|
|

|UNITED STATESSECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
|----------------------------------------------------------------------
|                                                                      
|                                                                      
|                                                                      
|FORM 10-Q                                                             
|                                                                      
|                                                                      
|                                                                      

|                                              | x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934       
|--------------------------------------------- | - | ----------------------------------------------------------------------------------------
|                                             
|For the quarterly period ended March 31, 2007
|                                              |   |                                                                                         
|                                              |   | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

|                                                      
|------------------------------------------------------
|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)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                         

|Yesx       Noo                                                                                                                                                                                                             
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                           
|Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer
in Exchange Act Rule 12b-2.
|                                                                                                                                                                                                                           

|Large accelerated filer  x                       Accelerated filer ____Non-accelerated filer ____
|-------------------------------------------------------------------------------------------------

|                                                                                                         
|---------------------------------------------------------------------------------------------------------
|Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
|                                                                                                         

|Yeso       Nox                                                                                                                                               
|-------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                             
|Indicate
        the number of shares outstanding of each of the issuers classes
        of common stock: 292,393,000 shares of common stock on May 4, 2007.

|
|



|TABLE OF CONTENTS
|-----------------
|                 

|                                                                                                                | **Page No.** | 
|--------------------------------------------------------------------------------------------------------------- | ------------ | 
|                                                                                                                |              | 
|THE SERVICEMASTER COMPANY (Registrant) -                                                                        |              | 
|                                                                                                               
|Part I. Financial Information                                                                                   |              | 
|                                                                                                               
|Item 1: Financial Statements (Unaudited)                                                                        |              | 
|                                                                                                               
|Condensed Consolidated Statements of Operations for the three   months ended March 31, 2007 and March 31, 2006  | 3            | 
|                                                                                                               
|Condensed Consolidated Statements of Financial Positionas of March 31, 2007 and December 31, 2006               | 4            | 
|                                                                                                               
|Condensed Consolidated Statements of Cash Flows for the three months    ended March 31, 2007 and March 31, 2006 | 5            | 
|                                                                                                               
|Notes to Condensed Consolidated Financial Statements                                                            | 6            | 
|                                                                                                               
|Item 2: Management Discussion and Analysis of Financial    Condition and Results of Operations                  | 18           | 
|                                                                                                               
|Item 3: Quantitative and Qualitative Disclosures About Market Risk                                              | 27           | 
|                                                                                                               
|Item 4: Controls and Procedures                                                                                 | 28           | 
|                                                                                                               
|Part II. Other Information                                                                                      |              | 
|                                                                                                               
|Item 1: Legal Proceedings                                                                                       | 29           | 
|                                                                                                               
|Item 1A: Risk Factors                                                                                           | 29           | 
|                                                                                                               
|Item 2: Unregistered Sales of Equity Securities and Use of Proceeds                                             | 30           | 
|                                                                                                               
|Item 6: Exhibits                                                                                                | 30           | 
|                                                                                                               
|Signature                                                                                                       | 31           | 

|2
|-



|PART I. FINANCIAL INFORMATIONTHE SERVICEMASTER COMPANYCondensed Consolidated Statements of Operations (Unaudited)(In thousands, except per share data)
|------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                      

|                                                              | **Three Months Ended 
March 31,** |          
|------------------------------------------------------------- | --------------------------------- | ---------
|                                                              | **2007**                          |          
|                                                              |                                   |          
|**Operating Revenue**                                         | $                                 | 695,895  
|                                                             
|**Operating Costs and Expenses:**                             |                                   |          
|Cost of services rendered and products sold                   |                                   | 458,991  
|Selling and administrative expenses                           |                                   | 201,760  
|Amortization expense                                          |                                   | 2,831    
|Restructuring charges                                         |                                   | 7,058    
|Merger related expenses                                       |                                   | 2,540    
|                                                              |                                   |          
|Total operating costs and expenses                            |                                   | 673,180  
|                                                              |                                   |          
|                                                             
|**Operating Income**                                          |                                   | 22,715   
|                                                             
|**Non-operating Expense (Income):**                           |                                   |          
|Interest expense                                              |                                   | 14,283   
|Interest and investment income, net                           |                                   | (8,066   
|Minority interest and other expense, net                      |                                   | 2,049    
|                                                              |                                   |          
|                                                             
|**Income from Continuing Operations** **before Income Taxes** |                                   | 14,449   
|Provision for income taxes                                    |                                   | 5,821    
|                                                              |                                   |          
|                                                             
|**Income from Continuing Operations**                         |                                   | 8,628    
|                                                             
|Loss from discontinued operations, net of 
   income taxes    |                                   | (79      
|                                                              |                                   |          
|**Net Income (Loss)**                                         | $                                 | 8,549    
|                                                              |                                   |          
|                                                             
|**Per Share:**                                                |                                   |          
|Basic Earnings (Loss) Per Share:                              |                                   |          
|Income from continuing operations                             | $                                 | 0.03     
|                                                             
|Loss from discontinued operations                             |                                   |         
|                                                              |                                   |          
|Basic earnings (loss) per share                               | $                                 | 0.03     
|                                                              |                                   |          
|*Shares*                                                      | **                                | *291,110*
|                                                             
|Diluted Earnings (Loss) Per Share:                            |                                   |          
|Income from continuing operations                             | $                                 | 0.03     
|                                                             
|Loss from discontinued operations                             |                                   |         
|                                                              |                                   |          
|Diluted earnings (loss) per share                             | $                                 | 0.03     
|                                                              |                                   |          
|*Shares*                                                      | **                                | *293,608*

|                                                        
|--------------------------------------------------------
|See Notes to Condensed Consolidated Financial Statements

|3
|-



|THE SERVICEMASTER COMPANYCondensed Consolidated Statements of Financial Position (Unaudited)(In thousands, except per share data)
|---------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                 

|**Assets**                                                                                                     | **As of March 31, 2007** |           | **As of December 31,
    2006** |  
|-------------------------------------------------------------------------------------------------------------- | ------------------------ | --------- | ------------------------------- | -
|                                                                                                               |                          |           |                                 |  
|**Current Assets** :                                                                                           |                          |           |                                 |  
|Cash and cash equivalents                                                                                      | $                        | 114,011   |                                 | $
|Marketable securities                                                                                          |                          | 113,036   |                                 |  
|Receivables, less allowance of $27,225 and $26,759, respectively                                               |                          | 410,867   |                                 |  
|Inventories                                                                                                    |                          | 77,863    |                                 |  
|Prepaid expenses and other assets                                                                              |                          | 72,624    |                                 |  
|Deferred customer acquisition costs                                                                            |                          | 66,502    |                                 |  
|Deferred taxes                                                                                                 |                          | 36,430    |                                 |  
|Assets of discontinued operations                                                                              |                          | 1,448     |                                 |  
|                                                                                                               |                          |           |                                 |  
|Total Current Assets                                                                                           |                          | 892,781   |                                 |  
|                                                                                                               |                          |           |                                 |  
|**Property and Equipment:**                                                                                    |                          |           |                                 |  
|At cost                                                                                                        |                          | 421,456   |                                 |  
|Less: accumulated depreciation                                                                                 |                          | (244,084  | )                               |  
|                                                                                                               |                          |           |                                 |  
|Net property and equipment                                                                                     |                          | 177,372   |                                 |  
|                                                                                                               |                          |           |                                 |  
|                                                                                                              
|**Other Assets:**                                                                                              |                          |           |                                 |  
|Goodwill                                                                                                       |                          | 1,662,784 |                                 |  
|Intangible assets, primarily trade names, net                                                                  |                          | 249,054   |                                 |  
|Notes receivable                                                                                               |                          | 28,133    |                                 |  
|Long-term marketable securities                                                                                |                          | 183,389   |                                 |  
|Other assets                                                                                                   |                          | 12,458    |                                 |  
|                                                                                                               |                          |           |                                 |  
|Total Assets                                                                                                   | $                        | 3,205,971 |                                 | $
|                                                                                                               |                          |           |                                 |  
|                                                                                                              
|**Liabilities and Shareholders Equity**                                                                       |                          |           |                                 |  
|                                                                                                              
|**Current Liabilities** :                                                                                      |                          |           |                                 |  
|Accounts payable                                                                                               | $                        | 115,901   |                                 | $
|Accrued liabilities:                                                                                           |                          |           |                                 |  
|Payroll and related expenses                                                                                   |                          | 84,125    |                                 |  
|Self-insured claims and related expenses                                                                       |                          | 89,423    |                                 |  
|Income taxes payable                                                                                           |                          | 9,888     |                                 |  
|Other                                                                                                          |                          | 97,879    |                                 |  
|Deferred revenues                                                                                              |                          | 505,321   |                                 |  
|Liabilities of discontinued operations                                                                         |                          | 7,289     |                                 |  
|Current portion of long-term debt                                                                              |                          | 20,779    |                                 |  
|                                                                                                               |                          |           |                                 |  
|Total Current Liabilities                                                                                      |                          | 930,605   |                                 |  
|                                                                                                               |                          |           |                                 |  
|                                                                                                              
|**Long-Term Debt**                                                                                             |                          | 734,907   |                                 |  
|                                                                                                              
|**Long-Term Liabilities:**                                                                                     |                          |           |                                 |  
|Deferred taxes                                                                                                 |                          | 171,673   |                                 |  
|Liabilities of discontinued operations                                                                         |                          | 7,356     |                                 |  
|Other long-term obligations, primarily self-insured claims                                                     |                          | 169,317   |                                 |  
|                                                                                                               |                          |           |                                 |  
|Total Long-Term Liabilities                                                                                    |                          | 348,346   |                                 |  
|                                                                                                               |                          |           |                                 |  
|                                                                                                              
|**Minority Interest**                                                                                          |                          | 100,000   |                                 |  
|                                                                                                              
|**Commitments and Contingencies**                                                                              |                          |           |                                 |  
|                                                                                                              
|**Shareholders Equity:**                                                                                      |                          |           |                                 |  
|Common stock $0.01 par value, authorized 1,000,000 shares; issued 
   328,253 and 326,168 shares, respectively |                          | 3,283     |                                 |  
|Additional paid-in capital                                                                                     |                          | 1,200,652 |                                 |  
|Retained earnings                                                                                              |                          | 292,268   |                                 |  
|Accumulated other comprehensive income                                                                         |                          | 11,960    |                                 |  
|Treasury stock                                                                                                 |                          | (416,050  | )                               |  
|                                                                                                               |                          |           |                                 |  
|Total Shareholders Equity                                                                                     |                          | 1,092,113 |                                 |  
|                                                                                                               |                          |           |                                 |  
|Total Liabilities and Shareholders Equity                                                                     | $                        | 3,205,971 |                                 | $
|                                                                                                               |                          |           |                                 |  

|                                                        
|--------------------------------------------------------
|See Notes to Condensed Consolidated Financial Statements

|4
|-



|THE SERVICEMASTER COMPANYCondensed Consolidated Statements of Cash Flows (Unaudited)(In thousands)
|--------------------------------------------------------------------------------------------------
|                                                                                                  

|                                                                                            | **Three Months Ended 
March 31,** |         
|------------------------------------------------------------------------------------------- | --------------------------------- | --------
|                                                                                            | **2007**                          |         
|                                                                                            |                                   |         
|**Cash and Cash Equivalents at January 1**                                                  | $                                 | 123,675 
|****                                                                                       
|**Cash Flows from Operating Activities from Continuing Operations:**                        |                                   |         
|**Net Income (Loss)**                                                                       |                                   | 8,549   
|Adjustments to reconcile net income (loss) to net cash used for 
     operating activities: |                                   |         
|Loss from discontinued operations                                                           |                                   | 79      
|Depreciation expense                                                                        |                                   | 12,499  
|Amortization expense                                                                        |                                   | 2,831   
|Option and restricted stock expense                                                         |                                   | 1,555   
|Change in working capital, net of acquisitions:                                             |                                   |         
|Receivables                                                                                 |                                   | (6,027  
|Inventories and other current assets                                                        |                                   | (84,518 
|Accounts payable                                                                            |                                   | 544     
|Deferred revenues                                                                           |                                   | 62,434  
|Accrued liabilities                                                                         |                                   | (26,504 
|Change in tax accounts:                                                                     |                                   |         
|Current and deferred income taxes                                                           |                                   | (10,074 
|Resolution of income tax audits                                                             |                                   |        
|Other, net                                                                                  |                                   | 2,074   
|                                                                                            |                                   |         
|**Net Cash Used for Operating Activities from Continuing Operations**                       |                                   | (36,558 
|                                                                                            |                                   |         
|****                                                                                       
|**Cash Flows from Investing Activities from Continuing Operations:**                        |                                   |         
|Property additions                                                                          |                                   | (12,360 
|Sale of equipment and other assets                                                          |                                   | 155     
|Business acquisitions, net of cash acquired                                                 |                                   | (13,312 
|Notes receivable, financial investments and securities                                      |                                   | 405     
|                                                                                            |                                   |         
|**Net Cash Used for Investing Activities from Continuing Operations**                       |                                   | (25,112 
|                                                                                            |                                   |         
|****                                                                                       
|**Cash Flows from Financing Activities from Continuing Operations:**                        |                                   |         
|Borrowings of debt                                                                          |                                   | 352,901 
|Payments of debt                                                                            |                                   | (292,707
|Purchase of Service Master stock                                                            |                                   |        
|Shareholders dividends                                                                     |                                   | (34,990 
|Proceeds from employee share plans                                                          |                                   | 26,527  
|                                                                                            |                                   |         
|**Net Cash Provided from Financing Activities from Continuing Operations**                  |                                   | 51,731  
|                                                                                            |                                   |         
|****                                                                                       
|**Cash Flows from Discontinued Operations:**                                                |                                   |         
|Cash provided from (used for) operating activities                                          |                                   | 275     
|Cash provided from investing activities                                                     |                                   |        
|                                                                                            |                                   |         
|**Net Cash Provided from (Used for) Discontinued Operations**                               |                                   | 275     
|                                                                                            |                                   |         
|****                                                                                       
|**Cash Increase (Decrease) During the Period**                                              |                                   | (9,664  
|                                                                                            |                                   |         
|****                                                                                       
|**Cash and Cash Equivalents at March 31**                                                   | $                                 | 114,011 
|                                                                                            |                                   |         

|                                                        
|--------------------------------------------------------
|See Notes to Condensed Consolidated Financial Statements

|5
|-



|THE SERVICEMASTER COMPANYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
Note 1:  The condensed consolidated financial statements include the accounts of The ServiceMaster Company
and its subsidiaries, collectively referred to as the Company or ServiceMaster.
Intercompany transactions and balances have been eliminated in consolidation.
Note 2:  The condensed consolidated financial statements have been prepared by the Company in accordance
with accounting principles generally accepted in the United States (GAAP) and pursuant to the rules
and regulations of the Securities and Exchange Commission. The Company recommends that the quarterly
condensed consolidated financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Companys latest Annual Report to Shareholders
on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2006
(2006 Annual Report). The condensed consolidated financial statements reflect all adjustments which
are, in the opinion of management, necessary for the fair presentation of the financial position,
results of operations and cash flows for the interim periods. The results of operations for any interim
period are not necessarily indicative of the results which might be achieved for a full year.
      Note
        3:   On March 19, 2007, the Company announced the execution
        of a definitive merger agreement to be acquired by CDRSVM Topco, Inc.,
        a corporation formed by a fund managed by Clayton, Dubilier & Rice,
        Inc. (CD&R). The transaction is subject to receipt of
        shareholder approval, and approval of the California Department of Insurance
        and the Florida Office of Insurance Regulation, as well as satisfaction
        or waiver of other closing conditions. The Company has announced that
        it will hold a special meeting of shareholders on June 28, 2007 to consider
        and vote on a proposal to approve the merger agreement. The preliminary
        proxy statement describing the proposed merger and related information
        was filed with the Securities and Exchange Commission on April 16, 2007.
        The Company expects the final proxy statement to be mailed to shareholders
        on or about May 24, 2007.
      If the
        merger is completed, ServiceMasters shareholders will receive $15.625
        in cash for each outstanding share of common stock of the Company. The
        Company estimates the total amount of funds necessary to complete the
        merger and the related transactions to be approximately $5.2 billion,
        which includes approximately $4.8 billion to be paid out to the Companys
        stockholders and holders of other equity-based interests in the Company
        and the remainder to be applied to pay related fees and expenses in connection
        with the merger, the financing arrangements and the related transactions.
        These payments are expected to be funded by a combination of equity contributions
        and debt financing, as well as the Companys available cash. The
        estimate of the total funds necessary to complete the merger and related
        transactions also includes amounts necessary to repay borrowings under
        ServiceMasters existing credit facilities as well as certain public
        debt obligations that mature in 2007 and 2009. The estimated debt to be
        repaid does not include the public debt with longer maturities, or certain
        capital leases, deferred payments and other obligations. The parties to
        the merger agreement have received equity commitment letters from equity
        sponsors totaling approximately $1.4 billion and debt commitment letters
        from debt financing providers totaling approximately $4.5 billion. Under
        certain conditions resulting in the termination of the merger, each party
        to the merger may be required to pay the other party a termination fee
        of $100 million. See the preliminary proxy statement filed with the Securities
        and Exchange Commission for additional details related to the estimate
        of the total funds necessary to complete the merger, the financing of
        the merger and the effects of terminating the merger agreement.
The Companys outstanding options, stock appreciation rights and restricted stock units (equity
awards), and its outstanding restricted stock, are impacted by the merger. The restrictions
applicable to restricted stock that is outstanding immediately prior to the effective time of the
merger will lapse and each share will be converted at the effective time of the merger into the right
to receive a cash payment equal to $15.625. Options to acquire shares of ServiceMaster common stock
that are outstanding immediately prior to the effective time of the merger, vested or unvested, will
be converted at the effective time of the merger into the right to receive a cash payment equal to
the excess (if any) of
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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|6
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|$15.625 per share over the exercise price per share of the option times the number of shares subject
to the option, less any applicable withholding taxes. Stock appreciation rights that are outstanding
immediately prior to the effective time of the merger, vested or unvested, will be converted at the
effective time of the merger into the right to receive a cash payment equal to the excess of $15.625
per share over the base price per share of the stock appreciation right times the number of shares
subject to the stock appreciation rights award, less any applicable withholding taxes. Restricted
stock units that are outstanding immediately prior to the effective time of the merger, vested or
unvested, will be converted at the effective time of the merger into the right to receive a cash
payment equal to $15.625 per share times the number of units, less any applicable withholding taxes.
For all outstanding equity awards, upon consummation of the merger, the Company will record compensation
expense at least equal to the fair value of the awards at the grant date. The total amount expected
to be paid in respect of options, stock appreciation rights and restricted stock units is approximately $62 million.
The Company has change in control severance agreements with its executive officers. These agreements
generally provide, among other things, for severance pay and other benefits to the officer if, within
two years following a change in control of ServiceMaster, the officers employment is terminated
by the Company other than for cause or is terminated by the officer for good reason. The completion
of the merger would constitute a change of control for purposes of these severance agreements.
Under the terms of the merger agreement, all fees and expenses incurred in connection with the transaction
will be paid by the party incurring such fees and expenses. During the first quarter of 2007, the
Company incurred certain costs related to the merger that are presented as Merger related expenses
in the Condensed Consolidated Statements of Operations and were recorded in the Other Operations
and Headquarters business segment. Merger related expenses totaled $2.5 million pretax ($2.1 million
after-tax, and $0.01 per diluted share) for the first quarter of 2007. These merger related costs
include fees for a fairness opinion provided by a third party to the Companys Board of Directors,
as well as legal and other professional fees. Additional merger related costs are expected to be
incurred in future periods, including financial advisor fees and expenses, financing fees, legal
and accounting fees, as well as proxy solicitation and other costs.
After the merger, if completed, ServiceMaster common stock will cease to be traded on the New York
Stock Exchange.
On April 17, 2007, the Company was notified by the Federal Trade Commission of early termination of
the 30-day waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
in conjunction with the transaction.
Note 4:   The 2007 first quarter results include restructuring charges related to the Companys
consolidation of its corporate headquarters into its operations support center in Memphis, Tennessee
and the closing of its headquarters in Downers Grove, Illinois. The transition to Memphis is targeted
to be completed by November 2007. As previously disclosed, the Company expects to incur incremental
costs in connection with the corporate headquarters consolidation plan in the range of $30 to $35
million through the end of 2007. Almost all such costs will be cash expenditures. In accordance with
U.S. GAAP, these costs are being expensed throughout the transition period. In the first quarter
of 2007, the Company recognized pretax charges of approximately $7.1 million, ($4.4 million, after-tax
and $0.02 per diluted share). These pretax charges consisted of $6.1 million of employee retention
and severance and $1.0 million of recruiting and related costs. Separation agreements with certain
officers provide that if a merger is completed prior to the employees agreed upon
termination date and other contractual provisions are met; the officers will be deemed to
have terminated their employment for good reason for purposes of their change in control
severance agreements and will receive, in lieu of the employees retention and
severance payments under the employees separation agreements, the payments and
benefits provided in the change in control severance agreements. No costs related to the headquarters
consolidation were incurred in the first quarter of 2006.
The 2006 first quarter results include a $3.6 million, pretax charge ($2.2 million, after-tax and $0.01
per diluted share) related to Project Accelerate, an internal, multi-phase restructuring project
designed to improve the effectiveness and efficiency of all functional support areas. All the restructuring
costs associated with Project Accelerate were recognized entirely in 2006.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7
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|The pretax charges related to the headquarters consolidation as well as Project Accelerate are reported
in the Restructuring charges line in the Condensed Consolidated Statements of Operations
and are recorded in the Other Operations and Headquarters business segment.
Note 5:  The Company has identified the most important accounting policies with respect to its financial
position and results of operations. These relate primarily to revenue recognition and the deferral
of customer acquisition costs. The following revenue recognition policies have not changed since
year-end. Revenues from lawn care and pest control services, as well as liquid and fumigation termite
applications are recognized as the services are provided. Revenues from landscaping services are
recognized as they are earned based upon monthly contract arrangements or when services are performed
for non-contractual arrangements. The Company eradicates termites through the use of baiting systems,
as well as through non-baiting methods (e.g., fumigation or liquid treatments). Termite services
using baiting systems, as well as home warranty services, are frequently sold through annual contracts
for a one-time, upfront payment. Direct costs of these contracts (service costs for termite contracts
and claim costs for warranty contracts) are expensed as incurred. The Company recognizes revenue
over the life of these contracts in proportion to the expected direct costs. Those costs bear a direct
relationship to the fulfillment of the Companys obligations under the contracts and are representative
of the relative value provided to the customer (the proportional performance method). Home warranty
contract revenue is recognized based on the expected emergence of total claim costs. The Company
regularly reviews its estimates of direct costs for its termite bait and home warranty contracts
and adjusts the estimates when appropriate. Revenues from the Companys commercial disaster
response and reconstruction projects are recognized using the percentage of completion method in
the ratio that total incurred costs bear to total estimated costs. Revenues from trade name licensing
arrangements are recognized when earned. The Company has franchise agreements in its TruGreen LawnCare,
Terminix, ServiceMaster Clean, Merry Maids, AmeriSpec and Furniture Medic businesses. Franchised
revenue (which in the aggregate represents approximately four percent of consolidated revenue) consists
principally of monthly fees based upon the franchisees customer level revenue. Monthly fee
revenue is recognized when the related customer level revenue is reported by the franchisee and collectibility
is assured. Franchise revenue also includes initial fees resulting from the sale of franchises. These
fees are fixed and are recognized as revenue when collectibility is assured and all material services
or conditions relating to the sale have been substantially performed. Due to the seasonality of the
TruGreen and Terminix operations, total profits from the franchised operations comprised 22 percent
and 21 percent of the consolidated operating income, before headquarters overheads, restructuring
charges and merger related expenses, for the three months ended March 31, 2007 and 2006 respectively,
a much higher percentage than is expected for subsequent quarters and the year as a whole. The portion
of total franchise fee income related to initial fees received from the sale of franchises was immaterial
to the Companys consolidated financial statements for all periods.
The Company had $505 million and $442 million of deferred revenue at March 31, 2007 and December 31,
2006, respectively, which consist primarily of payments received for annual contracts relating to
home warranty, termite baiting, pest control and lawn care services. The revenue related to these
services is recognized over the contractual period as the direct costs are incurred, such as when
the services are performed or claims are incurred.
Customer acquisition costs, which are incremental and direct costs of obtaining a customer, are deferred
and amortized over the life of the related contract in proportion to revenue recognized. These costs
include sales commissions and direct selling costs which can be shown to have resulted in a successful
sale.
TruGreen LawnCare has significant seasonality in its business. In the winter and spring, this business
sells a series of lawn applications to customers which are rendered primarily in March through October
(the production season). This business incurs incremental selling expenses at the beginning of the
year that directly relate to successful sales for which the revenues are recognized in later quarters.
On an interim basis, TruGreen LawnCare defers these incremental selling expenses, pre-season advertising
costs
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8
|-



|and annual repairs and maintenance procedures that are performed primarily in the first quarter. These
costs are deferred and recognized in proportion to the contract revenue over 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 costs are deferred and recognized
approximately in proportion to revenue over the balance of the year, and are not deferred beyond
the calendar year-end.
The cost of direct-response advertising at Terminix and TruGreen LawnCare, consisting primarily of
direct-mail promotions, is capitalized and amortized over its expected period of future benefits.
The preparation of the consolidated financial statements requires management to make certain estimates
and assumptions required under GAAP which may differ from the actual results. Disclosures in the
2006 Annual Report presented the significant areas that require the use of managements estimates
and discussed how management formed its judgments. The areas discussed included revenue recognition;
the allowance for uncollectible receivables; accruals for self-insured retention limits related to
medical, workers compensation, auto and general liability insurance claims; accruals for home
warranty and termite damage claims; the possible outcome of outstanding litigation; accruals for
income tax liabilities as well as deferred tax accounts; the deferral and amortization of customer
acquisition costs; work-in-process balances related to commercial disaster response and reconstruction
projects; useful lives for depreciation and amortization expense; and the valuation of tangible and
intangible assets. In 2007, there have been no changes in the significant areas that require estimates
or in the underlying methodologies used in determining the amounts of these associated estimates.
      The receivable
        balance at March 31, 2007 includes approximately $61 million of InStar
        receivables (including approximately $19 million of work-in-process that
        has not yet been billed). InStars receivables include hurricane
        disaster recovery work performed in New Orleans, southern Florida and
        other hurricane-affected areas. The Company has accounts receivable from
        customers that were insured by a family of insurance companies in Florida
        that are insolvent, and whose claims are now being administered by the
        Florida Insurance Guaranty Association (FIGA). The aggregate
        receivable balance due from FIGA insured customers, net of related reserves,
        totaled approximately $8 million at March 31, 2007, and represents the
        Companys best estimate of the amounts that will ultimately be collected.
        The Company expects that collection of certain of InStars receivables,
        potentially including certain of those administered by FIGA, will be significantly
        delayed and require or involve litigation. While InStar has a history
        of recovering amounts related to its disaster recovery projects, the current
        circumstances increase the uncertainties in estimating the amounts recoverable
        on certain projects. In light of these circumstances and
uncertainties, the Company has been performing an internal review of outstanding balances
and related billing and collection procedures. The allowance for doubtful accounts at
March 31, 2007 included approximately $9 million related to InStars accounts
receivable. Such allowance incorporates the results of this review to date, and reflects
managements best estimate of the amounts that will not be collected. If the
estimated amounts recoverable on the projects change from the amounts currently recorded,
these differences will be recognized as income or loss when the change in estimate is
made. Such changes, if any, would not currently be expected to be material to the
Companys consolidated financial statements.
Note 6:   The Company carries insurance policies on insurable risks at levels which it believes
to be appropriate, including workers compensation, auto and general liability risks. The Company
has both self-insured retention limits and insured layers of excess insurance coverage above such
self-insured retention limits. The Company is required to pay all claims that fall below the retention
limits. As of March 31, 2007 and 2006, the Company had total accrued self-insured claims of $162
million and $167 million, respectively. During the three months ended March 31, the Company recorded
provisions for claims totaling $12 million in 2007 and $13 million in 2006, and the Company paid
claims totaling $16 million in 2007 and $19 million in 2006. The Company uses historical claims experience
and an independent, national actuarial firm to establish both the current year accrual and the underlying
provision for future losses. The actuarially determined provision and related accrual include consideration
of both known claims, as well as incurred but not reported claims. The Company adjusts its estimate
of accrued self-insured claims when required to reflect changes based on factors such as changes
in health care costs, accident frequency and claim severity.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9
|-



|Accruals for warranty claims in the American Home Shield business are made based on the Companys
claims experience and actuarial projections. Termite damage claim accruals are recorded based on
both the historical rates of claims incurred within a contract year and the cost per claim. Current
activity could differ causing a change in estimates. The Company has certain liabilities with respect
to existing or potential claims, lawsuits, and other proceedings. The Company accrues for these liabilities
when it is probable that future costs will be incurred and such costs can be reasonably estimated.
Any resulting adjustments, which could be material, are recorded in the period the adjustments are
identified.
Note 7:  In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets, goodwill and intangible assets that are not amortized are subject
to assessment for impairment by applying a fair-value based test on an annual basis or more frequently
if circumstances indicate a potential impairment. Such circumstances could include actual earnings
being significantly below managements estimates. The Companys annual assessment date
is October 1.
During the first quarter of 2007, the Company completed the purchase price allocation for the acquisition
of InStar, and goodwill related to this acquisition increased by approximately $1.1 million, primarily
based upon the receipt of additional information regarding the fair values of certain pre-acquisition
contingencies. The remaining increase in goodwill and intangible assets primarily relates to tuck-in
acquisitions completed throughout the first three months by Terminix and TruGreen LawnCare.
The table below summarizes the goodwill and intangible asset activity and balances:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|**(In thousands)**          | **As of 
      December 31, 
      2006** |           | **Additions** |   | **Amorti- 
      zation** |  | **As of 
      March 31, 
      2007** |       
|--------------------------- | ----------------------------------------- | --------- | ------------- | - | ------------------------- |  | -------------------------------------- | ------
|                            |                                           |           |               |   |                           |  |                                        |       
|Non-amortizable Assets:     |                                           |           |               |   |                           |  |                                        |       
|Goodwill                    | $                                         | 1,648,258 |               | $ | 14,526                    |  | $                                      |      
|Trade names & other         |                                           | 215,493   |               |   |                          |  |                                        |      
|                           
|Amortizable Assets:         |                                           |           |               |   |                           |  |                                        |       
|Other intangible assets     |                                           | 80,098    |               |   | 2,668                     |  |                                        |      
|Accumulated amortization(1) |                                           | (46,374   | )             |   |                          |  |                                        | (2,831
|                            |                                           |           |               |   |                           |  |                                        |       
|Net other intangibles       |                                           | 33,724    |               |   | 2,668                     |  |                                        | (2,831
|                            |                                           |           |               |   |                           |  |                                        |       
|Total                       | $                                         | 1,897,475 |               | $ | 17,194                    |  | $                                      | (2,831
|                            |                                           |           |               |   |                           |  |                                        |       

|                                                                                                                                                                                                                                                                                    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)  For the existing intangible assets, the Company anticipates amortization expense of
$11 million in 2007, declining ratably to approximately $2 million of amortization expense in 2011.
The table below presents, by segment, the goodwill that is not subject to amortization:
|                                                                                                                                                                                                                                                                                    

|**(In thousands)**              | **As of 
      March 31, 
      2007** |           | **As of 
      December 31, 
      2006** |  
|------------------------------- | -------------------------------------- | --------- | ----------------------------------------- | -
|                                |                                        |           |                                           |  
|TruGreen LawnCare               | $                                      | 747,260   |                                           | $
|Terminix                        |                                        | 712,112   |                                           |  
|American Home Shield            |                                        | 84,358    |                                           |  
|Other Operations & Headquarters |                                        | 119,054   |                                           |  
|                                |                                        |           |                                           |  
|Total                           | $                                      | 1,662,784 |                                           | $
|                                |                                        |           |                                           |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 8: Basic earnings per share are computed by dividing income available to common stockholders by the weighted-average
number of shares outstanding for the period. The weighted-average common shares for the diluted earnings
per share calculation includes the incremental effect related to outstanding options and stock appreciation
rights (SARS) whose market price is in excess of the grant price. Shares potentially issuable under
convertible securities have been considered outstanding for purposes of the diluted earnings per
share calculations. In computing diluted earnings per share, the after-tax interest expense related to

|10
|--



|convertible securities is added back to net income in the numerator, while the diluted shares in the
denominator include the shares issuable upon conversion of the securities. Shares potentially issuable
under convertible securities have not been considered outstanding for the three months ended March
31, 2007 and 2006, as their inclusion results in a less dilutive computation. Had the inclusion of
convertible securities not resulted in a less dilutive computation for the three months ended March
31, 2007 and 2006, incremental shares attributable to the assumed conversion of the debentures would
have increased shares outstanding by 8.0 million shares for both periods and the after-tax interest
expense related to the convertible debentures that would have been added to net income in the numerator
would have been $1.2 million for both periods.
The following table reconciles both the numerator and the denominator of the basic earnings per share
from continuing operations computation to the numerator and the denominator of the diluted earnings
per share from continuing operations computation.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|**(In thousands, except per share data)**  | **Three Months 
      Ended  March 31, 2007** |       | **Three Months 
      Ended  March 31, 2006** | 
|------------------------------------------ | --------------------------------------------- | ----- | --------------------------------------------- | 
|                                           |                                               |       |                                               | 
|**Continuing Operations:**                 | **Income**                                    |       | **Shares**                                    | 
|                                           |                                               |       |                                               | 
|Basic earnings per share                   | $                                             | 8,628 |                                               | 
|Effect of dilutive securities, net of tax: |                                               |       |                                               | 
|Options & SARS                             |                                               |       |                                               | 
|                                           |                                               |       |                                               | 
|                                          
|Diluted earnings per share                 | $                                             | 8,628 |                                               | 
|                                           |                                               |       |                                               | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 9:   The Company maintains a shareholder approved incentive plan that allows for the issuance
of equity-based compensation awards, including stock options, stock appreciation rights, share grants,
restricted stock awards and restricted stock unit awards. For purposes of this Note 9, the Companys
stock options and stock appreciation rights are collectively called option(s).
Total pretax option expense for the three months ended March 31, 2007 and 2006 was approximately $.8
million and $1.6 million, respectively. Income tax benefits recognized for these awards for the three
months ended March 31, 2007 and 2006 were approximately $.3 million and $.6 million, respectively.
Total pretax share grant and restricted stock expense for the three months ended March 31, 2007 and
2006 was approximately $.8 million and $1.3 million, respectively. Income tax benefits recognized
for these awards for the three months ended March 31, 2007 and 2006 were approximately $.3 million
and $.5 million, respectively. The Company did not issue stock options, stock appreciation rights,
share grants, restricted stock awards or restricted stock unit awards during the three months ended
March 31, 2007.
Note 10:   In the Condensed Consolidated Statements of Cash Flows, the caption Cash and Cash Equivalents
includes investments in short-term, highly-liquid securities having a maturity of three months or
less. Supplemental information relating to the Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2007 and 2006 is presented in the following table:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|**(in thousands) 
      Cash paid for or (received from):** | **2007** |        | **2006** |  
|----------------------------------------------------------- | -------- | ------ | -------- | -
|                                                            |          |        |          |  
|Interest expense                                            | $        | 25,444 |          | $
|Interest and investment income                              |          | (8,981 | )        |  
|Income taxes, net of refunds                                |          | 15,900 |          |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) Income tax payments for the three months ended March 31, 2006 include payments of $5 million relating
to the resolution of the 2003 and 2004 audits.
Cash received from interest and investment income primarily reflects investment income and gains realized
on the investment portfolio at American Home Shield. The increase in cash paid for income taxes reflects
an increase in final estimated tax payments for the previous calendar year.
Note 11:  Total comprehensive income (loss) was $10 million and ($12) million for the three months ended
March 31, 2007 and 2006, respectively. Total comprehensive income primarily includes net

|11
|--



|income (loss), changes in unrealized gains and losses on marketable securities and foreign currency
translation balances.
Note 12:  The Company has an agreement to provide for the ongoing revolving sale of a designated pool
of accounts receivable of TruGreen LawnCare and Terminix to a wholly-owned, bankruptcy-remote subsidiary,
ServiceMaster Funding LLC. ServiceMaster Funding LLC has entered into an agreement to transfer, on
a revolving basis, an undivided percentage ownership interest in a pool of accounts receivable to
unrelated third-party purchasers. ServiceMaster Funding LLC retains an undivided percentage interest
in the pool of accounts receivable and bad debt losses for the entire pool are allocated first to
this retained interest. During the three months ended March 31, 2007 and 2006, there were no receivables
sold to third parties under this agreement. However, the Company may sell its receivables in the
future, which would provide an alternative funding source. The agreement is a 364-day facility that
is renewable at the option of the purchasers. The Company may sell up to $70 million of its receivables
to these purchasers and therefore has immediate access to cash proceeds from these sales. The amount
of the eligible receivables varies during the year based on seasonality of the business and will,
at times, limit the amount available to the Company.
Note 13:   Total debt was $756 million at March 31, 2007, approximately $65 million more than the
amount at December 31, 2006. This increase reflects normal seasonal working capital needs and funding
for acquisitions. Approximately 60 percent of the Companys debt matures beyond five years and
49 percent beyond fifteen years. The Companys next public debt maturity of $49 million is in
August 2007. The Company has both the intent and ability to pay this debt with other long-term financing,
and it is classified as long-term debt in the Condensed Consolidated Statements of Financial Position.
Note 14:   The financial statement caption discontinued operations includes American
Residential Services (ARS) and American Mechanical Services (AMS). The ARS/AMS operations provide
heating, ventilation, air conditioning (HVAC), plumbing and electrical installation and repair. In
the first quarter of 2006, the Company recorded a ($25) million after-tax provision for expected
losses on the disposition of certain ARS/AMS properties. In the third quarter of 2006, the Company
completed the sales of ARS and AMS. As part of the ARS and AMS sale agreements, the Company continues
to be obligated to third parties with respect to operating leases for which the Company has been
released as being the primary obligor of certain real estate leased and operated by the buyers. The
Companys obligations under these agreements may be limited in terms of time and or amount,
and in some cases, the Company may have recourse against the buyers for any potential future payments
made by the Company. At the present time, the Company does not believe it is probable that the buyers
will default on their obligations subject to guarantee. The fair value of the Companys obligations
related to these guarantees is not significant and no liability has been recorded.
In addition, the Company has guarantees on certain bonds issued by the divested companies, primarily
performance and license type bonds. The maximum payments the Company could be required to make if
the buyers are unable to fulfill their obligations is approximately $23 million at March 31, 2007.
Approximately 67 percent of the bonds expire during 2007, with the remaining bonds expiring primarily
through 2008. The Company believes that if it were to incur a loss on any individual bond guarantee,
the likelihood of which the Company believes is remote, such loss would not have a material effect
on the Companys business, financial condition or results of operations.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12
|--



|The operating results and financial position of discontinued operations are as follows:
|---------------------------------------------------------------------------------------
|                                                                                       

|                                                              | **Three months ended March 31,** |     
|------------------------------------------------------------- | -------------------------------- | ----
|                                                              |                                  |     
|**(In thousands, except per share data)**                     | **2007**                         |     
|                                                              |                                  |     
|Operating revenue                                             | $                                |    
|                                                              |                                  |     
|                                                             
|Operating loss                                                | $                                | (126
|Impairment charge                                             |                                  |    
|                                                              |                                  |     
|Pretax loss                                                   |                                  | (126
|                                                             
|Benefit for income taxes                                      |                                  | (47 
|                                                              |                                  |     
|                                                             
|Loss from discontinued operations                             | $                                | (79 
|                                                              |                                  |     
|                                                             
|Per diluted share loss from 
         discontinued operations | $                                |    
|                                                              |                                  |     

|**(In thousands)**    | **As of 
      March 31, 2007** |        | **As of 
      December 31, 2006** |  
|--------------------- | ------------------------------- | ------ | ---------------------------------- | -
|                      |                                 |        |                                    |  
|Current assets        | $                               | 1,448  |                                    | $
|                      |                                 |        |                                    |  
|Total assets          | $                               | 1,448  |                                    | $
|                      |                                 |        |                                    |  
|                     
|Current liabilities   | $                               | 7,289  |                                    | $
|Long-term liabilities |                                 | 7,356  |                                    |  
|                      |                                 |        |                                    |  
|Total liabilities     | $                               | 14,645 |                                    | $
|                      |                                 |        |                                    |  

|                                                                                                                                                                                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The following table summarizes the activity during the three months ended March 31, 2007 for the remaining
liabilities from discontinued operations. The remaining obligations primarily relate to long-term
self-insurance claims. The Company believes that the remaining reserves continue to be adequate and
reasonable.
|                                                                                                                                                                                                                                                                                                                            

|**(In thousands)**                                 | **Balance at 
      December 31, 
      2006** |        | **Cash 
      Payments 
      or Other** |   | **Balance at 
      March 31, 
      2007** |  
|-------------------------------------------------- | ---------------------------------------------- | ------ | ---------------------------------------- | - | ------------------------------------------- | -
|                                                   |                                                |        |                                          |   |                                             |  
|Liabilities from ARS/AMS                           | $                                              | 4,301  |                                          | $ | 637                                         |  
|Liabilities from other discontinued 
   operations |                                                | 10,884 |                                          |   | (97                                         | )
|                                                   |                                                |        |                                          |   |                                             |  
|Total liabilities from discontinued 
   operations | $                                              | 15,185 |                                          | $ | 540                                         |  
|                                                   |                                                |        |                                          |   |                                             |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 15: The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes (FIN 48), on January 1, 2007. As a result of the adoption of FIN 48, the Company
recorded a $.8 million increase in the liability for unrecognized tax benefits and a corresponding
reduction to the January 1, 2007 balance of retained earnings. The Company has $22.5 million of tax
items primarily reflected in state tax returns that have not been recognized for financial reporting
(unrecognized tax benefits). If recognized, the effective income tax rate would be favorably
impacted by $14 million, net of federal and state tax benefits.
It is expected that the amount of unrecognized tax benefits will change in the next twelve months.
Up to $7 million ($4 million, net of federal and state tax benefits) of the Companys unrecognized
tax benefits could be recognized within the next twelve months, primarily resulting from the expiration
of filing statutes and generally pertaining to the classification of income on certain state tax
returns.

|13
|--



|The Company files consolidated and separate income tax returns in the United States federal jurisdiction
and in many state and foreign jurisdictions. The Company has been audited by the United States Internal
Revenue Service (IRS) through 2005 and is no longer subject to state and local or foreign income
tax examinations by tax authorities for years before 2001.
In the ordinary course, the Company is subject to review by domestic and foreign taxing authorities,
including the IRS. As previously disclosed, the U.S. federal tax returns filed by the Company through
the 2005 return have been reviewed by the IRS. The Company paid $5 million primarily in the first
quarter of 2006 relating to the resolution of the 2003 and 2004 audits. In the fourth quarter of
2006, the IRS completed the audit of the Companys tax return for 2005, with no adjustments
or additional payments. The IRS commenced examinations of the Companys U.S. federal income
tax returns for 2006 and 2007 in the first quarter of 2006 and 2007, respectively, which are anticipated
to be completed by the end of 2007 and 2008, respectively. At this time, the outcome of these audits
is not known and no significant adjustments have been proposed by the IRS pertaining to these audit
periods. Various state tax authorities are in the process of auditing state income tax returns of
various subsidiaries. Several state audits are at the appeals level. If state authorities were to
prevail with their assessments, the Company does not anticipate that these adjustments would have
a material impact on the Companys financial position or results of operations.
The Companys policy is to recognize interest and penalties related to its tax positions within
the tax provision. During the three months ended March 31, 2007, the Company recognized less than
$100 thousand in interest expense through the tax provision. Upon adoption of FIN 48 on January 1,
2007, the Company had accrued for the payment of interest and penalties approximately $4.5 million
($2.6 million, net of federal and state tax benefits).
Note 16:  The business of the Company is conducted through five reportable operating segments: TruGreen
LawnCare, TruGreen LandCare, Terminix, American Home Shield and Other Operations and Headquarters.
The TruGreen LawnCare segment provides residential and commercial lawn care services. The TruGreen
LandCare segment provides landscape maintenance services primarily to commercial customers. The Terminix
segment provides termite and pest control services to residential and commercial customers. The American
Home Shield segment provides home warranties to consumers that cover heating, ventilation and air
conditioning, plumbing and other home systems and appliances. The Other Operations and Headquarters
segment includes InStar Services Group, a direct provider of commercial disaster response and reconstruction
services as well as the franchised and Company-owned operations of ServiceMaster Clean, AmeriSpec,
Furniture Medic and Merry Maids, which provide primarily residential disaster restoration, commercial
cleaning, carpet and upholstery cleaning, home inspection services, furniture repair and maid services.
The Other Operations and Headquarters segment also includes the Companys headquarters operations,
which provide various technology, marketing, finance, legal and other support services to the business
units. Segment information is presented in the following table.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14
|--



|**(In
      thousands)**                         | **Three Months 
      Ended March 31, 
      2007** | ****    | **Three
      Months 
      Ended March 31, 
      2006** |   |        
|------------------------------------------------ | --------------------------------------------------- | ------- | --------------------------------------------------------- | - | -------
|                                                 |                                                     |         |                                                           |   |        
|Operating Revenue:                               |                                                     |         |                                                           |   |        
|TruGreen LawnCare                                | $                                                   | 132,672 |                                                           | $ | 137,264
|TruGreen LandCare                                |                                                     | 102,942 |                                                           |   | 98,921 
|Terminix                                         |                                                     | 262,172 |                                                           |   | 253,539
|American Home Shield                             |                                                     | 125,187 |                                                           |   | 116,930
|Other Operations 
           and Headquarters    |                                                     | 72,922  |                                                           |   | 55,733 
|                                                 |                                                     |         |                                                           |   |        
|Total Operating Revenue                          | $                                                   | 695,895 |                                                           | $ | 662,387
|                                                 |                                                     |         |                                                           |   |        
|                                                
|Operating Income (Loss)(1):                      |                                                     |         |                                                           |   |        
|TruGreen LawnCare                                | $                                                   | (11,593 | )                                                         | $ | (2,823 
|TruGreen
      LandCare                          |                                                     | 66      |                                                           |   | (1,818 
|Terminix                                         |                                                     | 44,771  |                                                           |   | 33,462 
|American Home Shield                             |                                                     | 7,021   |                                                           |   | 9,133  
|Other Operations 
           and Headquarters(a) |                                                     | (17,550 | )                                                         |   | (11,694
|                                                 |                                                     |         |                                                           |   |        
|Total Operating Income(a)                        | $                                                   | 22,715  |                                                           | $ | 26,260 
|                                                 |                                                     |         |                                                           |   |        

|
|
|

|(a) Total operating income and the operating (loss) of the Other Operations and Headquarters segment include restructuring charges of $7.1 million and $3.6 million for the three months ended March 31, 2007 and 2006, respectively. In addition, total operating income and the operating (loss) of the Other Operations and Headquarters segment for the three months ended March 31, 2007 include merger related expenses of $2.5 million.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(1)                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                              

|**(In thousands)**                                        | **Three Months 
      Ended March 31, 
      2007** | ****   | **Three Months 
      Ended March 31, 
      2006** | **** |        
|--------------------------------------------------------- | --------------------------------------------------- | ------ | --------------------------------------------------- | ---- | -------
|                                                          |                                                     |        |                                                     |      |        
|Segment Operating Income                                  | $                                                   | 22,715 |                                                     | $    | 26,260 
|Non-operating expense (income):                           |                                                     |        |                                                     |      |        
|Interest expense                                          |                                                     | 14,283 |                                                     |      | 14,430 
|Interest and investment income, net                       |                                                     | (8,066 | )                                                   |      | (10,336
|Minority interest and other expense, net                  |                                                     | 2,049  |                                                     |      | 2,049  
|                                                          |                                                     |        |                                                     |      |        
|Income from Continuing Operations before 
   Income Taxes | $                                                   | 14,449 |                                                     | $    | 20,117 
|                                                          |                                                     |        |                                                     |      |        

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Other Operations and Headquarters segment includes the operations of InStar, ServiceMaster Clean
and Merry Maids, as well as the Companys headquarters function. InStar (acquired February 28,
2006) reported revenue of $22 million and $11 million for the three months ended March 31, 2007 and
2006, respectively and operating (loss)/income, net of acquisition related amortization costs, of
($2) million and $1 million for the three months ended March 31, 2007 and 2006, respectively. The
ServiceMaster Clean and Merry Maids franchise operations reported combined revenue of $49 and $43
million for the three months ended March 31, 2007 and 2006 respectively and combined operating income
of $13 million and $12 million for the three months ended March 31, 2007 and 2006, respectively.

|15
|--



|**(In thousands)**              | **As of 
      March 31, 2007** |           | **As of 
      December 31, 2006** |  
|------------------------------- | ------------------------------- | --------- | ---------------------------------- | -
|                                |                                 |           |                                    |  
|Identifiable Assets:            |                                 |           |                                    |  
|TruGreen LawnCare               | $                               | 1,057,309 |                                    | $
|TruGreen LandCare               |                                 | 105,923   |                                    |  
|Terminix                        |                                 | 929,943   |                                    |  
|American Home Shield            |                                 | 575,285   |                                    |  
|Other Operations & Headquarters |                                 | 536,063   |                                    |  
|Discontinued Operations         |                                 | 1,448     |                                    |  
|                                |                                 |           |                                    |  
|Total Identifiable Assets       | $                               | 3,205,971 |                                    | $
|                                |                                 |           |                                    |  

|
|
|

|**(In thousands)**                                                       | **As of 
      March 31, 2007** |           | **As of 
      March 31, 2006** |  
|------------------------------------------------------------------------ | ------------------------------- | --------- | ------------------------------- | -
|                                                                         |                                 |           |                                 |  
|Capital Employed:  (2)                                                   |                                 |           |                                 |  
|TruGreen LawnCare                                                        | $                               | 887,674   |                                 | $
|TruGreen LandCare                                                        |                                 | 47,051    |                                 |  
|Terminix                                                                 |                                 | 713,750   |                                 |  
|American Home Shield                                                     |                                 | 225,390   |                                 |  
|*American Home Shield without 
      Cash and marketable securities (2)* |                                 | *(85,222* | *)*                             |  
|Other Operations & Headquarters                                          |                                 | 87,130    |                                 |  
|Discontinued Operations                                                  |                                 | (13,196   | )                               |  
|                                                                         |                                 |           |                                 |  
|Total Capital Employed                                                   | $                               | 1,947,799 |                                 | $
|                                                                         |                                 |           |                                 |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Capital employed is a non-GAAP measure that is defined as the segments total assets less liabilities,
  exclusive of debt balances. The Company believes this information is useful to investors in helping
  them compute return on capital measures and therefore better understand the performance of the Companys
  business segments. The calculation of capital employed for the American Home Shield segment includes
  approximately $311 million and $287 million of cash and marketable securities at March 31, 2007 and
  2006, respectively. The investment income and realized gains/losses on these assets are reported
  below operating income in non-operating income/expense. In order to facilitate the comparison of
  return on invested capital for the American Home Shield segment, the Company has also presented capital
  employed for this segment excluding cash and marketable securities. The negative capital employed
  balances primarily result from deferred revenue and amounts payable to subcontractors. Presented
  below is a reconciliation of total segment capital employed to the most comparable GAAP measure.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|**(In thousands)**                                                    | **As of 
      March 31, 2007** |           | **As of 
      March 31, 2006** |  
|--------------------------------------------------------------------- | ------------------------------- | --------- | ------------------------------- | -
|                                                                      |                                 |           |                                 |  
|Total Assets                                                          | $                               | 3,205,971 |                                 | $
|Less:                                                                 |                                 |           |                                 |  
|Current liabilities, excluding current portion of 
    long-term debt |                                 | 909,826   |                                 |  
|Long-term liabilities                                                 |                                 | 348,346   |                                 |  
|                                                                      |                                 |           |                                 |  
|Total Capital Employed                                                | $                               | 1,947,799 |                                 | $
|                                                                      |                                 |           |                                 |  

|                                                                                                                                                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 17: In the ordinary course of conducting its business activities, the Company becomes involved in judicial,
administrative and regulatory proceedings involving both private parties and governmental authorities.
These proceedings include general and commercial liability actions and a small number of

|16
|--



|environmental proceedings. The Company does not expect any of these proceedings to have a material
adverse effect on its Consolidated Financial Statements.
Class Action suits brought against the Company and CD&R
Following the announcement of the proposed acquisition of ServiceMaster by CD&R, five (5) complaints

have been filed against ServiceMaster concerning the proposed merger: Kaiman v. Spainhour,
et
al. (filed in Chancery Court in Memphis, Tennessee) (Kaiman); Golombuski v. The
ServiceMaster
Co., et al. (filed in Circuit Court in Memphis, Tennessee) (Golombuski);
Sokol and Bowen
v. The ServiceMaster Co., et al. (filed in Circuit Court in Memphis, Tennessee)
(Sokol);
Palmer v. The ServiceMaster Co., et al. (filed in Cook County Circuit Court
in Chicago, Illinois)
(Palmer); and Smith v. The ServiceMaster Co., et al. (filed in
Chancery Court for Newcastle
County, Delaware) (Smith).
All of the complaints name ServiceMaster, its CEO and its Board of Directors as defendants. The Kaiman, Golombuski

and Smith complaints additionally name CD&R as a defendant and the Smith complaint also names

the investors in CDRSVM Topco, Inc., CDRSVM Topco, Inc. and CDRSVM Acquisition Co., Inc., the acquisition

vehicle which is being merged with and into ServiceMaster at the effective time of the merger.
All
of the complaints allege breach of fiduciary duties and seek injunctive relief. The Kaiman
complaint
also contains a specific count seeking indemnification of costs. The Golombuski and Smith
complaints
also allege that CD&R aided and abetted the individual defendants breach of
fiduciary duties,
while the Kaiman complaint generally alleges that defendants breached
their fiduciary
duties or aided and abetted a breach of fiduciary duty. The Smith complaint also
alleges that there
are material omissions in the preliminary proxy statement relating to the proposed
acquisition that
the Company filed with the SEC on April 16, 2007.
ServiceMaster has been served in each of the actions. ServiceMaster has secured an extension of time
to answer or otherwise plead in the Kaiman, Golombuski and Sokol cases, and expects that these cases
will be consolidated. ServiceMaster has moved to dismiss the Palmer action on the grounds of the
three prior filed Tennessee actions. ServiceMasters response with respect to the Smith action
is due no later than May 23, 2007; however, the plaintiff in the Smith
case has scheduled a motion for expedited discovery to be held on May 14, 2007 and
requested the scheduling of a preliminary injunction hearing prior to the special meeting
of stockholders scheduled to be held June 28, 2007 for the purpose of voting on approval
of the merger agreement. These matters are at early stages and it is not yet possible for
the Company to determine their ultimate outcomes or ranges of potential losses, if any.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|17
|--



|MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MERGER AGREEMENT
      On March
        19, 2007, ServiceMaster (or the Company) announced the execution
        of a definitive merger agreement to be acquired in a transaction with
        CDRSVM Topco, Inc., a corporation formed by a fund managed by Clayton,
        Dubilier & Rice, Inc. (CD&R). The merger agreement
        contains customary restrictions on the operations of the Company prior
        to the consummation of the transaction, including restrictions related
        to the incurrence of debt and capital expenditures. On April 17, 2007,
        the Company was notified by the Federal Trade Commission of early termination
        of the 30-day waiting period required under the Hart-Scott-Rodino Antitrust
        Improvements Act of 1976 in connection with the transaction. The transaction
        is subject to receipt of shareholder approval, and approval of the California
        Department of Insurance and Florida Department of Insurance Regulation,
        as well as satisfaction or waiver of other closing conditions. The Company
        has announced that it will hold a special meeting of shareholders on June
        28, 2007 to consider and vote on a proposal to approve the merger agreement.
        The preliminary proxy statement describing the proposed merger and related
        information was filed with the Securities and Exchange Commission on April
        16, 2007. The Company expects the final proxy statement to be mailed to
        shareholders on or about May 24, 2007.
      If the
        merger is completed, ServiceMasters shareholders will receive $15.625
        in cash for each outstanding share of common stock of the Company. The
        Company estimates the total amount of funds necessary to complete the
        merger and the related transactions to be approximately $5.2 billion,
        which includes approximately $4.8 billion to be paid out to the Companys
        stockholders and holders of other equity-based interests in the Company
        and the remainder to be applied to pay related fees and expenses in connection
        with the merger, the financing arrangements and the related transactions.
        These payments are expected to be funded by a combination of equity contributions
        and debt financing, as well as the Companys available cash. The
        estimate of the total funds necessary to complete the merger and related
        transactions also includes amounts necessary to repay borrowings under
        ServiceMasters existing credit facilities as well as certain public
        debt obligations that mature in 2007 and 2009. The estimated debt to be
        repaid does not include the public debt with longer maturities, or certain
        capital leases, deferred payments and other obligations. The parties to
        the merger agreement have received equity commitment letters from equity
        sponsors totaling approximately $1.4 billion and debt commitment letters
        from debt financing providers totaling approximately $4.5 billion. Under
        certain conditions resulting in the termination of the merger, each party
        to the merger may be required to pay the other party a termination fee
        of $100 million. See the preliminary proxy statement filed with the Securities
        and Exchange Commission for additional details related to the estimate
        of the total funds necessary to complete the merger, the financing of
        the merger and the effects of terminating the merger agreement.
RESULTS OF OPERATIONS
FIRST QUARTER 2007 COMPARED TO 2006
The Company reported first quarter 2007 revenue of $696 million, a five percent increase compared to
2006. Approximately four percent of the increase in revenue resulted from acquisitions. Total diluted
earnings per share (i.e., from both continuing operations and discontinued operations) were $0.03
compared to a loss of ($0.05) in 2006. Diluted earnings per share from continuing operations were
$0.03, compared with $0.04 in 2006. As more fully described below, the 2007 results include restructuring
charges and merger related expenses totaling $0.02 per diluted share ($9.6 million pretax, $6.5 million
after-tax), and the 2006 results include restructuring charges of $0.01 per diluted share ($3.6 million
pretax, $2.2 million after-tax). Operating income for the first quarter was $23 million compared
to $26 million in the prior year. The current year results included $6 million more of restructuring
charges and merger related costs. The change in operating income also reflects profit growth at Terminix
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|18
|--



|and lower headquarters support costs, offset in part by lower profits at TruGreen LawnCare resulting
from a weather-impacted later start to lawn applications this year and lower profits at InStar.
      In the
        first quarter of 2007, the Company recognized approximately $7.1 million
        of restructuring charges. These charges relate primarily to the Companys
        consolidation of its corporate headquarters into its operations support
        center in Memphis, Tennessee and closing of its headquarters in Downers
        Grove, Illinois. The transition to Memphis is targeted to be completed
        by November 2007. During the first quarter of 2007, the Company also incurred
        merger related expenses totaling $2.5 million. These merger related costs
        include fees for a fairness opinion provided by a third-party to the Companys
        Board of Directors, as well as legal and other professional fees. The
        2006 first quarter results include a $3.6 million restructuring charge
        related to Project Accelerate, an internal, multi-phase restructuring
        project designed to improve the effectiveness and efficiency of all functional
        support areas. All the restructuring costs associated with Project Accelerate
        were recognized entirely in 2006.
Cost of services rendered and products sold increased six percent in the first quarter. As a percentage
of revenue, these costs increased to 66.0 percent in 2007 from 65.6 percent in 2006, due in part
to increased contract costs per claim at American Home Shield and increased health benefit and fuel
costs throughout the enterprise. Selling and administrative expenses increased three percent in the
first quarter. As a percentage of revenue, these costs decreased to 29.0 percent in 2007 from 29.6
percent in 2006, primarily reflecting reduced sales and marketing costs at Terminix.
Net non-operating expenses increased approximately $2.1 million in the first quarter, reflecting a
lower level of investment gains on the American Home Shield investment portfolio as well as less
investment income related to an employee deferred compensation trust (for which there is a corresponding
and offsetting decrease in compensation expense within operating income).
Key Performance Indicators
The table below presents selected metrics related to customer counts and customer retention for the
three largest profit businesses in the Company. These measures are presented on a rolling, twelve-month
basis in order to avoid seasonal anomalies.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                                     | Key Performance Indicators 
      As of March 31, |  
|------------------------------------ | ------------------------------------------------- | -
|                                     | 2007                                              |  
|                                     |                                                   |  
|TruGreen LawnCare -                  |                                                   |  
|Growth in Full Program Contracts     | 1                                                 | %
|Customer Retention Rate              | 66.8                                              | %
|                                    
|Terminix -                           |                                                   |  
|Growth in Pest Control Customers     | 8                                                 | %
|Pest Control Customer Retention Rate | 78.7                                              | %
|                                    
|Growth in Termite Customers          | 0                                                 | %
|Termite Customer Retention Rate      | 87.5                                              | %
|                                    
|American Home Shield -               |                                                   |  
|Growth in Warranty Contracts         | 4                                                 | %
|Customer Retention Rate              | 58.7                                              | %

|19
|--



|Segment Reviews for the First Quarter 2007 Compared to 2006
The following business segment reviews should be read in conjunction with the required footnote disclosures
presented in the Notes to the Condensed Consolidated Financial Statements. This disclosure provides
a reconciliation of segment operating income to income from continuing operations before income taxes,
with net non-operating expenses as the only reconciling item. The Companys business segment
reviews include discussions of capital employed, which is a non-GAAP measure that is defined as the
segments total assets less liabilities, exclusive of debt balances. The Company believes this
information is useful to investors in helping them compute return on capital measures and therefore
better understand the performance of the Companys business segments. The Notes to the Condensed
Consolidated Financial Statements also include a reconciliation of segment capital employed to its
most comparable GAAP measure.
The TruGreen LawnCare segment, which provides lawn care services to residential and commercial customers,
reported revenues of $133 million compared to $137 million in 2006. The segment reported a seasonal
first quarter operating loss of ($12) million compared to an operating loss of ($3) million in 2006.
The revenue and operating income comparisons to last year are adversely impacted by less favorable
weather conditions experienced this year. Last years first quarter benefited from the favorable
effects of an earlier spring, which resulted in increased lawn applications. In contrast, late first
quarter snowfall this year in the Midwest and Northeast portions of the country delayed completion
of lawn applications. During the first quarter, the lawn care operations experienced favorable trending
in the key fundamental metrics of customer counts, retention and pricing. Customer counts at March
31 were one percent higher than prior year levels and improved from a one percent decline that existed
at the beginning of the year. The growth in customer counts primarily reflected the improved customer
retention. The rolling twelve-month retention rate improved 380 basis points over the period as a
result of improvements in overall quality of service delivery, and enhanced customer communication,
specifically the Lawn Quality Audit (LQA) visits made during the second half of 2006. These improvements
fueled continued increases in customer retention during the first quarter this year. The improvement
is also impacted, in part, by the earlier start to production last year, since the Company historically
experiences an increase in cancellations following the first round of program applications. New sales
declined three percent, primarily reflecting continued declines in telemarketing sales, mostly offset
by gains in the direct mail sales channel. During the first quarter, the Company realized an improvement
in average prices of two to three percent. For the full year, the Company expects improved price
realization to help offset higher fertilizer costs. Capital employed in the TruGreen LawnCare segment
increased four percent, primarily reflecting the impact of tuck-in acquisitions.
The TruGreen LandCare segment, which provides landscape maintenance services primarily to commercial
customers, reported a four percent increase in first quarter revenue to $103 million, compared to
$99 million in 2006, and operating income of $0.1 million compared to an operating loss of ($1.8)
million in 2006. Base contract maintenance revenue grew two percent, supported by improved customer
retention. Enhancement revenue (e.g., add-on services such as seasonal flower plantings, mulching,
etc.) decreased eight percent in the first quarter, as the volume of enhancement work was adversely
impacted by snow storms late in the quarter in the Midwest and Northeast. The Companys snow
removal business accounts for only about four percent of the full year revenue, but a larger percentage
of first quarter totals. In the first quarter, snow removal revenue increased $6 million over prior
year levels. The improvement in segment operating profitability primarily reflects the increase in
high margin snow removal work, offset in part by increased sales labor resulting from investments
made to increase the size, caliber and training of the sales team, as well as increased legal costs.
Capital employed in the TruGreen LandCare segment totaled $47 million, approximately $10 million
more than the prior year, reflecting the timing of snow related receivables.
The Terminix segment, which includes termite and pest control services, reported a three percent increase
in first quarter revenue to $262 million, compared to $254 million in 2006. Operating income increased
34 percent to $45 million, compared to $33 million in 2006. Terminixs overall revenue growth
for the
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|20
|--



|first quarter
        reflected double-digit growth in pest control services and an increase
        in termite contract renewals, offset in part by a double-digit decrease
        in revenue from initial termite treatments. Revenue from pest control
        services, which represent approximately one-half of the annual revenues
        of the Terminix segment, increased 11 percent in the first quarter, reflecting
        the impact of acquisitions and a strong improvement in retention, which
        more than offset a decline in unit sales in the quarter. Revenue from
        termite contract renewals grew three percent in the first quarter, supported
        by improved retention. Revenue from termite completions declined 14 percent,
        as termite swarm activity was negatively impacted by cooler than normal
        weather conditions. Also impacting the decrease in revenue were the favorable
        effects realized last year related to one-time fees for converting existing
        bait customers to liquid treatments, as well as the residual effects of
        the prior year shift in mix from the bait product to liquid treatments.
        First quarter operating income increased $11 million primarily reflecting
        managed delays in seasonal staffing of sales and technician labor, lower
        termite materials costs and the favorable leveraging of overhead costs.
        Capital employed in the Terminix segment increased nine percent, reflecting
        the impact of tuck-in acquisitions.
The American Home Shield segment, which provides home warranties to consumers that cover heating, ventilation
and air conditioning (HVAC), plumbing and other home systems and appliances, reported a seven percent
increase in revenue to $125 million from $117 million in 2006 and operating income of $7 million
in 2007 compared to $9 million in 2006. New contract sales and renewals, which are reported as earned
revenue over the subsequent twelve-month contract period, increased 13 percent in the first quarter.
Contract sales from customer renewals, which represent approximately 60 percent of total annual contracts
written, increased 14 percent, supported by a larger base of renewable customers and continued improvements
in retention. Sales in the real estate channel, which represents approximately 25 percent of total
annual contracts written, increased 12 percent and included the beneficial impact of the Realogy
agreement signed during the third quarter of 2006. Excluding the impact of sales from the Realogy
agreement, real estate unit sales declined, as home listings and closings were impacted by continued
softness in the home resale market. The direct-to-consumer channel, which represents approximately
15 percent of total annual contracts written, experienced an eight percent increase in sales supported
by incremental direct mail programs in the fourth quarter of 2006. The decline in operating income
reflects an increased incidence of service claims this year, as last year benefited from relatively
mild weather, higher average costs per claim due to inflationary pressures, and a planned $2 million
investment in license and marketing fees related to the new Realogy agreement. Capital employed in
the American Home Shield segment increased four percent, primarily reflecting a higher level of marketable
securities due to growth in the business. Capital employed at American Home Shield, which totaled
$225 million and $217 million at March 31, 2007 and March 31, 2006, respectively, includes $311 million
and $287 million of cash, short-term and long-term marketable securities at those dates. The investment
income and realized gains/losses on these assets are reported as non-operating income/expense.
The Other Operations and Headquarters segment includes the operations of ServiceMaster Clean, InStar
and Merry Maids as well as the Companys headquarters functions. Revenue in this segment increased
to $73 million from $56 million in 2006. Revenue from InStar (which was acquired on February 28,
2006) was $22 million compared to $11 million in the prior year. InStar reported an operating loss
of ($2.4) million, net of acquisition-related amortization costs, compared to operating income, net
of acquisition-related amortization costs of $1.1 million in 2006. InStars results were negatively
impacted by a substantially lower volume of hurricane-related work, as well as increased reserves
for certain receivables associated with prior year hurricanes. The combined franchise operations
of ServiceMaster Clean and Merry Maids reported a 14 percent increase in first quarter revenue reflecting
a strong increase in product sales as well as the impact of acquisitions at Merry Maids. The Other
Operations and Headquarters segment operating loss for the quarter was ($18) million compared with
($12) million in 2006. Included in the first quarter 2007 operating loss are restructuring charges
of $7.1 million and merger related expenses of $2.5 million. The 2006 results include restructuring
charges of $3.6 million. The increase in the segments operating loss for the quarter reflects
the increase in the aforementioned restructuring charges and merger related expenses, a decrease
in the operating results at InStar, offset in part by lower overhead support costs as well as increased
profits from the combined franchise operations. Capital employed in this segment decreased, primarily
reflecting the realization of the annual tax benefit associated with the amortization of tax intangible
assets that will continue through 2012.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21
|--



|FINANCIAL POSITION AND LIQUIDITY
Cash Flows from Operating Activities from Continuing Operations
Net cash used for operating activities from continuing operations in the quarter was $37 million, compared
to $38 million used for operating activities in the prior year. Included in the 2006 amount was a
$5 million tax payment related to the IRS agreement. Excluding this IRS payment, cash used for operating
activities from continuing operations increased by $4 million resulting from an increase in final
estimated tax payments relating to the prior year, offset in part by lower working capital requirements,
primarily due to the timing of customer prepayments at TruGreen LawnCare.
Historically, the first quarter is a period of investment for many of the Companys businesses
as they prepare for the summer and fall production season. The Company expects full year cash provided
from operating activities to again substantially exceed net income. This expected result reflects
a solid earnings base, businesses that need relatively little working capital to fund growth in their
operations, and significant annual deferred tax benefits.
The Company receives a significant annual cash tax benefit due to a large base of intangible assets
which exist for income tax reporting purposes, but not for financial reporting purposes. A significant
portion of these assets arose in connection with the Companys 1997 conversion from a limited
partnership to a corporation. The amortization of the tax basis will result in approximately $50
to $55 million of average annual cash tax benefits through 2012, for which no corresponding income
statement benefit is recognized. Subsequent to 2012, the benefit from the step-up in tax basis that
resulted from the reincorporation will be fully amortized.
In the ordinary course, the Company is subject to review by domestic and foreign taxing authorities,
including the IRS. As previously disclosed, the U.S. federal tax returns filed by the Company through
the 2005 return have been reviewed by the IRS. The Company paid $5 million primarily in the first
quarter of 2006 relating to the resolution of the 2003 and 2004 audits. In the fourth quarter of
2006, the IRS completed the audit of the Companys tax return for 2005, with no adjustments
or additional payments. The IRS commenced examinations of the Companys U.S. federal income
tax returns for 2006 and 2007 in the first quarter of 2006 and 2007, respectively, which are anticipated
to be completed by the end of 2007 and 2008, respectively. At this time, the outcome of these audits
is not known and no significant adjustments have been proposed by the IRS pertaining to these audit periods.
Cash Flows from Investing Activities from Continuing Operations
Capital expenditures increased over the prior year and included recurring capital needs and information
technology projects. The Company anticipates approximately $50 million of capital expenditures in
2007, reflecting the continuation of investments in information systems and productivity enhancing
operating systems. The Company has no material capital commitments at this time.
Acquisitions for the three months ended March 31, 2007 totaled $17 million, compared with $104 million
in 2006. This decrease reflects the 2006 acquisition of InStar, a leading direct provider of commercial
disaster response and reconstruction services, for approximately $85 million of cash. Consideration
paid for tuck-in acquisitions consisted of cash payments, seller financed notes and Company stock.
The Company expects to continue its tuck-in acquisition program at both Terminix and TruGreen LawnCare.
Cash Flows from Financing Activities from Continuing Operations
Cash dividends paid to shareholders totaled $35 million or $.12 per share for the three months ended
March 31, 2007. In April 2007, the Company announced the declaration of a cash dividend of $.12 per
share, payable on May 31, 2007 to shareholders of record on May 8, 2007. This represents a nine percent
increase from the $.11 per share paid in the second quarter of the prior year. As previously discussed,
the Company has entered into a definitive merger agreement to be acquired by CDRSVM Topco, Inc.,
a corporation
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|22
|--



|formed by a fund managed by CD&R. The Company expects to continue its existing dividend policy
until the merger closes.
There were no share repurchases for the three months ended March 31, 2007. The Company does not intend
to repurchase any of its shares due to the pending merger agreement.
Liquidity
Cash and short and long-term marketable securities totaled approximately $410 million at March 31,
2007, compared with approximately $421 million at December 31, 2006. Approximately $406 million of
the cash and short and long-term marketable securities balance is associated with regulatory requirements
at American Home Shield and for other purposes. Based on the Companys normal annual dividends
and other payments from regulated American Home Shield subsidiaries, recent changes in regulations
in certain states, and a reevaluation of the level of required reserves in other states, the Company
currently estimates that approximately 25 percent to 35 percent of the balance at March 31, 2007
could be liquidated during 2007 and used to reduce debt or to fund other liquidity needs. Total debt
at March 31, 2007 was $756 million, approximately $65 million more than the amount at December 31,
2006 reflecting the funding for normal seasonal working capital needs and acquisitions.
Approximately 60 percent of the Companys debt matures beyond five years and 49 percent beyond
fifteen years. The Companys 6.95% notes, with an outstanding principal balance of $49.2 million,
mature on August 15, 2007. The Company currently has both the intent and ability to pay this debt
with other long-term financing.
Management believes that funds generated from operating activities and other existing resources will
continue to be adequate to satisfy ongoing working capital needs of the Company. If the proposed
sale of the Company is consummated, the Company will incur substantial additional debt. The Company
maintains a revolving credit facility of $500 million. As of March 31, 2007, the Company had $50
million of borrowings outstanding under this facility and had issued approximately $136 million of
letters of credit, resulting in unused revolving credit commitments of approximately $314 million.
The Company also has $550 million of senior unsecured debt and equity securities available for issuance
under an effective shelf registration statement. In addition, the Company has an arrangement enabling
it to sell, on a revolving basis, certain receivables to unrelated third party purchasers. The agreement
is a 364-day facility that is renewable at the option of the purchasers. The Company may sell up
to $70 million of its receivables to these purchasers in the future and therefore would have immediate
access to cash proceeds from these sales. The amount of the eligible receivables varies during the
year based on seasonality of the business and will at times limit the amount available to the Company.
During the three month period ended March 31, 2007, there were no receivables sold to third parties
under this agreement.
There have been no material changes in the Companys financing agreements since December 31, 2006.
As described in the Companys 2006 Annual Report, the Company is party to a number of debt agreements
that require it to maintain certain financial and other covenants, including limitations on indebtedness
and an interest coverage ratio. In addition, under certain circumstances, the agreements may limit
the Companys ability to pay dividends and repurchase shares of common stock. These limitations
are not expected to be a factor in the Companys dividend and share repurchase plans in the
near future. Failure by the Company to maintain these covenants could result in the acceleration
of the maturity of the debt. At March 31, 2007, the Company was in compliance with the covenants
related to these debt agreements and, based on its operating outlook for the remainder of 2007, expects
to be able to maintain compliance in the future. The closing of the proposed merger would result
in an event of default under several of the Companys debt agreements and the debt related to
such agreements is expected to be repaid at the closing of the merger. The Company does not have
any debt agreements that contain put rights or provide for an acceleration of maturity as a result
of a change in credit rating.
The Company maintains operating lease facilities with banks totaling $68 million which provide for
the acquisition and development of branch properties to be leased by the Company. At March 31, 2007,
there
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|23
|--



|was approximately $68 million funded under these facilities. Approximately $15 million of these leases
have been included on the balance sheet as assets with related debt as of March 31, 2007 and December
31, 2006. The remaining funded balances are treated as operating leases. Approximately $15 million
of the available facility expires in January 2008 and the remaining $53 million expires in September
2009. The Company has guaranteed the residual value of the properties under the leases up to 82 percent
of the fair market value at the commencement of the lease. At March 31, 2007, the Companys
residual value guarantee related to the leased assets totaled $53 million for which the Company has
recorded the estimated fair value of this guarantee (approximately $0.6 million) in the Condensed
Consolidated Statements of Financial Position.
The majority of the Companys fleet and some equipment are leased through operating leases. The
lease terms are non-cancelable for the first twelve-month term, and then are month-to-month, cancelable
at the Companys option. There are residual value guarantees (ranging from 70 percent to 87
percent depending on the agreement) relative to these vehicles and equipment, which historically
have not resulted in significant net payments to the lessors. At March 31, 2007, there was approximately
$220 million of residual value relating to the Companys fleet and equipment leases. The fair
value guarantee of the assets under the leases is expected to fully mitigate the Companys obligations
under the agreements. At March 31, 2007, the Company has recorded the estimated fair value of this
guarantee (approximately $1.2 million) in the Condensed Consolidated Statements of Financial Position.
The Companys 2006 Annual Report included disclosure of the Companys contractual obligations
and commitments as of December 31, 2006. The Company continues to make the contractually required
payments and therefore, the 2007 obligations and commitments as listed in the December 31, 2006 Annual
Report have been reduced by the required payments. There were no other significant additions during
the three months ended March 31, 2007.
Financial Position
      Receivables
        increased from year-end levels, due in part to the timing of snow-related
        receivables at TruGreen LandCare. The receivable balance at March 31,
        2007 includes approximately $61 million of InStar receivables (including
        approximately $19 million of work-in-process that has not yet been billed).
        InStars receivables include hurricane disaster recovery work performed
        in New Orleans, southern Florida and other hurricane-affected areas. The
        Company has accounts receivable from customers that were insured by a
        family of insurance companies in Florida that are insolvent, and whose
        claims are now being administered by the Florida Insurance Guaranty Association
        (FIGA). The aggregate receivable balance due from FIGA insured
        customers, net of related reserves, totaled approximately $8 million at
        March 31, 2007, and represents the Companys best estimate of the
        amounts that will ultimately be collected. The Company expects that collection
        of certain of InStars receivables, potentially including certain
        of those administered by FIGA, will be significantly delayed and require
        or involve litigation. While InStar has a history of recovering amounts
        related to its disaster recovery projects, the current circumstances increase
        the uncertainties in estimating the amounts recoverable on certain projects. In light of these circumstances and
uncertainties, the Company has been performing an internal review of outstanding balances
and related billing and collection procedures. The allowance for doubtful accounts at
March 31, 2007 included approximately $9 million related to InStars accounts
receivable. Such allowance incorporates the results of this review to date, and reflects
managements best estimate of the amounts that will not be collected. If the
estimated amounts recoverable on the projects change from the amounts currently recorded,
these differences will be recognized as income or loss when the change in estimate is
made. Such changes, if any, would not currently be expected to be material to the
Companys consolidated financial statements.
Inventories increased from year-end levels, reflecting general business growth and increased seasonal
activity. Prepaid expenses and other assets increased from year-end primarily reflecting preseason
advertising costs at TruGreen LawnCare as well as costs of annual repair and maintenance procedures
that are performed primarily in the first quarter at TruGreen LawnCare. These costs are deferred
and recognized over the production season and are not deferred beyond the calendar year end. Deferred
customer acquisition costs increased, reflecting the seasonality in the lawn care operations. In
the winter and spring, this business sells a series of lawn applications to customers, which are
rendered primarily in March through October. These direct and incremental selling expenses which
relate to successful sales are deferred and recognized over the production season and are not deferred
beyond the calendar year-end. The Company capitalizes sales commissions and other direct contract
acquisition costs relating to termite
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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|baiting and pest contracts, as well as home warranty agreements. These costs vary with and are directly
related to a new sale, and are amortized over the life of the related contract.
Property and equipment was consistent with year-end levels. The Company does not have any material
capital commitments at this time.
Deferred revenue increased from year-end levels, reflecting the significant amount of customer prepayments
recorded in the first quarter (pre-season) at TruGreen LawnCare. Accrued payroll and related expenses
have decreased from year end levels, reflecting the payment during the first quarter of incentive
compensation related to 2006 performance.
The Company currently has minority investors in Terminix. At any time, holders of the minority equity
interests may convert the interests into eight million shares of ServiceMaster common stock. The
ServiceMaster shares are included in the shares used for the calculation of diluted earnings per
share whenever their inclusion has a dilutive impact. ServiceMaster has the right to require conversion
of the interests into eight million shares of ServiceMaster common stock, provided that the closing
price of ServiceMasters common stock has averaged at least $15 per share for 40 consecutive
trading days prior to the exercise of the right. On May 3, 2007, ServiceMaster exercised this right
so that, unless the holders of the interests convert the interests sooner, on June 4, 2007 the interests
will be converted into eight million shares of ServiceMaster common stock.
Total shareholders equity was approximately $1.1 billion at March 31, 2007, consistent with the
balance at December 31, 2006. Operating profits in the business and proceeds from employee share
plans were offset by cash dividend payments in the first quarter.
Under federal tax rules, dividends are considered taxable only when paid out of current or accumulated
earnings and profits as defined under federal tax laws. As a result of its December 1997 reincorporation,
the Company only began generating corporate earnings and profits for tax purposes in 1998. Since
1998, earnings and profits for tax purposes have been reduced by dividend payments, amortization
of intangible assets that exist for tax reporting purposes only, deductions relating to business
closures, divestitures and restructuring charges, and the timing of certain other tax-related items.
The Company currently expects that none of the 2007 dividend will be taxable as dividend income for
federal income tax purposes. This differs from previous projections primarily due to anticipated
transaction-related costs associated with the recently announced proposed merger with CDRSVM Topco,
Inc. Any portion of the dividend that is not taxable as dividend income would be treated as a return
of capital and would generally be applied to reduce the cost basis of outstanding shares. The 2007
estimate is subject to change, based on the outcome of future events.
DISCONTINUED OPERATIONS
The changes in the results of operations and financial position of discontinued operations primarily
results from the divestitures in the third quarter of 2006 of the American Residential Services (ARS)
and American Mechanical Services (AMS) businesses. Additionally, during the first quarter of 2006,
the Company recorded a ($25) million after-tax impairment charge for expected losses on the disposition
of certain ARS/AMS properties that were held pending sale at that time.
As part of the ARS and AMS sale agreements, the Company guaranteed obligations to third parties with
respect to bonds (primarily performance and license type), operating leases for which the Company
has been released as being the primary obligor, real estate leased and operated by the buyers, and
other guarantees of payment. At the present time, the Company does not believe it is probable that
the buyers will default on their obligations subject to guarantee. The fair value of the Companys
obligations related to these guarantees is not significant and no liability has been recorded.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|Forward-Looking Statements
The Companys Form 10-Q filing contains or incorporates by reference statements concerning future results and other matters that may be deemed to be forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company intends that these forward-looking
statements, which look forward in time and include everything other than historical information,
be subject to the safe harbors created by such legislation. The Company notes that these forward-looking
statements involve risks and uncertainties that could affect its results of operations, financial
condition or cash flows. Factors that could cause actual results to differ materially from those
expressed or implied in a forward-looking statement include the following (among others): failure
to obtain shareholder approval of the merger agreement or the failure to satisfy other closing conditions,
including regulatory approvals, with respect to the proposed merger; failure of CDRSVM Topco, Inc.
to obtain the necessary financing arrangements to pay the aggregate merger consideration; the occurrence
of any event, change or other circumstance that could give rise to the termination of the merger
agreement; the failure of the proposed merger to close for any other reason; the amount of the costs,
fees, expenses and charges relating to the merger and the actual terms of financings that will need
to be obtained for the merger; the impact of substantial indebtedness that will need to be incurred
to finance the consummation of the merger; the successful consolidation of headquarters in Memphis;
weather conditions that affect the demand for the Companys services; changes in the source
and intensity of competition in the markets served by the Company; labor shortages or increases in
wage rates; unexpected increases in operating costs, such as higher insurance premiums, self insurance
and health care claim costs; higher fuel prices; changes in the types or mix of the Companys
service offerings or products; changes in the estimated recoverable amounts of receivables related
to hurricane disaster recovery work; increased governmental regulation, including telemarketing and
environmental restrictions; general economic conditions in the United States, especially as they
may affect home sales or consumer spending levels; time, expenses and cash flows associated with
integrating, selling, or winding down businesses; and other factors described from time to time in
documents filed by the Company with the Securities and Exchange Commission.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK
The economy and its impact on discretionary consumer spending, labor wages, fuel prices, home re-sales,
unemployment rates, insurance costs and medical inflation rates could be significant to future operating
earnings.
The Company does not hold or issue derivative financial instruments for trading or speculative purposes.
The Company has entered into specific financial arrangements, primarily fuel hedges, in the normal
course of business to manage certain market risks, with a policy of matching positions and limiting
the terms of contracts to relatively short durations. The effect of derivative financial instrument
transactions is not material to the Companys financial statements.
In December 2003 and January 2004, the Company entered into interest rate swap agreements with a total
notional amount of $165 million. Under the terms of these agreements, the Company pays a floating
rate of interest (based on a specified spread over six-month LIBOR) on the notional amount and the
Company receives a fixed rate of interest at 7.88 percent on the notional amount. The impact of these
swap transactions was to convert $165 million of the Companys debt from a fixed rate of 7.88
percent to a variable rate based on LIBOR (9.4 percent average rate during the three months ended
March 31, 2007).
The Company believes its exposure to interest rate fluctuations, when viewed on both a gross and net
basis, is not material to its overall results of operations. On a gross basis, the Companys
adverse exposure to rising interest rates principally relates to interest payments on floating rate
debt ($274 million at March 31, 2007, after considering the effect of interest rate swap agreements)
and payments on operating leases that are tied to floating interest rates. These operating leases
consist of approximately $53 million of funding outstanding under the Companys real estate
operating lease facilities as well as fleet and equipment operating leases (approximately $220 million
in residual value). The Companys exposure to interest expense based on floating rates is partially
offset on a net basis by floating rate investment income earned on its cash and marketable securities
balances. The Company estimates that on a net basis, each one percentage point change in interest
rates would result in a change of less than $.01 in earnings per share on an annual basis.
The Company has several debt and lease agreements where the interest rate or rent payable under the
agreements automatically adjusts based on changes in the Companys credit ratings. Following
the announcement that the Company had entered into the merger agreement, the Companys debt
credit rating was reduced by two credit rating agencies. As a result, the annual rent payable under
a lease agreement was increased by approximately $.6 million, pretax. Based on amounts outstanding
at March 31, 2007, a one rating category reduction in the Companys credit rating by another
credit rating agency would further increase annual expense by approximately $1.0 million, pretax.
The following table summarizes information about the Companys fixed rate debt as of December
31, 2006 (after considering the effect of the interest rate swap agreements), including the principal
cash payments and related weighted-average interest rates by expected maturity dates. The fair-value
of the Companys fixed rate debt was approximately $448 million at December 31, 2006.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|Expected Maturity Date
|----------------------
|                      
|(In millions)         
|                      
|Fixed rate debt       
|Avg. rate             
|                      

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|CONTROLS AND PROCEDURES
The Companys Chairman and Chief Executive Officer, J. Patrick Spainhour, and the Companys
Vice Chairman and Chief Financial Officer, Ernest J. Mrozek, have evaluated the Companys disclosure
controls and procedures as of the end of the period covered by this report.
The Companys disclosure controls and procedures include a roll-up of financial and non-financial
reporting that is consolidated in the Downers Grove, Illinois office of the Company. The reporting
process is designed to ensure that information required to be disclosed by the Company in the reports
that it files with or submits to the Securities and Exchange Commission is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange Commissions rules
and forms. Messrs. Spainhour and Mrozek have concluded that both the design and operation of the
Companys disclosure controls and procedures are effective.
There were no changes in the Companys internal control over financial reporting that occurred
during the Companys most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Class Action suits brought against the Company and CD&R
Following the announcement of the proposed acquisition of ServiceMaster by CD&R, five (5) complaints

have been filed against ServiceMaster concerning the proposed merger: Kaiman v. Spainhour,
et
al. (filed in Chancery Court in Memphis, Tennessee) (Kaiman); Golombuski v. The
ServiceMaster
Co., et al. (filed in Circuit Court in Memphis, Tennessee) (Golombuski);
Sokol and Bowen
v. The ServiceMaster Co., et al. (filed in Circuit Court in Memphis, Tennessee)
(Sokol);
Palmer v. The ServiceMaster Co., et al. (filed in Cook County Circuit Court
in Chicago, Illinois)
(Palmer); and Smith v. The ServiceMaster Co., et al. (filed in
Chancery Court for Newcastle
County, Delaware) (Smith).
All of the complaints name ServiceMaster, its CEO and its Board of Directors as defendants. The Kaiman, Golombuski

and Smith complaints additionally name CD&R as a defendant and the Smith complaint also names

the investors in CDRSVM Topco, Inc., CDRSVM Topco, Inc. and CDRSVM Acquisition Co., Inc., the acquisition

vehicle which is being merged with and into ServiceMaster at the effective time of the merger.
All
of the complaints allege breach of fiduciary duties and seek injunctive relief. The Kaiman
complaint
also contains a specific count seeking indemnification of costs. The Golombuski and Smith
complaints
also allege that CD&R aided and abetted the individual defendants breach of
fiduciary duties,
while the Kaiman complaint generally alleges that defendants breached
their fiduciary
duties or aided and abetted a breach of fiduciary duty. The Smith complaint also
alleges that there
are material omissions in the preliminary proxy statement relating to the proposed
acquisition that
the Company filed with the SEC on April 16, 2007.
ServiceMaster has been served in each of the actions. ServiceMaster has secured an extension of time
to answer or otherwise plead in the Kaiman, Golombuski and Sokol cases, and expects that these cases
will be consolidated. ServiceMaster has moved to dismiss the Palmer action on the grounds of the
three prior filed Tennessee actions. ServiceMasters response with respect to the Smith action
is due no later than May 23, 2007; however, the plaintiff in the Smith
case has scheduled a motion for expedited discovery to be held on May 14, 2007 and
requested the scheduling of a preliminary injunction hearing prior to the special meeting
of stockholders scheduled to be held June 28, 2007 for the purpose of voting on approval
of the merger agreement.
Item 1A:  Risk Factors
In addition to the other information contained in this Quarterly Report on Form 10-Q, and the factors
presented in Part I, Item 1A. Risk Factors in the Companys Annual Report on Form
10-K for fiscal year ended December 31, 2006, the following risk factors should also be considered
in evaluating the Company.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| | failure to obtain stockholder approval of the merger agreement or the failure to satisfy other closing
  conditions, including regulatory approvals, with respect to the proposed merger;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                          
| | failure of CDRSVM Topco, Inc. to obtain the necessary financing arrangements to pay the aggregate merger consideration;                                                                  
|  |                                                                                                                                                                                          
| | the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement;                                                               
|  |                                                                                                                                                                                          
| | the failure of the proposed merger to close for any other reason;                                                                                                                        
|  |                                                                                                                                                                                          
| | the amount of the costs, fees, expenses and charges relating to the merger and the actual terms of financings that will need to be obtained for the merger; and                          
|  |                                                                                                                                                                                          
| | the
        impact of substantial indebtedness that will need to be incurred to finance
        the consummation of the merger.                                                          

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|Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchases:
In February 2006, the Board of Directors authorized $250 million for share repurchases. As presented
in the following table, there were no share repurchases of the Companys common stock for the
three months ended March 31, 2007. The Company does not intend to repurchase any of its shares due
to the pending merger agreement.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                            | Total Number
      of Shares 
      Purchased |   | Average Price
      Paid per 
      Share |   | Total 
      Number 
      of Shares 
      Purchased as 
      Part of Publicly
      Announced 
      Plan |  | Approximate 
      Dollar Value 
      of Shares that 
      May Yet be 
      Purchased 
      Under the 
      Plan |  
|------------------------------------------- | --------------------------------------------- | - | ----------------------------------------- | - | ------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------- | -
|                                           
|January 1, 2007 through
 January 31, 2007   |                                               |  |                                           | $ |                                                                                                             |  |                                                                                                                       | 
|                                            |                                               |   |                                           |  
|                                            |                                               |   |                                           |   |                                                                                                              |  |                                                                                                                       |  
|February 1, 2007 through
 February 28, 2007 |                                               |  |                                           | $ |                                                                                                             |  |                                                                                                                       | 
|                                            |                                               |   |                                           |  
|                                            |                                               |   |                                           |   |                                                                                                              |  |                                                                                                                       |  
|March 1, 2007 through
 March 31, 2007       |                                               |  |                                           | $ |                                                                                                             |  |                                                                                                                       | 
|                                            |                                               |   |                                           |  
|                                            |                                               |   |                                           |   |                                                                                                             
|Total                                       |                                               |  |                                           | $ |                                                                                                             |  |                                                                                                                       | 
|                                            |                                               |   |                                           |   |                                                                                                             

|                
|----------------
|Item 6: Exhibits
|                

|Exhibit
      No. | Description of Exhibit
|----------------- | ----------------------
|                  |                       
|31.1              |                       
|                  |                       
|31.2              |                       
|                  |                       
|32.1              |                       
|                  |                       
|32.2              |                       

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|SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 10, 2007
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | THE SERVICEMASTER COMPANY                
| | -----------------------------------------
| | (Registrant)                             
| |                                          
| | By:  /s/ Ernest J. Mrozek                
| |                                          
| | Ernest J. Mrozek                         
| | Vice Chairman and Chief Financial Officer

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