ) |
| Other(4)                            |       | 0.6                                              |       | 1.1 |   |
| Interest  and net investment income |       | $                                                | 4.6        |   | $ | 0.2 |   |

 

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(1)           Represents the net investment gains(losses) and the interest and dividend income realized on the American HomeShield investment 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 income from continuing operations beforeincome taxes).

 

(4)           Represents a portion of the earningsgenerated by ServiceMaster Acceptance Company Limited Partnership (“SMAC”), ourfinancing subsidiary exclusively dedicated to providing financing to ourfranchisees and retail customers of our operating units, and interest income onother cash balances.

 

The effective taxrate on income from continuing operations was 16.4 percent for the thirdquarter of 2009 compared to 32.3 percent for the third quarter of 2008. Thechange in the effective tax rate is primarily due to a change in the state taxrates applied to cumulative deferred taxes. This was partially offset by statetax expense offsetting the statutory federal benefit generated due to losses in2008 compared to state tax expense increasing the annual projected tax expensein 2009.

 

***Restructuring and Merger Related Charges***

 

The Company isengaged in a reorganization and restructuring of certain of its businesses andsupport functions known as Fast Forward. Among the purposes of Fast Forward isto eliminate layers and bureaucracy and simplify work processes in order tobetter align the Company’s work processes around its operational and strategicobjectives. Fast Forward is being implemented in phases. The first phaseinvolved, among other things, a reduction in work force and various processimprovements, including the closing of American Home Shield’s call centerlocated in Santa Rosa, California. The second phase includes, among otherthings, the organization of certain corporate support functions into centers ofexcellence which are expected to deliver higher quality services to ourbusiness units at lower costs, the outsourcing to third party vendors ofvarious business activities that currently are handled internally, as well asother employee workforce reductions expected to result in cost-savings. Thefirst phase of Fast Forward was substantially completed in the first quarter of2008, and the second phase is underway.

 

As part of thesecond phase of Fast Forward, on December 11, 2008, the Company enteredinto an agreement with IBM pursuant to which IBM will provide informationtechnology operations and applications development services to the Company. Theinitial term of the agreement is seven years. The agreement commenced on December 11,2008 and the services were phased in during the first half of 2009. Inconnection with the agreement, the Company eliminated approximately 275positions. As a result of the elimination of positions and the transition ofinformation technology services to IBM, the Company incurred charges relatedto, among other things, employee retention and severance costs, and transitionfees paid to IBM and other consulting fees. Almost all charges related to theagreement were cash charges and were expensed throughout the transition period.Such charges amounted to approximately $3.5 million, pre-tax, during 2008 andapproximately $9.5 million, pre-tax, during the first nine months of 2009.These charges were recorded as restructuring charges in the condensedconsolidated statement of operations as incurred. 

 

The Companyexpects that it will incur additional costs in order to implement the secondphase of Fast Forward, but is currently unable to estimate the aggregate amountor timing of such charges or the anticipated related cash outlays. The Companyhas achieved its previously forecasted savings, $60.0 million pre-tax on anannualized basis, from Fast Forward. Most of these savings benefit the sellingand administrative expenses line in the statement of operations.

 

32

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In connection with FastForward, the Company incurred costs of approximately $1.5 million and $2.0million for the three months ended September 30, 2009 and 2008,respectively, which included the costs described above. For the three monthsended September 30, 2009, such costs included consulting fees ofapproximately $1.1 million and severance, lease termination and other costs ofapproximately $0.4 million For the three months ended September 30, 2008,these charges included consulting fees of approximately $0.6 million andseverance, lease termination and other costs of approximately $1.4 million.

 

For the three monthsended September 30, 2009, TruGreen LawnCare recorded restructuring costsof approximately $6.0 million relating to a reorganization of field leadershipand a restructuring of branch operations. For the three months ended September 30, 2009,these costs included approximately $4.1 million of consulting fees,approximately $0.7 million of severance and approximately $1.2 million of leasetermination and other costs. In connection with the restructuring of branchoperations, we wouldexpect to incur cash charges through the fourth quarter of 2010 related to,among other things, employee retention and severance costs and consulting fees,and such charges could be material. The Company is currently unable to estimatethe aggregate amount or timing of such charges or the anticipated related cashoutlays.

 

For the three monthsended September 30, 2009, Terminix recorded restructuring costs ofapproximately $0.2 million relating to a branch optimization project, which wasrelated to lease termination costs.

 

The results forthe three months ended September 30, 2008 include restructuring chargesrelated to the Company’s consolidation of its corporate headquarters into itsoperations support center in Memphis, Tennessee and the closing of itsheadquarters in Downers Grove, Illinois. The transition to Memphis wassubstantially completed in 2007. Almost all costs related to the transitionwere cash expenditures and were expensed throughout the transition period.During the three months ended September 30, 2008, the Company reversed netexpenses of approximately $0.2 million relating to this relocation.

 

During the three monthsended September 30, 2009 and 2008, the Company incurred Merger relatedcharges totaling $0.8 million and $0.4 million, respectively. These Mergerrelated charges include investment banking, accounting, legal fee, legal settlement,change in control severance and other costs associated with the Merger.

 

**KeyPerformance Indicators**

 

The table belowpresents selected operating metrics related to customer counts and customerretention for the three largest profit businesses in the Company. Thesemeasures are presented on a rolling, twelve-month basis in order to avoidseasonal anomalies.

 
| ** **                                    | ** ** | **Key Performance Indicators  as of September 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                                           | ** ** | **2008** | ** ** |
| **TruGreen LawnCare—**                   |       |                                                               |       |   |   |
| Growth  in Full Program Accounts              |       | 0                                                                  | %          | 1 | % |
| Customer  Retention Rate                      |       | 69.2                                                               | %          | 68.2 | % |
| **Terminix—**                            |       |                                                               |       |   |   |
| Growth  in Pest Control Customers             |       | 1                                                                  | %          | 0 | % |
| Pest  Control Customer Retention Rate         |       | 77.9                                                               | %          | 78.8 | % |
| (Reduction)  Growth in Termite Customers      |       | (1                                                                 | )%         | 1 | % |
| Termite  Customer Retention Rate              |       | 85.8                                                               | %          | 87.5 | % |
| **American Home Shield—**                |       |                                                               |       |   |   |
| (Reduction)  Growth in Home Service Contracts |       | (2                                                                 | )%         | 0 | % |
| Customer  Retention Rate                      |       | 63.3                                                               | %          | 61.5 | % |

 

**Segment Reviews for the Third Quarter2009 Compared to 2008**

 

The following business segment reviews should be read in conjunctionwith the required footnote disclosures presented in the Notes to the condensedconsolidated financial statements. This disclosure provides a reconciliation ofsegment operating income to income from continuing operations before incometaxes, with net non-operating expenses as the only reconciling item.

 

The Company uses Adjusted EBITDA and Comparable Operating Performanceto facilitate operating performance comparisons from period to period. AdjustedEBITDA and Comparable Operating Performance are supplemental measures of theCompany’s performance that are not required by, or presented in accordancewith, GAAP. Adjusted EBITDA and Comparable Operating Performance are notmeasurements of the Company’s financial performance under GAAP and should notbe considered as alternatives to net income or any other performance measuresderived in accordance with GAAP or as alternatives to net cash 

 

33

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providedby operating activities or any other measures of the Company’s cash flow orliquidity. “Adjusted EBITDA” means net income before net income (loss) fromdiscontinued operations; provision (benefit) for income taxes; other expense;gain on extinguishment of debt; interest expense and interest and netinvestment income; and depreciation and amortization expense; as well as addingback interest and net investment income, residual value guarantee charge andnon-cash trade name impairment. “Comparable Operating Performance” iscalculated by adding back to Adjusted EBITDA non-cash option and restrictedstock expense and non-cash effects on Adjusted EBITDA attributable to theapplication of purchase accounting in connection with the Merger.

 

The Company believes Adjusted EBITDA facilitates company-to-companyoperating performance comparisons by backing out potential differences causedby variations in capital structures (affecting net interest income andexpense), taxation and the age and book depreciation of facilities andequipment (affecting relative depreciation expense), which may vary fordifferent companies for reasons unrelated to operating performance. Inaddition, the Company excludes residual value guarantee charges that do notresult in additional cash payments to exit the facility at the end of the leaseterm. The Company uses Comparable Operating Performance as a supplementalmeasure to assess the Company’s performance because it excludes non-cash optionand restricted stock expense and non-cash effects on Adjusted EBITDAattributable to the application of purchase accounting in connection with theMerger. The Company presents Comparable Operating Performance because itbelieves that it is useful for investors, analysts and other interested partiesin their analysis of the Company’s operating results.

 

TheCompany believes Comparable Operating Performance, which excludes the impact ofpurchase accounting and non-cash option and restricted stock expenseadjustments, is useful to investors. The exclusion of the impact of these itemsfacilitates a comparison of operating results from periods pre-dating theMerger transaction with the Equity Sponsors with periods subsequent to theMerger. The purchase accounting charges were not present prior to the Merger.In addition, charges relating to option and restricted stock expense prior to theMerger were computed under different plans and formulas than charges subsequentto the Merger. Moreover, such charges are non-cash and the exclusion of theimpact of these items from Comparable Operating Performance allows investors tounderstand the current period results of operations of the business on acomparable basis with previous periods and, secondarily, gives the investorsadded insight into cash earnings available to service the Company’s debt. Webelieve this to be of particular importance to the Company’s public investors,which are debt holders. The Company also believes that the exclusion of thepurchase accounting and non-cash option and restricted stock expenseadjustments may provide an additional means for comparing the Company’s performanceto the performance of other companies by eliminating the impact of differentlystructured equity-based long-term incentive plans (although care must be takenin making any such comparison, as there may be inconsistencies among companiesin the manner of computing similarly titled financial measures).

 

Adjusted EBITDA and Comparable Operating Performance are notnecessarily comparable to other similarly titled financial measures of othercompanies due to the potential inconsistencies in the method of calculation.

 

Adjusted EBITDA and Comparable Operating Performance have limitationsas analytical tools, and should not be considered in isolation or assubstitutes for analyzing the Company’s results as reported under GAAP. Some ofthese limitations are:

 

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

 

·      Adjusted EBITDA andComparable Operating Performance do not reflect the Company’s interest expenseor the cash requirements necessary to service interest or principal payments onthe Company’s debt;

 

·      Adjusted EBITDA andComparable Operating Performance do not reflect the Company’s tax expense orthe cash requirements to pay the Company’s taxes;

 

·      Adjusted EBITDA andComparable Operating Performance do not reflect historical cash expenditures orfuture requirements for capital expenditures or contractual commitments;

 

·      Although depreciation andamortization are non-cash charges, the assets being depreciated and amortizedwill often have to be replaced in the future, and Adjusted EBITDA andComparable Operating Performance do not reflect any cash requirements for suchreplacements;

 

·      Other companies in theCompany’s industries may calculate Adjusted EBITDA and Comparable OperatingPerformance differently, limiting their usefulness as comparative measures; and

 

·      Comparable Operating Performance does not includepurchase accounting adjustments and option and restricted stock expense, thelatter exclusion may cause the overall compensation cost of the business to beunderstated.

 

34

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

 
| ** **                                                             | ** ** | **Three months ended********September 30,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(In thousands)**                                                | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Operating  Revenue:                                                    |       |                                             |       |   |   |
| TruGreen  LawnCare                                                     |       | $                                                | 351,830    |   | $ | 364,442 |   |
| TruGreen  LandCare                                                     |       | 63,244                                           |       | 78,365 |   |
| Terminix                                                               |       | 272,598                                          |       | 273,172 |   |
| American  Home Shield                                                  |       | 179,617                                          |       | 177,328 |   |
| Other  Operations and Headquarters                                     |       | 53,225                                           |       | 54,766 |   |
| Total  Operating Revenue                                               |       | $                                                | 920,514    |   | $ | 948,073 |   |
| Comparable  Operating Performance:                                     |       |                                             |       |   |   |
| TruGreen  LawnCare                                                     |       | $                                                | 74,639     |   | $ | 83,838 |   |
| TruGreen  LandCare                                                     |       | 707                                              |       | 2,133 |   |
| Terminix                                                               |       | 50,580                                           |       | 45,402 |   |
| American  Home Shield                                                  |       | 36,138                                           |       | 34,567 |   |
| Other  Operations and Headquarters                                     |       | (1,465                                           | )          | 680 |   |
| Total  Comparable Operating Performance                                |       | $                                                | 160,599    |   | $ | 166,620 |   |
|                                                                   |       |                                             |       |   |   |
| Memo:  Items included in Comparable Operating Performance              |       |                                             |       |   |   |
| Restructuring  charges and Merger related charges(1)                   |       | $                                                | 8,498      |   | $ | 2,225 |   |
| Management  fee(2)                                                     |       | $                                                | 4,625      |   | $ | 500 |   |
|                                                                   |       |                                             |       |   |   |
| Memo:  Items excluded from Comparable Operating Performance            |       |                                             |       |   |   |
| Comparable  Operating Performance of InStar                            |       | $                                                | (56        | ) | $ | (1,659 | ) |
| Comparable  Operating Performance of all other discontinued operations |       | (553                                             | )          | 824 |   |
| Comparable  Operating Performance of discontinued operations           |       | $                                                | (609       | ) | $ | (835 | ) |

 

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(1)           Includes (i) charges related to FastForward, (ii) charges related to a reorganization of field leadership and a restructuringof branch operationsat TruGreen LawnCare, (iii) charges related to a branch optimizationproject at Terminix, (iv) charges related to the Company’s decision toconsolidate its corporate headquarters into its operations support center inMemphis, Tennessee and close its former headquarters in Downer’s Grove,Illinois and (v) Merger related charges.

 

(2)           Represents a management fee payable toCD&R pursuant to a consulting agreement under which CD&R provides theCompany with on-going consulting and management advisory services in exchangefor an annual management fee of $6.25 million, which is payable quarterly.On July 30, 2009, the annual management fee payable under the consultingagreement with CD&R was increased from $2.0 million to $6.25 million.The full year management fee will apply in 2009 and the incremental feesrelating to the first three quarters of 2009 were paid to CD&R in the thirdquarter of 2009.

 

In August 2009, the Company entered into consulting agreements with Citigroup,BAS and JPMorgan, each of which is an Equity Sponsor or an affiliate of anEquity Sponsor. Under the consulting agreements, Citigroup, BAS and JPMorganeach will provide the Company with on-going consulting and management advisoryservices until June 30, 2016 or the earlier termination of the existingconsulting agreement between the Company and CD&R. The Company will payannual management fees of $0.5 million, $0.5 million and $0.25 million,respectively, to Citigroup, BAS and JPMorgan. The full year management feeswill apply in 2009, and the fees relating to the first three quarters of 2009were paid to Citigroup, BAS and J.P. Morgan in the third quarter of 2009.

 

35

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The following table presents reconciliations ofoperating (loss) income, the most directly comparable financial measure underGAAP, to Adjusted EBITDA and Comparable Operating Performance for the periodspresented.

 
| **(In thousands)**                                                     | ** ** | **TruGreen  LawnCare** | ** ** | **TruGreen  LandCare** | ** ** | **Terminix** | ** ** | **American  Home********Shield** | ** ** | **Other  Operations &********Headquarters** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------|------------|----------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                                                  | ** ** | ** **             | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Three  Months Ended September 30, 2009**                             |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Operating income  (loss)(1)                                                 |       | $                      | 50,393     |                   | $          | (2,014       | )          | $                                | 34,868     |                                                 | $          | 22,998     |       | $ | (11,405 | ) | $ | 94,840 |   |
| Depreciation and  amortization expense                                      |       | 21,911                 |       | 2,884                  |       | 15,811       |       | 10,368                           |       | 5,686                                                |       | 56,660     |       |
| EBITDA before  interest and net investment income                      |       | 72,304                 |       | 870                    |       | 50,679       |       | 33,366                           |       | (5,719                                               | )          | 151,500    |       |
| Interest  and net investment income(2)                                      |       | —                 |       | —                 |       | —       |       | 2,762                            |       | 1,796                                                |       | 4,558      |       |
| Residual  value guarantee charge(3)                                         |       | 2,363                  |       | —                 |       | —       |       | —                           |       | 367                                                  |       | 2,730      |       |
| Adjusted  EBITDA                                                            |       | 74,667                 |       | 870                    |       | 50,679       |       | 36,128                           |       | (3,556                                               | )          | 158,788    |       |
| Non-cash  option and restricted stock expense                               |       | —                 |       | —                 |       | —       |       | —                           |       | 2,091                                                |       | 2,091      |       |
| Non-cash  (credits) charges attributable to purchase accounting(4)          |       | (28                    | )          | (163                   | )          | (99          | )          | 10                               |       | —                                               |       | (280       | )          |
| Comparable  Operating Performance                                           |       | $                      | 74,639     |                   | $          | 707          |       | $                                | 50,580     |                                                 | $          | 36,138     |       | $ | (1,465 | ) | $ | 160,599 |   |
|                                                                        |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Memo:  Items included in Comparable Operating Performance              |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Restructuring  charges and Merger related charges(5)                        |       | $                      | 5,951      |                   | $          | 184          |       | $                                | 214        |                                                 | $          | 30         |       | $ | 2,119 |   | $ | 8,498 |   |
| Management  fee(6)                                                          |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | 4,625 |   | $ | 4,625 |   |
|                                                                        |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Memo:  Items excluded from Comparable Operating Performance                 |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Comparable  Operating Performance of InStar                                 |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | (56 | ) | $ | (56 | ) |
| Comparable  Operating Performance of all other discontinued operations |       | —                 |       | —                 |       | —       |       | —                           |       | (553                                                 | )          | (553       | )          |
| Comparable  Operating Performance of discontinued operations(7)             |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | (609 | ) | $ | (609 | ) |
| ** **                                                                  | ** ** | ** **             | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Three Months Ended September 30, 2008**                              |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Operating income  (loss)(1)                                                 |       | $                      | 64,060     |                   | $          | (323         | )          | $                                | 30,696     |                                                 | $          | 22,897     |       | $ | (6,659 | ) | $ | 110,671 |   |
| Depreciation and  amortization expense                                      |       | 19,779                 |       | 2,619                  |       | 14,720       |       | 11,097                           |       | 5,499                                                |       | 53,714     |       |
| EBITDA before  interest and net investment income (loss)                    |       | 83,839                 |       | 2,296                  |       | 45,416       |       | 33,994                           |       | (1,160                                               | )          | 164,385    |       |
| Interest  and net investment income (loss)(2)                               |       | —                 |       | —                 |       | —       |       | 311                              |       | (67                                                  | )          | 244        |       |
| Adjusted  EBITDA                                                            |       | 83,839                 |       | 2,296                  |       | 45,416       |       | 34,305                           |       | (1,227                                               | )          | 164,629    |       |
| Non-cash  option and restricted stock expense                               |       | —                 |       | —                 |       | —       |       | —                           |       | 1,736                                                |       | 1,736      |       |
| Non-cash  (credits) charges attributable to purchase accounting(4)          |       | (1                     | )          | (163                   | )          | (14          | )          | 262                              |       | 171                                                  |       | 255        |       |
| Comparable  Operating Performance                                           |       | $                      | 83,838     |                   | $          | 2,133        |       | $                                | 45,402     |                                                 | $          | 34,567     |       | $ | 680 |   | $ | 166,620 |   |
|                                                                        |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Memo:  Items included in Comparable Operating Performance              |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Restructuring  charges and Merger related charges(5)                        |       | $                      | (1         | )                      | $          | 180          |       | $                                | —     |                                                 | $          | 45         |       | $ | 2,001 |   | $ | 2,225 |   |
| Management  fee(6)                                                          |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | 500 |   | $ | 500 |   |
|                                                                        |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Memo:  Items excluded from Comparable Operating Performance                 |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Comparable  Operating Performance of InStar                                 |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | (1,659 | ) | $ | (1,659 | ) |
| Comparable  Operating Performance of all other discontinued operations |       | —                 |       | —                 |       | —       |       | —                           |       | 824                                                  |       | 824        |       |
| Comparable  Operating Performance of discontinued operations(7)             |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | (835 | ) | $ | (835 | ) |

 

36

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

 
| ** **                                              | ** ** | **Three months ended********September 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Total  Segment Operating Income                         |       | $                                                | 94,840     |   | $ | 110,671 |   |
| Non-operating  expense (income):                        |       |                                             |       |   |   |
| Interest  expense                                       |       | 74,216                                           |       | 83,886 |   |
| Interest  and net investment income                     |       | (4,558                                           | )          | (244 | ) |
| Other  expense                                          |       | 176                                              |       | 141 |   |
| Income  from Continuing Operations before Income Taxes  |       | $                                                | 25,006     |   | $ | 26,888 |   |
| Provision  for income taxes                             |       | 4,102                                            |       | 8,683 |   |
| Income  from Continuing Operations                      |       | $                                                | 20,904     |   | $ | 18,205 |   |
| Loss  from discontinued operations, net of income taxes |       | (396                                             | )          | (1,186 | ) |
| Net  Income                                             |       | $                                                | 20,508     |   | $ | 17,019 |   |

 

(2)           Interest and net investment income is primarilycomprised of investment income and realized gain (loss) on our American HomeShield segment investment portfolio. Cash, short-term and long-term marketablesecurities associated with regulatory requirements in connection with AmericanHome Shield and for other purposes totaled approximately $258.9 million as of September 30,2009. American Home Shield interest and net investment income was $2.8 millionand $0.3 million for the third quarter of 2009 and 2008, respectively. Thebalance of interest and investment income primarily relates to (i) aportion of the earnings generated by SMAC, (ii) investment income (loss) fromour employee deferred compensation trust (for which there is a correspondingand offsetting change in compensation expense within income from continuingoperations before income taxes), and (iii) interest income on other cashbalances.

 

(3)           Includes residual value guarantee chargesthat do not result in additional cash payments to exit the facility at the endof the lease term. In the third quarter of 2009, the Company determined that itwas probable that the fair value of the properties under operating leases wouldbe below the guaranteed residual value at the end of the lease term. TheCompany’s current estimate of this shortfall is approximately $11.8 million,which will be recorded over the remainder of the lease term.

 

(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)           Includes (i) charges related to FastForward, (ii) charges related to a reorganization of field leadership and a restructuringof branch operationsat TruGreen LawnCare, (iii) charges related to a branch optimizationproject at Terminix, (iv) charges related to the Company’s decision toconsolidate its corporate headquarters into its operations support center inMemphis, Tennessee and close its former headquarters in Downer’s Grove,Illinois and (v) Merger related charges.

 

(6)           Represents a management fee payable toCD&R pursuant to a consulting agreement under which CD&R provides theCompany with on-going consulting and management advisory services in exchangefor an annual management fee of $6.25 million, which is payable quarterly.On July 30, 2009, the annual management fee payable under the consultingagreement with CD&R was increased from $2.0 million to $6.25 million.The full year management fee will apply in 2009 and the incremental feesrelating to the first three quarters of 2009 were paid to CD&R in the thirdquarter of 2009.

 

In August 2009, the Company entered into consulting agreements with Citigroup,BAS and JPMorgan, each of which is an Equity Sponsor or an affiliate of anEquity Sponsor. Under the consulting agreements, Citigroup, BAS and JPMorganeach will provide the Company with on-going consulting and management advisoryservices until June 30, 2016 or the earlier termination of the existingconsulting agreement between the Company and CD&R. The Company will payannual management fees of $0.5 million, $0.5 million and $0.25 million,respectively, to Citigroup, BAS and JPMorgan. The full year management feeswill apply in 2009, and the fees relating to the first three quarters of 2009were paid to Citigroup, BAS and J.P. Morgan in the third quarter of 2009.

 

(7)           The table included in “DiscontinuedOperations” presents reconciliations of operating loss, the most directlycomparable financial measure under GAAP, to Adjusted EBITDA and ComparableOperating Performance for the periods presented.

 

37

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***TruGreen LawnCareSegment***

 

The TruGreen LawnCare segment, which includes lawn, tree and shrub careservices, reported a 3.5 percent decrease in revenue, a 21.3 percent decreasein operating income and an 11.0 percent decrease in Comparable Operating Performancefor the third quarter of 2009 compared to 2008. The revenue results wereadversely impacted by soft customer demand. Customer counts at September 30,2009 were 0.4 percent lower than last year’s level due primarily to a declinein new unit sales in the first and second quarter, partially offset by a 100basis point improvement in the rolling twelve-month customer retention rate.Trends in revenue were also adversely impacted by discounts offered on FullProgram Accounts in 2009 designed to offset the impacts of a difficult economicenvironment. TruGreen LawnCare remains committed to improving customerretention by focusing on the overall quality of service delivery, including theLawn Quality Audit program, the reduction of route manager turnover and thecontinued improvement of overall communication with customers.

 

TruGreen LawnCare’s Comparable Operating Performance declined $9.2million for the third quarter of 2009 compared to 2008, which includes theimpact of $6.0 million of restructuring charges relating to a reorganization offield leadership and a restructuring of branch operations. TruGreen LawnCare’s ComparableOperating Performance also reflects increased sales and marketing expenses,offset, in part, by improved management of seasonal staffing of productionlabor, lowervehicle counts, reduced fuel and fertilizer costs and the favorableimpact of acquiring assets in connection with exiting certain fleet leases in2008.

 

***TruGreen LandCareSegment***

 

The TruGreen LandCare segment, which includeslandscape maintenance services, reported a 19.3 percent decrease in revenue, a523.5 percent increase in operating loss and a 66.9 percent decrease inComparable Operating Performance for the third quarter of 2009 compared to2008. The decline in revenue included a 13.7 percent decline in base contractmaintenance revenue and a 29.1 percent decline in enhancement revenue. Revenuetrends were adversely impacted by soft customer demand.

 

TruGreen LandCare’s Comparable Operating Performancedeclined $1.4 million for the third quarter of 2009 compared to 2008, whichalso reflects a declining gross profit margin due to pressure on pricing andincreased fuel costs. These factors were offset, in part, by reduced branchadministrative and corporate overhead spending, lower vehicle fleet counts, andthe favorable impact of acquiring assets in connection with exiting certainfleet leases in 2008.

 

***Terminix Segment***

 

The Terminix segment, which includes termite and pestcontrol services, reported a 0.2 percent decrease in revenue for the thirdquarter of 2009 compared to 2008. Revenue for the third quarter of 2008 hasbeen reduced by $0.1 million (non-cash) as a result of recording deferredrevenue at its fair value in connection with purchase accounting. Excluding thisimpact of purchase accounting, revenue decreased 0.3 percent for the thirdquarter of 2009 compared to 2008. Terminix reported a 13.6 percentincrease in operating income and an 11.4 percent increase in ComparableOperating Performance for the third quarter of 2009 compared to 2008. Thesegment’s overall revenue results, excluding purchase accounting, reflectedmodest growth in pest control revenues, offset by a decline in revenue fromtermite contract renewals and termite completions. Pest control revenuesincreased 2.3 percent for the third quarter of 2009 compared to 2008,reflecting increased customer counts and improved price realization. Theincrease in customer counts was driven by tuck-in acquisitions, partiallyoffset by a decline in new unit sales in the second quarter and a 90 basispoint decline in customer retention. A 0.6 percent decline in termite renewalrevenues for the third quarter of 2009 compared to 2008 was due to a 170 basispoint decline in termite customer retention. Revenue from termite completionsdeclined 5.1 percent for the third quarter of 2009 compared to 2008, due, inpart, to reduced average pricing on new termite treatments and fewer unitssold. Trends in retention and new unit sales were adversely impacted by softcustomer demand.

 

Terminix’s Comparable Operating Performance improved$5.2 million for the third quarter of 2009 compared to 2008, which alsoreflects favorable termite damage claims trends, reduced fuel costs, lowervehicle counts and the favorable impact of acquiring assets in connection withexiting certain fleet leases in 2008.

 

***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 1.3 percentincrease in revenue for the third quarter of 2009 compared to 2008. Revenue forthe third quarter of 2008 has been reduced by $0.6 million (non-cash) as aresult of recording deferred revenue at its fair value in connection withpurchase accounting. Excluding this impact of purchase accounting, AmericanHome Shield reported a 1.0 percent increase in revenue for the third quarter of2009 compared to 2008, reflecting improved price realization, partially offset bya decline in customer counts. The decline in customer counts was driven by adecline in new unit sales in the first and second quarter, partially offset bya 180 basis point improvement in customer retention. American Home Shield’ssales in the real 

 

38

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estate market in the first and second quarter weresignificantly impacted by the continued softness in the home resale marketthroughout most of the country.

 

American Home Shield reported a 0.4 percent increasein operating income and a 4.5 percent increase in Comparable OperatingPerformance for the third quarter of 2009 compared to 2008. The $1.6 millionincrease in Comparable Operating Performance for the third quarter of 2009compared to 2008 also reflects an increase in interest and net investmentincome, partially offset by increased provisions for certain legal matters.

 

***Other Operationsand Headquarters Segment***

 

This segment includes the operations of ServiceMasterClean and Merry Maids, as well as the Company’s headquarters functions. Thesegment reported a 2.8 percent decrease in revenue, a 71.3 percent increase inoperating loss and a 315.4 percent decrease in Comparable Operating Performancefor the third quarter of 2009 compared to 2008. The segment’s $2.1 milliondecrease in Comparable Operating Performance for the third quarter of 2009compared to 2008 reflects increased management fees and an increase inrestructuring and Merger related charges partially offset by reduced overheadspending and reduced provisions for incentive compensation. The ServiceMasterClean and Merry Maids operations reported a combined 2.9 percent decrease inrevenue for the third quarter of 2009 compared to 2008. The decrease in revenueresulted from decreases in product sales and other franchise revenues. TheServiceMaster Clean and Merry Maids operations reported a combined increase inoperating income of 5.8 percent and an increase in Comparable OperatingPerformance of 5.0 percent, or $0.8 million, for the third quarter of 2009compared to 2008.

 

***DiscontinuedOperations***

 

The components of loss from discontinued operations,net of income taxes, and the reconciliation of operating (loss) income toAdjusted EBITDA and Comparable Operating Performance for the three months endedSeptember 30, 2009 and 2008 are as follows:

 
| ** **                                              | ** ** | **Three months ended********September 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Operating  loss                                         |       | $                                                | (609       | ) | $ | (835 | ) |
| Interest  expense                                       |       | —                                           |       | (3 | ) |
| Loss  from discontinued operations, before income taxes |       | (609                                             | )          | (838 | ) |
| Benefit  for income taxes                               |       | (213                                             | )          | (239 | ) |
| Loss  on sale, net of tax                               |       | —                                           |       | (587 | ) |
| Loss  from discontinued operations, net of income taxes |       | $                                                | (396       | ) | $ | (1,186 | ) |
|                                                    |       |                                             |       |   |   |
| Operating  loss                                         |       | $                                                | (609       | ) | $ | (835 | ) |
| Depreciation  and amortization expense                  |       | —                                           |       | — |   |
| EBITDA  before interest and net investment income       |       | (609                                             | )          | (835 | ) |
| Interest  and net investment income                     |       | —                                           |       | — |   |
| Adjusted  EBITDA                                        |       | (609                                             | )          | (835 | ) |
| Non-cash  option and restricted stock expense           |       | —                                           |       | — |   |
| Non-cash  charges attributable to purchase accounting   |       | —                                           |       | — |   |
| Comparable  Operating Performance                       |       | $                                                | (609       | ) | $ | (835 | ) |

 

**Nine Months Ended September 30, 2009 Compared to2008**

 

The Company reported revenue of $2,523.7 million for the nine monthsended September 30, 2009, a $53.9 million or 2.1 percent decrease comparedto 2008. The revenue for the nine months ended September 30, 2008 has beenreduced by $34.1 million (non-cash) resulting from recording deferred revenueat its fair value in connection with purchase accounting. Excluding this impactof purchase accounting, revenue for the nine months ended September 30,2009 decreased $88.0 million or 3.4 percent, from 2008 levels, driven by theresults of our business units as described in our “Segment Reviews for the NineMonths Ended September 30, 2009 Compared to 2008”.

 

Operating income was $241.5 million in the nine months ended September 30,2009 compared to $214.5 million in 2008. Income from continuing operationsbefore income taxes was $64.7 million in the nine months ended September 30,2009 compared to loss from continuing operations before income taxes of $44.4million in 2008. The increase in income from continuing operations beforeincome taxes of $109.1 million primarily reflects the net effect of:

 

39

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| **(In millions)**                                      | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------|------------|
| Non-cash  purchase accounting adjustments(1)           |       | $          | 33.8       |   |
| Decreased  interest expense(2)                         |       | 31.4       |       |
| Increased  interest and net investment income(3)       |       | 4.8        |       |
| Increased  restructuring and Merger related charges(4) |       | (12.9      | )          |
| Gain  on extinguishment of debt(5)                     |       | 46.1       |       |
| Improved  segment results(6)                           |       | 5.9        |       |
|                                                   |       | $          | 109.1      |   |

 

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(1)           The netfavorable impact of non-cash purchase accounting adjustments in the nine monthsended September 30, 2009 of $33.8 million consists primarily of decreasedamortization of intangible assets of $13.4 million and a $34.1 million increasein revenue resulting from recording deferred revenue at its fair value inconjunction with purchase accounting partially offset by increased deferredcustomer acquisition expense of $14.1 million.

 

(2)           Represents a decrease in interest expenseas a result of decreases in our weighted average interest rates and decreasesin our weighted average long-term debt balances as compared to the first ninemonths of 2008.

 

(3)           As furtherdescribed in “Operating and Non-Operating Expenses”, represents an increase ininterest and net investment income.

 

(4)           Represents (i) anincrease in restructuring charges primarily resulting from Fast Forward, (ii) areorganization of field leadership and a restructuring of branch operations atTruGreen LawnCare, (iii) a branch optimization project at Terminix and (iv) an increase in Merger related chargesprimarily related to certain legal matters and change in control severanceagreements.

 

(5)           Represents thegain on extinguishment of debt recorded in the nine months ended September 30,2009 related to the completion of open market purchases of $89.0 million inface value of our Permanent Notes.

 

(6)           Represents anet increase in income from continuing operations before income taxes, non-cashpurchase accounting adjustments, interest expense, interest and net investmentincome, Merger related charges and restructuring charges supported by theimproved results at Terminix, American Home Shield and TruGreen LandCarepartially offset by a decline in results at TruGreen LawnCare and OtherOperations and Headquarters as described in our “Segment Reviews for the NineMonths Ended September 30, 2009 Compared to 2008”.

 

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

 

The Company reported cost ofservices rendered and products sold of $1,475.2 million for the nine monthsended September 30, 2009 compared to $1,566.7 million in 2008. Excludingthe unfavorable non-cash reduction of revenue of $34.1 million for the ninemonths ended September 30, 2008 resulting from recording deferred revenueat its fair value in conjunction with purchase accounting, as a percentage ofrevenue, these costs decreased to 58.5 percent for the nine months ended September 30,2009 from 60.0 percent in 2008. This primarily reflects the impact of reduced fertilizercosts, favorable termite damage claim trends, improved labor efficiency, lowervehicle counts, reduced fuel costs and the favorable impact of acquiring assetsin connection with exiting certain fleet leases in 2008, partially offset byincreased health care costs and a residual value guarantee charge.

 

The Company reported selling and administrative expenses of $663.0million for the nine months ended September 30, 2009 compared to$653.4 million in 2008. The nine months ended September 30, 2008 includea $14.1 million (non-cash) decrease in selling and administrative expensesresulting from recording deferred customer acquisition costs at their fairvalue in connection with purchase accounting. Excluding the impact of purchaseaccounting, these costs increased, as a percentage of revenue, to 26.3 percentfor the nine months ended September 30, 2009 from 25.6 percent in 2008. This primarily reflects decreasedleverage of selling and administrative expenses at TruGreen LawnCare, increasedcompensation charges for the Company resulting from a change in the marketvalue of investments within an employee deferred compensation trust (for whichthere is a corresponding and offsetting change within interest and netinvestment loss) and increased management fees, offset, in part, by loweradvertising costs, reduced provisions for certain legal matters, lower overheadcharges and reduced provisions for incentive compensation.

 

Amortization expense was $121.1 million for the nine months ended September 30,2009 compared to $133.1 million for 2008. The decrease is a result ofamortization being included in the first nine months of 2008 related to finitelived intangible assets recorded in connection with the Merger which had livesof one year or less and were fully amortized as of July 24, 2008.

 

40

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The Companyreviews goodwill and indefinite-lived intangible assets for impairment annuallyin the fourth quarter and between annual test dates in certain circumstances.The majority of the Company’s goodwill and indefinite-lived intangible assets(mainly trade names) relate to the Merger. The Company does not believe atriggering event requiring the Company to conduct an interim impairment testhad occurred as of September 30, 2009. However, due to the potential forprolonged economic softness in the markets in which we operate, the Companybelieves it is reasonably possible that we will record a non-cash impairmentcharge in the fourth quarter. As of September 30, 2009, the balances ofthe Company’s goodwill and indefinite-lived intangible assets were $3.1 billionand $2.9 billion, respectively.

 

Non-operating expense totaled $176.8 million for the nine months ended September 30,2009 compared with $259.0 million for 2008. This change includes a $46.1million gain on extinguishment of debt, a $31.4 million decrease in interestexpense, primarilyresulting from decreases in our weighted average interest rates and decreasesin our weighted average long-term debt balances, and a $4.8 million increasein interest and net investment income. Interest and net investment income wascomprised of the following for the nine months ended September 30, 2009and 2008:

 
| ** **                                 | ** ** | **Nine months ended********September 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------|------------|
| **(In millions)**                          | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| Realized  gains(1)                         |       | $                                               | 5.5        |   | $ | 8.4 |   |
| Impairments  of securities(2)              |       | (5.9                                            | )          | (9.0 | ) |
| Deferred  compensation trust(3)            |       | 1.7                                             |       | (3.9 | ) |
| Other(4)                                   |       | 1.9                                             |       | 2.9 |   |
| Interest  and net investment income (loss) |       | $                                               | 3.2        |   | $ | (1.6 | ) |

 

----

(1)           Represents thenet investment gains (losses) and the interest and dividend income realized onthe American Home Shield investment portfolio.

 

(2)           Representsother than temporary declines in the value of certain investments in theAmerican Home Shield investment portfolio.

 

(3)           Representsinvestment income (loss) resulting from a change in the market value ofinvestments within an employee deferred compensation trust (for which there isa corresponding and offsetting change in compensation expense within incomefrom continuing operations before income taxes).

 

(4)           Represents a portion of the earningsgenerated by SMAC and interest income on other cash balances.

 

The effective tax rate on income (loss) from continuing operations wasa provision of 32.0 percent for the nine months ended September 30, 2009compared to a benefit of 18.8 percent for 2008. The change in the effective taxrate is primarily due tostate tax expense offsetting the statutory federal benefit generated due tolosses in 2008 compared to state tax expense increasing the annual projectedtax expense in 2009. This was partially offset by a change in the state taxrates applied to cumulative deferred taxes.

 

***Restructuring and Merger RelatedCharges***

 

The Company isengaged in a reorganization and restructuring of certain of its businesses andsupport functions known as Fast Forward. Among the purposes of Fast Forward isto eliminate layers and bureaucracy and simplify work processes in order tobetter align the Company’s work processes around its operational and strategicobjectives. Fast Forward is being implemented in phases. The first phaseinvolved, among other things, a reduction in work force and various processimprovements, including the closing of American Home Shield’s call centerlocated in Santa Rosa, California. The second phase includes, among otherthings, the organization of certain corporate support functions into centers ofexcellence which are expected to deliver higher quality services to ourbusiness units at lower costs, the outsourcing to third party vendors ofvarious business activities that currently are handled internally, as well asother employee workforce reductions expected to result in cost-savings. Thefirst phase of Fast Forward was substantially completed in the first quarter of2008, and the second phase is underway.

 

As part of thesecond phase of Fast Forward, on December 11, 2008, the Company enteredinto an agreement with IBM pursuant to which IBM will provide informationtechnology operations and applications development services to the Company. Theinitial term of the agreement is seven years. The agreement commenced on December 11,2008 and the services were phased in during the first half of 2009. Inconnection with the agreement, the Company eliminated approximately 275positions. As a result of the elimination of positions and the transition ofinformation technology services to IBM, the Company incurred charges relatedto, 

 

41

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among other things,employee retention and severance costs, and transition fees paid to IBM andother consulting fees. Almost all charges related to the agreement were cashcharges and were expensed throughout the transition period. Such chargesamounted to approximately $3.5 million, pre-tax, during 2008 and approximately$9.5 million, pre-tax, during the first nine months of 2009. These charges wererecorded as restructuring charges in the condensed consolidated statement ofoperations as incurred.

 

The Companyexpects that it will incur additional costs in order to implement the secondphase of Fast Forward, but is currently unable to estimate the aggregate amountor timing of such charges or the anticipated related cash outlays. The Companyhas achieved its previously forecasted savings, $60.0 million pre-tax on anannualized basis, from Fast Forward. Most of these savings benefit the sellingand administrative expenses line in the statement of operations.

 

Inconnection with Fast Forward, the Company incurred costs of approximately $11.3million and $8.7 million for the nine months ended September 30, 2009 and2008 respectively, which included the costs described above. For the nine months ended September 30,2009, these charges included transition fees paid to IBM of approximately $7.2million, consulting fees of approximately $2.4 million and severance, leasetermination and other costs of approximately $1.7 million. For the ninemonths ended September 30, 2008 these charges included consulting fees ofapproximately $4.4 million and severance, lease termination and other costs ofapproximately $4.3 million.

 

For the nine months endedSeptember 30, 2009, TruGreen LawnCare recorded restructuring costs ofapproximately $6.0 million relating to a reorganization of field leadership anda restructuring of branch operations. For the nine months ended September 30, 2009,these costs included approximately $4.1 million of consulting fees,approximately $0.7 million of severance and approximately $1.2 million of leasetermination and other costs. In connection with the restructuring of branchoperations, we wouldexpect to incur cash charges through the fourth quarter of 2010 related to,among other things, employee retention and severance costs and consulting fees,and such charges could be material.

 

For the nine months endedSeptember 30, 2009, Terminix recorded restructuring costs of approximately$3.3 million relating to a branch optimization project, which includedapproximately $3.0 million of lease termination costs and approximately $0.3million of severance costs.

 

Theresults for the nine months ended September 30, 2008 include restructuringcharges related to the Company’s consolidation of its corporate headquartersinto its operations support center in Memphis, Tennessee and the closing of itsheadquarters in Downers Grove, Illinois. The transition to Memphiswas substantially completed in 2007. Almost all costs related to the transitionwere cash expenditures and were expensed throughout the transition period.During the nine months ended September 30, 2008, the Company incurred anadditional $0.4 million relating to this relocation, which includes additionalseverance and other costs.

 

Duringthe nine months ended September 30, 2009 and 2008, the Company incurredMerger related charges totaling $2.2 million and $0.8 million, respectively.These Merger related charges include investment banking, accounting, legal fee,legal settlement, change in control severance and other costs associated withthe Merger.

 

**SegmentReviews for the Nine Months Ended September 30, 2009 Compared to 2008**

 

The following businesssegment reviews should be read in conjunction with the required footnotedisclosures presented in the Notes to the Condensed Consolidated FinancialStatements. This disclosure provides a reconciliation of segment operating(loss) income to (loss) income from continuing operations before income taxes,with net non-operating expenses as the only reconciling item. As noted insegment reviews for the third quarter 2009 compared to 2008, the Company usesAdjusted EBITDA and Comparable Operating Performance to facilitate operatingperformance comparisons from period to period.

 

42

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

 
| ** **                                                             | ** ** | **Nine months ended********September 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(In thousands)**                                                | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| Operating  Revenue:                                                    |       |                                            |       |   |   |
| TruGreen  LawnCare                                                     |       | $                                               | 834,899    |   | $ | 876,180 |   |
| TruGreen  LandCare                                                     |       | 199,562                                         |       | 240,894 |   |
| Terminix                                                               |       | 843,134                                         |       | 846,594 |   |
| American  Home Shield                                                  |       | 490,308                                         |       | 450,316 |   |
| Other  Operations and Headquarters                                     |       | 155,830                                         |       | 163,625 |   |
| Total  Operating Revenue                                               |       | $                                               | 2,523,733  |   | $ | 2,577,609 |   |
| Comparable  Operating Performance:                                     |       |                                            |       |   |   |
| TruGreen  LawnCare                                                     |       | $                                               | 138,427    |   | $ | 152,437 |   |
| TruGreen  LandCare                                                     |       | 10,528                                          |       | 6,764 |   |
| Terminix                                                               |       | 190,650                                         |       | 174,414 |   |
| American  Home Shield                                                  |       | 86,065                                          |       | 76,770 |   |
| Other  Operations and Headquarters                                     |       | (3,087                                          | )          | 2,382 |   |
| Total  Comparable Operating Performance                                |       | $                                               | 422,583    |   | $ | 412,767 |   |
|                                                                   |       |                                            |       |   |   |
| Memo:  Items included in Comparable Operating Performance              |       |                                            |       |   |   |
| Restructuring  charges and Merger related expenses(1)                  |       | $                                               | 22,859     |   | $ | 9,910 |   |
| Management  fee(2)                                                     |       | $                                               | 5,625      |   | $ | 1,500 |   |
|                                                                   |       |                                            |       |   |   |
| Memo:  Items excluded from Comparable Operating Performance            |       |                                            |       |   |   |
| Comparable  Operating Performance of InStar                            |       | $                                               | (255       | ) | $ | (2,502 | ) |
| Comparable  Operating Performance of all other discontinued operations |       | (795                                            | )          | 2,296 |   |
| Comparable  Operating Performance of discontinued operations           |       | $                                               | (1,050     | ) | $ | (206 | ) |

 

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(1)           Includes (i) chargesrelated to Fast Forward, (ii) charges related to a reorganization of fieldleadership and a restructuring of branch operations at TruGreen LawnCare, (iii) chargesrelated to a branch optimization project at Terminix, (iv) charges relatedto the Company’s decision to consolidate its corporate headquarters into itsoperations support center in Memphis, Tennessee and close its formerheadquarters in Downers Grove, Illinois and (v) Merger related charges.

 

(2)           Represents a management fee payable toCD&R pursuant to a consulting agreement under which CD&R provides theCompany with on-going consulting and management advisory services in exchangefor an annual management fee of $6.25 million, which is payable quarterly.On July 30, 2009, the annual management fee payable under the consultingagreement with CD&R was increased from $2.0 million to $6.25 million. The full yearmanagement fee will apply in 2009 and the incremental fees relating to thefirst three quarters of 2009 were paid to CD&R in the third quarter of 2009.

 

InAugust 2009, the Company entered into consulting agreements withCitigroup, BAS and JPMorgan, each of which is an Equity Sponsor or an affiliateof an Equity Sponsor. Under the consulting agreements, Citigroup, BAS andJPMorgan each will provide the Company with on-going consulting and managementadvisory services until June 30, 2016 or the earlier termination of theexisting consulting agreement between the Company and CD&R. The Companywill pay annual management fees of $0.5 million, $0.5 million and $0.25million, respectively, to Citigroup, BAS and JPMorgan. The full year managementfees will apply in 2009, and the fees relating to the first three quarters of2009 were paid to Citigroup, BAS and J.P. Morgan in the third quarter of 2009.

 

43

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The following table presents reconciliations ofoperating income (loss) to Adjusted EBITDA and Comparable Operating Performancefor the periods presented.

 
| **(In thousands)**                                                | ** ** | **TruGreen  LawnCare** | ** ** | **TruGreen  LandCare** | ** ** | **Terminix** | ** ** | **American  Home********Shield** | ** ** | **Other  Operations &********Headquarters** | ** ** | **Total**  | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------|------------|----------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                                             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Nine Months Ended September 30, 2009**                          |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Operating  income (loss)(1)                                            |       | $                      | 70,519     |                   | $          | 2,203        |       | $                                | 143,531    |                                                 | $          | 55,059     |       | $ | (29,789 | ) | $ | 241,523 |   |
| Depreciation  and amortization expense                                 |       | 65,631                 |       | 8,814                  |       | 47,260       |       | 31,395                           |       | 16,820                                               |       | 169,920    |       |
| EBITDA  before interest and net investment (loss) income          |       | 136,150                |       | 11,017                 |       | 190,791      |       | 86,454                           |       | (12,969                                              | )          | 411,443    |       |
| Interest  and net investment (loss) income(2)                          |       | —                 |       | —                 |       | —       |       | (331                             | )          | 3,523                                                |       | 3,192      |       |
| Residual  value guarantee charge(3)                                    |       | 2,363                  |       | —                 |       | —       |       | —                           |       | 367                                                  |       | 2,730      |       |
| Adjusted  EBITDA                                                       |       | 138,513                |       | 11,017                 |       | 190,791      |       | 86,123                           |       | (9,079                                               | )          | 417,365    |       |
| Non-cash  option and restricted stock expense                          |       | —                 |       | —                 |       | —       |       | —                           |       | 5,992                                                |       | 5,992      |       |
| Non-cash  credits attributable to purchase accounting(4)               |       | (86                    | )          | (489                   | )          | (141         | )          | (58                              | )          | —                                               |       | (774       | )          |
| Comparable  Operating Performance                                      |       | $                      | 138,427    |                   | $          | 10,528       |       | $                                | 190,650    |                                                 | $          | 86,065     |       | $ | (3,087 | ) | $ | 422,583 |   |
|                                                                   |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Memo:  Items included in Comparable Operating Performance              |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Restructuring  charges and Merger related charges(5)                   |       | $                      | 5,951      |                   | $          | 133          |       | $                                | 3,365      |                                                 | $          | 105        |       | $ | 13,305 |   | $ | 22,859 |   |
| Management  fee(6)                                                     |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | 5,625 |   | $ | 5,625 |   |
|                                                                   |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Memo:  Items excluded from Comparable Operating Performance            |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Comparable  Operating Performance of InStar                            |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | (255 | ) | $ | (255 | ) |
| Comparable  Operating Performance of all other discontinued operations |       | —                 |       | —                 |       | —       |       | —                           |       | (795                                                 | )          | (795       | )          |
| Comparable  Operating Performance of discontinued operations(7)        |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | (1,050 | ) | $ | (1,050 | ) |
| ** **                                                             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Nine Months Ended September 30, 2008**                          |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Operating  income (loss)(1)                                            |       | $                      | 85,914     |                   | $          | (925         | )          | $                                | 133,591    |                                                 | $          | 14,606     |       | $ | (18,638 | ) | $ | 214,548 |   |
| Depreciation  and amortization expense                                 |       | 66,490                 |       | 8,177                  |       | 44,611       |       | 36,539                           |       | 16,490                                               |       | 172,307    |       |
| EBITDA  before interest and net investment loss                   |       | 152,404                |       | 7,252                  |       | 178,202      |       | 51,145                           |       | (2,148                                               | )          | 386,855    |       |
| Interest  and net investment loss(2)                                   |       | —                 |       | —                 |       | —       |       | (651                             | )          | (986                                                 | )          | (1,637     | )          |
| Adjusted  EBITDA                                                       |       | 152,404                |       | 7,252                  |       | 178,202      |       | 50,494                           |       | (3,134                                               | )          | 385,218    |       |
| Non-cash  option and restricted stock expense                          |       | —                 |       | —                 |       | —       |       | —                           |       | 5,137                                                |       | 5,137      |       |
| Non-cash  charges (credits) attributable to purchase accounting(4)     |       | 33                     |       | (488                   | )          | (3,788       | )          | 26,276                           |       | 379                                                  |       | 22,412     |       |
| Comparable  Operating Performance                                      |       | $                      | 152,437    |                   | $          | 6,764        |       | $                                | 174,414    |                                                 | $          | 76,770     |       | $ | 2,382 |   | $ | 412,767 |   |
|                                                                   |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Memo:  Items included in Comparable Operating Performance              |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Restructuring  charges and Merger related charges(5)                   |       | $                      | 315        |                   | $          | 382          |       | $                                | 57         |                                                 | $          | 493        |       | $ | 8,663 |   | $ | 9,910 |   |
| Management  fee(6)                                                     |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | 1,500 |   | $ | 1,500 |   |
|                                                                   |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Memo:  Items excluded from Comparable Operating Performance            |       |                   |       |                   |       |         |       |                             |       |                                                 |       |       |       |
| Comparable  Operating Performance of InStar                            |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | (2,502 | ) | $ | (2,502 | ) |
| Comparable  Operating Performance of all other discontinuedoperations  |       | —                 |       | —                 |       | —       |       | —                           |       | 2,296                                                |       | 2,296      |       |
| Comparable  Operating Performance of discontinued operations(7)        |       | $                      | —     |                   | $          | —       |       | $                                | —     |                                                 | $          | —     |       | $ | (206 | ) | $ | (206 | ) |

 

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(1)           Presented below is areconciliation of total segment operating income to net income (loss).

 
| ** **                                                    | ** ** | **Nine months ended********September 30,** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(In thousands)**                                       | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| Total  Segment Operating Income                               |       | $                                               | 241,523    |   | $ | 214,548 |   |
| Non-operating  expense (income):                              |       |                                            |       |   |   |
| Interest  expense                                             |       | 225,538                                         |       | 256,897 |   |
| Interest  and net investment (income) loss                    |       | (3,192                                          | )          | 1,637 |   |
| Gain  on extinguishment of debt                               |       | (46,106                                         | )          | — |   |
| Other  expense                                                |       | 555                                             |       | 418 |   |
| Income  (Loss) from Continuing Operations before Income Taxes |       | $                                               | 64,728     |   | $ | (44,404 | ) |
| Provision  (Benefit) for income taxes                         |       | 20,720                                          |       | (8,341 | ) |
| Income  (Loss) from Continuing Operations                     |       | $                                               | 44,008     |   | $ | (36,063 | ) |
| Loss  from discontinued operations, net of income taxes       |       | (666                                            | )          | (4,670 | ) |
| Net  Income (Loss)                                            |       | $                                               | 43,342     |   | $ | (40,733 | ) |

 

(2)           Interest and net investment(income) loss is primarily comprised of investment income and realized gain(loss) on our American Home Shield segment investment portfolio. Cash,short-term and long-term marketable securities associated with regulatoryrequirements in connection with American Home Shield and for other purposestotaled approximately $258.9 million as of September 30, 2009. AmericanHome Shield interest and net investment loss was $0.3 million and $0.7million for the nine months ended September 30, 2009 and 2008,respectively. The balance of interest and net investment loss primarily relatesto (i) a portion of the earnings generated by SMAC; (ii) investmentincome (loss) from our employee deferred compensation trust (for which there isa corresponding and offsetting change in compensation expense within incomefrom continuing operations before income taxes); and (iii) interest incomeon other cash balances.

 

(3)           Includes residual value guarantee charges that do notresult in additional cash payments to exit the facility at the end of the leaseterm. In the third quarter of 2009, the Company determined that it was probablethat the fair value of the properties under operating leases would be below theguaranteed residual value at the end of the lease term. The Company’s currentestimate of this shortfall is approximately $11.8 million, which will berecorded over the remainder of the lease term.

 

(4)           The Merger wasaccounted for using purchase accounting. This adjustment represents theaggregate, non-cash adjustments (other than amortization and depreciation)attributable to the application of purchase accounting.

 

(5)           Includes (i) chargesrelated to Fast Forward, (ii) charges related to a reorganization of fieldleadership and a restructuring of branch operations at TruGreen LawnCare, (iii) chargesrelated to a branch optimization project at Terminix, (iv) charges relatedto the Company’s decision to consolidate its corporate headquarters into itsoperations support center in Memphis, Tennessee and close its formerheadquarters in Downers Grove, Illinois and (v) Merger related charges.

 

(6)           Represents a management fee payable to CD&Rpursuant to a consulting agreement under which CD&R provides the Companywith on-going consulting and management advisory services in exchange for anannual management fee of $6.25 million, which is payable quarterly. On July 30,2009, the annual management fee payable under the consulting agreement withCD&R was increased from $2.0 million to $6.25 million. The full yearmanagement fee will apply in 2009 and the incremental fees relating to thefirst three quarters of 2009 were paid to CD&R in the third quarter of2009.

 

InAugust 2009, the Company entered into consulting agreements withCitigroup, BAS and JPMorgan, each of which is an Equity Sponsor or an affiliateof an Equity Sponsor. Under the consulting agreements, Citigroup, BAS andJPMorgan each will provide the Company with on-going consulting and managementadvisory services until June 30, 2016 or the earlier termination of theexisting consulting agreement between the Company and CD&R. The Companywill pay annual management fees of $0.5 million, $0.5 million and $0.25 million,respectively, to Citigroup, BAS and JPMorgan. The full year management feeswill apply in 2009, and the fees relating to the first three quarters of 2009were paid to Citigroup, BAS and J.P. Morgan in the third quarter of 2009.

 

(7)           The table included in “Discontinued Operations”presents reconciliations of operating loss, the most directly comparablefinancial measure under GAAP, to Adjusted EBITDA and Comparable OperatingPerformance for the periods presented.

 

***TruGreen LawnCareSegment***

 

The TruGreen LawnCaresegment reported a 4.7 percent decrease in revenue, a 17.9 percent decrease inoperating income and a 9.2 percent decrease in Comparable Operating Performancefor the nine months ended September 30, 2009 compared to 2008. 

 

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The revenue results were adversely impacted by softcustomer demand. Customercounts at September 30, 2009 were 0.4 percent lower than last year’s leveldue primarily to a decline in new unit sales in the first and second quarter,partially offset by a 100 basis point improvement in the rolling twelve-monthcustomer retention rate. Trends in revenue were also adverselyimpacted by discounts offered on Full Program Accounts in 2009 designed tooffset the impacts of a difficult economic environment. TruGreen LawnCare remains committed toimproving customer retention by focusing on the overall quality of servicedelivery, including the Lawn Quality Audit program, the reduction of routemanager turnover and the continued improvement of overall communication withcustomers.

 

TruGreen LawnCare’sComparable Operating Performance declined $14.0 million for the nine monthsended September 30, 2009 compared to 2008, which includes the impact of$6.0 million of restructuring charges related to a reorganization of fieldleadership and a restructuring of branch operations. TruGreen LawnCare’sComparable Operating Performance also reflects increased sales and marketingexpenses, offset, in part, by improved management of seasonal staffing of productionlabor, lower vehicle counts, reduced fuel and fertilizer costs and thefavorable impact of acquiring assets in connection with exiting certain fleetleases in 2008.

 

***TruGreen LandCare Segment***

 

The TruGreen LandCaresegment reported a 17.2 percent decrease in revenue, a 338.2 percent increasein operating income and a 55.6 percent increase in Comparable OperatingPerformance for the nine months ended September 30, 2009 compared to 2008.The decline in revenue included an 11.2 percent decline in base contractmaintenance revenue and a 29.3 percent decline in enhancement revenue. Revenuefor the first three months of 2009 was adversely impacted by TruGreen LandCare’scontinued efforts to improve the quality of its customer base with a bettercustomer mix by pruning less profitable jobs, implementing stricter pricing onnew sales, and increasing the average size of new proposals and sales. Inaddition, revenue trends were adversely impacted by soft customer demand.

 

TruGreen LandCare’sComparable Operating Performance improved $3.8 million for the nine monthsended September 30, 2009 compared to 2008, which also reflects the impactsof pruning less profitable jobs, improved materials management, reduced branchadministrative and corporate overhead spending, lower vehicle fleet counts andthe favorable impact of acquiring assets in connection with exiting certainfleet leases in 2008. These factors were offset, in part, by pressure onpricing and increased fuel costs.

 

***Terminix Segment***

 

The Terminix segmentreported a 0.4 percent decrease in revenue for the nine months ended September 30,2009 compared to 2008. Revenue for the nine months ended September 30,2008 has been reduced by $3.3 million (non-cash) as a result of recordingdeferred revenue at its fair value in connection with purchase accounting.Excluding this impact of purchase accounting, revenue decreased 0.8 percent forthe nine months ended September 30, 2009 compared to 2008. Terminixreported a 7.4 percent increase in operating income and an 9.3 percent increasein Comparable Operating Performance for the nine months ended September 30,2009 compared to 2008. The segment’s overall revenue results, excludingpurchase accounting, reflected modest growth in pest control revenues offset bya decline in revenue from termite contract renewals and termite completions.Pest control revenues increased 2.3 percent for the nine months ended September 30,2009 compared to 2008, reflecting increased customer counts and improved pricerealization. The increase in customer counts was driven by tuck-inacquisitions, partially offset by a decline in new unit sales in the secondquarter and a 90 basis point decline in customer retention. A 2.0 percentdecline in termite renewal revenues for the nine months ended September 30,2009 compared to 2008 was due to a 170 basis point decline in termite customerretention.Revenue from termite completions declined 6.1 percent for the ninemonths ended September 30, 2009 compared to 2008, due, in part, to reducedaverage pricing on new termite treatments. Trends in retention and new unitsales were adversely impacted by soft customer demand.

 

Terminix’s ComparableOperating Performance improved $16.2 million for the nine months ended September 30,2009 compared to 2008, which includes the impact of $3.4 million ofrestructuring charges relating to a branch optimization program. Terminix’sComparable Operating Performance also reflects favorable termite damage claimtrends, effective management of seasonal staffing of production and saleslabor, reduced fuel costs and overhead spending, lower vehicle counts, and thefavorable impact of acquiring assets in connection with exiting certain fleetleases in 2008.

 

***American Home Shield Segment***

 

The American Home Shieldsegment reported an 8.9 percent increase in revenue for the nine months ended September 30,2009 compared to 2008. Revenue for the nine months ended September 30,2008 has been reduced by $30.8 million (non-cash) as a result of recordingdeferred revenue at its fair value in connection with purchase accounting.Excluding this impact of purchase accounting, revenue increased 1.9 percent forthe nine months ended September 30, 2009 compared to 2008, reflectingimproved price realization, partially offset by a decline in customer counts.The decline in customer counts was driven by a decline in new unit sales in thefirst and second quarter, partially offset by a 180 basis point improvement incustomer retention. American Home Shield’s sales in the real estate market inthe first and second quarter were significantly impacted by the continuedsoftness in the home resale market throughout most of the country.

 

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American Home Shieldreported a 277.0 percent increase in operating income and a 12.1 percentincrease in Comparable Operating Performance for the nine months ended September 30,2009 compared to 2008. The $9.3 million increase in Comparable OperatingPerformance for the nine months ended September 30, 2009 compared to 2008also reflects a decrease in advertising spending and reduced provisions forcertain legal matters.

 

***Other Operations and Headquarters Segment***

 

The Other Operations andHeadquarters segment reported a 4.8 percent decrease in revenue, a 59.8 percentincrease in operating loss and a 229.6 percent decrease in Comparable OperatingPerformance for the nine months ended September 30, 2009 compared to 2008.The segment’s $5.5 million decrease in Comparable Operating Performance for thenine months ended September 30, 2009 compared to 2008 reflects increasedmanagement fees, increased health care costs, and an increase in restructuringand Merger related charges partially offset by reduced provisions for incentivecompensation and reduced overhead spending.****The ServiceMasterClean and Merry Maids operations reported a combined 4.8 percent decrease inrevenue for the nine months ended September 30, 2009 compared to 2008. Thedecrease in revenue resulted from decreases in product sales and otherfranchise revenues. The ServiceMaster Clean and Merry Maids operations reporteda combined increase in operating income of 8.2 percent and an increase inComparable Operating Performance of 5.3 percent, or $2.7 million, for the ninemonths ended September 30, 2009 compared to 2008, which includes a $1.5million reduction in restructuring charges and reduced overhead spending ascompared to 2008.

 

***Discontinued Operations***

 

The components of loss fromdiscontinued operations, net of income taxes, and the reconciliation of operatingloss (income) to Adjusted EBITDA and Comparable Operating Performance for thenine months ended September 30, 2009 and 2008 are as follows:

 
| ** **                                              | ** ** | **Nine months ended********September 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| Operating  loss                                         |       | $                                               | (1,050     | ) | $ | (206 | ) |
| Interest  expense                                       |       | —                                          |       | (73 | ) |
| Impairment  charge                                      |       | —                                          |       | (6,317 | ) |
| Loss  from discontinued operations, before income taxes |       | (1,050                                          | )          | (6,596 | ) |
| Benefit  from income taxes                              |       | (384                                            | )          | (2,513 | ) |
| Loss  on sale, net of tax                               |       | —                                          |       | (587 | ) |
| Loss  from discontinued operations, net of income taxes |       | $                                               | (666       | ) | $ | (4,670 | ) |
|                                                    |       |                                            |       |   |   |
| Operating  loss                                         |       | $                                               | (1,050     | ) | $ | (206 | ) |
| Depreciation  and amortization expense                  |       | —                                          |       | — |   |
| EBITDA  before interest and net investment income       |       | (1,050                                          | )          | (206 | ) |
| Interest  and net investment income                     |       | —                                          |       | — |   |
| Adjusted  EBITDA                                        |       | (1,050                                          | )          | (206 | ) |
| Non-cash  option and restricted stock expense           |       | —                                          |       | — |   |
| Non-cash  charges attributable to purchase accounting   |       | —                                          |       | — |   |
| Comparable  Operating Performance                       |       | $                                               | (1,050     | ) | $ | (206 | ) |

 

**FINANCIAL POSITION AND LIQUIDITY**

 

***Cash Flows fromOperating Activities from Continuing Operations***

 

Net cash provided from operating activities fromcontinuing operations increased $17.5 million to $69.2 million for the ninemonths ended September 30, 2009 compared to $51.7 million for 2008.The increase was primarily due to a $57.3 million increase in earnings adjustedfor non-cash charges, partially offset by a $39.8 million increase in cashrequired for working capital. The increase in working capital requirements forthe nine months ended September 30, 2009 was driven primarily by reductionsin accrued interest due to changes in the timing of interest payments on ourpermanent financing and non-cash purchase accounting adjustments recorded inconnection with the Merger, partially offset by reduced seasonal inventorygrowth.

 

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

 

Netcash used for investing activities from continuing operations was $61.9 millionfor the nine months ended September 30, 2009 compared to$26.3 million for the nine months ended September 30, 2008 andincluded $1.5 million and $26.1 million paid in connection with the Merger forthe nine months ended September 30, 2009 and 2008, respectively. Amountspaid in connection with 

 

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the Merger in 2009 and2008 were primarily related to payments under change in control severanceagreements.

 

Capitalexpenditures decreased to $50.5 million for the nine months ended September 30,2009 from $75.2 million for the nine months ended September 30, 2008 andincluded vehicle purchases of $27.9 million, recurring capital needs andinformation technology projects. The Company anticipates that capitalexpenditures for the remainder of 2009 will total approximately $15.0 millionto $25.0 million, reflecting the purchases of vehicles and the continuation ofinvestments in information systems and productivity enhancing operatingsystems. The Company has no additional material capital commitments at thistime.

 

Acquisitions,excluding the Merger, for the nine months ended September 30, 2009 totaled$20.7 million, compared with $27.5 million for the nine months ended September 30,2008. Consideration paid for tuck-in acquisitions consisted of cash paymentsand debt payable to sellers. The Company expects to continue its tuck-inacquisition program at Terminix, TruGreen LawnCare and Merry Maids.

 

Thechange in notes receivable, financial investments and securities for the ninemonths ended September 30, 2009 and 2008 includes the net sales ofmarketable securities at American Home Shield due in part to lowering theamount of excess reserves over minimum statutory reserve requirements incertain states in accordance with our investment policy and reduced statutoryreserve requirements. During the nine months ended September 30, 2008, theCompany sold certain marketable securities and subsequently invested in cashequivalents in an effort to limit our exposure to changing market conditions.

 

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

 

Netcash used for financing activities from continuing operations was$201.8 million for the nine months ended September 30, 2009 comparedto net cash provided from financing activities from continuing operations of$103.1 million for the nine months ended September 30, 2008. Duringthe first quarter of 2009, the Company completed open market purchases of $89.0million in face value of our Permanent Notes for a cost of $41.0 million. TheCompany also made repayments of $125.0 million under the Revolving CreditFacility and made scheduled principal payments of long-term debt of $35.4million during the nine months ended September 30, 2009. During the ninemonths ended September 30, 2008, the Company made borrowings of $347.0million and repayments of $182.0 million under the Revolving Credit Facilityand sold $10.0 million of interests under its accounts receivablesecuritization arrangement reflecting normal seasonal working capital needs,made scheduled principal payments of long-term debt of $45.3 million and paiddebt issuance costs of $26.6 million.

 

***Liquidity***

 

The Merger was completed on the Closing Date.Following the completion of the Merger, the Company is highly leveraged, and avery substantial portion of the Company’s liquidity needs arise from debtservice on indebtedness incurred in connection with the Merger and from fundingthe Company’s operations, working capital and capital expenditures. Equitycontributions totaling $1,431.1 million from the Equity Sponsors, togetherwith (i) borrowings under the Interim Loan Facility, (ii) borrowingsunder a new $2,650.0 million senior secured term loan facility and (iii) cashon hand at ServiceMaster, were used, among other things, to finance theaggregate Merger Consideration, to make payments in satisfaction of otherequity-based interests in ServiceMaster under the Merger Agreement, to settleexisting interest rate swaps, to redeem or provide for the repayment of certainof the Company’s existing indebtedness and to pay related transaction fees andexpenses. In addition, letters of credit issued under a new $150.0 millionpre-funded letter of credit facility were used to replace and/or secure lettersof credit previously issued under a ServiceMaster credit facility that wasterminated as of the Closing Date. On the Closing Date, the Company alsoentered into, but did not draw under, the $500.0 million Revolving CreditFacility.

 

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 September 30, 2009.

 

TheInterim Loan Facility matured on July 24, 2008. On the maturity date,outstanding amounts under the Interim Loan Facility were converted on a one toone basis into the Permanent Notes. The Permanent Notes were issued pursuant toa refinancing indenture. In connection with the issuance of Permanent Notes,ServiceMaster entered into a Registration Rights Agreement, pursuant to whichServiceMaster filed with the SEC a registration statement with respect to theresale of the Permanent Notes, which was declared effective on January 16,2009. ServiceMaster deregistered the Permanent Notes and terminated theeffectiveness of the registration statement on November 12, 2009 inaccordance with the terms of the Registration Rights Agreement.

 

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% as CashInterest and 50% as PIK Interest. Interest payable after July 15, 2011 ispayable entirely as Cash Interest. The Company elected to pay interest payablein January 2010 entirely as Cash Interest.

 

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Cashand short-term and long-term marketable securities totaled $337.6 million at September 30,2009, compared with $538.6 million at December 31, 2008. Approximately$258.9 million and $244.5 million of the cash and short-term and long-termmarketable securities balance as of September 30, 2009 and December 31,2008, respectively, is associated with regulatory requirements at American HomeShield and for other purposes. American Home Shield’s investment portfolio hasbeen invested in a combination of high quality, short duration fixed incomesecurities and equities. The Company closely monitors the performance of theinvestments. From time to time, the Company reviews the statutory reserverequirements to which its regulated entities are subject and any changes tosuch requirements. These reviews may result in identifying current reservelevels above or below minimum statutory reserve requirements, in which case theCompany may adjust its reserves. The reviews may also identify opportunities tosatisfy certain regulatory reserve requirements through alternate financialvehicles, which could enhance our liquidity.

 

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 September 30, 2009, the Company’s residual valueguarantees related to the leased assets totaled $85.9 million for which theCompany has recorded the estimated fair value of these guarantees ofapproximately $1.7 million in the condensed consolidated statement of financialposition. We expect to fulfill our ongoing vehicle fleet needs through directpurchases of vehicles.

 

The Company maintainslease facilities with banks totaling $65.2 million, which provide for thefinancing of branch properties to be leased by the Company. At September 30,2009, approximately $65.2 million was funded under these facilities.Approximately $12.5 million of these leases are treated as capital leases andhave been included on the balance sheet as assets with related debt as of September 30,2009. The balance of the funded amount is treated as operating leases. Inconnection with the closing of the Merger, the Company amended these leaseseffective July 24, 2007. Among the modifications, the Company extended thelease terms through July 24, 2010 and made a $22.0 million investment inthe lease facilities. This $22.0 million investment is included in other assetsin the condensed consolidated statements of financial position, and will bereturned to the Company at the end of the lease term. The operating lease andcapital lease classifications of these leases did not change as a result of themodifications. At the end of the lease term, the Company may exercise any ofthe following three options related to the leased properties: (1) negotiatean extension to the current leasing arrangement; (2) return the propertiesto the lessor; or (3) purchase the properties for $65.2 million, the totalamount funded under the lease facilities. If the properties are returned to thelessor, the lessor will sell the properties and the Company will be obligatedto pay the lessor for any shortfall between the sales proceeds and the amountfunded under the lease facilities up to 73 percent of fair market value at thecommencement of the lease pursuant to a residual value guarantee. The Companyhas the option to terminate the lease facilities and purchase the propertiesprior to expiration of the facilities. If the Company were to exercise thispurchase option, it would be required to pay the banks approximately $43.2million in addition to the $22.0 million investment discussed above. If theCompany were to exercise this purchase option, it would fund the purchase pricefrom available cash and/or borrowing on its Revolving Credit Facility.

 

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, interest rates) andunobservable inputs (for example, forward commodity prices) at the balancesheet date.

 

Underthe terms of its fuel swap contracts, the Company is required to postcollateral in the event that the fair value of the contracts exceeds a certainagreed upon liability level. As of September 30, 2009, the fair value ofthe Company’s fuel swap contracts was a liability of $0.3 million and theCompany posted approximately $3.5 million in letters of credit as collateralfor these contracts, none of which were posted under the Company’s RevolvingCredit Facility. The continued use of letters of credit for this purpose couldlimit the Company’s ability to post letters of credit for other purposes andcould limit the Company’s borrowing availability under the Revolving Credit Facility.However, the Company does not expect the fair value of its outstanding fuelswap contacts to materially impact its financial position 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. We expect that cash provided from operations and availablecapacity 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 twelve months, including payment of interest andprincipal on our debt. As of September 30, 2009, the Company had $460.0million of remaining capacity available under the Revolving Credit Facility and$34.2 million of remaining 

 

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capacity under theaccounts receivable securitization arrangement.

 

The Company mayfrom time to time repurchase or otherwise retire the Company’s debt and takeother steps to reduce the Company’s debt or otherwise improve the Company’sfinancial position. These actions may include open market debt repurchases,negotiated repurchases and other retirements of outstanding debt. The amount ofdebt that may be repurchased or otherwise retired, if any, will depend onmarket conditions, trading levels of the Company’s debt from time to time, theCompany’s cash position and other considerations. Affiliates of the Company mayalso purchase the Company’s debt from time to time, through open marketpurchases or other transactions. In such cases, the Company’s debt may not beretired, in which case the Company would continue to pay interest in accordancewith the terms of the debt and the Company would continue to reflect the debtas outstanding in its statement of financial position.

 

The Company wasadvised by Holdings that, during the first quarter of 2009, Holdings completedopen market purchases of $11.0 million in face value of our PermanentNotes for a cost of $4.5 million. As of September 30,2009, Holdings has completed open market purchases totaling $65.0 millionin face value of our 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. During the nine months endedSeptember 30, 2009, the Company recorded interest expense of $5.2 millionand made cash payments to Holdings of $6.5 million. Interest accrued by theCompany and payable to Holdings as of September 30, 2009 and December 31,2008 amounted to $1.5 million and $0.4 million, respectively.

 

During the firstquarter of 2009, the Company completed open market purchases of$89.0 million in face value of our Permanent Notes for a cost of$41.0 million. The debt acquired by the Company has been retired, and theCompany has discontinued the payment of interest. The Company recorded a gainon extinguishment of debt of $46.1 million in its condensed consolidatedstatement of operations for the nine months ended September 30, 2009related to these retirements. Included in the gain on extinguishment of debtare write-offs of unamortized debt issuance costs related to the extinguisheddebt of $1.9 million.

 

Inlight of the uncertainty in the credit and financial markets, in September 2008,the Company borrowed $165.0 million under its existing $500.0 million RevolvingCredit Facility to increase its cash position to preserve financialflexibility. The Company invested $125.0 million of the borrowings in moneymarket funds which were invested in short term U.S. Government securities andplaced the remaining borrowings in a money market account used to fund workingcapital needs. On July 22, 2009, the Company liquidated its investments inthese money market funds and used the proceeds to make a repayment of $125.0million under the Revolving Credit Facility.

 

The Company hasentered into an accounts receivable securitization arrangement under whichTruGreen LawnCare and Terminix may sell certain eligible trade accountsreceivable to Funding, the Company’s wholly-owned, bankruptcy-remote subsidiarywhich is consolidated for financial reporting purposes. Funding, in turn, maytransfer, on a revolving basis, an undivided percentage ownership interest ofup to $50.0 million in the pool of accounts receivable to one or both ofthe Purchasers. The amount of the eligible receivables varies during the yearbased on seasonality of the businesses and could, at times, limit the amountavailable to the Company from the sale of these interests.

 

The accounts receivable securitization arrangement isa 364-day facility that is renewable annually at the option of Funding, with afinal termination date of July 17, 2012. Only one of the Purchasers isrequired to purchase interests under the arrangement. If this Purchaser were toexercise its right to terminate its participation in the arrangement, which itmay do in the third quarter of each year, the amount of cash available to theCompany may be reduced or eliminated. As part of the annual renewal of thefacility, which occurred on July 21, 2009, this Purchaser agreed tocontinue its participation in the arrangement at least through July 2010.

 

During the nine monthsended September 30, 2009, there were no transfers of interests in the poolof accounts receivables to Purchasers under this arrangement. During the thirdquarter of 2008, an interest in the pool of accounts receivable was transferredto a third party in exchange for $10.0 million. As of September 30, 2009and December 31, 2008, the Company had $10.0 million outstanding under thearrangement and had $34.2 million and $25.7 million, respectively, of remainingcapacity available under the accounts receivable securitization arrangement.

 

As a holding company, wedepend on our subsidiaries to distribute funds to us so that we may pay ourobligations and expenses, including our debt service obligations. The abilityof our subsidiaries to make distributions and dividends to us depends on theiroperating results, cash requirements and financial condition and generalbusiness conditions. Our insurance subsidiaries and home services andsimilar subsidiaries (through which we conduct our American Home Shieldbusiness) are subject to significant regulatory restrictions under the laws andregulations of the states in which they operate. Among other things, such lawsand regulations require certain such subsidiaries to maintain minimum capitaland net worth requirements and may limit the amount of ordinary andextraordinary dividends and other payments that these subsidiaries can pay tous. For example, certain states prohibit payment by these subsidiaries to the Companyof dividends in excess of 10% of their capital as of the most recent year end,as determined in accordance with prescribed insurance accounting practices inthose states. Of the $258.9 million as of September 30, 2009, which weidentify as being potentially unavailable to be paid to the Company by itssubsidiaries, approximately $200.0 million 

 

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isheld by our home services and insurance subsidiaries and is subject to theseregulatory limitations on the payment of funds to us. Such limitations will bein effect throughout 2009 and similar limitations will be re-computed as of December 31,2009 and will be in effect in 2010. The remainder of the $258.9 million, or$58.9 million, is related to amounts that the Company’s management does notconsider readily available to be used to service the Company’s indebtednessdue, among other reasons, to the Company’s cash management practices andworking capital needs at various subsidiaries.

 

TheCompany’s Annual Report on Form 10-K for the year ended December 31,2008 included disclosure of the Company’s contractual obligations andcommitments as of December 31, 2008. The Company continues to make thecontractually required payments and, therefore, the 2009 obligations andcommitments as listed in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2008 have been reduced by the required payments.There were no material changes outside of ordinary course of business in theCompany’s previously disclosed contractual obligations and commitments duringthe nine months ended September 30, 2009.

 

***Financial Position—Continuing Operations***

 

Receivablesincreased from year-end levels, reflecting increased seasonal activity.

 

Prepaidexpenses and other assets increased from year-end levels primarily reflectingpreseason advertising costs at TruGreen LawnCare and other advertising costs ofthe Company which are incurred early in the year and deferred on an interimbasis and recognized approximately in proportion to revenue over the balance ofthe fiscal year.

 

Propertyand equipment increased slightly from year-end levels, reflecting vehiclepurchases, other recurring capital purchases and information technologyprojects.

 

Goodwill increased from year-end levels as a resultof acquisitions at TruGreen LawnCare, Terminix and Merry Maids.

 

Intangibles decreased from year-end levels due toamortization expense being recorded.

 

Debt issuance costs decreased from year-end levelsdue to amortization expense being recorded.

 

Accruedself-insurance claims and related expenses decreased from year-end levels,reflecting a reduction in required reserve levels under certain of ourself-insurance programs, partially off set by an increase in accruals for homeservice contract claims in the American Home Shield business.

 

Otheraccrued liabilities decreased from year-end levels due primarily to reductionsin accrued interest due to changes in the timing of interest payments on ourpermanent financing and decreases in the fair value liability recorded relatedto fuel hedges.

 

Long-termdebt decreased from year-end levels, reflecting debt payments.

 

Totalshareholder’s equity was $1,204.5 million at September 30, 2009 ascompared to $1,132.4 million at December 31, 2008.

 

***Financial Position—Discontinued Operations***

 

Theassets and liabilities related to discontinued operations have been classifiedin a separate caption on the condensed consolidated statements of financialposition.

 

Aspart of the InStar, American Residential Services and American MechanicalServices sale agreements, the Company guaranteed obligations to third partieswith respect to bonds (primarily performance and license type), operatingleases for which the Company has been released as being the primary obligor,real estate leased and operated by the buyers, and other guarantees of payment.At the present time, the Company does not believe it is probable that thebuyers will default on their obligations subject to guarantee. The fair valueof the Company’s obligations related to these guarantees is not significant andno liability has been recorded.

 

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**InformationRegarding Forward-Looking Statements**

 

This reportincludes forward-looking statements and cautionary statements. Some of theforward-looking statements can be identified by the use of forward-lookingterms such as “believes,” “expects,” “may,” “will,” “shall,” “should,” “would,”“could,” “seek,” “intends,” “plans,” “estimates,” “anticipates” or other comparableterms. These forward-looking statements include all matters that are nothistorical facts. They appear in a number of places throughout this report andinclude, without limitation, statements regarding our intentions, beliefs orcurrent expectations concerning, among other things, our results of operations;financial condition; liquidity; prospects; growth strategies; futureimpairments; capital expenditures; customer retention; improvements in customercommunications; the continuation of tuck-in acquisitions; the impact ofinterest rate hedges and fuel swaps; the amounts we will pay in connection withrestructurings and reorganizations; the cost savings from such restructuringsand reorganizations and expected charges related to such restructurings andreorganizations; and the impact of prevailing economic conditions.

 

Forward-lookingstatements are subject to known and unknown risks and uncertainties, many ofwhich may be beyond our control. We caution you that forward-looking statementsare not guarantees of future performance or outcomes and that actual outcomesand performances, including, without limitation, our actual results ofoperations, financial condition and liquidity, and the development of theindustries in which we operate may differ materially from those made in orsuggested by the forward-looking statements contained in this report. Inaddition, even if our results of operations, financial condition and liquidity,and the development of the industries in which we operate are consistent withthe forward-looking statements contained in this report, those results ordevelopments may not be indicative of results or developments in subsequentperiods. A number of important factors, including the risks and uncertaintiesdiscussed in Item 1A—Risk Factors in Part I in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2008, could causeactual results and outcomes to differ materially from those in theforward-looking statements. Factors that could cause actual results and outcomesto differ from those reflected in forward-looking statements include, withoutlimitation:

 

·                  the effects of our substantialindebtedness and the limitations contained in the agreements governing suchindebtedness;

 

·                  our ability to generate the significantamount of cash needed to fund our operations and service our debt obligationsand debt repurchases;

 

·                  our ability to secure sources offinancing or other funding to allow for direct purchases of commercialvehicles;

 

·                  changes in interest rates;

 

·                  weather conditions and seasonalityfactors that affect the demand for our services;

 

·                  changes in the source and intensity ofcompetition in our markets;

 

·                  higher commodity prices and lack ofavailability, including fuel and fertilizers;

 

·                  increases in operating costs, such ashigher insurance premiums, self-insurance costs and health care costs;

 

·                  employee retention, labor shortages orincreases in compensation and benefits costs;

 

·                  epidemics, pandemics or other publichealth concerns or crises;

 

·                  a continued downturn in general economic,financial and credit conditions in the United States and elsewhere (includingfurther deterioration or disruption in the credit and financial markets),especially as such a downturn may affect home sales, consumer or businessliquidity, consumer or commercial confidence or spending levels including as aresult of inflation or deflation, unemployment, interest rate fluctuations,mortgage foreclosures, subprime credit dislocations;

 

·                  a failure of any banking institution withwhich we deposit our funds or any insurance company that provides insurance tous;

 

·                  changes in the type or mix of our serviceofferings or products;

 

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·                  existing and future governmentalregulation and the enforcement thereof, including regulation relating torestricting or banning of telemarketing, direct mail or other marketingactivities, the Termite Inspection Protection Plan, pesticides and/orfertilizers;

 

·                  the success of and costs associated with ourcurrent restructuring initiatives, including the implementation of centers ofexcellence;

 

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

 

·                  possible labor organizing activities atthe Company or its franchisees;

 

·                  risks inherent in acquisitions anddispositions;

 

·                  the timing and structuring of ourbusiness process outsourcings, including the outsourcing of portions of ourinformation technology function, and risks associated with such outsourcings;and

 

·                  other factors described from time to time in documents that we filewith the Securities and Exchange Commission.

 

You should readthis report completely and with the understanding that actual future resultsmay be materially different from expectations. All forward-looking statementsmade in this report are qualified by these cautionary statements. Theseforward-looking statements are made only as of the date of this report, and wedo not undertake any obligation, other than as may be required by law, toupdate or revise any forward-looking statements to reflect changes inassumptions, the occurrence of events, unanticipated or otherwise, changes infuture operating results over time or otherwise.

 

Comparisons of results for current and any prior periods are not intendedto express any future trends, or indications of future performance, unlessexpressed as such, and should only be viewed 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 contracts for trading orspeculative purposes. The market risk associated with debt obligations andother significant instruments as of September 30, 2009 has not materiallychanged from December 31, 2008 (see Item 7A of the Company’s AnnualReport on Form 10-K for the year ended December 31, 2008).

 

*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 28 million gallons of fuel on anannual basis. A 10% change in fuel prices would result in a change ofapproximately $7.2 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 September 30, 2009, the Company hadfuel swap contracts to pay fixed prices for fuel with an aggregate notionalamount of $72.9 million, maturing through 2010. The estimated fair value ofthese contracts at September 30, 2009 was a liability of $0.3 million.These fuel swap contracts provide a fixed price for approximately 89% and 83%of the Company’s estimated fuel usage for the remainder of 2009 and 2010,respectively.

 

##### **ITEM4T. 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.

 

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##### ** **

##### **Changes in Internal Control over Financial Reporting.**No change inServiceMaster’s internal control over financial reporting occurred during thethird quarter of 2009 that has materially affected, or is reasonably likely tomaterially affect, ServiceMaster’s internal control over financial reporting.

##### ** **

**PART II.OTHER INFORMATION**

 

**ITEM 6: EXHIBITS**

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

 

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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: November 16,2009

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

 

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