EX-99.1 11 a2236572zex-99_1.htm EX-99.1

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TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS

Exhibit 99.1

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[                    ], 2018

Dear ServiceMaster Global Holdings, Inc. Stockholder:

        We previously announced plans to separate our American Home Shield business from our Terminix and Franchise Services Group ("FSG") businesses. The separation will occur by means of a spin-off of a newly formed company named frontdoor, inc. ("Frontdoor"), which will own the assets and liabilities associated with the American Home Shield business. ServiceMaster Global Holdings, Inc. ("ServiceMaster"), the existing publicly traded company in which you currently own common stock, will continue to own and operate our Terminix and FSG businesses. The separation will create two companies with proven long-term strategies, scale and financial strength that will be leaders in their industries. The ServiceMaster board of directors believes that separating the American Home Shield business from the remaining businesses of ServiceMaster is in the best interest of ServiceMaster and its stockholders for a number of reasons, including:

    The separation will allow investors to separately value ServiceMaster and Frontdoor based on each company's unique investment identities, including the merits, strategy, performance and future prospects of their respective businesses.

    The separation will allow each business to more effectively pursue its own distinct operating priorities and strategies and will enable the management of both companies to pursue unique opportunities for long-term growth and profitability.

    The separation will permit each company to concentrate its financial resources solely on its own operations, providing greater flexibility to invest capital in its business at a time and in a manner appropriate for its distinct strategy and business needs.

    The separation will provide greater opportunity to grow organically and pursue value-enhancing acquisitions in industries with active M&A markets.

    The separation will create independent, public companies that will afford each company direct access to capital markets and facilitate the ability to capitalize on its unique growth opportunities.

        The ServiceMaster board of directors also considered a number of potentially negative factors in evaluating the separation, including, among others, risks relating to the creation of a new public company, possible increased costs and one-time separation costs, but concluded that the potential benefits of the separation significantly outweighed these factors. As two distinct publicly traded companies, ServiceMaster and Frontdoor will be better positioned, both strategically and operationally, to drive organic growth and capitalize on strategic opportunities.

        ServiceMaster's Terminix business will continue to be a leader in the pest control industry, with an approximate 21 percent share of the $8 billion U.S. pest control services industry. ServiceMaster has recently implemented a number of strategic investments to transform the Terminix business that focus on process, talent, technology and customers. Following the separation of Frontdoor, ServiceMaster will be better positioned to continue a strategic focus on Terminix's field operations and sales force and progress on the path to higher organic growth and improved customer retention. Additionally, ServiceMaster's FSG businesses each hold a leading position in their respective categories with strong and trusted brands such as AmeriSpec®, Furniture Medic®, Merry Maids®, ServiceMaster Clean® and ServiceMaster Restore®. FSG will continue its key initiatives to grow its business and drive results, such as expanding service offerings and helping franchisees increase customer-level revenue growth.

        The separation will provide ServiceMaster stockholders with equity ownership in both ServiceMaster and Frontdoor. The separation is intended to qualify as generally tax-free to ServiceMaster stockholders for U.S. federal income tax purposes.


        The separation will be effected by means of a pro rata distribution of at least 80.1 percent of the outstanding shares of Frontdoor common stock to holders of ServiceMaster common stock. Following the distribution, Frontdoor will be a separate public company. Each ServiceMaster stockholder will receive one share of Frontdoor common stock for every two shares of ServiceMaster common stock held at the close of business on September 14, 2018, the record date for the distribution. No vote of ServiceMaster stockholders is required for distribution. You do not need to take any action to receive the shares of Frontdoor common stock to which you are entitled as a ServiceMaster stockholder. You will not be required to make any payments or to surrender or exchange your shares of ServiceMaster common stock.

        Frontdoor's common stock has been approved for listing on the Nasdaq Global Select Market under the symbol "FTDR." Following the distribution, ServiceMaster will continue to trade on the New York Stock Exchange ("NYSE") under the symbol "SERV."

        I encourage you to read the attached information statement, which is being provided to all ServiceMaster stockholders who held shares on the record date for the distribution. The information statement describes the separation in detail and contains important business and financial information about Frontdoor.

  Sincerely,

 


Nikhil M. Varty
Chief Executive Officer
ServiceMaster Global Holdings, Inc.


LOGO

[                    ], 2018

Dear Future frontdoor, inc. Stockholder:

        I am pleased to welcome you as a future stockholder of frontdoor, inc. ("Frontdoor," "we," "us," "our" or the "Company"). Frontdoor common stock has been approved for listing on the Nasdaq Global Select Market under the symbol "FTDR." Although we will be newly public, we have been a leader in providing homeowners affordable protection against inevitable home system component and appliance breakdowns for more than 45 years.

        We decided to call our new company Frontdoor. The front door is where we open ourselves up to the world every day. It's the place we welcome friends and family, and greet new people. It's also where our company meets homeowners face-to-face to help them deal with the hassles of owning a home. We're a difference-maker for homeowners, delivering solutions powered by people and enabled by technology. We listen to them, share our expertise, anticipate their needs and fix their problems. Simply, we make homeownership simple. That's the opportunity that knocks for us every day. We feel this name encapsulates our broader mission for the Company. It allows us ample room to grow under a new name, but still provide the level of service customers expect. American Home Shield doesn't go away, it just becomes part of a larger mission.

        Frontdoor owns multiple home service brands including HSA, OneGuard, Landmark and American Home Shield, which is the largest provider of home service plans in the U.S. Through our home services platform, we respond to over four million service requests annually (or one every eight seconds) from homeowners who require assistance with technical home repair issues utilizing our nationwide network of over 15,000 pre-qualified professional contractor firms that employ more than 45,000 technicians. Our customizable home service plans help customers protect and maintain their homes, typically their most valuable asset, from costly and unplanned breakdowns of essential home systems and appliances. Our large recurring customer base provides our contractors a significant volume of work throughout the year, which is highly valued by them. We facilitate these interactions through our customer and service delivery platform.

        We will continue to leverage this technology-enabled and people-driven platform as a catalyst of future sustained growth.

        Our strong national brand recognition, industry leading contractor base and commitment to taking the hassle out of owning a home will allow us to invest in future growth of the Company. A strong track record of consistent revenue and free cash flow growth affords opportunities to expand via organic and inorganic means.

        We are committed to providing outstanding returns to our stockholders. We will achieve this by obsessing about customers, investing in growth and generating strong cash flow. I invite you to learn more about Frontdoor and our strategic initiatives by reading the attached information statement. We would be honored to have you as a future stockholder of Frontdoor.

 

Sincerely,


 

 

 

 

Rexford J. Tibbens

 

President and Chief Executive Officer

 

frontdoor, inc.


Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended.

PRELIMINARY AND SUBJECT TO COMPLETION, DATED AUGUST 30, 2018

INFORMATION STATEMENT
frontdoor, inc.

        This information statement is being furnished in connection with the distribution by ServiceMaster Global Holdings, Inc. ("ServiceMaster") to its stockholders of shares of common stock of frontdoor, inc., a Delaware corporation ("Frontdoor," "we," "us," "our" or the "Company"), currently an indirect, wholly owned subsidiary of ServiceMaster, that will hold directly or indirectly the assets and liabilities associated with the American Home Shield business. ServiceMaster will distribute at least 80.1 percent of the outstanding shares of Frontdoor common stock on a pro rata basis to ServiceMaster stockholders in a transaction intended to qualify as generally tax-free to ServiceMaster stockholders for U.S. federal income tax purposes, except with respect to any cash received in lieu of fractional shares. Following the distribution, we will be a separate public company. Immediately after the distribution becomes effective, ServiceMaster will own no more than 19.9 percent of the outstanding shares of Frontdoor common stock. Prior to completing the separation, ServiceMaster may adjust the percentage of Frontdoor common stock to be distributed to ServiceMaster stockholders and retained by ServiceMaster in response to market and other factors, and it will amend this information statement to reflect any such adjustment. The distribution is subject to certain conditions, as described in this information statement. You should consult your tax advisor as to the particular consequences of the distribution to you, including the applicability and effect of any U.S. federal, state and local and non-U.S. tax laws.

        For every two shares of ServiceMaster common stock held of record by you as of the close of business on September 14, 2018, the record date for the distribution, you will receive one share of Frontdoor common stock. You will receive cash in lieu of any fractional shares of Frontdoor common stock that you would have received after application of the above ratio. As discussed under "The Separation and Distribution—Trading Between the Record Date and Distribution Date," if you sell your shares of ServiceMaster common stock in the "regular-way" market after the record date and before the distribution, you also will be selling your right to receive shares of Frontdoor common stock in the distribution. We expect the shares of Frontdoor common stock to be distributed by ServiceMaster to you at 12:01 a.m. Eastern Time, on October 1, 2018. We refer to the date of the distribution of the shares of Frontdoor common stock as the "distribution date."

        No vote of ServiceMaster stockholders is required for the distribution. Therefore, you are not being asked for a proxy, and you are requested not to send ServiceMaster a proxy, in connection with the distribution. You do not need to pay any consideration or exchange or surrender your existing shares of ServiceMaster common stock or take any other action to receive your shares of Frontdoor common stock.

        There is no current trading market for Frontdoor common stock, although we expect that a limited market, commonly known as a "when-issued" trading market, will develop on or about the record date for the distribution, and we expect "regular-way" trading of Frontdoor common stock to begin on the first trading day following the completion of the distribution. Frontdoor common stock has been approved for listing on the Nasdaq Global Select Market ("NASDAQ") under the symbol "FTDR." ServiceMaster common shares will continue to trade on the New York Stock Exchange ("NYSE") under the symbol "SERV."

        In reviewing this information statement, you should carefully consider the matters described under the caption "Risk Factors" beginning on page 33.

        Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

        This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

The date of this information statement is [    ].

        This information statement was first made available to ServiceMaster stockholders on or about [    ].


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TABLE OF CONTENTS

 
  Page  

Questions and Answers About the Separation and Distribution

    1  

Information Statement Summary

    11  

Summary Historical and Unaudited Pro Forma Combined Financial Data

    28  

Risk Factors

    33  

Cautionary Statement Concerning Forward-Looking Statements

    50  

The Separation and Distribution

    52  

Dividend Policy

    60  

Capitalization

    61  

Selected Historical Combined Financial Data

    63  

Unaudited Pro Forma Combined Financial Statements

    67  

Business

    75  

Management's Discussion and Analysis of Financial Condition and Results of Operations

    88  

Management

    110  

Board of Directors and Corporate Governance

    112  

Executive Compensation

    122  

Director Compensation

    132  

Certain Relationships and Related Person Transactions

    133  

Material U.S. Federal Income Tax Consequences

    140  

Description of Material Indebtedness

    144  

Security Ownership of Certain Beneficial Owners and Management

    148  

Description of Our Capital Stock

    150  

Where You Can Find More Information

    155  

Index to Financial Statements

    F-1  


Presentation of Information

        Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement about Frontdoor assumes the completion of all of the transactions referred to in this information statement in connection with the separation and distribution. Unless the context otherwise requires, references in this information statement to "Frontdoor," "we," "us," "our" or the "Company" refer to frontdoor, inc., a Delaware corporation, and its combined subsidiaries. References in this information statement to "ServiceMaster" or "Parent" refer to ServiceMaster Global Holdings, Inc., a Delaware corporation, and its consolidated subsidiaries (other than, after the distribution, Frontdoor and its consolidated subsidiaries), unless the context otherwise requires. References to our historical business and operations refer to the business and operations of ServiceMaster's American Home Shield business that will be transferred to Frontdoor in connection with the separation and distribution. References in this information statement to the "separation" refer to the separation of the American Home Shield business from ServiceMaster's other businesses and the creation, as a result of the distribution, of an independent, publicly traded company, Frontdoor, to hold the assets and liabilities associated with the American Home Shield business after the distribution. References in this information statement to the "distribution" refer to the distribution of shares of Frontdoor common stock to ServiceMaster stockholders on a pro rata basis.

        The data included in this information statement regarding industry size and relative industry position is derived from a variety of sources, including company research, third-party studies and surveys, industry and general publications and estimates based on our knowledge and experience in the industries in which we operate. Our estimates have been based on information obtained from our customers, suppliers, trade and business organizations and other contacts in the industry. This information may prove to be inaccurate due to the method by which we obtained some of the data for our estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties.


 


QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND DISTRIBUTION

What is Frontdoor, and why is ServiceMaster separating its American Home Shield business and distributing Frontdoor stock?

  Frontdoor, which is currently an indirect, wholly owned subsidiary of ServiceMaster, was formed to own and operate ServiceMaster's American Home Shield business. The separation of the American Home Shield business from ServiceMaster and the distribution of Frontdoor common stock are intended to provide you with equity ownership in two separate publicly traded companies that will be able to focus exclusively on each of their respective businesses. ServiceMaster and Frontdoor expect that the separation will result in enhanced long-term performance of each business for the reasons discussed in the section entitled "The Separation and Distribution—Reasons for the Separation."

Why am I receiving this document?

 

ServiceMaster is delivering this document to you because you are a holder of ServiceMaster common stock. If you are a holder of ServiceMaster common stock as of the close of business on September 14, 2018, the record date for the distribution, you will be entitled to receive one share of Frontdoor common stock for every two shares of ServiceMaster common stock that you held at the close of business on such date. This document will help you understand how the separation and distribution will affect your post-separation ownership in ServiceMaster and Frontdoor, respectively.

How will the separation of the American Home Shield business from ServiceMaster work?

 

ServiceMaster will distribute at least 80.1 percent of the outstanding shares of Frontdoor common stock to ServiceMaster stockholders on a pro rata basis in a distribution intended to be generally tax-free to ServiceMaster stockholders for U.S. federal income tax purposes. As a result of the distribution, Frontdoor will become a separate public company. The number of shares of ServiceMaster common stock you own will not change as a result of the separation and distribution.

What is the record date for the distribution?

 

The record date for the distribution will be September 14, 2018.

When will the distribution occur?

 

It is expected that at least 80.1 percent of the outstanding shares of Frontdoor common stock will be distributed by ServiceMaster at 12:01 a.m. Eastern Time, on October 1, 2018, to holders of record of ServiceMaster common stock at the close of business on September 14, 2018, the record date for the distribution.

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What do stockholders need to do to participate in the distribution?

 

Stockholders of ServiceMaster as of the record date for the distribution will not be required to take any action to receive shares of Frontdoor common stock in the distribution, but you are urged to read this entire information statement carefully. No stockholder approval of the distribution is required. You are not being asked for a proxy. You do not need to pay any consideration, exchange or surrender your existing shares of ServiceMaster common stock or take any other action to receive your shares of Frontdoor common stock. The distribution will not affect the number of outstanding shares of ServiceMaster common stock or any rights of ServiceMaster stockholders, although it will affect the market value of each outstanding share of ServiceMaster common stock.

How will shares of Frontdoor common stock be issued?

 

You will receive shares of Frontdoor common stock through the same channels that you currently use to hold or trade ServiceMaster common stock, whether through a brokerage account or other channel. Receipt of our shares will be documented for you in the same manner that you typically receive stockholder updates, such as monthly broker statements.

 

If you own ServiceMaster common stock as of the close of business on September 14, 2018, the record date for the distribution, ServiceMaster, with the assistance of Computershare Trust Company, N.A. ("Computershare"), the distribution agent for the distribution, will electronically distribute shares of Frontdoor common stock to you or to your brokerage firm on your behalf in book-entry form. Computershare will mail you a book-entry account statement that reflects your shares of Frontdoor common stock, or your bank or brokerage firm will credit your account for the shares.

How many shares of Frontdoor common stock will I receive in the distribution?

 

ServiceMaster will distribute to you one share of Frontdoor common stock for every two shares of ServiceMaster common stock held by you as of close of business on the record date for the distribution. Based on approximately 135.6 million shares of ServiceMaster common stock outstanding as of August 22, 2018, and assuming a distribution of 80.2 percent of the outstanding shares of Frontdoor common stock, a total of approximately 67.8 million shares of Frontdoor common stock will be distributed to holders of record of ServiceMaster common stock at the close of business on September 14, 2018, and approximately 16.7 million shares of Frontdoor common stock will be retained by ServiceMaster, for a total of approximately 84.5 million shares of Frontdoor common stock outstanding. For additional information on the distribution, see "The Separation and Distribution."

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Will Frontdoor issue fractional shares of its common stock in the distribution?

 

No. We will not issue fractional shares of Frontdoor common stock in the distribution. Fractional shares that ServiceMaster stockholders would otherwise have been entitled to receive will be aggregated and sold in the public market by the distribution agent. The aggregate net cash proceeds of these sales will be distributed pro rata (based on the fractional share such holder would otherwise be entitled to receive) to those stockholders who would otherwise have been entitled to receive fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.

What are the conditions to the distribution?

 

The distribution is subject to final approval by the ServiceMaster board of directors, as well as to the satisfaction (or waiver by ServiceMaster in its sole discretion) of the following conditions:

 

the transfer of assets and liabilities from ServiceMaster to us shall be completed in accordance with the separation and distribution agreement that ServiceMaster and we will enter into prior to the distribution;

 

The private letter ruling from the Internal Revenue Service (the "IRS") regarding certain U.S. federal income tax matters relating to the separation and distribution received by ServiceMaster continuing to be valid and being satisfactory to the ServiceMaster board of directors;

 

ServiceMaster shall have received one or more opinions from its tax advisors, in each case satisfactory to the ServiceMaster board of directors, regarding certain U.S. federal income tax matters relating to the separation and distribution;

 

an independent appraisal firm acceptable to ServiceMaster shall have delivered one or more opinions to the board of directors of ServiceMaster at the time or times requested by the board of directors of ServiceMaster confirming the solvency and financial viability of ServiceMaster before the consummation of the distribution and each of ServiceMaster and Frontdoor after consummation of the distribution, and such opinions shall have been acceptable to ServiceMaster in form and substance in ServiceMaster's sole discretion and such opinions shall not have been withdrawn or rescinded;

 

the U.S. Securities and Exchange Commission (or the "SEC") shall have declared effective the registration statement of which this information statement forms a part, and this information statement shall have been made available to ServiceMaster stockholders;

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all actions or filings necessary or appropriate under applicable U.S. federal, U.S. state or other securities laws shall have been taken and, where applicable, have become effective or been accepted by the applicable governmental entity;

 

we shall have received all necessary approvals from applicable state regulators;

 

the transaction agreements relating to the separation shall have been duly executed and delivered by the parties;

 

no order, injunction or decree issued by any court of competent jurisdiction, or other legal restraint or prohibition preventing the consummation of the separation, distribution or any of the related transactions, shall be in effect;

 

the shares of Frontdoor common stock to be distributed shall have been approved for listing on the NASDAQ, subject to official notice of distribution;

 

we shall have entered into the financing transactions described in this information statement that are contemplated to occur on or prior to the date of the separation and distribution; and

 

no other event or development shall exist or have occurred that, in the judgment of ServiceMaster's board of directors, in its sole discretion, makes it inadvisable to effect the separation, distribution and other related transactions.

 

Neither we nor ServiceMaster can assure you that any or all of these conditions will be met. In addition, ServiceMaster can decline at any time to go forward with the separation and distribution. For a complete discussion of all of the conditions to the distribution, see "The Separation and Distribution—Conditions to the Distribution."

What is the expected date of completion of the distribution?

 

The completion and timing of the distribution are dependent upon a number of conditions. It is expected that the shares of Frontdoor common stock will be distributed by ServiceMaster at 12:01 a.m. Eastern Time, on October 1, 2018, to holders of record of ServiceMaster common stock at the close of business on September 14, 2018, the record date for the distribution. However, no assurance can be provided as to the timing of the distribution or that all conditions to the distribution will be met.

4


 

Can ServiceMaster decide to cancel the distribution of Frontdoor common stock even if all the conditions have been met?

 

Yes. The distribution is subject to the satisfaction or waiver of certain conditions. See the section entitled "The Separation and Distribution—Conditions to the Distribution." Until the distribution has occurred, ServiceMaster has the right to terminate the distribution, even if all of the conditions are satisfied.

What if I want to sell my ServiceMaster common stock or my Frontdoor common stock?

 

If you sell your shares of ServiceMaster common stock prior to or on the distribution date, you may also be selling your right to receive shares of Frontdoor common stock. See "The Separation and Distribution—Trading Between the Record Date and Distribution Date." You are encouraged to consult with your financial advisor regarding the specific implications of selling your ServiceMaster common stock prior to or on the distribution date.

What is "regular-way" and "ex-distribution" trading of ServiceMaster common stock?

 

Beginning on or shortly before the record date for the distribution and continuing up to and through the distribution date, it is expected that there will be two markets in ServiceMaster common stock: a "regular-way" market and an "ex-distribution" market. ServiceMaster common stock that trades in the "regular-way" market will trade with an entitlement to shares of Frontdoor common stock distributed pursuant to the distribution. Shares that trade in the "ex-distribution" market will trade without an entitlement to shares of Frontdoor common stock distributed pursuant to the distribution. If you hold shares of ServiceMaster common stock on the record date and then decide to sell any ServiceMaster common stock before the distribution date, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your ServiceMaster common stock with or without your entitlement to Frontdoor common stock pursuant to the distribution.

5


 

Where will I be able to trade shares of Frontdoor common stock?

 

Frontdoor common stock has been approved for listing on the NASDAQ under the symbol "FTDR." We anticipate that trading in shares of Frontdoor common stock will begin on a "when-issued" basis on or about September 14, 2018, the record date for the distribution, and will continue up to and through the distribution date and that "regular-way" trading in Frontdoor common stock will begin on the first trading day following the completion of the distribution. If trading begins on a "when-issued" basis, you may purchase or sell shares of Frontdoor common stock up to and through the distribution date, but your transaction will not settle until after the distribution date. We cannot predict the trading prices for its common stock before, on or after the distribution date.

What will happen to the listing of ServiceMaster common stock?

 

ServiceMaster common stock will continue to trade on the NYSE under the symbol "SERV."

Will the number of shares of ServiceMaster common stock that I own change as a result of the distribution?

 

No. The number of shares of ServiceMaster common stock that you own will not change as a result of the distribution.

Will the distribution affect the market price of my shares of ServiceMaster common stock?

 

Yes. As a result of the distribution, ServiceMaster expects the trading price of ServiceMaster common stock immediately following the distribution to be lower than the "regular-way" trading price of such stock immediately prior to the distribution because the trading price will no longer reflect the value of the American Home Shield business. There can be no assurance that the aggregate market value of shares of ServiceMaster common stock and Frontdoor common stock following the distribution will be higher or lower than the market value of shares of ServiceMaster common stock if the separation and distribution did not occur. This means, for example, that the combined trading prices of one share of ServiceMaster common stock and one share of Frontdoor common stock after the distribution may be equal to, greater than or less than the trading price of one share of ServiceMaster common stock before the distribution.

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What are the material U.S. federal income tax consequences of the separation and distribution?

 

It is a condition to the distribution that the private letter ruling from the IRS regarding certain U.S. federal income tax matters relating to the separation and distribution received by ServiceMaster remain valid and be satisfactory to the ServiceMaster board of directors and that the ServiceMaster board of directors receive one or more opinions from its tax advisors, in each case satisfactory to the ServiceMaster board of directors, regarding certain U.S. federal income tax matters relating to the separation and distribution. Accordingly, it is expected that ServiceMaster stockholders generally will not recognize any gain or loss upon receipt of Frontdoor common stock pursuant to the distribution, except with respect to any cash received in lieu of fractional shares. You should carefully read the section entitled "Material U.S. Federal Income Tax Consequences" and should consult your own tax advisor about the particular consequences of the distribution to you, including the application of U.S. federal, state and local and non-U.S. tax laws.

What will happen to my tax basis in my ServiceMaster stock?

 

If you do not sell your ServiceMaster stock in advance of the distribution, your tax basis will be adjusted and the aggregate tax basis of the ServiceMaster common stock and Frontdoor common stock received in the distribution (including any fractional share interest in Frontdoor common stock for which cash is received) will equal the aggregate tax basis of ServiceMaster common stock immediately prior to the distribution, allocated between the ServiceMaster common stock and Frontdoor common stock (including any fractional share interest in Frontdoor common stock for which cash is received) in proportion to the relative fair market value of each on the date of the distribution. You should carefully read the section entitled "Material U.S. Federal Income Tax Consequences" and should consult your own tax advisor about the particular consequences of the distribution to you, including the application of U.S. federal, state and local and non-U.S. tax laws.

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What will Frontdoor's relationship be with ServiceMaster following the separation and distribution?

 

Following the distribution, ServiceMaster stockholders will directly own at least 80.1 percent of the outstanding shares of Frontdoor common stock, and ServiceMaster and Frontdoor will be separate companies with separate management teams and separate boards of directors. ServiceMaster will retain no more than 19.9 percent of the outstanding shares of Frontdoor common stock following the distribution. Prior to the distribution, we will enter into a separation and distribution agreement with ServiceMaster to effect the separation and distribution and provide a framework for our relationship with ServiceMaster after the separation and will enter into certain other agreements, such as a transition services agreement, a tax matters agreement, an employee matters agreement and a stockholder and registration rights agreement with respect to ServiceMaster's continuing ownership of shares of Frontdoor common stock. These agreements will provide for the separation between ServiceMaster and us of the assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) of ServiceMaster and its subsidiaries attributable to periods prior to, at and after our separation from ServiceMaster and will govern the relationship between ServiceMaster and us subsequent to the completion of the separation. For additional information regarding the separation and distribution agreement, other transaction agreements and certain other commercial agreements between ServiceMaster and us, see the sections entitled "Risk Factors—Risks Related to the Separation and the Distribution" and "Certain Relationships and Related Person Transactions."

How will ServiceMaster vote any shares of Frontdoor common stock it retains?

 

ServiceMaster will agree to vote any shares of Frontdoor common stock that it retains in proportion to the votes cast by our other stockholders and grant us a proxy to vote its shares of Frontdoor common stock in such proportion. For additional information on these voting arrangements, see "Certain Relationships and Related Person Transactions—Stockholder and Registration Rights Agreement."

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What does ServiceMaster intend to do with any shares of Frontdoor common stock it retains?

  ServiceMaster currently intends to responsibly dispose of all of the Frontdoor common stock that it retains after the distribution through one or more subsequent exchanges for debt by June 14, 2019 in accordance with the terms of the private letter ruling.

Who will manage Frontdoor after the separation?

 

We have assembled a management team of highly experienced leaders who have strong track records in a wide variety of industries and economic conditions, led by Mr. Rexford J. Tibbens, who is our President and Chief Executive Officer, Brian K. Turcotte, our Senior Vice President and Chief Financial Officer and Jeffrey A. Fiarman, our Senior Vice President, General Counsel and Corporate Secretary. Our management team is highly focused on execution and driving growth and profitability. Further, we believe that we have a deep pool of talent across our organization, including long-tenured individuals with significant expertise and knowledge of our business. For more information regarding our management, see "Management."

Are there risks associated with owning Frontdoor common stock?

 

Yes. Ownership of Frontdoor common stock is subject to both general and specific risks relating to our business, the industry in which we operate, our ongoing contractual relationships with ServiceMaster and our status as a separate, publicly traded company. Ownership of Frontdoor common stock is also subject to risks relating to the separation and the distribution. These risks are described in the "Risk Factors" section of this information statement beginning on page 33. You are encouraged to read that section carefully.

Does Frontdoor plan to pay dividends?

 

We currently expect to retain all available funds and any future earnings for use in the operation and expansion of our business. The declaration and payment of any dividends in the future will be subject to the sole discretion of our board of directors and will depend on many factors. See "Dividend Policy."

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Will Frontdoor incur any indebtedness prior to or at the time of the distribution?

 

In connection with the separation and distribution, we incurred long-term debt consisting of $350 million in aggregate principal amount of senior unsecured notes and $650 million in aggregate principal amount of senior secured term loans. We also entered into a senior secured revolving credit facility with commitments in aggregate principal amount of $250 million. The notes and term loans were incurred in favor of ServiceMaster's wholly owned subsidiary, The ServiceMaster Company, LLC ("The ServiceMaster Company"), as partial consideration for the contribution of the American Home Shield business assets to us. The ServiceMaster Company exchanged the notes and term loans with a certain financial institution for $1 billion in aggregate principal amount of outstanding debt of The ServiceMaster Company owed to such financial institution.

 

Additional details regarding such financing arrangements will be included in an amendment to this information statement. See "Description of Material Indebtedness" and "Risk Factors—Risks Related to the Separation and the Distribution."

Who will be the distribution agent, transfer agent and registrar for shares of Frontdoor common stock?

 

The distribution agent, transfer agent and registrar for shares of Frontdoor common stock will be Computershare Trust Company, N.A. For questions relating to the transfer or mechanics of the stock distribution, you should contact Computershare toll free at 800-546-5141.

Where can I find more information about ServiceMaster and Frontdoor?

 

Before the distribution, if you have any questions relating to ServiceMaster's business performance, you should contact:

 

ServiceMaster Global Holdings, Inc.
150 Peabody Place
Memphis, TN 38103
Attention: Investor Relations

 

After the distribution, our stockholders who have any questions relating to our business performance should contact us at:

 

frontdoor, inc.
150 Peabody Place
Memphis, TN 38103
Attention: Investor Relations

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INFORMATION STATEMENT SUMMARY

        Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement about Frontdoor assumes the completion of all of the transactions referred to in this information statement in connection with the separation and distribution. Unless the context otherwise requires, references in this information statement to "Frontdoor," "we," "us," "our" or the "Company" refer to frontdoor, inc., a Delaware corporation, and its combined subsidiaries. References in this information statement to "ServiceMaster" or "Parent" refer to ServiceMaster Global Holdings, Inc., a Delaware corporation, and its consolidated subsidiaries (other than, after the distribution, Frontdoor and its consolidated subsidiaries), unless the context otherwise requires. References to our historical business and operations refer to the business and operations of ServiceMaster's American Home Shield business that will be transferred to us in connection with the separation and distribution. References in this information statement to the "separation" refer to the separation of the American Home Shield business from ServiceMaster's other businesses and the creation, as a result of the distribution, of an independent, publicly traded company, Frontdoor, to hold the assets and liabilities associated with the American Home Shield business after the distribution. References in this information statement to the "distribution" refer to the distribution of at least 80.1 percent of the shares of Frontdoor common stock to ServiceMaster stockholders on a pro rata basis.

LOGO

Business Overview

        Frontdoor is obsessed with taking the hassle out of owning a home. Frontdoor owns multiple home service brands including HSA, OneGuard, Landmark and American Home Shield, which is the largest provider of home service plans in the U.S., as measured by revenue. Through our home services platform, we respond to over four million service requests annually (or one every eight seconds) from homeowners who require assistance with technical home repair issues utilizing our nationwide network of over 15,000 pre-qualified professional contractor firms that employ more than 45,000 technicians. Our customizable home service plans help customers protect and maintain their homes, typically their most valuable asset, from costly and unplanned breakdowns of essential home systems and appliances. Our large recurring customer base provides our contractors a significant volume of work throughout the year, which is highly valued by them. We facilitate these interactions through our leading technology-enabled customer interface and service delivery platform. We will continue to leverage this technology-enabled and people-driven platform as a catalyst for future sustained growth.

        For the six months ended June 30, 2018, we generated revenue, net income and Adjusted EBITDA of $602 million, $58 million and $105 million, respectively. Revenue represented year-over-year growth of nine percent while net income and Adjusted EBITDA reflected year-over-year decreases of seven percent and seven percent, respectively. The seven percent decrease in Adjusted EBITDA was primarily driven by $28 million of increased contract claims costs, incremental sales and marketing costs and customer service costs, offset, in part, by the impact of higher revenue. The seven percent decrease in net income was primarily driven by the above factors and $15 million of pre-tax spin-off charges, offset, in part, by lower income taxes due to the Tax Cuts and Jobs Act (the "Act" or "U.S. Tax Reform").

        For the fiscal year ended December 31, 2017, we generated revenue, net income and Adjusted EBITDA of $1,157 million, $160 million, and $259 million, respectively. Revenue, net income and Adjusted EBITDA represented year-over-year growth of 13 percent, 29 percent and 19 percent, respectively. Additionally, we have grown through various business cycles as evidenced by the fact we

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grew revenue from 2007 to 2017 at a compound annual growth rate ("CAGR") of eight percent. We believe that our strong performance through these cycles is attributable to the essential nature of our services, our strong value proposition and management's focus on driving results through strategic investment and operational execution. From 2013 to 2017, we grew revenue, net income and Adjusted EBITDA at a CAGR of 12 percent, 17 percent and 16 percent, respectively. For a reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to net income, see "—Summary Historical and Unaudited Pro Forma Combined Financial Data."

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Our Value Proposition

        Customer value proposition.    We serve approximately two million customers who subscribe to a yearly service plan agreement that covers the repair or replacement of major components of up to 21 home systems and appliances, including electrical, plumbing, central heating and air conditioning ("HVAC") systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops. Increasingly, these items tend to be the most critical and complicated items in a home, which lead to complex repairs. Product failures can result in significant emotional and financial inconvenience for our customers. We continuously upgrade our offerings through additional coverages and home services as homes become increasingly complex and connected. Our plans are generally structured as renewable one-year contracts, and, because our customers value the services we provide, 66 percent of our revenue base in 2017 was recurring. This drives consistency and predictability in our business performance.

        Our service plans appeal to the growing segment of U.S. homeowners who want: (1) budget protection against unexpected and/or expensive home repair; and (2) the convenience of having repairs completed by experienced professionals. Given the high price of an appliance or home system breakdown, the length of time associated with vetting and hiring a qualified repairperson and, typically, the lack of formal guarantee for services performed, consumers are willing to pay for the peace of mind, convenience, repair expertise and guarantee provided by a home service plan. Our service plans appeal to a broad range of customer demographics.

        From 2007 to 2017, our customer base has grown from 1.3 million to two million, representing a CAGR of four percent, our customer retention rate increased from 73 percent to 75 percent, and the annual revenue we generated from renewals grew from 60 percent to 66 percent.

        Professional contractor value proposition.    Our customers are serviced by a select group of high quality, pre-qualified independent contractors. Our reputation as a strong partner, our growth and our increasing scale have allowed us to attract one of the largest independent contractor networks in the U.S., which currently stands at more than 15,000 pre-qualified professional contractor firms that employ more than 45,000 technicians. Our large recurring customer base guarantees our contractors a

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significant volume of work throughout the year, which is highly valued by them. In return for this volume, we are able to negotiate favorable rates for work performed. We estimate that approximately 95 percent of our contractor base plans to maintain or expand their relationship with us over the next two years.

        We are highly selective in onboarding new contractors into our service network and actively monitor our existing contractors through a rigorous set of performance measures including direct feedback from customer satisfaction surveys. We believe substantial time and expense would be required to develop a contractor base that has comparable national reach, experience and quality of service. Our status as the largest provider of home service plans in the U.S. provides us a significant competitive advantage. We classify a subset of our independent contractor network as "preferred," and they represent a combination of our highest quality and longest-tenured independent contractors. Historically, approximately 80 percent of work orders are assigned to our preferred contractors, driving higher customer satisfaction and ultimately retention rates. We have the opportunity to leverage this supply base for improving and maintaining our customers' homes.

        From 2013 to 2017, our network of professional contractor partners has grown from approximately 10,000 to over 15,000, all of whom have performed a service order for us in the past 12 months.

Our Go-to-Market Strategy

        We founded the home service plan segment (commonly referred to as "home warranties") in 1971 and benefit from significant scale advantages as the leader in this highly fragmented segment. As we have grown, a greater number of homeowners and contractors have been attracted to, and joined, our network. We believe there is a significant opportunity for us to build on our current leadership position by investing in our customer service experience, increasing customer retention and expanding and further refining our lead generation channels and partners. To capture this opportunity, we are focused on the following customer acquisition channels:

        Real estate channel.    Our plans typically have been used to provide peace of mind to potential home buyers by protecting them from large, unanticipated out-of-pocket expenses related to the breakdown of major home systems and appliances during the first year after a home purchase. We leverage marketing service agreements and a team of field-based account executives to train, educate and market our plans via real estate brokers and agents, working directly with real estate offices and participating in broker meetings and national sales events. We have long-standing relationships with seven of the 10 largest real estate brokerages in the U.S. and continue to improve relationships with other key brokers. On average, we have been in business with these real estate brokerages for 16 years, and we have strategic partnership arrangements with many of these brokerages. Our long-standing relationships help to secure and grow our position. In addition, for 15 years running, we have had a strategic alliance agreement with the National Association of Realtors, which is the largest real estate association in the U.S. representing 1.3 million realtors.

        We had a 32 percent share of plans sold in connection with a home resale transaction in 2017, up from 26 percent in 2012. In 2017, 1.5 million homes were sold with a home service plan out of the approximately 5.5 million homes sold. Customers acquired through the real estate channel represented 48 percent of our customer base in 2017, down from 56 percent in 2007, as we have rapidly grown our direct-to-consumer ("DTC") customer base. In 2017, customers in this channel renewed at 28 percent after the first contract year. Revenue from this channel, including associated renewals, was $400 million, $449 million and $533 million for the years ended December 31, 2015, 2016 and 2017, respectively. Overall revenues within this channel have grown at a five percent CAGR from 2007 through 2017.

        Direct-to-consumer channel.    Leveraging our experience in the real estate channel, we invested significant resources to develop the DTC channel to broaden our reach beyond home resale

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transactions. Our value proposition resonates with a wide demographic of homeowners who find security in a plan protecting against expensive and unexpected breakdowns in the home. This strong value proposition is promoted to our potential customers through search engine marketing, content marketing, social media, direct mail and TV/radio and sold through our customer care centers and mobile-optimized e-commerce platform. Over the past decade, we have strategically invested to expand the DTC channel given its high retention rates and customer lifetime value. Our research indicates a relatively low home service plan penetration rate of four percent of occupied U.S. households. We believe that penetration rates will increase over time as consumers become more aware of, and educated about, home service plans.

        Since 2012, we have maintained an over 50 percent share of home service plans purchased or renewed outside of a home resale transaction. This industry remains underpenetrated, with approximately three million homes out of the 115 million U.S. households (excluding home resales) having a home service plan. Customers acquired through the DTC channel represented 52 percent of our customer base in 2017, up from 44 percent in 2007. In 2017, customers in this channel renewed at 75 percent after the first contract year. Revenue from this channel, including associated renewals, was $513 million, $571 million and $618 million for the years ended December 31, 2015, 2016 and 2017, respectively. Overall revenues within this channel have grown at a nine percent CAGR from 2007 through 2017.

        Customer renewals.    We generated 66 percent of our revenue through existing customer renewals for the six months ended June 30, 2018 and the year ended December 31, 2017. We have made significant investments in our integrated technology platform, self-service capabilities, customer care center operations and contractor management systems, which we believe position us to further improve retention and drive consistency and predictability into our business. We estimate that each one-percent improvement in customer retention generates approximately $8 million of incremental revenue and $4 million of gross profit.

Our Opportunity

        Frontdoor operates within the larger $400 billion U.S. home services market, of which the U.S. home service plan segment represents $2.3 billion. While the home service plan segment has grown at a CAGR of seven percent from 2013 to 2017, our revenue has grown at a 12 percent CAGR during the same period. We believe that we are well-positioned to capitalize on our leadership position, while leveraging our network to provide other services to consumers in the broader home services market, as it becomes more complex and connected.

        We view the home service plan segment as a long-term growth space. This segment is characterized by low household penetration with approximately five million of nearly 120 million households (owner-occupied homes and rentals) covered by a home service plan, or approximately four percent of these households.

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        As consumer demand shifts towards more outsourced services, we believe we have an opportunity, as a reliable, scaled service provider with a national, licensed independent contractor network, to increase share and household penetration. Additionally, we believe that increasingly complex home systems and appliances may further highlight the value proposition of professional repair services and, accordingly, the coverage benefits offered by a home warranty or other service plans. We aim to capitalize on this opportunity through a comprehensive strategy built on the key strengths of our business.

Strategy

        We have a three-pronged strategy for penetrating the $400 billion U.S. home services market:

    Grow our core business: expand the home service plan business through growing the category, expanding into new geographies and expanding into new customer segments;

    Develop a broader home services offering: reach new customers with on-demand service and expand into home improvement and home maintenance services; and

    Develop a world class data platform: seek to capture valuable home data to facilitate home services and anticipate repair and maintenance needs.

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1.     Grow our Core Business

        We see an opportunity to triple the size of our core business by increasing household penetration through consumer education and improvements to the customer experience, penetrating new geographies and expanding into new segments, including convenience seekers and multi-family homes.

        Increase household penetration.    To accelerate new customer growth, we make strategic investments in sales, marketing and advertising to drive new business leads, brand awareness and household penetration. We will continue to rapidly expand our core business via a focused effort on our two primary channels:

    Direct-to-consumer; and

    Real estate transactions.

        We aim to increase household penetration by targeting homeowners more effectively, employing more sophisticated sales tactics, growing our product breadth and partnering with new providers. Between 2012 and 2016, such efforts have enabled us to increase our share of industry revenue from 38 percent to 46 percent, while the overall size of the home service plan category has increased from approximately three million to five million households. Increased household penetration ultimately allows us to build economies of scale, capitalize on our consistently high retention rates and drive long-term value to us.

        Deliver superior customer experience.    We will continue to improve the customer experience by investing in our integrated technology platform, self-service capabilities, customer care center operations and contractor management systems. These targeted investments deliver enhancements most

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valued by our customers, including providing a convenient service experience and driving contractor service improvement. We believe these initiatives will lead to improved retention rates, more word-of-mouth marketing and the opportunity to deliver additional services to satisfied customers. Our customer retention rate has steadily grown from 73 percent in 2007 to 75 percent as of June 30, 2018.

        Continue digital innovation.    We continue to invest in digital innovation to provide customers, contractors and realtors with a fully-integrated experience and increase profitability.

        Customers.    In recent years, we have developed robust customer technology platforms, which make it easy for customers to purchase from us, request service and manage their account. Approximately 40 percent of our DTC sales in 2017 were entered online, and 55 percent of our total service request volume was entered online or through our interactive voice response system. Our customer MyAccount platform had over one million active users at the end of 2017, allowing customers to pay bills, request service, review account information or chat with a representative online without calling our customer care centers.

        Contractors.    Our contractor technology platform makes it easier for contractors to work with us and improves communication between contractors and customers. Our contractor portal had nearly 5,000 active users at the end of 2017, and our platform sent over one million "On-My-Way" notifications to customers, letting them know their contractor was en route to their home.

        Realtors.    Our realtor technology platform makes it easier for realtors to work with us, and therefore recommend our products to their clients. Approximately 55 percent of real estate channel orders were placed online in 2017. Our realtor portal had over 80,000 active users at the end of 2017, allowing realtors to enter, edit and pay for orders; view or print order confirmations, invoices, and contracts for active contracts; request service on behalf of their clients; and view and manage expiring orders.

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2.     Develop a broader home services offering

        We see an opportunity to expand beyond repair services for home service plan customers by developing a lead generation engine for our contractor network, which we believe will increase customer satisfaction and enhance our contractor value proposition. Repair services make up only approximately 25 percent of the U.S. home services market, and home improvement and maintenance work is highly valued by our contractors. We see an asymmetrical opportunity to generate leads for our contractors at a low cost to them because it strengthens our relationship with our network and therefore benefits our core business.

        We see a large opportunity to develop on-demand services for convenience seekers. Customers' expectations are changing and we intend to develop new services that meet those expectations. Our industry-leading contractor network will allow us to offer services that focus on speed and convenience.

        Develop and expand service offerings.    We intend to continue to leverage our existing sales channels and service platform to deliver additional value-added services to our customers. Our product development teams draw upon the experience of technicians in the field to both create innovative customer solutions for the existing product suite and to identify service and category adjacencies. In the real estate channel, we have recently launched a new nationwide service offering of re-keying locks for recent home buyers with a home service plan, which enhances the value proposition of our service offering and has been well received in the marketplace. We are currently piloting a new offering of central HVAC pre-season check ups, which we expect to launch nationwide in 2019. Additionally, we are testing smart home technology services, which we think will add value to our plans and result in increases in renewals.

        As we seek to further expand our share in the home services market, we are exploring opportunities in on-demand service and property management to leverage our industry-leading repair services platform to provide new services to the nearly 120 million homeowners in the U.S. home services market.

        Pursue selective acquisitions.    We have a track record of sourcing and purchasing targets at attractive prices and successfully integrating them into our business. In 2016, we made two key acquisitions. In June 2016, we acquired OneGuard Home Warranties ("OneGuard"), and in November 2016, we acquired Landmark Home Warranty, LLC ("Landmark"), which together resulted in over 100,000 new customers. We anticipate that the highly fragmented nature of the home service plan industry will continue to create opportunities for further consolidation, and, with our scale, we believe we are the acquirer of choice in the industry. In the future, we intend to continue to take advantage of strategic acquisition opportunities, particularly in underserved regions where we can enhance and expand service capabilities. We use acquisitions to cost-effectively grow our home service plan contract count and deepen our customer base in high-growth geographies and may consider strategic acquisitions that will expand our reach into the home services market.

3.     Develop a world class data platform that fuels our growth

        We have the opportunity to become the authoritative source of home information. We are constantly looking to leverage our data, and have identified additional opportunities to use technology to capture valuable home data, make it easier for customers and contractors to interact and ultimately enable us to anticipate repair needs before the customer is aware of them. We believe these investments will both improve the customer experience and reduce our operating expenses. We believe building this data platform will provide additional revenue opportunities as real estate companies, manufacturers and other companies within the U.S. home services market see the benefit of this data. We intend for this platform to be the definitive source of information for homeowners to understand industry quality and service trends to make informed decisions to maintain, improve or repair their home.

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Strengths

        We enjoy the benefits of a large and diverse base of talent, assets and service offerings, which have helped us develop into and retain our position as the established segment leader. The following strengths support our business strategies:

        Strong position in large, fragmented, growing segment.    We have the leading position in the U.S. home service plan segment with a 46 percent share in 2016. We have spent decades developing a reputation built on brand reputation, fairness of contract terms, including price, and timely response to service claims. As a result, we enjoy industry-leading brand awareness and a reputation for high-quality customer service, both of which serve as key drivers of our customer acquisition efforts. Our nationwide presence also allows us to effectively serve local residential customers and to capitalize on lead generation sources such as real estate agencies. We believe our size and scale provide us a competitive advantage in contractor selection, purchasing power and marketing and operating efficiencies compared to smaller local and regional competitors. Additionally, we have an opportunity to leverage our contractor network into the broader home services market.

        Diverse revenue stream across geographies.    We are diversified by customer acquisition channel, real estate and DTC, and geography, with operations in all 50 states and the District of Columbia. Our ability to acquire customers through multiple channels mitigates the effect of a downturn in the real estate market, while our nationwide presence limits the risk of poor economic conditions or adverse weather conditions in any particular geography affecting our operations. Therefore, we believe we are better insulated from adverse economic conditions than our smaller regional competitors.

        High-value service offerings resulting in high customer retention and recurring revenue.    We believe our high annual customer retention demonstrates the highly valued nature of our services and the high level of execution and customer service that we provide. As a result of our high retention and renewal rates and long-standing contractor and real estate relationships, we enjoy significant predictability and stability in our business. These factors limit the effect of adverse economic cycles on our revenue.

        Technology-enabled platform drives efficiency, quality of service and customer retention.    We believe our fully integrated, technology-enabled platform is a competitive advantage and differentiates us from our competitors. Our technology-enabled platform allows customers to procure and utilize their home service plan without ever having to use a customer care center if they so choose. Customers can purchase a home service plan, electronically chat with a representative, pay bills and track the progress of their service requests, all from their mobile device or personal computer. Further, for our contractor and real estate broker base, we have created a robust platform that allows them to serve our customers and place home service plans, respectively. We believe our fully integrated, technology-enabled platform provides a better customer experience, drives customer retention, allows for seamless interaction with our contractor and real estate broker base and provides operating efficiencies superior to our competitors.

        Capital-light business model.    Our business model is characterized by strong Adjusted EBITDA margins, negative working capital and limited capital expenditure requirements. Our recurring capital expenditure requirements are typically less than two percent of our annual revenue. We may, from time-to-time, make more significant investments in capability-expanding technology, including investments to develop a world-class data platform to fuel our growth. Net cash provided from operating activities increased by $10 million to $122 million for the six months ended June 30, 2018 compared to $112 million for the six months ended June 30, 2017. Net cash provided from operating activities in the six months ended June 30, 2018 comprised $92 million in earnings adjusted for non-cash charges and a $41 million decrease in cash required for working capital, offset, in part, by

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$11 million for cash payments related to restructuring and spin-off charges. Capital expenditures were $17 million and free cash flow was $105 million for the six months ended June 30, 2018.

        Net cash provided from operating activities increased by $39 million to $194 million for the year ended December 31, 2017 compared to $155 million for the year ended December 31, 2016 and $135 million for the year ended December 31, 2015. Net cash provided from operating activities in 2017 comprised $162 million in earnings adjusted for non-cash charges and a $31 million decrease in cash required for working capital. Capital expenditures were $15 million in 2017, $11 million in 2016, and $7 million in 2015. Free Cash Flow was $179 million, $144 million and $127 million for the years ended December 31, 2017, 2016 and 2015, respectively. For a reconciliation of Free Cash Flow to net cash provided from operating activities from continuing operations, which we consider to be the most directly comparable financial measure presented in accordance with generally accepted accounting principles, see "Selected Historical Combined Financial Data" and "Unaudited Pro Forma Combined Financial Data."

    Resilient financial model with track record of consistent performance.

        Solid revenue, net income and Adjusted EBITDA growth through business cycles.    Our combined revenue, net income and Adjusted EBITDA CAGR from 2013 through 2017 was 12 percent, 17 percent and 16 percent, respectively. Although we can be impacted by economic and housing downturns, our revenue and earnings remained stable during the last major downturn. We believe that this strong performance is attributable to the essential nature of our services, our strong value proposition and management's focus on driving results through strategic investment and operational execution.

        Solid margins with attractive operating leverage and productivity improvement initiatives.    Our business model enjoys inherent operating leverage stemming from fixed investments in infrastructure and technology, among other factors. We have demonstrated our ability to expand our margins through a variety of initiatives, including metric-driven continuous improvement in our customer care centers and targeted systems investments, which we believe will continue to increase self-service capabilities for our customers, and leveraging our size and scale to deepen and improve our contractor network. We estimate that we enjoy industry-leading gross margins, in many cases significantly outpacing our largest competitors in the U.S.

        Enhance our profitability.    We continue to invest in initiatives designed to maintain or improve our margins and drive profitable growth. We have been able to increase productivity through actions such as continuous process improvement and targeted systems investments which we believe will continue to increase self-service capabilities for our customers, contractors and realtors, resulting in lower customer acquisition and service costs. We also focus on strategically capitalizing on our purchasing power to achieve more favorable pricing and terms on repair parts and home systems and appliances when replacement is necessary. In addition, we have implemented tools and processes to centralize and systematize pricing decisions. These tools and processes enable us to optimize pricing at the geographic market and product level while creating a flexible and scalable pricing architecture that is fully scalable across our business. We intend to leverage these investments and identify further opportunities to enhance profitability.

        Multi-channel marketing approach supported by sophisticated consumer analytic modeling capabilities.    Our multi-channel marketing approach focuses on building the value of our brand and generating revenue by understanding the decisions consumers make at each stage in the purchase of home services. The effectiveness of our marketing efforts is demonstrated by an increase in lead generation and online sales. In the DTC channel, new home service plan lead generation has benefited from increased spending in marketing as well as improved digital marketing. Testing we have performed suggests that customers' intent to purchase increases by approximately two times after being presented with a basic description of how our home service plans work. We also have been deploying increasingly

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sophisticated consumer analytics models that allow us to more effectively segment our prospective customers and tailor campaigns towards them in order to keep cost-per-sale relatively flat. In addition, we have been successful with innovative ways of reaching and marketing to consumers, including content marketing, online reputation management and social media channels. Our marketing spend in 2017 was composed of digital (38 percent), direct mail (24 percent), broadcast (16 percent) and social & other (22 percent).

        Operational and customer service excellence driven by superior contractor development.    We are constantly focused on improving customer service. The customer experience is at the foundation of our business model, and we believe that each interaction between a customer and one of our independent contractors is an extension of our reputation. We employ rigorous contractor selection practices and continuously analyze ratings from customers to identify potential improvements in service and productivity.

        Experienced management team.    We have assembled a management team of highly experienced leaders who have strong track records in a wide variety of industries and economic conditions. Our management team is highly focused on execution and driving growth and profitability, and, as such, our compensation structure, including incentive compensation, is tied to key performance metrics that are designed to incentivize senior management to drive the long-term success of our business. Further, we believe that we have a deep pool of talent across our organization, including long-tenured individuals with significant expertise and knowledge of our business.

Summary of Risk Factors

        An investment in our company is subject to a number of risks, including risks relating to our business, the separation and distribution and Frontdoor common stock. Set forth below is a high-level summary of some, but not all, of these risks. Please read the information in the section captioned "Risk Factors" beginning on page 33 for a more thorough description of these and other risks.

Risks Related to Our Business

    Our industry is highly competitive.

    Weakening general economic conditions, especially as they may affect home sales, unemployment or consumer confidence or spending levels, may adversely impact our business, financial position, results of operations and cash flows.

    We may not successfully implement our business strategies, including achieving our growth objectives.

    Adverse credit and financial market events and conditions could, among other things, impede access to or increase the cost of financing, which could have a material adverse impact on our business, financial position, results of operations and cash flows.

    Weather conditions and seasonality affect the demand for our services, labor costs and our results of operations and cash flows.

    We may not be able to attract and retain qualified key executives or transition smoothly to new leadership, which could adversely impact us and our businesses and inhibit our ability to operate and grow successfully.

    We are dependent on labor availability at our customer care centers.

    Changes in U.S. tariff and import/export regulations may impact our business, financial position, results of operations and cash flows.

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    Laws and government regulations applicable to our business and lawsuits, enforcement actions and other claims by third parties or governmental authorities could increase our legal and regulatory expenses and impact our business, financial position, results of operations and cash flows.

    Disruptions or failures in our information technology systems could create liability for us or limit our ability to effectively monitor, operate and control our operations and adversely impact our reputation, business, financial position, results of operations and cash flows.

    Increases in appliances, parts and system prices, fuel prices and other operating costs may impact our business, financial position, results of operations and cash flows.

    We depend on a limited number of third-party component suppliers.

    Changes in the services we deliver or the products we use could affect our reputation, business, financial position, results of operations and cash flows.

    If we fail to protect the security of personal information about our customers, associates and third parties, we could be subject to interruption of our business operations, private litigation, reputational damage and costly penalties.

    We may not be able to adequately protect our intellectual property and other proprietary rights that are material to our business.

    Future acquisitions or other strategic transactions could negatively affect our reputation, business, financial position, results of operations and cash flows.

    Under our new debt agreements, we expect to be subject to various restrictive covenants that could materially adversely impact our business, financial position, results of operations and cash flows.

    Our future success depends on our ability to attract, retain and maintain positive relations with third party contractors and vendors and their performance.

Risks Related to the Separation and Distribution

    We have no history of operating as an independent, public company, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

    If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, we, ServiceMaster, and ServiceMaster stockholders could be subject to significant tax liabilities and, in certain circumstances, we could be required to indemnify ServiceMaster for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement.

    U.S. federal income tax consequences may restrict our ability to engage in certain desirable strategic or capital-raising transactions after the separation.

    Until the separation and distribution occur, ServiceMaster has sole discretion to change the terms of the separation and distribution in ways that may be unfavorable to us.

    We may not achieve some or all of the expected benefits of the separation, and the separation may materially and adversely affect our business, financial position, results of operations and cash flows.

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    ServiceMaster or we may fail to perform under various transaction agreements that will be executed as part of the separation, or we may fail to have necessary systems and services in place when certain of the transaction agreements expire.

    After the distribution, certain members of management, directors and stockholders will hold stock in both ServiceMaster and our Company and, as a result, may face actual or potential conflicts of interest.

    No vote of ServiceMaster stockholders is required in connection with the separation and distribution.

    Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could materially and adversely affect us.

    In connection with our separation from ServiceMaster, we will incur debt obligations that could adversely affect our business and profitability and our ability to meet our obligations.

    As an independent, publicly traded company, we may not enjoy the same benefits that we did as a segment of ServiceMaster.

    In connection with our separation from ServiceMaster, ServiceMaster will indemnify us for certain liabilities, and we will indemnify ServiceMaster for certain liabilities. If we are required to pay under these indemnities to ServiceMaster, our financial results could be negatively impacted. The ServiceMaster indemnity may not be sufficient to hold us harmless from the full amount of liabilities for which ServiceMaster will be allocated responsibility, and ServiceMaster may not be able to satisfy its indemnification obligations in the future.

    Our ability to generate the significant amount of cash needed to pay interest and principal on our new indebtedness and our ability to refinance all or a portion of our indebtedness or obtain additional financing depends on many factors beyond our control.

Risks Related to Frontdoor Common Stock

    We cannot be certain that an active trading market for our shares of common stock will develop or be sustained after the distribution, and, following the distribution, our stock price may fluctuate significantly.

    If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.

    There may be substantial changes in our stockholder base.

    We do not expect to pay any cash dividends for the foreseeable future.

    Your percentage of ownership in our Company may be diluted in the future.

    Our certificate of incorporation will designate the state courts of the State of Delaware, or, if no state court located in the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against us and our directors and officers.

    Provisions in our certificate of incorporation and bylaws and of Delaware law may prevent or delay an acquisition of our Company, which could decrease the trading price of Frontdoor common stock.

    A significant number of our shares of common stock are or will be eligible for future sale, including the disposition by ServiceMaster of the shares of Frontdoor common stock that it may

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      retain after the distribution, which may cause the market price for Frontdoor common stock to decline.


The Separation and Distribution

        On July 26, 2017, ServiceMaster announced its intention to separate its American Home Shield business from its Terminix and Franchise Service Group ("FSG") businesses. The separation will occur by means of pro rata distribution to ServiceMaster stockholders of at least 80.1 percent of the outstanding shares of common stock of Frontdoor, which was formed to hold ServiceMaster's American Home Shield business.

        Following the distribution, ServiceMaster stockholders will own directly at least 80.1 percent of the outstanding shares of Frontdoor common stock, and Frontdoor will be a separate public company from ServiceMaster. ServiceMaster will retain no more than 19.9 percent of the outstanding shares of Frontdoor common stock following the distribution. ServiceMaster currently intends to responsibly dispose of all of the Frontdoor common stock that it retains after the distribution through one or more subsequent exchanges for debt by June 14, 2019 in accordance with the terms of the private letter ruling.

        On August 24, 2018, the ServiceMaster board of directors approved the distribution of Frontdoor's issued and outstanding shares of common stock on the basis of one share of Frontdoor common stock for every two shares of ServiceMaster common stock held as of the close of business on September 14, 2018, the record date for the distribution, subject to the satisfaction or waiver of the conditions to the distribution as described in this information statement. For a more detailed description of these conditions, see "The Separation and Distribution—Conditions to the Distribution."

Our Post-Separation Relationship with ServiceMaster

        After the distribution, ServiceMaster and Frontdoor will be separate companies with separate management teams and separate boards of directors. Prior to the distribution, we will enter into a separation and distribution agreement with ServiceMaster, which is referred to in this information statement as the "separation agreement" or the "separation and distribution agreement." In connection with the separation, we will also enter into various other agreements to effect the separation and provide a framework for our relationship with ServiceMaster after the separation, such as a transition services agreement, a tax matters agreement, an employee matters agreement and a stockholder and registration rights agreement with respect to ServiceMaster's continuing ownership of Frontdoor common stock. These agreements will provide for the allocation between Frontdoor and ServiceMaster of ServiceMaster's assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the distribution, and will govern certain relationships between Frontdoor and ServiceMaster after the distribution.

        For additional information regarding the separation agreement and other transaction agreements and the transactions contemplated thereby, see the sections entitled "Risk Factors—Risks Related to the Separation and Distribution," "The Separation and Distribution" and "Certain Relationships and Related Person Transactions."

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Reasons for the Separation

        The ServiceMaster board of directors believes that separating the American Home Shield business from the remaining businesses of ServiceMaster is in the best interest of ServiceMaster and its stockholders for a number of reasons, including that:

    The separation will allow investors to separately value ServiceMaster and Frontdoor based on each company's unique investment identities, including the merits, strategy, performance and future prospects of their respective businesses. The separation will also provide investors with two distinct and targeted investment opportunities.

    The separation will allow each business to more effectively pursue its own distinct operating priorities and strategies and will enable the management of both companies to pursue unique opportunities for long-term growth and profitability.

    The separation will permit each company to concentrate its financial resources solely on its own operations, providing greater flexibility to invest capital in its business at a time and in a manner appropriate for its distinct strategy and business needs. This will facilitate a more efficient allocation of capital based on each company's profitability, cash flow and growth opportunities and allow each company to pursue an optimal mix of return of capital to stockholders, reinvestment in leading-edge technology and value-enhancing M&A opportunities.

    The separation will provide greater opportunity to grow organically and pursue value-enhancing acquisitions in industries with active M&A markets.

    The separation will create independent, public companies that will afford each company direct access to capital markets and facilitate the ability to capitalize on its unique growth opportunities.

    The separation will facilitate incentive compensation arrangements for employees and management that are more directly tied to the performance of each relevant company's business and enhance employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives.

        The ServiceMaster board of directors also considered a number of potentially negative factors in evaluating the separation, including, among others, risks relating to the creation of a new public company, possible increased costs and one-time separation costs, but concluded that the potential benefits of the separation significantly outweighed these factors. For additional information, see the sections entitled "Risk Factors" and "The Separation and Distribution—Reasons for the Separation" included elsewhere in this information statement.

Reasons for ServiceMaster's Retention of Up to 19.9 Percent of Frontdoor Common Stock

        In considering the appropriate structure for the separation, ServiceMaster determined that, immediately after the distribution becomes effective, ServiceMaster will own no more than 19.9 percent of the outstanding shares of Frontdoor common stock. The retention of Frontdoor common stock strengthens ServiceMaster's balance sheet by providing ServiceMaster a security that can be exchanged to accelerate debt reduction, thereby facilitating an appropriate capital structure and financial flexibility necessary for ServiceMaster to execute its growth strategy. We understand that ServiceMaster currently intends to responsibly dispose of all of the Frontdoor common stock that it retains after the distribution through one or more subsequent exchanges for debt by June 14, 2019, in accordance with the terms of the private letter ruling. Following any such debt-for-equity exchange, it is anticipated that any creditors that are investment banks would sell such shares to public investors in a pre-marketed equity offering. We anticipate that Frontdoor would benefit from increased equity research coverage in connection with such an offering. ServiceMaster intends to continue to monitor market conditions for Frontdoor, in the

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home warranty industry generally and in the high-yield debt market and to assess the impact of each on the ultimate structure of the separation.


Corporate Information

        AHS Holding Company, Inc. was incorporated in Delaware on January 2, 2018 for the purpose of holding ServiceMaster's American Home Shield business in connection with the separation and distribution described herein, and its certificate of incorporation was amended on July 26, 2018 to change its name to frontdoor, inc. Prior to the contribution of this business to Frontdoor, which will be completed prior to the distribution, we will have no operations. The address of our principal executive offices is 150 Peabody Place, Memphis, TN 38103. Our telephone number after the distribution will be 901-701-5198. We maintain an Internet site at www.frontdoorhome.com. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated herein, and you should not rely on any such information in making an investment decision.


Reason for Furnishing This Information Statement

        This information statement is being furnished solely to provide information to stockholders of ServiceMaster who will receive shares of Frontdoor common stock in the distribution. It is not, and is not to be construed as, an inducement or encouragement to buy or sell any of our securities. We believe the information contained in this information statement to be accurate as of the date set forth on the cover of this information statement. Changes may occur after that date, and neither we nor ServiceMaster undertake any obligation to update such information except in the normal course of our respective disclosure obligations and practices, or as required by applicable law.

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SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

        The following summary financial data reflects the combined operations of ServiceMaster's American Home Shield business. The summary operating data for the years ended December 31, 2017, 2016 and 2015 and the balance sheet data as of December 31, 2017 and 2016 were derived from our historical combined financial statements, which are included in the "Index to Financial Statements" section of this information statement. The summary combined operating data for the six months ended June 30, 2018 and 2017 and the balance sheet data as of June 30, 2018 were derived from our unaudited historical condensed combined financial statements, which are included in the "Index to Financial Statements" section of this information statement. The operating data for the years ended December 31, 2014 and 2013, and the balance sheet data as of June 30, 2017 and December 31, 2015, 2014 and 2013 are unaudited and are derived from the financial records of ServiceMaster, which are not included in this information statement.

        The summary historical combined financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Combined Financial Statements," and the historical combined financial statements and the notes thereto included in this information statement. The summary historical combined financial data reflects our results as historically operated as a part of ServiceMaster, and these results may not be indicative of our future performance as a stand-alone company following the separation and distribution.

        The summary unaudited pro forma combined financial data as of and for the six months ended June 30, 2018 and the year ended December 31, 2017 have been prepared to reflect the separation and distribution, including the incurrence of indebtedness of $1 billion, with an additional $250 million available under a senior secured revolving credit facility. The outstanding indebtedness consists of $650 million in aggregate principal amount of senior secured term loans and $350 million in aggregate principal amount of senior unsecured notes, as described in "Description of Material Indebtedness." The unaudited pro forma combined operating data presented for the six months ended June 30, 2018 and the year ended December 31, 2017 assumes the separation occurred on January 1, 2017. The unaudited pro forma combined balance sheet data as of June 30, 2018 assumes the separation occurred on June 30, 2018. The unaudited pro forma condensed combined statements of income give effect to adjustments that are (i) directly attributable to the Transactions, (ii) are factually supportable and (iii) are expected to have a continuing impact on the Company. The unaudited pro forma condensed combined balance sheet gives effect to adjustments that (i) are directly attributable to the Transactions and (ii) are factually supportable regardless of whether they have a continuing impact on the Company or are non-recurring.

        The unaudited pro forma combined financial information is for illustrative and informational purposes only and is not intended to represent or be indicative of what our financial condition or results of operations would have been had we operated historically as a company independent of ServiceMaster or if the separation and the distribution had occurred on the dates indicated. The unaudited pro forma combined financial information also should not be considered representative of our future combined financial condition or combined results of operations.

        You should read this summary financial data together with "Unaudited Pro Forma Combined Financial Statements," "Capitalization," "Selected Historical Combined Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Description of Material Indebtedness," the Unaudited Interim Condensed Combined Financial Statements and the Audited Annual Combined Financial Statements and accompanying notes included elsewhere in the information statement.

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  Pro Forma
Six
Months
Ended
June 30,
  Six Months
Ended
June 30,
  Pro Forma
Year Ended
December 31,
  Year Ended December 31,  
(In millions, except per share data)
  2018   2018   2017   2017   2017   2016   2015   2014   2013  

Operating Results:

                                                       

Revenue

  $ 602   $ 602   $ 553   $ 1,157   $ 1,157   $ 1,020   $ 917   $ 828   $ 740  

Cost of services rendered

    330     330     285     589     589     526     467     401     367  

Selling and administrative expenses

    169     169     158     312     312     286     256     254     235  

Impairment of software and other related costs(1)

                                47      

Restructuring charges(2)

    3     3     1     20     20     3         1     1  

Spin-off charges(3)

    15     15                              

Interest expense(4)

    29             60     1                  

Income before Income Taxes

    49     78     100     162     220     196     189     120     134  

Net Income

    36     58     63     123     160     124     120     74     84  

Unaudited Pro Forma Earnings Per Share

                                                       

Basic

  $ 0.43               $ 1.46                                

Diluted

  $ 0.43               $ 1.45                                

Number of Shares used in calculating earnings per share

                                                       

Basic

    84.5                 84.3                                

Diluted

    84.7                 84.8                                

Financial Position (as of period end):

                                                       

Total assets

  $ 1,006   $ 1,069   $ 1,358         $ 1,416   $ 1,276   $ 1,136   $ 1,063   $ 1,005  

Total long-term debt

    988     3     14           9     14     1     1     2  

Total Parent's equity

    (391 )   657     584           661     560     518     498     509  

Cash Flow Data:

                                                       

Net cash provided from operating activities

        $ 122   $ 112         $ 194   $ 155   $ 135   $ 142   $ 78  

Net cash (used for) provided from investing activities

          (16 )   (13 )         (11 )   (55 )   19     (2 )   (13 )

Net cash used for financing activities

          (74 )   (41 )         (68 )   (88 )   (100 )   (85 )   (74 )

Other Non-GAAP Financial Data:

                                                       

Adjusted EBITDA(5)

        $ 105   $ 113         $ 259   $ 218   $ 205   $ 179   $ 145  

Adjusted EBITDA Margin(6)

          17.4 %   20.4 %         22.4 %   21.4 %   22.4 %   21.6 %   19.7 %

Free Cash Flow(7)

        $ 105   $ 106         $ 179   $ 144   $ 127   $ 131   $ 65  

(1)
Represents the impairment of software relating to our decision to abandon our efforts to deploy a new operating system.

(2)
Represents restructuring charges. For the six months ended June 30, 2018, these comprised $1 million of severance costs which primarily represent an allocation of severance costs related to actions taken to enhance capabilities and reduce costs in ServiceMaster's corporate functions that provide company-wide administrative services to support operations, and an allocation of $2 million of nonpersonnel charges primarily related to the relocation to our corporate headquarters. For the six months ended June 30, 2017, charges primarily represent an allocation of severance costs as part of the severance agreement with ServiceMaster's former Chief Financial Officer ("CFO").


For the year ended December 31, 2017, these comprised $13 million of spin-off costs, $5 million of severance costs which primarily represent an allocation of severance costs and stock-based compensation expense as part of the severance agreement with ServiceMaster's former Chief Executive Officer ("CEO") and ServiceMaster's former CFO, and allocations of $1 million of nonpersonnel charges and $1 million of asset write-off and other costs related to the relocation of our corporate headquarters. For the year ended December 31, 2016, these comprised lease termination, asset write-off and other costs related to the decision to consolidate the stand-alone operations of Home Security of America, Inc., acquired in February 2014, with

29


 

    those of the American Home Shield business and severance and other costs related to an initiative to enhance capabilities and reduce costs in ServiceMaster's headquarters functions that provide administrative services for our operations. For the years ended December 31, 2014 and 2013, restructuring charges are principally comprised of severance and other costs related to an initiative to enhance capabilities and reduce costs in ServiceMaster's headquarters functions that provide administrative services for our operations.

(3)
For the six months ended June 30, 2018, the $15 million of spin-off charges were primarily comprised of $12 million of professional fees and $3 million of other incremental costs related to the spin-off.

(4)
For the pro forma periods presented, reflects estimated interest expense related to the financing in connection with the spin-off. Interest expense on ServiceMaster's debt has not been allocated to us for any of the periods presented since we are not the legal obligor of the debt.

(5)
We use Adjusted EBITDA to facilitate operating performance comparisons from period to period. Adjusted EBITDA is a supplemental measure of our performance that is not required by, or presented in accordance with, accounting principles generally accepted in the United States of America ("GAAP"). Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income or any other performance measures derived in accordance with GAAP or as an alternative to net cash provided by operating activities or any other measures of our cash flow or liquidity. We define "Adjusted EBITDA" as net income before: provision for income taxes; interest expense; interest income from affiliate; depreciation and amortization expense; non-cash stock-based compensation expense; restructuring charges; non-cash impairment of software and other related costs; affiliate royalty expense; spin-off charges; (gain) loss on insured home service plan claims; and other non-operating expenses.

We believe Adjusted EBITDA facilitates company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures (affecting net interest income and expense), taxation, the age and book depreciation of facilities and equipment (affecting relative depreciation expense), restructuring initiatives, spin-off charges, arrangements with affiliates and equity-based, long-term incentive plans, which may vary for different companies for reasons unrelated to operating performance.

Adjusted EBITDA is not necessarily comparable to other similarly titled financial measures of other companies due to the potential inconsistencies in the methods of calculation.

Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations are:

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

Adjusted EBITDA does not reflect our interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

Adjusted EBITDA does not reflect our tax expense or the cash requirements to pay our taxes;

Adjusted EBITDA does not reflect historical capital expenditures or future requirements for capital expenditures or contractual commitments;

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

Adjusted EBITDA does not reflect true impact of certain historical transactions with affiliates related to the use of trade names, related party receivables and insured home service plan claims; and

Other companies in our industry may calculate Adjusted EBITDA differently, limiting its usefulness as a comparative measure.

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    The following table reconciles Adjusted EBITDA to Net Income for the periods presented, which we consider to be the most directly comparable GAAP financial measure:

 
  Six Months
Ended
June 30,
  Year Ended December 31,  
(In millions)
  2018   2017   2017   2016   2015   2014   2013  

Net Income

  $ 58   $ 63   $ 160   $ 124   $ 120   $ 74   $ 84  

Depreciation and amortization expense

    9     9     17     13     9     9     8  

Interest expense

            1                  

Interest income from affiliate(a)

    (1 )   (1 )   (3 )   (2 )            

Provision for income taxes

    20     37     60     71     69     46     50  

Non-cash stock-based compensation expense(b)

    2     3     4     4     4     3     1  

Restructuring charges(c)

    3     1     20     3         1     1  

Spin-Off charges(d)

    15                          

Non-cash impairment of software and other related costs(e)

                        47      

Affiliate royalty expense(f)

    1     1     2     2     1     1     1  

(Gain) loss on insured home service plan claims(g)

    (1 )       (1 )   1         (3 )    

Other

        1         1     1          

Adjusted EBITDA:

  $ 105   $ 113   $ 259   $ 218   $ 205   $ 179   $ 145  

(a)
Represents interest earned on interest-bearing related party receivables included within Net Parent Investment on the accompanying Statement of Financial Position. We exclude interest income from related party receivables from Adjusted EBITDA because we believe it does not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.

(b)
Represents the non-cash expense of equity-based compensation. We exclude this expense from Adjusted EBITDA primarily because it is a non-cash expense and because it is not used by management to assess ongoing operational performance. We believe excluding this expense from Adjusted EBITDA is useful to investors in aiding period-to-period comparability.

(c)
Represents restructuring charges. For the six months ended June 30, 2018, these comprised $1 million of severance costs which primarily represent an allocation of severance costs related to actions taken to enhance capabilities and reduce costs in ServiceMaster's corporate functions that provide company-wide administrative services to support operations, and an allocation of $2 million of nonpersonnel charges primarily related to the relocation to our corporate headquarters. For the six months ended June 30, 2017, charges primarily represent an allocation of severance costs as part of the severance agreement with ServiceMaster's former CFO.


For the year ended December 31, 2017, these comprised $13 million of spin-off costs, $5 million of severance costs which primarily represent an allocation of severance costs and stock-based compensation expense as part of the severance agreement with ServiceMaster's former CEO and CFO, and allocations of $1 million of nonpersonnel charges and $1 million of asset write-off and other costs related to the relocation to our corporate headquarters. For the year ended December 31, 2016, these comprised lease termination, asset write-off and other costs related to the decision to consolidate the stand-alone operations of Home Security of America, Inc., acquired in February 2014, with those of the American Home Shield

31


 

    business and severance and other costs related to an initiative to enhance capabilities and reduce costs in ServiceMaster's headquarters functions that provide administrative services for our operations. For the years ended December 31, 2014 and 2013, restructuring charges are principally comprised of severance and other costs related to an initiative to enhance capabilities and reduce costs in ServiceMaster's headquarters functions that provide administrative services for our operations. We exclude these restructuring charges from Adjusted EBITDA because we believe they do not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.

(d)
Represents spin-off charges. For the six months ended June 30, 2018, these comprised $15 million of spin-off charges comprised of $12 million of professional fees and $3 million of other incremental costs related to the spin-off. We exclude these spin-off charges from Adjusted EBITDA because we believe they do not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.

(e)
Represents the impairment of software and other related costs. We exclude non-cash impairments from Adjusted EBITDA because we believe doing so is useful to investors in aiding period-to-period comparability.

(f)
Represents royalty expense with ServiceMaster for the use of its trade names. We exclude royalty expense with an affiliate from Adjusted EBITDA because it is not used by management to assess ongoing operational performance and because it does not reflect our core ongoing operations. We do not expect to incur these expenses after the distribution.

(g)
Represents gain or loss on an arrangement with a captive insurance affiliate whereby certain American Home Shield home service plan claims are insured. We exclude the gain or loss on insured home service plan claims because it is not used by management to assess ongoing operational performance and because it does not reflect our core ongoing operations.
(6)
Adjusted EBITDA margin is defined as Adjusted EBITDA as a percentage of revenue.

(7)
Free Cash Flow is not a measurement of our financial performance or liquidity under GAAP and does not purport to be an alternative to net cash provided from operating activities or any other performance or liquidity measures derived in accordance with GAAP. Free Cash Flow means net cash provided from operating activities from continuing operations less property additions. Free Cash Flow has limitations as an analytical tool and should not be considered in isolation or as a substitute for analyzing our results as reported under GAAP. Other companies in our industries may calculate Free Cash Flow or similarly titled non-GAAP financial measures differently, limiting its usefulness as a comparative measure.

    Management believes Free Cash Flow is useful as a supplemental measure of our liquidity. Management uses Free Cash Flow to facilitate company-to-company cash flow comparisons, which may vary from company to company for reasons unrelated to operating performance.

    The following table reconciles net cash provided from operating activities, which we consider to be the most directly comparable GAAP measure, to Free Cash Flow using data derived from our condensed combined financial statements for the six months ended June 30, 2018 and 2017 and our combined financial statements for the years ended December 31, 2017, 2016, 2015, 2014 and 2013:

 
  Six Months
Ended
June 30,
  Year Ended December 31,  
(In millions)
  2018   2017   2017   2016   2015   2014   2013  

Net Cash Provided from Operating Activities

  $ 122   $ 112   $ 194   $ 155   $ 135   $ 142   $ 78  

Property additions

    (17 )   (6 )   (15 )   (11 )   (7 )   (11 )   (13 )

Free Cash Flow

  $ 105   $ 106   $ 179   $ 144   $ 127   $ 131   $ 65  

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RISK FACTORS

        You should carefully consider the following risks and other information in this information statement in evaluating our Company and Frontdoor common stock. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. The risk factors generally have been separated into three groups: risks related to our business, risks related to the separation and risks related to Frontdoor common stock.

Risks Related to Our Business

Our industry is highly competitive. Competition could reduce our share and adversely affect our reputation, business, financial position, results of operations and cash flows.

        We operate in a highly competitive industry. Changes in the source and intensity of competition in the industry served by us impact the demand for our services and may also result in additional pricing pressure. Regional and local competitors operating in a limited geographic area may have lower labor, employee benefits and overhead costs than us. The principal methods of competition in our business include customer service, brand reputation, fairness of contract terms, including price, and timely response to service claims. We may be unable to compete successfully against current or future competitors, and the competitive pressures that we face may result in reduced share, reduced pricing or an adverse impact to our reputation, business, financial position, results of operations and cash flows.

Weakening general economic conditions, especially as they may affect home sales, unemployment or consumer confidence or spending levels, may adversely impact our business, financial position, results of operations and cash flows.

        Our results of operations are dependent upon consumer spending. Deterioration in general economic conditions and consumer confidence, particularly in California, Texas, Arizona and Florida, which collectively represented approximately 42 percent of our revenue in 2017, could affect the demand for our services. Consumer spending and confidence tend to decline during times of declining economic conditions. A worsening of macroeconomic indicators, including weak home sales, higher home foreclosures, declining consumer confidence or rising unemployment rates, could adversely affect consumer spending levels, reduce demand for our services and adversely impact our business, financial position, results of operations and cash flows.

We may not successfully implement our business strategies, including achieving our growth objectives.

        We may not be able to fully implement our business strategies or realize, in whole or in part within the expected time frames, the anticipated benefits of various growth or other initiatives. Our business strategies and initiatives, including growth of our customer base, introduction of new service and product offerings, geographic expansion and enhancement of profitability, are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.

        We will incur certain costs to achieve efficiency improvements and growth in our business, and we may not meet anticipated implementation timetables or stay within budgeted costs. As these efficiency improvement and growth initiatives are implemented, we may not fully achieve expected cost savings and efficiency improvements or growth rates, or these initiatives could adversely impact customer retention or our operations. Also, our business strategies may change in light of our ability to implement new business initiatives, competitive pressures, economic uncertainties or developments or other factors.

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Adverse credit and financial market events and conditions could, among other things, impede access to or increase the cost of financing, which could have a material adverse impact on our business, financial position, results of operations and cash flows.

        Disruptions in credit or financial markets could make it more difficult for us to obtain, or increase our cost of obtaining, financing for our operations or investments or to refinance our proposed indebtedness, or cause the proposed lenders to depart from prior credit industry practice and not give technical or other waivers under credit facility or other agreements to the extent we may seek them in the future, thereby causing us to be in default. Market changes in the real estate segment could also affect the demand for our services as home buyers elect not to purchase our services, which could have a material adverse impact on our business, financial position, results of operations and cash flows.

Weather conditions and seasonality affect the demand for our services and our results of operations and cash flows.

        The demand for our services and our results of operations are affected by weather conditions, including, without limitation, potential impacts, if any, from climate change, known and unknown. Extreme temperatures can lead to an increase in service requests related to home systems, particularly central HVAC systems, resulting in higher claim frequency and costs and lower profitability, while mild temperatures in the winters or summers can lead to lower home systems claim frequency. For example, in the second quarter of 2018, we experienced an increase in contract claims cost driven by a higher number of central HVAC work orders driven by higher summer temperatures. Extreme or unpredictable weather conditions could materially adversely impact our business, financial position, results of operations and cash flows.

We may not be able to attract and retain qualified key executives or transition smoothly to new leadership, which could adversely impact us and our businesses and inhibit our ability to operate and grow successfully.

        The execution of our business strategy and our financial performance will depend in significant part on our executive management team and other key management personnel. Our future success will depend in large part on our success in attracting new talent and in utilizing current, experienced senior leadership and transitioning responsibilities to, and implementing the goals and objectives of, our new management team. Any inability to attract in a timely manner qualified key executives, retain our leadership team and recruit other important personnel could have a material adverse impact on our business, financial position, results of operations and cash flows.

We are dependent on labor availability at our customer care centers.

        Our ability to conduct our operations is in part affected by our ability to increase our labor force, including on a seasonal basis at our customer care centers, which may be adversely affected by a number of factors. In the event of a labor shortage, we could experience difficulty in responding to customer calls in a timely fashion or delivering our services in a high-quality or timely manner, and could be forced to increase wages to attract and retain associates, which would result in higher operating costs and reduced profitability. Long wait times by customers during peak operating times could have a material adverse impact on our reputation, business, financial position, results of operations and cash flows.

Laws and government regulations applicable to our business and lawsuits, enforcement actions and other claims by third parties or governmental authorities could increase our legal and regulatory expenses, and impact our business, financial position, results of operations and cash flows.

        Our business is subject to significant federal, state and local laws and regulations. These laws and regulations include laws relating to home service plans, real estate, wage and hour requirements, the

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employment of immigrants, labor relations, licensing, building code requirements, workers' safety, the environment, insurance coverages, sales tax collection and remittance, employee benefits, marketing (including, without limitation, telemarketing) and advertising. In particular, various federal, state and local governing bodies may propose additional legislation and regulation that may be detrimental to our business or may substantially increase our operating costs, including increases in the minimum wage; environmental regulations related to climate change, equipment efficiency standards, refrigerant production and use and other environmental matters; health care coverage; or "do-not-call" or other marketing regulations.

        While we do not consider ourselves to be an insurance company, the IRS or state agencies could deem us to be taxed as such, which could adversely impact the timing of our tax payments. We cannot predict whether our operation as a stand-alone company following the separation and distribution will increase the likelihood that the IRS or any state agency may view us as an insurance company.

        In addition, new federal tax legislation was enacted in December 2017. This legislation made significant changes to the Internal Revenue Code of 1986 (the "Code"), many of which are highly complex and may require interpretations and implementing regulations. As a result, we may incur meaningful expenses (including professional fees) as the new legislation is implemented. The expected impact of certain aspects of the legislation is unclear and subject to change.

        We are also subject to various consumer protection laws and subject to receiving inquiries or investigative demands by regulatory bodies, including the Bureau of Consumer Financial Protection and state attorneys general and other state agencies. It is difficult to predict the future impact of the broad and expanding legislative and regulatory requirements affecting our business and changes to such requirements may adversely affect our business, financial position, results of operations and cash flows. In addition, if we were to fail to comply with any applicable law or regulation, we could be subject to substantial fines or damages, be involved in lawsuits, enforcement actions and other claims by third parties or governmental authorities, suffer harm to our reputation, suffer the loss of licenses or incur penalties that may affect how our business is operated, which, in turn, could have a material adverse impact on our business, financial position, results of operations and cash flows.

Changes to U.S. tariff and import/export regulations may increase the costs of home systems, appliances and repair parts and, in turn, adversely impact our business.

        Tariff policies are under continuous review and subject to change. The current U.S. administration has voiced strong concerns about imports from countries that it perceives as engaging in unfair trade practices, and could impose import duties or restrictions on components and raw materials that are applicable to our business from countries it perceives as engaging in unfair trade practices. Such duties or restrictions, or the perception that they could occur, may materially and adversely affect our business by increasing our costs or reducing global trade. For example, rising steel costs due to blanket tariffs on imported steel and aluminum could increase the costs of our home systems, appliances and repair parts, which could have a material adverse effect on our business, financial position, results of operations and cash flows.

        Moreover, new tariffs and changes to U.S. trade policy could prompt retaliation from affected countries, potentially triggering the imposition of tariffs on U.S. goods. Such a "trade war" could lead to general economic downturn or could materially and adversely affect the demand for our services, thus negatively impacting our business, financial position, results of operations and cash flows.

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Disruptions or failures in our information technology systems could create liability for us or limit our ability to effectively monitor, operate and control our operations and adversely impact our reputation, business, financial position, results of operations and cash flows.

        Our information technology systems facilitate our ability to monitor, operate and control our operations. These systems were developed in conjunction with other systems at ServiceMaster prior to the separation and may require changes or modifications after the separation. Such changes or modifications to our information technology systems could cause disruption to our operations or cause challenges with respect to compliance with laws, regulations or other applicable standards. As the development and implementation of our information technology systems (including our operating systems) evolve, we may elect to modify, replace or abandon certain technology initiatives, which could result in write-downs.

        Any disruption in our information technology systems, including capacity limitations, instabilities, or failure to operate as expected, could, depending on the magnitude of the problem, adversely impact our business, financial position, results of operations and cash flows, including by limiting our capacity to monitor, operate and control our operations effectively. Failures of our information technology systems could also lead to violations of privacy laws, regulations, trade guidelines or practices related to our customers and associates. If our disaster recovery plans do not work as anticipated, or if the third-party vendors to which we have outsourced certain information technology, contact center or other services fail to fulfill their obligations, our operations may be adversely affected, and any of these circumstances could adversely affect our reputation, business, financial position, results of operations and cash flows.

Changes in the services we deliver or the products we use could affect our reputation, business, financial position, results of operations and cash flows.

        Our financial performance is affected by changes in the services and products we offer to customers. There can be no assurance that our strategies or product offerings will succeed in increasing revenue and growing profitability. An unsuccessful execution of strategies, including the rollout or adjustment of any new services or products or sales and marketing plans, could cause us to reevaluate or change our business strategies and could have a material adverse impact on our reputation, business, financial position, results of operations and cash flows.

Increases in appliances, parts and system prices, fuel prices and other operating costs could adversely impact our reputation, businesses, financial position, results of operations and cash flows.

        Our financial performance may be adversely affected by increases in the level of our operating expenses, such as fuel, refrigerants, appliances and equipment, parts, raw materials, wages and salaries, employee benefits, health care, contractor costs, self-insurance costs and other insurance premiums, as well as various regulatory compliance costs, all of which may be subject to inflationary and other pressures. For example, a higher mix of appliance replacement versus repairs may, in turn, increase our contract claims costs, which could have a material adverse impact on our reputation, businesses, financial position, results of operations and cash flows.

        Raw materials, such as steel and fuel prices are subject to market volatility. We cannot predict the extent to which we may experience future increases in costs of fuel, chemicals, refrigerants, appliances and equipment, parts, raw materials, wages and salaries, employee benefits, health care, vehicle maintenance, contractor costs, self-insurance costs and other insurance premiums, as well as various regulatory compliance costs and other operating costs. To the extent such costs increase, we may be prevented, in whole or in part, from passing these cost increases through to our existing and prospective customers, which could have a material adverse impact on our reputation, businesses, financial position, results of operations and cash flows.

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We depend on a limited number of third-party components suppliers. Our reputation, business, financial position, results of operations and cash flows may be harmed if these parties do not perform their obligations or if they suffer interruptions to their own operations, or if alternative component sources are unavailable or if there is an increase in the costs of these components.

        We are dependent on a limited number of suppliers for various key components used in the services and products we offer to customers, and the cost, quality and availability of these components are essential to our services. We are subject to the risk of shortages, increased costs and long lead times in the supply of these components and other materials, and the risk that our suppliers discontinue or modify, or increase the price of, the components used. If the supply of these components were to be delayed or constrained, or if one or more of our main suppliers were to go out of business, alternative sources or suppliers may not be available on acceptable terms or at all. Further, if there were a shortage of supply, the cost of these components may increase and harm our ability to provide our services on a cost-effective basis. In connection with any supply shortages in the future, reliable and cost-effective replacement sources may not be available on short notice or at all, and this may force us to increase prices and face a corresponding decrease in demand for our services. In the event that any of our suppliers were to discontinue production of our key product components, developing alternate sources of supply for these components would be time consuming, difficult and costly. This would harm our ability to market our services in order to meet market demand and could materially and adversely affect our reputation, business, financial position, results of operations and cash flows.

        We have limited control over these parties on which our business depends. If any of these parties fails to perform its obligations on schedule, or breaches or ends its relationship with us, we may be unable to satisfy demand for our services. Delays, product shortages and other problems could impair our retail distribution and brand image and make it difficult for us to attract new customers. If we experience significantly increased demand, or if we need to replace an existing supplier, we may be unable to supplement or replace such supply capacity on terms that are acceptable to us, which may undermine our ability to deliver our services to customers in a timely and cost-efficient manner. Accordingly, a loss or interruption in the service of any key party could adversely impact our reputation, business, financial position, results of operations and cash flows.

If we fail to protect the security of personal information about our customers, associates and third parties, we could be subject to interruption of our business operations, private litigation, reputational damage and costly penalties.

        We rely on, among other things, commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential information of customers, associates and third parties, such as payment cards and personal information. The systems currently used for transmission and approval of payment card transactions, and the technology utilized in payment cards themselves, all of which can put payment card data at risk, are central to meeting standards set by the payment card industry ("PCI"). We continue to evaluate and modify these systems and protocols for PCI compliance purposes, and such PCI standards may change from time to time. Activities by third parties, advances in computer and software capabilities and encryption technology, new tools and discoveries and other events or developments may facilitate or result in a compromise or breach of these systems. Any compromises, breaches or errors in applications related to these systems or failures to comply with standards set by the PCI could cause damage to our reputation and interruptions in our operations, including customers' ability to pay for services and products by credit card or their willingness to purchase our services and products and could result in a violation of applicable laws, regulations, orders, industry standards or agreements and subject us to costs, penalties and liabilities. We are subject to risks caused by data breaches and operational disruptions, particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments and cyber

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terrorists. The frequency of data breaches of companies and governments have increased in recent years as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. The occurrence of any of these events could have a material adverse impact on our reputation, business, financial position, results of operations and cash flows.

We may not be able to adequately protect our intellectual property and other proprietary rights that are material to our business.

        Our ability to compete effectively depends in part on our rights to proprietary information, service marks, trademarks, trade names and other intellectual property rights we own or license, particularly our registered brand names, Frontdoor, American Home Shield, HSA, OneGuard and Landmark Home Warranty. We have not sought to register or protect every one of our marks in the United States. If we are unable to protect our proprietary information and intellectual property rights, including brand names, it could cause a material adverse effect on our reputation, business, financial position, results of operations and cash flows. Litigation may be necessary to enforce our intellectual property rights and protect our proprietary information, or to defend against claims by third parties that our products, services or activities infringe their intellectual property rights.

Future acquisitions or other strategic transactions could negatively affect our reputation, business, financial position, results of operations and cash flows.

        We may pursue strategic transactions in the future, which could involve acquisitions or dispositions of businesses or assets. Any future strategic transaction could involve integration or implementation challenges, business disruption or other risks, or change our business profile significantly. Any inability on our part to consolidate and manage growth from acquired businesses or successfully implement other strategic transactions could have an adverse impact on our reputation, business, financial position, results of operations and cash flows. Any acquisition that we make may not provide us with the benefits that were anticipated when entering into such acquisition. The process of integrating an acquired business may create unforeseen difficulties and expenses, including the diversion of resources needed to integrate new businesses, technologies, products, personnel or systems; the inability to retain associates, customers and suppliers; the assumption of actual or contingent liabilities; failure to effectively and timely adopt and adhere to internal control processes and other policies; write-offs or impairment charges relating to goodwill and other intangible assets; unanticipated liabilities relating to acquired businesses; and potential expense associated with litigation with sellers of such businesses. Any future disposition transactions could also impact our business and may subject us to various risks, including failure to obtain appropriate value for the disposed businesses and post-closing claims.

Our future success depends on our ability to attract, retain and maintain the network of third-party contractors and vendors and their performance.

        Our ability to conduct our operations is in part impacted by reliance on a network of third-party contractors. Our future success and financial performance depend substantially on our ability to attract and retain third-party contractors and ensure third-party contractor compliance with our policies and standards and performance expectations. However, these third-party contractors are independent parties that we do not control, and who own, operate and oversee the daily operations of their individual businesses. If third-party contractors do not successfully operate their businesses in a manner consistent with required laws, standards and regulations, we could be subject to claims from regulators or legal claims for the actions or omissions of such third-party contractors. In addition, our relationship with our third-party contractors could become strained (including resulting in litigation) as we impose new standards or assert more rigorous enforcement practices of the existing required standards and performance expectations. When a contractor relationship is terminated, there is a risk that we may not be able to enter into a similar agreement with an alternate contractor in a timely manner or on

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favorable terms. We could incur costs to transition to other contractors, and these costs could materially adversely affect our results of operations and cash flows.

        We are also dependent on vendors for home systems, appliances and parts and the ability to rely on the pricing for such in the contracts we negotiate with these vendors. If we cannot obtain the appliances, systems or parts from vendors within our existing stable of vendors to satisfy consumer claims, we may be forced to obtain replacement appliances, systems and parts from other vendors at higher costs, which could have a material adverse impact on our business, financial position, results of operations and cash flows.

Risks Related to the Separation and the Distribution

We have no history of operating as an independent, public company, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

        The historical information in this information statement refers to our business as operated by and integrated with ServiceMaster. Our historical and pro forma financial information included in this information statement is derived from the consolidated financial statements and accounting records of ServiceMaster and Frontdoor (an indirect, wholly owned subsidiary of ServiceMaster). Accordingly, the historical and pro forma financial information included in this information statement does not necessarily reflect the financial position, results of operations and cash flows that we would have achieved as a separate, publicly traded company during the periods presented or those that we will achieve in the future primarily as a result of the factors described below:

    Until the distribution, our business will be operated by ServiceMaster as part of its broader corporate organization, rather than as an independent company. ServiceMaster or one of its affiliates currently perform certain corporate functions for us. Our historical and pro forma financial results reflect allocations of corporate expenses from ServiceMaster for such functions and are likely to be less than the expenses we would have incurred had we operated as a separate publicly traded company.

    Currently, our business is integrated with the other businesses of ServiceMaster. We have shared economies of scope and scale in costs, employees and vendor relationships. Although we will enter into a transition services agreement with ServiceMaster prior to the distribution, these arrangements may not retain or fully capture the benefits that we have enjoyed as a result of being integrated with ServiceMaster and may result in us paying higher charges than in the past for these services. This could have a material adverse effect on our business, financial position, results of operations and cash flows following the completion of the distribution.

    Generally, our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, have in the past been satisfied as part of the corporate-wide cash management policies of ServiceMaster. Following the completion of the distribution, we may need to obtain financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements, which may or may not be available and may be more costly.

    After the completion of the distribution, the cost of capital for our business may be higher than ServiceMaster's cost of capital prior to the distribution.

    Our historical financial information does not reflect the debt that we expect to incur in connection with the separation.

    We have historically been able to rely on the net worth of ServiceMaster when calculating our reserve requirements as a home service plan company in certain states. Following the

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      distribution, we may be required to hold more reserves than we were required to hold as a subsidiary of ServiceMaster. This could have a material adverse effect on our business, financial position, results of operations and cash flows following the completion of the distribution.

    As a public company, we will become subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the Dodd-Frank Act and will be required to prepare our financial statements according to the rules and regulations required by the SEC. Complying with these requirements could result in significant costs and require us to divert substantial resources, including management time, from other activities.

        Other significant changes may occur in our cost structure, management, financing and business operations as a result of operating as a company separate from ServiceMaster. For additional information about the past financial performance of our business and the basis of presentation of the historical combined financial statements and the unaudited pro forma combined financial statements, see "Selected Historical Combined Financial Data," "Unaudited Pro Forma Combined Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements and accompanying notes included elsewhere in this information statement.

If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, ServiceMaster, we and ServiceMaster stockholders could be subject to significant tax liabilities and, in certain circumstances, we could be required to indemnify ServiceMaster for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement.

        It is a condition to the distribution that the private letter ruling from the IRS regarding certain U.S. federal income tax matters relating to the separation and distribution received by ServiceMaster remain valid and be satisfactory to the ServiceMaster board of directors and that the ServiceMaster board of directors receive one or more opinions from its tax advisors, in each case satisfactory to the ServiceMaster board of directors, regarding certain U.S. federal income tax matters relating to the separation and the distribution. The IRS private letter ruling and the opinion(s) of tax advisors will be based upon and rely on, among other things, various facts and assumptions, as well as certain representations, statements and undertakings of ServiceMaster and us, including those relating to the past and future conduct of ServiceMaster and us. If any of these representations, statements or undertakings is, or becomes, inaccurate or incomplete, or if ServiceMaster or we breach any of the representations or covenants contained in any of the separation-related agreements and documents or in any documents relating to the IRS private letter ruling and/or the opinion(s) of tax advisors, the IRS private letter ruling and/or the opinion(s) of tax advisors may be invalid and the conclusions reached therein could be jeopardized.

        Notwithstanding receipt of the IRS private letter ruling and the opinion(s) of tax advisors, the IRS could determine that the distribution and/or certain related transactions should be treated as taxable transactions for U.S. federal income tax purposes if it determines that any of the representations, assumptions, or undertakings upon which the IRS private letter ruling or the opinion(s) of tax advisors were based are false or have been violated. In addition, neither the IRS private letter ruling nor the opinion(s) of tax advisors will address all of the issues that are relevant to determining whether the distribution, together with certain related transactions, qualifies as a transaction that is generally tax-free for U.S. federal income tax purposes. Further, the opinion(s) of tax advisors represent the judgment of such tax advisors and are not binding on the IRS or any court, and the IRS or a court may disagree with the conclusions in the opinion(s) of tax advisors. Accordingly, notwithstanding receipt by ServiceMaster of the IRS private letter ruling and the opinion(s) of tax advisors, there can be no assurance that the IRS will not assert that the distribution and/or certain related transactions do not qualify for tax-free treatment for U.S. federal income tax purposes or that a court would not

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sustain such a challenge. In the event the IRS were to prevail in such challenge, ServiceMaster, we and ServiceMaster stockholders could be subject to significant U.S. federal income tax liability.

        If the distribution, together with related transactions, fails to qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code, in general, for U.S. federal income tax purposes, ServiceMaster would recognize taxable gain as if it had sold Frontdoor common stock in a taxable sale for its fair market value (unless ServiceMaster and we jointly make an election under Section 336(c) of the Code with respect to the distribution, in which case, in general, (a) the ServiceMaster group would recognize taxable gain as if we had sold all of our assets in a taxable sale in exchange for an amount equal to the fair market value of Frontdoor common stock and the assumption of all our liabilities and (b) we would obtain a related step-up in the basis of our assets) and, if the distribution fails to qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Section 355, in general, for U.S. federal income tax purposes, ServiceMaster stockholders who receive our shares in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares. For more information, see "Material U.S. Federal Income Tax Consequences."

        Under the tax matters agreement that ServiceMaster will enter into with us, we may be required to indemnify ServiceMaster against any additional taxes and related amounts resulting from (a) an acquisition of all or a portion of our equity securities or assets, whether by merger or otherwise (and regardless of whether we participated in or otherwise facilitated the acquisition), (b) other actions or failures to act by us or (c) any inaccuracy or breach of our representations, covenants or undertakings contained in any of the separation-related agreements and documents or in any documents relating to the IRS private letter ruling and/or the opinion(s) of tax advisors. Any such indemnity obligations, including the obligation to indemnify ServiceMaster for taxes resulting from the distribution and certain related transactions not qualifying as tax-free, could be material.

U.S. federal income tax consequences may restrict our ability to engage in certain desirable strategic or capital-raising transactions after the separation.

        Under current law, a separation can be rendered taxable to the parent corporation and its stockholders as a result of certain post-separation acquisitions of shares or assets of the spun-off corporation. For example, a separation may result in taxable gain to the parent corporation under Section 355(e) of the Code if the separation were later deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, shares representing a 50 percent or greater interest (by vote or value) in the spun-off corporation. To preserve the U.S. federal income tax treatment of the separation and distribution, and in addition to our indemnity obligation described above, the tax matters agreement will restrict us, for the two-year period following the distribution, except in specific circumstances, from:

    entering into any transaction pursuant to which all or a portion of Frontdoor common stock or assets would be acquired, whether by merger or otherwise;

    issuing equity securities beyond certain thresholds;

    repurchasing shares of our capital stock other than in certain open-market transactions;

    ceasing to actively conduct certain aspects of our business; and/or

    taking or failing to take any other action that would jeopardize the expected U.S. federal income tax treatment of the distribution and certain related transactions.

        These restrictions may limit our ability to pursue certain strategic transactions or other transactions that we may believe to be in the best interests of our stockholders or that might increase the value of our business.

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Until the separation and distribution occur, ServiceMaster has sole discretion to change the terms of the separation and distribution in ways that may be unfavorable to us.

        Until the separation and distribution occur, we will continue to be an indirect, wholly owned subsidiary of ServiceMaster. Accordingly, ServiceMaster will have the sole and absolute discretion to determine and change the terms of the separation and distribution, including the establishment of the record date for the distribution and the distribution date. These changes could be unfavorable to us. In addition, ServiceMaster may decide at any time not to proceed with the separation and distribution.

We may not achieve some or all of the expected benefits of the separation, and the separation may materially and adversely affect our financial position, results of operations and cash flows.

        We may be unable to achieve the full strategic and financial benefits expected to result from the separation, or such benefits may be delayed or not occur at all. The separation and distribution are expected to provide the following benefits, among others:

    a distinct investment identity allowing investors to evaluate the merits, strategy, performance and future prospects of our business separately from ServiceMaster;

    more efficient allocation of capital for both ServiceMaster and us;

    enhanced management focus to more effectively pursue distinct operating priorities and strategies at ServiceMaster and Frontdoor;

    direct access for our business to the capital markets, while at the same time creating an independent equity structure that will facilitate our ability to effect future acquisitions utilizing Frontdoor common stock;

    the ability to pursue value-enhancing acquisitions with fewer regulatory obstacles in two consolidating industries; and

    facilitation of incentive compensation arrangements for employees and management that are more directly tied to the performance of the relevant company's business, and enhancement of employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives.

        We may not achieve these and other anticipated benefits for a variety of reasons, including, among others that: (a) the separation will require significant amounts of management's time and effort, which may divert management's attention from operating and growing our business; (b) following the separation and distribution, we may be more susceptible to market fluctuations and other adverse events than if we were still a part of ServiceMaster; (c) following the separation and distribution, our business will be less diversified than ServiceMaster's business prior to the separation and distribution; and (d) the other actions required to separate ServiceMaster's and our respective businesses could disrupt our operations. If we fail to achieve some or all of the benefits expected to result from the separation, or if such benefits are delayed, it could have a material adverse effect on our financial position, results of operations and cash flows.

We or ServiceMaster may fail to perform under various transaction agreements that will be executed as part of the separation or we may fail to have necessary systems and services in place when certain of the transaction agreements expire.

        In connection with the separation and prior to the distribution, we and ServiceMaster will enter into a separation agreement and will also enter into various other agreements, including a transition services agreement, a tax matters agreement and an employee matters agreement. The separation agreement, the tax matters agreement and the employee matters agreement will determine the allocation of assets and liabilities between the companies following the separation for those respective

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areas and will include any necessary indemnifications related to liabilities and obligations. The transition services agreement will provide for the performance of certain services by ServiceMaster for the benefit of us for a limited period of time after the separation. We will rely on ServiceMaster to satisfy its obligations under these agreements. If ServiceMaster is unable to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operational difficulties or losses. Upon expiration of the transition services agreement, each of the services that are covered in such agreement will have to be provided internally or by third parties. If we do not have agreements with other providers of these services once certain transaction agreements expire or terminate, we may not be able to operate our business effectively, which may have a material adverse effect on our financial position, results of operations and cash flows.

After the distribution, certain members of management, directors and stockholders will hold stock in both ServiceMaster and our Company, and as a result may face actual or potential conflicts of interest.

        After the distribution, the management and directors of each of ServiceMaster and Frontdoor may own both ServiceMaster common stock and Frontdoor common stock. This ownership overlap could create, or appear to create, potential conflicts of interest when our management and directors and ServiceMaster's management and directors face decisions that could have different implications for us and ServiceMaster. For example, potential conflicts of interest could arise in connection with the resolution of any dispute between ServiceMaster and us regarding the terms of the agreements governing the distribution and our relationship with ServiceMaster thereafter. These agreements include the separation and distribution agreement, the tax matters agreement, the employee matters agreement, the transition services agreement, the stockholder and registration rights agreement and any commercial agreements between the parties or their affiliates. Potential conflicts of interest may also arise out of any commercial arrangements that we or ServiceMaster may enter into in the future.

No vote of ServiceMaster stockholders is required in connection with the separation and distribution.

        No vote of ServiceMaster stockholders is required in connection with the separation and distribution. Accordingly, if this transaction occurs and you do not want to receive Frontdoor common stock in the distribution, your only recourse will be to divest yourself of your ServiceMaster common stock prior to the record date for the distribution or to sell your ServiceMaster common stock in the "regular way" market in between the record date and the distribution date.

Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could materially and adversely affect us.

        As a public company, we will become subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the Dodd-Frank Act and will be required to prepare our financial statements according to the rules and regulations required by the SEC. In addition, the Exchange Act requires that we file annual, quarterly and current reports. Our failure to prepare and disclose this information in a timely manner or to otherwise comply with applicable law could subject us to penalties under federal securities laws, expose us to lawsuits and restrict our ability to access financing. In addition, the Sarbanes-Oxley Act requires that, among other things, that we establish and maintain effective internal controls and procedures for financial reporting and disclosure purposes. Internal control over financial reporting is complex and may be revised over time to adapt to changes in our business, or changes in applicable accounting rules. We cannot assure you that our internal control over financial reporting will be effective in the future or that a material weakness will not be discovered with respect to a prior period for which we had previously believed that internal controls were effective. If we are not able to maintain or document effective internal control over financial reporting, our independent registered public accounting firm will not be able to certify as to the effectiveness of our internal control over financial reporting. While we have been adhering to these laws and regulations as

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a subsidiary of ServiceMaster, after the distribution we will need to demonstrate our ability to manage our compliance with these corporate governance laws and regulations as an independent, public company.

        Matters affecting our internal controls may cause us to be unable to report our financial information on a timely basis, or may cause us to restate previously issued financial information, and thereby subject us to adverse regulatory consequences, including sanctions or investigations by the SEC, or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in our Company and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to suffer if we or our independent registered public accounting firm reports a material weakness in our internal control over financial reporting. This could have a material and adverse effect on us by, for example, leading to a decline in our share price and impairing our ability to raise additional capital.

In connection with our separation from ServiceMaster, we have incurred and may incur debt obligations that could adversely affect our business and profitability and our ability to meet other obligations.

        We have entered into financing arrangements in connection with the separation of approximately $1 billion.

        This significant amount of debt could potentially have important consequences to us and our debt and equity investors, including:

    requiring a substantial portion of our cash flow from operations to make interest payments on this debt;

    making it more difficult to satisfy debt service and other obligations;

    increasing the risk of a future credit ratings downgrade of our debt, which could increase future debt costs and limit the future availability of debt financing;

    increasing our vulnerability to general adverse economic and industry conditions;

    reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow our business;

    limiting our flexibility in planning for, or reacting to, changes in our business and the industry;

    placing us at a competitive disadvantage relative to our competitors that may not be as highly leveraged with debt; and

    limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise, pay cash dividends or repurchase ordinary shares.

        To the extent that we incur additional indebtedness, the foregoing risks could increase. In addition, our actual cash requirements in the future may be greater than expected. Our cash flow from operations may not be sufficient to repay all of the outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to refinance our debt.

A lowering or withdrawal of the ratings, outlook or watch assigned to our new debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital.

        Our indebtedness has a non-investment grade rating, and any rating, outlook or watch assigned could be lowered or withdrawn entirely by a rating agency if, in that rating agency's judgment, current or future circumstances relating to the basis of the rating, outlook, or watch such as adverse changes to

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our business, so warrant. Any future lowering of our ratings, outlook or watch likely would make it more difficult or more expensive for us to obtain additional debt financing.

Our ability to generate the significant amount of cash needed to pay interest and principal on our new indebtedness and our ability to refinance all or a portion of our indebtedness or obtain additional financing depends on many factors beyond our control.

        We are a holding company, and as such have no material operations or assets other than ownership of equity interests in our subsidiaries. We depend on our subsidiaries to distribute funds to us so that we may pay obligations and expenses, including satisfying obligations with respect to our new proposed indebtedness. Our ability to make scheduled payments on, or to refinance our obligations under, our indebtedness depends on the financial and operating performance of our subsidiaries, and their ability to make distributions and dividends to us, which, in turn, depends on their results of operations, cash flows, cash requirements, financial position and general business conditions and any legal and regulatory restrictions on the payment of dividends to which they may be subject, many of which may be beyond our control.

        There are third-party restrictions on the ability of certain of our subsidiaries to transfer funds to us. If we cannot receive sufficient distributions from our subsidiaries, we may not be able to meet our obligations to fund general corporate expenses or service our debt obligations. Certain of these restrictions are related to our regulatory requirements. The payment of ordinary and extraordinary dividends by our operating subsidiaries are subject to significant regulatory restrictions under the laws and regulations of the states in which they operate. Among other things, such laws and regulations require certain such subsidiaries to maintain minimum capital and net worth requirements and may limit the amount of ordinary and extraordinary dividends and other payments that these subsidiaries can pay to us. As of June 30, 2018, the total net assets subject to these third-party restrictions was $160 million. We expect that such limitations will be in effect for the foreseeable future and in connection with the distribution minimum capital and net worth requirements are expected to increase in certain jurisdictions.

As an independent, publicly traded company, we may not enjoy the same benefits that we did as a segment of ServiceMaster.

        Historically, our business has been operated as one of ServiceMaster's business segments, and ServiceMaster performed substantially all the corporate functions for our operations, including managing financial and human resources systems, internal auditing, investor relations, treasury services, accounting functions, finance and tax administration, benefits administration, legal, regulatory, and corporate branding functions. Following the distribution, ServiceMaster will provide support to us with respect to certain of these functions on a transitional basis. We will need to replicate certain facilities, systems, infrastructure and personnel to which we will no longer have access after the distribution and will likely incur capital and other costs associated with developing and implementing our own support functions in these areas. Such costs could be material.

        As an independent, publicly traded company, we may become more susceptible to market fluctuations and other adverse events than we would have been were we still a part of ServiceMaster. As part of ServiceMaster, we have been able to enjoy certain benefits from ServiceMaster's operating diversity and available capital for investments. As an independent, publicly traded company, we will not have similar operating diversity and may not have similar access to capital markets, which could have a material adverse effect on our financial position, results of operations and cash flows.

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In connection with our separation from ServiceMaster, ServiceMaster will indemnify us for certain liabilities and we will indemnify ServiceMaster for certain liabilities. If we are required to pay under these indemnities to ServiceMaster, our financial results could be negatively impacted. The ServiceMaster indemnity may not be sufficient to hold us harmless from the full amount of liabilities for which ServiceMaster will be allocated responsibility, and ServiceMaster may not be able to satisfy its indemnification obligations in the future.

        Pursuant to the separation agreement and certain other agreements with ServiceMaster, ServiceMaster will agree to indemnify us for certain liabilities, and we will agree to indemnify ServiceMaster for certain liabilities, in each case for uncapped amounts, as discussed further in "Certain Relationships and Related Person Transactions." Indemnities that we may be required to provide ServiceMaster are not subject to any cap, may be significant and could negatively impact our business, particularly with respect to indemnities provided in the tax matters agreement (as described in more detail above). Third parties could also seek to hold us responsible for any of the liabilities that ServiceMaster has agreed to retain. Any amounts we are required to pay pursuant to these indemnification obligations and other liabilities could require us to divert cash that would otherwise have been used in furtherance of our operating business. Further, the indemnity from ServiceMaster may not be sufficient to protect us against the full amount of such liabilities, and ServiceMaster may not be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from ServiceMaster any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could have a material adverse effect on our financial position, results of operations and cash flows.

Risks Related to Frontdoor Common Stock

We cannot be certain that an active trading market for our shares of common stock will develop or be sustained after the distribution, and following the distribution, our stock price may fluctuate significantly.

        A public market for our shares of common stock does not currently exist. We anticipate that on or about the record date for the distribution, trading in shares of Frontdoor common stock will begin on a "when-issued" basis, which will continue through the distribution date. However, we cannot guarantee that an active trading market will develop or be sustained for shares of Frontdoor common stock after the distribution. Nor can we predict the prices at which shares of Frontdoor common stock may trade after the distribution. Similarly, we cannot predict the effect of the distribution on the trading prices of shares of Frontdoor common stock or whether the combined market value of the shares of Frontdoor common stock and ServiceMaster common stock will be less than, equal to or greater than the market value of shares of ServiceMaster common stock prior to the distribution.

        Until the market has fully evaluated ServiceMaster's remaining businesses without Frontdoor, the price at which shares of ServiceMaster common stock trade may fluctuate more significantly than might otherwise be typical, even with other market conditions, including general volatility, held constant. Similarly, until the market has fully evaluated our business as a stand-alone entity, the prices at which shares of Frontdoor common stock trade may fluctuate more significantly than might otherwise be typical, even with other market conditions, including general volatility, held constant. The increased volatility of our stock price following the distribution may have a material adverse effect on our business, financial condition and results of operations.

        The market price of shares of Frontdoor common stock may decline or fluctuate significantly due to a number of factors, some of which may be beyond our control, including:

    actual or anticipated fluctuations in our operating results;

    declining operating revenues derived from our core business;

    the operating and stock price performance of comparable companies;

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    changes in our stockholder base due to the separation;

    changes in the regulatory and legal environment in which we operate; and

    market conditions in the home service plan industry, home construction and sales market, and the domestic and worldwide economy as a whole.

A significant number of our shares of common stock are or will be eligible for future sale, including the disposition by ServiceMaster of the shares of Frontdoor common stock that it may retain after the distribution, which may cause the market price for Frontdoor common stock to decline.

        Upon completion of the separation and distribution, we will have an aggregate of approximately 84.5 million shares of common stock outstanding. Virtually all of those shares will be freely tradable without restriction or registration under the Securities Act of 1933, as amended (the "Securities Act"), except for the shares of Frontdoor retained by ServiceMaster. We are unable to predict whether large amounts of Frontdoor common stock will be sold in the open market following the separation and distribution. We are also unable to predict whether a sufficient number of buyers of Frontdoor common stock to meet the demand to sell shares of Frontdoor common stock at attractive prices would exist at that time. It is possible that ServiceMaster stockholders will sell the shares of Frontdoor common stock they receive in the distribution for various reasons. For example, such stockholders may not believe that our business profile or our level of market capitalization as an independent company fits their investment objectives. The sale of significant amounts of Frontdoor common stock or the perception in the market that this will occur may lower the market price of Frontdoor common stock.

        Following the distribution, ServiceMaster will retain approximately 19.8 percent of the outstanding shares of Frontdoor common stock. We understand that ServiceMaster currently intends to responsibly dispose of all of the Frontdoor common stock that it retains after the distribution through one or more subsequent exchanges for debt by June 14, 2019 in accordance with the terms of the private letter ruling. We will agree that, upon the request of ServiceMaster, we will use our reasonable best efforts to effect a registration under applicable federal and state securities laws of any shares of Frontdoor common stock retained by ServiceMaster. See "Certain Relationships and Related Persons Transactions—Stockholder and Registration Rights Agreement." Any disposition by ServiceMaster, or any significant stockholder, of Frontdoor common stock in the public market, or the perception that such dispositions could occur, could adversely affect prevailing market prices for Frontdoor common stock.

If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.

        The trading market for Frontdoor common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage for Frontdoor common stock. If there is no research coverage of Frontdoor common stock, the trading price for shares of Frontdoor common stock may be negatively impacted. If we obtain research coverage for Frontdoor common stock and if one or more of the analysts downgrades our stock or publishes misleading or unfavorable research about our business, our stock price would likely decline. If one or more of the analysts ceases coverage of Frontdoor common stock or fails to publish reports on us regularly, demand for Frontdoor common stock could decrease, which could cause Frontdoor common stock price or trading volume to decline.

There may be substantial changes in our stockholder base.

        Many investors receiving shares of Frontdoor common stock pursuant to the distribution may hold those shares because of a decision to invest in a company with ServiceMaster's profile. Following the distribution, the shares of Frontdoor common stock held by those investors will represent an investment

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in a company focused on the home service plan industry, with a different profile. This may not be aligned with a holder's investment strategy and may cause the holder to sell the shares of Frontdoor common stock they receive in the distribution. As a result, our stock price may decline or experience volatility as our stockholder base changes.

We do not expect to pay any cash dividends for the foreseeable future.

        We currently intend to retain future earnings to finance the operation and expansion of our business. As a result, we do not expect to pay any cash dividend for the foreseeable future. All decisions regarding the payment of dividends will be made by our board of directors from time to time in accordance with applicable law. There can be no assurance that we will have sufficient surplus under Delaware law to be able to pay any dividends at any time in the future. This may result from extraordinary cash expenses, actual expenses exceeding contemplated costs, funding of capital expenditures or increases in reserves. If we do not pay dividends, the price of the shares of Frontdoor common stock that you receive in the distribution must appreciate for you to receive a gain on your investment. This appreciation may not occur. Further, you may have to sell some or all of your shares of Frontdoor common stock to generate cash flow from your investment.

Your percentage of ownership in our Company may be diluted in the future.

        In the future, your percentage ownership in our Company may be diluted because of equity awards that we will be granting to our directors, officers and employees or otherwise as a result of equity issuances for acquisitions or capital market transactions. Our employees will have options to purchase shares of Frontdoor common stock after the distribution as a result of conversion of their ServiceMaster stock options (in whole or in part) to our stock options. Our employees also have restricted stock units that will vest into shares of Frontdoor common stock after the distribution as a result of the adjustments to their ServiceMaster restricted stock units. Further, we anticipate our Compensation Committee will grant additional stock-based awards to our employees after the distribution. Such awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of shares of Frontdoor common stock. From time to time, we will issue additional stock-based awards to our employees under our employee benefits plans.

        In addition, our certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock that have such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over Frontdoor common stock respecting dividends and distributions, as our board of directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of Frontdoor common stock. Similarly, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock. See "Description of Our Capital Stock."

Our certificate of incorporation will designate the state courts of the State of Delaware, or, if no state court located in the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against us and our directors and officers.

        Our certificate of incorporation will provide that, unless the board of directors otherwise determines, the state courts of the State of Delaware, or, if no state court located in the state of Delaware has jurisdiction, the federal court for the District of Delaware, will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of our Company, any action asserting a claim of breach of a fiduciary duty owed by any director or officer to our Company or our stockholders, creditors or other constituents, any action asserting a claim against us or any director or officer arising pursuant to any provision of the Delaware General Corporation Law, as amended (the

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"DGCL"), or our certificate of incorporation or bylaws, or any action asserting a claim against us or any director or officer governed by the internal affairs doctrine. This exclusive forum provision may limit the ability of our stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with our Company or our directors or officers, which may discourage such lawsuits against us and our directors and officers. Alternatively, if a court outside of Delaware were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

Provisions in our certificate of incorporation and bylaws and of applicable law may prevent or delay an acquisition of our Company, which could decrease the trading price of Frontdoor common stock.

        Our certificate of incorporation and bylaws, and Delaware law, contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids more expensive to the acquiror and to encourage prospective acquirors to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings and the right of our board of directors to issue preferred stock without stockholder approval. Delaware law also imposes some restrictions on mergers and other business combinations between any holder of 15 percent or more of our outstanding common stock and us. For more information, see "Description of Our Capital Stock—Anti-Takeover Effects of Various Provisions of Delaware Law and our Certificate of Incorporation and Bylaws."

        We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our board of directors determines is not in the best interests of our Company and our stockholders. Accordingly, in the event that our board of directors determines that a potential business combination transaction is not in the best interests of our Company and our stockholders but certain stockholders believe that such a transaction would be beneficial to us and our stockholders, such stockholders may elect to sell their shares in our Company and the trading price of Frontdoor common stock could decrease.

        These and other provisions of our certificate of incorporation, bylaws and the DGCL could have the effect of delaying, deferring or preventing a proxy contest, tender offer, merger or other change in control, which may have a material adverse effect on our business, financial condition and results of operations.

        In addition, because we are regulated by state regulators in certain states, we are subject to certain state statutes that generally require any person or entity desiring to acquire direct or indirect control of certain of our subsidiaries obtain prior approval from the applicable regulator. Control is generally presumed to exist under these state laws with the acquisition of 10 percent or more of our outstanding voting securities of either the subsidiary or its controlling parent. Applicable state insurance laws and regulations could delay or impede a change of control of the Company.

        Furthermore, an acquisition or further issuance of our stock could trigger the application of Section 355(e) of the Code, causing the distribution to be taxable to ServiceMaster. For a discussion of Section 355(e) of the Code, see "Material U.S. Federal Income Tax Consequences." Under the tax matters agreement, and as described in more detail above, we would be required to indemnify ServiceMaster for the resulting taxes and related amount, and this indemnity obligation might discourage, delay or prevent a change of control that you may consider favorable.

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

        This information statement and other materials we and ServiceMaster have filed or will file with the SEC contain, or will contain, certain forward-looking statements regarding business strategies, market potential, future financial performance and other matters. The words "believe," "expect," "estimate," "could," "should," "intend," "may," "plan," "seek," "anticipate," "project" and similar expressions, among others, generally identify "forward-looking statements," which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. In particular, information included under "Risk Factors," "The Separation and Distribution," "Capitalization," "Unaudited Pro Forma Combined Financial Statements," "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this information statement contain forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Whether any such forward-looking statements are in fact achieved will depend on future events, some of which are beyond our control. Except as may be required by law, we undertake no obligation to modify or revise any forward-looking statements to reflect new information, events or circumstances occurring after the date of this information statement. Factors, risks, trends and uncertainties that could cause actual results or events to differ materially from those anticipated include the matters described under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," in addition to the following other factors, risks, trends and uncertainties:

    weakening general economic conditions, especially as they may affect home sales, unemployment and consumer confidence or spending levels;

    our ability to generate the significant amount of cash needed to fund our operations and service our debt obligations to be incurred;

    our ability to successfully implement our business strategies;

    compliance with, or violation of, laws and regulations, including consumer protection laws;

    cyber security breaches, disruptions or failures in our information technology systems and our failure to protect the security of personal information about our customers;

    our ability to attract and retain key personnel, including our ability to attract, retain and maintain positive relations with third-party contractors and vendors;

    adverse weather conditions;

    adverse credit and financial markets impeding access and leading to increased financing costs;

    increase in minimum wage levels;

    changes in the source and intensity of competition in our segment;

    our third-party contractors and vendors taking actions that harm our business;

    changes in our services or products;

    our ability to protect our intellectual property and other material proprietary rights;

    negative reputational and financial impacts resulting from future acquisitions or strategic transactions;

    laws and governmental regulations increasing our legal and regulatory expenses;

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    increases in interest rates increasing the cost of servicing our substantial indebtedness to be incurred;

    increased borrowing costs due to lowering or withdrawal of the ratings, outlook or watch assigned to us, our debt securities to be issued or our credit facilities to be incurred;

    restrictions contained in our debt agreements;

    the effects of our substantial indebtedness and the limitations contained in the agreements governing such indebtedness; and

    other factors described in this information statement and from time to time in documents that we file with the SEC.

        You should read this information statement completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this information statement are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this information statement, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise.

        Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.

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THE SEPARATION AND DISTRIBUTION

Overview

        On July 26, 2017, ServiceMaster announced its intention to separate its American Home Shield business from its Terminix and FSG businesses. ServiceMaster intends to effect the separation through a pro rata distribution of at least 80.1 percent of the outstanding shares of common stock of a new entity, Frontdoor. Frontdoor was formed to hold the assets and liabilities associated with the American Home Shield business of ServiceMaster. Following the distribution, ServiceMaster stockholders will directly own at least 80.1 percent of the outstanding shares of Frontdoor common stock, and Frontdoor will be a separate public company from ServiceMaster. ServiceMaster will retain no more than 19.9 percent of the outstanding shares of Frontdoor common stock following the distribution. Prior to completing the separation, ServiceMaster may adjust the percentage of Frontdoor common stock to be distributed to ServiceMaster stockholders and retained by ServiceMaster in response to market and other factors, and it will amend this information statement to reflect any such adjustment. The number of shares of ServiceMaster common stock you own will not change as a result of the separation.

        On August 24, 2018, the ServiceMaster board of directors approved the distribution of at least 80.1 percent of the issued and outstanding shares of Frontdoor common stock, on the basis of one share of Frontdoor common stock for every two shares of ServiceMaster common stock held as of the close of business on the record date of September 14, 2018, subject to the satisfaction or waiver of the conditions to the distribution as described in this information statement.

        At 12:01 a.m. Eastern Time, on October 1, 2018, the distribution date, each ServiceMaster stockholder will receive one share of Frontdoor common stock for every two shares of ServiceMaster common stock held at the close of business on the record date for the distribution, as described below. ServiceMaster stockholders will receive cash in lieu of any fractional shares of Frontdoor common stock that they would have received after application of this ratio. ServiceMaster stockholders will not be required to make any payment, surrender or exchange their shares of ServiceMaster common stock or take any other action to receive their shares of Frontdoor common stock in the distribution. The distribution of Frontdoor common stock as described in this information statement is subject to the satisfaction or waiver of certain conditions. For a more detailed description of these conditions, see "—Conditions to the Distribution."

Reasons for the Separation

        The ServiceMaster board of directors determined that the separation of ServiceMaster's American Home Shield business from its Terminix and FSG businesses would be in the best interests of ServiceMaster and its stockholders and approved the separation. A wide variety of factors were considered by the ServiceMaster board of directors in evaluating the separation. Among other things, the ServiceMaster board of directors considered the following potential benefits of the separation:

    Distinct investment identity.  The separation will allow investors to separately value ServiceMaster and Frontdoor based on their distinct investment identities. Our American Home Shield business differs from ServiceMaster's Terminix and FSG businesses in several respects, such as important differences relating to customer bases, the use of independent contractors rather than employees to perform home services, competitors, suppliers, strategic initiatives, sales channels and technology needs. Additionally, while our American Home Shield business is in "growth" mode, the Terminix business is focused on improving its performance, having experienced challenges of late and having underperformed relative to its peer companies in terms of organic growth. The separation will enable investors to evaluate the merits, strategy, performance, and future prospects of each company's respective business and to invest in each company separately based on these distinct characteristics. The separation may attract new investors who may not have

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      properly assessed the value of the American Home Shield business relative to the value it is currently accorded as part of ServiceMaster.

    Enhanced strategic and management focus.  The separation will allow ServiceMaster and us to more effectively pursue our distinct operating priorities and strategies and will enable the management of both companies to pursue unique opportunities for long-term growth and profitability. Our management will be able to focus exclusively on its Frontdoor business, while the management of ServiceMaster will be dedicated to growing its Terminix and FSG businesses.

    Growth opportunities.  The separation will provide greater opportunities for each company to grow organically and pursue value-enhancing acquisitions in industries with active M&A markets. Each company will have the flexibility to develop a growth strategy that capitalizes on its distinct strengths and is well-suited for the available opportunity set in its specific market.

    More efficient allocation of capital.  The separation will permit each company to concentrate its financial resources solely on its own operations, providing greater flexibility to invest capital in its business at a time and in a manner appropriate for its distinct strategy and business needs without having to compete with each other for investment capital. This will facilitate a more efficient allocation of capital based on each company's profitability, cash flow and growth opportunities and allow each company to pursue an optimal mix of return of capital to stockholders, reinvestment in leading-edge technology, and value-enhancing M&A opportunities.

    Direct access to capital markets.  The separation will create independent equity structures that will afford us direct access to the capital markets and will facilitate our ability to effect future acquisitions utilizing Frontdoor common stock. As a result, each company will have more flexibility to capitalize on its unique growth opportunities.

    Alignment of incentives with performance objectives.  The separation will facilitate incentive compensation arrangements for employees more directly tied to the performance of each company's business, and enhance employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives.

        Neither we nor ServiceMaster can assure you that, following the separation, any of the benefits described above or otherwise will be realized to the extent anticipated or at all.

        The ServiceMaster board of directors also considered a number of potentially unfavorable factors in evaluating the separation, including the potential loss of synergies, time and effort required to be dedicated to this transaction by ServiceMaster's and our management and the potential diversion of their attention away from their respective businesses, increased costs resulting from operating as a separate public entity, one-time costs of the separation, the risk of not realizing the anticipated benefits of the separation and limitations placed upon us as a result of the tax matters agreement that ServiceMaster and we will enter into prior to the distribution. The ServiceMaster board of directors concluded that the potential benefits of the separation significantly outweighed these negative factors.

Reasons for ServiceMaster's Retention of up to 19.9 Percent of Frontdoor Common Stock

        In considering the appropriate structure for the separation, ServiceMaster determined that, immediately after the distribution becomes effective, ServiceMaster will own no more than 19.9 percent of the outstanding shares of Frontdoor common stock. The retention of Frontdoor common stock strengthens ServiceMaster's balance sheet by providing ServiceMaster a security that can be exchanged to accelerate debt reduction, thereby facilitating an appropriate capital structure and financial flexibility necessary for ServiceMaster to execute its growth strategy. We understand that ServiceMaster currently intends to responsibly dispose of all of the Frontdoor common stock that it retains after the distribution through one or more subsequent exchanges for debt by June 14, 2019 in accordance with the terms of

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the private letter ruling. Following any such debt-for-equity exchange, it is anticipated that any creditors that are investment banks would sell such shares to public investors in a pre-marketed equity offering. We anticipate that Frontdoor would benefit from increased equity research coverage in connection with such an offering. ServiceMaster intends to continue to monitor market conditions for Frontdoor, in the home service plan industry generally, and in the high-yield debt market, and to assess the impact of each on the ultimate structure of the separation.

Formation of frontdoor, inc. and Internal Reorganization

        AHS Holding Company, Inc. was formed as a Delaware corporation on January 2, 2018 for the purpose of holding ServiceMaster's American Home Shield business, and its certificate of incorporation was amended on July 26, 2018 to change its name to frontdoor, inc. As part of the plan to separate the American Home Shield business from the remainder of its businesses, pursuant to the separation and distribution agreement that we and ServiceMaster will enter into prior to the distribution, ServiceMaster plans to transfer the equity interests of certain entities that operate the American Home Shield business and the assets and liabilities of the American Home Shield business to us prior to the distribution. Following the distribution, ServiceMaster will continue to own the Terminix and FSG businesses.

When and How You Will Receive the Distribution

        With the assistance of Computershare, ServiceMaster expects to distribute at least 80.1 percent of the outstanding shares of Frontdoor common stock at 12:01 a.m. Eastern Time, on October 1, 2018, the distribution date, to all holders of outstanding shares of ServiceMaster common stock as of the close of business on September 14, 2018, the record date for the distribution. Computershare, which currently serves as the transfer agent and registrar for ServiceMaster common stock, will serve as the settlement and distribution agent in connection with the distribution and the transfer agent and registrar for Frontdoor common stock.

        If you own shares of ServiceMaster common stock as of the close of business on the record date for the distribution, the shares of Frontdoor common stock that you will be entitled to receive in the distribution will be issued electronically, as of the distribution date, to you in direct registration form or to your bank or brokerage firm on your behalf. If you are a registered holder, Computershare will then mail you a direct registration account statement that reflects your shares of Frontdoor common stock. If you hold your shares through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares. Direct registration form refers to a method of recording share ownership when no physical share certificates are issued to stockholders, as is the case in this distribution. If you sell shares of ServiceMaster common stock in the "regular-way" market up to and including the distribution date, you will be selling your right to receive shares of Frontdoor common stock in the distribution.

        Most ServiceMaster stockholders hold their shares of ServiceMaster common stock through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the shares in "street name" and ownership would be recorded on the bank or brokerage firm's books. If you hold your shares of common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for shares of Frontdoor common stock that you are entitled to receive in the distribution. If you have any questions concerning the mechanics of having shares held in "street name," please contact your bank or brokerage firm.

Transferability of Shares You Receive

        Shares of Frontdoor common stock distributed to holders in connection with the distribution will be transferable without registration under the Securities Act, except for shares received by persons who may be deemed to be our affiliates. Persons who may be deemed to be our affiliates after the

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distribution generally include individuals or entities that control, are controlled by or are under common control with us, which may include certain of our executive officers, directors or principal stockholders. Securities held by our affiliates will be subject to resale restrictions under the Securities Act. Our affiliates will be permitted to sell shares of Frontdoor common stock only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144 under the Securities Act.

Number of Shares of Frontdoor Common Stock You Will Receive

        For every two shares of ServiceMaster common stock that you own at the close of business on September 14, 2018, the record date for the distribution, you will receive one share of Frontdoor common stock on the distribution date. ServiceMaster will not distribute any fractional shares of Frontdoor common stock to its stockholders. Instead, if you are a registered holder, Computershare (which is sometimes referred to herein as the distribution agent) will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate cash proceeds (net of discounts and commissions) of the sales pro rata (based on the fractional share such holder would otherwise be entitled to receive) to each holder who otherwise would have been entitled to receive a fractional share in the distribution. The distribution agent, in its sole discretion, without any influence by ServiceMaster or us, will determine when, how, and through which broker-dealer and at what price to sell the whole shares. Any broker-dealer used by the distribution agent will not be an affiliate of either ServiceMaster or us. Computershare is not an affiliate of either ServiceMaster or us. Neither we nor ServiceMaster will be able to guarantee any minimum sale price in connection with the sale of these shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.

        The aggregate net cash proceeds of these sales of fractional shares will be taxable for U.S. federal income tax purposes. See "Material U.S. Federal Income Tax Consequences" for an explanation of the material U.S. federal income tax consequences of the distribution. We estimate that it will take approximately two weeks from the distribution date for the distribution agent to complete the distributions of the aggregate net cash proceeds. If you hold your shares of ServiceMaster common stock through a bank or brokerage firm, your bank or brokerage firm will receive, on your behalf, your pro rata share of the aggregate net cash proceeds of the sales and will credit your account for your share of such proceeds.

Treatment of Equity-Based Compensation

        Outstanding ServiceMaster equity awards held by employees and nonemployee directors of ServiceMaster and Frontdoor are expected to be treated as follows:

    Stock Options Held by ServiceMaster and Former Employees

        Each ServiceMaster stock option held by a ServiceMaster employee, and each vested and exercisable ServiceMaster stock option held by a former employee of ServiceMaster and its affiliates (including Frontdoor employees who terminate pre-spin), will remain an option to purchase shares of ServiceMaster common stock. However, the exercise price and number of shares subject to each such ServiceMaster stock option will be adjusted as described in the employee matters agreement in order to preserve the aggregate value of the original ServiceMaster stock option, as measured immediately before and immediately after the distribution date, subject to rounding. The vesting terms and life span of the stock options will not change.

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    Stock Options Held by Frontdoor Employees

        Each ServiceMaster stock option held by a Frontdoor employee will be converted into an option to purchase shares of Frontdoor common stock. The exercise price and number of shares subject to each such Frontdoor stock option will be adjusted as described in the employee matters agreement in order to preserve the aggregate value of the original ServiceMaster stock option, as measured immediately before and immediately after the distribution date, subject to rounding. The vesting terms and life span of the stock options will not change.

    Restricted Stock Units ("RSUs") Held by ServiceMaster and Frontdoor Employees

        Unless otherwise elected by a ServiceMaster or Frontdoor employee, each ServiceMaster RSU award (including performance RSU awards) held by such employee granted prior to April 23, 2018 will be converted into an award in respect of both shares of ServiceMaster common stock and shares of Frontdoor common stock. The number of shares of ServiceMaster common stock subject to each award will be the same as the number subject to the award prior to the separation, while the number of shares of Frontdoor common stock subject to the award will be determined based on the number of Frontdoor shares distributed per ServiceMaster share in the separation. The vesting terms of the awards will not change.

        Each ServiceMaster RSU award (including performance RSU awards) held by a ServiceMaster employee granted on or after April 23, 2018, and, if elected by a ServiceMaster employee, such employee's RSU awards granted prior to April 23, 2018, will remain denominated in shares of ServiceMaster common stock. However, the number of shares of ServiceMaster common stock subject to the award will be adjusted as described in the employee matters agreement in order to preserve the aggregate value of the original ServiceMaster RSU award, as measured immediately before and immediately after the distribution date, subject to rounding. The vesting terms of the awards will not change.

        Each ServiceMaster RSU award (including performance RSU awards) held by a Frontdoor employee granted on or after April 23, 2018 and if elected by a Frontdoor employee, such employee's RSU awards granted prior to April 23, 2018, will be converted into a Frontdoor RSU award. The number of shares of Frontdoor common stock subject to the award will be adjusted as described in the employee matters agreement in order to preserve the aggregate value of the original ServiceMaster RSU award, as measured immediately before and immediately after the distribution date, subject to rounding. The vesting terms of the awards will not change.

    Director Deferred Share Equivalents

        Each award of ServiceMaster deferred share equivalents held by a Frontdoor nonemployee director will be converted into a Frontdoor deferred share equivalent award. The number of shares of Frontdoor common stock subject to the award will be adjusted as described in the employee matters agreement in order to preserve the aggregate value of the original ServiceMaster deferred share unit award, as measured immediately before and immediately after the distribution date, subject to rounding.

        Each award of a ServiceMaster deferred share equivalents held by a continuing ServiceMaster nonemployee director will remain denominated in shares of ServiceMaster common stock. However, the number of shares of ServiceMaster common stock subject to the award will be adjusted as described in the employee matters agreement in order to preserve the aggregate value of the original ServiceMaster deferred share equivalent award, as measured immediately before and immediately after the distribution date, subject to rounding.

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Results of the Distribution

        After the distribution, we will be an independent, publicly traded company. The actual number of shares to be distributed will be determined at the close of business on September 14, 2018, the record date for the distribution, and will reflect any exercise of ServiceMaster options prior to the record date for the distribution. The distribution will not affect the number of outstanding shares of ServiceMaster common stock or any rights of ServiceMaster stockholders. ServiceMaster will not distribute any fractional shares of Frontdoor common stock.

        We will enter into a separation agreement and other related agreements with ServiceMaster before the distribution to effect the separation and provide a framework for our relationship with ServiceMaster after the separation. These agreements will provide for the allocation between ServiceMaster and us of assets, liabilities and obligations (including investments, property, employee benefits and tax-related assets and liabilities) associated with the American Home Shield business and will govern the relationship between ServiceMaster and us after the separation. For a more detailed description of these agreements, see "Certain Relationships and Related Person Transactions."

Market for Frontdoor Common Stock

        There is currently no public trading market for Frontdoor common stock. Frontdoor common stock has been approved for listing on the NASDAQ under the symbol "FTDR." We have not and will not set the initial price of Frontdoor common stock. The initial price will be established by the public markets.

        We cannot predict the price at which shares of Frontdoor common stock will trade after the distribution. In fact, the combined trading prices, after the distribution, of the shares of Frontdoor common stock that each ServiceMaster stockholder will receive in the distribution and shares of ServiceMaster common stock held at the record date for the distribution may not equal the "regular-way" trading price of shares of ServiceMaster common stock immediately prior to the distribution. The price at which shares of Frontdoor common stock trades may fluctuate significantly, particularly until an orderly public market develops. Trading prices for shares of Frontdoor common stock will be determined in the public markets and may be influenced by many factors. See "Risk Factors—Risks Related to Frontdoor Common Stock."

Incurrence of Debt

        In connection with the separation and distribution, we incurred long-term debt consisting of $350 million in aggregate principal amount of senior unsecured notes and $650 million in aggregate principal amount of senior secured term loans. We also entered into a senior secured revolving credit facility with commitments in aggregate principal amount of $250 million. The notes and term loans were incurred in favor of ServiceMaster's wholly owned subsidiary, The ServiceMaster Company, as partial consideration for the contribution of the American Home Shield business assets to us. The ServiceMaster Company exchanged the notes and term loans with a certain financial institution for $1 billion in aggregate principal amount of outstanding debt of The ServiceMaster Company owed to such financial institution.

Trading Between the Record Date and Distribution Date

        Beginning on or about the record date for the distribution and continuing up to and including the distribution date, ServiceMaster expects that there will be two markets for shares of ServiceMaster common stock: a "regular-way" market and an "ex-distribution" market. Shares of ServiceMaster common stock that trade on the "regular-way" market will trade with an entitlement to shares of Frontdoor common stock to be distributed pursuant to the separation. Shares of ServiceMaster common stock that trade on the "ex-distribution" market will trade without an entitlement to shares of

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Frontdoor common stock to be distributed pursuant to the distribution. Therefore, if you sell shares of ServiceMaster common stock in the "regular-way" market up to and including the distribution date, you will be selling your right to receive shares of Frontdoor common stock in the distribution. If you own shares of ServiceMaster common stock at the close of business on the record date and sell those shares on the "ex-distribution" market up to and including the distribution date, you will receive the shares of Frontdoor common stock that you are entitled to receive pursuant to your ownership of shares of ServiceMaster common stock as of the record date.

        Furthermore, beginning on or about the record date for the distribution and continuing up to and including the distribution date, we expect that there will be a "when-issued" market in shares of Frontdoor common stock. "When-issued" trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The "when-issued" trading market will be a market for shares of Frontdoor common stock that will be distributed to holders of shares of ServiceMaster common stock on the distribution date. If you own shares of ServiceMaster common stock at the close of business on the record date for the distribution, you would be entitled to shares of Frontdoor common stock distributed pursuant to the distribution. You may trade this entitlement to shares of Frontdoor common stock, without the shares of ServiceMaster common stock you own, on the "when-issued" market, but your transaction will not settle until after the distribution date. On the first trading day following the distribution date, "when-issued" trading with respect to shares of Frontdoor common stock will end, and "regular-way" trading will begin.

Conditions to the Distribution

        The distribution will be effective at 12:01 a.m. Eastern Time, on October 1, 2018, which is the distribution date, provided that the conditions set forth in the separation agreement have been satisfied (or waived by ServiceMaster in its sole discretion), including, among others:

    the transfer of assets and liabilities from ServiceMaster to Frontdoor shall be completed in accordance with the separation and distribution agreement that ServiceMaster and we will enter into prior to the distribution;

    the private letter ruling from the IRS regarding certain U.S. federal income tax matters relating to the separation and distribution received by ServiceMaster continuing to be valid and being satisfactory to the ServiceMaster board of directors;

    ServiceMaster shall have received one or more opinions from its tax advisors, in each case satisfactory to the ServiceMaster board of directors, regarding certain U.S. federal income tax matters relating to the separation and distribution;

    an independent appraisal firm acceptable to ServiceMaster shall have delivered one or more opinions to the board of directors of ServiceMaster at the time or times requested by the board of directors of ServiceMaster confirming the solvency and financial viability of ServiceMaster before the consummation of the distribution and each of ServiceMaster and Frontdoor after the consummation of the distribution, such opinions shall have been acceptable to ServiceMaster in form and substance in ServiceMaster's sole discretion and such opinions shall not have been withdrawn or rescinded;

    the SEC shall have declared effective our registration statement on Form 10, of which this information statement forms a part, and this information statement shall have been made available to ServiceMaster stockholders;

    all actions and filings necessary or appropriate under applicable U.S. federal, U.S. state or other securities laws shall have been taken and, where applicable, have become effective or been accepted by the applicable governmental authority;

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    we shall have received all necessary approvals from applicable state regulators;

    the transaction agreements relating to the separation that ServiceMaster and we will enter into prior to the distribution shall have been duly executed and delivered by the parties;

    no order, injunction, or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the separation, distribution or any of the related transactions shall be in effect;

    the shares of Frontdoor common stock to be distributed shall have been approved for listing on the NASDAQ, subject to official notice of distribution;

    we shall have entered into the financing transactions described in this information statement that are contemplated to occur on or prior to the date of the separation and distribution; and

    no event or development shall have occurred or exist that, in the judgment of ServiceMaster's board of directors, in its sole and absolute discretion, makes it inadvisable to effect the separation, the distribution and other related transactions.

        We cannot assure you that any or all of these conditions will be met. ServiceMaster will have sole discretion to waive any of the conditions to the distribution. In addition, ServiceMaster will have the sole and absolute discretion to determine (and change) the terms of, and whether to proceed with, the distribution and, to the extent it determines to so proceed, to determine the record date for the distribution, the distribution date and the distribution ratio, as well as to reduce the amount of outstanding shares of Frontdoor common stock that it will retain, if any, following the distribution. ServiceMaster may rescind or delay its declaration of the distribution even after the record date for the distribution. ServiceMaster does not intend to notify its stockholders of any modifications to the terms of the separation and distribution that, in the judgment of its board of directors, are not material. To the extent that the ServiceMaster board of directors determines that any modifications by ServiceMaster materially change the material terms of the separation and distribution, ServiceMaster will notify ServiceMaster stockholders in a manner reasonably calculated to inform them about the modification as may be required by law, by, for example, publishing a press release, filing a current report on Form 8-K, or circulating a supplement to this information statement. For example, the ServiceMaster board of directors might consider material such matters as significant changes to the distribution ratio, the assets to be contributed or the liabilities to be assumed in the separation.

Regulatory Approval

        Our registration statement on Form 10, of which this information statement forms a part, must become effective prior to the distribution, and shares of Frontdoor common stock to be distributed must have been approved for listing on the NASDAQ, subject to official notice of distribution.

        Additionally, as a condition to the separation and distribution, we must receive regulatory approval from certain state insurance regulatory authorities, including in California and Florida (from each of which we have received conditional approval), and we must also provide a detailed pre-separation notice to the Texas Real Estate Commission. We or certain of our subsidiaries plan to notify certain other states in which our operating entities have licenses or registrations of the planned separation prior to the separation and distribution and of the completion of the separation after the separation and distribution. Many state insurance regulators require companies operating in their states to maintain certain capitalization, net worth or reserve requirements either alone or with the parent company. To the extent that we have previously relied on our parent company in meeting such requirements, we will take steps to ensure that prior to the completion of the spin-off we meet such requirements through alternate means, such as insuring our obligations or posting a bond or a letter of credit after the distribution.

No Appraisal Rights

        Under the DGCL, ServiceMaster stockholders will not have appraisal rights in connection with the distribution.

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DIVIDEND POLICY

        We currently expect to retain all available funds and any future earnings for use in the operation and expansion of our business. We do not currently anticipate paying dividends on Frontdoor common stock following the distribution. Any declaration and payment of future dividends to holders of Frontdoor common stock will be at the discretion of our board of directors and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. The terms of our indebtedness may restrict us from paying dividends, or may restrict our subsidiaries from paying dividends to us. Under Delaware law, dividends may be payable only out of surplus, which is net assets minus liabilities and capital, or, if we have no surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. See "Description of Material Indebtedness" and "Description of Our Capital Stock—Common Stock."

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CAPITALIZATION

        The following table sets forth our capitalization as of June 30, 2018:

    on a historical basis; and

    on an unaudited as adjusted basis to give effect to the pro forma adjustments included in our unaudited pro forma combined financial information.

        The information below is not necessarily indicative of what our capitalization would have been had the separation, distribution and related transactions been completed as of June 30, 2018. In addition, it is not indicative of our future capitalization.

        This table should be read in conjunction with the "Unaudited Pro Forma Combined Financial Statements," "Selected Historical Combined Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Description of Material Indebtedness" sections of this information statement and our unaudited condensed combined financial statements and notes thereto included in the "Index to Financial Statements" of this information statement.

 
  As of June 30,
2018
 
(In millions)
  Historical   As
Adjusted
 

Cash and cash equivalents

  $ 314   $ 250  

Marketable securities

    25     25  

Total(1)

  $ 339   $ 275  

Capitalization:

             

Debt:

             

Term-loan(2)

  $   $ 641  

Senior Unsecured Notes(2)

        344  

Other

    3     3  

Revolving credit facility(2)

         

Total debt

  $ 3     988  

Equity:

             

Common stock ($0.01 par value per share); 2,000,000,000 shares authorized, 84,511,849 shares issued and outstanding, as adjusted

  $   $ 1  

Additional paid-in capital (deficit)

        (392 )

Net Parent Investment(3)

    657      

Accumulated other comprehensive income (loss)

         

Total equity

    657     (391 )

Total capitalization

  $ 660   $ 597  

(1)
Pursuant to the separation and distribution agreement, Frontdoor is expected to have a minimum cash and cash equivalents and current marketable securities balance of approximately $275 million for working capital purposes and restricted assets required for regulatory purposes.

(2)
In connection with the separation and distribution, we incurred long-term debt consisting of $350 million in aggregate principal amount of senior unsecured notes and $650 million in aggregate principal amount of senior secured term loans. We also entered into a senior secured revolving credit facility with commitments in aggregate principal amount of $250 million to be available for general corporate purposes, including working capital needs and acquisitions. The amounts shown here are for illustrative purposes only and are net of debt issuance costs related to the senior unsecured notes and senior secured term loans of approximately $15 million.

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(3)
On the distribution date, ServiceMaster's net investment in Frontdoor will be re-designated as our Stockholders' Equity to reflect the aggregate par value of our common stock and additional paid-in capital based on the number of shares of ServiceMaster common stock outstanding on the distribution date. See notes to unaudited pro forma combined financial statements for more information.

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SELECTED HISTORICAL COMBINED FINANCIAL DATA

        Set forth below are our selected historical combined financial data for each of the five years ended December 31, 2017, 2016, 2015, 2014 and 2013. The operating data for the years ended December 31, 2017, 2016 and 2015 and the balance sheet data as of December 31, 2017 and 2016 were derived from our audited historical combined financial statements, which are included in the "Index to Financial Statements" section of this information statement. The selected historical combined operating data for the six months ended June 30, 2018 and 2017 and the balance sheet data as of June 30, 2018 were derived from our unaudited historical condensed combined financial statements, which are included in the "Index to Financial Statements" section of this information statement. The operating data for the years ended December 31, 2014 and 2013 and the balance sheet data as of June 30, 2017 and December 31, 2015, 2014 and 2013 are unaudited and are derived from the financial records of ServiceMaster, which are not included in this information statement.

        The selected historical combined financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Combined Financial Statements," and the historical combined financial data reflects our results as historically operated as a part of ServiceMaster, and these results may not be indicative of our future performance as a stand-alone company following the separation and distribution.

 
  Six Months
Ended
June 30,
  Year Ended December 31,  
(In millions)
  2018   2017   2017   2016   2015   2014   2013  

Operating Results:

                                           

Revenue

  $ 602   $ 553   $ 1,157   $ 1,020   $ 917   $ 828   $ 740  

Cost of services rendered

    330     285     589     526     467     401     367  

Selling and administrative expenses

    169     158     312     286     256     254     235  

Impairment of software and other related costs(1)

                        47      

Restructuring charges(2)

    3     1     20     3         1     1  

Spin-off charges(3)

    15                          

Interest expense(4)

            1                  

Income before Income Taxes

    78     100     220     196     189     120     134  

Net Income

    58     63     160     124     120     74     84  

Financial Position (as of period end):

                                           

Total assets

  $ 1,069   $ 1,358   $ 1,416   $ 1,276   $ 1,136   $ 1,063   $ 1,005  

Total long-term debt

    3     14     9     14     1     1     2  

Total Parent's equity

    657     584     661     560     518     498     509  

Cash Flow Data:

                                           

Net cash provided from operating activities

  $ 122   $ 112   $ 194   $ 155   $ 135   $ 142   $ 78  

Net cash (used for) provided from investing activities

    (16 )   (13 )   (11 )   (55 )   19     (2 )   (13 )

Net cash used for financing activities

    (74 )   (41 )   (68 )   (88 )   (100 )   (85 )   (74 )

Other Non-GAAP Financial Data:

                                           

Adjusted EBITDA(5)

  $ 105   $ 113   $ 259   $ 218   $ 205   $ 179   $ 145  

Adjusted EBITDA Margin(6)

    17.4 %   20.4 %   22.4 %   21.4 %   22.4 %   21.6 %   19.7 %

Free Cash Flow(7)

  $ 105   $ 106   $ 179   $ 144   $ 127   $ 131   $ 65  

(1)
Represents the impairment of software relating to our decision to abandon our efforts to deploy a new operating system.

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(2)
Represents restructuring charges. For the six months ended June 30, 2018, these comprised $1 million of severance costs, which primarily represent an allocation of severance costs related to actions taken to enhance capabilities and reduce costs in ServiceMaster's corporate functions that provide company-wide administrative services to support operations, and an allocation of $2 million of nonpersonnel charges primarily related to the relocation to our corporate headquarters. For the six months ended June 30, 2017, charges primarily represent an allocation of severance costs as part of the severance agreement with the former ServiceMaster CFO.

For the year ended December 31, 2017, these comprised $13 million of spin-off costs, $5 million of severance costs, which primarily represent an allocation of severance costs and stock-based compensation expense as part of the severance agreement with ServiceMaster's former CEO and CFO, and allocations of $1 million of nonpersonnel charges and $1 million of asset write-off and other costs related to the relocation to our corporate headquarters. For the year ended December 31, 2016, these comprised lease termination, asset write-off and other costs related to the decision to consolidate the stand-alone operations of Home Security of America, Inc., acquired in February 2014, with those of the American Home Shield business and severance and other costs related to an initiative to enhance capabilities and reduce costs in ServiceMaster's headquarters functions that provide administrative services for our operations. For the years ended December 31, 2014 and 2013, restructuring charges are principally comprised of severance and other costs related to an initiative to enhance capabilities and reduce costs in ServiceMaster's headquarters functions that provide administrative services for our operations.

(3)
Represents spin-off charges. For the six months ended June 30, 2018, the $15 million of spin-off charges were primarily comprised of $12 million of professional fees and $3 million of other incremental costs related to the spin-off.

(4)
Interest expense on ServiceMaster's debt has not been allocated to us for any of the periods presented since we are not the legal obligor of the debt.

(5)
For our definition of Adjusted EBITDA, see "Information Statement Summary—Summary Historical and Unaudited Pro Forma Combined Financial Data."

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    The following table reconciles Adjusted EBITDA to Net Income for the periods presented, which we consider to be the most directly comparable GAAP financial measure:

 
  Six Months
Ended
June 30,
  Year Ended December 31,  
(In millions)
  2018   2017   2017   2016   2015   2014   2013  

Net Income

  $ 58   $ 63   $ 160   $ 124   $ 120   $ 74   $ 84  

Depreciation and amortization expense

    9     9     17     13     9     9     8  

Interest expense

            1                  

Interest income from affiliate(a)

    (1 )   (1 )   (3 )   (2 )            

Provision for income taxes

    20     37     60     71     69     46     50  

Non-cash stock-based compensation expense(b)

    2     3     4     4     4     3     1  

Restructuring charges(c)

    3     1     20     3         1     1  

Spin-Off charges(d)

    15                          

Impairment of software and other related costs(e)

                        47      

Affiliate royalty expense(f)

    1     1     2     2     1     1     1  

(Gain) loss on insured home service plan claims(g)

    (1 )       (1 )   1         (3 )    

Other

        1         1     1          

Adjusted EBITDA

  $ 105   $ 113   $ 259   $ 218   $ 205   $ 179   $ 145  

(a)
Represents interest earned on interest-bearing related party receivables included within Net Parent Investment on the accompanying Statement of Financial Position. We exclude interest income from related party receivables from Adjusted EBITDA because we believe it does not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.

(b)
Represents the non-cash expense of equity-based compensation. We exclude this expense from Adjusted EBITDA primarily because it is a non-cash expense and because it is not used by management to assess ongoing operational performance. We believe excluding this expense from Adjusted EBITDA is useful to investors in aiding period to period comparability.

(c)
Represents restructuring charges. For the six months ended June 30, 2018, these comprised $1 million of severance costs which primarily represent an allocation of severance costs related to actions taken to enhance capabilities and reduce costs in ServiceMaster's corporate functions that provide company-wide administrative services to support operations, and an allocation of $2 million of nonpersonnel charges primarily related to the relocation to our corporate headquarters. For the six months ended June 30, 2017, charges primarily represent an allocation of severance costs as part of the severance agreement with ServiceMaster's former CFO.

For the year ended December 31, 2017, these comprised $13 million of spin off costs, $5 million of severance costs which primarily represent an allocation of severance costs and stock based compensation expense as part of the severance agreement with ServiceMaster's former CEO and CFO, and allocations of $1 million of nonpersonnel charges and $1 million of asset write-off and other costs related to the relocation to our corporate headquarters. For the year ended December 31, 2016, these comprised lease termination, asset write-off and other costs related to the decision to consolidate the stand-alone operations of Home Security of America, Inc., acquired in February 2014, with those of the American Home Shield business and severance and other costs related to an initiative to enhance capabilities and reduce costs in ServiceMaster's headquarters functions that provide administrative services for our operations. For the years ended December 31, 2014 and 2013, restructuring charges are principally comprised of severance and other costs related to an initiative to enhance

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    capabilities and reduce costs in ServiceMaster's headquarters functions that provide administrative services for our operations. We exclude these restructuring charges from Adjusted EBITDA because we believe they do not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.

(d)
Represents spin-off charges. For the six months ended June 30, 2018, these comprised $15 million of spin-off charges comprised of $12 million of professional fees and $3 million of other incremental costs related to the spin-off. We exclude these spin-off charges from Adjusted EBITDA because we believe they do not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.

(e)
Represents the impairment of software and other related costs. We exclude non-cash impairments from Adjusted EBITDA because we believe doing so is useful to investors in aiding period-to-period comparability.

(f)
Represents royalty expense with ServiceMaster for the use of its trade names. We exclude royalty expense with an affiliate from Adjusted EBITDA because it is not used by management to assess ongoing operational performance and because it does not reflect our core ongoing operations. We do not expect to incur these expenses after the distribution.

(g)
Represents gain or loss on an arrangement with a captive insurance affiliate whereby certain American Home Shield home service plan claims are insured. We exclude the gain or loss on insured home service plan claims because it is not used by management to assess ongoing operational performance and because it does not reflect our core ongoing operations.
(6)
Adjusted EBITDA margin is defined as Adjusted EBITDA as a percentage of revenue.

(7)
For our definition of Free Cash Flow, see "Information Statement Summary—Summary Historical and Unaudited Pro Forma Combined Financial Data."

    The following table reconciles net cash provided from operating activities, which we consider to be the most directly comparable GAAP measure, to Free Cash Flow using data derived from our condensed combined financial statements for the six months ended June 30, 2018 and 2017 and our combined financial statements for the years ended December 31, 2017, 2016, 2015, 2014 and 2013:

 
  Six Months
Ended
June 30,
  Year Ended December 31,  
(In millions)
  2018   2017   2017   2016   2015   2014   2013  

Net Cash Provided from Operating Activities

  $ 122   $ 112   $ 194   $ 155   $ 135   $ 142   $ 78  

Property additions

    (17 )   (6 )   (15 )   (11 )   (7 )   (11 )   (13 )

Free Cash Flow

  $ 105   $ 106   $ 179   $ 144   $ 127   $ 131   $ 65  

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

        The following unaudited pro forma combined balance sheet as of June 30, 2018 and the unaudited pro forma combined statements of operations for the six months ended June 30, 2018 and the year ended December 31, 2017 are based on our historical combined financial statements. The unaudited pro forma combined financial statements presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Description of Material Indebtedness" and the historical combined annual financial statements and corresponding notes thereto included elsewhere in this information statement. The unaudited pro forma combined financial statements reflect certain known impacts as a result of our separation from ServiceMaster. The unaudited pro forma combined financial statements have been prepared giving effect to the separation and distribution as if the transaction had occurred as of January 1, 2017 for the unaudited pro forma combined statement of operations for six months ended June 30, 2018 and the year ended December 31, 2017, and as of June 30, 2018 for the unaudited pro forma combined balance sheet. The unaudited pro forma combined statements of income give effect to adjustments that are (i) directly attributable to such transactions, (ii) are factually supportable and (iii) are expected to have a continuing impact on the Company. The unaudited pro forma combined balance sheet gives effect to adjustments that (i) are directly attributable to such transactions and (ii) are factually supportable regardless of whether they have a continuing impact on the Company or are non-recurring.

        The unaudited pro forma combined financial statements presented below have been derived from our historical combined financial statements included in this information statement. While the historical combined financial statements reflect the past financial results of ServiceMaster's American Home Shield business, these pro forma statements give effect to the separation of that business into an independent, publicly traded company. The pro forma adjustments to reflect the separation include:

    the distribution of 80.2 percent of our issued and outstanding common stock by ServiceMaster in connection with the separation;

    the effect of our anticipated post-separation capital structure, which includes (1) the incurrence of $1 billion in additional indebtedness, as described in this information statement, and (2) an assumed minimum post-separation cash and cash equivalents and current marketable securities balance of $275 million; and

    the impact of the aforementioned adjustments on our income tax expense.

        The pro forma adjustments are based on available information and assumptions that management believes are reasonable given the information that is currently available. However, such adjustments are subject to change based on the finalization of the terms of the separation and distribution agreement and related agreements.

        The costs to operate our business as an independent public entity are expected to exceed the historical allocations, including corporate and administrative charges from ServiceMaster of approximately $31 million and $60 million for the six months ended June 30, 2018 and the year ended December 31, 2017, respectively, reflected in the accompanying combined financial statements presented elsewhere within this information statement, and principally relate to areas that include, but are not limited to:

    additional personnel including finance, accounting, compliance, tax, treasury, internal audit, information technology and legal;

    additional fees associated with information technology services;

    additional professional fees associated with audits, tax, legal and other services;

    increased insurance premiums;

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    costs relating to board of directors' fees;

    stock market listing fees, investor relations costs and fees for preparing and distributing periodic filings with the SEC; and

    other administrative costs and fees, including anticipated incremental executive compensation costs related to existing and new executive management.

        We are currently evaluating the optimal structure of corporate functions to support the strategic objectives of our business as an independent public entity subsequent to the spin-off and estimate the increased operating costs will be approximately $5 million in 2018. Dis-synergies for the six months ended June 30, 2018 were $1 million. For full-year 2019, we currently project dis-synergies of approximately $6 million.

        After the separation, subject to the terms of the separation agreement, all costs and expenses related to the separation incurred by either ServiceMaster or us will be borne by the party incurring the costs and expenses, including charges incurred by us for services provided by ServiceMaster under the Transition Services Agreement.

        Subject to the terms of the separation agreement, ServiceMaster intends to settle the majority of the nonrecurring third-party costs and expenses related to the separation and incurred by us or ServiceMaster prior to the separation date. Such nonrecurring amounts include costs to separate and/or duplicate information technology systems, investment banker fees, outside legal and accounting fees, debt issuance and other similar costs. Approximately $15 million and $13 million of costs related to the separation have been incurred by AHS for the six months ended June 30, 2018 and the year ended December 31, 2017, respectively. These costs are included within Spin-off charges in the statements of operations and comprehensive income in the unaudited interim condensed combined financial statements and within Restructuring charges in the statements of operations and comprehensive income in the audited annual combined financial statements. Frontdoor expects to incur aggregate transaction related costs of approximately $35 to $45 million in 2018.

        The unaudited pro forma combined financial information is for illustrative and informational purposes only and is not intended to represent or be indicative of what our financial condition or results of operations would have been had we operated historically as a company independent of ServiceMaster or if the separation and the distribution had occurred on the dates indicated. The unaudited pro forma combined financial information also should not be considered representative of our future combined financial condition or combined results of operations.

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frontdoor, inc.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Six months ended June 30, 2018
(In millions, except per share data)

 
  Historical   Pro Forma
Adjustments
   
  Pro Forma  

Revenue

  $ 602   $       $ 602  

Cost of services rendered

    330               330  

Selling and administrative expenses

    169               169  

Depreciation expense

    5               5  

Amortization expense

    4               4  

Restructuring charges

    3               3  

Spin-off charges

    15               15  

Affiliate royalty expense

    1               1  

Interest expense

        29   (A)     29  

Interest income from affiliate

    (1 )             (1 )

Net investment income

    (1 )             (1 )

Income before Income Taxes

    78     (29 )       49  

Provision for income taxes

    20     (7 ) (B)     13  

Net Income

  $ 58   $ (22 )     $ 36  

Unaudited Pro Forma Earnings Per Share

                       

Basic

                  $ 0.43  

Diluted

                  $ 0.43  

Number of Shares used in calculating earnings per share

                       

Basic

              (F)     84.5  

Diluted

              (G)     84.7  

        See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements, which are an integral part of the financial statements.

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frontdoor, inc.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2017
(In millions, except per share data)

 
  Historical   Pro Forma
Adjustments
   
  Pro Forma  

Revenue

  $ 1,157   $       $ 1,157  

Cost of services rendered

    589               589  

Selling and administrative expenses

    312               312  

Depreciation expense

    9               9  

Amortization expense

    8               8  

Restructuring charges

    20               20  

Affiliate royalty expense

    2               2  

Interest expense

    1     59   (A)     60  

Interest income from affiliate

    (3 )             (3 )

Net investment income

    (2 )             (2 )

Income before Income Taxes

    220     (59 )       162  

Provision for income taxes

    60     (21 ) (B)     39  

Net Income

  $ 160   $ (38 )     $ 123  

Unaudited Pro Forma Earnings Per Share

                       

Basic

                  $ 1.46  

Diluted

                  $ 1.45  

Number of Shares used in calculating earnings per share

                       

Basic

              (F)     84.3  

Diluted

              (G)     84.8  

        See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements, which are an integral part of the financial statements.

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frontdoor, inc.
UNAUDITED PRO FORMA COMBINED STATEMENT OF FINANCIAL POSITION
As of June 30, 2018
(In millions)

 
  Historical   Pro Forma
Adjustments
   
  Pro Forma  

Assets:

                       

Current Assets:

                       

Cash and cash equivalents

  $ 314   $ (64 ) (C)   $ 250  

Marketable securities

    25               25  

Receivables, less allowance of $1

    17               17  

Prepaid expenses and other assets

    9               9  

Deferred customer acquisition costs

                   

Total Current Assets

    366     (64 )       301  

Other Assets:

                       

Property and equipment, net

    43               43  

Goodwill

    476               476  

Intangible assets, net

    161               161  

Long-term marketable securities

    2               2  

Deferred customer acquisition costs

    21               21  

Other assets

    1     1   (D)     2  

Total Assets

  $ 1,069   $ (63 )     $ 1,006  

Liabilities and Equity:

                       

Current Liabilities:

                       

Accounts payable

  $ 47   $       $ 47  

Accrued liabilities:

                       

Payroll and related expenses

    12               12  

Home service plan claims

    85               85  

Other

    21               21  

Deferred revenue

    188               188  

Current portion of long-term debt

    2     7   (D)     9  

Total Current Liabilities

    356     7         363  

Long-Term Debt

        979   (D)     979  

Other Long-Term Liabilities:

                       

Deferred taxes

    42               42  

Other long-term obligations

    13               13  

Total Other Long-Term Liabilities

    55             55  

Equity:

                       

Common stock, $0.01 par value

        1   (E)     1  

Additional paid-in-capital

        (392 ) (E)     (392 )

Net Parent Investment

    657     (657 ) (E)      

Accumulated other comprehensive income

                 

Total Equity

    657     (1,048 )       (391 )

Total Liabilities and Equity

  $ 1,069   $ (63 )     $ 1,006  

        See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements, which are an integral part of the financial statements.

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NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

        For further information regarding our historical combined financial statements, refer to the combined financial statements and the notes thereto in this information statement. The unaudited pro forma combined balance sheet as of June 30, 2018 and unaudited pro forma combined statements of income for the six months ended June 30, 2018 and the year ended December 31, 2017, include adjustments related to the following:

            (A)  Reflects interest expense related to $1 billion in debt that we incurred, financing fees related to entering into a revolving credit facility and related amortization of debt issuance costs. Interest expense on the new debt was computed based on a weighted average interest rate of 5.9 percent including fees. The interest rates for pro forma purposes are based on assumptions of the rates to be effective upon the issuance of the indebtedness. Actual interest expense may be higher or lower based on final terms of our debt arrangements. See "Description of Material Indebtedness." A one percent change to the annual interest rate would change income before income taxes by approximately $10 million on an annual basis.

            (B)  For purposes of our combined unaudited pro forma financial statements, our income tax expense and deferred tax balances have been prepared as if we filed income tax returns on a stand-alone basis separate from ServiceMaster. As an independent, publicly traded company, our deferred taxes and effective tax rate may differ significantly from those in the historical periods. Tax expense was calculated at a statutory tax rate of 25.1 percent and 36.0 percent applied to the related pre-tax pro forma adjustments for the six months ended June 30, 2018 and the year ended December 31, 2017, respectively. This rate reflects federal and state tax impacts, taking into consideration the nature of the adjustment.

            (C)  Reflects cash to be transferred to ServiceMaster in order to arrive at the agreed-upon cash and cash equivalents and current marketable securities needed for working capital purposes and restricted assets required for regulatory purposes pursuant to the separation and distribution agreement.

            (D)  In connection with the separation and distribution, we incurred long-term debt consisting of $350 million in aggregate principal amount of senior unsecured notes and $650 million in aggregate principal amount of senior secured term loans, less debt issuance costs of approximately $16 million (of which $1 million relates to the senior secured revolving credit facility). The new indebtedness includes approximately $7 million that is classified as current maturities of long-term debt in the unaudited pro forma combined statement of financial position. The notes and term loans were incurred in favor of ServiceMaster's wholly owned subsidiary, The ServiceMaster Company, as partial consideration for the contribution of the American Home Shield business assets to us. The ServiceMaster Company exchanged the notes and term loans with a certain financial institution for $1 billion in aggregate principal amount of outstanding debt of The ServiceMaster Company owed to such financial institution.

            (E)  On the distribution date, ServiceMaster's net investment in our Company will be re-designated as Stockholders' Equity and will be $1 million to common stock and $(392) million to additional paid-in capital (deficit) based on the number of shares of our common stock outstanding at the distribution date. This adjustment also reflects the impact of the other pro forma adjustments reflected within the balance sheet. The adjustments are summarized below:

Impact of pro forma adjustments as of June 30, 2018

  $ (1,048 )

Re-designation of net parent investment

    657  

Common stock adjustment

    (1 )

Total additional paid-in capital (deficit) adjustment

  $ (392 )

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            (F)  The number of shares of Frontdoor common stock used to compute basic earnings per share for the six months ended June 30, 2018 and the year ended December 31, 2017 is based on 135.6 million shares and 135.1 million shares of ServiceMaster common stock issued and outstanding on June 30, 2018 and December 31, 2017, respectively, the most recent date for which information is available. We have assumed a distribution ratio of 1 share of Frontdoor common stock for every 2 shares of ServiceMaster common stock, and ServiceMaster's retention of 19.8 percent ownership in our Company, the calculation of basic common shares outstanding is summarized below:

Basic
   

Number of ServiceMaster common shares outstanding as of June 30, 2018

  135.6 million

Distribution Ratio: 1 share of Frontdoor common stock for every 2 shares of ServiceMaster common stock

  0.5

Number of our common shares assumed to be issued by ServiceMaster

  67.8 million

19.8% ServiceMaster ownership retention

  16.7 million

Total outstanding common shares

  84.5 million

 

Basic
   

Number of ServiceMaster common shares outstanding as of December 31, 2017

  135.1 million

Distribution Ratio: 1 share of Frontdoor common stock for every 2 shares of ServiceMaster common stock

  0.5

Number of our common shares assumed to be issued by ServiceMaster

  67.6 million

19.8% ServiceMaster ownership retention

  16.7 million

Total outstanding common shares

  84.3 million

        The actual number of shares of Frontdoor common stock will be dependent upon the number of shares of ServiceMaster common stock outstanding on the record date, the actual distribution ratio and the actual percentage of shares of our common stock retained by ServiceMaster.

            (G)  The pro forma weighted average number of shares of Frontdoor common stock used to compute diluted earnings per share is based on ServiceMaster's weighted average number of dilutive shares as of June 30, 2018 and December 31, 2017, as this is the most recent date for which information is available regarding dilution. The calculations of diluted shares outstanding is below:

Diluted
   

Number of our common shares assumed to be issued from ServiceMaster stock

  67.8 million

Weighted average ServiceMaster diluted shares as of June 30, 2018

  0.3 million

Distribution Ratio: 1 share of Frontdoor common stock for every 2 shares of ServiceMaster common stock

  0.5

Total dilutive impact

  0.2 million

19.8% ServiceMaster ownership retention

  16.7 million

Total outstanding diluted common shares

  84.7 million

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Diluted
   

Number of our common shares assumed to be issued from ServiceMaster stock

  67.6 million

Weighted average ServiceMaster diluted shares as of December 31, 2017

  1.0 million

Distribution Ratio: 1 share of Frontdoor common stock for every 2 shares of ServiceMaster common stock

  0.5

Total dilutive impact

  0.5 million

19.8% ServiceMaster ownership retention

  16.7 million

Total outstanding diluted common shares

  84.8 million

        The actual number of diluted shares of Frontdoor common stock will be dependent upon the number of shares of ServiceMaster common stock outstanding on the record date, the actual distribution ratio and the actual percentage of shares of our common stock retained by ServiceMaster, as well as the equity awards issued on the distribution date, which will be determined after the distribution pursuant to an equitable adjustment in the separation and distribution agreement. For additional information, see "Executive Compensation—Compensation Discussion and Analysis—Treatment of Holdings Equity Awards in Connection with the Distribution."

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BUSINESS

Overview

        Frontdoor is obsessed with taking the hassle out of owning a home. Frontdoor owns multiple home service brands including HSA, OneGuard, Landmark and American Home Shield, which is the largest provider of home service plans in the U.S. as measured by revenue. Through our home services platform, we respond to over four million service requests annually (or one every eight seconds) from homeowners who require assistance with technical home repair issues utilizing our nationwide network of over 15,000 pre-qualified professional contractor firms that employ more than 45,000 technicians. Our customizable home service plans help customers protect and maintain their homes, typically their most valuable asset, from costly and unplanned breakdowns of essential home systems and appliances. Our large recurring customer base provides our contractors a significant volume of work throughout the year, which is highly valued by them. We facilitate these interactions through our leading technology-enabled customer interface and service delivery platform. We will continue to leverage this technology-enabled and people-driven platform as a catalyst for future sustained growth.

        For the six months ended June 30, 2018, we generated revenue, net income and Adjusted EBITDA of $602 million, $58 million and $105 million, respectively. Revenue represented year-over-year growth of nine percent while net income and Adjusted EBITDA reflected year-over-year decreases of seven percent and seven percent, respectively. The seven percent decrease in Adjusted EBITDA was primarily driven by $28 million of increased contract claims costs, incremental sales and marketing costs and customer service costs, offset, in part, by the impact of higher revenue. The seven percent decrease in net income was primarily driven by the above factors and $15 million of pre-tax spin-off charges, offset, in part, by lower income taxes due to U.S. Tax Reform.

        For the fiscal year ended December 31, 2017, we generated revenue, net income and Adjusted EBITDA of $1,157 million, $160 million, and $259 million, respectively. Revenue, net income and Adjusted EBITDA represented year-over-year growth of 13 percent, 29 percent and 19 percent, respectively. Additionally, we have grown through various business cycles as evidenced by the fact we grew revenue from 2007 to 2017 at a CAGR of eight percent. We believe that our strong performance through these cycles is attributable to the essential nature of our services, our strong value proposition and management's focus on driving results through strategic investment and operational execution. From 2013 to 2017, we grew revenue, net income and Adjusted EBITDA at a CAGR of 12 percent, 17 percent and 16 percent, respectively. For a reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to net income, see "—Summary Historical and Unaudited Pro Forma Combined Financial Data."

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Our Value Proposition

        Customer value proposition.    We serve approximately two million customers who subscribe to a yearly service plan agreement that covers the repair or replacement of major components of up to 21 home systems and appliances, including electrical, plumbing, central HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops. Increasingly, these items tend to be the most critical and complicated items in a home, which lead to complex repairs. Product failures can result in significant emotional and financial inconvenience for our customers. We continuously upgrade our offerings through additional coverages and home services as homes become increasingly complex and connected. Our plans are generally structured as renewable one-year contracts, and, because our customers value the services we provide, 66 percent of our revenue base in 2017 was recurring. This drives consistency and predictability in our business performance.

        Our service plans appeal to the growing segment of U.S. homeowners who want: (1) budget protection against unexpected and/or expensive home repair; and (2) the convenience of having repairs completed by experienced professionals. Given the high price of an appliance or home system breakdown, the length of time associated with vetting and hiring a qualified repairperson and, typically, the lack of formal guarantee for services performed, consumers are willing to pay for the peace of mind, convenience, repair expertise and guarantee provided by a home service plan. Our service plans appeal to a broad range of customer demographics.

        From 2007 to 2017, our customer base has grown from 1.3 million to two million, representing a CAGR of four percent, our customer retention rate increased from 73 percent to 75 percent, and the annual revenue we generated from renewals grew from 60 percent to 66 percent.

        Professional contractor value proposition.    Our customers are serviced by a select group of high quality, pre-qualified independent contractors. Our reputation as a strong partner, our growth and our increasing scale have allowed us to attract one of the largest independent contractor networks in the U.S., which currently stands at more than 15,000 pre-qualified professional contractor firms that employ more than 45,000 technicians. Our large recurring customer base guarantees our contractors a significant volume of work throughout the year, which is highly valued by them. In return for this volume, we are able to negotiate favorable rates for work performed. We estimate that approximately 95 percent of our contractor base plans to maintain or expand their relationship with us over the next two years.

        We are highly selective in onboarding new contractors into our service network and actively monitor our existing contractors through a rigorous set of performance measures including direct feedback from customer satisfaction surveys. We believe substantial time and expense would be required to develop a contractor base that has comparable national reach, experience and quality of service. Our status as the largest provider of home service plans in the U.S. provides us a significant competitive advantage. We classify a subset of our independent contractor network as "preferred," and they represent a combination of our highest quality and longest-tenured independent contractors. Historically, approximately 80 percent of work orders are assigned to our preferred contractors, driving higher customer satisfaction and ultimately retention rates. We have the opportunity to leverage this supply base for improving and maintaining our customers' homes.

        From 2013 to 2017, our network of professional contractor partners has grown from approximately 10,000 to over 15,000, all of whom have performed a service order for us in the past 12 months.

Our Go-to-Market Strategy

        We founded the home service plan segment (commonly referred to as "home warranties") in 1971 and benefit from significant scale advantages as the leader in this highly fragmented segment. As we have grown, a greater number of homeowners and contractors have been attracted to, and joined, our

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network. We believe there is a significant opportunity for us to build on our current leadership position by investing in our customer service experience, increasing customer retention and expanding and further refining our lead generation channels and partners. To capture this opportunity, we are focused on the following customer acquisition channels:

        Real estate channel.    Our plans typically have been used to provide peace of mind to potential home buyers by protecting them from large, unanticipated out-of-pocket expenses related to the breakdown of major home systems and appliances during the first year after a home purchase. We leverage marketing service agreements and a team of field-based account executives to train, educate and market our plans via real estate brokers and agents, working directly with real estate offices and participating in broker meetings and national sales events. We have long-standing relationships with seven of the 10 largest real estate brokerages in the U.S. and continue to improve relationships with other key brokers. On average, we have been in business with these real estate brokerages for 16 years, and we have strategic partnership arrangements with many of these brokerages. Our long-standing relationships help to secure and grow our position. In addition, for 15 years running, we have had a strategic alliance agreement with the National Association of Realtors, which is the largest real estate association in the U.S. representing 1.3 million realtors.

        We had a 32 percent share of plans sold in connection with a home resale transaction in 2017, up from 26 percent in 2012. In 2017, 1.5 million homes were sold with a home service plan out of the approximately 5.5 million homes sold. Customers acquired through the real estate channel represented 48 percent of our customer base in 2017, down from 56 percent in 2007, as we have rapidly grown our DTC customer base. In 2017, customers in this channel renewed at 28 percent after the first contract year. Revenue from this channel, including associated renewals, was $400 million, $449 million and $533 million for the years ended December 31, 2015, 2016 and 2017, respectively. Overall revenues within this channel have grown at a five percent CAGR from 2007 through 2017.

        Direct-to-consumer channel.    Leveraging our experience in the real estate channel, we invested significant resources to develop the DTC channel to broaden our reach beyond home resale transactions. Our value proposition resonates with a wide demographic of homeowners who find security in a plan protecting against expensive and unexpected breakdowns in the home. This strong value proposition is promoted to our potential customers through search engine marketing, content marketing, social media, direct mail and TV/radio and sold through our customer care centers and mobile-optimized e-commerce platform. Over the past decade, we have strategically invested to expand the DTC channel given its high retention rates and customer lifetime value. Our research indicates a relatively low home service plan penetration rate of four percent of occupied U.S. households. We believe that penetration rates will increase over time as consumers become more aware of, and educated about, home service plans.

        Since 2012, we have maintained an over 50 percent share of home service plans purchased or renewed outside of a home resale transaction. This industry remains underpenetrated, with approximately three million homes out of the 115 million U.S. households (excluding home resales) having a home service plan. Customers acquired through the DTC channel represented 52 percent of our customer base in 2017, up from 44 percent in 2007. In 2017, customers in this channel renewed at 75 percent after the first contract year. Revenue from this channel, including associated renewals, was $513 million, $571 million and $618 million for the years ended December 31, 2015, 2016 and 2017, respectively. Overall revenues within this channel have grown at a nine percent CAGR from 2007 through 2017.

        Customer renewals.    We generated 66 percent of our revenue through existing customer renewals for the six months ended June 30, 2018 and the year ended December 31, 2017. We have made significant investments in our integrated technology platform, self-service capabilities, customer care center operations and contractor management systems, which we believe position us to further improve

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retention and drive consistency and predictability into our business. We estimate that each one-percent improvement in customer retention generates approximately $8 million of incremental revenue and $4 million of gross profit.

Our Opportunity

        Frontdoor operates within the larger $400 billion U.S. home services market, of which the U.S. home service plan segment represents $2.3 billion. While the home service plan segment has grown at a CAGR of seven percent from 2013 to 2017, our revenue has grown at a 12 percent CAGR during the same period. We believe that we are well-positioned to capitalize on our leadership position, while leveraging our network to provide other services to consumers in the broader home services market, as it becomes more complex and connected.

        We view the home service plan segment as a long-term growth space. This segment is characterized by low household penetration with approximately five million of nearly 120 million households (owner-occupied homes and rentals) covered by a home service plan, or approximately four percent of these households.

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        As consumer demand shifts towards more outsourced services, we believe we have an opportunity, as a reliable, scaled service provider with a national, licensed independent contractor network, to increase share and household penetration. Additionally, we believe that increasingly complex home systems and appliances may further highlight the value proposition of professional repair services and, accordingly, the coverage benefits offered by a home warranty or other service plans. We aim to capitalize on this opportunity through a comprehensive strategy built on the key strengths of our business.

Strategy

        We have a three-pronged strategy for penetrating the $400 million U.S. home services market:

    Grow our core business: expand the home service plan business through growing the category, expanding into new geographies and expanding into new customer segments;

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    Develop a broader home services offering: reach new customers with on-demand service and expand into home improvement and home maintenance services; and

    Develop a world-class data platform: seek to capture valuable home data to facilitate home services and anticipate repair and maintenance needs.

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1. Grow our Core Business

        We see an opportunity to triple the size of our core business by increasing household penetration through consumer education and improvements to the customer experience, penetrating new geographies and expanding into new segments, including convenience seekers and multi-family homes.

        Increase household penetration.    To accelerate new customer growth, we make strategic investments in sales, marketing and advertising to drive new business leads, brand awareness and household penetration. We will continue to rapidly expand our core business via a focused effort on our two primary channels:

    Direct-to-consumer; and

    Real estate transactions.

        We aim to increase household penetration by targeting homeowners more effectively, employing more sophisticated sales tactics, growing our product breadth and partnering with new providers. Between 2012 and 2016, such efforts have enabled us to increase our share of industry revenue from 38 percent to 46 percent, while the overall size of the home service plan category has increased from approximately three million to five million households. Increased household penetration ultimately

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allows us to build economies of scale, capitalize on our consistently high retention rates and drive long-term value to us.

        Deliver superior customer experience.    We will continue to improve the customer experience by investing in our integrated technology platform, self-service capabilities, customer care center operations and contractor management systems. These targeted investments deliver enhancements most valued by our customers, including providing a convenient service experience and driving contractor service improvement. We believe these initiatives will lead to improved retention rates, more word-of-mouth marketing and the opportunity to deliver additional services to satisfied customers. Our customer retention rate has steadily grown from 73 percent in 2007 to 75 percent as of June 30, 2018.

        Continue digital transformation.    We continue to invest in digital transformation to provide customers, contractors and realtors with a fully-integrated experience and increase profitability.

        Customers.    In recent years, we have developed robust customer technology platforms, which make it easy for customers to purchase from us, request service and manage their account. Approximately 40 percent of our DTC sales in 2017 were entered online, and 55 percent of our total service request volume was entered online or through our interactive voice response system. Our customer MyAccount platform had over one million active users at the end of 2017, allowing customers to pay bills, request service, review account information or chat with a representative online without calling our customer care centers.

        Contractors.    Our contractor technology platform makes it easier for contractors to work with us and improves communication between contractors and customers. Our contractor portal had nearly 5,000 active users at the end of 2017, and our platform sent over one million "On-My-Way" notifications to customers, letting them know their contractor was en route to their home.

        Realtors.    Our realtor technology platform makes it easier for realtors to work with us, and therefore recommend our products to their clients. Approximately 55 percent of real estate channel orders were placed online in 2017. Our realtor portal had over 80,000 active users at the end of 2017, allowing realtors to enter, edit and pay for orders; view or print order confirmations, invoices, and contracts for active contracts; request service on behalf of their clients; and view and manage expiring orders.

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2. Develop a broader home services offering

        We see an opportunity to expand beyond repair services for home service plan customers by developing a lead generation engine for our contractor network, which we believe will increase

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customer satisfaction and enhance our contractor value proposition. Repair services make up only approximately 25 percent of the U.S. home services market, and home improvement and maintenance work is highly valued by our contractors. We see an asymmetrical opportunity to generate leads for our contractors at a low cost to them because it strengthens our relationship with our network and therefore benefits our core business.

        We see a large opportunity to develop on-demand services for convenience seekers. Customers' expectations are changing and we intend to develop new services that meet those expectations. Our industry-leading contractor network will allow us to offer services that focus on speed and convenience.

        Develop and expand service offerings.    We intend to continue to leverage our existing sales channels and service platform to deliver additional value-added services to our customers. Our product development teams draw upon the experience of technicians in the field to both create innovative customer solutions for the existing product suite and to identify service and category adjacencies. In the real estate channel, we have recently launched a new nationwide service offering of re-keying locks for recent home buyers with a home service plan, which enhances the value proposition of our service offering and has been well received in the marketplace. We are currently piloting a new offering of central HVAC pre-season check ups, which we expect to launch nationwide in 2019. Additionally, we are testing smart home technology services, which we think will add value to our plans and result in increases in renewals.

        As we seek to further expand our share in the home services market, we are exploring opportunities in on-demand service and property management to leverage our industry-leading repair services platform to provide new services to the nearly 120 million homeowners in the U.S. home services market.

        Pursue selective acquisitions.    We have a track record of sourcing and purchasing targets at attractive prices and successfully integrating them into our business. In 2016, we made two key acquisitions. In June 2016, we acquired OneGuard, and in November 2016, we acquired Landmark, which together resulted in over 100,000 new customers. We anticipate that the highly fragmented nature of the home service plan industry will continue to create opportunities for further consolidation, and, with our scale, we believe we are the acquirer of choice in the industry. In the future, we intend to continue to take advantage of strategic acquisition opportunities, particularly in underserved regions where we can enhance and expand service capabilities. We use acquisitions to cost-effectively grow our home service plan contract count and deepen our customer base in high-growth geographies and may consider strategic acquisitions that will expand our reach into the home services market.

3. Develop a world-class data platform that fuels our growth

        We have the opportunity to become the authoritative source of home information. We are constantly looking to leverage our data, and have identified additional opportunities to use technology to capture valuable home data, make it easier for customers and contractors to interact and ultimately enable us to anticipate repair needs before the customer is aware of them. We believe these investments will both improve the customer experience and reduce our operating expenses. We believe building this data platform will provide additional revenue opportunities as real estate companies, manufacturers and other companies within the U.S. home services market see the benefit of this data. We intend for this platform to be the definitive source of information for homeowners to understand industry quality and service trends to make informed decisions to maintain, improve or repair their home.

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Strengths

        We enjoy the benefits of a large and diverse base of talent, assets and service offerings, which have helped us develop into and retain our position as the established segment leader. The following strengths support our business strategies:

        Strong position in large, fragmented, growing segment.    We have the leading position in the U.S. home service plan segment with a 46 percent share in 2016. We have spent decades developing a reputation built on brand reputation, fairness of contract terms, including price, and timely response to service claims. As a result, we enjoy industry-leading brand awareness and a reputation for high-quality customer service, both of which serve as key drivers of our customer acquisition efforts. Our nationwide presence also allows us to effectively serve local residential customers and to capitalize on lead generation sources such as real estate agencies. We believe our size and scale provide us a competitive advantage in contractor selection, purchasing power and marketing and operating efficiencies compared to smaller local and regional competitors. Additionally, we have an opportunity to leverage our contractor network into the broader home services market.

        Diverse revenue stream across geographies.    We are diversified by customer acquisition channel, real estate and DTC, and geography, with operations in all 50 states and the District of Columbia. Our ability to acquire customers through multiple channels mitigates the effect of a downturn in the real estate market, while our nationwide presence limits the risk of poor economic conditions or adverse weather conditions in any particular geography affecting our operations. Therefore, we believe we are better insulated from adverse economic conditions than our smaller regional competitors.

        High-value service offerings resulting in high customer retention and recurring revenue.    We believe our high annual customer retention demonstrates the highly valued nature of our services and the high level of execution and customer service that we provide. As a result of our high retention and renewal rates and long-standing contractor and real estate relationships, we enjoy significant predictability and stability in our business. These factors limit the effect of adverse economic cycles on our revenue.

        Technology-enabled platform drives efficiency, quality of service and customer retention.    We believe our fully integrated, technology-enabled platform is a competitive advantage and differentiates us from our competitors. Our technology-enabled platform allows customers to procure and utilize their home service plan without ever having to use a customer care center if they so choose. Customers can purchase a home service plan, electronically chat with a representative, pay bills and track the progress of their service requests, all from their mobile device or personal computer. Further, for our contractor and real estate broker base, we have created a robust platform that allows them to serve our customers and place home service plans, respectively. We believe our fully integrated, technology-enabled platform provides a better customer experience, drives customer retention, allows for seamless interaction with our contractor and real estate broker base and provides operating efficiencies superior to our competitors.

        Capital-light business model.    Our business model is characterized by strong Adjusted EBITDA margins, negative working capital and limited capital expenditure requirements. Our recurring capital expenditure requirements are typically less than two percent of our annual revenue. We may, from time to time, make more significant investments in capability-expanding technology, including investments to develop a world-class data platform to fuel our growth. Net cash provided from operating activities increased by $10 million to $122 million for the six months ended June 30, 2018 compared to $112 million for the six months ended June 30, 2017. Net cash provided from operating activities in the six months ended June 30, 2018 comprised $92 million in earnings adjusted for non-cash charges and a $41 million decrease in cash required for working capital, offset, in part, by $11 million for cash payments

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related to restructuring and spin-off charges. Capital expenditures were $17 million and free cash flow was $105 million for the six months ended June 30, 2018.

        Net cash provided from operating activities increased by $39 million to $194 million for the year ended December 31, 2017 compared to $155 million for the year ended December 31, 2016 and $135 million for the year ended December 31, 2015. Net cash provided from operating activities in 2017 comprised $162 million in earnings adjusted for non-cash charges and a $31 million decrease in cash required for working capital. Capital expenditures were $15 million in 2017, $11 million in 2016, and $7 million in 2015. Free Cash Flow was $179 million, $144 million and $127 million for the years ended December 31, 2017, 2016 and 2015, respectively. For a reconciliation of Free Cash Flow to net cash provided from operating activities from continuing operations, which we consider to be the most directly comparable financial measure presented in accordance with generally accepted accounting principles, see "Selected Historical Combined Financial Data" and "Unaudited Pro Forma Combined Financial Data."

    Resilient financial model with track record of consistent performance.

        Solid revenue, net income and Adjusted EBITDA growth through business cycles.    Our combined revenue, net income and Adjusted EBITDA CAGR from 2013 through 2017 was 12 percent, 17 percent and 16 percent, respectively. Although we can be impacted by economic and housing downturns, our revenue and earnings remained stable during the last major downturn. We believe that this strong performance is attributable to the essential nature of our services, our strong value proposition and management's focus on driving results through strategic investment and operational execution.

        Solid margins with attractive operating leverage and productivity improvement initiatives.    Our business model enjoys inherent operating leverage stemming from fixed investments in infrastructure and technology, among other factors. We have demonstrated our ability to expand our margins through a variety of initiatives, including metric-driven continuous improvement in our customer care centers and targeted systems investments, which we believe will continue to increase self-service capabilities for our customers, and leveraging our size and scale to deepen and improve our contractor network. We estimate that we enjoy industry-leading gross margins, in many cases significantly outpacing our largest competitors in the U.S.

        Enhance our profitability.    We continue to invest in initiatives designed to maintain or improve our margins and drive profitable growth. We have been able to increase productivity through actions such as continuous process improvement and targeted systems investments which we believe will continue to increase self-service capabilities for our customers, contractors and realtors, resulting in lower customer acquisition and service costs. We also focus on strategically capitalizing on our purchasing power to achieve more favorable pricing and terms on repair parts and home systems and appliances when replacement is necessary. In addition, we have implemented tools and processes to centralize and systematize pricing decisions. These tools and processes enable us to optimize pricing at the geographic market and product level while creating a flexible and scalable pricing architecture that is fully scalable across our business. We intend to leverage these investments and identify further opportunities to enhance profitability.

        Multi-channel marketing approach supported by sophisticated consumer analytic modeling capabilities.    Our multi-channel marketing approach focuses on building the value of our brand and generating revenue by understanding the decisions consumers make at each stage in the purchase of home services. The effectiveness of our marketing efforts is demonstrated by an increase in lead generation and online sales. In the DTC channel, new home service plan lead generation has benefited from increased spending in marketing as well as improved digital marketing. Testing we have performed suggests that customers' intent to purchase increases by approximately two times after being presented with a basic description of how our home service plans work. We also have been deploying increasingly

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sophisticated consumer analytics models that allow us to more effectively segment our prospective customers and tailor campaigns towards them in order to keep cost-per-sale relatively flat. In addition, we have been successful with innovative ways of reaching and marketing to consumers, including content marketing, online reputation management and social media channels. Our marketing spend in 2017 was composed of digital (38 percent), direct mail (24 percent), broadcast (16 percent) and social & other (22 percent).

        Operational and customer service excellence driven by superior contractor development.    We are constantly focused on improving customer service. The customer experience is at the foundation of our business model, and we believe that each interaction between a customer and one of our independent contractors is an extension of our reputation. We employ rigorous contractor selection practices and continuously analyze ratings from customers to identify potential improvements in service and productivity.

        Experienced management team.    We have assembled a management team of highly experienced leaders who have track records of producing profitable growth in a wide variety of industries and economic conditions. Our management team is highly focused on execution and driving growth and profitability, and, as such, our compensation structure, including incentive compensation, is tied to key performance metrics that are designed to incentivize senior management to drive the long-term success of our business. Further, we believe that we have a deep pool of talent across our organization, including long-tenured individuals with significant expertise and knowledge of our business.

Sales and Marketing

        We market our services to homeowners on a national and local level through various means, including search engine marketing, content marketing, social media, direct mail, television and radio, print advertisements, marketing partnerships and telemarketing. We sell through our customer care centers, mobile-optimized e-commerce platform and national sales teams. Additionally, we partner with various participants in the residential real estate marketplace, such as real estate brokerages and insurance carriers.

        Real Estate channel.    We partner with various participants in the residential real estate marketplace, and we have a national real estate sales team that build relationships with real estate agents and brokers. We have over 150 field-based account executives and sales leaders who focus on a defined geographic area, and educate real estate agents within their territory about the benefits of a home service plan. In addition to our field-based account executives, we have nine account managers who operate out of a customer care center and a team of seven providing sales and marketing support.

        Direct to Consumer channel.    We market our services to homeowners on a national and local level through various means, including search engine marketing, content marketing, social media, direct mail, television and radio and print advertisements. We sell through our customer care centers and our mobile-optimized e-commerce platform.

Customers, Contractors, Suppliers and Geographies

        Customers.    As our customers are predominantly owners of single family residences, we do not have significant customer concentration. We had 2.0 million, 1.9 million and 1.6 million customers on December 31, 2017, 2016 and 2015, respectively.

        Contractors.    We have a network of more than 15,000 high quality, pre-qualified independent home service contracting firms. See "—Our value proposition—Professional contractor value proposition." The qualification process for a contractor includes assessing their online presence and customer reviews, gathering public information about the company, reviewing references from customers and other contractors, and confirming they meet all insurance and licensing standards. In

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addition, contractors must agree to our service requirements, such as timely appointments and follow-up with all customers, guaranteed work, professionalism, and availability. Our contractors are supported by a designated Contractor Relations Representative who guides them through the process of working with us, from on-boarding, to the first service call to continuous monitoring and training. No contractor accounts for more than five percent of our expenditures.

        Suppliers.    We have three national suppliers of repair parts and home systems and appliances that each account for more than 10 percent of our supplier spend—GE Appliances, Carrier Corporation and Marcone. However, supplier spend makes up only 15 percent of our cost of services rendered in 2017, and, with multiple national supplier agreements in place, the loss of any of our top suppliers would not have a material adverse effect on our business.

        Geographies.    A significant percentage of our revenue is concentrated in the southern and western regions of the U.S. California, Texas, Arizona and Florida collectively accounted for approximately 42 percent of our revenue in 2017. California, Texas, Arizona and Florida accounted for approximately 11 percent, 20 percent, seven percent and five percent, respectively, of our revenue in 2017.

Competition

        We compete in the home service plan industry and the broader U.S. home services market. The principal methods by which we differentiate ourselves from our competitors are quality and speed of service, brand awareness and reputation, customer satisfaction, pricing and promotions, contractor network and referrals. While we compete with a broad range of competitors in each locality and region, we are the only home service plan company providing home service plans in all 50 states and the District of Columbia. Our primary direct competitors are First American Financial Corporation and Old Republic International Corporation. We also compete in the broader home service market with HomeAdvisor (who also recently acquired Angie's List) and HomeServe. We believe our network of over 15,000 pre-qualified professional contractor firms, in combination with our large base of contracted customers, differentiates us from other platforms in the home services market.

Employees

        We expect to employ approximately 2,700 persons as of the distribution date, none of whom is represented by labor unions.

Intellectual Property

        We hold various service marks, trademarks and trade names, such as Frontdoor and American Home Shield, that we deem particularly important to our advertising and marketing activities. All of our key service marks and trademarks are protected by registration in the U.S.

Properties

        Our corporate headquarters is located in downtown Memphis, Tennessee, in a leased facility. We operate five customer care centers throughout the U.S. that field inbound claims calls and initiate sales calls. Those customer care centers are located in Carroll, Iowa; LaGrange, Georgia; Memphis, Tennessee; Phoenix, Arizona; and Salt Lake City, Utah. The facilities in Carroll and LaGrange are owned and the facilities in Memphis, Phoenix and Salt Lake City are leased. We believe that these facilities, when considered with our corporate headquarters, are suitable and adequate to support the needs of our business.

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Insurance

        ServiceMaster maintains insurance coverage that it believes is appropriate for the American Home Shield business, including workers' compensation, auto liability, general liability, umbrella and property insurance. In advance of the distribution, we intend to secure our own insurance policies, including workers' compensation, auto liability, general liability, umbrella and property insurance that will be effective as of the distribution date.

Regulatory Matters

        We are subject to various federal, state and local laws and regulations, compliance with which increases our operating costs, limits or restricts the services we provide or the methods by which we may offer, sell and fulfill those services or conduct our business, or subjects us to the possibility of regulatory actions or proceedings. Noncompliance with these laws and regulations can subject us to fines, loss of licenses or registrations or various forms of civil or criminal prosecution, any of which could have a material adverse effect on our reputation, business, financial position, results of operations and cash flows.

        These federal, state and local laws and regulations include laws relating to consumer protection, deceptive trade practices, licensing, wage and hour, state contractor laws, real estate settlements, workers' safety, tax, healthcare reforms, labor laws, environmental and employee benefits. We are regulated in certain states by the applicable state insurance regulatory authority and by the Real Estate Commission in Texas.

        We are subject to federal, state and local laws and regulations designed to protect consumers, including laws governing consumer privacy and fraud, the collection and use of consumer data, telemarketing and other forms of solicitation. The telemarketing rules adopted by the Federal Communications Commission pursuant to the Federal Telephone Consumer Protection Act and the Federal Telemarketing Sales Rule issued by the Federal Trade Commission govern our telephone sales practices. In addition, some states and local governing bodies have adopted laws and regulations targeted at direct telephone sales, i.e., "do-not-call" regulations. The implementation of these marketing regulations requires us to rely more extensively on other marketing methods and channels. In addition, if we were to fail to comply with any applicable law or regulation, we could be subject to substantial fines or damages, be involved in lawsuits, enforcement actions and other claims by third parties or governmental authorities, suffer losses to our reputation and our business or suffer the loss of licenses or registrations or incur penalties that may affect how the business is operated, which, in turn, could have a material adverse effect on our financial position, results of operations and cash flows.

Legal Proceedings

        In the ordinary course of conducting our business activities, we and our subsidiaries become involved in judicial, administrative and regulatory proceedings involving both private parties and governmental authorities. These proceedings include insured and uninsured matters that are brought on an individual, collective, representative and class action basis, and other proceedings involving regulatory, employment, general and commercial liability, automobile liability and other matters. We do not expect any of these proceedings to have a material effect on our reputation, business, financial position, results of operations or cash flows; however, we can give no assurance that the results of any such proceedings will not materially affect our reputation, business, financial position, results of operations and cash flows.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following information should be read in conjunction with the combined financial statements and related notes, and the unaudited pro forma combined financial statements and corresponding notes included elsewhere in this information statement. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this report, particularly in "—Cautionary Statement Concerning Forward-Looking Statements" and "Risk Factors."

The Spin-Off

        On July 26, 2017, ServiceMaster announced its intention to spin off the ownership and operations of its American Home Shield business into a stand-alone publicly traded company. To accomplish the separation, ServiceMaster has contributed the assets and liabilities of its American Home Shield business to Frontdoor and will distribute shares of Frontdoor common stock to ServiceMaster stockholders. We have received a favorable private letter ruling from the IRS regarding the tax-free treatment of the distribution to our stockholders. See "Material U.S. Federal lncome Tax Consequences." Following the distribution, ServiceMaster stockholders will own shares in both Frontdoor and ServiceMaster.

        Our financial statements include nonrecurring costs incurred to evaluate, plan and execute the spin-off. These costs are primarily related to third-party consulting and other incremental costs directly associated with the spin-off process. Our results for the six months ended June 30, 2018 and the year ended December 31, 2017 include charges of $15 million and $13 million, respectively, related to the spin-off. We expect to incur aggregate spin-off charges of $35 million to $45 million in 2018 related to the spin-off. In addition, we expect incremental capital expenditures will be required to effect the spin-off in 2018 and will range from $20 million to $30 million in the aggregate, principally reflecting costs to replicate information technology systems historically shared with ServiceMaster.

        The separation into two independent public companies is expected to result in increased operating costs, which could be material to our results of operations. These increased costs are primarily associated with corporate functions such as finance, legal, information technology and human resources. We are currently evaluating the optimal structure of corporate functions to support the strategic objectives of our business as an independent public entity subsequent to the spin-off and estimate the increased operating costs will be approximately $5 million in 2018. Dis-synergies for the six months ended June 30, 2018 were $1 million. For full-year 2019, we currently project dis-synergies of approximately $6 million.

Basis of Presentation

        Throughout the period covered by the combined financial statements, we did not operate as a separate entity, and stand-alone separate financial statements historically have not been prepared. We are composed of certain stand-alone legal entities for which discrete financial information is available. The accompanying combined financial statements have been prepared on a stand-alone basis and are derived from ServiceMaster's consolidated financial statements and accounting records, using ServiceMaster's historical basis in our assets and liabilities before the distribution. These combined financial statements reflect our financial position, results of operations and cash flows in conformity with GAAP. Our financial position, results of operations and cash flows may not be indicative of our condition had we been a separate stand-alone entity during the periods presented, nor are the results stated herein indicative of what our financial position, results of operations and cash flows would have been had we operated as a separate, independent company during the periods presented. The

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combined financial statements included herein do not reflect any changes that may occur in our financing and operations as a result of the distribution.

        The combined financial statements include all revenues, costs, assets and liabilities directly attributable to us. The combined statements of operations and comprehensive income include allocations of certain costs from ServiceMaster incurred on our behalf. Such corporate-level costs are being allocated to us using methods based on proportionate formulas such as revenue, headcount and others. Such corporate costs include costs pertaining to: accounting and finance, legal, human resources, information technology, insurance, marketing, tax services, procurement services and other costs. We consider the expense allocation methodology and results to be reasonable for all periods presented. However, these allocations may not be indicative of the actual level of expense that we would have incurred if we had operated as a separate independent, publicly traded company during the periods presented, nor are these costs indicative of what we may incur in the future.

        Current and deferred income taxes and related tax expense have been determined based on our stand-alone results by applying Accounting Standards Codification ("ASC") 740, "Income Taxes," issued by the Financial Accounting Standards Board ("FASB"), as if we were a separate taxpayer, following the separate return methodology (see Note 5). Our portion of current income taxes payable is deemed to have been remitted to ServiceMaster in the period the related tax expense was recorded. Our portion of current income taxes receivable is deemed to have been remitted to us by ServiceMaster in the period to which the receivable applies only to the extent that we could have recognized a refund of such taxes on a stand-alone basis under the law of the relevant taxing jurisdiction.

        Cash and cash equivalents included in the combined statements of financial position reflects cash and cash equivalents that are specifically attributable to us. ServiceMaster's debt and interest thereon has not been allocated to us for any of the periods presented since we are not the legal obligor of the debt.

        ServiceMaster maintains various stock-based compensation and employee benefit plans at a corporate level. Our employees participate in those plans, and a portion of the cost of those plans is included in our combined financial statements. See Note 10 and Note 11 in the audited annual combined financial statements for a further description of the accounting for stock-based compensation and employee benefit plans, respectively.

Overview

        Our core services include providing plans that cover the repair or replacement of major components of up to 21 home systems and appliances, including electrical, plumbing, central HVAC systems, water heaters, refrigerators, dishwashers and ranges/ovens/cooktops under the American Home Shield, HSA, OneGuard and Landmark brands. We serve residential customers, across all 50 states and the District of Columbia. Additionally, we operate and take service calls 24 hours a day, seven days a week. For the six months ended June 30, 2018, our total operating revenue included 66 percent of revenue derived from existing contract renewals, while 22 percent and 12 percent were derived from sales made in conjunction with existing home resale transactions and direct-to-consumer sales, respectively. For the year ended December 31, 2017, our total operating revenue included 66 percent of revenue derived from existing contract renewals, while 22 percent and 12 percent were derived from sales made in conjunction with existing home resale transactions and direct-to-consumer sales, respectively. We present these operations in our combined financial statements in one reportable segment.

U.S. Federal Income Tax Reform

        On December 22, 2017, U.S. Tax Reform was signed into law. The Act includes numerous changes in existing tax law, including a permanent reduction in the federal corporate income tax rate from

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35 percent to 21 percent, which will reduce our effective tax rate and cash tax payments, beginning in 2018. The rate reduction took effect on January 1, 2018; however, the Act was signed in 2017 and had an immediate one-time effect of an income tax benefit of $20 million for the year ended December 31, 2017. See Note 5 to the annual combined financial statements for more details.

        Some of the provisions of the Act have the potential to affect us adversely, including but not limited to an expansion to the limitation on the deductibility of certain employee compensation. We do not expect the provisions set forth by the Act to have a significant adverse impact on our effective tax rate. This list is not comprehensive and represents our current views on the potential impacts of the Act; however, these views are subject to change as additional guidance becomes available and further analysis is completed.

Key Business Metrics

        We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and performance of our business. These metrics include:

    revenue;

    operating expenses;

    net income;

    Adjusted EBITDA;

    organic revenue growth;

    customer retention rates; and

    growth in renewable home service plans.

        To the extent applicable, these measures are evaluated with and without impairment, restructuring and other charges that management believes are not indicative of the earnings capability of our businesses. We also focus on measures designed to monitor cash flow, including net cash provided from operating activities and free cash flow.

        Revenue.    Our revenue is primarily a function of the volume and pricing of the services provided to our customers, as well as the mix of services provided. Our revenue volume is impacted by new unit sales, customer retention and acquisitions. We currently only serve residential customers in the U.S.

        Operating Expenses.    In addition to changes in our revenue, our operating results are affected by, among other things, the level of our operating expenses. A number of our operating expenses are subject to inflationary pressures, such as wages and salaries, employee benefits and health care, contractor costs, home systems, appliances and repair parts, self-insurance costs and other insurance premiums, as well as various regulatory compliance costs.

        Net Income.    Net income is computed by subtracting all operating and non-operating expenses and taxes from our annual total revenue. The presentation of net income provides GAAP measures of performance that are useful for investors, analysts and other interested parties in company-to-company operating performance comparisons.

        Adjusted EBITDA.    We evaluate performance and allocate resources based primarily on Adjusted EBITDA, which is a financial measure not calculated in accordance with GAAP. We define Adjusted EBITDA as net income before: provision for income taxes; interest expense; interest income from affiliate; depreciation and amortization expense; non-cash stock-based compensation expense; restructuring charges; non-cash impairment of software and other related costs; affiliate royalty expense; spin-off charges; (gain) loss on insured home service plan claims; and other non-operating

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expenses. We believe Adjusted EBITDA is useful for investors, analysts and other interested parties as it facilitates company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives, spin-off charges, arrangements with affiliates and equity-based, long-term incentive plans.

        Organic Revenue Growth.    We evaluate organic revenue growth to track performance of our business, including the impacts of sales, pricing, new service offerings and other growth initiatives. Organic revenue growth excludes revenue from acquired customers for 12 months following the acquisition date.

        Customer Retention Rates and Growth.    We report our customer retention rates and growth in renewable home service plans in order to track the performance of our business. Renewable home service plans represent our recurring customer base, which includes customers with active contracts for recurring services. Retention rates are calculated as the ratio of ending renewable home service plans to the sum of beginning renewable home service plans, new sales and acquired accounts for the applicable period. These measures are presented on a rolling, 12-month basis in order to avoid seasonal anomalies.

Seasonality

        Our business is subject to seasonal fluctuations, which drives variations in our revenue and Adjusted EBITDA for interim periods. In 2017, approximately 20 percent, 28 percent, 30 percent and 22 percent of our revenue and approximately 12 percent, 32 percent, 37 percent and 20 percent of our Adjusted EBITDA was recognized in the first, second, third and fourth quarters, respectively.

Effect of Weather Conditions

        The demand for our services, and our results of operations, are affected by weather conditions. Extreme temperatures can lead to an increase in service requests related to home systems, particularly central HVAC systems, resulting in higher claim frequency and costs and lower profitability, while mild temperatures in the winters or summers can lead to lower home systems claim frequency. For example, in the second quarter of 2018, we experienced an increase in contract claims cost driven by a higher number of central HVAC work orders driven by higher summer temperatures. Weather conditions that have a potentially favorable impact to our business include mild winters or summers, which can lead to lower home systems claim frequency.

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Results of Operations

For the six months ended June 30, 2018 and 2017

 
  Six Months
Ended
June 30,
  Increase
(Decrease)
  % of
Revenue
 
(In millions)
  2018   2017   2018 vs. 2017   2018   2017  

Revenue

  $ 602   $ 553     9 %   100 %   100 %

Cost of services rendered

    330     285     16     55     52  

Selling and administrative expenses

    169     158     7     28     29  

Depreciation expense

    5     4     25     1     1  

Amortization expense

    4     4         1     1  

Restructuring charges

    3     1       *        

Spin-off charges

    15           *   2      

Affiliate royalty expense

    1     1       *        

Interest income from affiliate

    (1 )   (1 )     *        

Interest and net investment income

    (1 )   (1 )     *        

Other

        1       *        

Income before Income Taxes

    78     100     (22 )   13     18  

Provision for income taxes

    20     37     (48 )   3     7  

Net Income

  $ 58   $ 63     (7 )%   10 %   11 %

*
not meaningful

Revenue

        We reported revenue of $602 million and $553 million for the six months ended June 30, 2018 and 2017, respectively, a nine percent increase.

 
  Six months
ended
June 30,
   
   
 
(In millions)
  2018   2017   Growth  

Renewals

  $ 398   $ 362   $ 36     10 %

Real estate

    127     120     7     6  

Direct to consumer

    75     69     5     8  

Other

    3     2     1       *

Total revenue

  $ 602   $ 553   $ 49     9 %

*
not meaningful

        Renewal revenue increased 10 percent reflecting the overall growth in home service plans as well as improved price realization.

        Real estate and direct to consumer revenue increased six percent and eight percent, respectively, reflecting growth in new unit sales.

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        The growth in renewable home service plan contract counts and customer retention are presented below.

 
  As of
June 30,
 
 
  2018   2017(1)  

Growth in Home Service Plans

    6 %   11 %

Customer Retention Rate

    75 %   75 %

(1)
As of June 30, 2017, excluding the impact of acquisitions, the growth in renewable home service plans was six percent and the customer retention rate was 75 percent.

Cost of Services Rendered

        We reported cost of services rendered of $330 million and $285 million for the six months ended June 30, 2018 and 2017, respectively. The following table provides a summary of changes in cost of services rendered:

(In millions)
   
 

Six Months Ended June 30, 2017

  $ 285  

Impact of change in revenue

    17  

Contract claims

    28  

Gain on insured home service plan claims(1)

    (2 )

Other

    1  

Six Months Ended June 30, 2018

  $ 330