Fitch Ratings Affirms ServiceMaster; Revises Outlook To Stable.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 19, 2003

Fitch Ratings has affirmed the 'BBB-' ratings on The ServiceMaster Company's (ServiceMaster) senior unsecured debt and bank credit facility. The Rating Outlook is revised to Stable from Positive. These actions affect about $826 million of ServiceMaster's debt.

The affirmation reflects ServiceMaster's diverse portfolio of primarily consumer services that generate strong and stable cash flows as well as producing some stability to revenues and operating earnings. Customer retention rates have remained relatively stable despite the challenging economic environment. In addition, ServiceMaster generates high discretionary cash flows primarily due to modest capital expenditures and working capital usage. Going forward, ServiceMaster's ability to generate free cash flow will provide a cushion to weather potential strains on major operations.

The change in Outlook reflects potentially weaker than expected results for Terminix and TruGreen in the near to intermediate term. Terminix and TruGreen are ServiceMaster's two largest businesses, representing about 64% of revenues and 88% of operating earnings. Beginning in 2004, ServiceMaster anticipates the mix of its termite product offerings to significantly change to liquid from bait. Fitch estimates that the mix is likely to shift to 40% bait and 60% liquid insecticides from the current 85% bait and 15% liquid. Terminix's operating margins could be negatively affected as liquid customers generate less profitability in the first year of application, with profitability gradually increasing in subsequent years.

Operating margins are also expected to be pressured at TruGreen as ServiceMaster continues to pull back on its telemarketing efforts due to the national 'Do Not Call' list. Instead, the company will further increase its direct marketing efforts, which are more costly. In previous years telemarketing was ServiceMaster's cheapest marketing tool.

Also considered in the Outlook change is the sizable $481 million asset impairment charge ($383 million net of tax). This non-cash impairment charge was recorded in the third quarter of 2003. The charge consisted of $224 million at American Residential Services (ARS), $68 million at American Mechanical Services (AMS) and $189 million at TruGreen LandCare (Landcare). The charge reflects management's determination that these businesses would not generate the level of cash flows originally projected when acquired, as well as the valuation of the intangibles given at that time. Goodwill for these businesses has essentially been written off.