Table ofContents

** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

----

 

**FORM 10-Q**

 

----

 

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

 

**For the quarterly period ended September 30, 2010**

 

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

 

**For the transition period from                   to**

 

**Commission file number 1-14762**

 

----

 

**THE SERVICEMASTER COMPANY**

(Exact name of registrant as specified in its charter)

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

 

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

(Address of principal executive offices) (Zip Code)

 

**901-597-1400**

(Registrant’s telephone number, including area code)

 

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

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 
| 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 inRule 12b-2 of the Exchange Act). Yes o  No x

 

Theregistrant is a privately held corporation and its equity shares are notpublicly traded. At November 15, 2010, 1,000 shares of the registrant’scommon stock were outstanding, all of which were owned by CDRSVMHolding, Inc.

 

TheServiceMaster Company is not required to file this Quarterly Report onForm 10-Q with the Securities and Exchange Commission and is doing so on avoluntary basis.

 

 

 

----

Table ofContents

** **

**TABLE OF CONTENTS**

 
| ** **                                                                                                                       | **Page  No.** |
|----------------------------------------------------------------------------------------------------------------------------------|---------------|
| Part I.  Financial Information                                                                                              | 3             |
|                                                                                                                             |          |
| Item 1.  Financial Statements                                                                                                    | 3             |
|                                                                                                                             |          |
| Condensed  Consolidated Statements of Operations for the three months ended  September 30, 2010 and September 30, 2009 | 3             |
| *** ***                                                                                                                     | *** ***  |
| Condensed  Consolidated Statements of Operations for the nine months ended  September 30, 2010 and September 30, 2009  | 4             |
| *** ***                                                                                                                     | *** ***  |
| Condensed  Consolidated Statements of Financial Position as of September 30, 2010 and  December 31, 2009               | 5             |
| *** ***                                                                                                                     | *** ***  |
| Condensed  Consolidated Statements of Cash Flows for the nine months ended  September 30, 2010 and September 30, 2009  | 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 4. Controls and  Procedures                                                                                                 | 53            |
| *** ***                                                                                                                     | *** ***  |
| Part II. Other  Information                                                                                                 | 53            |
| ** **                                                                                                                       | ** **    |
| Item 1. Legal Proceedings                                                                                                        | 53            |
|                                                                                                                             |          |
| Item 6. Exhibits                                                                                                                 | 54            |
|                                                                                                                             |          |
| Signature                                                                                                                        | 55            |

 

2

----

Table ofContents

 

**PART I. FINANCIALINFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

**THE SERVICEMASTER COMPANY**

**Condensed Consolidated Statementsof Operations (Unaudited)**

*(In thousands)*

 
| ** **                                                                  | ** ** | **Three months ended****September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2010**                                               | ** ** | **2009** | ** ** |
| Operating Revenue                                                      |       | $                                                      | 977,260    |   | $ | 920,514 |   |
|                                                                        |       |                                                   |       |   |   |
| Operating Costs and Expenses:                                |       |                                                   |       |   |   |
| Cost of services rendered and products sold   |       | 561,236                                                |       | 527,445 |   |
| Selling and administrative expenses                          |       | 266,794                                                |       | 249,302 |   |
| Amortization expense                                                        |       | 30,868                                                 |       | 40,429 |   |
| Restructuring and Merger  related charges                                   |       | 1,690                                                  |       | 8,498 |   |
| Total operating costs and expenses                      |       | 860,588                                                |       | 825,674 |   |
|                                                                        |       |                                                   |       |   |   |
| Operating Income                                                       |       | 116,672                                                |       | 94,840 |   |
|                                                                        |       |                                                   |       |   |   |
| Non-operating Expense (Income):                                   |       |                                                   |       |   |   |
| Interest expense                                                       |       | 71,267                                                 |       | 74,216 |   |
| Interest and net  investment income                               |       | (3,989                                                 | )          | (4,558 | ) |
| Other expense                                                          |       | 209                                                    |       | 176 |   |
|                                                                        |       |                                                   |       |   |   |
| Income  from Continuing Operations  before Income Taxes |       | 49,185                                                 |       | 25,006 |   |
| Provision  for income taxes                                       |       | 43,790                                                 |       | 4,102 |   |
|                                                                        |       |                                                   |       |   |   |
| Income  from Continuing Operations                                |       | 5,395                                                  |       | 20,904 |   |
|                                                                        |       |                                                   |       |   |   |
| Loss from discontinued  operations, net of income taxes                     |       | (105                                                   | )          | (396 | ) |
| Net Income                                                             |       | $                                                      | 5,290      |   | $ | 20,508 |   |

 

*See accompanying Notes to the Condensed Consolidated FinancialStatements*

 

3

----

Table ofContents

 

**THE SERVICEMASTER COMPANY**

**Condensed Consolidated Statementsof Operations (Unaudited)**

*(In thousands)*

 
| ** **                                                                         | ** ** | **Nine months ended****September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2010**                                              | ** ** | **2009** | ** ** |
| Operating Revenue                                                             |       | $                                                     | 2,619,730  |   | $ | 2,523,733 |   |
|                                                                               |       |                                                  |       |   |   |
| Operating Costs and Expenses:                                       |       |                                                  |       |   |   |
| Cost of services rendered and products sold          |       | 1,537,337                                             |       | 1,475,218 |   |
| Selling and administrative expenses                                 |       | 714,132                                               |       | 662,994 |   |
| Amortization expense                                                               |       | 111,761                                               |       | 121,139 |   |
| Goodwill and trade name  impairment                                                |       | 46,884                                                |       | — |   |
| Restructuring and Merger  related charges                                          |       | 9,781                                                 |       | 22,859 |   |
| Total operating costs and expenses                             |       | 2,419,895                                             |       | 2,282,210 |   |
|                                                                               |       |                                                  |       |   |   |
| Operating Income                                                              |       | 199,835                                               |       | 241,523 |   |
|                                                                               |       |                                                  |       |   |   |
| Non-operating Expense (Income):                                          |       |                                                  |       |   |   |
| Interest expense                                                              |       | 217,117                                               |       | 225,538 |   |
| Interest and net  investment income                                      |       | (7,487                                                | )          | (3,192 | ) |
| Gain on extinguishment of  debt                                                    |       | —                                                |       | (46,106 | ) |
| Other expense                                                                 |       | 556                                                   |       | 555 |   |
|                                                                               |       |                                                  |       |   |   |
| (Loss) Income  from Continuing Operations  before Income Taxes |       | (10,351                                               | )          | 64,728 |   |
| Provision  for income taxes                                              |       | 3,888                                                 |       | 20,720 |   |
|                                                                               |       |                                                  |       |   |   |
| (Loss) Income  from Continuing Operations                                |       | (14,239                                               | )          | 44,008 |   |
|                                                                               |       |                                                  |       |   |   |
| Loss from discontinued  operations, net of income taxes                            |       | (687                                                  | )          | (666 | ) |
| Net (Loss) Income                                                             |       | $                                                     | (14,926    | ) | $ | 43,342 |   |

 

*See accompanying Notes to the Condensed Consolidated FinancialStatements*

 

4

----

Table ofContents

 

**THE SERVICEMASTER COMPANY**

**Condensed Consolidated Statementsof Financial Position**

*(In thousands, except share data)*

 
| ** **                                                                   | ** ** | **As of****September 30,  2010** | ** ** | **As of****December 31,  2009** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                   | ** ** | **(Unaudited)**                            | ** ** | **(Audited)**                             | ** ** |
| Assets                                                                       |       |                                       | ** ** | ** **                                | ** ** |
| Current Assets:                                                              |       |                                       |       |                                      |       |
| Cash and cash equivalents                                                    |       | $                                          | 197,040    |                                      | $          | 253,463 |   |
| Marketable securities                                                        |       | 28,127                                     |       | 21,120                                    |       |
| Receivables, less allowance  of $21,335 and $20,314, respectively            |       | 442,093                                    |       | 348,655                                   |       |
| Inventories                                                                  |       | 77,812                                     |       | 76,592                                    |       |
| Prepaid expenses and other  assets                                           |       | 46,020                                     |       | 36,564                                    |       |
| Deferred customer  acquisition costs                                         |       | 43,121                                     |       | 36,070                                    |       |
| Deferred taxes                                                               |       | 16,757                                     |       | 21,595                                    |       |
| Assets of discontinued  operations                                           |       | 10                                         |       | 42                                        |       |
| Total Current Assets                                                         |       | 850,980                                    |       | 794,101                                   |       |
| Property and Equipment:                                                      |       |                                       |       |                                      |       |
| At cost                                                                      |       | 448,982                                    |       | 345,100                                   |       |
| Less: accumulated  depreciation                                              |       | (180,122                                   | )          | (132,965                                  | )          |
| Net property and equipment                                                   |       | 268,860                                    |       | 212,135                                   |       |
|                                                                         |       |                                       |       |                                      |       |
| Other Assets:                                                                |       |                                       |       |                                      |       |
| Goodwill                                                                     |       | 3,119,484                                  |       | 3,119,754                                 |       |
| Intangible assets, primarily  trade names, service marks and trademarks, net |       | 2,689,260                                  |       | 2,787,237                                 |       |
| Notes receivable                                                             |       | 23,880                                     |       | 23,490                                    |       |
| Long-term marketable  securities                                             |       | 111,518                                    |       | 111,066                                   |       |
| Other assets                                                                 |       | 7,094                                      |       | 31,799                                    |       |
| Debt issuance costs                                                          |       | 55,909                                     |       | 66,807                                    |       |
| Total Assets                                                                 |       | $                                          | 7,126,985  |                                      | $          | 7,146,389 |   |
|                                                                         |       |                                       |       |                                      |       |
| Liabilities and Shareholder’s Equity                                    |       |                                       |       |                                      |       |
| Current Liabilities:                                                         |       |                                       |       |                                      |       |
| Accounts payable                                                             |       | $                                          | 99,005     |                                      | $          | 73,471 |   |
| Accrued liabilities:                                                         |       |                                       |       |                                      |       |
| Payroll and related expenses                                                 |       | 102,711                                    |       | 74,385                                    |       |
| Self-insured claims and  related expenses                                    |       | 86,037                                     |       | 87,332                                    |       |
| Other                                                                        |       | 139,590                                    |       | 156,649                                   |       |
| Deferred revenue                                                             |       | 452,751                                    |       | 449,746                                   |       |
| Liabilities of discontinued  operations                                      |       | 656                                        |       | 2,806                                     |       |
| Current portion of long-term  debt                                           |       | 50,316                                     |       | 64,395                                    |       |
| Total Current Liabilities                                                    |       | 931,066                                    |       | 908,784                                   |       |
|                                                                         |       |                                       |       |                                      |       |
| Long-Term Debt                                                               |       | 3,906,902                                  |       | 3,910,549                                 |       |
|                                                                         |       |                                       |       |                                      |       |
| Other Long-Term Liabilities:                                                 |       |                                       |       |                                      |       |
| Deferred taxes                                                               |       | 932,656                                    |       | 957,077                                   |       |
| Liabilities of discontinued  operations                                      |       | 4,078                                      |       | 4,145                                     |       |
| Other long-term obligations                                                  |       | 178,719                                    |       | 179,503                                   |       |
| Total Other Long-Term  Liabilities                                           |       | 1,115,453                                  |       | 1,140,725                                 |       |
|                                                                         |       |                                       |       |                                      |       |
| Commitments and Contingencies (See Note 4)                                   |       |                                       |       |                                      |       |
|                                                                         |       |                                       |       |                                      |       |
| Shareholder’s Equity:                                                   |       |                                       |       |                                      |       |
| Common stock $0.01 par  value, authorized 1,000 shares; issued 1,000 shares  |       | —                                     |       | —                                    |       |
| Additional paid-in capital                                                   |       | 1,453,393                                  |       | 1,446,529                                 |       |
| Retained deficit                                                             |       | (251,350                                   | )          | (236,424                                  | )          |
| Accumulated other  comprehensive loss                                        |       | (28,479                                    | )          | (23,774                                   | )          |
| Total Shareholder’s Equity                                              |       | 1,173,564                                  |       | 1,186,331                                 |       |
| Total Liabilities and  Shareholder’s Equity                             |       | $                                          | 7,126,985  |                                      | $          | 7,146,389 |   |

 

*See accompanying Notes to the Condensed Consolidated FinancialStatements*

 

5

----

Table ofContents

 

**THE SERVICEMASTER COMPANY**

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

*(In thousands)*

 
| ** **                                                                           | ** ** | **Nine months ended****September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2010**                                              | ** ** | **2009** | ** ** |
| Cash and Cash Equivalents at  Beginning of Period                                    |       | $                                                     | 253,463    |   | $ | 405,587 |   |
|                                                                                 |       |                                                  |       |   |   |
| Cash Flows from Operating  Activities from Continuing Operations:                    |       |                                                  |       |   |   |
| Net (Loss) Income                                                                    |       | (14,926                                               | )          | 43,342 |   |
| Adjustments to reconcile net  income to net cash provided from operating activities: |       |                                                  |       |   |   |
| Loss from discontinued  operations                                                   |       | 687                                                   |       | 666 |   |
| Depreciation expense                                                                 |       | 50,699                                                |       | 48,781 |   |
| Amortization expense                                                                 |       | 111,761                                               |       | 121,139 |   |
| Amortization of debt  issuance costs                                                 |       | 10,933                                                |       | 10,989 |   |
| Gain on extinguishment of  debt                                                      |       | —                                                |       | (46,106 | ) |
| Deferred income tax  (benefit) provision                                             |       | (13,516                                               | )          | 6,887 |   |
| Stock-based compensation  expense                                                    |       | 6,864                                                 |       | 5,992 |   |
| Goodwill and trade name  impairment                                                  |       | 46,884                                                |       | — |   |
| Restructuring and Merger  related charges                                            |       | 9,781                                                 |       | 22,859 |   |
| Cash payments related to  restructuring charges                                      |       | (10,249                                               | )          | (19,805 | ) |
| Change in working capital,  net of acquisitions:                                     |       |                                                  |       |   |   |
| Current income taxes                                                                 |       | 3,827                                                 |       | 12,933 |   |
| Receivables                                                                          |       | (95,207                                               | )          | (56,039 | ) |
| Inventories and other  current assets                                                |       | (21,260                                               | )          | (16,533 | ) |
| Accounts payable                                                                     |       | 27,929                                                |       | (9,214 | ) |
| Deferred revenue                                                                     |       | 1,042                                                 |       | (2,919 | ) |
| Accrued liabilities                                                                  |       | (1,416                                                | )          | (63,185 | ) |
| Other, net                                                                           |       | 5,406                                                 |       | 9,417 |   |
| Net Cash Provided from  Operating Activities from Continuing Operations              |       | 119,239                                               |       | 69,204 |   |
|                                                                                 |       |                                                  |       |   |   |
| Cash Flows from Investing Activities  from Continuing Operations:                    |       |                                                  |       |   |   |
| Property additions                                                                   |       | (105,292                                              | )          | (50,470 | ) |
| Sale of equipment and other  assets                                                  |       | 1,558                                                 |       | 2,756 |   |
| Acquisition of The  ServiceMaster Company                                            |       | (2,219                                                | )          | (1,482 | ) |
| Other business acquisitions,  net of cash acquired                                   |       | (52,488                                               | )          | (20,730 | ) |
| Notes receivable, financial  investments and securities, net                         |       | 20,954                                                |       | 8,032 |   |
| Net Cash Used for Investing  Activities from Continuing Operations                   |       | (137,487                                              | )          | (61,894 | ) |
|                                                                                 |       |                                                  |       |   |   |
| Cash Flows from Financing  Activities from Continuing Operations:                    |       |                                                  |       |   |   |
| Borrowings of debt                                                                   |       | 15,000                                                |       | — |   |
| Payments of debt                                                                     |       | (49,797                                               | )          | (201,371 | ) |
| Debt issuance costs paid                                                             |       | (30                                                   | )          | (410 | ) |
| Net Cash Used for Financing Activities from  Continuing Operations                   |       | (34,827                                               | )          | (201,781 | ) |
|                                                                                 |       |                                                  |       |   |   |
| Cash Flows from Discontinued  Operations:                                            |       |                                                  |       |   |   |
| Cash used for operating  activities                                                  |       | (3,348                                                | )          | (2,329 | ) |
| Cash used for investing  activities                                                  |       | —                                                |       | (914 | ) |
| Net Cash Used for  Discontinued Operations                                           |       | (3,348                                                | )          | (3,243 | ) |
|                                                                                 |       |                                                  |       |   |   |
| Cash Decrease During the  Period                                                     |       | (56,423                                               | )          | (197,714 | ) |
|                                                                                 |       |                                                  |       |   |   |
| Cash and Cash Equivalents at  End of Period                                          |       | $                                                     | 197,040    |   | $ | 207,873 |   |

 

*See accompanying Notes to the Condensed Consolidated FinancialStatements*

 

6

----

Table ofContents

** **

**THE SERVICEMASTER COMPANY**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**Note 1. Basis of Presentation**

 

The ServiceMaster Company is a national company serving bothresidential and commercial customers. Its products and services include lawncare, landscape maintenance, termite and pest control, home service contracts,cleaning and disaster restoration, house cleaning, furniture repair and home inspection.ServiceMaster provides these services through a network of company-ownedlocations and franchise licenses operating under the following leading brands:TruGreen, TruGreen LandCare, Terminix, American Home Shield, ServiceMasterClean, Merry Maids, Furniture Medic and AmeriSpec. ServiceMaster is organizedinto six principal reportable segments: TruGreen LawnCare, TruGreen LandCare,Terminix, American Home Shield, ServiceMaster Clean and Other Operations andHeadquarters.

 

The condensed consolidated financial statements include the accounts ofThe ServiceMaster Company and its majority owned subsidiary partnerships,limited liability companies and corporations, collectively referred to as “ServiceMaster”,the “Company”, “we”, “us” or “our”.

 

The condensed consolidated financial statements have been prepared bythe Company in accordance with generally accepted accounting principles in theUnited States (“GAAP”) and pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). The Company recommends that thequarterly condensed consolidated financial statements be read in conjunctionwith the consolidated financial statements and the notes thereto included inthe Company’s Annual Report on Form 10-K filed with the SEC for the yearended December 31, 2009. The condensed consolidated financial statementsreflect all adjustments which are, in the opinion of management, necessary forthe fair presentation of the financial position, results of operations and cashflows for the interim periods presented. All intercompany transactions andbalances have been eliminated in consolidation. The results of operations forany interim period are not necessarily indicative of the results which might beachieved for a full year.

 

On March 18, 2007, ServiceMaster entered into an Agreement andPlan of Merger (the “Merger Agreement”) with ServiceMaster GlobalHoldings, Inc. (formerly CDRSVM Topco, Inc.) (“Holdings”) and CDRSVMAcquisition Co., Inc., an indirect wholly owned subsidiary ofHoldings (“Acquisition Co.”). The Merger Agreement provided that, upon theterms and subject to the conditions set forth in the Merger Agreement,Acquisition Co. would merge with and into ServiceMaster, withServiceMaster as the surviving corporation (the “Merger”).

 

On July 24, 2007 (the “Closing Date”), the Merger was completed,and, immediately following the completion of the Merger, all of the outstandingcapital stock of Holdings, the ultimate parent company of ServiceMaster, wasowned by investment funds sponsored by, or affiliated with, Clayton,Dubilier & Rice, Inc. (now operated as Clayton,Dubilier & Rice, LLC, “CD&R”), Citigroup Private Equity LP(together with its affiliate, Citigroup Alternative Investments LLC, “Citigroup”),BAS Capital Funding Corporation (“BAS”) and J.P. Morgan Ventures Corporation (“JPMorgan”) (collectively, the “Equity Sponsors”).

 

Equity contributions totaling $1,431.1 million from the EquitySponsors, together with (i) borrowings under a new $1,150.0 million seniorunsecured interim loan facility (“Interim Loan Facility”), (ii) borrowingsunder a new $2,650.0 million senior secured term loan facility and(iii) cash on hand at ServiceMaster, were used, among other things, tofinance the aggregate merger consideration, to make payments in satisfaction ofother equity-based interests in ServiceMaster under the Merger Agreement, tosettle existing interest rate swaps, to redeem or provide for the repayment ofcertain of the Company’s existing indebtedness and to pay related transactionfees and expenses. In addition, letters of credit issued under a new$150.0 million pre-funded letter of credit facility (together with thesenior secured term loan facility, the “Term Facilities”) were used to replaceand/or secure letters of credit previously issued under a ServiceMaster creditfacility that was terminated as of the Closing Date. On the Closing Date, theCompany also entered into, but did not then draw under, a new$500.0 million senior secured revolving credit facility (the “RevolvingCredit Facility”).

 

The Interim Loan Facility matured on July 24, 2008. On thematurity date, outstanding amounts under the Interim Loan Facility wereconverted on a one-to-one basis into 10.75%/11.50% senior toggle notes maturingin 2015 (the “Permanent Notes”). The Permanent Notes were issued pursuant to arefinancing indenture. In connection with the issuance of the Permanent Notes,ServiceMaster entered into a registration rights agreement (the “RegistrationRights Agreement”), pursuant to which ServiceMaster filed with the Securitiesand Exchange Commission (“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 in accordance with theterms of the Registration Rights Agreement, and the effectiveness of theregistration statement was terminated, on November 19, 2009.

 

7

----

Table ofContents

 

**Note 2. Significant Accounting Policies**

 

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

 

Revenuesfrom lawn care and pest control services, as well as liquid and fumigationtermite applications, are recognized as the services are provided. Revenuesfrom landscaping services are recognized as they are earned based uponcontractual arrangements or when services are performed for non-contractualarrangements. The Company eradicates termites through the use of non-baitingmethods (e.g., fumigation or liquid treatments) and baiting systems. Termiteservices using baiting systems, termite inspection and protection contracts, aswell as home service contracts, 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). The Company regularly reviews its estimates of directcosts for its termite bait and home service contracts and adjusts the estimateswhen appropriate. Revenue from trade name licensing arrangements is recognizedwhen earned.

 

TheCompany has franchise agreements in its TruGreen LawnCare, Terminix,ServiceMaster Clean, AmeriSpec, Furniture Medic and Merry Maids businesses.Franchise revenue (which in the aggregate represents approximately four percentof consolidated revenue from continuing operations) consists principally ofcontinuing monthly fees based upon the franchisee’s customer level revenue. Monthlyfee revenue is recognized when the related customer level revenue is reportedby the franchisee and collectability is reasonably assured. Franchise revenuealso includes initial fees resulting from the sale of a franchise. These feesare fixed and are recognized as revenue when collectability is reasonablyassured and all material services or conditions relating to the sale have beensubstantially performed. Total profits from the franchised operations were$17.3 million**and $51.9 million for the threeand nine months ended September 30, 2010, respectively, and $20.3 millionand $49.9 million for the three and nine months ended September 30, 2009,respectively. Consolidated operating income from continuing operations was$116.7 million and $199.8 million for the three and nine months ended September 30,2010, respectively, and $94.8 million and $241.5 million for the three and ninemonths ended September 30, 2009, respectively. The Company evaluates theperformance of its franchise businesses based primarily on operating profitbefore corporate general and administrative expenses, interest expense andamortization of intangible assets. The portion of total franchise fee incomerelated to initial fees received from the sale of franchises was immaterial tothe Company’s condensed consolidated financial statements for all periods.

 

TheCompany had $452.8 million and $449.7 million of deferred revenue at September 30,2010 and December 31, 2009, respectively. Deferred revenue consistsprimarily of payments received for annual contracts relating to home servicecontracts, termite baiting, termite inspection, pest control and lawn careservices.

 

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

 

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

 

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

 

Thepreparation of the condensed consolidated financial statements requires managementto make certain estimates and assumptions required under GAAP which may differfrom actual results. Disclosures in the Company’s Annual Report onForm 10-K for the year ended December 31, 2009 presented thesignificant areas that require the use of management’s estimates and discussedhow management formed its judgments. The areas discussed included revenuerecognition; the allowance for uncollectible receivables; accruals forself-insured retention limits related to medical, workers’ compensation, autoand general liability insurance 

 

8

----

Table ofContents

 

claims;accruals for home service contracts 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.

 

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

 

TheCompany incurred restructuring and Merger related charges of $1.7 million ($1.0million, net of tax) and $9.8 million ($6.0 million, net of tax) for the threeand nine months ended September 30, 2010, respectively, and $8.5 million($5.6 million, net of tax) and $22.9 million ($14.4 million, net of tax) forthe three and nine months ended September 30, 2009, respectively.Restructuring and Merger related charges were comprised of the following:

 
| ** **                                             | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands)**                                | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| TruGreen LawnCare  reorganization and restructuring(1) |       | $                                | 695        |                            | $          | 5,951 |   | $ | 6,657 |   | $ | 5,951 |   |
| Information technology  outsourcing(2)                 |       | —                           |       | —                          |       | — |   | 9,461 |   |
| Terminix branch  optimization(3)                       |       | —                           |       | —                          |       | — |   | 3,219 |   |
| Merger related charges(4)                              |       | 44                               |       | 786                             |       | 1,180 |   | 2,234 |   |
| Other(5)                                               |       | 951                              |       | 1,761                           |       | 1,944 |   | 1,994 |   |
| Total restructuring and  Merger related charges        |       | $                                | 1,690      |                            | $          | 8,498 |   | $ | 9,781 |   | $ | 22,859 |   |

 

----

(1)                                  Representsrestructuring charges related to a reorganization of field leadership and arestructuring of branch operations. For the three months ended September 30,2010, these costs included consulting fees of $0.7 million. For the nine monthsended September 30, 2010, these costs included consulting fees of $4.5million and severance, lease termination and other costs of $2.2 million. Forthe three and nine months ended September 30, 2009, these costs includedconsulting fees of $4.1 million and severance, lease termination and othercosts of $1.9 million.

 

(2)                                  OnDecember 11, 2008, the Company entered into an agreement withInternational Business Machines Corporation (“IBM”) pursuant to which IBMprovides information technology operations and applications developmentservices to the Company. These services were phased in during the first half of2009. For the nine months ended September 30, 2009, these costs includedtransition fees paid to IBM of $7.2 million, employee retention and severancecosts of $1.3 million and consulting and other costs of $1.0 million.

 

(3)                                  Representsrestructuring charges related to a branch optimization project. For the ninemonths ended September 30, 2009, these costs included lease terminationcosts of $2.8 million and severance costs of $0.4 million.

 

(4)                                  Includesseverance, retention, legal fees and other costs associated with the Merger.

 

(5)                                  For the threeand nine months ended September 30, 2010, these costs included adjustmentsto lease termination reserves related to previous restructuring initiatives of$1.2 million and $1.7 million, respectively, and consulting and other (credits)costs of ($0.2) million and $0.2 million, respectively. For the three and ninemonths ended September 30, 2009, these costs included adjustments to leasetermination reserves related to previous restructuring initiatives of $0.4million and consulting and other costs of $1.4 million and $1.6 million,respectively.

 

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

 

A reconciliation of the beginning and ending balances of accruedrestructuring and Merger related charges, which are included in AccruedLiabilities — Other on the condensed consolidated statements of financialposition, is presented as follows:

 
| **(In thousands)**            | ** ** | **Accrued Restructuring********and Merger Related********Charges** | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| Balance at December 31, 2009  |       | $                                                                                 | 12,083     |   |
| Costs incurred                     |       | 9,781                                                                             |       |
| Costs paid or otherwise settled    |       | (17,085                                                                           | )          |
| Balance at September 30, 2010 |       | $                                                                                 | 4,779      |   |

 

9

----

Table ofContents

 

**Note 4. Commitments and Contingencies**

 

Aportion of the Company’s vehicle fleet and some equipment are leased throughoperating leases. The lease terms are non-cancelable for the first twelve-monthterm, and then are month-to-month, cancelable at the Company’s option. Thereare residual value guarantees by the Company (ranging from 70 percent to84 percent of the estimated terminal value at the inception of the leasedepending on the agreement) relative to these vehicles and equipment, whichhistorically have not resulted in significant net payments to the lessors. Thefair value of the assets under all of the fleet and equipment leases isexpected to substantially mitigate the Company’s guarantee obligations underthe agreements. At September 30, 2010, the Company’s residual valueguarantees related to the leased assets totaled $59.2 million for which theCompany has recorded a liability for the estimated fair value of theseguarantees of approximately $1.3 million in the condensed consolidatedstatement of financial position.

 

Priorto the Merger, the Company maintained lease facilities with banks totaling$65.2 million, which provided for the financing of branch properties to beleased by the Company. In connection with the closing of the Merger, theCompany amended these leases effective July 24, 2007. Among themodifications, the Company extended the lease terms through July 24, 2010and made a $22.0 million investment in the lease facilities. In July 2010,the Company purchased the properties for $65.2 million. The Company’s $22.0million investment in the lease facilities was returned to the Company uponpurchase, resulting in a net cash payment of $43.2 million. In the thirdquarter of 2009, the Company determined that it was probable that the fairvalue of the real properties under operating leases would be below the totalamount funded under the lease facilities at the end of the lease term. TheCompany’s estimate of this shortfall was $15.9 million, which was expensed overthe remainder of the lease term. The Company recorded charges of $1.4 millionand $10.4 million in the three and nine months ended September 30, 2010,respectively, and $2.7 million for the three and nine months ended September 30,2009 related to this shortfall.

 

TheCompany carries insurance policies on insurable risks at levels that itbelieves to be appropriate, including workers’ compensation, auto and generalliability risks. The Company purchases insurance policies from third partyinsurance carriers, which typically incorporate significant deductibles orself-insured retentions. The Company is responsible for all claims that fallbelow the retention limits. As of September 30, 2010 and December 31,2009, the Company had accrued self-insured claims of $128.3 million and $131.3million, respectively, which are included in Accrued Liabilities — Self-insuredclaims and related expenses and Other long-term obligations on the condensedconsolidated statements of financial position. During the nine months ended September 30,2010 and 2009, the Company recorded provisions for uninsured claims totaling$26.2 million and $27.2 million, respectively, and the Company paid claimstotaling $29.2 million and $34.7 million, respectively. In determining theCompany’s accrual for self-insured claims, the Company uses historical claimsexperience to establish both the current year accrual and the underlyingprovision for future losses. This actuarially determined provision and relatedaccrual includes known claims, as well as incurred but not reported claims. TheCompany adjusts its estimate of accrued self-insured claims when required toreflect changes based on factors such as changes in health care costs, accidentfrequency and claim severity.

 

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

 

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

 

Inthe ordinary course of conducting business activities, the Company and itssubsidiaries become involved in judicial, administrative and regulatoryproceedings involving both private parties and governmental authorities. Theseproceedings include, on an individual, collective and class action basis,regulatory, insured and uninsured employment, general, and commercial liabilityactions and environmental proceedings. Additionally, the Company has enteredinto settlement agreements in certain cases, including putative class actions,which are subject to court approval. If one or more of these settlements arenot finally approved, the Company could have additional or different exposure.The enactment of new federal or state legislation or the promulgation of newregulation or interpretation at any level of government may also expose theCompany to potential new liabilities or costs, or may require the Company tomodify its business model or business practices. At this time, the Company doesnot expect any of these proceedings or changes in law to have a material effecton its financial position, results of operations or cash flows; however, theCompany can give 

 

10

----

Table ofContents

 

noassurance that the results of any such proceedings may not be material to itsfinancial position, results of operations and cash flows for any period inwhich costs, if any, are recognized.

 

**Note 5.Goodwill and Intangible Assets**

 

In accordance with applicable accountingstandards, goodwill and intangible assets that are not amortized are subject toassessment for impairment by applying a fair-value based test on an annualbasis or more frequently if circumstances indicate a potential impairment. TheCompany’s annual assessment date is October 1. There were no goodwill ortrade name impairment charges in the three months ended September 30,2010. The results for the nine months ended September 30, 2010 include anon-cash impairment charge of $46.9 million to reduce the carrying value ofgoodwill and trade names as a result of the Company’s interim impairmenttesting of goodwill and indefinite-lived intangible assets. There were nogoodwill or trade name impairment charges in the three and nine months ended September 30,2009.

 

Based on the results of operations at TruGreen LandCare in the firstsix months of 2010 and the revised outlook for the remainder of 2010, theCompany concluded there was an impairment indicator requiring the performanceof an interim goodwill impairment test for the TruGreen LandCare reporting unitas of June 30, 2010. The first step of the goodwill impairment testinvolves a comparison of the estimated fair value of the reporting unit to itscarrying amount, including goodwill. In performing the first step, the Companydetermined the fair value of the TruGreen LandCare reporting unit using acombination of a discounted cash flow analysis, a market-based comparableapproach and a market-based transaction approach. Based on the results of thestep one analysis, the Company determined that the carrying value of theTruGreen LandCare reporting unit exceeded its fair value, indicating thatgoodwill was potentially impaired. As a result, the Company completed thesecond step of the goodwill impairment test which involves calculating theimplied fair value of the reporting unit’s goodwill by allocating the fairvalue of the reporting unit to all assets and liabilities other than goodwilland comparing it to the carrying amount of goodwill. The Company determinedthat the implied fair value of goodwill was less than the carrying value forTruGreen LandCare by $43.0 million, which was recorded as a goodwill impairmentcharge in the second quarter of 2010. As of June 30 and September 30,2010, there was no remaining goodwill at TruGreen LandCare.

 

As a result of the aforementioned goodwill impairment indicators and inaccordance with applicable accounting standards, the Company performed animpairment analysis on its indefinite lived intangible asset related toTruGreen LandCare’s trade name to determine its fair value as of June 30,2010. Based on the lower projected cash flows for TruGreen LandCare asdiscussed above, the Company determined the fair value attributable to theindefinite lived intangible asset was less than the carrying value for TruGreenLandCare by $3.9 million, which was recorded as a trade name impairment in thesecond quarter of 2010.

 

The Company determined that there were no additional impairmentindicators for goodwill or other indefinite lived intangible assets as of September 30,2010.

 

The table below summarizes the goodwill balances by segment forcontinuing operations:

 
| **(In thousands)**         | ** ** | **TruGreen  LawnCare** | ** ** | **TruGreen  LandCare** | ** ** | **Terminix** | ** ** | **American  Home  Shield** | ** ** | **ServiceMaster  Clean** | ** ** | **Other  Operations &  Headquarters** | ** ** | **Total** | ** ** |
|---------------------------------|------------|------------------------|------------|------------------------|------------|--------------|------------|----------------------------|------------|--------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Balance  at Dec. 31, 2009  |       | $                      | 1,178,436  |                   | $          | 43,901       |       | $                          | 1,361,698  |                     | $          | 348,010                                        |       | $         | 135,713    |   | $ | 51,996 |   | $ | 3,119,754 |   |
| Impairment  charge              |       | —                 |       | (42,984                | )          | —       |       | —                     |       | —                   |       | —                                         |       | (42,984   | )          |
| Acquisitions                    |       | 11,786                 |       | —                 |       | 31,762       |       | —                     |       | —                   |       | 1,214                                          |       | 44,762    |       |
| Other(1)                        |       | (393                   | )          | (917                   | )          | (483         | )          | (190                       | )          | 11                       |       | (76                                            | )          | (2,048    | )          |
| Balance  at Sept. 30, 2010 |       | $                      | 1,189,829  |                   | $          | —       |       | $                          | 1,392,977  |                     | $          | 347,820                                        |       | $         | 135,724    |   | $ | 53,134 |   | $ | 3,119,484 |   |

 

----

(1)                                 Reflects theimpact of the amortization of tax deductible goodwill and foreign exchange ratechanges.

 

The accumulated impairment losses as of September 30, 2010 were$43.0 million associated with our TruGreen LandCare segment. There were noaccumulated impairment losses as of December 31, 2009.

 

11

----

Table ofContents

 

The table below summarizes the other intangible asset balances forcontinuing operations:

 
| ** **              | ** ** | **As of********September 30, 2010** | ** ** | **As of********December 31, 2009** | ** ** |
|-------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(In thousands)** | ** ** | **Gross**                                          | ** ** | **Accumulated  Amortization**                     | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Trade names(1)          |       | $                                                  | 2,375,787  |                                              | $          | — |   | $ | 2,375,787 |   | $ | 2,380,100 |   | $ | — |   | $ | 2,380,100 |   |
| Customer relationships  |       | 682,618                                            |       | (451,487                                          | )          | 231,131 |   | 669,581 |   | (352,605 | ) | 316,976 |   |
| Franchise agreements    |       | 88,000                                             |       | (33,058                                           | )          | 54,942 |   | 88,000 |   | (26,418 | ) | 61,582 |   |
| Other                   |       | 54,690                                             |       | (27,290                                           | )          | 27,400 |   | 49,630 |   | (21,051 | ) | 28,579 |   |
| Total                   |       | $                                                  | 3,201,095  |                                              | $          | (511,835 | ) | $ | 2,689,260 |   | $ | 3,187,311 |   | $ | (400,074 | ) | $ | 2,787,237 |   |

 

----

(1)           Not subject toamortization. Reflects the $3.9 million trade name impairment at TruGreenLandCare discussed above and the impact of the amortization of tax deductiblegoodwill at TruGreen LandCare, which is applied to the trade name balancebeginning July 1, 2010.

 

**Note 6.Stock-Based Compensation**

 

Forthe three and nine months ended September 30, 2010, the Company recognizedstock-based compensation expense of $2.5 million ($1.5 million, net of tax) and$6.9 million ($4.3 million, net of tax), respectively. For the three and ninemonths ended September 30, 2009, the Company recognized stock-basedcompensation expense of $2.1 million ($1.7 million, net of tax) and $6.0million ($4.1 million, net of tax), respectively. As of September 30,2010, there was $21.1 million of total unrecognized compensation cost relatedto non-vested stock options and restricted share units (“RSUs”) granted byHoldings under the ServiceMaster Global Holdings, Inc. Stock IncentivePlan (the “MSIP”). These remaining costs are expected to be recognized over aweighted-average period of 2.2 years.

 

Asof September 24, 2010, the board of directors and stockholders of Holdingsapproved an amendment to the MSIP. The amendment to the MSIP increased by800,000 the maximum number of shares of Holdings’ common stock available forissuance thereunder, to 13,845,000, and provides for the award of RSUs underthe MSIP.

 

Inaddition, on September 24, 2010, the compensation committee of theHoldings board of directors approved an employee restricted stock unitagreement to be used when awards of RSUs are made under the MSIP and granted735,000 RSU awards to certain senior executives of ServiceMaster. The RSUs hada grant-date fair value of $10 per unit and will vest in three equal annualinstallments, subject to an employee’s continued employment. Upon vesting, eachRSU will be converted into one share of Holdings’ common stock.

 

OnSeptember 7, 2010, ServiceMaster announced the retirement of its ChiefExecutive Officer (“CEO”) with a targeted retirement date of December 31,2010, or such earlier or later date as a successor CEO is appointed. On September 8,2010, in connection with the CEO’s retirement, Holdings extended the optionperiod on the CEO’s vested standalone options to three years following hisdeparture date. This extension of the option period is considered a stockoption modification resulting in additional stock compensation expense of $0.5 million,of which $0.3 million was recorded in the third quarter of 2010.

 

**Note 7. Supplemental Cash Flow Information**

 

Supplemental information relating to the condensed consolidatedstatement of cash flows for the nine months ended September 30, 2010 and2009 is presented in the following table:
| ** **                                                 | ** ** | ** **                      | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|---------------------------------|------------|------------|------------|
| ** **                                                 | ** ** | **Nine months ended** | ** ** |
| ** **                                                 | ** ** | **September 30,**          | ** ** |
| **(In thousands)**                                    | ** ** | **2010**                        | ** ** | **2009**   | ** ** |
| Cash paid for or (received from): |       |                            |       |       |       |
| Interest  expense                                          |       | $                               | 238,727    |       | $          | 266,943 |   |
| Interest  and dividend income                              |       | (3,997                          | )          | (5,193     | )          |
| Income  taxes, net of refunds                              |       | 12,139                          |       | 1,457      |       |
|                                                            |            |                                 |            |            |            |  |  |

 

 

12

----

Table ofContents

 

**Note 8. Comprehensive Income**

 

Total comprehensive income (loss) was $6.7 million and ($19.6) millionfor the three and nine months ended September 30, 2010 and $24.5 millionand $66.2 million for the three and nine months ended September 30, 2009,respectively. Total comprehensive income primarily includes net income (loss),unrealized gain (loss) on marketable securities, unrealized gain (loss) onderivative instruments and the effect of foreign currency translation.

 

**Note 9.Receivable Sales**

 

The Company has entered into an accounts receivable securitizationarrangement under which TruGreen LawnCare and Terminix may sell certaineligible trade accounts receivable to ServiceMaster Funding Company LLC (“Funding”),the Company’s wholly owned, bankruptcy-remote subsidiary, which is consolidatedfor financial reporting purposes. Funding, in turn, may transfer, on arevolving basis, an undivided percentage ownership interest of up to$50.0 million in the pool of accounts receivable to one or both of theunrelated purchasers who are parties to the accounts receivable securitizationarrangement (“Purchasers”). The amount of the eligible receivables variesduring the year based on seasonality of the businesses and could, at times,limit the amount available to the Company from the sale of these interests.

 

During the nine months ended September 30, 2010, there were notransfers of interests in the pool of trade accounts receivables to Purchasersunder this arrangement. As of September 30, 2010 and December 31,2009, the Company had $10.0 million outstanding under the arrangement and, asof September 30, 2010, had $40.0 million of remaining capacity availableunder the trade accounts receivable securitization arrangement.

 

Theaccounts receivable securitization arrangement is a 364-day facility that isrenewable annually at the option of Funding, with a final termination date ofJuly 17, 2012. Only one of the Purchasers is required to purchaseinterests under the arrangement. If this Purchaser were to exercise its rightto terminate its participation in the arrangement, which it may do in the thirdquarter of each year, the amount of cash available to the Company under thisagreement may be reduced or eliminated. As part of the annual renewal of thefacility, which last occurred on July 20, 2010, this Purchaser agreed tocontinue its participation in the arrangement at least throughJuly 19, 2011.

 

TheCompany has recorded its obligation to repay the third party for its interestin the pool of receivables as long-term debt in the condensed consolidatedfinancial statements. The interest rates applicable to the Company’s obligationare based on a fluctuating rate of interest based on the third party Purchaser’spooled commercial paper rate (0.36% at September 30, 2010). In addition,the Company pays usage fees on its obligations and commitment fees on undrawnamounts committed by the Purchasers. All obligations under the accountsreceivable securitization arrangement must be repaid by July 17, 2012, thefinal termination date of the arrangement.

 

**Note10. Cash and Marketable Securities**

 

Cash,money market funds and certificates of deposits, with maturities of threemonths or less when purchased, are included in the condensed consolidatedstatement of financial position caption “Cash and cash equivalents”. As of September 30,2010 and December 31, 2009, the Company’s investments consist primarily ofdomestic publicly traded debt and certificates of deposit totaling $102.0million and $93.9 million, respectively, and common equity securities of$37.7 million and $38.3 million, respectively.

 

Theaggregate market value of the Company’s short-term and long-term investments indebt and equity securities was $139.7 million and $132.2 million, and theaggregate cost basis was $131.4 million and $126.7 million at September 30,2010 and December 31, 2009, respectively.

 

Asof September 30, 2010 and December 31, 2009, $296.0 million and$256.5 million, respectively, of the cash and short- and long-term marketablesecurities balance are 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.

 

Gainsand losses on sales of investments, as determined on a specific identificationbasis, are included in investment income in the period they are realized. TheCompany periodically reviews its portfolio of investments to determine whetherthere has been an other than temporary decline in the value of the investmentsfrom factors such as deterioration in the financial condition of the issuer orthe market(s) in which the issuer competes. The table below summarizesgross realized gains and gross realized losses, each resulting from sales ofavailable-for-sale securities, and impairment charges due to other thantemporary declines in the value of certain investments.

 

13

----

Table ofContents

 
| ** **                         | ** ** | **Three months ended****September 30,** | ** ** | **Nine months ended****September 30,** | ** ** |
|------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **(In thousands)**            | ** ** | **2010**                                               | ** ** | **2009**                                              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Gross realized gains,  pre-tax     |       | $                                                      | 988        |                                                  | $          | 1,250 |   | $ | 2,089 |   | $ | 2,812 |   |
| Gross realized gains, net of  tax  |       | 605                                                    |       | 770                                                   |       | 1,279 |   | 1,732 |   |
|                               |       |                                                   |       |                                                  |       |   |   |   |   |
| Gross realized losses,  pre-tax    |       | (52                                                    | )          | (137                                                  | )          | (178 | ) | (1,490 | ) |
| Gross realized losses, net  of tax |       | (32                                                    | )          | (84                                                   | )          | (109 | ) | (918 | ) |
|                               |       |                                                   |       |                                                  |       |   |   |   |   |
| Impairment charges, pre-tax        |       | —                                                 |       | —                                                |       | — |   | (5,854 | ) |
| Impairment charges, net of  tax    |       | —                                                 |       | —                                                |       | — |   | (3,606 | ) |
|                                    |            |                                                        |            |                                                       |            |  |  |  |  |  |  |  |  |

 

Thetable below summarizes unrealized gains and losses in the investment portfolio.

 
| **(In thousands)**                                                                | ** ** | **As of  September 30,  2010** | ** ** | **As of  December 31,  2009** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| Unrealized gains                                                                       |       | $                                        | 10,363     |                                    | $          | 7,674 |   |
| Unrealized losses                                                                      |       | (2,099                                   | )          | (2,226                                  | )          |
| Portion of unrealized losses which had been in a  loss position for more than one year |       | (189                                     | )          | (739                                    | )          |
| Aggregate fair value of the investments with  unrealized losses                        |       | 4,290                                    |       | 26,837                                  |       |
|                                                                                        |            |                                          |            |                                         |            |  |  |

 

**Note11. Long-Term Debt**

 

Long-termdebt at September 30, 2010 and December 31, 2009 is summarized in thefollowing table:

 
| **(In thousands)**                              | ** ** | **As of  September 30,  2010** | ** ** | **As of  December 31,  2009** | ** ** |
|------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| Senior secured term loan facility maturing in 2014   |       | $                                        | 2,563,875  |                                    | $          | 2,583,750 |   |
| 10.75% /11.50% senior toggle notes maturing in  2015 |       | 1,061,000                                |       | 1,061,000                               |       |
| Revolving credit facility maturing in 2013           |       | —                                   |       | —                                  |       |
| 7.10% notes maturing in 2018(1)                      |       | 65,068                                   |       | 63,624                                  |       |
| 7.45% notes maturing in 2027(1)                      |       | 149,887                                  |       | 147,885                                 |       |
| 7.25% notes maturing in 2038(1)                      |       | 60,431                                   |       | 59,824                                  |       |
| Other                                                |       | 56,957                                   |       | 58,861                                  |       |
| Less current portion                                 |       | (50,316                                  | )          | (64,395                                 | )          |
| Total long-term debt                                 |       | $                                        | 3,906,902  |                                    | $          | 3,910,549 |   |

 

----

(1)          The increase in the balancefrom December 31, 2009 to September 30, 2010 reflects theamortization of fair value adjustments related to purchase accounting, whicheffectively increases the stated coupon interest rates.

 

TheCompany had $34.5 million and $70.2 million of accrued interest at September 30,2010 and December 31, 2009, respectively. Accrued interest is included inAccrued Liabilities — Other on the condensed consolidated statements offinancial position.

 

InJune 2010, the Company entered into two, two-year interest rate swapagreements effective March 3, 2011. The total notional amount of theagreements was $250.0 million. Under the terms of the agreements, the Company willpay a weighted average fixed rate of interest of 1.70% on the $250.0 millionnotional amount and the Company will receive a floating rate of interest (basedon the one month LIBOR) on the notional amount. Therefore, during the term ofthe swap agreements, the effective interest rate for $250.0 million of the termloans will be fixed at a rate of 1.70% plus the incremental borrowing margindescribed in Note 14 in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2009.

 

InJune 2010, the Company entered into two, two-year interest rate swapagreements effective September 1, 2011. The total notional amount of theagreements was $200.0 million. Under the terms of the agreements, the Companywill pay a weighted average fixed rate of interest of 2.22% on the $200.0million notional amount and the Company will receive a floating rate ofinterest (based on the one month LIBOR) on the notional amount. Therefore,during the term of the swap agreements, the effective interest rate for $200.0million of the term loans will be fixed at a rate of 2.22% plus the incrementalborrowing margin described in Note 14 in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2009.

 

14

----

Table ofContents

 

Inaccordance with accounting standards for derivative instruments and hedgingactivities, these interest rate swap agreements are classified as cash flowhedges and, as such, the hedging instruments are recorded on the balance sheetas either an asset or liability at fair value, with the effective portion ofthe changes in fair value attributable to the hedged risks recorded in othercomprehensive income.

 

**Note 12.Discontinued Operations**

 

Reported“loss from discontinued operations, net of income taxes” for all periodspresented includes the operating results of the sold businesses noted in theCompany’s Annual Report on Form 10-K for the year ended December 31,2009. The operating results of discontinued operations are as follows:

 
| ** **                                              | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Operating Results:                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Operating revenue                                       |       | $                                                    | —     |                                                | $          | 6 |   | $ | — |   | $ | 62 |   |
| Operating loss                                          |       | (227                                                 | )          | (609                                                | )          | (1,171 | ) | (1,050 | ) |
| Loss from discontinued operations, before income  taxes |       | (227                                                 | )          | (609                                                | )          | (1,171 | ) | (1,050 | ) |
| Benefit from income taxes                               |       | (122                                                 | )          | (213                                                | )          | (484 | ) | (384 | ) |
| Loss from discontinued operations, net of income  taxes |       | $                                                    | (105       | )                                                   | $          | (396 | ) | $ | (687 | ) | $ | (666 | ) |

 

Thetable below summarizes the activity for the nine months ended September 30,2010 for the remaining liabilities from operations that were disposed of inyears prior to 2010. The remaining obligations primarily relate to long-termself-insurance claims. The Company believes that the remaining reservescontinue to be adequate and reasonable.

 
| **(In thousands)**                           | ** ** | **As of  December 31,  2009** | ** ** | **Cash Payments  or Other** | ** ** | **Expense** | ** ** | **As of  September 30,  2010** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|-------------|------------|------------------------------------------|------------|
| Remaining liabilities of discontinued operations: |       |                                    |       |                                  |       |        |       |                                     |       |
| ARS/AMS                                           |       | $                                       | 2,921      |                                  | $          | (2,459      | )          | $                                        | 639        |   | $ | 1,101 |   |
| LandCare Construction                             |       | 722                                     |       | (85                                   | )          | 11          |       | 648                                      |       |
| LandCare utility line clearing business           |       | 911                                     |       | (102                                  | )          | —      |       | 809                                      |       |
| Certified Systems, Inc. and other            |       | 2,149                                   |       | (207                                  | )          | 1           |       | 1,943                                    |       |
| InStar                                            |       | 248                                     |       | (51                                   | )          | 36          |       | 233                                      |       |
| Total liabilities of discontinued operations      |       | $                                       | 6,951      |                                  | $          | (2,904      | )          | $                                        | 687        |   | $ | 4,734 |   |

 

**Note13. Income Taxes**

 

Theeffective tax rates for the three and nine months ending September 30, 2010 are89.0 percent and (37.6) percent, respectively. As required by ASC 740, wecompute interim period income taxes by applying an anticipated annual effectivetax rate to our year-to-date income or loss from continuing operations beforeincome taxes, except for significant unusual or infrequently occurring items. Ourestimated tax rate is adjusted each quarter in accordance with ASC 740. Thecomputed effective rate for the three months ending September 30, 2010 ishigher than the customary relationship between income tax expense and incomefrom continuing operations before income taxes due to a change in ourforecasted annual rate. The computed effective rate for the nine months endingSeptember 30, 2010 is lower than the customary relationship between income taxexpense and loss from continuing operations before income taxes primarily dueto the Company incurring foreign and state tax expense despite anticipating afull year loss from continuing operations before income taxes.

 

AtSeptember 30, 2010 and December 31, 2009, the Company had $14.9million and $15.4 million, respectively, of tax benefits primarily reflected instate tax returns that had not been recognized for financial reporting purposes(“unrecognized tax benefits”). The Company currently estimates that, as aresult of pending tax settlements and expiration of statutes of limitations,the amount of unrecognized tax benefits could be reduced by approximately $9.3million during the next 12 months.

 

**Note14. Business Segment Reporting**

 

Thebusiness of the Company is conducted through six reportable segments: TruGreenLawnCare, TruGreen LandCare, Terminix, American Home Shield, ServiceMasterClean and Other Operations and Headquarters.

 

Inaccordance with accounting standards for segments, the Company’s reportablesegments are strategic business units that offer different services. TheTruGreen LawnCare segment provides residential and commercial lawn careservices. The TruGreen LandCare segment provides landscaping services primarilyto commercial customers. The Terminix segment provides termite and pest controlservices to residential and commercial customers. The American Home Shieldsegment provides home service contracts to consumers that cover heating,ventilation, air conditioning, plumbing and other home systems and appliances.The ServiceMaster Clean segment provides residential and commercial disasterrestoration and cleaning services primarily under the ServiceMaster andServiceMaster Clean brand names, on-site furniture repair and restorationservices primarily under the Furniture Medic brand name and home inspectionservices primarily under the AmeriSpec brand name. The Other Operations andHeadquarters segment includes the franchised and Company-owned operations ofMerry Maids, which provides house cleaning services. The Other Operations andHeadquarters segment also includes The ServiceMaster Acceptance Company LimitedPartnership (“SMAC”), our financing subsidiary exclusively dedicated toproviding financing to our franchisees and retail customers of our operatingunits, and the Company’s headquarters operations, which provide varioustechnology, marketing, finance, legal and other support services to thebusiness units.

 

15

----

Table of Contents

 

Inthe second quarter of 2010, the Company revised its methodology for theallocation of general corporate overhead expenses to each reportable segment.The portion of general corporate support services previously allocated to eachreportable segment is now reflected in the Other Operations and Headquarterssegment. Under the revised method, allocations are limited to corporate supportservices incurred directly on behalf of each reportable segment. The operatingincome presented below for each reportable segment has been revised to reflectthe new allocation methodology for all periods presented. The revision to theallocation methodology had no impact on reported operating revenue for eachreportable segment or total operating income.

 

Segmentinformation for continuing operations is presented below.

 
| ** **                          | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands)**             | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Operating Revenue:                  |       |                             |       |                            |       |   |   |   |   |
| TruGreen LawnCare                   |       | $                                | 371,298    |                            | $          | 351,830 |   | $ | 874,022 |   | $ | 834,899 |   |
| TruGreen LandCare                   |       | 58,278                           |       | 63,244                          |       | 180,541 |   | 199,562 |   |
| Terminix                            |       | 295,172                          |       | 272,598                         |       | 889,482 |   | 843,134 |   |
| American Home Shield                |       | 196,913                          |       | 179,617                         |       | 513,910 |   | 490,308 |   |
| ServiceMaster Clean                 |       | 34,041                           |       | 32,132                          |       | 98,337 |   | 92,869 |   |
| Other Operations and Headquarters   |       | 21,558                           |       | 21,093                          |       | 63,438 |   | 62,961 |   |
| Total Operating Revenue             |       | $                                | 977,260    |                            | $          | 920,514 |   | $ | 2,619,730 |   | $ | 2,523,733 |   |
| Operating Income (Loss):(1),(2),(3) |       |                             |       |                            |       |   |   |   |   |
| TruGreen LawnCare                   |       | $                                | 66,730     |                            | $          | 51,373 |   | $ | 80,248 |   | $ | 75,382 |   |
| TruGreen LandCare                   |       | (5,138                           | )          | 27                              |       | (52,367 | ) | 8,658 |   |
| Terminix                            |       | 44,979                           |       | 37,490                          |       | 166,714 |   | 152,778 |   |
| American Home Shield                |       | 28,777                           |       | 24,279                          |       | 57,245 |   | 60,423 |   |
| ServiceMaster Clean                 |       | 13,464                           |       | 12,549                          |       | 38,708 |   | 36,673 |   |
| Other Operations and Headquarters   |       | (32,140                          | )          | (30,878                         | )          | (90,713 | ) | (92,391 | ) |
| Total Operating Income              |       | $                                | 116,672    |                            | $          | 94,840 |   | $ | 199,835 |   | $ | 241,523 |   |

 

----

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

 
| ** **                                                         | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                         | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands)**                                            | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Total Segment Operating Income                                     |       | $                                | 116,672    |                            | $          | 94,840 |   | $ | 199,835 |   | $ | 241,523 |   |
| Non-operating expense (income):                                    |       |                             |       |                            |       |   |   |   |   |
| Interest expense                                                   |       | 71,267                           |       | 74,216                          |       | 217,117 |   | 225,538 |   |
| Interest and net investment income                                 |       | (3,989                           | )          | (4,558                          | )          | (7,487 | ) | (3,192 | ) |
| Gain on extinguishment of debt                                     |       | —                           |       | —                          |       | — |   | (46,106 | ) |
| Other expense                                                      |       | 209                              |       | 176                             |       | 556 |   | 555 |   |
| Income (Loss) from Continuing Operations  before Income Taxes |       | $                                | 49,185     |                            | $          | 25,006 |   | $ | (10,351 | ) | $ | 64,728 |   |

 

(2)            As described in Note 5, includes a non-cashimpairment charge of $46.9 million recorded in the second quarter of 2010 toreduce the carrying value of goodwill and trade names at TruGreen LandCare as aresult of the Company’s interim impairment test of goodwill and indefinite-livedintangible assets.

 

(3)            Includes (i) restructuring charges related to areorganization of field leadership and a restructuring of branch operations atTruGreen LawnCare, a branch optimization project at Terminix and informationtechnology outsourcing at Other Operations and Headquarters and(ii) Merger related charges. Presented below is a summary of restructuringand Merger related charges (credits) by segment.

 

16

----

Table of Contents

 
| ** **                                     | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands)**                        | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Restructuring and Merger related charges:      |       |                             |       |                            |       |   |   |   |   |
| TruGreen LawnCare                              |       | $                                | 695        |                            | $          | 5,951 |   | $ | 6,657 |   | $ | 5,951 |   |
| TruGreen LandCare                              |       | 127                              |       | 184                             |       | 785 |   | 133 |   |
| Terminix                                       |       | 1,061                            |       | 214                             |       | 1,139 |   | 3,365 |   |
| American Home Shield                           |       | —                           |       | 30                              |       | (127 | ) | 105 |   |
| ServiceMaster Clean                            |       | 61                               |       | —                          |       | 61 |   | — |   |
| Other Operations and Headquarters              |       | (254                             | )          | 2,119                           |       | 1,266 |   | 13,305 |   |
| Total restructuring and Merger related charges |       | $                                | 1,690      |                            | $          | 8,498 |   | $ | 9,781 |   | $ | 22,859 |   |

 

**Note15. Related Party Transactions**

 

Inconnection with the Merger and the related transactions, the Company enteredinto a consulting agreement with CD&R under which CD&R provides theCompany with on-going consulting and management advisory services in exchangefor an annual management fee of $2.0 million, which is payable quarterly. OnJuly 30, 2009, the consulting agreement was amended and the annual management fee payable under the consultingagreement with CD&R was increased from $2.0 million to $6.25 million inorder to align our fee structure with current market rates. Under thisagreement, the Company recorded a management fee of $1.6 million and $4.7million for the three and nine months ended September 30, 2010,respectively, and $3.7 million and $4.7 million for the three and nine monthsended September 30, 2009, respectively. The full year management fee wasapplied in 2009, and the incremental fees relating to the first three quartersof 2009 were recorded and paid to CD&R in the third quarter of 2009. The amended consulting agreement also providesthat CD&R may receive additional fees in connection with certain subsequentfinancing and acquisition or disposition transactions.

 

Inaddition, in August 2009, the Company entered into consulting agreementswith Citigroup, BAS and JPMorgan, each of which is an Equity Sponsor or anaffiliate of an Equity Sponsor. Under the consulting agreements, Citigroup, BASand JPMorgan each provide the Company with on-going consulting and managementadvisory services through September 30, 2016 or the earlier termination ofthe existing consulting agreement between the Company and CD&R. The Companypays annual management fees of $0.5 million, $0.5 million and $0.25 million toCitigroup, BAS and JPMorgan, respectively. The Company recorded consulting feesrelated to these agreements of $0.3 million and $0.9 million for the three and nine months ended September 30,2010, respectively, and $0.9 million for the three and nine months endedSeptember 30, 2009. The full year management fee was applied in 2009, andthe incremental fees relating to the first three quarters of 2009 were recordedand paid to Citigroup, BAS and JPMorgan in the third quarter of 2009. On September 30,2010, Citigroup transferred the management responsibility for, and its proprietaryinterests in, certain investment funds that own shares of common stock of Holdingsto StepStone Group LLC (“StepStone”) and Lexington Partners Advisors LP. Citigroupalso assigned its obligations and rights under the consulting agreement toStepStone, and beginning in the fourth quarter of 2010, the consulting fee otherwisepayable to Citigroup will be paid to StepStone.

 

Between the Merger and September 30, 2010, Holdings has completedopen market purchases totaling $65.0 million in face value of thePermanent Notes for a cost of $21.4 million. The debt acquired by Holdingshas not been retired, and the Company has continued to pay interest inaccordance with the terms of the debt. The Company recorded interest expense of$5.2 million for the nine months ended September 30, 2010 and 2009,respectively, related to the Permanent Notes held by Holdings. The Company madecash payments to Holdings of $7.0 million and $6.5 million during the ninemonths ended September 30, 2010 and 2009, respectively. Interest accruedby the Company and payable to Holdings as of September 30, 2010 andDecember 31, 2009 amounted to $1.4 million and $3.2 million, respectively.

 

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

 

In September 2009, the Financial Accounting Standards Board (“FASB”)issued Accounting Standards Update (“ASU”) 2009-13, “Multiple-DeliverableRevenue Arrangements”, which amends the multiple-element arrangement guidanceunder ASC 605, “Revenue Recognition”. This standard amends the criteria forseparating consideration received for products or services inmultiple-deliverable arrangements. This standard establishes a selling pricehierarchy for determining the selling price of a deliverable, eliminates theresidual method of allocation, and requires that total arrangementconsideration be allocated at the inception of the arrangement to alldeliverables using the relative selling price method. In addition, thisstandard significantly expands required disclosures related to a vendor’smultiple-deliverable revenue arrangements. This standard is effectiveprospectively for revenue arrangements entered into or materially modified infiscal years beginning on or after June 15, 2010 (calendar year 2011). TheCompany is currently evaluating the effect of this standard on its condensedconsolidated financial statements.

 

17

----

Table of Contents

 

InDecember 2009, the FASB issued ASU 2009-17, “Accounting by EnterprisesInvolved with Variable Interest Entities” (“ASU 2009-17”). ASU 2009-17 formallyincorporates into the FASB Codification amendments to FASB InterpretationNo. 46(R) made by Statement of Financial Accounting Standards (“SFAS”)167 to require that a comprehensive qualitative analysis be performed todetermine whether a holder of variable interests in a variable interest entityalso has a controlling financial interest in that entity. In addition, theamendments require that the same type of analysis be applied to entities thatwere previously designated as qualifying special-purpose entities. Thisstandard applies prospectively for fiscal years beginning on or afterNovember 15, 2009. The Company adopted the required provisions of thisstandard during the first quarter of 2010. The adoption of this standard didnot have a material impact on the Company’s condensed consolidated financialstatements.

 

In January 2010, the FASB issued ASU 2010-06, “ImprovingDisclosures about Fair Value Measurements”, which amends ASC 820 to add newrequirements for disclosures about transfers into and out of Level 1 and 2measurements and separate disclosures about purchases, sales, issuances andsettlements relating to Level 3 measurements. The ASU also clarifies existingfair value disclosure requirements about the level of disaggregation and aboutinputs and valuation techniques used to measure fair value. Further, the ASUamends guidance on employers’ disclosures about postretirement benefit planassets under ASC 715 to require that disclosures be provided by classes ofassets instead of by major categories of assets. This standard is effective forthe first reporting period (including interim periods) beginning afterDecember 15, 2009, except for the requirement to provide the Level 3activity of purchases, sales, issuances, and settlements on a gross basis,which will be effective for fiscal years beginning after December 15,2010, and for interim periods within those fiscal years. The Company appliedthe required provisions of this standard on the Company’s condensedconsolidated financial statements during the first quarter of 2010 (see Note17).

 

**Note17. Fair Value of Financial Instruments**

 

The period end carrying amounts of receivables, accounts payable andaccrued liabilities approximate fair value because of the short maturity ofthese instruments. The period end carrying amounts of long-term notesreceivable approximate fair value as the effective interest rates for theseinstruments are comparable to market rates at period end. The period endcarrying amounts of current and long-term marketable securities alsoapproximate fair value, with unrealized gains and losses reported net-of-tax asa component of accumulated comprehensive income (loss), or, for certain unrealizedlosses, reported in interest and net investment income in the condensedconsolidated statement of operations if the decline in value is other thantemporary. The carrying amount of total debt was $3,957.2 million and$3,974.9 million and the estimated fair value was $3,903.5 million and$3,716.5 million at September 30, 2010 and December 31, 2009,respectively. The fair values of the Company’s financial instruments reflectthe amounts that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants at the measurement date(exit price). The fair value estimates presented in this report are based oninformation available to the Company as of September 30, 2010 andDecember 31, 2009.

 

 The Company has estimated thefair value of its financial instruments measured at fair value on a recurringbasis using the market and income approaches. For investments in marketablesecurities, deferred compensation trust assets and derivative contracts, whichare carried at their fair values, the Company’s fair value estimatesincorporate quoted market prices, other observable inputs (for example, forwardinterest rates) and unobservable inputs (for example, forward commodity prices)at the balance sheet date.

 

Interestrate swap contracts are valued using forward interest rate curves obtained fromthird party market data providers. The fair value of each contract is the sumof the expected future settlements between the contract counterparties,discounted to present value. The expected future settlements are determined bycomparing the contract interest rate to the expected forward interest rate asof each settlement date and applying the difference between the two rates tothe notional amount of debt in the interest rate swap contracts.

 

Fuelswap contracts are valued using forward fuel price curves obtained from thirdparty market data providers. The fair value of each contract is the sum of theexpected future settlements between the contract counterparties, discounted topresent value. The expected future settlements are determined by comparing thecontract fuel price to the expected forward fuel price as of each settlementdate and applying the difference between the contract and expected prices tothe notional gallons in the fuel swap contracts.

 

18

----

Table of Contents

 

The carrying amount and estimated fair value of the Company’s financialinstruments that are recorded at fair value for the periods presented are asfollows:

 
| ** **                               | ** ** | ** **                                                 | ** ** | **As of  September 30, 2010** | ** ** | **As of  December 31, 2009**                 | ** ** |
|------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                               | ** ** | ** **                                                 | ** ** | ** **                                   | ** ** | **Estimated Fair Value Measurements**        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(In thousands)**                  | ** ** | **Balance Sheet Locations**                      | ** ** | **Carrying  Value**                          | ** ** | **Quoted  Prices In  Active  Markets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Carrying  Value** | ** ** | **Estimated  Fair Value** | ** ** |
| Financial  Assets:                       |       |                                                       |       |                                         |       |                                                        |       |   |   |   |   |   |   |   |   |
| Deferred  compensation trust assets |       | Long-term marketable securities                            |       | $                                            | 9,984      |                                                        | $          | 9,984 |   | $ | — |   | $ | — |   | $ | 9,985 |   | $ | 9,985 |   |
| Investments  in marketable securities    |       | Marketable securities  and Long-term marketable securities |       | 129,661                                      |       | 45,798                                                      |       | 83,863 |   | — |   | 122,201 |   | 122,201 |   |
| Fuel  swap contracts:                    |       |                                                       |       |                                         |       |                                                        |       |   |   |   |   |   |   |   |   |
| Current                                  |       | Prepaid expenses and  other assets                         |       | 3,382                                        |       | —                                                      |       | — |   | 3,382 |   | 7,840 |   | 7,840 |   |
| Noncurrent                               |       | Other assets                                               |       | 640                                          |       | —                                                      |       | — |   | 640 |   | — |   | — |   |
| Total  financial assets                  |       |                                                       |       | $                                            | 143,667    |                                                        | $          | 55,782 |   | $ | 83,863 |   | $ | 4,022 |   | $ | 140,026 |   | $ | 140,026 |   |
|                                     |       |                                                       |       |                                         |       |                                                        |       |   |   |   |   |   |   |   |   |
| Financial  Liabilities:                  |       |                                                       |       |                                         |       |                                                        |       |   |   |   |   |   |   |   |   |
| Fuel  swap contracts:                    |       |                                                       |       |                                         |       |                                                        |       |   |   |   |   |   |   |   |   |
| Current                                  |       | Other accrued  liabilities                                 |       | $                                            | 804        |                                                        | $          | — |   | $ | — |   | $ | 804 |   | $ | 924 |   | $ | 924 |   |
| Noncurrent                               |       | Other long-term  obligations                               |       | 192                                          |       | —                                                      |       | — |   | 192 |   | — |   | — |   |
| Interest  rate swap contracts            |       | Other long-term  obligations                               |       | 62,385                                       |       | —                                                      |       | 62,385 |   | — |   | 54,120 |   | 54,120 |   |
| Total  financial liabilities             |       |                                                       |       | $                                            | 63,381     |                                                        | $          | — |   | $ | 62,385 |   | $ | 996 |   | $ | 55,044 |   | $ | 55,044 |   |

 

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

 
| **(In thousands)**                        | ** ** | **Fuel Swap Contract  Assets (Liabilities)** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------------|------------|
| Balance at December 31, 2009              |       | $                                                           | 6,916      |   |
| Total gains (losses) (realized and unrealized) |       |                                                        |       |
| Included in earnings(1)                        |       | 4,154                                                       |       |
| Included in other comprehensive income         |       | (3,890                                                      | )          |
| Settlements, net                               |       | (4,154                                                      | )          |
| Balance at September 30, 2010             |       | $                                                           | 3,026      |   |

 
| **(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       | ) |

 

----

(1)                                Gains (losses)included in earnings are reported in cost of services rendered and productssold.

 

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

 

19

----

Table of Contents

 

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

 

Theeffect of derivative instruments on the condensed consolidated statement ofoperations and other comprehensive income for the nine months ended September 30,2010 and 2009, respectively, is presented as follows:

 
| **(In thousands)**                                            | ** ** | **Effective Portion of  Loss Recognized in  Accumulated Other** | ** ** | **Effective Portion of  Gain (Loss) Reclassified from  Accumulated Other** | ** ** | ** **                                 | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Derivatives designated as  Cash Flow Hedge** | ** ** | **Comprehensive Income  (Loss)**                                                    | ** ** | **Comprehensive Income  (Loss) into Income**                                              | ** ** | **Location of Gain (Loss)** | ** ** |
| **Relationships**                                                  | ** ** | **Nine months ended September 30, 2010**                        | ** ** | **included in Income**                                                                         | ** ** |
|                                                               |       |                                                                                     |       |                                                                                                     |       |                                       |       |
| Fuel swap contracts                                                |       | $                                                                                        | (3,890     | )                                                                                                        | $          | 4,154                                      |       | Cost  of services rendered and products sold |   |
| Interest rate swap contracts                                       |       | $                                                                                        | (8,265     | )                                                                                                        | $          | (38,516                                    | )          | Interest  expense |   |

 
| **Derivatives designated as  Cash Flow Hedge** | ** ** | **Effective Portion of  Gain (Loss) Recognized in  Accumulated Other  Comprehensive Income  (Loss)** | ** ** | **Effective Portion of  Loss Reclassified from  Accumulated Other  Comprehensive Income  (Loss) 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 |   |

 

Ineffectiveportions of derivative instruments designated in accordance with accountingstandards as cash flow hedge relationships were insignificant during the ninemonths ended September 30, 2010. As of September 30, 2010, theCompany had fuel swap contracts to pay fixed prices for fuel with an aggregatenotional amount of $78.2 million, maturing through 2012. Under the terms of itsfuel swap contracts, the Company is required to post collateral in the eventthat the fair value of the contracts exceeds a certain agreed upon liabilitylevel and in other circumstances required by the counterparty. As of September 30,2010, the Company had posted $5.0 million in letters of credit as collateral underits fuel hedging program, none of which were issued under the Company’sRevolving Credit Facility. As of September 30, 2010, the Company hadinterest rate swap contracts to pay fixed rates for interest on long-term debtwith an aggregate notional amount of $1.430 billion, maturing through 2013.

 

Theeffective portion of the gain or loss on derivative instruments designated andqualifying as cash flow hedging instruments is recorded in other comprehensiveincome. These amounts are reclassified into earnings in the same period orperiods during which the hedged forecasted debt interest settlement or the fuelsettlement affects earnings. The amount expected to be reclassified intoearnings during the next 12 months includes unrealized gains and losses relatedto open fuel hedges and interest rate swaps. Specifically, as the underlyingforecasted transactions occur during the next 12 months, the hedging gains andlosses in accumulated other comprehensive income expected to be recognized inearnings is a loss of $21.2 million, net of tax, at September 30, 2010.The amounts that are ultimately reclassified into earnings will be based onactual interest rates and fuel prices at the time the positions are settled andmay differ materially from the amount noted above.

 

20

----

Table of Contents

 

**Note18. Condensed Consolidating Financial Statements of The ServiceMaster Companyand Subsidiaries**

 

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

 

Thepayment obligations of the Company under the Permanent Notes are jointly andseverally guaranteed on a senior unsecured basis by certain of the Company’sdomestic subsidiaries excluding certain subsidiaries subject to regulatoryrequirements in various states (“Guarantors”). Each of the Guarantors is whollyowned, directly or indirectly, by the Company, and all guarantees are full andunconditional. All other subsidiaries of the Company, either directly orindirectly owned, do not guarantee the Permanent Notes (“Non-Guarantors”).

 

21

----

Table of Contents

 

**THE SERVICEMASTER COMPANY AND SUBSIDIARIES**

**Condensed Consolidating Statement of Operations**

**For the Three Months Ended September 30, 2010 (Unaudited)**

**(In thousands)**

 
| ** **                                                            | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                            | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                            | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating Revenue**                                                 |       | $                 | —     |           | $          | 758,593        |       | $                | 224,864    |             | $          | (6,197 | ) | $ | 977,260 |   |
|                                                                  |       |              |       |           |       |           |       |             |       |             |       |
| **Operating Costs and Expenses:**                                     |       |              |       |           |       |           |       |             |       |             |       |
| Cost of services rendered and products sold                           |       | —            |       | 457,808        |       | 109,421        |       | (5,993           | )          | 561,236          |       |
| Selling and administrative expenses                                   |       | 2,464             |       | 164,497        |       | 99,913         |       | (80              | )          | 266,794          |       |
| Amortization expense                                                  |       | 56                |       | 21,848         |       | 8,964          |       | —           |       | 30,868           |       |
| Restructuring and Merger related charges                              |       | 44                |       | 1,944          |       | (298           | )          | —           |       | 1,690            |       |
| Total operating costs and expenses                                    |       | 2,564             |       | 646,097        |       | 218,000        |       | (6,073           | )          | 860,588          |       |
|                                                                  |       |              |       |           |       |           |       |             |       |             |       |
| **Operating (Loss) Income**                                           |       | (2,564            | )          | 112,496        |       | 6,864          |       | (124             | )          | 116,672          |       |
|                                                                  |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating Expense (Income):**                                   |       |              |       |           |       |           |       |             |       |             |       |
| Interest expense (income)                                             |       | 48,752            |       | 26,097         |       | (3,458         | )          | (124             | )          | 71,267           |       |
| Interest and net investment (income) loss                             |       | (825              | )          | 2,164          |       | (5,328         | )          | —           |       | (3,989           | )          |
| Other expense                                                         |       | —            |       | —         |       | 209            |       | —           |       | 209              |       |
|                                                                  |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing  Operations before Income Taxes**     |       | (50,491           | )          | 84,235         |       | 15,441         |       | —           |       | 49,185           |       |
| Provision for income taxes                                            |       | 2,567             |       | 22,454         |       | 18,769         |       | —           |       | 43,790           |       |
|                                                                  |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing  Operations**                         |       | (53,058           | )          | 61,781         |       | (3,328         | )          | —           |       | 5,395            |       |
| Income (loss) from discontinued operations,  net of income taxes |       | —            |       | 80             |       | (185           | )          | —           |       | (105             | )          |
| Equity in losses of subsidiaries (net of tax)                         |       | 58,348            |       | (8,864         | )          | —         |       | (49,484          | )          | —           |       |
| **Net Income (Loss)**                                                 |       | $                 | 5,290      |           | $          | 52,997         |       | $                | (3,513     | )                | $          | (49,484 | ) | $ | 5,290 |   |

 

22

----

Table of Contents

 

**THE SERVICEMASTER COMPANY AND SUBSIDIARIES**

**Condensed Consolidating Statement of Operations**

**For the Three Months Ended September 30, 2009(Unaudited)**

**(In thousands)**

** **
| ** **                                                        | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                        | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **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           |       |
| Restructuring and Merger related charges                          |       | 786               |       | 6,349          |       | 1,363          |       | —           |       | 8,498            |       |
| 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                                |       | (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 |   |

 

23

----

Table ofContents

 

**THE SERVICEMASTER COMPANY AND SUBSIDIARIES**

**Condensed Consolidating Statement of Operations**

**For the Nine Months Ended September 30, 2010(Unaudited)**

**(In thousands)**

 
| ** **                                                            | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                            | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                            | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Operating Revenue**                                                 |       | $                 | —     |           | $          | 2,054,342      |       | $                | 607,004    |             | $          | (41,616 | ) | $ | 2,619,730 |   |
|                                                                  |       |              |       |           |       |           |       |             |       |             |       |
| **Operating Costs and Expenses:**                                     |       |              |       |           |       |           |       |             |       |             |       |
| Cost of services rendered and products sold                           |       | —            |       | 1,291,877      |       | 286,872        |       | (41,412          | )          | 1,537,337        |       |
| Selling and administrative expenses                                   |       | 7,004             |       | 426,144        |       | 281,064        |       | (80              | )          | 714,132          |       |
| Amortization expense                                                  |       | 167               |       | 84,700         |       | 26,894         |       | —           |       | 111,761          |       |
| Goodwill and trade name impairment                                    |       | —            |       | 46,884         |       | —         |       | —           |       | 46,884           |       |
| Restructuring and Merger related charges                              |       | 1,180             |       | 8,642          |       | (41            | )          | —           |       | 9,781            |       |
| Total operating costs and expenses                                    |       | 8,351             |       | 1,858,247      |       | 594,789        |       | (41,492          | )          | 2,419,895        |       |
|                                                                  |       |              |       |           |       |           |       |             |       |             |       |
| **Operating (Loss) Income**                                           |       | (8,351            | )          | 196,095        |       | 12,215         |       | (124             | )          | 199,835          |       |
|                                                                  |       |              |       |           |       |           |       |             |       |             |       |
| **Non-operating Expense (Income):**                                   |       |              |       |           |       |           |       |             |       |             |       |
| Interest expense (income)                                             |       | 148,818           |       | 78,282         |       | (9,859         | )          | (124             | )          | 217,117          |       |
| Interest and net investment loss (income)                             |       | 1,344             |       | 4,906          |       | (13,737        | )          | —           |       | (7,487           | )          |
| Other expense                                                         |       | —            |       | —         |       | 556            |       | —           |       | 556              |       |
|                                                                  |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing  Operations before Income Taxes**     |       | (158,513          | )          | 112,907        |       | 35,255         |       | —           |       | (10,351          | )          |
| (Benefit) provision for income taxes                                  |       | (49,875           | )          | 6,446          |       | 47,317         |       | —           |       | 3,888            |       |
|                                                                  |       |              |       |           |       |           |       |             |       |             |       |
| **(Loss) Income from Continuing  Operations**                         |       | (108,638          | )          | 106,461        |       | (12,062        | )          | —           |       | (14,239          | )          |
| Income (loss) from discontinued operations,  net of income taxes |       | —            |       | 415            |       | (1,102         | )          | —           |       | (687             | )          |
| Equity in losses of subsidiaries (net of tax)                         |       | 93,712            |       | (22,449        | )          | —         |       | (71,263          | )          | —           |       |
| **Net (Loss) Income**                                                 |       | $                 | (14,926    | )              | $          | 84,427         |       | $                | (13,164    | )                | $          | (71,263 | ) | $ | (14,926 | ) |

 

24

----

Table of Contents

** **

**THE SERVICEMASTER COMPANY AND SUBSIDIARIES**

**CondensedConsolidating Statement of Operations**

**For the Nine Months Ended September 30, 2009(Unaudited)**

**(In thousands)**

** **
| ** **                                                        | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                        | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **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          |       |
| Restructuring and Merger related charges                          |       | 2,234             |       | 9,449          |       | 11,176         |       | —           |       | 22,859           |       |
| 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 |   |

 

25

----

Table ofContents

 

**THE SERVICEMASTER COMPANY AND SUBSIDIARIES**

**Condensed Consolidating Statement of FinancialPosition (Unaudited)**

**As of September 30, 2010**

**(In thousands)**

** **
| ** **                                                                   | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                   | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Assets**                                                                   |       |              |       |           |       |           |       |             |       |             |       |
| **Current Assets:**                                                          |       |              |       |           |       |           |       |             |       |             |       |
| Cash and cash equivalents                                                    |       | $                 | 39,114     |           | $          | 20,284         |       | $                | 137,642    |             | $          | — |   | $ | 197,040 |   |
| Marketable securities                                                        |       | —            |       | —         |       | 28,127         |       |             |       | 28,127           |       |
| Receivables                                                                  |       | 1,202             |       | 185,959        |       | 459,318        |       | (204,386         | )          | 442,093          |       |
| Inventories                                                                  |       | —            |       | 75,243         |       | 2,569          |       | —           |       | 77,812           |       |
| Prepaid expenses and other assets                                            |       | 3,242             |       | 24,593         |       | 18,185         |       | —           |       | 46,020           |       |
| Deferred customer acquisition costs                                          |       | —            |       | 22,060         |       | 21,061         |       | —           |       | 43,121           |       |
| Deferred taxes                                                               |       | —            |       | 15,988         |       | 1,017          |       | (248             | )          | 16,757           |       |
| Assets of discontinued operations                                            |       | —            |       | —         |       | 10             |       | —           |       | 10               |       |
| Total Current Assets                                                         |       | 43,558            |       | 344,127        |       | 667,929        |       | (204,634         | )          | 850,980          |       |
| **Property and Equipment:**                                                  |       |              |       |           |       |           |       |             |       |             |       |
| At cost                                                                      |       | —            |       | 324,433        |       | 124,549        |       | —           |       | 448,982          |       |
| Less: accumulated depreciation                                               |       | —            |       | (129,944       | )          | (50,178        | )          | —           |       | (180,122         | )          |
| Net property and equipment                                                   |       | —            |       | 194,489        |       | 74,371         |       | —           |       | 268,860          |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Assets:**                                                            |       |              |       |           |       |           |       |             |       |             |       |
| Goodwill                                                                     |       | —            |       | 2,755,130      |       | 364,354        |       | —           |       | 3,119,484        |       |
| Intangible assets, primarily trade names, service  marks and trademarks, net |       | —            |       | 1,921,985      |       | 767,275        |       | —           |       | 2,689,260        |       |
| Notes receivable                                                             |       | 2,012,779         |       | 287            |       | 31,543         |       | (2,020,729       | )          | 23,880           |       |
| Long-term marketable securities                                              |       | 9,984             |       | —         |       | 101,534        |       | —           |       | 111,518          |       |
| Investments in and advances to subsidiaries                                  |       | 3,671,237         |       | 1,493,466      |       | —         |       | (5,164,703       | )          | —           |       |
| Other assets                                                                 |       | 101,555           |       | 4,101          |       | 1,015          |       | (99,577          | )          | 7,094            |       |
| Debt issuance costs                                                          |       | 55,909            |       | —         |       | —         |       | —           |       | 55,909           |       |
| Total Assets                                                                 |       | $                 | 5,895,022  |           | $          | 6,713,585      |       | $                | 2,008,021  |             | $          | (7,489,643 | ) | $ | 7,126,985 |   |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Liabilities and Shareholder’s  Equity**                               |       |              |       |           |       |           |       |             |       |             |       |
| **Current Liabilities:**                                                     |       |              |       |           |       |           |       |             |       |             |       |
| Accounts payable                                                             |       | $                 | 5          |           | $          | 58,269         |       | $                | 40,731     |             | $          | — |   | $ | 99,005 |   |
| Accrued liabilities:                                                         |       |              |       |           |       |           |       |             |       |             |       |
| Payroll and related expenses                                                 |       | 2,211             |       | 58,159         |       | 42,341         |       | —           |       | 102,711          |       |
| Self-insured claims and related expenses                                     |       | —            |       | 21,846         |       | 64,191         |       | —           |       | 86,037           |       |
| Other                                                                        |       | 43,677            |       | 46,867         |       | 49,294         |       | (248             | )          | 139,590          |       |
| Deferred revenue                                                             |       | —            |       | 139,123        |       | 313,628        |       | —           |       | 452,751          |       |
| Liabilities of discontinued operations                                       |       | —            |       | 233            |       | 423            |       | —           |       | 656              |       |
| Current portion of long-term debt                                            |       | 111,382           |       | 13,778         |       | 129,542        |       | (204,386         | )          | 50,316           |       |
| Total Current Liabilities                                                    |       | 157,275           |       | 338,275        |       | 640,150        |       | (204,634         | )          | 931,066          |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Long-Term Debt**                                                           |       | 3,873,749         |       | 2,010,286      |       | 43,596         |       | (2,020,729       | )          | 3,906,902        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Other Long-Term Liabilities:**                                             |       |              |       |           |       |           |       |             |       |             |       |
| Deferred taxes                                                               |       | —            |       | 760,180        |       | 272,053        |       | (99,577          | )          | 932,656          |       |
| Intercompany payable                                                         |       | 610,198           |       | —         |       | 61,804         |       | (672,002         | )          | —           |       |
| Liabilities of discontinued operations                                       |       | —            |       | —         |       | 4,078          |       | —           |       | 4,078            |       |
| Other long-term obligations                                                  |       | 80,236            |       | 1,737          |       | 96,746         |       | —           |       | 178,719          |       |
| Total Other Long-Term Liabilities                                            |       | 690,434           |       | 761,917        |       | 434,681        |       | (771,579         | )          | 1,115,453        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Shareholder’s Equity**                                                |       | 1,173,564         |       | 3,603,107      |       | 889,594        |       | (4,492,701       | )          | 1,173,564        |       |
|                                                                         |       |              |       |           |       |           |       |             |       |             |       |
| **Total Liabilities and  Shareholder’s Equity**                         |       | $                 | 5,895,022  |           | $          | 6,713,585      |       | $                | 2,008,021  |             | $          | (7,489,643 | ) | $ | 7,126,985 |   |

 

26

----

Table ofContents

 

**THE SERVICEMASTER COMPANY AND SUBSIDIARIES**

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

**As of December 31, 2009**

**(In thousands)**

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

 

27

----

Table of Contents

** **

**THE SERVICEMASTER COMPANY AND SUBSIDIARIES**

**Condensed Consolidating Statement of Cash Flows(Unaudited)**

**For the Nine Months Ended September 30, 2010**

**(In thousands)**

 
| ** **                                                                                  | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                  | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                  | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash and Cash Equivalents at  Beginning of Period**                                       |       | $                 | 124,674    |           | $          | 15,796         |       | $                | 112,993    |             | $          | — |   | $ | 253,463 |   |
| **Net Cash (Used for) Provided from  Operating Activities from Continuing Operations** |       | (111,085          | )          | 290,685        |       | (9,005         | )          | (51,356          | )          | 119,239          |       |
|                                                                                        |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Investing  Activities from Continuing Operations:**                       |       |              |       |           |       |           |       |             |       |             |       |
| Property additions                                                                          |       | —            |       | (61,778        | )          | (43,514        | )          | —           |       | (105,292         | )          |
| Sale of equipment and other assets                                                          |       | —            |       | 1,426          |       | 132            |       | —           |       | 1,558            |       |
| Acquisition of The ServiceMaster Company                                                    |       | (2,219            | )          | —         |       | —         |       | —           |       | (2,219           | )          |
| Other business acquisitions, net of cash acquired                                           |       | —            |       | (52,276        | )          | (212           | )          | —           |       | (52,488          | )          |
| Notes receivable, financial investments and  securities, net                                |       | 22,012            |       | —         |       | (1,058         | )          | —           |       | 20,954           |       |
| **Net Cash Used for Investing  Activities from Continuing Operations**                      |       | 19,793            |       | (112,628       | )          | (44,652        | )          | —           |       | (137,487         | )          |
|                                                                                        |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Financing  Activities from Continuing Operations:**                       |       |              |       |           |       |           |       |             |       |             |       |
| Borrowings of debt                                                                          |       | 5,000             |       | —         |       | 10,000         |       | —           |       | 15,000           |       |
| Payments of debt                                                                            |       | (25,438           | )          | (10,918        | )          | (13,441        | )          | —           |       | (49,797          | )          |
| Debt issuance costs paid                                                                    |       | —            |       | —         |       | (30            | )          | —           |       | (30              | )          |
| Shareholders’ dividends                                                                |       | —            |       | (25,678        | )          | (25,678        | )          | 51,356           |       | —           |       |
| Net intercompany advances                                                                   |       | 26,170            |       | (136,973       | )          | 110,803        |       | —           |       | —           |       |
| **Net Cash Provided from (Used for)  Financing Activities from Continuing Operations** |       | 5,732             |       | (173,569       | )          | 81,654         |       | 51,356           |       | (34,827          | )          |
|                                                                                        |       |              |       |           |       |           |       |             |       |             |       |
| **Cash Flows from Discontinued  Operations:**                                               |       |              |       |           |       |           |       |             |       |             |       |
| Cash used for operating activities                                                          |       | —            |       | —         |       | (3,348         | )          | —           |       | (3,348           | )          |
| **Net Cash Used for Discontinued  Operations**                                              |       | —            |       | —         |       | (3,348         | )          | —           |       | (3,348           | )          |
| **Cash (Decrease) Increase During  the Period**                                             |       | (85,560           | )          | 4,488          |       | 24,649         |       | —           |       | (56,423          | )          |
|                                                                                        |       |              |       |           |       |           |       |             |       |             |       |
| **Cash and Cash Equivalents at End  of Period**                                             |       | $                 | 39,114     |           | $          | 20,284         |       | $                | 137,642    |             | $          | — |   | $ | 197,040 |   |

 

28

----

Tableof Contents

 

**THESERVICEMASTER COMPANY AND SUBSIDIARIES**

**Condensed Consolidating Statement of Cash Flows(Unaudited)**

**For the Nine Months Ended September 30, 2009**

**(In thousands)**

 
| ** **                                                                                  | ** ** | **The**           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                  | ** ** | **ServiceMaster** | ** ** | ** **     | ** ** | **Non-**       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                  | ** ** | **Company**       | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Cash and Cash Equivalents at  Beginning of Period**                                       |       | $                 | 300,362    |           | $          | 12,105         |       | $                | 93,120     |             | $          | — |   | $ | 405,587 |   |
| **Net Cash (Used for) Provided from  Operating Activities from Continuing Operations** |       | (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         | )          |
| Debt issuance costs paid                                                                    |       | (410              | )          | —         |       | —         |       | —           |       | (410             | )          |
| Shareholders’ dividends                                                                |       | —            |       | (21,817        | )          | (21,817        | )          | 43,634           |       | —           |       |
| 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 |   |

 

29

----

Tableof Contents

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

**Merger Agreement**

 

On March 18, 2007, ServiceMaster entered into the Merger Agreementwith Holdings and Acquisition Co., and the Merger was completed onJuly 24, 2007. Immediately following the completion of the Merger, all ofthe outstanding capital stock of Holdings, the ultimate parent company ofServiceMaster, was owned by investment funds sponsored by, or affiliated with,the Equity Sponsors.

 

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

 

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

 

**Results of Operations**

 

**Third Quarter 2010 Compared to 2009**

 

The Company reported third quarter 2010 revenue of $977.3 million, a$56.7 million, or 6.2 percent, increase compared to 2009. The revenue increase wasdriven by the results of our business units as described in “Segment Reviewsfor the Third Quarter 2010 Compared to 2009”.

 

Operating income was $116.7 million for the third quarter of 2010compared to $94.8 million for the third quarter of 2009. Income from continuingoperations before income taxes was $49.2 million for the third quarter of 2010compared to $25.0 million for the third quarter of 2009. The increase in incomefrom continuing operations before income taxes of $24.2 million reflects the neteffect of:

 
| **(In millions)**                      | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| Non-cash purchase accounting adjustments(1) |       | $          | 10.2       |   |
| Interest expense(2)                         |       | 2.9        |       |
| Interest and net investment income(3)       |       | (0.6       | )          |
| Restructuring and Merger related charges(4) |       | 6.8        |       |
| Management and consulting fees(5)           |       | 2.8        |       |
| Residual value guarantee charge(6)          |       | 1.3        |       |
| Key executive separation charges(7)         |       | (5.0       | )          |
| Segment results(8)                          |       | 5.8        |       |
|                                        |       | $          | 24.2       |   |

 

----

(1)                                 Consistsprimarily of decreased amortization of intangible assets as a result of certainfinite lived intangible assets being fully amortized as of July 24, 2010.

 

(2)                                 Represents adecrease in interest expense as a result of decreases in our weighted averageinterest rates and average long-term debt balances as compared to the thirdquarter of 2009.

 

30

----

Table ofContents

 

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

 

(4)                                 Represents(i) a decrease in restructuring charges related to a reorganization offield leadership and a restructuring of branch operations at TruGreen LawnCareand (ii) a decrease in Merger related charges.

 

(5)                                  Representsmanagement and consulting fees payable to certain related parties. A managementfee is payable to CD&R pursuant to a consulting agreement under whichCD&R provides the Company with on-going consulting and management advisoryservices in exchange for an annual management fee of $6.25 million, whichis payable quarterly. On July 30, 2009, the annual management fee payableunder the consulting agreement with CD&R was increased from$2.0 million to $6.25 million in order to align the fee structurewith current market rates. Under this agreement, the Company recorded a managementfee of $1.6 million and $3.7 million for the third quarter of 2010 and 2009,respectively. The full year management fee was applied in 2009, and theincremental fees relating to the first three quarters of 2009 were recorded andpaid to CD&R in the third quarter of 2009.

 

In addition, in August 2009, the Companyentered into consulting agreements with Citigroup, BAS and JPMorgan, each ofwhich is an Equity Sponsor or an affiliate of an Equity Sponsor. Under theconsulting agreements, Citigroup, BAS and JPMorgan each provide the Companywith on-going consulting and management advisory services through September 30,2016 or the earlier termination of the existing consulting agreement betweenthe Company and CD&R. The Company pays annual management fees of$0.5 million, $0.5 million and $0.25 million to Citigroup, BASand JPMorgan, respectively. The Company recorded consulting fees related tothese agreements of $0.3 million and $0.9 million for the third quarter of 2010and 2009, respectively. The full year management fee was applied in 2009, andthe incremental fees relating to the first three quarters of 2009 were recordedand paid to Citigroup, BAS and JPMorgan in the third quarter of 2009.****On September 30, 2010, Citigroup transferred themanagement responsibility for, and its proprietary interests in, certaininvestment funds that own shares of common stock of Holdings to StepStone GroupLLC (“StepStone”) and Lexington Partners Advisors LP. Citigroup also assignedits obligations and rights under the consulting agreement to StepStone, and beginningin the fourth quarter of 2010, the consulting fee otherwise payable toCitigroup will be paid to StepStone.

 

(6)                                  Represents a decrease inresidual value guarantee charges related to a synthetic lease for operatingproperties that did not result in additional cash payments to exit the facilityat the end of the lease term in July 2010. In the third quarter of 2009,the Company determined that it was probable that the fair value of the realproperties under operating leases would be below the total amount funded underthe lease facilities at the end of the lease term. The Company’s estimate ofthis shortfall was $15.9 million, which was expensed over the remainder of thelease term. The Company recorded charges of $1.4 million and $2.7 million inthe three months ended September 30, 2010 and 2009, respectively, relatedto this shortfall.

 

(7)                                 Represents key executiveseparation charges recorded in the third quarter of 2010 related to the pendingretirement of our Chief Executive Officer and the resignation of the Presidentof TruGreen LandCare.

 

(8)                                 Represents anet increase in income from continuing operations before income taxes, non-cashpurchase accounting charges, interest expense, interest and net investmentincome, restructuring and Merger related charges, management and consultingfees, residual value guarantee charge and key executive separation charges,reflecting the improvement in results at Terminix, American Home Shield andServiceMaster Clean, offset, in part, by the decline in results at TruGreenLandCare, TruGreen LawnCare and Other Operations and Headquarters as describedin “Segment Reviews for the Third Quarter 2010 Compared to 2009”.

 

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

 

The Company reported cost of services rendered and products sold of$561.2 million for the third quarter of 2010 compared to $527.4 million for thethird quarter of 2009. As a percentage of revenue, these costs increased to57.4 percent for the third quarter of 2010 from 57.3 percent for the thirdquarter of 2009. This percentage increase primarily reflects increased contractclaims costs at American Home Shield, decreased labor efficiencies at TruGreenLandCare and increased costs related to ongoing initiatives at TruGreenLawnCare to transform our branch operations and to improve customer service,offset, in part, by, reduced fertilizer costs and residual value guaranteecharges at TruGreen LawnCare and reduced fuel costs.

 

TheCompany reported selling and administrative expenses of $266.8 million for thethird quarter of 2010 compared to $249.3 million for the third quarter of 2009.As a percentage of revenue, these costs increased to 27.3 percent for the thirdquarter of 2010 from 27.1 percent for the third quarter of 2009. Thispercentage increase primarily reflects investments in sales and marketing,increased provisions for incentive compensation, key executive separationcharges of $5.0 million recorded in the third quarter of 2010 related to thepending retirement of our Chief Executive Officer and the resignation of thePresident of TruGreen LandCare and increases in spending in the Company’sheadquarters functions to enhance capabilities in our centers of excellence andon initiatives 

 

31

----

Table ofContents

 

designedto improve the performance of our operating segments, offset, in part, bydecreased management and consulting fees payable to the Equity Sponsors due tothe timing of fees recognized in 2009.

 

Amortization expense was $30.9 million for the third quarter of 2010compared to $40.4 million for the third quarter of 2009. The decrease is aresult of certain finite lived intangible assets being fully amortized as of July 24,2010.

 

Non-operating expense totaled $67.5 million for the third quarter of2010 compared to $69.8 million for the third quarter of 2009. This decreaseincludes a $2.9 million decrease in interest expense resulting from decreasesin our weighted average interest rates and average long-term debt balances, offset,in part, by a $0.6 million decrease in interest and net investment income.Interest and net investment income was comprised of the following for the thirdquarter of 2010 and 2009:

 
| ** **                         | ** ** | **Three months ended  September 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| **(In thousands)**            | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Realized gains(1)                  |       | $                                                    | 2,016      |   | $ | 2,763 |   |
| Deferred compensation trust(2)     |       | 884                                                  |       | 1,168 |   |
| Other(3)                           |       | 1,089                                                |       | 627 |   |
| Interest and net investment income |       | $                                                    | 3,989      |   | $ | 4,558 |   |

 

----

(1)                                 Represents thenet investment gains and the interest and dividend income realized on the AmericanHome Shield investment portfolio.

 

(2)                                 Representsinvestment income resulting from a change in the market value of investmentswithin an employee deferred compensation trust (for which there is acorresponding and offsetting change in compensation expense within income fromcontinuing operations before income taxes).

 

(3)                                 Representsinterest income on other cash balances.

 

The effective tax rate on income from continuing operations was aprovision of 89.0 percent for the third quarter of 2010 compared to a provisionof 16.4 percent for the third quarter of 2009. The change in the effective rateis primarily due to a decrease in the state tax rates in 2009 applied tocumulative deferred taxes; an increase in unfavorable permanent book to taxdifferences from 2009 to 2010; and recording the impact of an adjustment to theCompany’s 2010 forecasted annual effective tax rate during the third quarter of2010.

 

***Restructuring and Merger Related Charges***

 

TheCompany incurred restructuring and Merger related charges of $1.7 million and$8.5 million for the third quarter of 2010 and 2009, respectively.Restructuring and Merger related charges were comprised of the following:

 
| ** **                                                                | ** ** | **Three months ended****September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **(In thousands)**                                                   | ** ** | **2010**                                               | ** ** | **2009** | ** ** |
| TruGreen LawnCare reorganization and restructuring(1) | ** ** | $                                                      | 695        |   | $ | 5,951 | ** ** |
| Merger related charges(2)                                                 |       | 44                                                     |       | 786 |   |
| Other(3)                                                                  |       | 951                                                    |       | 1,761 |   |
| Total restructuring and  Merger related charges                           |       | $                                                      | 1,690      |   | $ | 8,498 |   |

 

----

(1)                                  Representsrestructuring charges related to a reorganization of field leadership and arestructuring of branch operations. For the third quarter of 2010, these costsincluded consulting fees of $0.7 million. For the third quarter of 2009, thesecosts included consulting fees of $4.1 million and severance, lease terminationand other costs of $1.9 million. In connection with the restructuring of branchoperations, we expect to incur cash charges through the second quarter of 2011primarily related to consulting fees. Such charges are expected to amount to anadditional $0.7 million, pre-tax, and will be recorded as restructuring chargesin the condensed consolidated statement of operations as incurred.

 

(2)                                  Includes legalfees and other costs associated with the Merger.

 

(3)                                  For the threemonths ended September 30, 2010, these costs included adjustments to leasetermination reserves related to previous restructuring initiatives of $1.2million and a net reversal of consulting and other costs of $0.2 million. Forthe three months ended September 30, 2009, these costs includedadjustments to lease termination reserves related to previous restructuringinitiatives of $0.4 million and consulting and other costs of $1.4 million.

 

32

----

Table of Contents

** **

**KeyPerformance Indicators**

 

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

 
| ** **                                   | ** ** | **Key Performance Indicators  as of September 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2010**                                                                     | ** ** | **2009** | ** ** |
| **TruGreen LawnCare—**                  |       |                                                                         |       |   |   |
| Growth in Full Program Accounts              |       | 1                                                                            | %          | 0 | % |
| Customer Retention Rate                      |       | 69.5                                                                         | %          | 69.2 | % |
| **Terminix(a)—**                        |       |                                                                         |       |   |   |
| Growth in Pest Control Customers             |       | 5                                                                            | %          | 1 | % |
| Pest Control Customer Retention Rate         |       | 80.4                                                                         | %          | 77.9 | % |
| Growth (Reduction) in Termite Customers      |       | 0                                                                            | %          | (1 | )% |
| Termite Customer Retention Rate              |       | 86.0                                                                         | %          | 85.8 | % |
| **American Home Shield—**               |       |                                                                         |       |   |   |
| Growth (Reduction) in Home Service Contracts |       | 3                                                                            | %          | (2 | )% |
| Customer Retention Rate                      |       | 66.3                                                                         | %          | 63.3 | % |

 

----

(a)                                  2010 pest control customercount growth excluding the impact of the Antimite Termite and Pest Control acquisitioncompleted in the third quarter of 2010 was 3%. The pest control customerretention rate in 2010 excluding the impact of the Antimite Termite and PestControl acquisition was 80.1%.

 

**Segment Reviews for the Third Quarter 2010 Compared to2009**

 

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. Theoperating income, EBITDA, Adjusted EBITDA, and Comparable Operating Performancefor each reportable segment have been revised to reflect the Company’s revisedmethodology for the allocation of general corporate overhead expenses for allperiods presented. See Note 14 to the condensed consolidated financialstatements for further information.

 

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 accordance with,GAAP. Adjusted EBITDA and Comparable Operating Performance are not measurementsof the Company’s financial performance under GAAP and should not be consideredas alternatives to net income or any other performance measures derived inaccordance with GAAP or as alternatives to net cash provided by operatingactivities or any other measures of the Company’s cash flow or liquidity. “AdjustedEBITDA” means net income (loss) before net income (loss) from discontinuedoperations; provision (benefit) for income taxes; other expense; gain onextinguishment of debt; interest expense and interest and net investment loss(income); and depreciation and amortization expense; as well as adding backinterest and net investment loss (income), residual value guarantee charge andnon-cash goodwill and trade name impairment. “Comparable Operating Performance”is calculated by adding back to Adjusted EBITDA an amount equal to the non-cashstock-based compensation expense and non-cash effects on Adjusted EBITDAattributable to the application of purchase accounting in connection with theMerger.

 

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. In addition,the Company excludes residual value guarantee charges that do not result inadditional cash payments to exit the facility at the end of the lease term. TheCompany uses Comparable Operating Performance as a supplemental measure toassess the Company’s performance because it excludes non-cash stock-basedcompensation expense and non-cash effects on Adjusted EBITDA attributable tothe application of purchase accounting in connection with the Merger. TheCompany presents Comparable Operating Performance because it believes that itis useful for investors, analysts and other interested parties in theiranalysis of the Company’s operating results.

 

TheCompany believes Comparable Operating Performance, which excludes the impact ofpurchase accounting and non-cash stock-based compensation expense adjustments,is useful to investors. The exclusion of the impact of these items facilitatesa 

 

33

----

Table ofContents

 

comparisonof operating results from periods pre-dating the Merger transaction with theEquity Sponsors with periods subsequent to the Merger. The purchase accountingcharges were not present prior to the Merger. In addition, charges relating tonon-cash stock- based compensation expense prior to the Merger were computedunder different plans and formulas than charges subsequent to the Merger.Moreover, such charges are non-cash and the exclusion of the impact of theseitems from Comparable Operating Performance allows investors to understand thecurrent period results of operations of the business on a comparable basis withprevious periods and, secondarily, gives the investors added insight into cashearnings available to service the Company’s debt. We believe this to be ofparticular importance to the Company’s public investors, which are debtholders. The Company also believes that the exclusion of the impact of purchaseaccounting and non-cash stock-based compensation expense may provide anadditional means for comparing the Company’s performance to the performance ofother companies by eliminating the impact of differently structuredequity-based long-term incentive plans (although care must be taken in makingany such comparison, as there may be inconsistencies among companies in themanner 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 OperatingPerformance does not include the impact of purchase accounting and non-cashstock-based compensation expense, the latter exclusion may cause the overallcompensation cost of the business to be understated.

 

34

----

Table ofContents

 

Operating revenues and Comparable Operating Performance by operatingsegment are as follows:

 
| ** **                                                   | ** ** | **Three months ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(In thousands)**                                      | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Operating Revenue:                                           |       |                                                 |       |   |   |
| TruGreen LawnCare                                            |       | $                                                    | 371,298    |   | $ | 351,830 |   |
| TruGreen LandCare                                            |       | 58,278                                               |       | 63,244 |   |
| Terminix                                                     |       | 295,172                                              |       | 272,598 |   |
| American Home Shield                                         |       | 196,913                                              |       | 179,617 |   |
| ServiceMaster Clean                                          |       | 34,041                                               |       | 32,132 |   |
| Other Operations and Headquarters                            |       | 21,558                                               |       | 21,093 |   |
| Total Operating Revenue                                      |       | $                                                    | 977,260    |   | $ | 920,514 |   |
| Comparable Operating Performance:                            |       |                                                 |       |   |   |
| TruGreen LawnCare                                            |       | $                                                    | 80,290     |   | $ | 75,673 |   |
| TruGreen LandCare                                            |       | (2,383                                               | )          | 2,754 |   |
| Terminix                                                     |       | 62,328                                               |       | 53,241 |   |
| American Home Shield                                         |       | 41,276                                               |       | 37,438 |   |
| ServiceMaster Clean                                          |       | 15,533                                               |       | 15,056 |   |
| Other Operations and Headquarters                            |       | (24,492                                              | )          | (23,563 | ) |
| Total Comparable Operating Performance                       |       | $                                                    | 172,552    |   | $ | 160,599 |   |
|                                                         |       |                                                 |       |   |   |
| Memo: Items included in Comparable Operating  Performance:   |       |                                                 |       |   |   |
| Restructuring and Merger related charges(1)                  |       | $                                                    | 1,690      |   | $ | 8,498 |   |
| Management and consulting fees(2)                            |       | $                                                    | 1,875      |   | $ | 4,625 |   |
|                                                         |       |                                                 |       |   |   |
| Memo: Items excluded from Comparable Operating  Performance: |       |                                                 |       |   |   |
| Comparable Operating Performance of Discontinued  Operations |       | $                                                    | (227       | ) | $ | (609 | ) |

 

----

(1)                                 Represents(i) restructuring charges related to a reorganization of field leadershipand a restructuring of branch operations at TruGreen LawnCare and(ii) Merger related charges.

 

(2)                                 Represents management andconsulting fees payable to certain related parties. See Note 15 to thecondensed consolidated financial statements for further information on managementand consulting fees.

 

35

----

Table ofContents

 

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

 
| **(in thousands)**                                            | ** ** | **TruGreen  LawnCare** | ** ** | **TruGreen  LandCare** | ** ** | **Terminix** | ** ** | **American  Home  Shield** | ** ** | **Service********Master  Clean** | ** ** | **Other  Operations  and  Headquarters** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------|------------|----------------------------|------------|----------------------------------|------------|------------------------------------------|------------|------------|------------|
| **Three Months Ended September 30, 2010** | ** ** | ** **             | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                 | ** ** | ** **                       | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Operating  income (loss)(1)                                        |       | $                      | 66,730     |                   | $          | (5,138       | )          | $                          | 44,979     |                             | $          | 28,777                                   |       | $          | 13,464     |   | $ | (32,140 | ) | $ | 116,672 |   |
| Depreciation  and amortization expense                             |       | 12,332                 |       | 2,909                  |       | 17,388       |       | 10,577                     |       | 1,790                            |       | 3,271                                    |       | 48,267     |       |
| EBITDA                                                             |       | 79,062                 |       | (2,229                 | )          | 62,367       |       | 39,354                     |       | 15,254                           |       | (28,869                                  | )          | 164,939    |       |
| Interest  and net investment income (2)                            |       | —                 |       | —                 |       | —       |       | 2,016                      |       | 153                              |       | 1,820                                    |       | 3,989      |       |
| Residual  value guarantee charge(3)                                |       | 1,240                  |       | —                 |       | —       |       | —                     |       | 126                              |       | 32                                       |       | 1,398      |       |
| Adjusted  EBITDA                                                   |       | 80,302                 |       | (2,229                 | )          | 62,367       |       | 41,370                     |       | 15,533                           |       | (27,017                                  | )          | 170,326    |       |
| Non-cash  stock-based compensation expense                         |       | —                 |       | —                 |       | —       |       | —                     |       | —                           |       | 2,525                                    |       | 2,525      |       |
| Non-cash  (credits) attributable to purchase accounting(4)    |       | (12                    | )          | (154                   | )          | (39          | )          | (94                        | )          | —                           |       | —                                   |       | (299       | )          |
| Comparable  Operating Performance                                  |       | $                      | 80,290     |                   | $          | (2,383       | )          | $                          | 62,328     |                             | $          | 41,276                                   |       | $          | 15,533     |   | $ | (24,492 | ) | $ | 172,552 |   |
| Memo:  Items included in Comparable Operating Performance          |       |                   |       |                   |       |         |       |                       |       |                             |       |                                     |       |       |       |
| Restructuring  and Merger related charges (credits)(5)             |       | $                      | 695        |                   | $          | 127          |       | $                          | 1,061      |                             | $          | —                                   |       | $          | 61         |   | $ | (254 | ) | $ | 1,690 |   |
| Management  and consulting fees(6)                                 |       | $                      | —     |                   | $          | —       |       | $                          | —     |                             | $          | —                                   |       | $          | —     |   | $ | 1,875 |   | $ | 1,875 |   |
| Memo:  Items excluded from Comparable Operating Performance        |       |                   |       |                   |       |         |       |                       |       |                             |       |                                     |       |       |       |
| Comparable  Operating Performance of Discontinued Operations(7)    |       | $                      | —     |                   | $          | —       |       | $                          | —     |                             | $          | —                                   |       | $          | —     |   | $ | (227 | ) | $ | (227 | ) |
|                                                               |       |                   |       |                   |       |         |       |                       |       |                             |       |                                     |       |       |       |
| **Three Months Ended September 30, 2009**                     |       |                   |       |                   |       |         |       |                       |       |                             |       |                                     |       |       |       |
| Operating  income (loss)(1)                                        |       | $                      | 51,373     |                   | $          | 27           |       | $                          | 37,490     |                             | $          | 24,279                                   |       | $          | 12,549     |   | $ | (30,878 | ) | $ | 94,840 |   |
| Depreciation  and amortization expense                             |       | 21,965                 |       | 2,890                  |       | 15,850       |       | 10,387                     |       | 2,069                            |       | 3,499                                    |       | 56,660     |       |
| EBITDA                                                             |       | 73,338                 |       | 2,917                  |       | 53,340       |       | 34,666                     |       | 14,618                           |       | (27,379                                  | )          | 151,500    |       |
| Interest  and net investment income(2)                             |       | —                 |       | —                 |       | —       |       | 2,762                      |       | 144                              |       | 1,652                                    |       | 4,558      |       |
| Residual  value guarantee charge(3)                                |       | 2,363                  |       | —                 |       | —       |       | —                     |       | 294                              |       | 73                                       |       | 2,730      |       |
| Adjusted  EBITDA                                                   |       | 75,701                 |       | 2,917                  |       | 53,340       |       | 37,428                     |       | 15,056                           |       | (25,654                                  | )          | 158,788    |       |
| Non-cash  stock-based compensation expense                         |       | —                 |       | —                 |       | —       |       | —                     |       | —                           |       | 2,091                                    |       | 2,091      |       |
| Non-cash  (credits) charges attributable to purchase accounting(4) |       | (28                    | )          | (163                   | )          | (99          | )          | 10                         |       | —                           |       | —                                   |       | (280       | )          |
| Comparable  Operating Performance                                  |       | $                      | 75,673     |                   | $          | 2,754        |       | $                          | 53,241     |                             | $          | 37,438                                   |       | $          | 15,056     |   | $ | (23,563 | ) | $ | 160,599 |   |
| Memo:  Items included in Comparable Operating Performance          |       |                   |       |                   |       |         |       |                       |       |                             |       |                                     |       |       |       |
| Restructuring  and Merger related charges(5)                       |       | $                      | 5,951      |                   | $          | 184          |       | $                          | 214        |                             | $          | 30                                       |       | $          | —     |   | $ | 2,119 |   | $ | 8,498 |   |
| Management  and consulting fees(6)                                 |       | $                      | —     |                   | $          | —       |       | $                          | —     |                             | $          | —                                   |       | $          | —     |   | $ | 4,625 |   | $ | 4,625 |   |
| Memo:  Items excluded from Comparable Operating Performance        |       |                   |       |                   |       |         |       |                       |       |                             |       |                                     |       |       |       |
| Comparable  Operating Performance of Discontinued Operations(7)    |       | $                      | —     |                   | $          | —       |       | $                          | —     |                             | $          | —                                   |       | $          | —     |   | $ | (609 | ) | $ | (609 | ) |

 

36

----

Table ofContents

 

----

(1)                                  Presented belowis a reconciliation of total segment operating income to net income.

 
| ** **                                              | ** ** | **Three months ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Total Segment Operating Income                          |       | $                                                    | 116,672    |   | $ | 94,840 |   |
| Non-operating Expense (Income):                         |       |                                                 |       |   |   |
| Interest expense                                        |       | 71,267                                               |       | 74,216 |   |
| Interest and net investment income                      |       | (3,989                                               | )          | (4,558 | ) |
| Other expense                                           |       | 209                                                  |       | 176 |   |
| Income from Continuing Operations before Income  Taxes  |       | 49,185                                               |       | 25,006 |   |
| Provision for income taxes                              |       | 43,790                                               |       | 4,102 |   |
| Income from Continuing Operations                       |       | 5,395                                                |       | 20,904 |   |
| Loss from discontinued operations, net of income  taxes |       | (105                                                 | )          | (396 | ) |
| Net Income                                              |       | $                                                    | 5,290      |   | $ | 20,508 |   |

 

(2)                                 Interest and net investmentincome is primarily comprised of investment income and realized gain (loss) onour American Home Shield segment investment portfolio. Cash, short-term andlong-term marketable securities associated with regulatory requirements inconnection with American Home Shield and for other purposes totaled $296.0million as of September 30, 2010. American Home Shield interest and netinvestment income was $2.0 million and $2.8 million for the third quarter of2010 and 2009, respectively. The balance of interest and net investment incomeprimarily relates to (i) investment income (loss) from our employeedeferred compensation trust (for which there is a corresponding and offsettingchange in compensation expense within income from continuing operations beforeincome taxes) and (ii) interest income on other cash balances.

 

(3)                                  Represents residual valueguarantee charges related to a synthetic lease for operating properties thatdid not result in additional cash payments to exit the facility at the end ofthe lease term in July 2010. In the third quarter of 2009, the Companydetermined that it was probable that the fair value of the real propertiesunder operating leases would be below the total amount funded under the leasefacilities at the end of the lease term. The Company’s estimate of thisshortfall was $15.9 million, which was expensed over the remainder of the leaseterm. The Company recorded charges of $1.4 million and $2.7 million in thethree months ended September 30, 2010 and 2009, respectively, related tothis shortfall.

 

(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)                                 Represents(i) restructuring charges related to a reorganization of field leadershipand a restructuring of branch operations at TruGreen LawnCare and(ii) Merger related charges.

 

(6)                                 Represents management andconsulting fees payable to certain related parties. See Note 15 to thecondensed consolidated financial statements for further information onmanagement and consulting fees.

 

(7)                                 There are no adjustmentsnecessary to reconcile operating loss from discontinued operations, the mostdirectly comparable financial measure under GAAP, to Adjusted EBITDA orComparable Operating Performance from discontinued operations for the thirdquarter of 2010 and 2009.

 

***TruGreen LawnCareSegment***

 

TheTruGreen LawnCare segment, which includes lawn, tree and shrub care services,reported a 5.5 percent increase in revenue, a 29.9 percent increase inoperating income and a 6.1 percent improvement in Comparable OperatingPerformance for the third quarter of 2010 compared to 2009. The revenue resultsreflect a 1.3 percent increase in customer counts, higher sales of expandedservices to existing customers, lower discounts and improved price realization.The increase in customer counts was driven by an increase in new unit salesgenerated in our neighborhood selling channel and the contribution ofacquisitions.

 

TruGreenLawnCare’s Comparable Operating Performance improved $4.6 million for the thirdquarter of 2010 compared to 2009. In addition to the favorable impact ofincreased revenue, TruGreen LawnCare’s improved Comparable OperatingPerformance reflects a $5.3 million decrease in restructuring charges andreduced fuel and fertilizer costs, offset, in part, by investments in sales andmarketing and increased costs related to our ongoing initiatives to transformour branch operations and to improve customer service.

 

37

----

Table of Contents

*** ***

***TruGreen LandCare Segment***

 

The TruGreen LandCare segment, which includes landscape maintenanceservices, reported a 7.9 percent decrease in revenue, a $5.2 million decreasein operating income and a 186.5 percent decline in Comparable OperatingPerformance for the third quarter of 2010 compared to 2009. The decrease inrevenue included a 9.0 percent decrease in base contract maintenance revenueand an 8.3 percent decrease in enhancement revenue. Revenue trends wereprimarily impacted by contract cancellations and pricing concessions granted in2009 and 2010 in response to the impacts of a difficult economic environment.However, the ratio of enhancement revenue to base contract maintenance revenuefor the third quarter of 2010 increased 33 basis points as compared to 2009.

 

TruGreen LandCare’s Comparable Operating Performance declined $5.1million for the third quarter of 2010 compared to 2009. In addition to theunfavorable impact of decreased revenue, TruGreen LandCare’s decline inComparable Operating Performance reflects decreased labor efficiencies resultingfrom increased technician overtime and key executive separation charges,offset, in part, by reduced fuel costs. The Company is exploring strategicoptions relating to TruGreen LandCare, including the potential sale of thebusiness.

 

***Terminix Segment***

 

The Terminix segment, which includes termite and pest control servicesand the distribution of pest control products, reported an 8.3 percent increasein revenue, a 20.0 percent increase in operating income and a 17.1 percentimprovement in Comparable Operating Performance for the third quarter of 2010compared to 2009. The segment’s overall revenue results reflected growth intermite and pest control revenues, as well as increased product distributionrevenue of $6.2 million. Termite revenues increased 4.8 percent for the thirdquarter of 2010 compared to 2009, due to an increase in new unit sales, thecontribution of acquisitions and a 20 basis point improvement in the customerretention rate. Pest control revenues increased 7.2 percent for the third quarterof 2010 compared to 2009, reflecting a 5.0 percent increase in customer countsdue to an increase in new unit sales, the contribution of acquisitions and a250 basis point improvement in the customer retention rate. In the thirdquarter of 2010, Terminix acquired the assets of Antimite Termite and PestControl, a company with annual revenues of approximately $30 million.

 

Terminix’s Comparable Operating Performance improved $9.1 million forthe third quarter of 2010 compared to 2009. In addition to the favorable impactof increased revenue, Terminix’s Comparable Operating Performance reflectsreduced fuel costs, the favorable impact of acquiring assets in connection withexiting certain fleet leases, and favorable termite damage claims trends,offset, in part, by investments in sales and marketing, increased provisionsfor incentive compensation and an $0.8 million increase in restructuringcharges due to adjustments to lease termination reserves related to previousrestructuring initiatives.

 

***American Home Shield Segment***

 

The American Home Shield segment, which provides home service contractsto consumers that cover heating, ventilation, air conditioning, plumbing andother systems and appliances, reported a 9.6 percent increase in revenue, an18.5 percent increase in operating income and a 10.3 percent improvement inComparable Operating Performance for the third quarter of 2010 compared to2009. The increase in revenue reflects a 3.4 percent increase in customercounts and improved price realization. The increase in customer counts wasdriven by an increase in new unit sales and a 300 basis point improvement incustomer retention. The revenue results for the third quarter of 2010, ascompared to 2009, were also positively impacted by a difference between yearsin the timing of revenue recognition. American Home Shield recognizes revenueover the contract period in proportion to the expected direct costs.

 

American Home Shield’s Comparable Operating Performance improved $3.8million for the third quarter of 2010 compared to 2009. In addition to thefavorable impact of increased revenue, American Home Shields’s ComparableOperating Performance reflects the favorable impact of accelerating sales andmarketing spend earlier in the year as compared to prior year, offset, in part,by a 15.9 percent increase in contract claims costs driven by an increase in thenumber of seasonal contract claims and a $0.7 million reduction in interest andnet investment income from the American Home Shield investment portfolio.

 

***ServiceMaster Clean Segment***

 

The ServiceMaster Clean segment, which provides residential andcommercial disaster restoration and cleaning services through franchiseesprimarily under the ServiceMaster and ServiceMaster Clean brand names, on-sitefurniture repair and restoration services primarily under the Furniture Medicbrand name and home inspection services primarily under the AmeriSpec brandname, reported a 5.9 percent increase in revenue, a 7.3 percent increase inoperating income and a 3.2 percent improvement in Comparable OperatingPerformance for the third quarter of 2010 compared to 2009. Trends in revenuereflect an increase in national janitorial accounts, product sales tofranchisees and other revenues.

 

38

----

Tableof Contents

 

ServiceMaster Clean’s Comparable Operating Performance improved $0.5million for the third quarter of 2010 compared to 2009, primarily reflectingthe favorable impact of increased revenue.

 

***Other Operations and HeadquartersSegment***

 

This segment includes the operations of Merry Maids, SMAC and theCompany’s headquarters functions. The segment reported a 2.2 percent increasein revenue, a 4.1 percent increase in operating loss and a 3.9 percent declinein Comparable Operating Performance for the third quarter of 2010 compared to2009. The Merry Maids operations reported a 2.3 percent increase in revenue, a59.2 percent increase in operating income and a 34.5 percent improvement inComparable Operating Performance for the third quarter of 2010 compared to2009.

 

The segment’s Comparable Operating Performance declined $0.9 millionfor the third quarter of 2010 compared to 2009, which includes key executiveseparation charges of $4.3 million recorded in the third quarter of 2010 andincreases in spending in the Company’s headquarters functions to enhancecapabilities in our centers of excellence and on initiatives designed toimprove the performance of our operating segments. These items were offset, inpart, by a $2.8 million decrease in management and consulting fees payable tothe Equity Sponsors due to the timing of fees recognized in 2009, a $2.4million decrease in restructuring and Merger related charges and a $1.2 millionimprovement in Merry Maid’s Comparable Operating Performance, primarilyreflecting reduced overhead spending and increased labor efficiencies.

 

***Discontinued Operations***

 

The components of loss from discontinued operations, net of incometaxes for the third quarter of 2010 and 2009 are as follows:

 
| ** **                                              | ** ** | **Three months ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Operating loss                                          |       | $                                                    | (227       | ) | $ | (609 | ) |
| Interest expense                                        |       | —                                               |       | — |   |
| Loss from discontinued operations, before income  taxes |       | (227                                                 | )          | (609 | ) |
| Benefit for income taxes                                |       | (122                                                 | )          | (213 | ) |
| Loss from discontinued operations, net of income  taxes |       | $                                                    | (105       | ) | $ | (396 | ) |

 

Thereare no adjustments necessary to reconcile operating loss from discontinuedoperations to Adjusted EBITDA or Comparable Operating Performance fromdiscontinued operations for the third quarter of 2010 and 2009.

 

39

----

Table ofContents

 

**Nine Months Ended September 30, 2010 Compared to 2009**

 

The Company reported revenue of $2,619.7 million for the nine monthsended September 30, 2010, a $96.0 million, or 3.8 percent, increasecompared to 2009. The revenue increase was driven by the results of ourbusiness units as described in “Segment Reviews for the Nine Months Ended September 30,2010 Compared to 2009”.

 

Operating income was $199.8 million for the nine months ended September 30,2010 compared to $241.5 million for the nine months ended September 30,2009. Loss from continuing operations before income taxes was $10.4 million forthe nine months ended September 30, 2010 compared to income fromcontinuing operations before income taxes of $64.7 million for the nine monthsended September 30, 2009. The decrease in income from continuingoperations before income taxes of $75.1 million reflects the net effect of:

 
| **(In millions)**                         | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------|------------|
| Non-cash purchase accounting adjustments(1)    |       | $          | 10.0       |   |
| Interest expense(2)                            |       | 8.4        |       |
| Interest and net investment income(3)          |       | 4.3        |       |
| Restructuring and Merger related charges(4)    |       | 13.1       |       |
| Non-cash goodwill and trade name impairment(5) |       | (46.9      | )          |
| Gain on extinguishment of debt(6)              |       | (46.1      | )          |
| Residual value guarantee charge(7)             |       | (7.7       | )          |
| Long-term incentive plan(8)                    |       | (4.4       | )          |
| Key executive separation charges(9)            |       | (5.0       | )          |
| Segment results(10)                            |       | (0.8       | )          |
|                                           |       | $          | (75.1      | ) |

 

----

(1)                                 Consistsprimarily of decreased amortization of intangible assets as a result of certainfinite lived intangible assets being fully amortized as of July 24, 2010.

 

(2)                                 Represents adecrease in interest expense as a result of decreases in our average long-termdebt balances and weighted average interest rates as compared to the ninemonths ended September 30, 2009.

 

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

 

(4)                                 Represents thenet positive effect of (i) an increase in restructuring charges related toa reorganization of field leadership and a restructuring of branch operationsat TruGreen LawnCare, (ii) a decrease in restructuring charges related toa branch optimization project at Terminix, (iii) a decrease inrestructuring charges related to information technology outsourcing at OtherOperations and Headquarters and (iv) a decrease in Merger relatedcharges.

 

(5)                                 Represents anon-cash impairment charge recorded in the second quarter of 2010 to reduce thecarrying value of goodwill and trade names at TruGreen LandCare as a result ofthe Company’s interim impairment testing of goodwill and indefinite-livedintangible assets. See Note 5 to thecondensed consolidated financial statements for further information.

 

(6)                                 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 the Company’s Permanent Notes. There were no open market or otherpurchases of Permanent Notes by the Company in the nine months ended September 30,2010.

 

(7)                                 Represents anincrease in residual value guarantee charges related to a synthetic lease foroperating properties that did not result in additional cash payments to exitthe facility at the end of the lease term in July 2010. In the thirdquarter of 2009, the Company determined that it was probable that the fairvalue of the real properties under operating leases would be below the totalamount funded under the lease facilities at the end of the lease term. TheCompany’s estimate of this shortfall was $15.9 million, which was expensed overthe remainder of the lease term. The Company recorded charges of $10.4 millionand $2.7 million in the nine months ended September 30, 2010 and 2009,respectively, related to this shortfall.

 

(8)                                 Represents thereversal, in 2009, of a reserve for cash awards related to a long-termincentive plan as certain performance measures under the plan were notachieved. There was no similar reversal in 2010.

 

(9)                                 Represents keyexecutive separation charges recorded in the third quarter of 2010 related tothe pending retirement of our Chief Executive Officer and the resignation ofthe President of TruGreen LandCare.

 

40

----

                Table of Contents

 

(10)                           Represents anet decrease in income from continuing operations before income taxes, non-cashpurchase accounting adjustment charges, interest expense, interest and netinvestment income, restructuring and Merger related charges, non-cash goodwilland trade name impairment, gain on extinguishment of debt, residual valueguarantee charge, long-term incentive plan adjustments and key executiveseparation charges, reflecting the decline in results at TruGreen LandCare,American Home Shield and Other Operations and Headquarters, offset, in part, bythe improvement in results at Terminix, TruGreen LawnCare and ServiceMasterClean as described in “Segment Reviews for the Nine Months Ended September 30,2010 Compared to 2009”.

 

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

 

The Company reported cost of services rendered and products sold of$1,537.3 million for the nine months ended September 30, 2010 compared to$1,475.2 million for the nine months ended September 30, 2009. As apercentage of revenue, these costs increased to 58.7 percent for the ninemonths ended September 30, 2010 from 58.5 percent for the nine monthsended September 30, 2009. This percentage increase primarily reflectsincreased contract claims costs at American Home Shield, decreased laborefficiencies at TruGreen LandCare, increased costs related to ongoinginitiatives at TruGreen LawnCare to transform our branch operations and toimprove customer service and increased residual value guarantee charges atTruGreen LawnCare, offset, in part, by, reduced fertilizer costs at TruGreenLawnCare and reduced fuel costs.

 

TheCompany reported selling and administrative expenses of $714.1 million for thenine months ended September 30, 2010 compared to $663.0 million for thenine months ended September 30, 2009. As a percentage of revenue, thesecosts increased to 27.3 percent for the nine months ended September 30,2010 from 26.3 percent for the nine months ended September 30, 2009. Thispercentage increase primarily reflects investments in sales and marketing,increased provisions for incentive compensation, key executive separationcharges of $5.0 million recorded in the third quarter of 2010 related to thepending retirement of our Chief Executive Officer and the resignation of thePresident of TruGreen LandCare, increased costs related to ongoing initiativesat TruGreen LawnCare, increased provisions for certain legal matters atAmerican Home Shield and increases in spending in the Company’s headquartersfunctions to enhance capabilities in our centers of excellence and oninitiatives designed to improve the performance of our operating segments.

 

Amortization expense was $111.8 million for the nine months ended September 30,2010 compared to $121.1 million for the nine months ended September 30,2009. The decrease is a result of certain finite lived intangible assets beingfully amortized as of July 24, 2010.

 

Non-operating expense totaled $210.2 million for the nine months ended September 30,2010 compared to $176.8 million for the nine months ended September 30,2009. This increase includes a $46.1 million gain on extinguishment of debtrecorded in the nine months ended September 30, 2009, offset, in part, byan $8.4 million decrease in interest expense resulting from decreases in ouraverage long-term debt balances and weighted average interest rates and a $4.3million increase in interest and net investment income. Interest and netinvestment income was comprised of the following for the nine months ended September 30,2010 and 2009:

 
| ** **                         | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**            | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| Realized gains(1)                  |       | $                                                   | 5,245      |   | $ | 5,524 |   |
| Impairments of securities(2)       |       | —                                              |       | (5,854 | ) |
| Deferred compensation trust(3)     |       | 511                                                 |       | 1,670 |   |
| Other(4)                           |       | 1,731                                               |       | 1,852 |   |
| Interest and net investment income |       | $                                                   | 7,487      |   | $ | 3,192 |   |

 

----

(1)                                 Represents thenet investment gains and the interest and dividend income realized on theAmerican Home Shield investment portfolio.

 

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

 

(3)                                 Representsinvestment income resulting from a change in the market value of investmentswithin an employee deferred compensation trust (for which there is acorresponding and offsetting change in compensation expense within income fromcontinuing operations before income taxes).

 

(4)                                 Representsinterest income on other cash balances.

 

The effective tax rate on income from continuing operations was aprovision of (37.6) percent for the nine months ended September 30, 2010compared to a provision of 32.0 percent for the nine months ended September 30,2009. The negative effective 

 

41

----

Table ofContents

 

ratefor the nine months ended September 30, 2010 is primarily attributable tothe Company providing for state and foreign tax expense despite incurring aloss from continuing operations before income taxes.

 

***Restructuring and Merger RelatedCharges***

 

TheCompany incurred restructuring and Merger related charges of $9.8 million and$22.9 million for the nine months ended September 30, 2010 and 2009,respectively. Restructuring and Merger related charges were comprised of thefollowing:

 
| ** **                                             | ** ** | **Nine months ended****September 30,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **(In thousands)**                                | ** ** | **2010**                                              | ** ** | **2009** | ** ** |
| TruGreen LawnCare  reorganization and restructuring(1) |       | $                                                     | 6,657      |   | $ | 5,951 |   |
| Information technology  outsourcing(2)                 |       | —                                                |       | 9,461 |   |
| Terminix branch  optimization(3)                       |       | —                                                |       | 3,219 |   |
| Merger related charges(4)                              |       | 1,180                                                 |       | 2,234 |   |
| Other(5)                                               |       | 1,944                                                 |       | 1,994 |   |
| Total restructuring and  Merger related charges        |       | $                                                     | 9,781      |   | $ | 22,859 |   |

 

----

(1)                                  Representsrestructuring charges related to a reorganization of field leadership and arestructuring of branch operations. For the nine months ended September 30,2010, these costs included consulting fees of $4.5 million and severance, leasetermination and other costs of $2.2 million. For the nine months ended September 30,2009, these costs included consulting fees of $4.1 million and severance, leasetermination and other costs of $1.9 million. In connection with therestructuring of branch operations, we expect to incur cash charges through thesecond quarter of 2011 primarily related to consulting fees. Such charges areexpected to amount to an additional $0.7 million, pre-tax, and will be recordedas restructuring charges in the condensed consolidated statement of operationsas incurred.

 

(2)                                  OnDecember 11, 2008, the Company entered into an agreement with IBM pursuantto which IBM provides information technology operations and applicationsdevelopment services to the Company. These services were phased in during thefirst half of 2009. For the nine months ended September 30, 2009, thesecosts included transition fees paid to IBM of $7.2 million, employee retentionand severance costs of $1.3 million and consulting and other costs of $1.0million.

 

(3)                                  Representsrestructuring charges related to a branch optimization project. For the ninemonths ended September 30, 2009, these costs included lease terminationcosts of $2.9 million and severance costs of $0.3 million.

 

(4)                                  Includesseverance, retention, legal fees and other costs associated with the Merger.

 

(5)                                  For the ninemonths ended September 30, 2010, these costs included adjustments to leasetermination reserves related to previous restructuring initiatives of $1.7million and consulting and other costs of $0.2 million. For the nine monthsended September 30, 2009, these costs included adjustments to leasetermination reserves related to previous restructuring initiatives of $0.4million and consulting and other costs of $1.6 million.

 

***Impairment ofGoodwill and Trade Names***

 

During the second quarter of 2010, theCompany recorded a non-cash impairment charge of $46.9 million to reduce thecarrying value of goodwill and trade names at TruGreen LandCare as a result ofan interim impairment test of goodwill and indefinite-lived intangible assets.See Note 5 to the condensed consolidated financial statements for furtherinformation.

 

**Segment Reviews for the Nine Months Ended September 30,2010 Compared to 2009**

 

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. As notedin segment reviews for the third quarter 2010 compared to 2009, the Companyuses Adjusted EBITDA and Comparable Operating Performance to facilitateoperating performance comparisons from period to period. The operating income,EBITDA, Adjusted EBITDA, and Comparable Operating Performance for eachreportable segment have been revised to reflect the Company’s revisedallocation methodology for all periods presented. See Note 14 to the condensed consolidatedfinancial statements for further information.

 

42

----

Table ofContents

 

Operating revenues and Comparable Operating Performance by operatingsegment are as follows:

 
| ** **                                                   | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                                      | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| Operating Revenue:                                           |       |                                                |       |   |   |
| TruGreen LawnCare                                            |       | $                                                   | 874,022    |   | $ | 834,899 |   |
| TruGreen LandCare                                            |       | 180,541                                             |       | 199,562 |   |
| Terminix                                                     |       | 889,482                                             |       | 843,134 |   |
| American Home Shield                                         |       | 513,910                                             |       | 490,308 |   |
| ServiceMaster Clean                                          |       | 98,337                                              |       | 92,869 |   |
| Other Operations and Headquarters                            |       | 63,438                                              |       | 62,961 |   |
| Total Operating Revenue                                      |       | $                                                   | 2,619,730  |   | $ | 2,523,733 |   |
| Comparable Operating Performance:                            |       |                                                |       |   |   |
| TruGreen LawnCare                                            |       | $                                                   | 146,273    |   | $ | 143,435 |   |
| TruGreen LandCare                                            |       | 2,735                                               |       | 17,000 |   |
| Terminix                                                     |       | 216,400                                             |       | 200,005 |   |
| American Home Shield                                         |       | 94,071                                              |       | 91,481 |   |
| ServiceMaster Clean                                          |       | 45,217                                              |       | 43,294 |   |
| Other Operations and Headquarters                            |       | (71,507                                             | )          | (72,632 | ) |
| Total Comparable Operating Performance                       |       | $                                                   | 433,189    |   | $ | 422,583 |   |
|                                                         |       |                                                |       |   |   |
| Memo: Items included in Comparable Operating  Performance:   |       |                                                |       |   |   |
| Restructuring and Merger related charges(1)                  |       | $                                                   | 9,781      |   | $ | 22,859 |   |
| Management and consulting fees(2)                            |       | $                                                   | 5,625      |   | $ | 5,625 |   |
|                                                         |       |                                                |       |   |   |
| Memo: Items excluded from Comparable Operating  Performance: |       |                                                |       |   |   |
| Comparable Operating Performance of Discontinued  Operations |       | $                                                   | (1,171     | ) | $ | (1,050 | ) |

 

----

(1)                                 Represents(i) restructuring charges related to a reorganization of field leadershipand a restructuring of branch operations at TruGreen LawnCare, a branch optimizationproject at Terminix and information technology outsourcing at Other Operationsand Headquarters and (ii) Merger related charges.

 

(2)                                 Represents management andconsulting fees payable to certain related parties. See Note 15 to thecondensed consolidated financial statements for further information onmanagement and consulting fees.

 

43

----

Table ofContents

 

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

 
| **(in thousands)**                                           | ** ** | **TruGreen  LawnCare** | ** ** | **TruGreen  LandCare** | ** ** | **Terminix** | ** ** | **American  Home  Shield** | ** ** | **Service********Master  Clean** | ** ** | **Other  Operations  and  Headquarters** | ** ** | **Total**  | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------|------------|----------------------------|------------|----------------------------------|------------|------------------------------------------|------------|------------|------------|
| **Nine months ended September 30, 2010** | ** ** | ** **             | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                 | ** ** | ** **                       | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Operating  income (loss)(1)                                       |       | $                      | 80,248     |                   | $          | (52,367      | )          | $                          | 166,714    |                             | $          | 57,245                                   |       | $          | 38,708     |   | $ | (90,713 | ) | $ | 199,835 |   |
| Depreciation  and amortization expense                            |       | 56,843                 |       | 8,684                  |       | 49,838       |       | 31,714                     |       | 5,374                            |       | 10,007                                   |       | 162,460    |       |
| EBITDA                                                            |       | 137,091                |       | (43,683                | )          | 216,552      |       | 88,959                     |       | 44,082                           |       | (80,706                                  | )          | 362,295    |       |
| Interest  and net investment income (2)                           |       | —                 |       | —                 |       | —       |       | 5,244                      |       | 153                              |       | 2,090                                    |       | 7,487      |       |
| Residual  value guarantee charge(3)                               |       | 9,222                  |       | —                 |       | —       |       | —                     |       | 982                              |       | 245                                      |       | 10,449     |       |
| Non-cash  goodwill and trade name impairment(4)                   |       | —                 |       | 46,884                 |       | —       |       | —                     |       | —                           |       | —                                   |       | 46,884     |       |
| Adjusted  EBITDA                                                  |       | 146,313                |       | 3,201                  |       | 216,552      |       | 94,203                     |       | 45,217                           |       | (78,371                                  | )          | 427,115    |       |
| Non-cash  stock-based compensation expense                        |       | —                 |       | —                 |       | —       |       | —                     |       | —                           |       | 6,864                                    |       | 6,864      |       |
| Non-cash  credits attributable to purchase accounting(5)          |       | (40                    | )          | (466                   | )          | (152         | )          | (132                       | )          | —                           |       | —                                   |       | (790       | )          |
| Comparable  Operating Performance                                 |       | $                      | 146,273    |                   | $          | 2,735        |       | $                          | 216,400    |                             | $          | 94,071                                   |       | $          | 45,217     |   | $ | (71,507 | ) | $ | 433,189 |   |
| Memo:  Items included in Comparable Operating Performance         |       |                   |       |                   |       |         |       |                       |       |                             |       |                                     |       |       |       |
| Restructuring  and Merger related charges (credits)(6)            |       | $                      | 6,657      |                   | $          | 785          |       | $                          | 1,139      |                             | $          | (127                                     | )          | $          | 61         |   | $ | 1,266 |   | $ | 9,781 |   |
| Management  and consulting fees(7)                                |       | $                      | —     |                   | $          | —       |       | $                          | —     |                             | $          | —                                   |       | $          | —     |   | $ | 5,625 |   | $ | 5,625 |   |
| Memo:  Items excluded from Comparable Operating Performance       |       |                   |       |                   |       |         |       |                       |       |                             |       |                                     |       |       |       |
| Comparable  Operating Performance of Discontinued Operations(8)   |       | $                      | —     |                   | $          | —       |       | $                          | —     |                             | $          | —                                   |       | $          | —     |   | $ | (1,171 | ) | $ | (1,171 | ) |
|                                                              |       |                   |       |                   |       |         |       |                       |       |                             |       |                                     |       |       |       |
| **Nine months ended September 30, 2009**                     |       |                   |       |                   |       |         |       |                       |       |                             |       |                                     |       |       |       |
| Operating  income (loss)(1)                                       |       | $                      | 75,382     |                   | $          | 8,658        |       | $                          | 152,778    |                             | $          | 60,423                                   |       | $          | 36,673     |   | $ | (92,391 | ) | $ | 241,523 |   |
| Depreciation  and amortization expense                            |       | 65,776                 |       | 8,831                  |       | 47,368       |       | 31,447                     |       | 6,183                            |       | 10,315                                   |       | 169,920    |       |
| EBITDA                                                            |       | 141,158                |       | 17,489                 |       | 200,146      |       | 91,870                     |       | 42,856                           |       | (82,076                                  | )          | 411,443    |       |
| Interest  and net investment (loss) income (2)                    |       | —                 |       | —                 |       | —       |       | (331                       | )          | 144                              |       | 3,379                                    |       | 3,192      |       |
| Residual  value guarantee charge(3)                               |       | 2,363                  |       | —                 |       | —       |       | —                     |       | 294                              |       | 73                                       |       | 2,730      |       |
| Adjusted  EBITDA                                                  |       | 143,521                |       | 17,489                 |       | 200,146      |       | 91,539                     |       | 43,294                           |       | (78,624                                  | )          | 417,365    |       |
| Non-cash  stock-based compensation expense                        |       | —                 |       | —                 |       | —       |       | —                     |       | —                           |       | 5,992                                    |       | 5,992      |       |
| Non-cash  credits attributable to purchase accounting(5)          |       | (86                    | )          | (489                   | )          | (141         | )          | (58                        | )          | —                           |       | —                                   |       | (774       | )          |
| Comparable  Operating Performance                                 |       | $                      | 143,435    |                   | $          | 17,000       |       | $                          | 200,005    |                             | $          | 91,481                                   |       | $          | 43,294     |   | $ | (72,632 | ) | $ | 422,583 |   |
| Memo:  Items included in Comparable Operating Performance         |       |                   |       |                   |       |         |       |                       |       |                             |       |                                     |       |       |       |
| Restructuring  and Merger related charges(6)                      |       | $                      | 5,951      |                   | $          | 133          |       | $                          | 3,365      |                             | $          | 105                                      |       | $          | —     |   | $ | 13,305 |   | $ | 22,859 |   |
| Management  and consulting fees(7)                                |       | $                      | —     |                   | $          | —       |       | $                          | —     |                             | $          | —                                   |       | $          | —     |   | $ | 5,625 |   | $ | 5,625 |   |
| Memo:  Items excluded from Comparable Operating Performance       |       |                   |       |                   |       |         |       |                       |       |                             |       |                                     |       |       |       |
| Comparable  Operating Performance of Discontinued Operations(8)   |       | $                      | —     |                   | $          | —       |       | $                          | —     |                             | $          | —                                   |       | $          | —     |   | $ | (1,050 | ) | $ | (1,050 | ) |

 

44

----

Table ofContents

 

----

(1)                                  Presented belowis a reconciliation of total segment operating income to net income.

 
| ** **                                                    | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                                       | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| Total Segment Operating Income                                |       | $                                                   | 199,835    |   | $ | 241,523 |   |
| Non-operating Expense (Income):                               |       |                                                |       |   |   |
| Interest expense                                              |       | 217,117                                             |       | 225,538 |   |
| Interest and net investment income                            |       | (7,487                                              | )          | (3,192 | ) |
| Gain on extinguishment of debt                                |       | —                                              |       | (46,106 | ) |
| Other expense                                                 |       | 556                                                 |       | 555 |   |
| (Loss) Income from Continuing Operations before  Income Taxes |       | (10,351                                             | )          | 64,728 |   |
| Provision for income taxes                                    |       | 3,888                                               |       | 20,720 |   |
| (Loss) Income from Continuing Operations                      |       | (14,239                                             | )          | 44,008 |   |
| Loss from discontinued operations, net of income  taxes       |       | (687                                                | )          | (666 | ) |
| Net (Loss) Income                                             |       | $                                                   | (14,926    | ) | $ | 43,342 |   |

 

(2)                                 Interest and net investmentincome (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 $296.0 million as of September 30, 2010. American Home Shieldinterest and net investment income (loss) was $5.2 million and ($0.3) millionfor the nine months ended September 30, 2010 and 2009, respectively. Thebalance of interest and net investment income (loss) primarily relates to(i) investment income (loss) from our employee deferred compensation trust(for which there is a corresponding and offsetting change in compensationexpense within income from continuing operations before income taxes) and(ii) interest income on other cash balances.

 

(3)                                  Represents residual valueguarantee charges related to a synthetic lease for operating properties thatdid not result in additional cash payments to exit the facility at the end ofthe lease term in July 2010. In the third quarter of 2009, the Companydetermined that it was probable that the fair value of the real propertiesunder operating leases would be below the total amount funded under the leasefacilities at the end of the lease term. The Company’s estimate of thisshortfall was $15.9 million, which was expensed over the remainder of the leaseterm. The Company recorded charges of $10.4 million and $2.7 million in thenine months ended September 30, 2010 and 2009, respectively, related tothis shortfall.

 

(4)                                Represents anon-cash impairment charge of $46.9 million recorded in the second quarter of2010 to reduce the carrying value of goodwill and trade names at TruGreenLandCare as a result of the Company’s interim impairment test of goodwill andindefinite-lived intangible assets. SeeNote 5 to the condensed consolidated financial statements for furtherinformation.

 

(5)                                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.

 

(6)                                 Represents(i) restructuring charges related to a reorganization of field leadershipand a restructuring of branch operations at TruGreen LawnCare, a branchoptimization project at Terminix and information technology outsourcing atOther Operations and Headquarters and (ii) Merger related charges.

 

(7)                                 Represents management and consultingfees payable to certain related parties. See Note 15 to the condensedconsolidated financial statements for further information on management andconsulting fees.

 

(8)                                 There are no adjustmentsnecessary to reconcile operating loss from discontinued operations, the mostdirectly comparable financial measure under GAAP, to Adjusted EBITDA orComparable Operating Performance from discontinued operations for the ninemonths ended September 30, 2010 and 2009.

 

***TruGreen LawnCareSegment***

 

TheTruGreen LawnCare segment reported a 4.7 percent increase in revenue, a 6.5percent increase in operating income and a 2.0 percent increase in ComparableOperating Performance for the nine months ended September 30, 2010compared to 2009. The revenue results reflect a 1.3 percent increase incustomer counts, higher sales of expanded services to existing customers, lowerdiscounts and improved price realization. The increase in customer counts wasdriven by an increase in new unit sales generated in our neighborhood sellingchannel and the contribution of acquisitions.

 

45

----

Tableof Contents

 

TruGreenLawnCare’s Comparable Operating Performance improved $2.8 million for the ninemonths ended September 30, 2010 compared to 2009. In addition to thefavorable impact of increased revenue, TruGreen LawnCare’s Comparable OperatingPerformance reflects reduced fuel and fertilizer costs, offset, in part, byinvestments in sales and marketing and increased costs related to our ongoinginitiatives to transform our branch operations and to improve customer service.

 

***TruGreen LandCare Segment***

 

TheTruGreen LandCare segment reported a 9.5 percent decrease in revenue, a $61.0million decrease in operating income and an 83.9 percent decline in ComparableOperating Performance for the nine months ended September 30, 2010compared to 2009. The decline in revenue included a 10.8 percent decrease inbase contract maintenance revenue and a 10.8 percent decrease in enhancementrevenue. Revenue trends were primarily impacted by contract cancellations andpricing concessions granted in 2009 and 2010 in response to the impacts of adifficult economic environment. The ratio of enhancement revenue to basecontract maintenance revenue for the nine months ended September 30, 2010was comparable to 2009.

 

TruGreenLandCare’s $61.0 million decline in operating income includes a non-cashimpairment charge of $46.9 million to reduce the carrying value of goodwill andtrade names to their estimated fair value as further described in Note 5 to thecondensed consolidated financial statements. TruGreen LandCare’s ComparableOperating Performance declined $14.3 million for the nine months ended September 30,2010 compared to 2009. In addition to the unfavorable impact of decreasedrevenue, TruGreen LandCare’s Comparable Operating Performance reflectsdecreased labor efficiencies resulting from increased technician overtime andkey executive separation charges, offset, in part, by reduced fuel costs. TheCompany is exploring strategic options relating to TruGreen LandCare, includingthe potential sale of the business.

 

***Terminix Segment***

 

The Terminix segment reported a 5.5 percent increase in revenue, a 9.1percent increase in operating income and an 8.2 percent improvement inComparable Operating Performance for the nine months ended September 30,2010 compared to 2009. The segment’s overall revenue results reflected growthin termite and pest control revenues, as well as increased product distributionrevenue of $18.8 million. Termite revenues increased 2.0 percent for the ninemonths ended September 30, 2010 compared to 2009, due to an increase innew unit sales, the contribution of acquisitions and a 20 basis pointimprovement in the customer retention rate. Pest control revenues increased 4.5percent for the nine months ended September 30, 2010 compared to 2009,reflecting a 5.0 percent increase in customer counts due to an increase in newunit sales, the contribution of acquisitions and a 250 basis point improvementin the customer retention rate. In the third quarter of 2010, Terminix acquiredthe assets of Antimite Termite and Pest Control, a company with annual revenuesof approximately $30 million.

 

Terminix’s Comparable Operating Performance improved $16.4 million forthe nine months ended September 30, 2010 compared to 2009. In addition tothe favorable impact of increased revenue, Terminix’s Comparable OperatingPerformance reflects reduced fuel costs, the favorable impact of acquiringassets in connection with exiting certain fleet leases, favorable termite damageclaims trends and a $2.2 million decrease in restructuring charges related to abranch optimization program completed in 2009, offset, in part by increasedprovisions for incentive compensation and investments in sales and marketing.

 

***American Home Shield Segment***

 

The American Home Shield segment reported a 4.8 percent increase inrevenue, a 5.3 percent decrease in operating income and a 2.8 percentimprovement in Comparable Operating Performance for the nine months ended September 30,2010 compared to 2009. The increase in revenue reflects a 3.4 percent increasein customer counts and improved price realization. The increase in customercounts was driven by an increase in new unit sales and a 300 basis pointimprovement in customer retention.

 

American Home Shield’s Comparable Operating Performance improved $2.6million for the nine months ended September 30, 2010 compared to 2009. Inaddition to the favorable impact of increased revenue, American Home Shields’sComparable Operating Performance reflects a $5.6 million increase in interestand net investment income from the American Home Shield investment portfolio(primarily reflecting reductions in impairments of securities) offset, in part,by investments in consumer sales programs, an 8.9 percent increase in contractclaims costs driven by an increase in the number of seasonal contract claimsand increased provisions for certain legal matters.

 

46

----

Tableof Contents

 

***ServiceMaster Clean Segment***

 

The ServiceMaster Clean segment reported a 5.9 percent increase inrevenue, a 5.5 percent increase in operating income and a 4.4 percentimprovement in Comparable Operating Performance for the nine months ended September 30,2010 compared to 2009. Trends in revenue reflect an increase in nationaljanitorial accounts, product sales to franchisees and other revenues.

 

ServiceMaster Clean’s Comparable Operating Performance improved $1.9million for the nine months ended September 30, 2010 compared to 2009,primarily reflecting the favorable impact of increased revenues.

 

***Other Operations and HeadquartersSegment***

 

This segment includes the operations of Merry Maids, SMAC and theCompany’s headquarters functions. The segment reported comparable revenue, a1.8 percent improvement in operating loss and a 1.5 percent improvement inComparable Operating Performance for the nine months ended September 30,2010 compared to 2009. The Merry Maids operations reported comparable revenue,a 35.3 percent increase in operating income and a 23.8 percent improvement inComparable Operating Performance for the nine months ended September 30,2010 compared to 2009.

 

The segment’s Comparable Operating Performance improved $1.1 millionfor the nine months ended September 30, 2010 compared to 2009, whichincludes a $12.0 million decrease in restructuring and Merger related chargesand a $2.9 million improvement in Merry Maid’s Comparable OperatingPerformance, primarily reflecting reduced overhead spending and increased laborefficiencies. These items were offset, in part, by key executive separationcharges of $4.3 million recorded in the third quarter of 2010, increased provisionsfor incentive compensation in 2010, due primarily to the reversal, in 2009, ofa $4.4 million reserve for cash awards related to a long-term incentive plan ascertain performance measures under the plan were not achieved, and increases inspending in the Company’s headquarters functions to enhance capabilities in ourcenters of excellence and on initiatives designed to improve the performance ofour operating segments.

 

***Discontinued Operations***

 

The components of loss from discontinued operations, net of incometaxes for the nine months ended September 30, 2010 and 2009 are asfollows:

 
| ** **                                              | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                                 | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| Operating Loss                                          |       | $                                                   | (1,171     | ) | $ | (1,050 | ) |
| Interest expense                                        |       | —                                              |       | — |   |
| Loss from discontinued operations, before income  taxes |       | (1,171                                              | )          | (1,050 | ) |
| Benefit for income taxes                                |       | (484                                                | )          | (384 | ) |
| Loss from discontinued operations, net of income  taxes |       | $                                                   | (687       | ) | $ | (666 | ) |

 

Thereare no adjustments necessary to reconcile operating loss from discontinuedoperations to Adjusted EBITDA or Comparable Operating Performance fromdiscontinued operations for the nine months ended September 30, 2010 and2009.

 

47

----

Table ofContents

 

**FINANCIAL POSITION AND LIQUIDITY**

*** ***

***Cash Flows from Operating Activities fromContinuing Operations***

 

Netcash provided from operating activities from continuing operations increased$50.0 million to $119.2 million for the nine months ended September 30,2010 compared to $69.2 million for the nine months ended September 30,2009.

 

Netcash provided from operating activities for the nine months ended September 30,2010 was comprised of $209.1 million in earnings as adjusted for non-cashcharges, offset, in part, by a $79.7 million increase in cash required forworking capital and $10.2 million in cash payments related to restructuringcharges. Working capital requirements were impacted by normal seasonal workingcapital needs. Working capital requirements were adversely impacted by growthin accounts receivable balances, due to increases in revenue as compared toprior year and unfavorable collection trends partially attributable toincreases in revenue in service lines with longer than average collectionterms, and the timing of interest payments on our Permanent Notes. Workingcapital requirements were favorably impacted by favorable timing of accountspayable and payroll and related payments.

 

Netcash provided from operating activities for the nine months ended September 30,2009 was comprised of $214.5 million in earnings as adjusted for non-cashcharges, offset in part, by a $125.5 million increase in cash required forworking capital and $19.8 million in cash payments related to restructuringcharges. The increase in working capital requirements for the nine months endedSeptember 30, 2009 was driven primarily by normal seasonal activity andthe timing of interest payments on our Permanent Notes and Term Facilities.

 

***Cash Flows from Investing Activities fromContinuing Operations***

 

Netcash used for investing activities from continuing operations was $137.5million for the nine months ended September 30, 2010 compared to $61.9million for the nine months ended September 30, 2009.

 

Capitalexpenditures increased to $105.3 million for the nine months ended September 30,2010 from $50.5 million for the nine months ended September 30, 2009 andincluded vehicle purchases of $32.8 million, real estate purchases of $37.4million in connection with exiting certain real estate leases as furtherdiscussed in “Liquidity”, recurring capital needs and information technologyprojects. The Company anticipates that capital expenditures, excluding vehiclefleet and real estate purchases, for 2010 will range from $55.0 million to$65.0 million, reflecting recurring needs and the continuation of investmentsin information systems and productivity enhancing operating systems. TheCompany’s capital requirement for fleet vehicles for 2010 is expected to rangefrom $50.0 million to $60.0 million. The Company has no additional materialcapital commitments at this time.

 

Cashpayments for acquisitions, excluding the Merger, for the nine months ended September 30,2010 totaled $52.5 million, compared with $20.7 million for the nine monthsended September 30, 2009. Consideration paid for acquisitions consisted ofcash payments and debt payable to sellers. The Company expects to continue itsacquisition program at Terminix, TruGreen LawnCare and Merry Maids.

 

Theincrease in notes receivable, financial investments and securities for the ninemonths ended September 30, 2010 compared to September 30, 2009reflects the return of the Company’s $22.0 million investment in previouslyleased real estate facilities as further discuss in “Liquidity”, offset, inpart, by a decrease in net sales of certain marketable securities.

 

***Cash Flows from Financing Activities fromContinuing Operations***

 

Netcash used for financing activities from continuing operations was $34.8 millionfor the nine months ended September 30, 2010 compared to $201.8 millionfor the nine months ended September 30, 2009. During the nine months endedSeptember 30, 2010, the Company borrowed and repaid $5.0 million under theRevolving Credit Facility, borrowed $10.0 million under other financingarrangements, made scheduled principal payments of long-term debt of $32.3million and, as further discussed in “Liquidity”, made repayments of $12.5million in connection with exiting certain real estate leases. During the ninemonths ended September 30, 2009, the Company completed open marketpurchases of $89.0 million in face value of the Permanent Notes for a cost of$41.0 million. The Company also made repayments of $125.0 million under theRevolving Credit Facility and made scheduled principal payments of long-termdebt of $35.4 million during the nine months ended September 30, 2009.

 

48

----

Table ofContents

 

***Liquidity***

 

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

 

Theagreements governing the Term Facilities, the Permanent Notes and the RevolvingCredit Facility contain certain covenants that limit or restrict the incurrenceof additional indebtedness, debt repurchases, liens, sales of assets, certainpayments (including dividends) and transactions with affiliates, subject tocertain exceptions. The Company was in compliance with the covenants underthese agreements at September 30, 2010.

 

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

 

Cashand short- and long-term marketable securities totaled $336.7 million at September 30,2010, compared with $385.6 million at December 31, 2009. As of September 30,2010 and December 31, 2009, $296.0 million and $256.5 million,respectively, of the cash and short- and long-term marketable securitiesbalance are associated with regulatory requirements at American Home Shield andfor other purposes. American Home Shield’s investment portfolio has beeninvested 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, 2010, the Company’s residual valueguarantees related to the leased assets totaled $59.2 million for which theCompany has recorded a liability for the estimated fair value of theseguarantees of approximately $1.3 million in the condensed consolidatedstatement of financial position.

 

Priorto the Merger, the Company maintained lease facilities with banks totaling$65.2 million, which provided for the financing of branch properties to beleased by the Company. In connection with the closing of the Merger, theCompany amended these leases effective July 24, 2007. Among themodifications, the Company extended the lease terms through July 24, 2010and made a $22.0 million investment in the lease facilities. In July 2010,the Company purchased the properties for $65.2 million. The Company’s $22.0million investment in the lease facilities was returned to the Company uponpurchase, resulting in a net cash payment of $43.2 million. In the thirdquarter of 2009, the Company determined that it was probable that the fairvalue of the real properties under operating leases would be below the totalamount funded under the lease facilities at the end of the lease term. TheCompany’s estimate of this shortfall was $15.9 million, which was expensed overthe remainder of the lease term. The Company recorded charges of $10.4 millionin the nine months ended September 30, 2010 and $5.5 million in 2009related to this shortfall.

 

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

 

Underthe terms of its fuel swap contracts, the Company is required to postcollateral in the event that the fair value of the contracts exceeds a certainagreed upon liability level and in other circumstances required by thecounterparty. As of September 30, 2010, the fair value of the Company’sfuel swap contracts was a net asset of $3.0 million, and the Company posted$5.0 million in letters of credit as collateral under its fuel hedging program,none of which were issued under the Company’s Revolving Credit Facility. Thecontinued use of letters of credit for this purpose could limit the Company’sability to post letters of credit for other purposes and could limit theCompany’s borrowing 

 

49

----

Table ofContents

 

availabilityunder the Revolving Credit Facility. However, the Company does not expect thefair value of its outstanding fuel swap contacts to materially impact itsfinancial position or liquidity.

 

TheCompany’s ongoing liquidity needs are expected to be funded by cash on hand,net cash provided by operating activities and, as required, borrowings underthe Revolving Credit Facility and accounts receivable securitizationarrangement (discussed below). We expect that cash provided from operations andavailable capacity under the Revolving Credit Facility and accounts receivablesecuritization arrangement will provide sufficient funds to operate ourbusiness, make expected capital expenditures and meet our liquidityrequirements for the following 12 months, including payment of interest andprincipal on our debt. As of September 30, 2010, the Company had $500.0million of remaining capacity available under the Revolving Credit Facility and$40.0 million of remaining capacity under the accounts receivablesecuritization arrangement.

 

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

 

Between the Merger and September 30, 2010, Holdings has completedopen market purchases totaling $65.0 million in face value of thePermanent Notes for a cost of $21.4 million. The debt acquired by Holdingshas not been retired, and the Company has continued to pay interest inaccordance with the terms of the debt. The Company recorded interest expense of$5.2 million for the nine months ended September 30, 2010 and 2009,respectively, related to the Permanent Notes held by Holdings. The Company madecash payments to Holdings of $7.0 million and $6.5 million during the ninemonths ended September 30, 2010 and 2009, respectively. Interest accruedby the Company and payable to Holdings as of September 30, 2010 andDecember 31, 2009 amounted to $1.4 million and $3.2 million, respectively.

 

The Company has entered into an accounts receivable securitizationarrangement under which TruGreen LawnCare and Terminix may sell certaineligible trade accounts receivable to Funding, the Company’s wholly owned,bankruptcy-remote subsidiary, which is consolidated for financial reportingpurposes. Funding, in turn, may transfer, on a revolving basis, an undividedpercentage ownership interest of up to $50.0 million in the pool ofaccounts receivable to one or both of the Purchasers. The amount of theeligible receivables varies during the year based on seasonality of thebusinesses and could, at times, limit the amount available to the Company fromthe sale of these interests.

 

During the nine months ended September 30, 2010, there were notransfers of interests in the pool of trade accounts receivables to Purchasersunder this arrangement. As of September 30, 2010 and December 31,2009, the Company had $10.0 million outstanding under the arrangement and, asof September 30, 2010, had $40.0 million of remaining capacity availableunder the trade accounts receivable securitization arrangement.

 

The accounts receivable securitization arrangement is a 364-dayfacility that is renewable annually at the option of Funding, with a finaltermination date of July 17, 2012. Only one of the Purchasers is requiredto purchase interests under the arrangement. If this Purchaser were to exerciseits right to terminate its participation in the arrangement, which it may do inthe third quarter of each year, the amount of cash available to the Companyunder this arrangement may be reduced or eliminated. As part of the annualrenewal of the facility, which last occurred on July 20, 2010, thisPurchaser agreed to continue its participation in the arrangement at leastthrough July 19, 2011.

 

Asa holding company, we depend on our subsidiaries to distribute funds to us sothat we may pay our obligations and expenses, including our debt serviceobligations. The ability of our subsidiaries to make distributions anddividends to us depends on their operating results, cash requirements andfinancial condition and general business conditions. Our insurance subsidiariesand home services and similar subsidiaries (through which we conduct ourAmerican Home Shield business) are subject to significant regulatoryrestrictions under the laws and regulations of the states in which theyoperate. Among other things, such laws and regulations require certain suchsubsidiaries to maintain minimum capital and net worth requirements and maylimit the amount of ordinary and extraordinary dividends and other paymentsthat these subsidiaries can pay to us. For example, certain states prohibitpayment by these subsidiaries to the Company of dividends in excess of 10percent of their capital as of the most recent year end, as determined inaccordance with prescribed insurance accounting practices in those states. Ofthe $296.0 million as of September 30, 2010, which we identify as beingpotentially unavailable to be paid to the Company by its subsidiaries,approximately $235.5 million is held by our home services and insurancesubsidiaries and is subject to these regulatory limitations on the payment offunds to us. Such limitations will be in effect throughout 2010, and similarlimitations will be re-computed as of December 31, 2010 and will be ineffect in 2011. The remainder of the $296.0 million, or $60.5 million, isrelated to amounts that the Company’s management does not

 

50

----

Table ofContents

 

considerreadily available to be used to service the Company’s indebtedness due, amongother reasons, to the Company’s cash management practices and working capitalneeds at various subsidiaries.

 

TheCompany’s Annual Report on Form 10-K for the year ended December 31,2009 included disclosure of the Company’s contractual obligations andcommitments as of December 31, 2009. The Company continues to make thecontractually required payments and, therefore, the 2010 obligations andcommitments as listed in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2009 have been reduced by the required payments.There were no material changes outside of the ordinary course of business inthe Company’s previously disclosed contractual obligations and commitmentsduring the nine months ended September 30, 2010.

 

***Off-Balance Sheet Arrangements***

 

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

 

**Information Regarding Forward-Looking Statements**

 

This report includes forward-looking statements and cautionarystatements. Some of the forward-looking statements can be identified by the useof forward-looking terms such as “believes”, “expects”, “may”, “will”, “shall”,“should”, “would”, “could”, “seek”, “aims”, “projects”, “is optimistic”, “intends”,“plans”, “estimates”, “anticipates” or other comparable terms. These forward-lookingstatements include all matters that are not historical facts. They appear in anumber of places throughout this report and include, without limitation,statements regarding our intentions, beliefs, assumptions or currentexpectations concerning, among other things, the degree and timing of economicrecovery; governmental regulation or interpretation thereof; our liquidity;cash flows; results of operations; financial condition; prospects; growthstrategies; future impairments; capital expenditures and requirements; customerretention; the continuation of acquisitions; strategies related todivestitures; attraction and retention of key personnel; the impact of interestrate hedges and fuel swaps; the cost savings from restructurings and reorganizationsand expected charges related to such restructurings and reorganizations; andthe impact of prevailing economic conditions.

 

Forward-looking statements are subject to known and unknown risks anduncertainties, many of which may be beyond our control. We caution you thatforward-looking statements are not guarantees of future performance oroutcomes, and that actual outcomes and performances, including, withoutlimitation, our actual results of operations, financial condition andliquidity, and the development of the industries in which we operate may differmaterially from those made in or suggested by the forward-looking statementscontained in this report. In addition, even if our results of operations,financial condition and liquidity, and the development of the industries inwhich we operate are consistent with the forward-looking statements containedin this report, those results or developments may not be indicative of resultsor developments in subsequent periods. A number of important factors, includingthe risks and uncertainties discussed in Item 1A—Risk Factors inPart I in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2009, could cause actual results and outcomes to differ materiallyfrom those in the forward-looking statements. Additional factors that couldcause actual results and outcomes to differ from those reflected inforward-looking statements include, without limitation:

 

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

 

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

 

·                  changes in interest ratesbecause a significant portion of our indebtedness bears interest at variablerates;

 

·                  our ability to securesources of financing or other funding to allow for direct purchases ofcommercial vehicles, primarily for TruGreen LawnCare, Terminix and TruGreenLandCare;

 

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

 

·                  our ability to attract andretain key personnel, including a successor to our CEO who has announced hispending retirement with a targeted date of December 31, 2010, or suchearlier or later date as a successor CEO is appointed;

 

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

 

·                  higher commodity prices andlack of availability, including fuel and fertilizers (primarily at TruGreenLawnCare, Terminix and TruGreen LandCare) could impact our ability to provideand the profitability of our brands;

 

51

----

Table ofContents

 

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

 

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

 

·                  epidemics, pandemics orother public health concerns or crises could affect the demand for, or ourability to provide, our services resulting in a reduction in revenues;

 

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

 

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

 

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

 

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

 

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

 

·                  the success of and costsassociated with restructuring initiatives;

 

·                  the number, type, outcomes(by judgement or settlement) and costs of legal or administrative proceedings;

 

·                  possible labor organizingactivities at the Company or its franchisees;

 

·                  risks associated withacquisitions and dispositions, including retaining customers from thebusinesses acquired, difficulties in integrating acquired businesses andachieving expected synergies therefrom;

 

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

 

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

 

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

 

You should read this report completely and with the understanding thatactual future results may be materially different from expectations. Allforward-looking statements made in this report are qualified by thesecautionary statements. These forward-looking statements are made only as of thedate of this report, and we do not undertake any obligation, other than as maybe required by law, to update or revise any forward-looking statements to reflectchanges in assumptions, the occurrence of events, unanticipated or otherwise,changes in future operating results over time or otherwise.

 

Comparisons of results for current and any prior periods are notintended to express any future trends, or indications of future performance,unless expressed as such, and should only be viewed as historical data.

 

52

----

Table ofContents

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

*InterestRate Risk*

 

TheCompany is exposed to the impact of interest rate changes and manages thisexposure through the use of variable-rate and fixed-rate debt and by utilizinginterest rate swaps. The Company does not enter into these contracts fortrading or speculative purposes. In the Company’s opinion, the market riskassociated with debt obligations and other significant instruments as of September 30,2010 has not materially changed from December 31, 2009 (see Item 7Aof the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2009).

 

*Fuel Price Risk*

 

TheCompany is exposed to market risk for changes in fuel prices through theconsumption of fuel by its vehicle fleet in the delivery of services to itscustomers. The Company uses approximately 25 million gallons of fuel on anannual basis. A 10 percent change in fuel prices would result in a change ofapproximately $6.5 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, 2010, the Company hadfuel swap contracts to pay fixed prices for fuel with an aggregate notionalamount of $78.2 million, maturing through 2012. The estimated fair value ofthese contracts at September 30, 2010 was a net asset of $3.0 million.These fuel swap contracts provide a fixed price for approximately 80.5 percent,74.7 percent and 11.3 percent of the Company’s estimated fuel usage for theremainder of 2010, 2011 and 2012, respectively.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**Effectiveness of Disclosure Controls and Procedures.**ServiceMaster’sChief Executive 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 inRule 15d-15(e)) as of the end of the period covered by this QuarterlyReport on Form 10-Q. ServiceMaster’s disclosure controls and proceduresinclude a roll-up of financial and non-financial reporting that is consolidatedin the principal executive office of ServiceMaster in Memphis, Tennessee.Messrs. Spainhour and Martin have concluded that both the design andoperation of ServiceMaster’s disclosure controls and procedures are effective.

 

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

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

Inthe ordinary course of conducting business activities, the Company and itssubsidiaries become involved in judicial, administrative and regulatoryproceedings involving both private parties and governmental authorities. Theseproceedings include, on an individual, collective and class action basis,regulatory, insured and uninsured employment, general, and commercial liabilityactions and environmental proceedings. For instance, American Home ShieldCorporation was sued in a putative class action on May 26, 2009 in theU.S. District Court for the Northern District of Alabama by Abigail Rudd, *et al.*, and is alleged to have violated Section 8 ofthe Real Estate Settlement Procedures Act in connection with certain paymentsmade to real estate agencies. The plaintiffs seek damages equal to three timesthe amount of the allegedly improper payments occurring after May 26,2008. The Company intends to defend its interests vigorously.

 

Additionally, the Company has entered into settlement agreements incertain cases, including putative class actions, which are subject to courtapproval. If one or more of these settlements are not finally approved, theCompany could have additional or different exposure. The enactment of newfederal or state legislation or the promulgation of new regulation orinterpretation at any level of government may also expose the Company topotential new liabilities or costs, or may require the Company to modify itsbusiness model or business practices. At this time, the Company does not expectany of these proceedings or changes in law to have a material effect on itsfinancial position, results of operations or cash flows; however, the Companycan give no assurance that the results of any such proceedings may not bematerial to its financial position, results of operations and cash flows for anyperiod in which costs, if any, are recognized.

 

53

----

 

Table ofContents

** **

**ITEM 6. EXHIBITS**

 
| **Exhibit No****.** | ** ** | **Description of Exhibit**                                                                                                                                                                      |
|--------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                     |       |                                                                                                                                                                                                      |
| 10.1                     |       | Letter  Agreement with J. Patrick Spainhour, executed on September 8, 2010,  related to calculation of Mr. Spainhour’s benefits upon retirement.                                           |
|                     |       |                                                                                                                                                                                                      |
| 10.2                     |       | Amended  and Restated ServiceMaster Global Holdings, Inc. MSIP                                                                                                                                       |
|                     |       |                                                                                                                                                                                                      |
| 10.3                     |       | Form of  Employee Restricted Stock Unit Agreement under the MSIP                                                                                                                                     |
|                     |       |                                                                                                                                                                                                      |
| 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. |

 

54

----

Table ofContents

 

**SIGNATURE**

 

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

 

Date: November 15,2010

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

 

55

----