<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 6, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
THE SERVICEMASTER COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
DELAWARE 8741 36-3858106
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION NUMBER)
ORGANIZATION) --------------
ONE SERVICEMASTER WAY
DOWNERS GROVE, ILLINOIS 60515-1700
(630) 271-1300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
VERNON T. SQUIRES
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
THE SERVICEMASTER COMPANY
ONE SERVICEMASTER WAY, DOWNERS GROVE, ILLINOIS 60515-1700
(630) 271-1300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPIES TO
WILLIAM D. GUTERMUTH ROBERT H. KINDERMAN
BRACEWELL & PATTERSON, L.L.P. KIRKLAND & ELLIS
2900 SOUTH TOWER PENNZOIL PLACE, 711 200 EAST RANDOLPH DRIVE
LOUISIANA STREET CHICAGO, ILLINOIS 60601-6636
HOUSTON, TEXAS 77002-2781 (312) 861-2000
(713) 223-2900
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement and the
satisfaction of the conditions to the merger of SVM Acquisition Corporation, a
wholly-owned subsidiary of the Registrant, with and into LandCare USA, Inc.
(the "Merger") pursuant to a Plan of Reorganization and Agreement and Plan of
Merger by and among the Registrant, SVM Acquisition Corporation and LandCare
USA, Inc.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
--------------
CALCULATION OF REGISTRATION FEE
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE PRICE PER OFFERING PRICE REGISTRATION
TO BE REGISTERED REGISTERED (1) UNIT (2) (2) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value
$0.01 per share, and
related Preferred
Stock Purchase
Rights............... 11,000,000 $9.72 $178,733,274.84 $49,687.85
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</TABLE>
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(1) The securities being registered represent the maximum number of shares of
Common Stock and related Preferred Stock Purchase Rights anticipated to be
issued in the Merger.
(2) Calculated in accordance with Rule 457(f)(1) under the Securities Act of
1933, as amended. The proposed maximum offering price per share is based on
the product of (i) $9.72 (the average of the high and low prices of common
stock, par value $0.01 per share, of LandCare USA, Inc. ("LandCare Stock")
on January 4, 1999) multiplied by (ii) 18,388,197 (the number of shares of
LandCare Stock anticipated to be outstanding at the time of the Merger).
The proposed maximum offering price per share is based upon the proposed
maximum aggregate offering price divided by the number of shares to be
registered.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
LandCare USA, Inc.
2603 Augusta, Suite 1300
Houston, Texas 77057
Dear LandCare shareholder:
LandCare has entered into a merger agreement with The ServiceMaster Company.
Upon completion of the merger, LandCare will become a subsidiary of
ServiceMaster and your LandCare common stock will be converted into
ServiceMaster common stock based on an exchange ratio established under the
merger agreement.
Given the market prices of ServiceMaster and LandCare stock that prevailed
immediately before the merger agreement was announced on November 2, 1998, the
exchange ratio was designed to enable you to exchange your LandCare common
stock for ServiceMaster common stock having a significantly higher market
value. The market value of ServiceMaster stock you actually receive will of
course depend on the trading prices of ServiceMaster stock on the New York
Stock Exchange in the future. Based on the market price of $[ ] per
ServiceMaster share that prevailed on [ ], 1999, the market
value of the ServiceMaster stock issuable in exchange for each of your
LandCare shares would be $11.00 per LandCare share. This price would represent
a substantial premium for you over the closing price of $8.00 for LandCare
stock on October 30, 1998 (the last trading day prior to the announcement of
the merger agreement) and over the average price ($6.34 per share) at which
LandCare stock traded between its initial public offering on June 5, 1998 and
October 30, 1998.
In order for the merger to become effective, it must first be approved by
the LandCare stockholders. Enclosed with this letter is a proxy card you can
use to cast your vote with respect to the merger. The LandCare Board of
Directors has determined that the merger is in the best interests of LandCare
shareholders and recommends that you vote for the merger.
The enclosed proxy statement/prospectus provides additional information
about the merger, and we encourage you to carefully read it. ServiceMaster has
retained D.F. King & Co., Inc. to solicit voters in favor of the merger and to
assist you with any questions you may have. Should you have questions, please
feel free to call D.F. King at 1-800 488-8095.
Sincerely,
William F. Murdy
Chairman, President and Chief
Executive Officer
LandCare USA, Inc.
IMPORTANT: PLEASE MARK, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE.
<PAGE>
LANDCARE USA, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
DATE:, 1999
TIME:A.M., LOCAL TIME
PLACE: LANDCARE USA, INC.
2603 AUGUSTA, SUITE 1300
HOUSTON, TEXAS 77057
Dear LandCare Stockholder:
We invite you to attend our special meeting to consider and vote on the
following:
1. The proposal to adopt the merger agreement entered into by LandCare
and The ServiceMaster Company. Under the merger agreement, you will receive
a fraction of a share of ServiceMaster common stock for each share of
LandCare common stock that you own and LandCare will become a wholly-owned
subsidiary of ServiceMaster. This ServiceMaster fractional share will be
valued at not more than $11.00. There is no guarantee of a minimum value
for each ServiceMaster fractional share; however, if the value of this
fractional share is less than $9.00, LandCare may terminate the merger. THE
LANDCARE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN FAVOR OF APPROVAL
OF THE MERGER AGREEMENT.
2. Such other business as may properly come before the special meeting
(or any adjournments or postponements thereof).
APPROVAL OF THE MERGER AGREEMENT BY THE LANDCARE STOCKHOLDERS IS A CONDITION
TO THE COMPLETION OF THE MERGER. APPROVAL OF THE MERGER AGREEMENT REQUIRES THE
AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF
LANDCARE COMMON STOCK.
If you were a stockholder of record at the close of business on
[ ], 1999, you may vote at the special meeting. A list of the
LandCare stockholders of record on the close of business on this date will be
available for inspection at least ten days prior to [ ], 1999 at the
offices of LandCare during regular business hours.
For further information regarding the merger, we urge you to read carefully
the accompanying Proxy Statement/Prospectus and the copy of the merger
agreement attached thereto as Appendix A.
Please take the time to vote by completing and signing the enclosed proxy
card and mailing it to us in the enclosed postage-prepaid envelope. If you
attend the special meeting, you may vote your shares in person even if you
have previously submitted a proxy card. If your shares are held in "street
name," you must instruct your broker in order to vote. YOUR VOTE IS VERY
IMPORTANT. If you sign and send in your proxy and do not indicate how you want
to vote, your proxy will be counted as a vote for the merger agreement. If you
fail to vote or to instruct your broker to vote your shares, the effect will
be the same as a vote against the merger agreement.
By order of the LandCare Board of
Directors,
William L. Fiedler
Secretary
[ ], 1999
Houston, Texas
YOUR VOTE IS IMPORTANT!
TO VOTE YOUR SHARES, PLEASE COMPLETE, SIGN, DATE
AND MAIL THE ENCLOSED PROXY CARD.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME.
<PAGE>
[logo of servicemaster]
[logo of landcare]
MERGER PROPOSAL--YOUR VOTE IS VERY IMPORTANT
The ServiceMaster Company and LandCare USA, Inc. have entered into a merger
agreement. In the proposed merger, you will receive a fraction of a share of
ServiceMaster common stock for each outstanding share of LandCare common stock
that you own and LandCare will become a wholly-owned subsidiary of
ServiceMaster. This ServiceMaster fractional share will be valued at not more
than $11.00. There is no guarantee of a minimum value for each ServiceMaster
fractional share; however, if the value of the fractional share is less than
$9.00, LandCare may call off the merger.
We estimate that the shares of ServiceMaster common stock to be issued to
LandCare stockholders will represent approximately 3.0% of the outstanding
shares of ServiceMaster common stock after the merger.
The merger cannot be completed unless the LandCare stockholders approve the
merger agreement. Approval of the merger agreement requires the affirmative
vote of the holders of a majority of the outstanding shares of LandCare common
stock. LandCare has scheduled a special meeting for its stockholders to vote
on the merger agreement as described in this Proxy Statement/Prospectus.
Please take the time to vote by completing and signing the enclosed proxy
card and mailing it in the enclosed postage-prepaid envelope. If you attend
the LandCare special meeting, you may vote your shares in person even if you
have previously submitted a proxy card. If your shares are held in "street
name," you must instruct your broker in order to vote. YOUR VOTE IS VERY
IMPORTANT. If you sign and send in your proxy and do not indicate how you want
to vote, your proxy will be counted as a vote for the merger agreement. If you
fail to vote or to instruct your broker to vote your shares, the effect will
be the same as a vote against the merger agreement.
If you were a LandCare stockholder of record at the close of business on
[ ], 1999, you may vote at the LandCare special meeting. The date,
time and place of the LandCare special meeting are as follows:
[ ], 1999
[ ] a.m., Local Time
LandCare USA, Inc.
2603 Augusta, Suite 1300
Houston, Texas 77057
This Proxy Statement/Prospectus provides you with detailed information about
the proposed merger. We encourage you to read this entire document carefully.
In addition, you may obtain information about our companies from documents
that we have filed with the Securities and Exchange Commission.
NEITHER THE SEC NOR ANY STATE SECURITIES REGULATORS HAVE APPROVED THE
SERVICEMASTER COMMON STOCK TO BE ISSUED UNDER THIS PROXY
STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Proxy Statement/Prospectus dated [ ], 1999,
and first mailed to stockholders on [ ], 1999.
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why is the merger proposed?
A: ServiceMaster and LandCare are proposing the merger because the board of
directors of each of the companies has concluded that the merger is in the
best interests of its stockholders. In the case of LandCare, the merger
resolves difficult issues regarding the ability of LandCare to finance on an
acceptable basis its business plan (including its acquisition program) and
is expected to provide many of the LandCare stockholders with a significant
gain on their investment and a substantial premium over the trading price of
LandCare common stock that prevailed prior to the announcement of the
merger. In the case of ServiceMaster, the merger represents a significant
step forward in its commercial landscaping business.
Q: What will I receive in the merger?
A: Under the merger agreement, you will receive a fraction of a share of
ServiceMaster common stock for each share of LandCare common stock that you
own and LandCare will become a wholly-owned subsidiary of ServiceMaster.
This ServiceMaster fractional share will be valued at not more than $11.00.
The value of the ServiceMaster stock you actually receive in the merger will
depend on the market price for ServiceMaster stock in the 20 trading day
period ending , 1999 (which is three trading days prior to the
scheduled date of the LandCare special meeting). If the average closing
price for ServiceMaster stock during this period is $20.00 per share or
higher, then the value of each ServiceMaster fractional share you receive
will be $11.00. If the average closing price is less than $20.00, the value
of each ServiceMaster fractional share you receive will be less than $11.00.
There is no guarantee of a minimum value for each ServiceMaster fractional
share; however, if the value of the fractional share is less than $9.00,
LandCare may call off the merger.
Q: Does LandCare recommend voting in favor of the merger?
A: Yes. The LandCare Board of Directors recommends that LandCare stockholders
vote in favor of the merger agreement.
Q: How do I vote?
A: Simply indicate on your proxy card how you want to vote, sign and mail your
proxy card in the enclosed return envelope as soon as possible so that your
shares may be represented at the LandCare special meeting. If you sign and
send in your proxy and do not indicate how you want to vote, your proxy will
be counted as a vote for the merger agreement. If you fail to either return
your proxy card or vote in person at the LandCare special meeting, the
effect will be the same as a vote against the merger agreement.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will not vote your shares for you unless you provide
instructions to your broker on how to vote. It is important therefore that
you follow the directions provided by your broker regarding how to instruct
your broker to vote your shares. If you fail to instruct your broker how to
vote your shares, the effect will be the same as a vote against the merger
agreement.
i
<PAGE>
Q: May I change my vote after I have mailed my signed proxy card?
A: Yes. You may change your vote at any time before your proxy is voted at the
LandCare special meeting. If your shares are held in your name you may do
this in one of three ways. First, you may send a written notice stating that
you would like to revoke your proxy. Second, you may complete and submit a
new proxy card. If you choose either of these two methods, you must submit
your notice of revocation or your new proxy card to LandCare at the address
at the top of the LandCare notice of special meeting. Third, you may attend
the meeting and vote in person if you tell the Secretary that you want to
cancel your proxy and vote in person. Simply attending the LandCare special
meeting, however, will not revoke your proxy. If you have instructed a
broker to vote your shares, you must follow directions received from your
broker to change your vote or to vote at the LandCare special meeting.
Q: Should I send in my LandCare stock certificates now?
A: No. After the merger is completed, we will send you written instructions for
exchanging your stock certificates.
Q: When do you expect the merger to be completed?
A: We are working toward completing the merger as quickly as possible. We
currently expect to complete the merger before March 31, 1999.
Q: Why have you sent me this document?
A: This Proxy Statement/Prospectus contains important information regarding the
proposed merger, as well as information about ServiceMaster and LandCare. It
also contains important information about what the LandCare Board of
Directors and management considered in evaluating the proposed merger. We
urge you to read this Proxy Statement/Prospectus carefully, including its
Appendices. You may also want to review the documents referenced under
"Where You Can Find More Information." For information about where to call
to get answers to your questions, see "Who Can Help Answer Your Questions"
on the next page.
ii
<PAGE>
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have more questions about the merger, you should contact the
solicitation agent:
D.F. King & Co., Inc.
77 Water Street, 20th floor
New York, New York 10005
Telephone: (800) 488-8095
Web Site: http://www.dfking.com
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER.................................... i
WHO CAN HELP ANSWER YOUR QUESTIONS........................................ iii
SUMMARY................................................................... 1
The Companies........................................................... 1
The LandCare Special Meeting............................................ 1
Reasons For the Merger.................................................. 1
Recommendation to LandCare Stockholders................................. 2
Opinion of Financial Advisor............................................ 2
The Merger Agreement.................................................... 2
What LandCare Stockholders Will Receive................................. 2
Stockholder Vote Required to Approve the Merger......................... 2
Interests of Certain Persons in the Merger.............................. 3
Conditions to the Merger................................................ 3
Termination of the Merger Agreement..................................... 3
Termination Fees........................................................ 4
Accounting Treatment.................................................... 4
Certain Federal Income Tax Consequences................................. 4
No Right of Dissent..................................................... 4
SELECTED FINANCIAL INFORMATION............................................ 5
ServiceMaster Historical Financial Information.......................... 5
LandCare Historical and Pro Forma Financial Information................. 6
Selected Pro Forma Financial Information................................ 8
Equivalent and Comparative Per Share Data............................... 9
Comparative Stock Prices................................................ 10
LANDCARE SPECIAL MEETING, VOTING AND PROXIES.............................. 11
General................................................................. 11
Record Date and Voting.................................................. 11
Voting and Revocation of Proxies........................................ 12
THE MERGER................................................................ 14
Background of the Merger................................................ 14
Recommendation of the Board of Directors of LandCare; Reasons for the
Merger................................................................. 17
</TABLE>
<TABLE>
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PAGE
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<S> <C>
Fairness Opinion........................................................ 18
Interests of Certain Persons in the Merger.............................. 23
Voting Agreements....................................................... 25
Accounting Treatment of the Merger...................................... 25
Certain Federal Regulatory Matters...................................... 25
Certain Federal Income Tax Consequences................................. 26
Delisting and Deregistration of LandCare Common Stock; Listing of
ServiceMaster Common Stock Issued in Connection with the Merger........ 27
No Right of Dissent..................................................... 27
Resales of ServiceMaster Common Stock Issued in Connection with the
Merger................................................................. 27
Cautionary Statements Concerning Forward-Looking Statements............. 28
THE MERGER AGREEMENT...................................................... 30
The Merger.............................................................. 30
Conversion of Shares.................................................... 30
Merger Consideration.................................................... 30
Fractional Shares....................................................... 32
Certain Adjustments..................................................... 32
Surrender and Payment................................................... 32
Failure to Exchange..................................................... 33
Dividends and Distributions............................................. 33
Lost Certificates....................................................... 33
Conditions to the Merger; Governmental Regulatory Approvals............. 34
Representations and Warranties.......................................... 34
Conduct of Business Pending the Merger.................................. 35
Pipeline Acquisitions; Certain Related Termination Rights............... 36
LandCare Stock Options.................................................. 37
No Solicitation......................................................... 37
Indemnification......................................................... 38
Termination............................................................. 38
Termination Fees........................................................ 39
Fees and Expenses....................................................... 40
Amendment and Waiver.................................................... 40
DESCRIPTION OF SERVICEMASTER CAPITAL STOCK................................ 41
General................................................................. 41
Common Stock............................................................ 41
Stock Purchase Rights................................................... 41
Preferred Stock......................................................... 42
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
Certain Provisions of the Restated Certificate and By-Laws............. 42
Certain Anti-Takeover Provisions of Delaware Law....................... 44
COMPARATIVE RIGHTS OF COMMON STOCK....................................... 45
BUSINESS OF LANDCARE..................................................... 51
Industry Overview...................................................... 51
Services Provided...................................................... 52
Strategy............................................................... 53
Acquisition Program.................................................... 54
Operations............................................................. 54
Customers.............................................................. 56
Sales and Marketing.................................................... 56
Sources of Supply...................................................... 57
Employees.............................................................. 57
Recruiting, Training and Safety........................................ 57
Facilities; Vehicles and Maintenance................................... 58
Risk Management, Insurance and Litigation.............................. 58
Competition............................................................ 59
Regulation and Environmental Matters................................... 59
Year 2000 Compliance................................................... 60
LANDCARE SELECTED FINANCIAL DATA AND OTHER INFORMATION................... 62
LANDCARE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 64
Introduction........................................................... 64
LandCare Historical Results for the Nine Month Periods Ended September
30, 1998 and 1997..................................................... 65
LandCare Historical Results for the Years Ended 1997 and 1996.......... 66
LandCare Historical Results for the Years Ended 1996 and 1995.......... 66
Liquidity and Capital Resources........................................ 67
COMPARATIVE MARKET PRICES AND DIVIDENDS.................................. 69
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
LANDCARE................................................................ 70
UNAUDITED PRO FORMA FINANCIAL INFORMATION................................ 72
</TABLE>
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<S> <C>
THE SERVICEMASTER COMPANY PRO FORMA CONSOLIDATED SUMMARY OF OPERATIONS
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1998........................ 73
THE SERVICEMASTER COMPANY PRO FORMA CONSOLIDATED SUMMARY OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997............................................ 74
THE SERVICEMASTER COMPANY PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)............................................................. 76
LEGAL OPINION............................................................ 78
EXPERTS.................................................................. 78
WHERE YOU CAN FIND MORE INFORMATION...................................... 79
LANDCARE FINANCIAL STATEMENTS............................................ F-1
APPENDIX A
PLAN OF REORGANIZATION AND AGREEMENT AND PLAN OF MERGER................ A-1
APPENDIX B
OPINION OF BT ALEX. BROWN INCORPORATED................................. B-1
</TABLE>
v
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document and the documents to
which we have referred you. See "Where You Can Find More Information" on page
79. We have included page references parenthetically to direct you to a more
complete description of the topics in this summary.
THE COMPANIES
THE SERVICEMASTER COMPANY
One ServiceMaster Way
Downers Grove, Illinois 60515-1700
(630) 271-1300
ServiceMaster, with operating revenue of approximately $4 billion in 1997, is
one of the largest providers of residential services to individual customers
and supportive management services to businesses and institutions in the United
States. ServiceMaster common stock is traded on the New York Stock Exchange
under the symbol SVM.
The consumer services business of ServiceMaster provides services to over 9.6
million residential and commercial customers under eight market-leading brand
names: TruGreen-ChemLawn for lawn, tree and shrub care and commercial landscape
and indoor plant maintenance; Terminix for termite and pest control services;
American Home Shield and AmeriSpec for home system and appliance warranty
contracts and home inspection services; Rescue Rooter for plumbing and drain
cleaning services; ServiceMaster Residential/Commercial Services for heavy-duty
residential and commercial cleaning and disaster restoration services; Merry
Maids for residential maid services; and Furniture Medic for on-site furniture
repair and restoration services. The management services business of
ServiceMaster provides facilities management services to over 2,000 customers
in the health care, education, and business and industrial markets. These
services include plant operations and maintenance, housekeeping, grounds and
landscaping management, clinical equipment management, food service, laundry
and linen services, total facilities management and other services.
LANDCARE USA, INC.
2603 Augusta, Suite 1300
Houston, Texas 77057
(713) 965-0336
LandCare was established in connection with its June 1998 initial public
offering to become one of the leading national providers of comprehensive
landscape and tree services to commercial and institutional customers. LandCare
provides landscape installation and landscape maintenance services to regional
and national property owners and managers, real estate developers,
corporations, universities and governmental entities. LandCare also provides
tree services, which primarily consist of clearing trees away from utility
lines for its utility customers. LandCare common stock is traded on the New
York Stock Exchange under the symbol GRW.
THE LANDCARE SPECIAL MEETING
(Page 11)
The LandCare special meeting will be held at the principal executive offices
of LandCare at 2603 Augusta, Suite 1300, Houston, Texas 77057, at [ ]
a.m., local time, on [ ], 1999.
REASONS FOR THE MERGER
(Page 17)
ServiceMaster and LandCare are proposing the merger because the board of
directors of each of the companies has concluded that the merger is in the best
interests of its stockholders. In the case of LandCare, the merger resolves
difficult issues regarding the ability of LandCare to finance on an acceptable
basis its business plan (including its acquisition program) and is expected to
provide many of the LandCare stockholders with a significant gain on their
investment and a substantial premium over the trading price of LandCare common
stock that prevailed prior to the
1
<PAGE>
announcement of the merger. In the case of ServiceMaster, the merger represents
a significant step forward in the commercial landscaping business of its
TruGreen subsidiary.
RECOMMENDATION TO LANDCARE STOCKHOLDERS
(Page 17)
The LandCare Board of Directors has approved the merger agreement. The
LandCare Board of Directors believes that the merger is in your best interest
and recommends that you vote FOR the proposal to adopt the merger agreement.
While the LandCare Board of Directors is permitted under certain
circumstances to withdraw or modify its recommendation on the merger agreement,
LandCare would still be required by the merger agreement to hold the special
meeting and submit the proposal to adopt the merger agreement to its
stockholders.
OPINION OF FINANCIAL ADVISOR
(Page 18)
In deciding to approve the merger, the LandCare Board of Directors considered
an opinion from its financial advisor, BT Alex. Brown Incorporated, as to the
fairness of the exchange ratio from a financial point of view. This opinion is
attached as Appendix B to this Proxy Statement/Prospectus and you are
encouraged to read it.
THE MERGER AGREEMENT
(Page 30)
The merger agreement is attached as Appendix A to this Proxy
Statement/Prospectus. We encourage you to read the merger agreement because it
is the legal document that governs the merger.
WHAT LANDCARE STOCKHOLDERS WILL RECEIVE
(Page 30)
As a result of the merger, you will receive a fraction of a share of
ServiceMaster common stock for each share of LandCare common stock that you own
and LandCare will become a wholly-owned subsidiary of ServiceMaster. This
ServiceMaster fractional share will be valued at not more than $11.00. The
value of the ServiceMaster stock you actually receive in the merger will depend
on the market price for ServiceMaster stock in the 20 trading day period ending
, 1999 (which is three trading days prior to the scheduled date of the
LandCare special meeting). If the average closing price for ServiceMaster stock
during this period is $20.00 per share or higher, then the value of each
ServiceMaster fractional share you receive will be $11.00. If this average
closing price is less than $20.00, the value of each ServiceMaster fractional
share you receive will be less than $11.00. There is no guarantee of a minimum
value for each ServiceMaster fractional share; however, if the value of this
fractional share is less than $9.00, LandCare may call off the merger.
All references to the value of the ServiceMaster fractional share you will
receive for each of your LandCare shares will be based on the average closing
price for ServiceMaster stock during the 20 consecutive trading days ending
[ ], 1999. The market value of ServiceMaster stock you receive in the
merger will of course depend on the results of the trading in ServiceMaster
stock on the New York Stock Exchange after that period.
Following the merger, LandCare stockholders will own approximately 3.0% of
the outstanding shares of ServiceMaster common stock.
LandCare stockholders should retain their stock certificates until otherwise
instructed after the merger is completed.
STOCKHOLDER VOTE REQUIRED TO APPROVE THE MERGER
(Page 11)
Approval of the merger agreement by the LandCare stockholders is a condition
to the completion of the merger. Approval of the merger agreement requires the
affirmative vote of the holders of a majority of the outstanding shares of
LandCare common stock.
Certain of the directors and officers of LandCare and other LandCare
stockholders (who currently collectively own approximately 30.91% of the
outstanding shares of LandCare common stock)
2
<PAGE>
have already committed to vote in favor of approval of the merger agreement
with ServiceMaster. For a description of these voting commitments, see page 24
.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
(Page 23)
When considering the recommendation of the LandCare Board of Directors that
LandCare stockholders vote in favor of the merger agreement, you should be
aware that a number of executive officers and directors of LandCare have
interests in the merger that are different from or in addition to your
interests.
As of January 4, 1999, the executive officers and directors of LandCare
beneficially owned an aggregate of 5,468,276 shares of LandCare common stock,
which will be treated in the same manner as shares of LandCare common stock
held by other stockholders.
All LandCare stock options will become fully vested and immediately
exercisable as a result of the merger (except that five LandCare executive
officers have agreed to delay vesting of their stock options over a one year
period following the merger) and approximately 33.88% of these options are held
by the directors and executive officers of LandCare. All LandCare options will
be converted into options for ServiceMaster common stock following the merger
(and will be fully vested and immediately exercisable, except as discussed
above).
Certain officers of LandCare (including all of the executive officers of
LandCare) and its subsidiaries are parties to employment agreements which
provide for special severance benefits in the event that the respective officer
is terminated without cause or resigns for certain specified reasons during the
12 months following the merger.
CONDITIONS TO THE MERGER
(Page 34)
We currently expect to complete the merger before March 31, 1999. However,
there are several conditions to the merger that must be satisfied (or waived)
before the transaction can be completed. In the event any of these conditions
is not satisfied, the merger may not occur. In particular, we will not complete
the merger without the necessary approval of the merger agreement by the
LandCare stockholders or if there is a judgment, injunction, order or decree
that prohibits the merger.
TERMINATION OF THE MERGER AGREEMENT
(Page 38)
ServiceMaster and LandCare can mutually agree to terminate the merger
agreement without completing the merger. Either of ServiceMaster or LandCare
can terminate the merger agreement if:
. the merger is not completed by May 1, 1999;
. a court or other governmental authority permanently prohibits the merger;
. the LandCare stockholders do not approve the merger agreement; or
. the other party breaches or materially fails to comply with any of its
representations or warranties or obligations under the merger agreement.
LandCare and ServiceMaster each have the following additional specific rights
to terminate the merger agreement.
LandCare can terminate the merger agreement if the value of the ServiceMaster
fractional share to be paid in the merger for each share of LandCare stock is
less than $9.00.
ServiceMaster can terminate the merger agreement if among other things:
. the LandCare Board of Directors (i) withdraws, modifies or changes its
recommendation or approval in favor of the merger agreement in any manner
adverse to ServiceMaster or (ii) recommends any acquisition proposal
other than by ServiceMaster;
. any entity or group other than ServiceMaster becomes the beneficial owner
of more than 40% of the outstanding LandCare common stock; or
. LandCare does not complete certain acquisitions which satisfy various
specified criteria prior to the LandCare special meeting.
3
<PAGE>
TERMINATION FEES
(Page 39)
LandCare will be required to pay ServiceMaster a termination fee of (i)
$7,577,045 plus (ii) $0.44 multiplied by the aggregate number of shares of
LandCare common stock (other than any shares of LandCare common stock issued on
the exercise of LandCare stock options) issued after November 1, 1998 and
before the termination of the merger agreement if the merger agreement is
terminated because:
. the LandCare stockholders do not approve the merger agreement;
. LandCare breaches or materially fails to comply with any of its
representations or warranties or obligations under the merger agreement;
. the LandCare Board of Directors (i) withdraws, modifies or changes its
recommendation or approval in favor of the merger agreement in any manner
adverse to ServiceMaster or (ii) recommends any acquisition proposal
other than by ServiceMaster;
. any entity or group other than ServiceMaster becomes the beneficial owner
of more than 40% of the outstanding LandCare common stock;
. LandCare shall not have taken all actions necessary to cause the
conversion of LandCare stock options as provided by the merger agreement;
or
. the LandCare Board of Directors determines, under certain circumstances
and subject to certain limitations specified in the merger agreement and
before the approval of the merger agreement by the LandCare stockholders,
that the fiduciary obligations of the Board require acceptance of a
superior offer from a third party to acquire LandCare.
If ServiceMaster terminates the merger agreement because LandCare fails to
fulfill its obligation to complete certain acquisitions prior to the closing or
to meet certain other acquisition related requirements, LandCare will be
required to pay ServiceMaster an amount, not to exceed $1 million, equal to the
actual and reasonably documented out-of-pocket expenses incurred by
ServiceMaster and directly attributable to the proposed acquisition of
LandCare.
ACCOUNTING TREATMENT
(Page 25)
The merger will be accounted for under the "purchase" method of accounting in
accordance with generally accepted accounting principles.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
(Page 26)
We have structured the merger so that no gain or loss will be recognized for
federal income tax purposes on the receipt of shares of ServiceMaster common
stock by former LandCare stockholders. The specific tax consequences of the
merger to you will depend on the facts of your own situation. You should
consult your tax advisors to fully understand the tax consequences of the
merger to you.
NO RIGHT OF DISSENT
(Page 27)
Under Delaware law, LandCare stockholders will not have a right to dissent
from the merger and obtain payment of an alternative valuation for their shares
determined by a court.
4
<PAGE>
SELECTED FINANCIAL INFORMATION
Set forth on the following pages are selected historical financial and
operating information of ServiceMaster and LandCare and combined pro forma
financial and operating information of ServiceMaster and LandCare. Results of
operations for interim periods are not necessarily indicative of the results to
be expected in subsequent interim periods or for the full fiscal year.
SERVICEMASTER HISTORICAL FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------- ----------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Operating revenue............ $3,500 $2,918 $3,961 $3,458 $3,203 $2,985 $2,759
Cost of services rendered and
products sold............... 2,703 2,243 3,058 2,681 2,500 2,356 2,193
Selling and administrative
expenses.................... 500 420 559 482 451 415 393
------ ------ ------ ------ ------ ------ ------
Operating income............. 297 255 344 295 252 214 173
Non-operating expense........ 59 50 70 43 74 71 55
Provision for income taxes
(pro forma prior to 1998)
(1)......................... 96 83 111 102 72 58 48
------ ------ ------ ------ ------ ------ ------
Net income (pro forma prior
to 1998) (1) (2)............ $ 142 $ 122 $ 163 $ 150 $ 106 $ 85 $ 70
====== ====== ====== ====== ====== ====== ======
Net income per share:
Basic (pro forma prior to
1998) (1) (2).............. $ 0.49 $ 0.42 $ 0.57 $ 0.47 $ 0.41 $ 0.33 $ 0.28
Diluted (pro forma prior to
1998) (1) (2).............. $ 0.48 $ 0.41 $ 0.55 $ 0.46 $ 0.39 $ 0.32 $ 0.27
Shares used in computing net
income per share:
Basic....................... 287 290 286 317 260 256 254
Diluted..................... 297 303 300 330 273 267 266
Cash distributions per
share....................... $ 0.24 $ 0.23 $ 0.31 $ 0.29 $ 0.28 $ 0.27 $ 0.26
FINANCIAL POSITION AT PERIOD
END
Current assets............... $ 702 $ 580 $ 594 $ 499 $ 393 $ 331 $ 291
Current liabilities.......... 675 510 558 425 373 304 244
Working capital.............. 27 70 36 74 20 27 47
Total assets................. 2,883 2,322 2,475 1,847 1,650 1,231 1,122
Non-current liabilities...... 1,307 1,375 1,393 608 518 484 471
Minority interest............ -- 3 -- 17 13 135 118
Shareholders' equity......... 902 434 524 797 747 307 289
Book value per share......... $ 3.04 $ 1.58 $ 1.87 $ 2.49 $ 2.32 $ 1.20 $ 1.12
</TABLE>
- --------
(1) ServiceMaster converted from partnership to corporate form in a tax-free
exchange for shareholders on December 26, 1997. Prior to the conversion,
the partnership was not subject to federal income taxes, as its taxable
income was allocated to its equity holders. As a result of the conversion,
ServiceMaster became a taxable entity and is responsible for such
payments. The results shown above for the periods ended December 31, 1997
and prior thereto have been restated to adjust the actual historical
partnership information to a pro forma basis that assumes that
reincorporation had occurred as of the beginning of that period. The pro
forma provision for income taxes has been calculated assuming that
ServiceMaster's effective tax rate was approximately 40 percent of pretax
earnings. Actual historical net income and per share net income as a
partnership for these prior periods were as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------
1997 1997 (A) 1996 1995 1994 1993
------------- -------- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net income (2)................. $ 198 $ 264 $ 245 $ 172 $ 140 $ 116
EPS: Basic..................... $0.68 $0.93 $0.77 $0.66 $0.55 $0.46
Diluted...................... $0.66 $0.89 $0.75 $0.63 $0.53 $0.44
</TABLE>
(a) Including the one-time tax gain related to reincorporation, net income
for the year ended 1997 was $329 million and basic and diluted earnings
per share were $1.15 and $1.10, respectively.
(2) In the above presentation, the operating results in 1993 have been stated
to exclude a gain on issuance of subsidiary shares. Including this item,
pro forma corporate net income and basic and diluted earnings per share
were $88 million, $0.35 and $0.34, respectively, and actual historical
partnership net income and basic and diluted earnings per share were $146
million, $0.57 and $0.56, respectively.
All ServiceMaster share and per share data reflects the three-for-two share
splits in 1998, 1997, 1996 and 1993.
5
<PAGE>
LANDCARE HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- --------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- -------- -------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL OPERATING
RESULTS (1)
Revenues................ $ 101,908 $ 47,998 $ 65,950 $58,619 $54,922 $48,942 $48,284
Cost of services........ 80,496 40,384 55,889 47,905 45,351 46,206 43,872
--------- -------- -------- ------- ------- ------- -------
Gross profit............ 21,412 7,614 10,061 10,714 9,571 2,736 4,412
Selling, general and
administrative
expenses............... 13,093 4,961 6,709 6,989 4,855 4,555 4,028
--------- -------- -------- ------- ------- ------- -------
Income from operations.. 8,319 2,653 3,352 3,725 4,716 (1,819) 384
Other income (expense),
net.................... (641) 216 135 (332) (660) (567) (732)
--------- -------- -------- ------- ------- ------- -------
Income (loss) before
income taxes........... 7,678 2,869 3,487 3,393 4,056 (2,386) (348)
Income tax provision
(benefit).............. 3,413 1,141 1,375 1,275 1,580 (929) (137)
--------- -------- -------- ------- ------- ------- -------
Net income (loss)....... $ 4,265 $ 1,728 $ 2,112 $ 2,118 $ 2,476 $(1,457) $ (211)
========= ======== ======== ======= ======= ======= =======
Net income (loss) per
share:
Basic.................. $ 0.48 $ 0.49 $ 0.59 $ 0.60 $ 0.70 $ (0.41) $ (0.06)
Diluted (3)............ $ 0.48 $ 0.49 $ 0.59 $ 0.60 $ 0.70 $ (0.41) $ (0.06)
Shares used in computing
net income (loss) per
share:
Basic.................. 8,809 3,552 3,552 3,552 3,552 3,552 3,552
Diluted................ 8,851 3,552 3,552 3,552 3,552 3,552 3,552
LANDCARE PRO FORMA
OPERATING RESULTS DATA
(2)
Revenues................ $ 228,023 $263,779
Cost of services........ 178,311 206,547
--------- --------
Gross profit............ 49,712 57,232
Selling, general and
administrative
expenses............... 32,021 40,641
--------- --------
Income from operations.. 17,691 16,591
Other income (expense),
net.................... (4,198) (4,294)
--------- --------
Income before income
taxes.................. 13,493 12,297
Income tax provision.... 6,073 5,534
--------- --------
Net income.............. $ 7,420 $ 6,763
========= ========
Net income per share:
Basic.................. $ 0.42 $ 0.38
Diluted (3)............ $ 0.40 $ 0.37
Shares used in computing
pro forma net income
per share:
Basic.................. 17,735 17,735
Diluted................ 18,435 18,435
HISTORICAL FINANCIAL
POSITION AT PERIOD END
(1)
Current assets.......... $ 55,064 $ 13,368 $11,879 $10,527 $ 7,696 $ 9,825
Current liabilities..... 30,972 12,437 9,517 11,954 7,972 10,264
Working capital
(deficit).............. 24,092 931 2,362 (1,427) (276) (439)
Total assets............ 186,793 24,114 21,713 21,535 19,538 21,424
Non-current
liabilities............ 62,914 3,497 5,551 5,172 9,407 8,321
Shareholders' equity.... 92,907 8,180 6,645 4,409 2,159 2,839
Book value per share
(4).................... $ 5.59 $ 2.30 $ 1.87 $ 1.24 $ 0.61 $ 0.80
</TABLE>
6
<PAGE>
- --------
(1) For financial statement purposes, Trees, Inc. ("Trees"), one of the
Founding Companies (as defined in footnote 2 below), was identified as the
accounting acquiror. Accordingly, the accompanying historical financial
information included herein represents (i) the historical results of Trees,
(ii) the retroactive restatement of one of the companies acquired by
LandCare which was accounted for as a pooling-of-interests, (iii) the
acquisition of the remaining Founding Companies from June 9, 1998 and (iv)
the acquisition of the eleven companies acquired by LandCare subsequent to
June 9, 1998 and before September 30, 1998, all of which have been included
from their respective acquisition dates. The historical financial
information as of December 31, 1995, 1994, and 1993 and for the years ended
December 31, 1994 and 1993 is unaudited.
(2) The Pro Forma Operating Results Data assume that the acquisition of the
companies combined in connection with the LandCare initial public offering
(the "Founding Companies"), the companies acquired or probable of
acquisition by LandCare after the initial public offering and prior to
December 31, 1998 (the "Subsequent Acquisitions") and the LandCare initial
public offering (the "IPO") were closed January 1, 1997, and are not
necessarily indicative of the results LandCare would have achieved had
these events actually occurred on that date or indicative of LandCare's
future results. The Founding Companies and the Subsequent Acquisitions are
referred to as the "Acquired Companies." Pro forma adjustments reflected
herein include adjustments to reflect exclusion of certain operations not
acquired in the acquisitions of the Acquired Companies, compensation and
rent differentials, amortization of goodwill related to the acquisitions of
the Acquired Companies, income taxes related to certain of the Acquired
Companies which were S-Corporations, distributions made by the S-
Corporations prior to their acquisition by LandCare, and receipt and
application of proceeds received in the LandCare IPO.
(3) Diluted net income per share reflects adjustments to net income related to
interest expense on convertible debt.
(4) The historical book value per share is computed by dividing total
shareholders' equity by the total number of common shares outstanding at
the end of the period.
7
<PAGE>
SELECTED PRO FORMA FINANCIAL INFORMATION
The unaudited selected pro forma financial information set forth below has
been prepared based upon the historical consolidated financial statements of
ServiceMaster and its subsidiaries and the pro forma financial statements of
LandCare and its subsidiaries, adjusted for transactions described in the Notes
to the pro forma financial information of ServiceMaster included under
"Unaudited Pro Forma Financial Information-- ServiceMaster/LandCare
Consolidated Company." The pro forma financial statements of LandCare have been
presented and described in the "Selected Financial Information--LandCare
Historical and Pro Forma Financial Information" on page 6.
THE PRO FORMA FINANCIAL INFORMATION DOES NOT PURPORT TO REPRESENT WHAT
SERVICEMASTER'S FINANCIAL POSITION AS OF SEPTEMBER 30, 1998 OR RESULTS OF
OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 OR THE YEAR ENDED
DECEMBER 31, 1997 WOULD ACTUALLY HAVE BEEN HAD THE MERGER IN FACT OCCURRED ON
THAT DATE OR AT THE BEGINNING OF THE PERIODS INDICATED OR TO PROJECT
SERVICEMASTER'S FINANCIAL POSITION OR RESULTS OF OPERATIONS FOR ANY FUTURE DATE
OR PERIOD.
(IN MILLIONS, EXCEPT PER SHARE DATA)(1)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING RESULTS
Operating revenue.................................... $3,728 $4,225
Cost of services rendered and products sold.......... 2,881 3,265
Selling and administrative expenses.................. 534 602
------ ------
Operating income..................................... 313 358
Non-operating expense................................ 64 75
Provision for income taxes........................... 102 116
------ ------
Net income........................................... $ 147 $ 167
====== ======
Net income per share:
Basic.............................................. $ 0.50 $ 0.57
Diluted............................................ $ 0.48 $ 0.54
Shares used in computing net income per share:
Basic.............................................. 296 295
Diluted............................................ 306 309
Cash distributions per share......................... $ 0.24 $ 0.31
FINANCIAL POSITION AT PERIOD END
Current assets....................................... $ 769
Current liabilities.................................. 724
Working capital...................................... 45
Total assets......................................... 3,231
Non-current liabilities.............................. 1,402
Shareholders' equity................................. 1,105
Book value per share................................. $ 3.73
</TABLE>
- --------
(1) All per share data reflect the three-for-two share split in August 1998.
8
<PAGE>
EQUIVALENT AND COMPARATIVE PER SHARE DATA
We have summarized below the per share information for ServiceMaster and
LandCare on a historical, pro forma combined and equivalent basis.
<TABLE>
<CAPTION>
NINE
MONTHS ENDED YEAR ENDED
SEPTEMBER DECEMBER 31,
30, 1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ServiceMaster--Historical:
Basic earnings per share............................ $ 0.49 $ 0.57
Diluted earnings per share.......................... $ 0.48 $ 0.55
Dividends per share................................. $ 0.24 $ 0.31
Book value per share(1)............................. $ 3.04 $ 1.87
LandCare--Historical:
Basic earnings per share............................ $ 0.48 $ 0.59
Diluted earnings per share.......................... $ 0.48 $ 0.59
Dividends per share................................. $ -- $ --
Book value per share(1)............................. $ 5.59 $ 2.30
ServiceMaster/LandCare unaudited pro forma
combined:(2)
Basic earnings per ServiceMaster share.............. $ 0.50 $ 0.57
Diluted earnings per ServiceMaster share............ $ 0.48 $ 0.54
Dividends per ServiceMaster share................... $ 0.24 $ 0.31
Book value per ServiceMaster share.................. $ 3.73
Unaudited fractional ServiceMaster share issuable in
exchange for each LandCare share assuming average
closing price of $[ ]:(3)(4)
Basic earnings per fractional ServiceMaster share...
Diluted earnings per fractional ServiceMaster
share..............................................
Dividends per fractional ServiceMaster share........
Book value per fractional ServiceMaster share.......
Unaudited fractional ServiceMaster share issuable in
exchange for each LandCare share assuming average
closing price of $23.00:(3)(5)
Basic earnings per fractional ServiceMaster share... $ 0.23 $ 0.27
Diluted earnings per fractional ServiceMaster
share.............................................. $ 0.23 $ 0.26
Dividends per fractional ServiceMaster share........ $ 0.11 $ 0.15
Book value per fractional ServiceMaster share....... $ 1.45 $ 0.89
Unaudited fractional ServiceMaster share issuable in
exchange for each LandCare share assuming average
closing price between $16.36 and $20.00:(3)(6)
Basic earnings per fractional ServiceMaster share... $ 0.27 $ 0.31
Diluted earnings per fractional ServiceMaster
share.............................................. $ 0.26 $ 0.30
Dividends per fractional ServiceMaster share........ $ 0.13 $ 0.17
Book value per fractional ServiceMaster share....... $ 1.67 $ 1.03
</TABLE>
- --------
(1) The historical book value per share is computed by dividing total
shareholders' equity by the total number of common shares outstanding at
the end of the period.
(2) The pro forma combined data has been prepared based upon the historical
consolidated financial statements of ServiceMaster and its subsidiaries and
the pro forma financial statements of LandCare and its subsidiaries,
adjusted for pro forma merger adjustments which reflect the acquisition of
all of the shares of LandCare in exchange for shares of ServiceMaster
assuming an exchange ratio of 0.5000. The pro forma merger adjustments
include acquired intangible assets, legal, investment banking and other
fees related to the merger, intangible amortization expense and additional
interest expense. The pro forma financial statements of LandCare assume
that the acquisition of the Founding Companies and Subsequent Acquisitions
and the LandCare IPO were closed on January 1, 1997.
(3) This financial information shows the historical performance of
ServiceMaster stock that would be received in exchange for each LandCare
share if the average closing price described below for ServiceMaster stock
equals the assumed average closing price. That assumed average closing
price determines the exchange ratio for which LandCare shares will be
exchanged for ServiceMaster shares in the merger. The figures shown are
determined by multiplying the assumed exchange ratio by the historical data
per whole ServiceMaster share.
(4) The exchange ratio will be determined based on the average of the closing
prices of ServiceMaster common stock on the 20 consecutive trading days
ending on [ ], 1999 (which is the third trading day prior to the
scheduled date of the LandCare special meeting) (the "ServiceMaster Average
Closing Price"). See "The Merger Agreement--Merger Consideration" for a
detailed discussion of the determination of the exchange ratio. Assuming a
ServiceMaster Average Closing Price of $ [ ] (which is the ServiceMaster
Average Closing Price for the 20 trading day period ending on the latest
practicable date prior to the mailing of this Proxy Statement/Prospectus),
the exchange ratio of LandCare stock into ServiceMaster stock would be
[ ].
(5) Assuming a ServiceMaster Average Closing Price of $23.00, the exchange
ratio for the conversion of LandCare stock into ServiceMaster stock would
be 0.4783.
(6) Assuming a ServiceMaster Average Closing Price between $16.36 and $20.00,
the exchange ratio for the conversion of LandCare stock into ServiceMaster
stock would be 0.5500. See "The Merger Agreement--Merger Consideration" for
a discussion of the consequences of a ServiceMaster Average Closing Price
below $16.36.
9
<PAGE>
COMPARATIVE STOCK PRICES
ServiceMaster common stock and LandCare common stock are each traded on the
New York Stock Exchange (the "NYSE") under the respective symbols SVM and GRW.
The following table sets forth the closing sale price per share of
ServiceMaster common stock and LandCare common stock and the estimated
equivalent per share price (that is, the value of ServiceMaster stock issuable
in exchange for each LandCare share) for LandCare common stock on October 30,
1998, the last trading day before the joint public announcement by
ServiceMaster and LandCare of the execution of the merger agreement, and the
closing sale price per share on [ ], 1999, the latest practicable date
prior to the mailing of this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
VALUE OF SERVICEMASTER STOCK
SERVICEMASTER LANDCARE ISSUABLE IN EXCHANGE FOR EACH
COMMON STOCK COMMON STOCK LANDCARE SHARE(1)
------------- ------------ -----------------------------
<S> <C> <C> <C>
October 30, 1998...... $21.125 $8.00 $ 11.00(2)
[ ], 1999..... $[ ](3)
</TABLE>
- --------
(1) The amount paid for each share of LandCare common stock in the merger (in
the form of a fractional share of ServiceMaster common stock) will vary
depending on the ServiceMaster Average Closing Price. See "The Merger
Agreement--Merger Consideration" for a more detailed description of the
value to be received for each share of LandCare common stock.
(2) The $11.00 value was determined by multiplying $21.125 times an exchange
ratio of 0.5207. That exchange ratio is the fraction of a ServiceMaster
share that would be issued in exchange for each LandCare share if the
ServiceMaster Average Closing Price were $21.125.
(3) The $[ ] value was determined by multiplying $[ ] times an exchange
ratio of [ ]. That exchange ratio is the fraction of a ServiceMaster
share that would be issued in exchange for each LandCare share if the
ServiceMaster Average Closing Price were $[ ].
The exchange ratio which will be used to convert LandCare common stock into
ServiceMaster common stock will be based on the Average Closing Price for
ServiceMaster common stock on the New York Stock Exchange for the 20 trading
day period ending , 1999 (which is three trading days prior to the
scheduled date of the LandCare special meeting). The ServiceMaster Average
Closing Price, and therefore the actual exchange ratio, cannot be predicted.
10
<PAGE>
LANDCARE SPECIAL MEETING, VOTING AND PROXIES
GENERAL
This Proxy Statement/Prospectus is being furnished to LandCare stockholders
as part of the solicitation of proxies by the LandCare Board of Directors for
use at the LandCare special meeting to be held on [ ], 1999 at [ ]
a.m., local time, at the principal executive offices of LandCare at 2603
Augusta, Suite 1300, Houston, Texas 77057. This Proxy Statement/Prospectus and
the enclosed form of proxy are first being mailed to LandCare stockholders on
or about [ ], 1999.
The purpose of the LandCare special meeting is to consider and vote on the
following:
(1) The proposal to adopt the merger agreement between LandCare and
ServiceMaster. Under the merger agreement, each outstanding share of
LandCare common stock will be converted into the right to receive a
fraction of a share of ServiceMaster common stock based on an exchange
ratio and LandCare will become a wholly-owned subsidiary of ServiceMaster.
(2) To transact such other business as may properly come before the
LandCare special meeting (or any adjournments or postponements thereof).
Each copy of this Proxy Statement/Prospectus mailed to holders of LandCare
common stock is accompanied by a form of proxy for use at the LandCare special
meeting.
THE LANDCARE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
ADOPTION OF THE MERGER AGREEMENT.
RECORD DATE AND VOTING
LandCare has fixed the close of business on [ ], 1999 as the record
date for the determination of the LandCare stockholders entitled to notice of
and to vote at the LandCare special meeting. Accordingly, only holders of
record of LandCare common stock on the record date will be entitled to notice
of and to vote at the LandCare special meeting. As of [ ], 1999, there
were outstanding and entitled to vote [ ] shares of LandCare common
stock, which shares were held by approximately [ ] holders of record.
Each holder of record of shares of LandCare common stock on the record date is
entitled to one vote per share, which may be cast either in person or by
properly executed proxy, at the LandCare special meeting.
The presence at the LandCare special meeting, in person or by properly
executed proxy, of the holders of a majority of the outstanding shares of
LandCare common stock is necessary to constitute a quorum at the LandCare
special meeting. The approval of the merger agreement will require the
affirmative vote of the holders of a majority of the shares of LandCare common
stock outstanding on the record date.
LandCare shares which abstain from voting on the proposal to adopt the merger
agreement will be treated as shares that are present and entitled to vote at
the LandCare special meeting for purposes of determining whether a quorum
exists, but abstentions will have the same effect as votes against adoption of
the merger agreement. Brokers or nominees holding shares of record for
customers generally will not be entitled to vote on the proposal to adopt the
merger agreement unless they receive voting instructions from their customers.
Because the adoption of the merger agreement is the only matter for which
specific approval is being solicited, any shares held by brokers or nominees
for which no instructions are given by the beneficial owners thereof will not
be voted, meaning that such shares will have the same effect as shares voted
against adoption of the merger agreement.
Holders of an aggregate of 5,335,097 shares of LandCare common stock (the
"Key Stockholders"), representing approximately [ ]% of the outstanding shares
of LandCare common stock as of the record date for the LandCare special
meeting, have each entered into a Voting Agreement with ServiceMaster pursuant
to which the Key Stockholders have agreed, among other things, to vote their
shares of LandCare common stock
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in favor of the merger agreement. See "The Merger--Voting Agreements." Certain
of the directors and all of the executive officers of LandCare are a party to a
Voting Agreement.
VOTING AND REVOCATION OF PROXIES
All shares of LandCare common stock which are entitled to vote and are
represented at the LandCare special meeting by properly executed and unrevoked
proxies received prior to or at such meeting will be voted at such meeting in
accordance with the instructions indicated on such proxies. If no instructions
are indicated, such proxies will be voted for adoption of the merger agreement.
The LandCare Board of Directors does not know of any matters other than those
described in the notice of the LandCare special meeting that are to come before
such meeting. If any other matters are properly presented at the LandCare
special meeting for consideration, including, among other things, consideration
of a motion to adjourn such meeting to another time and/or place (including,
without limitation, for the purposes of soliciting additional proxies or
allowing additional time for the satisfaction of conditions to the merger), the
persons named in the enclosed forms of proxy and acting thereunder generally
will have discretion to vote on such matters in accordance with their best
judgment. Notwithstanding the foregoing, proxies voting against a specific
proposal may not be used by the persons named in the proxies to vote for
adjournment of the meeting for the purpose of giving management additional time
to solicit votes to approve such proposal.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of LandCare, at or before the taking of the vote at the
LandCare special meeting, a written notice of revocation bearing a later date
than the proxy, (ii) duly executing a later dated proxy relating to the same
shares and delivering it to the Secretary of LandCare before the taking of the
vote at the LandCare special meeting or (iii) attending the LandCare special
meeting and voting in person (although attendance at the LandCare special
meeting will not in and of itself constitute a revocation of a proxy). Any
written notice of revocation or subsequent proxy should be sent to LandCare
USA, Inc. at 2603 Augusta, Suite 1300, Houston, Texas 77057, Attention:
Secretary, or hand delivered to the Secretary of LandCare at or before the
taking of the vote at the LandCare special meeting. Stockholders that have
instructed a broker to vote their shares must follow directions received from
such broker in order to change their vote or to vote at the LandCare special
meeting.
All expenses of the solicitation of proxies for the LandCare special meeting
will be borne by LandCare except that, as indicated below, ServiceMaster will
pay the fees of D.F. King & Co., Inc. for its assistance in soliciting proxies
in favor of the merger. In addition to solicitation by use of the mails,
proxies may be solicited from LandCare stockholders by directors, officers and
employees of LandCare in person or by telephone, facsimile or other means of
communication. Such directors, officers and employees will not be additionally
compensated, but may be reimbursed for reasonable out-of-pocket expenses in
connection with such solicitation. LandCare and ServiceMaster have retained
D.F. King & Co., Inc., a proxy solicitation firm, for assistance in connection
with the solicitation of proxies for the LandCare special meeting at a cost of
approximately $10,000 plus reimbursement of reasonable out-of-pocket expenses,
which costs and expenses ServiceMaster has agreed to pay. Arrangements will
also be made with brokerage houses, custodians, nominees and fiduciaries for
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by such brokerage houses, custodians, nominees and fiduciaries, and
LandCare will reimburse such brokerage houses, custodians, nominees and
fiduciaries for their reasonable expenses incurred in connection therewith.
In the event that before the LandCare special meeting, another company makes
a Qualified Competing Proposal (as defined in the merger agreement) to acquire
LandCare and the LandCare Board withdraws its recommendation of the
ServiceMaster merger and recommends that LandCare stockholders approve the
Qualified Competing Proposal instead of the ServiceMaster merger proposal (or
in the event that LandCare otherwise withdraws or modifies its recommendation
of the ServiceMaster merger), the merger agreement grants ServiceMaster the
right to require that LandCare stockholders be afforded the opportunity to vote
with
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respect to the ServiceMaster merger proposal, and if ServiceMaster exercises
that right, ServiceMaster also has the right to utilize D.F. King & Co., Inc.
as its agent to solicit votes from LandCare stockholders in favor of the
ServiceMaster merger proposal.
Stockholders should not send stock certificates with their proxies.
LandCare common stock certificates will be exchanged for shares of
ServiceMaster common stock following completion of the merger in accordance
with instructions to be sent to holders of LandCare common stock after the
merger.
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THE MERGER
BACKGROUND OF THE MERGER
During conversations in August 1998 between long-time business colleagues
Philip B. Rooney, Vice Chairman of ServiceMaster, and Fred Ferreira, a non-
employee director of LandCare, Mr. Rooney inquired about the possibility of a
business combination between LandCare and ServiceMaster at some indefinite time
in the future. Mr. Ferreira advised Mr. Rooney that he did not believe LandCare
would be interested in discussing such a business combination at that time, but
said that he would inform Mr. William F. Murdy, LandCare's Chairman, Chief
Executive Officer and President, of his conversations with Mr. Rooney.
In the first week of September 1998, Mr. Murdy telephoned Mr. Rooney to say
that he had been informed of Mr. Ferreira's recent conversations with Mr.
Rooney regarding ServiceMaster's indication of interest in a potential business
combination between LandCare and ServiceMaster. Mr. Murdy told Mr. Rooney that
he thought a sale of LandCare to ServiceMaster was unlikely at that time, but
he would nevertheless be available to meet with Mr. Rooney the following week,
when Mr. Murdy was scheduled to travel to Chicago on other business. On
September 10, Mr. Murdy met with Mr. Rooney over dinner in Chicago. At this
meeting, Mr. Rooney informed Mr. Murdy that he believed a merger between
ServiceMaster and LandCare would be mutually beneficial to the companies,
emphasizing the opportunity for the combined business to generate operating
efficiencies and cost savings and expand its geographic coverage. In addition,
Mr. Rooney indicated that LandCare stockholders would benefit from the greater
liquidity and stability of ServiceMaster stock and the opportunity for the
merged companies to enhance their presence and achieve leadership in the
commercial landscaping sector. Mr. Murdy responded that LandCare was focusing
at that time on executing its current business plan, which involved the
aggressive acquisition of other landscape and tree services businesses, and
therefore was not interested in pursuing the sale of the company. Mr. Rooney
invited Mr. Murdy to call him if he changed his mind about initiating
discussions. Based largely on the then continuing deterioration in the price of
LandCare common stock and tightening conditions in the debt markets, on
September 28, 1998, Mr. Murdy asked Mr. Ferreira to reinitiate contact with Mr.
Rooney to determine the extent of ServiceMaster's interest in a business
combination with LandCare. On the same day, Mr. Ferreira spoke with Mr. Rooney,
who expressed an interest in meeting again with Mr. Murdy. A special meeting of
the LandCare Board was called for October 8, 1998 to discuss the possibility of
a business combination with ServiceMaster, as well as other possible strategic
alternatives available to LandCare in light of then-current market conditions.
At its meeting on October 8, the LandCare Board discussed ServiceMaster's
indication of interest in a business combination with LandCare. As part of its
analysis, the LandCare Board took into consideration the effect of then-current
equity and debt market conditions on LandCare's business strategy. In
particular, LandCare was concerned that it would not, consistent with its
business strategy, be able to finance its acquisitions with its common stock at
its then-current value, which from September 28, 1998 to October 7, 1998
averaged $6.10 per share (such average being 24% below its June 1998 initial
public offering price of $8.00 per share). In order to make accretive
acquisitions, LandCare, as a result of the prevailing trading price, would be
required to utilize more cash than had been anticipated and would therefore
need access to significantly greater financial resources than it possessed. The
strategic alternatives contemplated by LandCare included: (i) curtailing
LandCare's acquisition program and focusing on existing operations and internal
growth at the subsidiary level; (ii) issuing debt or equity securities through
one or more private placements; (iii) engaging a financial or strategic
partner; or (iv) entering into a business combination with ServiceMaster or
another compatible company with sufficient capital resources. The LandCare
Board then voted to retain an investment banking firm to perform an analysis of
market conditions and to examine the viability of all available financing
options. In addition, the LandCare Board authorized Mr. Murdy, LandCare
consultant Steven Harter and other consultants as necessary to meet with Mr.
Rooney and other representatives of ServiceMaster to pursue discussions with
ServiceMaster subject to the results of the investment banker's analysis.
On October 9, 1998, LandCare asked BT Alex. Brown Incorporated to evaluate
LandCare's then viable financing alternatives and a possible business
combination with ServiceMaster and present its findings to the LandCare Board.
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On October 14, 1998, Mr. Murdy and Mr. Harter, a principal in Notre Capital
Ventures II, L.L.C., a significant LandCare stockholder, met with Mr. Rooney
and John Deegan, a ServiceMaster financial analyst, in Downers Grove, Illinois.
At this meeting, the possibility of a business combination was further
discussed. Mr. Murdy and Mr. Harter expressed an interest in continuing the
discussion and, on the next day, ServiceMaster and LandCare entered into a
confidentiality agreement.
On October 16, negotiations continued between Messrs. Murdy and Rooney in
Chicago. At the same time that Messrs. Murdy and Rooney were meeting in
Chicago, John Deegan, Mary Tolar and Michael Cook, all financial
representatives of ServiceMaster, met with members of LandCare's senior
management in Houston, Texas. The LandCare representatives were Peter Forbes,
Senior Vice President and Chief Financial Officer, Kenneth V. Garcia, Senior
Vice President and Chief Development Officer, and William L. Fiedler, Senior
Vice President, General Counsel and Secretary. LandCare was also represented by
Stephen Cook, its acquisitions consultant. At this meeting in Houston, LandCare
representatives shared a significant amount of summary financial information
with the representatives from ServiceMaster along with information on the
LandCare acquisition strategy and its contracts with management.
The information LandCare shared with ServiceMaster included a business plan
and various iterations of a computer program (the "computer model") designed to
show possible future LandCare performance based on various alternative
assumptions. The computer model projections of LandCare's possible future
financial performance (and the related possible future value of LandCare common
stock) are dependent, among other things, on a number of key variables,
including but not necessarily limited to the following: the ability of LandCare
to acquire companies performing financially in a manner making a positive
contribution to LandCare's financial performance; internal growth of acquired
companies; the price at which such acquisitions could be made; the market price
of LandCare stock; and the cost and availability of other capital required to
make such acquisitions. When favorable assumptions were used as inputs for key
variables in the computer model, the model projected a future stock price for
LandCare higher than the price proposed in the merger. When less favorable
assumptions were used for key variables, the model projected a future stock
price for LandCare lower than the price proposed in the merger. Irrespective of
the assumptions used, at the time the merger negotiations occurred, there was
significant uncertainty regarding the validity of a number of the assumptions
used in the computer model, especially those relating to future liquidity in
the credit markets and LandCare's ability to use its common stock as
consideration for acquisitions or to borrow at a cost that would enable it to
grow through acquisitions on acceptable terms. In the end, the parties
negotiated the merger price based on their respective independent assessments
of LandCare's upside and downside potentials, and the price reached represented
from each party's perspective a fair balance of these potentials and
assessments. ServiceMaster's decision as to the price it was willing to pay for
LandCare depended far more on ServiceMaster's own assessment on what
ServiceMaster might be able to do with the LandCare business as an integral
part of ServiceMaster's TruGreen subsidiary than upon LandCare's business plan
or the variable outputs of LandCare's computer model.
Following these meetings, Mr. Rooney invited Mr. Murdy's executive management
to meet on October 21, 1998 with the executive management of ServiceMaster and
its commercial landscaping business operating subsidiary in Memphis, Tennessee.
Representing ServiceMaster at this meeting were C. William Pollard, Chairman of
the ServiceMaster Board of Directors, Mr. Rooney, Ernest J. Mrozek, President
and Chief Operating Officer, ServiceMaster Consumer Services, Donald K. Karnes,
Group President, Lawn Care & Pest Control Services, ServiceMaster Consumer
Services, David M. Slott, President and Chief Operating Officer of TruGreen-
ChemLawn, and Mr. Deegan. Representing LandCare at this meeting were Messrs.
Murdy, Harter, Forbes, Garcia and Cook. At this meeting, LandCare
representatives presented a financial and operational overview of LandCare as
well as an overview of LandCare's business plan and business strategies, and
the parties discussed the expected organizational and strategic effects of a
business combination with ServiceMaster. After substantial discussions and
negotiations between the parties at this meeting, ServiceMaster increased its
initial offer of $9.00 per LandCare share to $11.00 per share of LandCare
common stock based on
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a fixed exchange ratio of 0.5620 ServiceMaster shares for each LandCare share
without any collar. This offer was contingent on approval of the Boards of
Directors of LandCare and ServiceMaster, completion of due diligence and the
negotiation and execution of a definitive merger agreement.
On October 22, the LandCare Board of Directors held a meeting at LandCare's
corporate offices in Houston, Texas to discuss the terms of ServiceMaster's
offer. The LandCare Board authorized LandCare management and consultants to
continue negotiations with ServiceMaster based on, among other things, the
potential benefits to LandCare's stockholders of a business combination with
ServiceMaster, including the substantial premium over the then-current LandCare
stock price being discussed with ServiceMaster.
The following day, October 23, counsel for ServiceMaster delivered the
initial draft of a proposed merger agreement to LandCare and its counsel. At
the same time, business, financial and legal representatives of ServiceMaster
convened in Houston to negotiate various business terms, conduct a due
diligence investigation and negotiate a definitive merger agreement.
During the period of October 23 to October 31, ServiceMaster conducted due
diligence investigations, and ServiceMaster and LandCare negotiated the terms
of the proposed merger agreement.
On October 27 and 28, the LandCare Board held a regularly-scheduled meeting
in Houston, Texas. BT Alex. Brown presented to the LandCare Board the results
of its analyses of market conditions and the financing alternatives available
to LandCare. The LandCare Board then discussed the status of the negotiations
with ServiceMaster. Based on the information presented at this meeting and
discussions with its advisors and LandCare management, the LandCare Board
decided to continue negotiations with ServiceMaster regarding the terms of a
business combination between LandCare and ServiceMaster. In addition, LandCare
formally retained BT Alex. Brown to provide a fairness opinion to the LandCare
Board in connection with the proposed business combination with ServiceMaster.
On November 1, the LandCare Board convened a special meeting to vote on the
proposed merger with ServiceMaster. All of the members of the LandCare Board
were present at this meeting. In addition, representatives of LandCare's
independent financial, legal, tax and accounting advisors were in attendance at
the meeting. The LandCare Board discussed the principal terms of the proposed
merger agreement with its legal counsel and investment bankers, including: (i)
the manner in which shares of LandCare common stock would be valued and the
mechanisms for adjustment of the exchange ratio, which was negotiated to be
0.5500 with a collar; (ii) the requirement that certain key executives agree to
waive certain of their rights under LandCare stock options and accept a
modified vesting schedule for such stock options; (iii) the requirement that
certain stockholders of LandCare owning at least 30% of the outstanding shares
of LandCare common stock agree to enter into agreements to vote in favor of the
merger; and (iv) the principal conditions that must be satisfied by LandCare
prior to the consummation of the merger. The LandCare Board also discussed the
provisions of the proposed merger agreement which would permit LandCare to (i)
entertain other offers for the sale of LandCare, (ii) provide nonpublic
information to potential bidders, (iii) enter into negotiations with other
potential bidders and, (iv) if a superior offer were to emerge, terminate the
merger and enter into an alternative agreement with a third party, subject to
the requirement that the merger agreement with ServiceMaster be submitted to
the LandCare stockholders for a vote, that the LandCare stockholders vote
against the merger agreement and that LandCare pay a termination fee to
ServiceMaster.
At the LandCare Board meeting of November 1, representatives of BT Alex.
Brown made a presentation with respect to financial analyses performed in
connection with the proposed merger and rendered to the LandCare Board its oral
opinion, subsequently confirmed in writing as of the same date, that, as of
such date and subject to the assumptions made, matters considered and
limitations set forth in such opinion, the exchange ratio was fair, from a
financial point of view, to the holders of LandCare common stock. Following the
discussions with BT Alex. Brown, the LandCare Board determined that in its
judgment, the proposed business
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combination with ServiceMaster was in the best interest of LandCare and its
stockholders. Based on the information presented, the LandCare Board approved
the merger, the merger agreement and related transactions by a vote of twelve
directors in favor and with one director abstaining due to a potential conflict
of interest arising from his ownership of ServiceMaster stock.
Following the approval of the merger by the LandCare Board and by the
ServiceMaster Board of Directors, LandCare and ServiceMaster executed the
merger agreement as of November 1, 1998, and the parties issued a joint press
release on November 2, 1998 which announced the execution of the merger
agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF LANDCARE; REASONS FOR THE MERGER
The LandCare Board of Directors believes that the terms of the merger are
fair to, and in the best interests of, LandCare and its stockholders. In
reaching this conclusion, the LandCare Board considered a number of factors,
including:
. Assuming a ServiceMaster Average Closing Price of $20.00 or more, the
premium to the LandCare stockholders would be 37.5% over the closing
price of LandCare common stock on October 30, 1998 and would be 44.9%
over the average trading price of LandCare common stock from the time of
its initial public offering on June 4, 1998 through October 30, 1998.
Even if the ServiceMaster Average Closing Price decreased to $16.36, the
premium to the LandCare stockholders would be 12.5% over the closing
price of LandCare common stock on October 30, 1998 and would be 18.6%
over the average trading price of LandCare common stock from the time of
its initial public offering on June 4, 1998 through October 30, 1998. See
"The Merger Agreement--Merger Consideration" for a detailed discussion of
the exchange ratio and the factors that will affect the value of
ServiceMaster stock to be received by LandCare stockholders in the
merger.
. LandCare's right to terminate the merger agreement in the event the
ServiceMaster Average Closing Price should turn out to be less than
$16.36 and a resulting value to be received for each LandCare share
should turn out to be less than $9.00. See "The Merger Agreement--Merger
Consideration" for a detailed discussion of the exchange ratio and the
factors that affect the value of ServiceMaster stock to be received by
LandCare stockholders in the merger.
. Information with respect to LandCare's and ServiceMaster's businesses,
operations and prospects and the LandCare Board's review of the financial
performance of ServiceMaster, including ServiceMaster's prospects after
giving effect to the merger.
. LandCare stockholders would own, immediately after the merger,
approximately 3.0% of the outstanding shares of ServiceMaster common
stock and would obtain an ownership interest in an enterprise conducting
a more diversified range of services and having greater geographic
coverage than LandCare on a stand-alone basis.
. Receipt of a BT Alex. Brown opinion (described below) that, subject to
certain assumptions made, matters considered and the limitations on the
review undertaken, as of November 1, 1998, the exchange ratio pursuant to
the merger agreement is fair from a financial point of view to the
holders of LandCare common stock.
. The terms of the merger agreement were negotiated at arm's-length,
including the provisions of the merger agreement expressly permitting
LandCare to terminate the merger agreement to enter into a business
combination with a third party, if a superior offer were to emerge,
subject to the requirement that the merger agreement with ServiceMaster
be submitted to the LandCare stockholders for a vote, the LandCare
stockholders vote against the merger agreement and that LandCare pay a
termination fee to ServiceMaster.
The LandCare Board did not attach specific weight to any of the foregoing
factors; each was deemed to support the conclusion of the LandCare Board that
the terms of the merger are fair to, and in the best interests of, LandCare and
its stockholders.
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In analyzing the merger, the LandCare Board was advised by BT Alex. Brown
and, at its November 1, 1998 special meeting, the LandCare Board received an
oral opinion, subsequently confirmed in writing as of the same date, from BT
Alex. Brown, that, subject to the assumptions made, matters considered and
limitations set forth in such opinion, the exchange ratio was fair from a
financial point of view to the holders of LandCare common stock. See "--
Fairness Opinion" immediately below for a discussion of the analysis performed
by BT Alex. Brown in connection with rendering its opinion and the terms of
LandCare's agreement to engage, compensate and indemnify BT Alex. Brown.
FAIRNESS OPINION
LandCare engaged BT Alex. Brown on October 23, 1998 to deliver a fairness
opinion in connection with the merger. On November 1, 1998, at a meeting of the
LandCare Board held to evaluate the proposed merger, BT Alex. Brown rendered to
the LandCare Board an oral opinion, subsequently confirmed by delivery of a
written opinion dated November 1, 1998, to the effect that, as of such date and
based on and subject to the assumptions made, matters considered and
limitations set forth in such opinion and summarized below, the exchange ratio
was fair, from a financial point of view, to the holders of LandCare common
stock.
THE FULL TEXT OF BT ALEX. BROWN'S WRITTEN OPINION DATED NOVEMBER 1, 1998,
WHICH SETS FORTH, AMONG OTHER THINGS, THE ASSUMPTIONS MADE, MATTERS CONSIDERED
AND LIMITATIONS OF THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX B TO THIS
PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. BT ALEX.
BROWN'S OPINION IS DIRECTED ONLY TO THE LANDCARE BOARD, ADDRESSES ONLY THE
FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW, AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE AT THE LANDCARE SPECIAL MEETING. THE SUMMARY OF THE OPINION OF BT
ALEX. BROWN IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In connection with its opinion, BT Alex. Brown reviewed certain publicly
available financial information and other information concerning LandCare and
ServiceMaster, certain internal analyses and other information furnished to it
by LandCare, and certain third-party analyses furnished to it by or on behalf
of ServiceMaster. BT Alex. Brown also held discussions with members of the
senior management of LandCare and
ServiceMaster regarding the business and prospects of their respective
companies. In addition, BT Alex. Brown (i) reviewed the reported prices and
trading activity for LandCare common stock and ServiceMaster common stock, (ii)
compared certain financial and stock market information for LandCare and
ServiceMaster with similar information for certain other companies whose
securities are publicly traded, (iii) reviewed the financial terms of certain
recent business combinations which it deemed comparable in whole or in part,
(iv) reviewed the terms of the merger agreement and certain related documents,
and (v) performed such other studies and analyses and considered such other
factors as it deemed appropriate.
BT Alex. Brown did not assume responsibility for independent verification of,
and has not independently verified, any information, whether publicly available
or furnished to it, concerning LandCare or ServiceMaster, including, without
limitation, any financial information, forecasts or projections, considered in
connection with the rendering of its opinion. Accordingly, for purposes of its
opinion, BT Alex. Brown assumed and relied on the accuracy and completeness of
all such information and has not conducted a physical inspection of any of the
properties or assets of LandCare or ServiceMaster, and has not prepared or
obtained any independent evaluation or appraisal of any of the assets or
liabilities of LandCare or ServiceMaster. With respect to the financial
forecasts and projections made available to BT Alex. Brown and used in its
analyses, BT Alex. Brown has assumed that such financial forecasts and
projections have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of LandCare or
ServiceMaster, as the case may be, as to the matters covered thereby. In
rendering this opinion, BT Alex. Brown expresses no view as to the
reasonableness of such forecasts and projections or the assumptions on which
they are based. BT Alex. Brown's opinion was necessarily based on economic,
market and other conditions as in effect on, and the information made available
to it, as of the date thereof. BT Alex. Brown expresses no opinion as to the
price at which LandCare common stock or ServiceMaster common stock will trade
following the announcement or the consummation of the transaction.
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For purposes of rendering this opinion and based on the LandCare Board's
consent, BT Alex. Brown assumed that, in all respects material to its analysis,
the representations and warranties of LandCare and ServiceMaster contained in
the merger agreement are true and correct, LandCare and ServiceMaster will each
perform all of the covenants and agreements to be performed by it under the
merger agreement and all conditions to the obligations of each of LandCare and
ServiceMaster to consummate the transaction will be satisfied without any
waiver thereof. In addition, the LandCare Board informed BT Alex. Brown, and
accordingly for purposes of rendering its opinion BT Alex. Brown assumed, that
the transaction will be free from Federal income tax for LandCare and its
respective stockholders. BT Alex. Brown has also assumed that all material
governmental, regulatory or other approvals and consents required in connection
with the consummation of the transaction will be obtained and that in
connection with obtaining any necessary governmental, regulatory or other
approvals and consents, or any amendments, modifications or waivers to any
agreements, instruments or orders to which either LandCare or ServiceMaster is
a party or is subject or by which it is bound, no limitations, restrictions or
conditions will be imposed or amendments, modifications or waivers made that
would have a material adverse effect on LandCare or ServiceMaster or materially
reduce the contemplated benefits of the transaction to LandCare. In calculating
financial data for the 12 months ended September 30, 1998 ("LTM") for LandCare,
BT Alex. Brown used the data then publicly reported or subsequently so reported
by LandCare after its initial public offering and pro forma data supplied by
LandCare management for periods prior to LandCare's initial public offering
(pro forma as if the Founding Companies had been combined for these periods).
In connection with its engagement, BT Alex. Brown was not authorized to
solicit, and did not solicit, third party indications of interest with respect
to the acquisition of all or a part of LandCare, nor did BT Alex. Brown review
with LandCare or the LandCare Board any potential transactions in lieu of the
transaction.
Set forth below is a brief summary of the material financial analyses
performed and factors considered by BT Alex. Brown in connection with its
opinion and reviewed with the LandCare Board at its meeting on November 1,
1998:
Historical Financial Position. In rendering its opinion, BT Alex. Brown
reviewed and analyzed the historical and current financial condition of
LandCare by assessing LandCare's recent financial statements and analyzing
LandCare's revenue, growth prospects, current and projected acquisition
financing capacity and operating performance trends and prospects.
Historical Stock Price Performance. BT Alex. Brown reviewed and analyzed the
daily closing per share market prices for LandCare common stock for the period
from June 5, 1998 (the date of LandCare's initial public offering of common
stock) to October 30, 1998 and for the period from September 30, 1998 to
October 30, 1998. BT Alex. Brown also reviewed the daily closing per share
market prices of LandCare common stock and compared the movement of such daily
closing prices with the movement of the S&P 500 composite index, the Russell
2000 composite index and the movement of an index composed of "roll up"
industry consolidators (consisting of Building One Services Corp., Coach USA,
Inc., Comfort Systems USA, Inc., Group Maintenance America, Inc., Integrated
Electrical Services, MarineMax Inc., Metals USA, Inc., National Equipment
Services, Inc., PalEx, Inc., Pentacon, Inc., Quanta Services, Inc., Railworks
Corp., Service Experts Inc., Transportation Components, Inc., Travel Services
International, Inc., Unicapital Corp., United Road Services, Inc. and U.S.A.
Floral Products, Inc. (collectively, the "Selected Roll-up Industry
Consolidators")) over the period from June 5, 1998 through October 30, 1998 and
over the period from September 30, 1998 through October 30, 1998. BT Alex.
Brown noted that, on a relative basis between June 5, 1998 and September 30,
1998, the performance of LandCare common stock lagged the performance of the
S&P 500 composite index, was broadly consistent with the performance of the
Russell 2000 index and ahead of the performance of the Selected Roll-up
Industry Consolidators composite index. BT Alex. Brown further noted that, on a
relative basis between September 30, 1998 and October 30, 1998, LandCare's
stock price outperformed all three indices, particularly in the two weeks
leading up to the announcement of the transaction. BT Alex. Brown also reviewed
the daily closing per share market prices of ServiceMaster common stock and
compared the movement of such daily closing prices with the movement of the S&P
500 index, the Dow Jones Industrial Average and the movement of a facilities
services/consumer services industry index (consisting of ABM Industries
Incorporated, Chemed Corporation,
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Cintas Corporation, Ecolab Inc., Rentokil Initial Plc, Rollins Inc. and Sodexho
Marriott Services, Inc. (collectively, the "Facilities Services/Consumer
Services Companies")) over the period from October 30, 1997 through October 30,
1998 and over the period from September 30, 1998 through October 30, 1998. BT
Alex Brown noted that, on a relative basis, the performance of ServiceMaster
common stock was stronger than the S&P 500 index, the Dow Jones Industrial
Average and the Facilities Services/ Consumer Services industry index since
October 30, 1997, despite having lagged these indices in the period from
September 30, 1998 through October 30, 1998. This information was presented to
give the LandCare Board background information regarding the respective stock
prices of LandCare and ServiceMaster over the periods indicated.
Analysis of Certain Other Publicly Traded Companies. This analysis examines a
company's valuation in the public market as compared to the valuation in the
public market of other selected publicly traded companies. BT Alex. Brown
compared certain financial information (based on the commonly used valuation
measurements described below) relating to LandCare to certain corresponding
information from ServiceMaster and two groups: a group of two publicly traded
companies in the facilities services industry (consisting of ABM Industries and
Chemed (collectively, the "Selected Facilities Services Companies")), and the
Selected Roll-up Industry Consolidators. Such financial information included,
among other things, (i) common equity market valuation; (ii) capitalization
ratios; (iii) operating performance measures; (iv) ratios of common equity
market value as adjusted for debt and cash ("Adjusted Value") to revenues,
earnings before interest expense, income taxes, depreciation and amortization
("EBITDA"), and earnings before interest expense and income taxes ("EBIT"),
each for the latest reported twelve month period as derived from publicly
available information; (v) ratios of common equity market valuation ("Equity
Value") to net income for the latest reported twelve month period as derived
from publicly available information; and (vi) ratios of common stock price per
share divided by EPS ("P/E"), using estimated EPS for calendar years 1998 and
1999 to estimated EPS growth rates.
The financial information used in connection with the multiples provided
below with respect to LandCare, ServiceMaster, the Selected Facilities Services
Companies and the Selected Roll-up Industry Consolidators was based on the
latest reported twelve month period as derived from publicly available
information and on estimated EPS for calendar years 1998 and 1999 as reported
by the Institutional Brokers Estimating System, except that the calendar year
1999 estimate for ServiceMaster was taken from research of ServiceMaster's
investment banker, CS First Boston, with the approval of ServiceMaster. BT
Alex. Brown noted that, on a trailing twelve month basis, the multiple of
Adjusted Value to revenues was 1.3x for LandCare compared to a mean of 0.7x for
the Selected Facilities Services Companies, a multiple of 1.7x for
ServiceMaster, and a mean of 1.3x for the Selected Roll-up Industry
Consolidators; the multiple of Adjusted Value to EBITDA was 10.4x for LandCare
compared to a mean of 9.5x for the Selected Facilities Services Companies, a
multiple of 15.8x for ServiceMaster, and a mean of 10.0x for the Selected Roll-
up Industry Consolidators; and the multiple of Adjusted Value to EBIT was 15.6x
for LandCare compared to a mean of 15.1x for the Selected Facilities Services
Companies, a multiple of 20.0x for ServiceMaster, and a mean of 12.5x for the
Selected Roll-up Industry Consolidators. BT Alex. Brown further noted that the
multiple of Equity Value to trailing twelve month net income was 20.9x for
LandCare compared to a mean of 19.4x for the Selected Facilities Services
Companies, a multiple of 36.5x for ServiceMaster, and a mean of 21.2x for the
Selected Roll-up Industry Consolidators; the multiple of stock price to
calendar year 1998 EPS was 17.0x for LandCare compared to a mean of 20.8x for
the Selected Facilities Services Companies, a multiple of 32.5x for
ServiceMaster, and a mean of 14.4x for the Selected Roll-up Industry
Consolidators; the multiple of Equity Value to calendar year 1999 EPS was 10.0x
for LandCare compared to a mean of 17.4x for the Selected Facilities Services
Companies, a multiple of 27.4x for ServiceMaster, and a mean of 9.6x for the
Selected Roll-up Industry Consolidators. As a result of the foregoing
procedures, BT Alex. Brown noted that, as of October 30, 1998, the multiples
for LandCare were generally consistent with the mean of the multiples for the
Selected Facilities Services Companies and the Selected Industry Consolidators
and below the relevant multiples for ServiceMaster.
Analysis of Selected Mergers and Acquisitions. BT Alex. Brown noted that
there was little publicly available information concerning mergers and
acquisitions in the landscaping and facilities services industries. However, BT
Alex. Brown reviewed the financial terms, to the extent publicly available, of
seven pending or
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completed mergers or acquisitions in the facilities services industry (the
"Selected Facilities Services Transactions"), and nine pending or completed
mergers or acquisitions where consolidators were acquired (the "Selected
Consolidator Transactions"), which sector BT Alex. Brown deemed to have similar
economic and/or internal competitive dynamics to LandCare's business. BT Alex.
Brown calculated various financial multiples based on certain publicly
available information for each of the transactions and compared them to
corresponding financial multiples for the merger, based on the exchange ratio.
BT Alex. Brown noted that, at the implied offer price of $11.00 per share
(based on ServiceMaster's closing per share market price for October 30, 1998,
the last trading day prior to the November 2, 1998 announcement of the merger),
the multiple of Adjusted Value to trailing twelve month revenues was 1.5x for
the merger versus a range of 0.5x to 2.2x, with a mean of 1.3x, for the
Selected Facilities Services Transactions, and a range 0.5x to 5.8x, with a
mean of 1.8x, for the Selected Consolidator Transactions. BT Alex. Brown
further noted that, at the implied offer price of $11.00 per share, the
multiple of Adjusted Value to trailing twelve month EBITDA was 12.4x for the
merger versus a range of 5.9x to 10.2x, with a mean of 7.3x, for the Selected
Facilities Services Transactions, and a range of 6.3x to 22.6x, with a mean of
12.9x, for the Selected Consolidator Transactions. BT Alex. Brown also noted
that, at the implied offer price of $11.00 per share, the multiple of equity
purchase price to trailing twelve month net income was 27.7x for the merger
versus a range of 11.6x to 41.2x, with a mean of 23.5x, for the Selected
Facilities Services Transactions, and a range of 18.9x to 66.4x, with a mean of
36.9x, for the Selected Consolidator Transactions. All multiples for the
transactions analyzed were based on available public information, without
taking into account differing market and other conditions in the periods during
which the transactions occurred.
Premiums Paid Analysis. BT Alex. Brown reviewed the premiums paid, to the
extent publicly available, in 41 merger or acquisition transactions announced
since January 1, 1990, accounted for under the purchase accounting method and
involving all stock consideration, with transaction values between $200 million
and $350 million (collectively, the "Premium Transactions"). BT Alex. Brown
noted that the Premium Transactions were effected at mean and median premiums
to the target's per share market price one day prior to announcement of 23.3%
and 19.4%, respectively, versus a transaction premium of 37.5% for the merger
(based on LandCare's closing per share market price one day prior to the
November 2, 1998 announcement of the merger). BT Alex. Brown also noted that
the Premium Transactions were effected at mean and median premiums to the
target's per share market price four weeks prior to announcement of 41.4% and
41.2%, respectively, versus a transaction premium for the merger (based on the
closing per share market price four weeks prior for LandCare common stock) of
69.2%.
Historical Exchange Ratio Analysis. BT Alex. Brown reviewed and analyzed the
historical ratio of the daily per share market closing prices of LandCare
common stock divided by the corresponding prices of ServiceMaster common stock
over the periods from June 5, 1998 through October 30, 1998 (the last trading
day prior to announcement of the merger), ninety trading days prior to and
including October 30, 1998, thirty trading days prior to and including October
30, 1998, fifteen trading days prior to and including October 30, 1998, and as
of October 30, 1998. Such average exchange ratios for the aforementioned time
periods and as of such date were 0.349, 0.347, 0.338, 0.363 and 0.379,
respectively, as compared to the assumed exchange ratio for the merger of 0.55.
See "The Merger Agreement--Merger Consideration" for a detailed discussion of
the exchange ratio and the factors that affect the value of ServiceMaster stock
to be received by LandCare stockholders in the merger. The implied premium of
the assumed exchange ratio for the merger of 0.55 to the average exchange
ratios for the aforementioned time periods and as of such date were 57.6%,
58.5%, 62.7%, 51.5% and 45.1%, respectively.
Discounted Cash Flow Analysis. BT Alex. Brown performed a discounted cash
flow analysis for LandCare. The discounted cash flow approach values a business
based on the current value of the future cash flows that the business will
generate. To establish a current value under this approach, future cash flows
must be estimated and an appropriate discount rate determined.
BT Alex. Brown aggregated the present value of the projected LandCare cash
flows from 1999 through 2001 with the present value of a range of terminal
values. BT Alex. Brown discounted these cash flows at
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discount rates ranging from 15.0% to 17.0%. The terminal value was computed
based on projected EPS in calendar year 2002 and a range of terminal forward
P/E multiples of 8.0x to 11.0x. BT Alex. Brown arrived at such discount rates
based on its judgment of the cost of capital of the Selected Industry
Consolidators, and arrived at such terminal values based on its review of the
trading characteristics of LandCare common stock and the common stock of the
Selected Roll-up Industry Consolidators. This analysis indicated a range of
values of $6.55 to $9.43 per share. BT Alex. Brown further noted that the
LandCare projections assume sufficient availability of capital to finance
LandCare's acquisition program.
Pro Forma Combined Earnings Analysis. BT Alex. Brown analyzed certain pro
forma effects of the merger based on 100% stock consideration for the merger.
Based on such analysis, BT Alex. Brown computed the resulting
accretion/dilution to the combined company's diluted EPS estimate for calendar
years 1998 and 1999 pursuant to the merger before taking into account any
potential cost savings and other synergies that LandCare and ServiceMaster
could achieve if the merger were consummated, and before nonrecurring costs
relating to the merger. For purposes of this analysis, BT Alex. Brown utilized
LandCare management's projections for LandCare and CS First Boston research
estimates, with the approval of ServiceMaster, for ServiceMaster for calendar
year 1999 and CS First Boston research estimates for calendar year 1999
adjusted by their long-term EPS growth rate for ServiceMaster for calendar year
2000. BT Alex. Brown noted that before taking into account any potential cost
savings and other synergies and before certain nonrecurring costs relating to
the merger, the merger would be approximately 1.4% accretive and 2.8% accretive
to the combined company's diluted EPS for calendar years 1999 and 2000,
respectively. For purposes of this analysis, BT Alex. Brown assumed the implied
exchange ratio of 0.52 based on ServiceMaster's per share closing market price
one day prior to the announcement of the merger, in order to calculate the
actual share count that would have prevailed had the merger occurred on the
announcement date.
Liquidity Analysis. BT Alex. Brown analyzed the liquidity of the common
stocks of LandCare and ServiceMaster, and noted that the average number of
shares of LandCare common stock traded daily during the month of October 1998
was 28,574 shares, compared with 339,009 shares for ServiceMaster common stock
during the same period.
Relevant Market and Economic Factors. In rendering its opinion, BT Alex.
Brown considered, among other factors, the condition of the U.S. equity market,
particularly the public market for LandCare common stock and the market for
smaller capitalization consolidator stocks, the condition of the U.S. credit
markets, particularly those for smaller capitalization companies, and the then
current level of economic activity. BT Alex. Brown also considered the
competitive dynamics and market for acquisition targets in the commercial
landscape industry, particularly the increased competition for potential
acquisition targets in the industry, the increasing importance of cash as a
percentage of total acquisition consideration and the potential impact of such
market and economic factors on LandCare management's acquisition plans,
financing capacity and projections.
No company used in the analysis of other publicly traded companies nor any
transaction used in the analysis of selected mergers and acquisitions
summarized above is identical to LandCare or the merger. Accordingly, such
analyses must take into account differences in the financial and operating
characteristics of the Selected Facilities Services Companies, ServiceMaster,
and the Selected Industry Consolidators and the companies in the Selected
Facilities Services Transactions, and the Selected Consolidator Transactions
and other factors that would affect the public trading value and acquisition
value of the Selected Facilities Services Companies, ServiceMaster, and the
Selected Industry Consolidators and the companies in the Selected Facilities
Services Transactions and the Selected Consolidator Transactions, respectively.
The summary set forth above does not purport to be a complete description of
the opinion of BT Alex. Brown to the LandCare Board or the financial analyses
performed and factors considered by BT Alex. Brown in connection with its
opinion. The preparation of a fairness opinion is a complex analytic process
involving various determinations as to the most appropriate and relevant
methods of financial analyses and the application of those methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. BT Alex. Brown believes that its analyses
and the summary set forth above must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, or
selecting
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portions of the above summary, without considering all factors and analyses,
could create a misleading or incomplete view of the processes underlying such
analyses and opinion. In performing its analyses, BT Alex. Brown made numerous
assumptions with respect to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of LandCare and ServiceMaster. No company, transaction or business used
in such analyses as a comparison is identical to LandCare, ServiceMaster, the
combined LandCare/ServiceMaster company or the proposed merger, nor is an
evaluation of the results of such analyses entirely mathematical; rather, such
analyses involve complex considerations and judgments concerning financial and
operating characteristics and other factors that could affect the merger,
public trading or other values of the companies, business segments or
transactions being analyzed. The estimates contained in such analyses and the
ranges of valuations resulting from any particular analysis are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than those suggested by such analyses. In addition, analyses
relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold. Accordingly, such analyses and estimates are inherently subject to
substantial uncertainty.
The type and amount of consideration payable in the merger were determined
through negotiations between LandCare and ServiceMaster and were approved by
the LandCare Board. The decision to enter into the merger was solely that of
the LandCare Board. BT Alex. Brown's opinion and financial analyses were only
one of a number of factors taken into consideration by the LandCare Board in
its evaluation of the proposed merger and should not be viewed as determinative
of the views of the Board of Directors or management of LandCare with respect
to the exchange ratio or the merger.
Pursuant to the terms of BT Alex. Brown's engagement, LandCare has agreed to
pay $250,000 to BT Alex. Brown for rendering its opinion, which amount will be
credited against an aggregate opinion fee calculated as a percentage of the
aggregate consideration involved in the transaction and payable upon
consummation of the merger. In addition, LandCare has agreed to indemnify BT
Alex. Brown and certain related parties against certain liabilities, including
certain liabilities under the federal securities laws, relating to, or arising
out of, its engagement.
LandCare selected BT Alex. Brown based on BT Alex. Brown's reputation,
expertise and familiarity with LandCare and its business. BT Alex. Brown is an
internationally recognized investment banking firm and, as a customary part of
its investment banking business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and
other purposes. BT Alex. Brown has, from time to time, provided investment
banking and other financial services to LandCare or its affiliates (including
acting as lead managing underwriter in connection with LandCare's initial
public offering of common stock in June 1998), for which it has received
customary compensation. BT Alex. Brown maintains a market in LandCare common
stock and regularly publishes research reports regarding the facilities
services industry and the business and securities of LandCare and other
publicly owned companies in such industry. In the ordinary course of business,
BT Alex. Brown may actively trade or hold the securities of both LandCare and
ServiceMaster for its own account and the account of customers and,
accordingly, may at any time hold a long or short position in securities of
LandCare and ServiceMaster.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the LandCare Board with respect to the
merger, stockholders of LandCare should be aware that the directors and
executive officers of LandCare have certain interests in the merger that may be
substantial or in addition to the interests of stockholders of LandCare
generally. The LandCare Board was aware of these interests and considered them,
among other factors, in approving the merger agreement. These interests are
summarized below.
Interests in Common Stock and Options.
As of January 4, 1999, the executive officers and directors of LandCare
beneficially owned an aggregate of 5,468,276 shares of LandCare common stock,
which will be treated in the same manner as shares of LandCare common stock
held by other stockholders.
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As of January 4, 1999, the executive officers of LandCare had the right to
acquire an aggregate of 700,000 shares of LandCare common stock on the exercise
of options granted to such executive officers pursuant to option plans of
LandCare, and the non-employee directors of LandCare had the right to acquire
an aggregate of 40,000 shares of LandCare common stock on the exercise of
options granted to such non-employee directors pursuant to option plans of
LandCare. 33.88% of all LandCare options are held by the directors and
executive officers of LandCare. Under the terms of the LandCare option plans,
all of such outstanding options will become fully vested and immediately
exercisable on completion of the merger. In addition, on completion of the
merger, each unexpired and unexercised option to purchase LandCare common stock
previously granted by LandCare under any of its option plans will be converted
into an option to acquire the same number of shares of ServiceMaster common
stock as the holder of each such option would have been entitled to receive
pursuant to the merger had such holders exercised such options in full prior to
the merger (a "Substitute Option") at a price per share determined by dividing
the exercise price per share under each such option with respect to LandCare
common stock by the exchange ratio in the merger. The Substitute Options will
continue to be exercisable following the merger in accordance with the terms of
the LandCare option plans. See "The Merger Agreement--LandCare Stock Options."
The following five officers of LandCare agreed to waive full vesting and
exercisability of their LandCare options: William F. Murdy, Peter C. Forbes,
Harold D. Cranston, William L. Fiedler and Kenneth V. Garcia (the "Senior
Executives"). In lieu of such full vesting, the Senior Executives instead
accepted a modified vesting schedule whereby one-half of the shares subject to
their Substitute Options will vest and thereafter be exercisable on the date
six months after the merger, and the remaining one-half of the shares subject
to their Substitute Options will vest and thereafter be exercisable on the
first anniversary of the merger. If LandCare terminates the employment of a
Senior Executive without Cause (as defined in the employment agreement of such
Senior Executive) during the twelve-month period following the merger or if a
Senior Executive terminates his employment with LandCare for Good Reason (as
defined in the employment agreement of such Senior Executive) during the
twelve-month period following the merger, the unvested portion of such Senior
Executive's Substitute Options will immediately vest and be exercisable for a
period of three months following the termination of employment.
Employment Agreements.
The Senior Executives are parties to employment agreements with LandCare.
These Senior Executive employment agreements provide for a three-year initial
term and renew successively for one-year terms thereafter. If LandCare
terminates the employment of a Senior Executive without Cause (as defined in
the employment agreement of such Senior Executive) during the twelve-month
period following the merger or if a Senior Executive terminates his employment
with LandCare for Good Reason (as defined in the employment agreement of such
Senior Executive) during the twelve-month period following the merger, LandCare
will be required to pay such Senior Executive an amount equal to three times
the greater of (i) his then current base salary or (ii) his base salary as in
effect immediately prior to the merger (the "Severance Payment").
In addition, if a Senior Executive becomes entitled to any Severance Payment
which is subject to the tax imposed by Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Excise Tax"), LandCare is required to pay such
Senior Executive an additional amount such that the net amount retained by the
Senior Executive (after deduction of any Excise Tax and any income taxes,
interest and penalties on such additional payment) will be equal to the
Severance Payment.
Each of the seven founding companies acquired in connection with the LandCare
IPO are parties to employment agreements with one or more of the selling
stockholders of such founding companies. These employment agreements provide
for substantially similar change in control severance payments as those payable
to the Senior Executives.
Indemnification and Insurance.
The merger agreement provides for certain arrangements with respect to the
ongoing obligations of ServiceMaster to indemnify, and maintain insurance on
behalf of, the directors and executive officers of LandCare in respect of
certain liabilities.
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VOTING AGREEMENTS
Certain of the directors, all of the executive officers and certain
stockholders of LandCare, who owned in the aggregate approximately 30.91% of
the LandCare common stock outstanding on January 4, 1999, entered into voting
agreements with ServiceMaster (the "Voting Agreements") concurrent with the
execution of the merger agreement. The Voting Agreements provide that the
LandCare stockholders party thereto vote their shares of LandCare common stock
in favor of the adoption of the merger agreement and the approval of the merger
and against approval of any Opposing Proposal. "Opposing Proposal" is defined
in the Voting Agreements as any proposal made in opposition to or competition
with consummation of the merger with ServiceMaster and any merger,
consolidation, sale of assets, reorganization or recapitalization with any
party other than with ServiceMaster and its affiliates and any reorganization,
recapitalization, liquidation or winding up of LandCare. The Voting Agreements
also provide that the LandCare stockholders party thereto will not, directly or
indirectly, (i) invite or seek any Opposing Proposal, (ii) support (or suggest
that anyone else should support) any Opposing Proposal, (iii) otherwise take
any action designed to make any Opposing Proposal more likely, (iv) meet or
otherwise communicate with any person that is making, or considering making, an
Opposing Proposal, (v) fail to advise ServiceMaster of each contact that such
stockholders may receive from any person relating to an Opposing Proposal, (vi)
claim or join in any litigation alleging that the LandCare Board is required to
consider, endorse or support any Opposing Proposal or to invite or seek any
Opposing Proposal and (vii) take any other action that is reasonably likely to
make consummation of the merger with ServiceMaster less likely.
Notwithstanding the contractual voting obligations contained in the Voting
Agreements, certain of the Voting Agreements include specified exceptions as
discussed below. The Voting Agreements executed by the LandCare stockholders
who were also directors of LandCare state that "[n]othing in this Agreement
shall be deemed to restrict the Stockholder from taking any action in the
capacity of director of the Corporation that such Stockholder shall believe or
is advised by counsel are necessary to fulfill the Stockholder's fiduciary
duties as a director." The Voting Agreements executed by the LandCare
stockholders who were also officers of LandCare state that "[n]othing in this
Agreement shall be deemed to restrict Stockholder from acting on behalf of the
board of directors as an officer of the Corporation when requested to do so by
the board of directors in furtherance of their fiduciary duties."
In addition, during the term of the Voting Agreements, the LandCare
stockholders party to a Voting Agreement have agreed not to (i) tender their
shares in response to any tender offer or (ii) sell, transfer or encumber any
interest in their shares of LandCare common stock.
Certain of the LandCare stockholders party to a Voting Agreement have also
agreed pursuant to their respective Voting Agreement not to sell, transfer or
encumber their shares of ServiceMaster common stock which are received in the
merger until one year has elapsed from the date their shares of LandCare common
stock were originally issued. The certificates evidencing ServiceMaster common
stock to be issued to the LandCare stockholders party to a Voting Agreement
will be legended to reflect the applicable transfer restrictions described
above.
ACCOUNTING TREATMENT OF THE MERGER
The merger will be accounted for under the "purchase" method of accounting,
in accordance with GAAP. Under this method of accounting, the purchase price
will be allocated to assets acquired and liabilities assumed based on their
estimated fair values at the time of the merger. Income of ServiceMaster will
not include income (or loss) of LandCare prior to consummation of the merger,
except as provided for in the pro forma financial information.
CERTAIN FEDERAL REGULATORY MATTERS
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), and the rules and regulations thereunder, require that parties of a
certain size to a proposed merger or business combination exceeding a certain
size file with the Antitrust Division of the Department of Justice (the
"Antitrust Division") and the Federal Trade Commission (the "FTC") Notification
and Report Forms ("Forms") with respect to
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such merger or business combination. The parties thereafter are required to
observe a waiting period before consummating the reported transaction. In
compliance with the HSR Act, ServiceMaster and LandCare each filed Forms on
November 18, 1998 with the Antitrust Division and the FTC with respect to the
merger. Early termination of the applicable waiting period under the HSR Act
was granted on December 7, 1998.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material anticipated U.S. federal income
tax consequences of the merger to LandCare, SVM Acquisition Corporation, a
wholly-owned subsidiary of ServiceMaster ("Sub"), ServiceMaster and only those
holders of LandCare common stock who hold such stock as a capital asset. This
summary is based on applicable provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), Treasury regulations thereunder and administrative
rulings and court decisions in effect as of the date hereof, all of which are
subject to change at any time, possibly with retroactive effect. This summary
is not a complete description of all of the tax consequences of the merger and,
in particular, may not address U.S. federal income tax consequences to
stockholders subject to special treatment under U.S. federal income tax law
(including, for example, non-U.S. persons, financial institutions, dealers in
securities, insurance companies or tax-exempt entities, holders who acquired
LandCare common stock pursuant to the exercise of an employee stock option or
right or otherwise as compensation and holders who hold LandCare common stock
as part of a hedge, straddle or conversion transaction). In addition, no
information is provided herein with respect to the tax consequences of the
merger under applicable foreign, state or local laws.
Holders of LandCare common stock are urged to consult with their tax advisors
regarding the tax consequences of the merger to them, including the effects of
federal, state, local, foreign and other tax laws.
Arthur Andersen LLP, tax advisor to LandCare, has rendered its tax opinion
(the "Tax Opinion"), dated as of the date hereof, that, for U.S. federal income
tax purposes, the merger should be treated as a tax-free reorganization within
the meaning of Section 368(a) of the Code. Subject to the limitations and
qualifications referred to herein, the following federal income tax
consequences should result:
(i) No gain or loss will be recognized by the holders of LandCare common
stock who exchange all of their LandCare common stock solely for
ServiceMaster common stock pursuant to the merger (except with respect to
cash received in lieu of a fractional share interest in ServiceMaster
common stock);
(ii) LandCare, Sub and ServiceMaster will each be a party to the
reorganization within the meaning of Section 368(b) of the Code;
(iii) No gain or loss will be recognized by LandCare, Sub or
ServiceMaster as a result of the merger;
(iv) The aggregate tax basis of the ServiceMaster common stock received
by holders of LandCare common stock who exchange all of their LandCare
common stock solely for ServiceMaster common stock pursuant to the merger
will be the same as the aggregate tax basis of the LandCare common stock
surrendered in exchange therefor (reduced by any basis amount allocable to
the fractional share interest in ServiceMaster common stock for which cash
is received);
(v) Cash received by a holder of LandCare common stock in lieu of a
fractional share interest in ServiceMaster common stock will be treated as
received in redemption of such fractional share interest, and a holder of
LandCare common stock should generally recognize capital gain or loss for
U.S. federal income tax purposes measured by the difference between the
amount of cash received and the portion of the tax basis of the share of
LandCare common stock allocable to such fractional share interest; and
(vi) The holding period of a share of ServiceMaster common stock received
in the merger (including fractional share interests deemed received and
redeemed as described above) will include the holder's holding period in
the LandCare common stock surrendered in exchange therefor.
The Tax Opinion may be relied upon if the facts, representations,
assumptions, and other limitations referenced therein are consistent with the
facts existing at the closing of the merger. In rendering the Tax Opinion,
Arthur Andersen LLP has relied on and will assume as accurate the usual and
customary representations and covenants including those contained in
certificates of officers of ServiceMaster and LandCare.
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WHILE THE TAX OPINION REPRESENTS ARTHUR ANDERSEN LLP'S BEST JUDGEMENT AS TO
THE TAX TREATMENT OF THE MERGER, THE TAX OPINION IS NOT BINDING ON THE INTERNAL
REVENUE SERVICE OR THE COURTS. THE PARTIES DO NOT INTEND TO REQUEST A RULING
FROM THE INTERNAL REVENUE SERVICE WITH RESPECT TO THE MERGER. ACCORDINGLY,
THERE CAN BE NO ASSURANCE THAT THE INTERNAL REVENUE SERVICE WILL NOT CHALLENGE
SUCH CONCLUSION OR THAT A COURT WILL NOT SUSTAIN SUCH CHALLENGE. IN ADDITION,
THERE CAN BE NO ASSURANCE THAT FUTURE LEGISLATIVE, JUDICIAL OR ADMINISTRATIVE
CHANGES OR INTERPRETATIONS WILL NOT ADVERSELY AFFECT THE ACCURACY OF THE
STATEMENTS AND CONCLUSIONS SET FORTH IN THE TAX OPINION AND HEREIN. ANY SUCH
CHANGES OR INTERPRETATIONS COULD BE APPLIED RETROACTIVELY AND COULD AFFECT THE
TAX CONSEQUENCES OF THE MERGER TO LANDCARE, SERVICEMASTER AND THEIR RESPECTIVE
STOCKHOLDERS.
DELISTING AND DEREGISTRATION OF LANDCARE COMMON STOCK; LISTING OF SERVICEMASTER
COMMON STOCK ISSUED IN CONNECTION WITH THE MERGER
LandCare common stock currently is listed on the NYSE under the symbol GRW.
Upon consummation of the merger, LandCare common stock will be delisted from
the NYSE and deregistered under the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
Application will be made for the listing under the symbol SVM on the NYSE of
the shares of ServiceMaster common stock to be issued in the merger. The
listing of such shares on the NYSE is a condition to the completion of the
merger. Following the merger, LandCare stockholders will be required to
exchange their outstanding stock certificates for stock certificates
representing shares of ServiceMaster common stock (and no dividends and
distributions with respect to ServiceMaster common stock issued in the merger
will be paid until such LandCare certificates are properly exchanged). See "The
Merger Agreement--Merger Consideration."
NO RIGHT OF DISSENT
In accordance with Section 262 of the General Corporation Law of the State of
Delaware, LandCare stockholders will not have a right to dissent from the
merger and obtain payment of an alternative valuation for their LandCare common
stock determined by a court because LandCare common stock is listed on the
NYSE.
RESALES OF SERVICEMASTER COMMON STOCK ISSUED IN CONNECTION WITH THE MERGER
The shares of ServiceMaster common stock issuable in the merger have been
registered under the Securities Act. Therefore, such shares may be traded
freely without restriction by LandCare stockholders, except by those LandCare
stockholders who are deemed to be "affiliates" of LandCare. Those persons who
are deemed affiliates of LandCare will be restricted subsequent to the merger
from publicly selling the shares of ServiceMaster common stock they receive in
the merger unless such sales are made pursuant to, among other things, an
exemption from registration under the Securities Act (such as pursuant to Rule
145, which is discussed below).
An affiliate of LandCare is any person that, directly or indirectly through
one or more intermediaries, controls or is controlled by, or is under common
control with, LandCare. Directors and executive officers of a corporation are
commonly deemed to be included among the affiliates of such corporation. Each
person who entered into a Voting Agreement (see "The Merger--Voting Agreements"
above) has acknowledged that it is an affiliate of LandCare.
Persons who are affiliates of LandCare, for a period of one year following
the merger, generally will be able to sell shares of ServiceMaster common stock
received in the merger pursuant to Rule 145 under the Securities Act. In
general, under Rule 145 an affiliate of LandCare, together with certain members
of such affiliate's immediate family, will be entitled to sell shares of
ServiceMaster common stock received in the merger only through unsolicited
"brokers' transactions" or in transactions directly with a "market maker," as
such terms are defined in Rule 144 under the Securities Act. Additionally, the
number of such shares to be sold by an affiliate within any three-month period
under Rule 145 may not exceed the greater of 1% of the outstanding shares of
ServiceMaster common stock or the average weekly trading volume of such stock
during the four calendar weeks preceding such sale. It is not anticipated that
this limitation will adversely affect any LandCare stockholder to any
significant extent given that the ServiceMaster common stock to be outstanding
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after the merger is expected to be approximately 307 million shares; and thus
the number of shares that can be sold by an affiliate within any three-month
period will be at least approximately 3 million shares. In the second year
after the merger, such persons will be able to sell such ServiceMaster common
stock freely as long as ServiceMaster is current in its filings under the
Exchange Act.
Transfer restriction legends will be placed on certificates evidencing any
shares of ServiceMaster common stock to be received by affiliates in the
merger.
CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
ServiceMaster.
This Proxy Statement/Prospectus contains or incorporates by reference certain
forward-looking statements of ServiceMaster within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act, and ServiceMaster
intends that such forward-looking statements be subject to the safe harbors
created thereby. Such forward-looking statements involve risks and
uncertainties and include, but are not limited to, statements regarding future
events and the plans, goals and objectives of ServiceMaster. Such statements
are generally accompanied by words such as "intend," "anticipate," "believe,"
"estimate," "expect" or similar statements. The actual results of ServiceMaster
may differ materially from such statements. Factors that could cause or
contribute to such differences are set forth below or are discussed elsewhere
in this Proxy Statement/Prospectus and in the documents incorporated herein by
reference. Although ServiceMaster believes that the assumptions underlying its
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the results
contemplated in such forward-looking statements will be realized. The inclusion
of such forward-looking information should not be regarded as a representation
by ServiceMaster or any other person that the future events, plans or
expectations contemplated by ServiceMaster will be achieved. Furthermore, past
performance in operations and share price is not necessarily predictive of
future performance.
Seasonality and Impact of Weather Conditions. The lawn care and pest control
businesses of ServiceMaster are highly seasonal in nature, with a significant
portion of their net revenues occurring in the spring and summer months of each
year. Adverse weather conditions could have a negative impact on the demand for
the lawn care and pest control services of ServiceMaster.
Increased Competition. The service industries in which ServiceMaster operates
are highly competitive with limited barriers to entry. The entry of new
competitors into one or more of the markets served by ServiceMaster could
affect the demand for its services as well as impose additional pricing
pressures.
Labor Shortages. Most of the services provided by ServiceMaster are highly
labor intensive. In the event of a labor shortage, ServiceMaster may experience
difficulty in delivering its services in a high-quality manner and may be
forced to increase wages in order to attract a sufficient number of employees,
which could result in higher operating costs for ServiceMaster.
Continued Consolidation of the U.S. Hospital Market. In recent years, there
has been an ongoing consolidation of hospitals in the health care market. This
continued consolidation could adversely affect the level of demand for
ServiceMaster's health care management services and the prices which it can
charge for such services.
Ability to Continue Acquisition Strategy. ServiceMaster plans to continue to
pursue opportunities to expand through acquisitions. The ability of
ServiceMaster to continue to make acquisitions at reasonable prices and to
integrate the acquired businesses are important factors in its future growth.
LandCare.
This Proxy Statement/Prospectus contains certain forward-looking statements
of LandCare within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act, and LandCare intends that such forward-looking
statements be subject to the safe harbors created thereby. Such forward-looking
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statements involve risks and uncertainties and include, but are not limited to,
statements regarding future events and the plans, goals and objectives of
LandCare. Such statements are generally accompanied by words such as "intend,"
"anticipate," "believe," "estimate," "expect" or similar statements. The actual
results of LandCare may differ materially from such statements. Important
factors that could cause actual results to differ include, among others, risks
associated with acquisitions, volatility of stock price, changes in government
regulations, competition, integration of operations and growth of newly
acquired businesses and other risks detailed in LandCare's reports filed with
the Securities and Exchange Commission. Additional factors that could cause or
contribute to such differences are discussed elsewhere in this Proxy
Statement/Prospectus. Although LandCare believes that the assumptions
underlying its forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the results contemplated in such forward-looking statements will be
realized. The inclusion of such forward-looking information should not be
regarded as a representation by LandCare or any other person that the future
events, plans or expectations contemplated by LandCare will be achieved.
Furthermore, past performance in operations and share price is not necessarily
predictive of future performance.
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THE MERGER AGREEMENT
The following is a summary of certain provisions of the merger agreement,
which is attached as Appendix A to this Proxy Statement/Prospectus and is
incorporated herein by reference. This summary is not necessarily complete and
is qualified in its entirety by reference to the merger agreement. LandCare
stockholders are urged to read the merger agreement in its entirety for a more
complete description of the terms and conditions of the merger. Capitalized
terms not otherwise defined herein have the same meanings as defined in the
merger agreement.
THE MERGER
The merger agreement provides that, on the terms and subject to the
conditions contained therein, including the adoption of the merger agreement by
the LandCare stockholders, a wholly-owned subsidiary of ServiceMaster will
merge with and into LandCare, whereupon the separate existence of this
ServiceMaster subsidiary will cease, and LandCare will continue as the
surviving corporation and as a wholly-owned subsidiary of ServiceMaster.
After the conditions precedent to the merger have been fulfilled or waived
(where permissible), the filing of a duly executed certificate of merger will
be made with the Secretary of State of the State of Delaware, and the merger
will become effective on the filing of the certificate of merger or such later
time as is agreed by ServiceMaster and LandCare and specified in such
certificate (the "Effective Time").
CONVERSION OF SHARES
At the Effective Time, all shares of LandCare common stock that are held by
LandCare as treasury stock immediately prior to the Effective Time will be
canceled, and no consideration will be delivered in exchange therefor. Each
share of LandCare common stock outstanding immediately prior to the Effective
Time will be converted into shares of ServiceMaster common stock as discussed
immediately below.
MERGER CONSIDERATION
The merger agreement provides that, subject to the terms and conditions
contained therein, each share of LandCare common stock issued and outstanding
immediately prior to the Effective Time (other than shares held by LandCare)
will be converted into a fraction (the "exchange ratio") of one share of
ServiceMaster common stock. The exact exchange ratio depends on the average of
the closing prices of ServiceMaster common stock on the NYSE over the 20
consecutive trading days ending on [ ], 1999 (which is the third trading
day prior to the scheduled date of the LandCare special meeting) (which is
referred to as the ServiceMaster Average Closing Price).
If the ServiceMaster Average Closing Price is $16.36 or more per share and
not more than $20.00 per share, the exchange ratio will be 0.5500 and the value
of the ServiceMaster fractional share to be paid for each share of LandCare
common stock will be between $9.00 and $11.00 (valued at the ServiceMaster
Average Closing Price).
If the ServiceMaster Average Closing Price is more than $20.00, the exchange
ratio will automatically adjust so that exactly $11.00 of ServiceMaster common
stock valued at the ServiceMaster Average Closing Price will be paid for each
share of LandCare common stock.
If the ServiceMaster Average Closing Price is less than $16.36, then unless
ServiceMaster otherwise notifies LandCare in writing prior to the date
immediately prior to the date on which the LandCare special meeting is then
scheduled to occur (the "Freeze Deadline"), the exchange ratio will
automatically adjust so that exactly $9.00 of ServiceMaster common stock valued
at the ServiceMaster Average Closing Price will be paid for each share of
LandCare common stock. However, if ServiceMaster notifies LandCare in writing
prior
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to the Freeze Deadline that ServiceMaster elects not to permit the upward
adjustment of the exchange ratio, then: (i) the exchange ratio will be 0.5500
(or such greater number as ServiceMaster shall specify to LandCare); (ii)
LandCare will have the right to reschedule the LandCare special meeting up to
ten days later than the date on which it would have been held (provided that
without the agreement of LandCare and ServiceMaster such rescheduling will not
cause the period used to determine the ServiceMaster Average Closing Price to
change); and (iii) during this period LandCare will have the right to terminate
the merger agreement by giving written notice to ServiceMaster.
The following table illustrates (i) how the exchange ratio changes given a
range of possible ServiceMaster Average Closing Prices and (ii) the resulting
value of ServiceMaster common stock (valued at the ServiceMaster Average
Closing Price) that would be received for each share of LandCare common stock
in the merger. We only describe in this table such effects assuming a
ServiceMaster Average Closing Price equal to or greater than $16.36. If the
ServiceMaster Average Closing Price is less than $16.36, less than $9.00 of
ServiceMaster common stock (valued at the ServiceMaster Average Closing Price)
may be paid for each share of LandCare common stock (depending on the election
of ServiceMaster), but LandCare would have the right to terminate the merger
agreement.
<TABLE>
<CAPTION>
EXCHANGE
RATIO/FRACTION OF
SERVICEMASTER SERVICEMASTER VALUE RECEIVED
AVERAGE SHARE TO BE ISSUED FOR EACH
CLOSING PRICE PER LANDCARE SHARE LANDCARE SHARE
------------- ------------------ --------------
<S> <C> <C>
$25.00 0.4400 $11.00
$24.50 0.4498 $11.00
$24.00 0.4583 $11.00
$23.50 0.4681 $11.00
$23.00 0.4783 $11.00
$22.50 0.4889 $11.00
$22.00 0.5000 $11.00
$21.50 0.5116 $11.00
$21.00 0.5238 $11.00
$20.50 0.5366 $11.00
$20.00 0.5500 $11.00
$19.50 0.5500 $10.73
$19.00 0.5500 $10.45
$18.50 0.5500 $10.18
$18.00 0.5500 $ 9.90
$17.50 0.5500 $ 9.63
$17.00 0.5500 $ 9.35
$16.50 0.5500 $ 9.08
$16.36 0.5500 $ 9.00
</TABLE>
As of [ ], 1999, the closing price of ServiceMaster common stock
was $[ ], and if such date had been the last day in the 20 trading day
period for purposes of determining the ServiceMaster Average Closing Price, the
ServiceMaster Average Closing Price would have been $[ ]. Assuming that
$[ ] was the actual ServiceMaster Average Closing Price, the exchange ratio
would be [ ] and each share of LandCare common stock would receive
$[ ] of ServiceMaster common stock (valued at the assumed ServiceMaster
Average Closing Price).
The actual exchange ratio will be based on the average closing price for
ServiceMaster common stock on the New York Stock Exchange for the 20 trading
days ending , 1999 and cannot be predicted. You are urged to obtain
current market information for ServiceMaster common stock.
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All shares of LandCare common stock, when so converted in the merger, will no
longer be outstanding and will automatically be canceled and will cease to
exist. Each holder of a certificate which immediately prior to the Effective
Time represented shares of LandCare common stock (the "Certificates") will
cease to have any rights with respect thereto, except the right to receive
certain dividends and other distributions, and, on surrender of such
Certificates, the right to be issued shares of ServiceMaster common stock and
any cash, without interest, in lieu of fractional shares of ServiceMaster
common stock (referred to herein as the merger consideration).
FRACTIONAL SHARES
No certificates representing fractional shares of ServiceMaster common stock
will be issued on the surrender for exchange of Certificates formerly
representing LandCare common stock, no ServiceMaster dividend or other
distribution will be paid with respect to any fractional share interest, and no
fractional share interest will entitle the owner thereof to vote or to any
right as a stockholder of ServiceMaster.
CERTAIN ADJUSTMENTS
The merger agreement provides that, if on or prior to the Effective Time, any
stock dividend is declared in respect of outstanding ServiceMaster common
stock, or if ServiceMaster splits, combines or reclassifies its outstanding
common stock or if ServiceMaster issues any other securities in exchange or in
substitution for outstanding shares of ServiceMaster common stock at any time
during the period from the date of the merger agreement to the Effective Time,
LandCare and ServiceMaster will make such adjustment to the merger
consideration as LandCare and ServiceMaster mutually agree so as to preserve
the economic benefits that LandCare and ServiceMaster each reasonably expected
to receive as a result of the consummation of the merger and the other
transactions contemplated by the merger agreement.
SURRENDER AND PAYMENT
ServiceMaster and LandCare have authorized Harris Trust and Savings Bank of
Chicago to act as exchange agent (the "Exchange Agent") for the purpose of
exchanging Certificates representing LandCare common stock for the merger
consideration. Immediately following the Effective Time, ServiceMaster will
deposit with the Exchange Agent, for the benefit of the holders of Certificates
formerly representing LandCare common stock, the merger consideration in
exchange for outstanding LandCare common stock. Promptly after the Effective
Time, ServiceMaster will send, or will cause the Exchange Agent to send, to
each holder of LandCare common stock at the Effective Time (i) a letter of
transmittal for use in such exchange (which shall specify that delivery of the
merger consideration will be effected, and risk of loss and title to the
certificates representing ServiceMaster common stock and LandCare common stock
will pass, only on proper delivery of the Certificates formerly representing
LandCare common stock to the Exchange Agent), and (ii) instructions for use in
effecting the surrender of the Certificates formerly representing LandCare
common stock in exchange for the merger consideration.
Each holder of LandCare common stock that has been converted into a right to
receive the merger consideration, on surrender to the Exchange Agent of a
Certificate or Certificates formerly representing such LandCare common stock,
together with a properly completed and duly executed letter of transmittal
covering such LandCare common stock and such other documents as may reasonably
be required by the Exchange Agent, will be entitled to receive the merger
consideration payable in respect of such LandCare common stock and any
dividends payable in respect thereof. Until so surrendered, each such
Certificate will, after the Effective Time, represent for all purposes only the
right to receive the merger consideration and any dividends payable in respect
thereof. If any portion of the merger consideration is to be paid to a person
other than the registered holder of the LandCare common stock formerly
represented by the Certificate or Certificates surrendered in exchange
therefor, it shall be a condition to such payment that the Certificate or
Certificates so surrendered shall be properly endorsed or otherwise be in
proper form for transfer and that the person
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requesting such payment shall pay to the Exchange Agent any transfer or other
taxes required as a result of such payment to a person other than the
registered holder of such LandCare common stock represented by the Certificate
or Certificates so surrendered or establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not applicable. After the Effective
Time, there shall be no further registration of transfers of LandCare common
stock. If, after the Effective Time, Certificates formerly representing
LandCare common stock are presented to LandCare, they shall be canceled and
exchanged for the consideration provided for and in accordance with the
procedures set forth above.
FAILURE TO EXCHANGE
Any portion of the merger consideration made available to the Exchange Agent
that remains unclaimed by the holders of LandCare common stock one year after
the Effective Time will be returned to ServiceMaster, on demand by
ServiceMaster. Any holders who have not exchanged their LandCare common stock
for the merger consideration prior to that time shall thereafter look only to
ServiceMaster for payment of the merger consideration and any dividends payable
in respect of their LandCare common stock. Neither ServiceMaster, LandCare nor
the Exchange Agent will be liable to any person in respect of any shares of
ServiceMaster common stock, any dividends or distributions with respect thereto
or any cash in lieu of fractional shares of ServiceMaster common stock, in each
case, delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law. If any certificate representing LandCare
common stock shall not have been surrendered prior to two years after the
Effective Time (or immediately prior to such earlier date on which any merger
consideration, any dividends or distributions payable to the holder of such
Certificate or any cash payable to the holder of such Certificate formerly
representing LandCare common stock, would otherwise escheat to or become the
property of any governmental entity), any such merger consideration, dividends
or distributions in respect of such Certificate or such cash shall, to the
extent permitted by applicable law, become the property of LandCare (which will
become a wholly-owned subsidiary of ServiceMaster in the merger), free and
clear of all claims or interest of any person previously entitled thereto.
DIVIDENDS AND DISTRIBUTIONS
No dividends or other distributions declared or made after the Effective Time
with respect to ServiceMaster common stock issued in connection with the merger
shall be paid to the holder of any unsurrendered Certificates formerly
representing LandCare common stock until such Certificates are surrendered.
Subject to the effect of applicable laws, following the surrender of such
Certificates, there will be paid, without interest, to the record holder of
ServiceMaster common stock issued in exchange therefor at the time of such
surrender, the amount of dividends or other distributions with a record date
after the Effective Time payable prior to or on the date of such surrender with
respect to such whole shares of ServiceMaster common stock and not previously
paid, less the amount of any withholding taxes which may be required thereon.
The Exchange Agent shall invest any cash deposited with the Exchange Agent, as
directed by ServiceMaster, on a daily basis. Any interest and other income
resulting from such investments shall be paid to ServiceMaster.
LOST CERTIFICATES
If any Certificate which prior to the Effective Time represented shares of
LandCare common stock shall have been lost, stolen or destroyed, on the making
of an affidavit of that fact by the person claiming such Certificate to be
lost, stolen or destroyed and, if required by LandCare (which will become a
wholly-owned subsidiary of ServiceMaster in the merger), the posting by such
person of a bond in such reasonable amount as LandCare may direct as indemnity
against any claim that may be made against it with respect to such Certificate,
the Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the merger consideration and, if applicable, any unpaid dividends
and distributions on shares of ServiceMaster common stock deliverable in
respect thereof and any cash in lieu of fractional shares, in each case, due to
such person pursuant to the merger agreement.
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CONDITIONS TO THE MERGER; GOVERNMENTAL REGULATORY APPROVALS
The respective obligations of ServiceMaster and LandCare to effect the merger
are subject to the fulfillment of certain conditions at or prior to the
Effective Time including: (i) the merger agreement shall have been adopted by
the stockholders of LandCare in accordance with Delaware Law; (ii) no judgment,
injunction, order or decree shall prohibit the consummation of the merger; and
(iii) the merger agreement shall not have been terminated in accordance with
its terms.
In addition, the obligation of ServiceMaster to consummate the merger is
subject to the satisfaction of the following additional conditions: (i) the
representations and warranties of LandCare as set forth in the merger agreement
shall be true and correct in all material respects as if made on and as of the
Effective Time taking into account the exceptions set forth in the disclosure
schedule of LandCare; (ii) LandCare shall have complied with or performed in
all material respects all agreements and covenants required to be complied with
or performed by it under the merger agreement at or prior to the merger; and
(iii) ServiceMaster shall have received from each person who is, immediately
prior to the Effective Time, a director or officer of LandCare or any of its
subsidiaries his written resignation, effective as of the Effective Time, from
each position as a director or officer of LandCare and each subsidiary.
The obligations of LandCare to consummate the merger are subject to the
satisfaction of the following additional conditions: (i) the representations
and warranties of ServiceMaster as set forth in the merger agreement shall be
true and correct in all material respects as if made on and as of the Effective
Time; and (ii) ServiceMaster shall have complied with or performed in all
material respects all agreements and covenants required to be complied with or
performed by it under the merger agreement at or prior to the merger.
At any time prior to the Effective Time, LandCare and ServiceMaster, by
action taken by or pursuant to resolutions of their respective boards of
directors, may (i) extend the time for the performance of any of the
obligations or other acts of the parties thereto, (ii) waive any inaccuracies
in the representations and warranties contained in the merger agreement or in
any document delivered pursuant thereto, and (iii) except for adoption of the
merger agreement by the stockholders of LandCare, waive compliance with any of
the agreements or conditions contained in the merger agreement.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties of
ServiceMaster, including, among other things: (i) the accuracy of documents
filed by ServiceMaster with the SEC since December 31, 1996; (ii) no material
adverse change in the business of ServiceMaster except as disclosed in its
documents filed with the SEC prior to the date of the merger agreement; and
(iii) regulatory matters and compliance with laws. In addition, the merger
agreement contains representations and warranties by ServiceMaster as to its
organization, capital structure, authority to enter into the merger agreement
and the binding effect of the merger agreement. All representations and
warranties are subject to the exceptions disclosed in the ServiceMaster
disclosure schedule attached to the merger agreement.
The merger agreement contains customary representations and warranties of
LandCare, including, among other things: (i) no material adverse change in the
LandCare business except as disclosed in its documents filed with the SEC prior
to the date of the merger agreement; (ii) regulatory matters and compliance
with laws; (iii) tax matters; (iv) disclosure regarding pending or threatened
litigation against or involving LandCare; (v) employee benefit matters; (vi)
intellectual property matters; (vii) environmental matters; (viii) the
enforceability of material contracts; (ix) insurance policy matters; (x)
stockholder voting agreements; and (xi) disclosure regarding certain
liabilities. In addition, the merger agreement contains representations and
warranties by LandCare as to its organization, capital structure, authority to
enter into the merger agreement and the binding effect of the merger agreement.
All representations and warranties are subject to the exceptions disclosed in
the LandCare disclosure schedule attached to the merger agreement.
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CONDUCT OF BUSINESS PENDING THE MERGER
LandCare has agreed that, during the period from the date of the merger
agreement until the earlier of the termination of the merger agreement or the
Effective Time (except as otherwise expressly permitted by the terms of the
merger agreement), that:
(a) the businesses of LandCare and its subsidiaries will be conducted
only in the ordinary and usual course; LandCare will use its reasonable
best efforts to preserve intact its business organization and goodwill,
keep available the services of its officers and employees and maintain
satisfactory relationships with customers and others having business
relationships with it and its subsidiaries; and LandCare will promptly
notify ServiceMaster of any event or occurrence or emergency not in the
ordinary and usual course of the business of LandCare or any of its
subsidiaries or material to the business of LandCare and its subsidiaries,
taken as a whole;
(b) LandCare will not (i) amend its certificate of incorporation or
bylaws or (ii) split, combine or reclassify the outstanding LandCare common
stock or declare, set aside or pay any dividend payable in cash, stock or
property with respect to the LandCare common stock, other than dividends
paid by any of its subsidiaries to LandCare;
(c) Neither LandCare nor any of its subsidiaries will issue or agree to
issue any additional shares of, or rights of any kind to acquire shares of,
its capital stock of any class, other than (i) the issuance of shares of
capital stock of a subsidiary of LandCare to LandCare, (ii) with respect to
LandCare, LandCare common stock issuable on exercise of LandCare stock
options outstanding on the date of the merger agreement, (iii) options to
purchase LandCare shares issued to employees of enterprises acquired in
certain permitted acquisitions after the date of the merger agreement;
provided that the number of shares subject to options issued with respect
to any such particular acquisition shall not exceed 10% of the number of
shares of LandCare common stock issued in that acquisition and the exercise
price for such options shall not be lower than $11.00 per share; (iv)
LandCare common stock issuable in connection with the conversion of any of
the convertible notes of LandCare; and (v) the issuance of shares of
capital stock in connection with certain permitted acquisitions (see "--
Pipeline Acquisitions; Certain Related Termination Rights" below regarding
the LandCare acquisition restrictions);
(d) neither LandCare nor any of its subsidiaries will enter into or agree
to enter into any new or amended contract or agreement with any labor
unions representing employees of LandCare or any of its subsidiaries;
(e) except under certain circumstances (see "--Pipeline Acquisitions;
Certain Related Termination Rights" and "--No Solicitation" for a
discussion of the exceptions to this covenant), LandCare will not
authorize, recommend, propose or announce an intention to authorize,
recommend or propose, or enter into an agreement in principle or an
agreement with respect to any merger, consolidation or business combination
(other than the merger), any acquisition or disposition of a material
amount of assets or securities (including, without limitation, the assets
or securities of any of its subsidiaries) or any material change in its
capitalization, or enter, other than in the ordinary course of business,
into a material contract;
(f) neither LandCare nor any of its subsidiaries will modify, amend or
terminate any of the material LandCare agreements or waive, release or
assign any material rights or claims, except in the ordinary course of
business;
(g) neither LandCare nor any of its subsidiaries will: (i) grant any
increase in the compensation payable or to become payable by LandCare or
any of its subsidiaries to any officer or management employee other than
scheduled annual increases in the ordinary course of business; (ii) adopt
any new, or amend or otherwise increase, or accelerate the payment or
vesting of the amounts payable or to become payable under any existing,
bonus, incentive compensation, deferred compensation, severance, profit
sharing, stock option, stock purchase, insurance, pension, retirement or
other employee benefit plan agreement or arrangement; (iii) enter into any,
or amend any existing, employment, consulting or severance agreement with
or, except in accordance with the existing written policies of LandCare,
grant any severance or termination pay to any officer, director or employee
of LandCare or any of its
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subsidiaries; (iv) make any additional contributions to any grantor trust
created by LandCare to provide funding for non-tax-qualified employee
benefits or compensation; or (v) provide any new severance program or
rights;
(h) to the extent within their control, neither LandCare nor any of its
subsidiaries will permit any material insurance policy naming it as a
beneficiary or a loss payable payee to be canceled or terminated, except in
the ordinary course of business;
(i) except for increases in the aggregate principal amount of LandCare's
senior credit facility of up to $125 million, neither LandCare nor any of
its subsidiaries will: (i) incur or assume any debt except for borrowings
under existing credit facilities in the ordinary course of business; (ii)
assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any
other person, except in the ordinary course of business; (iii) make any
loans, advances or capital contributions to, or investments in, any other
person (other than to wholly-owned subsidiaries of LandCare, customary
loans or advances to employees in the ordinary course of business and
short-term investments pursuant to customary cash management systems of
LandCare in the ordinary course of business); or (iv) make or commit to
make any material capital expenditure in an amount or character that is not
consistent with LandCare's past practices;
(j) neither LandCare nor any of its subsidiaries will change any of the
accounting principles used by it unless required by GAAP; and
(k) except on the prior written consent of ServiceMaster, LandCare will
not make any tax election.
PIPELINE ACQUISITIONS; CERTAIN RELATED TERMINATION RIGHTS
LandCare delivered to ServiceMaster in connection with the execution of the
merger agreement a schedule (the "Pipeline Schedule") that shows: (a) every
enterprise with which LandCare has entered into a letter of intent or binding
acquisition agreement contemplating the acquisition of such enterprise by
LandCare as of the date the merger agreement was entered into; (b) the purchase
price for such enterprise specified in the letter of intent or acquisition
agreement; and (c) the annual revenues and proforma EBITDA (that is, earnings
before interest, taxes, depreciation and amortization) that LandCare estimated
such enterprise generated in the trailing 12 months prior to the execution of
the letter of intent or acquisition agreement with respect to that enterprise.
Eleven enterprises were so described on the Pipeline Schedule.
The merger agreement provides that LandCare will not enter into any letter of
intent or agreement to make any acquisition of any business enterprise or
consummate any acquisition of any business enterprise except that (i) LandCare
may enter into purchase agreements for the enterprises shown on the Pipeline
Schedule in accordance with certain terms and limitations specified in the
merger agreement, including limitations on the valuation of LandCare common
stock for the purpose of such acquisitions (if LandCare common stock is used)
and restrictions on the scope of representations and warranties and
indemnification and other provisions governing such acquisitions, and (ii)
LandCare may acquire businesses not listed on the Pipeline Schedule but only if
such acquisitions comply with the requirements referenced under (i) above and
which also meet certain purchase price, financial performance and quality of
business requirements.
ServiceMaster has the right to terminate the merger agreement if:
(a) by the date of the LandCare special meeting, LandCare has not
completed and closed acquisitions which satisfy the various criteria set
forth in the merger agreement, including specific criteria with respect to
such acquisitions on maximum aggregate purchase price, minimum aggregate
revenues and certain minimum financial performance targets;
(b) LandCare has made any acquisitions after the date of the merger
agreement that are contrary to the requirements set forth in the merger
agreement (including the requirements generally described or referenced
above); or
(c) the aggregate trailing 12 month revenues of all businesses acquired
by LandCare from November 1, 1998 through the date of the LandCare special
meeting exceed $70 million.
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LANDCARE STOCK OPTIONS
Pursuant to the merger agreement, the Board of Directors of LandCare has
adopted resolutions to effect the following: (i) adjust the terms of all
outstanding LandCare stock options granted under its stock option plans and the
terms of the LandCare stock option plans to provide that at the Effective Time,
each LandCare stock option outstanding immediately prior to the Effective Time
will be deemed to constitute an option to acquire, on the same terms and
conditions as were applicable under such LandCare stock option (except for
certain adjustments and lapsing of restrictions, vesting or acceleration of
exercisability of LandCare stock options described in the next paragraph), the
same number of shares of ServiceMaster common stock as the holder of such
LandCare stock option would have been entitled to receive pursuant to the
merger had such holder exercised such LandCare stock option in full immediately
prior to the Effective Time, at a price per share equal to the quotient derived
by dividing the exchange ratio into the exercise price per share at which the
LandCare common stock shall have been purchasable on exercise of such LandCare
stock option prior to the Effective Time; and (ii) make such other changes to
the LandCare stock option plans as it deems appropriate to give effect to the
merger (subject to approval of ServiceMaster).
At the Effective Time, all conditions and restrictions relating to all
outstanding LandCare stock options which have been granted pursuant to the
LandCare stock option plans, including limitations on exercisability, risks of
forfeiture and conditions and restrictions requiring continued performance of
services with respect to the exercisability or settlement of such LandCare
stock options, will immediately lapse.
The Senior Executives agreed to waive full vesting and exercisability of
their Options. In lieu of such full vesting, the Senior Executives instead
accepted a modified vesting schedule whereby one-half of the shares subject to
such Substitute Options will vest and thereafter be exercisable on the date six
months after the merger, and the remaining one-half of the shares subject to
such Substitute Options will vest and thereafter be exercisable on the first
anniversary of the merger. If LandCare terminates the employment of a Senior
Executive without Cause (as defined in such employment agreements) during the
twelve-month period following the merger or if a Senior Executive terminates
his employment with LandCare for Good Reason (as defined in such employment
agreements) during the twelve-month period following the merger, the unvested
portion of such Senior Executive's Substitute Options will immediately vest and
be exercisable for a period of three months following the termination of
employment.
As soon as practicable after the Effective Time, ServiceMaster will deliver
to the holders of LandCare stock options appropriate notices setting forth the
rights of such holders pursuant to the respective LandCare option plans, and
the agreements evidencing the grants of such LandCare stock options will
continue in effect on the same terms and conditions (except as expressly
provided in the merger agreement).
ServiceMaster will take all corporate action necessary to reserve for
issuance a sufficient number of shares of ServiceMaster common stock for
delivery on exercise of the LandCare stock options assumed in accordance with
the merger agreement. As soon as reasonably practicable after the Effective
Time, ServiceMaster will file a registration statement on Form S-8 (or any
successor or other appropriate form) with respect to the shares of
ServiceMaster common stock issuable on exercise of such LandCare stock options
and will use reasonable efforts to maintain the effectiveness of such
registration statement or registration statements (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as such
LandCare stock options remain outstanding.
NO SOLICITATION
Pursuant to the merger agreement, LandCare will not, and will not authorize
or permit any of its subsidiaries or any of its or its subsidiaries' officers,
directors, employees, agents or other representatives to, directly or
indirectly, solicit, initiate or encourage (including by way of furnishing or
disclosing non-public information) any inquiries or the making of any proposal
with respect to any merger, consolidation or other business combination
involving LandCare or the acquisition of all or any material portion of the
assets or capital stock of LandCare (an "Acquisition Transaction") or
negotiate, explore or otherwise engage in substantive discussions with any
person (other than ServiceMaster or its directors, officers, employees, agents
and representatives), or enter into any agreement, with respect to any
Acquisition Transaction or enter into any
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agreement, arrangement or understanding requiring it to abandon, terminate or
fail to consummate the merger or any other transactions contemplated by the
merger agreement. LandCare will immediately notify ServiceMaster of any
inquiries or proposals relating to any Acquisition Transaction.
LandCare may provide non-public information to and seek to negotiate an
Acquisition Transaction with a person (the "Competitor") provided that the
Competitor shall make a bona fide unsolicited written proposal to acquire
through an Acquisition Transaction all the capital stock or assets of LandCare
on Superior Terms (as defined in the merger agreement). A proposal to acquire
LandCare on Superior Terms is herein called a "Qualified Competing Proposal."
If LandCare receives a Qualified Competing Proposal, LandCare will nevertheless
(i) permit its stockholders to vote on the merger and (ii) not take any action
that would preclude LandCare from consummating the merger if it is approved by
LandCare's stockholders or make the merger any less advantageous to
ServiceMaster if it is approved by LandCare's stockholders. If the merger is
adopted by LandCare's stockholders (i) LandCare will consummate the merger, and
(ii) shall not consummate any Acquisition Transaction contemplated by a
Qualified Competing Proposal.
INDEMNIFICATION
The merger agreement provides that, from and after the Effective Time,
ServiceMaster shall indemnify, to the full extent permitted under Delaware Law,
the present and former directors and officers of LandCare and its subsidiaries
(the "Indemnified Parties") in respect of actions taken prior to and including
the Effective Time in connection with their duties as directors or officers of
LandCare or its subsidiaries for a period of not less than six years from the
Effective Time; provided that, in the event any claim or claims are asserted or
made within such six-year period, all rights to indemnification in respect of
any such claim or claims will continue until final disposition of any and all
such claims. Without limitation of the foregoing, in the event any Indemnified
Party becomes involved in such capacity in any action, proceeding or
investigation in connection with any matter, including the transactions
contemplated hereby, occurring prior to and including the Effective Time,
LandCare, to the extent permitted and on such conditions as may be required by
applicable law, will periodically advance expenses to such Indemnified Party
for his legal and other out-of-pocket expenses (including the cost of any
investigation and preparation) incurred in connection therewith.
Furthermore, for not less than six years after the Effective Time,
ServiceMaster will maintain in effect directors' and officers' liability
insurance covering the persons who are currently covered by LandCare's existing
directors' and officers' liability insurance, on terms and conditions no less
favorable to such persons than those in effect on the date hereof with respect
to the officers and directors of ServiceMaster; provided, however, that in no
event will ServiceMaster be required to pay in any year an amount to maintain
such insurance covering the Indemnified Parties in excess of twice the amount
paid by LandCare as of the Closing Date for such coverage; provided further
that if the annual premiums of such insurance coverage exceed such amount,
ServiceMaster will be obligated to obtain a policy with a premium equal to such
amount.
TERMINATION
The merger agreement will be terminated if not approved by the stockholders
of LandCare and may be terminated prior to the Effective Time, whether before
or after the approval by the stockholders of LandCare:
(a) by mutual written consent of LandCare and ServiceMaster;
(b) by either LandCare or ServiceMaster, if the merger has not been
consummated by May 1, 1999; provided that no party may terminate the merger
agreement pursuant to this subsection if such party's failure to fulfill
any of its obligations under the merger agreement shall have been the
primary and but-for reason that the Effective Time shall not have occurred
on or before said date and provided further that in no event shall
ServiceMaster's failure to permit an adjustment in the exchange ratio
preclude or impair ServiceMaster's right to terminate under this clause;
(c) by either LandCare or ServiceMaster, if there shall be any judgment,
injunction, order or decree enjoining ServiceMaster or LandCare from
consummating the transactions contemplated by the merger agreement entered
and such judgment, injunction, order or decree shall have become final and
nonappealable;
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(d) by either LandCare or ServiceMaster, if the merger agreement shall
not have been adopted by the stockholders of LandCare at the LandCare
special meeting;
(e) by ServiceMaster, if the Board of Directors of LandCare shall (i)
withdraw, modify or change its recommendation or approval in respect of the
merger agreement in a manner adverse to ServiceMaster, or (ii) have
recommended any proposal other than by ServiceMaster in respect of an
Acquisition Transaction;
(f) by ServiceMaster, if any corporation, partnership, person, other
entity or group other than ServiceMaster or any of its respective
subsidiaries or affiliates shall have become the beneficial owner of more
than 40% of the outstanding LandCare common stock (either on a primary or a
fully diluted basis);
(g) by ServiceMaster, if LandCare shall have breached (regardless of the
knowledge of ServiceMaster of such breach at or subsequent to the date of
the merger agreement) in any material respect any of its representations,
warranties, covenants or agreements contained in the merger agreement;
(h) by ServiceMaster, if the Committee acting under the 1998 Long-Term
Incentive Plan, LandCare's Board and all other necessary persons shall not
have taken all actions necessary to cause the stock option conversions
prescribed by the merger agreement to occur automatically on consummation
of the merger;
(i) by LandCare, if a Qualified Competing Proposal is made to LandCare;
provided that in accordance with Delaware law the merger agreement requires
that LandCare will nevertheless (i) permit the LandCare stockholders to
vote on the adoption of the ServiceMaster merger agreement, and (ii) not
take any action that would preclude LandCare from consummating the merger
if the ServiceMaster merger agreement is adopted by the LandCare
stockholders or make the merger any less advantageous to ServiceMaster if
the merger agreement is adopted by the LandCare stockholders; provided
further that if the merger agreement is adopted by the LandCare
stockholders the merger agreement provides that (a) LandCare will
consummate the merger with ServiceMaster, and (b) LandCare will not
consummate any Acquisition Transaction contemplated by a Qualified
Competing Proposal; or
(j) by LandCare, if ServiceMaster shall have breached (regardless of the
knowledge of LandCare of such breach at or subsequent to the date of the
merger agreement) in any material respect of its representations,
warranties, covenants or agreements contained in the merger agreement.
In the event that, before the LandCare special meeting, another company makes
a Qualified Competing Proposal to acquire LandCare and the LandCare Board
withdraws its recommendation of the ServiceMaster merger and recommends that
LandCare stockholders approve the Qualified Competing Proposal instead of the
ServiceMaster merger proposal (or in the event that LandCare otherwise
withdraws or modifies its recommendation of the ServiceMaster merger), the
merger agreement grants ServiceMaster the right to require that LandCare
stockholders be afforded the opportunity to vote with respect to the
ServiceMaster merger proposal, and if ServiceMaster exercises that right,
ServiceMaster also has the right to utilize D.F. King & Co., Inc. as its agent
to solicit votes from LandCare stockholders in favor of the ServiceMaster
merger proposal.
ServiceMaster also has the right to terminate the merger agreement upon the
failure of LandCare to perform certain of its acquisition related covenants.
See "--Pipeline Acquisitions; Certain Related Termination Rights."
In addition, LandCare has the right to terminate the merger agreement if the
ServiceMaster Average Closing Price is less than $16.36 and if ServiceMaster
elects not to permit the upward adjustment of the exchange ratio so that $9.00
of ServiceMaster common stock (valued at the ServiceMaster Average Closing
Price) is paid with respect to each share of LandCare common stock.
TERMINATION FEES
LandCare will promptly, but in no event later than two business days after
the date of such termination, pay ServiceMaster a termination fee equal to the
sum of (i) $7,577,045 plus (ii) $0.44 multiplied by the aggregate number of
shares of LandCare common stock (other than any shares of LandCare common stock
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issued on the exercise of LandCare stock options) issued subsequent to November
1, 1998 and on or prior to the date of termination of the merger agreement if
the merger agreement is terminated:
(a) by either LandCare or ServiceMaster, if the merger agreement shall
not have been adopted by the stockholders of LandCare at the LandCare
special meeting;
(b) by ServiceMaster, if the Board of Directors of LandCare shall (i)
withdraw, modify or change its recommendation or approval in respect of the
merger agreement in a manner adverse to ServiceMaster or (ii) have
recommended any proposal other than by ServiceMaster in respect of an
Acquisition Transaction;
(c) by ServiceMaster, if any corporation, partnership, person, other
entity or group other than ServiceMaster or any of its subsidiaries or
affiliates shall have become the beneficial owner of more than 40% of the
outstanding LandCare common stock (either on a primary or a fully diluted
basis);
(d) by ServiceMaster, if LandCare shall have breached (regardless of the
knowledge of ServiceMaster of such breach at or subsequent to the date of
the merger agreement) in any material respect any of its representations,
warranties, covenants or agreements contained in the merger agreement;
(e) by ServiceMaster, if the Committee acting under the 1998 Long-Term
Incentive Plan, LandCare's Board and all other necessary persons shall not
have taken all actions necessary to cause the conversions prescribed by the
merger agreement to occur automatically on consummation of the merger; or
(f) by LandCare, if a Qualified Competing Proposal is made to LandCare,
subject to the restrictions set forth in the merger agreement; provided
that the right to terminate described in this subsection will immediately
expire and be of no force or effect if LandCare's stockholders approve the
merger.
In no event shall LandCare be required to pay more than one termination fee
for the reasons above. If the merger agreement is terminated by ServiceMaster
pursuant to its termination rights regarding the Pipeline Transactions, then
LandCare shall promptly, but in no event later than two business days after the
date of such termination, pay ServiceMaster an amount, not to exceed $1
million, equal to the actual and reasonably documented out-of-pocket expenses
incurred by ServiceMaster directly attributable to the proposed acquisition of
LandCare and incurred since October 15, 1998, including negotiation and
execution of the merger agreement and the attempted completion of the merger,
which fee shall be payable in cash in same day funds.
FEES AND EXPENSES
Each party shall pay its own costs and expenses relating to the merger
agreement and the transactions contemplated thereby, except that each of
ServiceMaster and LandCare shall bear and pay one-half of the costs and
expenses incurred in connection with the filing, printing and mailing of this
Proxy Statement/Prospectus (including SEC filing fees).
AMENDMENT AND WAIVER
The merger agreement may be amended or waived prior to the Effective Time if,
and only if, such amendment or waiver is in writing and signed, in the case of
an amendment, by LandCare and ServiceMaster or in the case of a waiver, by the
party against whom the waiver is to be effective; provided that after the
adoption of the merger agreement by the stockholders of LandCare, no such
amendment or waiver shall, without the further approval of such stockholders,
alter or change (i) the amount or kind of consideration to be received in
exchange for the LandCare common stock, (ii) any term of the certificate of
incorporation of LandCare, or (iii) any of the terms or conditions of the
merger agreement if such alteration or change would adversely affect the
holders of any shares of capital stock of LandCare. No failure or delay by any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein provided shall be cumulative and not
exclusive of any rights or remedies provided by law.
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DESCRIPTION OF SERVICEMASTER CAPITAL STOCK
GENERAL
Under ServiceMaster's Amended and Restated Certificate of Incorporation (the
"ServiceMaster Restated Certificate"), ServiceMaster is authorized to issue
1,000,000,000 shares of common stock, par value $0.01 per share, and 11,000,000
shares of preferred stock, par value $0.01 per share (the "ServiceMaster
Preferred Stock"). As of January 4, 1999, 297,976,000 shares of ServiceMaster
common stock (excluding treasury shares) were issued and outstanding and no
shares of ServiceMaster Preferred Stock were issued and outstanding. In
addition, as of January 4, 1999, the ServiceMaster Board of Directors had
approved the issuance of 18,215,000 shares of ServiceMaster common stock under
ServiceMaster's equity incentive plans, and of that number approximately
16,921,000 were subject to issuance under outstanding stock options. The number
of authorized shares of ServiceMaster Preferred Stock includes 1,000,000
authorized shares of Junior Participating Preferred Stock, Series A (the
"ServiceMaster Series A Preferred Stock") issuable pursuant to the rights
agreement dated as of December 15, 1997, between ServiceMaster and Harris Trust
and Savings Bank (the "ServiceMaster Rights Plan"), none of which were
outstanding as of January 4, 1999.
COMMON STOCK
Subject to the rights of the holders of any ServiceMaster Preferred Stock,
each holder of ServiceMaster common stock on the applicable record date is
entitled to receive such dividends as may be declared by the ServiceMaster
Board of Directors out of funds legally available therefor, and, in the event
of liquidation, to share pro rata in any distribution of ServiceMaster's assets
after payment of liabilities. Each holder of ServiceMaster common stock is
entitled to one vote for each share held of record on the applicable record
date on all matters presented to a vote of stockholders. The outstanding
ServiceMaster common stock is, and the shares of ServiceMaster common stock
offered hereby by ServiceMaster will be, on issuance, fully paid and non-
assessable.
Harris Trust and Savings Bank of Chicago, Illinois is the registrar and
transfer agent for the ServiceMaster common stock.
STOCK PURCHASE RIGHTS
Each outstanding share of ServiceMaster common stock includes, and each share
of ServiceMaster common stock offered hereby will include, one preferred stock
purchase right (individually a "Right" and collectively the "Rights") provided
under the ServiceMaster Rights Plan. Each Right entitles the holder, until the
earlier of December 11, 2007 or the redemption of the Rights, to buy one one-
thousandth of a share of ServiceMaster Series A Preferred Stock at a price of
$130 per one one-thousandth of a share (as may be adjusted to reflect stock
splits since the issuance of the Rights). The ServiceMaster Series A Preferred
Stock is nonredeemable and will have 1,000 votes per share (subject to
adjustment). ServiceMaster has reserved 1,000,000 shares of ServiceMaster
Series A Preferred Stock for issuance on exercise of such Rights.
In the event that any person becomes the beneficial owner of 15% or more of
ServiceMaster common stock, the Rights (other than Rights held by the acquiring
stockholder) would become exercisable for that number of shares of the
ServiceMaster common stock having a market value of two times the exercise
price of the Right. Furthermore, if after any person becomes the beneficial
owner of 15% or more of ServiceMaster common stock, ServiceMaster is acquired
in a merger or other business combination or 50% or more of its assets or
earnings power were sold, each Right (other than Rights held by the acquiring
person) would become exercisable for that number of shares of ServiceMaster
common stock (or securities of the surviving company in a business combination)
having a market value of two times the exercise price of the Right.
ServiceMaster may redeem the Rights at one cent per Right prior to the
occurrence of an event that causes the Rights to become exercisable for
ServiceMaster common stock.
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One Right will be issued in respect of each share of ServiceMaster common
stock issued before the earlier of December 11, 2007 or the redemption of the
Rights. As of the date of this Prospectus, the Rights are not exercisable,
certificates representing the Rights have not been issued and the Rights
automatically trade with the shares of ServiceMaster common stock. The Rights
will expire on December 11, 2007, unless earlier redeemed.
PREFERRED STOCK
Shares of ServiceMaster Preferred Stock may be issued from time to time in
one or more series. The ServiceMaster Board is authorized to determine and
alter all rights, preferences and privileges and qualifications, limitations
and restrictions thereof (including, without limitation, voting rights and the
limitation and exclusion thereof) granted to or imposed on any wholly unissued
series of ServiceMaster Preferred Stock and the number of shares constituting
any such series and the designation thereof, to determine whether fractional
shares can be issued in any particular series and, if so, the nature of the
fractional interests which can be issued in that series, and to increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any series subsequent to the issue of shares of that
series then outstanding. In case the number of shares of any series is so
decreased, the shares constituting such reduction shall resume the status which
such shares had prior to the adoption of the resolution originally fixing the
number of shares of such series.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE AND BY-LAWS
The following summary of certain provisions of the ServiceMaster Restated
Certificate and By-Laws (the "ServiceMaster By-Laws") does not purport to be
complete and is subject to and qualified in its entirety by reference to the
ServiceMaster Restated Certificate and the ServiceMaster By-Laws.
Classification of Directors. The ServiceMaster Restated Certificate and
ServiceMaster By-Laws provide that its Board of Directors shall be divided into
three classes, each class being as nearly equal in number as reasonably
practicable, and that at each annual meeting of ServiceMaster's stockholders,
the successors to the Directors whose terms expire that year shall be elected
for a term of three years. The number of Directors is fixed by the affirmative
vote of the majority of the Directors then in office, but may not be less than
three. Newly created Directorships and any vacancies on the Board of Directors
are filled by a majority vote of the remaining Directors then in office, even
if less than a quorum. Except in certain limited circumstances, no Director may
be removed from the Board prior to the time such person's term would expire
unless (i) such removal is for cause and (ii) such removal has been approved by
the affirmative vote of the holders of 67% of the outstanding voting shares of
ServiceMaster. The ServiceMaster Restated Certificate requires that a majority
of the members of the Board be "independent directors," which is defined to
generally include any person: (i) who is not and has not been employed by any
ServiceMaster unit within one year; (ii) who is not a "Related Person" (as
hereinafter defined) and has not been employed by a Related Person within one
year; (iii) who is not a party to any agreement, requirement or arrangement
under which such person may be obligated to act in his or her capacity as a
Director in accordance with instructions provided by any person who is not
independent (including, but not limited to, a Related Person); and (iv) who is
not subject to any relationship, arrangement or circumstance (including any
relationship with a Related Person) which, in the judgment of a majority of the
independent Directors (the "Independent Board Majority"), is reasonably
possible will interfere with such person's exercise of independent judgment as
a Director.
Special Meetings. The ServiceMaster By-Laws provide that stockholder action
can be taken only at an annual or special meeting of stockholders and cannot be
taken by written consent in lieu of a meeting. The ServiceMaster By-Laws
provide that, except as otherwise required by law, special meetings of the
stockholders can only be called pursuant to a resolution adopted by a majority
of the Board of Directors. Stockholders are not permitted to call a special
meeting or to require the Board to call a special meeting.
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Approval of Certain Business Combinations. The ServiceMaster Restated
Certificate provides that the affirmative vote of the holders of not less than
80% of the outstanding shares of the common stock held by stockholders other
than a "Related Person" (any person or entity which, together with its
affiliates and associates, beneficially owns in the aggregate 15% or more of
the outstanding common stock and any affiliate or associate of such person or
entity) is required for the approval or authorization of any "Business
Combination" (as hereinafter defined) of ServiceMaster with any Related Person;
provided, that the foregoing 80% voting requirement is not applicable if an
"Independent Board Majority" (a majority of the group comprised of all
individuals who are independent sitting directors) either (i) has expressly
approved in advance the acquisition of the outstanding shares of common stock
that caused such Related Person to become a Related Person or (ii) has
expressly approved such Business Combination either in advance of or subsequent
to such Related Person's having become a Related Person. The term "Business
Combination" is defined under the ServiceMaster Restated Certificate to mean:
(a) any merger or consolidation of ServiceMaster or a subsidiary of
ServiceMaster with or into a Related Person; (b) any sale, lease, exchange,
transfer or other disposition of all or any substantial part (as defined in the
ServiceMaster Restated Certificate) of the assets either of ServiceMaster
(including without limitation any voting securities of a subsidiary) or of a
subsidiary of ServiceMaster to a Related Person; (c) any merger or
consolidation of a Related Person with or into ServiceMaster or a subsidiary of
ServiceMaster; (d) any sale, lease, exchange, transfer or other disposition of
all or any substantial part of the assets of a Related Person to ServiceMaster
or a subsidiary of ServiceMaster; (e) the issuance of any securities of
ServiceMaster or a subsidiary of ServiceMaster to a Related Person; (f) any
recapitalization that would have the effect of increasing the voting power of a
Related Person; and (g) any agreement, contract or other arrangement providing
for any of the transactions described in this definition of a Business
Combination.
Action by Written Consent. The ServiceMaster By-Laws provide that a holder of
common stock or any other class of stock at any time issued by ServiceMaster
shall not have the right to take action by written consent. Rather,
stockholders shall only have the right to act with respect to any particular
issue at a meeting of stockholders at which that issue is properly up for a
vote by stockholders.
Stockholder Proposals. Stockholders are only entitled to make proposals to be
voted on by stockholders at an annual meeting if they comply with certain
procedures set forth in the ServiceMaster By-Laws, which require, among other
things, that the proposing stockholder must deliver a written notice
identifying such proposal to the office of ServiceMaster's General Counsel at
ServiceMaster's headquarters no later than the close of business on the 60th
day nor earlier than the close of business on the 90th day prior to the first
anniversary of the preceding year's annual meeting; provided, however, that if
the date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the 90th day prior to such
annual meeting and not later than the close of business on the later of the
60th day prior to such annual meeting or the 10th day following the day on
which public announcement of the date of such meeting is first made by
ServiceMaster. At a special stockholders meeting, a stockholder's proposal will
be timely for that meeting if it is actually delivered to the General Counsel's
office at ServiceMaster's headquarters no later than the close of business on
the 10th day following the day on which ServiceMaster first publicly announced
the date of the special meeting and that a vote by stockholders will be taken
at that meeting. Such stockholder's proposal notice must: (i) contain a
description of the proposal, the reasons for the proposal and any material
interest in such proposal by the proposing stockholder or the beneficial owner
of the stockholder's record shares; (ii) contain an affirmation by the
proposing stockholder that the stockholder satisfies the requirements specified
in the ServiceMaster By-Laws for presentation of such proposal; and (iii) as to
the stockholder making the proposal and the beneficial owner, if any, on whose
behalf the proposal is made (x) the name and address of such stockholder, as
they appear on ServiceMaster's books, and of such beneficial owner and the
telephone number at which each may be reached during normal business hours
through the time for which the meeting is scheduled, and (y) the class and
number of shares of ServiceMaster which are owned beneficially and of record by
such stockholder and such beneficial owner.
Amendments to the ServiceMaster Restated Certificate and ServiceMaster By-
Laws. The ServiceMaster Restated Certificate provides that no change in the
ServiceMaster Restated Certificate shall be effective unless
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it shall have been approved by at least 80% of ServiceMaster's sitting
directors and shall have received such other approvals as may have been
required by the ServiceMaster By-Laws or by applicable law. Amendment of the
ServiceMaster By-Laws requires either the approval of 80% of the sitting
directors in office at the time such amendment is approved or the approval of
the holders of 80% of the outstanding shares of ServiceMaster common stock.
CERTAIN ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
ServiceMaster is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
ServiceMaster's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with ServiceMaster (or its majority-
owned subsidiaries) for three years following the time such person became an
interested stockholder unless: (i) before such person became an interested
stockholder, ServiceMaster's Board of Directors approved the transaction in
which the interested stockholder became an interested stockholder or approved
the business combination; (ii) on consummation of the transaction that resulted
in the interested stockholder becoming an interested stockholder, the
interested stockholder owns at least 85% of ServiceMaster's voting stock
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of ServiceMaster and by employee stock plans
that do not provide employees with the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer); or (iii) at or following the transaction in which such person
became an interested stockholder, the business combination is approved by
ServiceMaster's Board of Directors and approved at a meeting of stockholders by
the affirmative vote of the holders of at least two-thirds of ServiceMaster's
outstanding voting stock not owned by the interested stockholder. Under Section
203, the restrictions described above also do not apply to certain business
combinations proposed by an interested stockholder following the earlier of the
announcement or notification of one of certain extraordinary transactions
involving ServiceMaster and a person who had not been an interested stockholder
during the previous three years or who became an interested stockholder with
the approval of a majority of ServiceMaster's directors, if such extraordinary
transaction is approved or not opposed by a majority of the directors who were
directors prior to any person becoming an interested stockholder during the
previous three years or were recommended for election or elected to succeed
such directors by a majority of such directors.
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COMPARATIVE RIGHTS OF COMMON STOCK
COMPARISON OF LANDCARE AND SERVICEMASTER
The following summary compares certain rights of ServiceMaster stockholders
under the ServiceMaster Restated Certificate and ServiceMaster By-Laws with
certain rights of LandCare stockholders under the LandCare Amended and Restated
Certificate of Incorporation (the "LandCare Restated Certificate") and By-Laws
(the "LandCare By-Laws") and is qualified in its entirety by reference to the
Restated Certificate of Incorporation and By-Laws of each of ServiceMaster and
LandCare, copies of which are available upon request as described under "Where
You Can Find More Information." Certain topics discussed below are also subject
to federal law and the regulations promulgated thereunder. Both ServiceMaster
and LandCare are incorporated in Delaware, and so each is subject to the
Delaware General Corporation Law (the "DGCL").
Nominations of Directors. The LandCare By-Laws provide that nominations of
persons for election to the LandCare Board of Directors may be made at a
meeting of stockholders (i) by or at the direction of the LandCare Board or
(ii) by any stockholder entitled to vote for the election of directors at the
meeting and who complies with a series of notice procedures (effectively
requiring such stockholder to deliver notice to the principal executive offices
of LandCare not less than 60 days nor more than 90 days prior to such meeting).
The ServiceMaster By-Laws are substantially similar and provide that
nominations of persons for election to the ServiceMaster Board of Directors may
be made at a meeting of stockholders (i) by or at the direction of the
ServiceMaster Board or (ii) by any stockholder entitled to vote for the
election of directors at the meeting and who complies with a series of notice
procedures (effectively requiring such stockholder to deliver notice to the
principal executive offices of ServiceMaster not less than 60 nor more than 90
days prior to such meeting).
Procedure for Election of Directors. Both the LandCare and ServiceMaster By-
Laws provide that the election of directors shall be by ballot and a plurality
of the votes cast shall elect directors, while all matters other than the
election of directors submitted to the stockholders at any meeting shall be
decided by a majority (or such other percentage requirement pursuant to
applicable law or the respective charter and By-Laws of each of LandCare and
ServiceMaster) of the votes cast with respect thereto.
Number of Directors. The number of members of the LandCare Board is fixed
from time to time by a majority of the LandCare Board. The LandCare directors
have staggered three-year terms, as provided under Article Five of the LandCare
Restated Certificate. Article Five thereof may not be amended, repealed or
altered absent (i) the affirmative vote of a majority of the full LandCare
Board and the affirmative vote of a majority of the outstanding stock entitled
to vote thereon, or (ii) the affirmative vote of at least two-thirds of all of
the voting power of the then-outstanding shares of capital stock entitled to
vote generally in the election of directors, voting as a single class.
Currently, 13 members are serving on the LandCare Board.
The ServiceMaster Restated Certificate and By-Laws provide that its Board of
Directors shall be divided into three classes, each class being as nearly equal
in number as reasonably practicable, and that at each annual meeting of
ServiceMaster's stockholders, the successors to the directors whose terms
expire that year shall be elected for a term of three years. The number of
directors is fixed by the affirmative vote of the majority of the directors
then in office, but may not be less than three. Currently, 17 members are
serving on the ServiceMaster Board of Directors.
Removal of Directors. The LandCare Restated Certificate provides that the
only time a director or class of directors may be removed from office by a vote
of the stockholders is for cause. However, the LandCare By-Laws specify that
when any director shall have been elected by the holders of any class of stock
of LandCare voting separately as a class under the provisions of the LandCare
Restated Certificate, such director may be removed by, and only by, the holders
of that class of stock voting separately as a class.
The ServiceMaster Restated Certificate provides that no director may be
removed from the board prior to the time such director's term would end unless
(i) such removal is for cause and (ii) such removal is approved by the holders
of at least 67% of the outstanding voting shares of ServiceMaster, voting as a
single class. The
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ServiceMaster Restated Certificate also provides that if a person is elected as
a director at a time when he or she is an officer of ServiceMaster and if,
during the term of such person as a director he or she ceases to hold any of
the officership positions with ServiceMaster, such person's term and position
as director shall automatically end when such person ceases to be an officer of
ServiceMaster.
Special Meetings of Stockholders. The LandCare By-Laws authorize only the
Chief Executive Officer, a majority of the entire LandCare Board or a majority
of the executive committee to call a special meeting of stockholders.
The ServiceMaster By-Laws provide that, except as otherwise required by law,
special meetings of the stockholders can only be called pursuant to a
resolution adopted by a majority of the ServiceMaster Board. Stockholders are
not permitted to call a special meeting or to require the ServiceMaster Board
to call a special meeting. The ServiceMaster Board shall have the right to
determine the business to be transacted at any special meeting and no issue or
matter may be acted on by any stockholders at any special meeting unless such
issue or matter has been approved by the ServiceMaster Board for vote by
stockholders at the meeting.
Action Without Meeting. The LandCare By-Laws provide that any action required
or permitted to be taken by its stockholders must be effected at a duly called
annual or special meeting of stockholders and may not be effected without such
a meeting by any consent in writing by such stockholders. Any action required
or permitted to be taken at any meeting of the LandCare Board, unless otherwise
restricted by the LandCare Restated Certificate or the LandCare By-Laws, may be
taken without a meeting if all members of the LandCare Board consent thereto in
writing and the writing or writings are filed with the minutes of proceedings
of the LandCare Board.
The ServiceMaster By-Laws provide that any action required or permitted to be
taken by the stockholders must be effected at an annual or special meeting of
stockholders and may not be effected by any consent in writing in lieu of a
meeting of such stockholders. The ServiceMaster Board, however, may take action
without a meeting if all members of the ServiceMaster Board consent thereto in
writing.
Required Vote for Authorization of Certain Business Combinations. The
ServiceMaster Restated Certificate provides that the affirmative vote of the
holders of not less than 80% of the outstanding shares of ServiceMaster common
stock held by stockholders other than a "Related Person" (any person or entity
which, together with its affiliates and associates, beneficially owns in the
aggregate 15% or more of the outstanding common stock and any affiliate or
associate of such person or entity) is required for the approval or
authorization of any "Business Combination" (as hereinafter defined) of
ServiceMaster with any Related Person; provided, that the foregoing 80% voting
requirement is not applicable if an "Independent Board Majority" (a majority of
the group comprised of all individuals who are independent sitting directors)
either (a) has expressly approved in advance the acquisition of the outstanding
shares of common stock that caused such Related Person to become a Related
Person or (b) has expressly approved such Business Combination either in
advance of or subsequent to such Related Person's having become a Related
Person. The term "Business Combination" is defined under the ServiceMaster
Restated Certificate to mean: (a) any merger or consolidation of ServiceMaster
or a subsidiary of ServiceMaster with or into a Related Person; (b) any sale,
lease, exchange, transfer or other disposition of all or any substantial part
(as defined in the ServiceMaster Restated Certificate) of the assets either of
ServiceMaster (including without limitation any voting securities of a
subsidiary) or of a subsidiary of ServiceMaster to a Related Person; (c) any
merger or consolidation of a Related Person with or into ServiceMaster or a
subsidiary of ServiceMaster; (d) any sale, lease, exchange, transfer or other
disposition of all or any substantial part of the assets of a Related Person to
ServiceMaster or a subsidiary of ServiceMaster; (e) the issuance of any
securities of ServiceMaster or a subsidiary of ServiceMaster to a Related
Person; (f) any recapitalization that would have the effect of increasing the
voting power of a Related Person;
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and (g) any agreement, contract or other arrangement providing for any of the
transactions described in this definition of a Business Combination.
There are no comparable provisions in the LandCare Restated Certificate or
LandCare By-Laws.
Amendment of By-Laws and Charter. The LandCare Board has the power to adopt,
amend or repeal the LandCare By-Laws at any meeting of the LandCare Board,
subject to the right of the stockholders entitled to vote with respect thereto
to amend or repeal the LandCare By-Laws as adopted or amended by the LandCare
Board; provided, however, that unless a different percentage is called for in a
particular provision of the LandCare By-Laws, any amendment or repeal of the
LandCare By-Laws by the stockholders shall be by a vote of the holders of at
least two-thirds of the total votes eligible to be cast by holders of voting
stock with respect to such amendment or repeal. The LandCare Restated
Certificate allows for LandCare to amend, alter, change or repeal any provision
in the Certificate of Incorporation, in the manner prescribed by statute.
The ServiceMaster Restated Certificate provides that no change in the
ServiceMaster Restated Certificate shall be effective unless it shall have been
approved by at least 80% of the sitting directors and shall have received such
other approvals as may have been required by the ServiceMaster By-Laws or by
applicable law. Amendment of the ServiceMaster By-Laws requires either the
approval of 80% of the sitting directors in office at the time such amendment
is approved or the approval of the holders of 80% of the outstanding common
stock.
Indemnification. Each of ServiceMaster and LandCare is subject to the DGCL.
The DGCL permits a corporation to include in its certificate of incorporation a
provision eliminating or limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) arising under Section 174 of the DGCL (dealing with liability of
directors for unlawful payment of dividends or unlawful stock purchases or
redemptions of stock), or (iv) for any transaction from which the director
derived an improper personal benefit. Each of ServiceMaster and LandCare has
adopted such a provision in its charter or bylaws.
Each of the ServiceMaster and the LandCare charter and/or bylaws provide that
the respective company shall indemnify and hold harmless to the fullest extent
authorized by the DGCL any person who was or is made a party or is threatened
to be made a party to or is involved in any proceeding (whether civil,
criminal, investigative or administrative) by reason of the fact that such
person is or was a director, officer, employee or agent of the respective
company or is or was serving at the request of such company as a director,
officer, employee, agent or in any other capacity of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person or on such person's
behalf in any such capacity, or arising out of such person's status as such, if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of such company. The right to
indemnification is not exclusive of any other right which any person may have
or hereafter acquire under any statute, charter or bylaw provision, agreement
or vote of stockholders or disinterested directors.
Business Combination Statute. Each of ServiceMaster and LandCare is subject
to the DGCL. The DGCL prohibits business combinations for a period of three
years such as mergers, consolidations, asset purchases and other transactions
where the transaction is with a corporation subject to the provisions thereof,
such as LandCare and ServiceMaster, and where the acquiror became an
"interested stockholder" of the corporation before the date of the transaction
unless (i) prior to the date of the transaction the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) on
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by persons who are directors and also officers
and employee
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stock plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer, or (iii) on or subsequent to the date of the
transaction the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least two-thirds of the outstanding voting stock which is not owned
by the "interested stockholder."
In this context, an "interested stockholder" is any person (other than the
corporation and any direct or indirect majority-owned subsidiary of the
corporation) who directly or indirectly, alone or in concert with others,
beneficially owns or controls 15% or more of the voting stock of the
corporation. The DGCL is very broad in its scope but it does not apply to
corporations whose certificate of incorporation or by-laws contain a provision
not to be covered by this section. Neither ServiceMaster nor LandCare opted out
of the business combination statute.
Dividends and Other Distributions. The DGCL generally allows dividends to be
paid out of "surplus" of a corporation or, if there is no surplus, out of the
net profits for the current fiscal year and/or the prior fiscal year. No
dividends may be paid if they would result in the capital of a corporation
being less than the capital represented by the preferred stock of such
corporation. The LandCare By-Laws provide that the LandCare Board may from time
to time declare dividends on its outstanding shares in the manner provided by
law and its Restated Certificate of Incorporation. The LandCare Restated
Certificate provides, with respect to an issuance of preferred stock, that the
LandCare Board is expressly authorized to provide such designations,
preferences, and relative, participating, optional or other special rights as
may be permitted by the DGCL and as shall be stated and expressed in the
resolutions adopted by the LandCare Board providing for the issue of preferred
stock. The LandCare common stock holders are entitled to receive, as and when
declared by the LandCare Board out of the funds of LandCare legally available
therefor, such dividends (payable in cash, stock or otherwise) as the LandCare
Board may from time to time determine.
The ServiceMaster By-Laws and ServiceMaster Restated Certificate provide that
dividends on the capital stock of ServiceMaster may be declared by the
ServiceMaster Board and that dividends may be paid in cash, property or in
shares of ServiceMaster capital stock. With respect to preferred stock, the
ServiceMaster Board is empowered to determine and fix the dividend rate, the
conditions and dates on which such dividends shall be payable, the relation
which such dividends shall bear to the dividends payable on any other classes
of stock, and whether such dividends shall be cumulative or non-cumulative.
Appraisal Rights. Each of ServiceMaster and LandCare is subject to the DGCL.
The DGCL provides appraisal rights for certain mergers and consolidations.
Appraisal rights are not available to holders of (i) shares listed on a
national securities exchange or a national market system or held of record by
more than 2,000 stockholders or (ii) shares of the surviving corporation of a
merger, if the merger did not require the approval of the stockholders of such
corporation, unless in either case, the holders of such stock are required
pursuant to the merger to accept anything other than (a) shares of stock of the
surviving corporation, (b) shares of stock of another corporation which are
also listed on a national securities exchange or held by more than 2,000
holders or (c) cash in lieu of fractional shares of such stock, or any
combination thereof.
Advance Notice of Stockholders-Proposed Business at Annual Meetings. The
LandCare By-Laws provide that for business to be brought before an annual
meeting by a stockholder, notice in writing must be given to the secretary of
LandCare at the principal executive office of LandCare not later than the close
of business on the 60th day nor earlier than the close of business on the 90th
day prior to the first anniversary of the preceding year's annual meeting;
provided, however that in the event that the date of the annual meeting is more
than 30 days after such anniversary date, notice by the stockholder to be
timely must be so delivered not earlier than the close of business on the 90th
day prior to such annual meeting and not later than the close of business on
the later of the 60th day prior to such annual meeting or the tenth day
following the day on which public announcement of the date of such meeting is
first made by LandCare. The LandCare By-Laws provide that such stockholder's
notice must set forth as to each matter the stockholder proposes to bring
before the annual meeting: (i) a brief description of the business desired to
be brought before the meeting; (ii) the reasons for
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conducting such business at the meeting; (iii) any material interest in such
business of such stockholder and the beneficial owner, if any, on whose behalf
the proposal is made; and (iv) as to the stockholder giving the notice, the
name and address of such stockholder, as they appear on LandCare's books, and
the class and number of shares of LandCare common stock which are beneficially
owned by such stockholder.
In addition, the LandCare By-Laws provide that for a stockholder to properly
nominate a director at a meeting of stockholders, the stockholder must give
timely notice in writing, given to the secretary of LandCare at the principal
executive office of LandCare not later than the close of business on the 60th
day nor earlier than the close of business on the 90th day prior to the first
anniversary of the preceding year's annual meeting; provided, however that in
the event that the date of the annual meeting is more than 30 days after such
anniversary date, notice by the Stockholder to be timely must be so delivered
not earlier than the close of business on the 90th day prior to such annual
meeting and not later than the close of business on the later of the 60th day
prior to such annual meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made by LandCare. The
LandCare By-Laws provide that such stockholder's notice must set forth: (i) as
to each individual whom the stockholder proposes to nominate for election or
re-election as a director all information relating to such person that is
required to be disclosed in solicitations of proxies for elections of directors
in an election contest, or is otherwise required, in each case pursuant to
Regulation 14A under the Exchange Act and Rule 14a-11 thereunder (including
such individual's written consent to being named as a nominee and to serving as
a director if elected); and (ii) as to the stockholder giving the notice, the
name and address of such stockholder, as they appear on LandCare's books, and
the class and number of shares of LandCare common stock which are beneficially
owned by such stockholder.
The ServiceMaster By-Laws provide that for business to be brought before an
annual meeting by a stockholder, notice in writing identifying such proposal
must be delivered to the office of ServiceMaster's General Counsel at
ServiceMaster's headquarters not later than the close of business on the 60th
day nor earlier than the close of business on the 90th day prior to the first
anniversary of the preceding year's annual meeting; provided that, in the event
that the date of the meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the stockholder to be timely must be so
delivered no earlier than close of business on the 90th day prior to such
annual meeting and not later than the close of business on the later of the
60th day prior to such annual meeting or the tenth day following the day on
which public announcement of the date of the annual meeting is first made by
ServiceMaster. The ServiceMaster By-Laws provide that such stockholder's
proposal notice must set forth as to each matter the stockholder proposes to
bring before the annual meeting: (i) a brief description of the business to be
brought before the annual meeting and any material interest in such proposal by
the proposing stockholder or beneficial owner of stockholder's record shares;
(ii) an affirmation by the proposing stockholder that the stockholder satisfies
the requirements specified in the ServiceMaster By-Laws for presentation of
such proposal; and (iii) as to the stockholder making the proposal and the
beneficial owner, if any, on whose behalf the proposal is made (x) the name and
address of the stockholder, as they appear on ServiceMaster's books, and of
such beneficial owner and the telephone number at which each may be reached
during normal business hours through the time for which the meeting is
scheduled and (y) the class and number of shares of ServiceMaster which are
owned beneficially and of record by such stockholder and such beneficial owner.
In addition, the ServiceMaster By-Laws provide that for a stockholder to
properly nominate a director at a meeting of stockholders, the stockholder must
deliver notice in writing to the office of ServiceMaster's General Counsel at
ServiceMaster's headquarters (i) in the case of an annual meeting, not later
than the close of business on the 60th day nor earlier than the close of
business on the 90th day prior to the first anniversary of the preceding year's
annual meeting; provided that, in the event that the date of the meeting is
more than 30 days before or more than 60 days after such anniversary date,
notice by the stockholder to be timely must be so delivered no earlier than
close of business on the 90th day prior to such annual meeting and not later
than the close of business on the later of the 60th day prior to such annual
meeting or the tenth day following the day on which public announcement of the
date of the annual meeting is first made by ServiceMaster or (ii) in the case
of a special meeting at which directors are to be elected not later than the
tenth day following the day on
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which public announcement of the date of the special meeting and that a vote by
stockholders will be taken at that meeting to elect a director or directors.
Such stockholder nomination notice must set forth (i) as to each person whom
the stockholder proposes to nominate for election or re-election as a director,
all information relating to such person that would be required to be disclosed
in solicitations of proxies for election of directors in an election contest,
or is otherwise required, in each case pursuant to Regulation 14A under the
Exchange Act (including such individual's written consent to being named as a
nominee and to serving as a director if elected); (ii) as to the stockholder
giving the notice, the name, address and telephone number at which
ServiceMaster will be able to reach the stockholder during normal business
hours during the period through the meeting at which the nomination is to take
place, of such stockholder and the class and number of shares of ServiceMaster
common stock which are beneficially owned by such stockholder; and (iii) as to
any beneficial owner on whose behalf the nomination is made, the name, address
and telephone number at which ServiceMaster will be able to reach the
stockholder during normal business hours during the period through the meeting
at which the nomination is to take place, of such person and the class and
number of shares of ServiceMaster common stock which are beneficially owned by
such person.
If there are any other areas of particular interest to you that relate to
specific provisions of the respective charter or bylaws of ServiceMaster
and/or LandCare, please call or write D.F. King & Co., Inc. as described
under "Who Can Help Answer Your Questions" at the beginning of this Proxy
Statement/Prospectus, and we will promptly provide you the relevant
comparison or additional information.
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BUSINESS OF LANDCARE
On the consummation of the LandCare initial public offering on June 9, 1998
(the "IPO"), LandCare acquired in separate merger transactions (the "LandCare
Formation"), in exchange for cash and shares of LandCare common stock, seven
companies (the "Founding Companies") engaged in comprehensive landscape and
tree services, which had been in business an average of 25 years. Subsequent to
the IPO and through December 31, 1998, LandCare acquired 22 additional
companies involved in similar businesses (the "Subsequent Acquisitions" and
collectively with the Founding Companies, the "Acquired Companies"). Pro forma
combined revenues of LandCare were $227.4 million in the nine month period
ended September 30, 1998. In addition to emphasizing internal growth, the
LandCare business plan provides for the continued implementation of an
aggressive acquisition program. As of December 31, 1998, LandCare had entered
into letters of intent with respect to the acquisition of 9 additional
businesses, the aggregate 12 month historical revenues of which are
approximately $43.3 million. See "The Merger Agreement--Pipeline Acquisitions;
Certain Related Termination Rights." Unless otherwise indicated, all references
herein to LandCare include the Founding Companies and the Subsequent
Acquisitions.
LandCare offers a full range of landscape maintenance, landscape installation
and tree services capabilities, including trimming trees and other plant growth
away from power lines, generally known as "line clearing." LandCare serves a
diverse set of customers, including regional and national property owners and
managers, real estate developers, corporations, utilities, universities and
governmental entities. Properties served by LandCare include office buildings,
multi-family residential complexes, shopping centers, corporate and university
campuses, parks, hotels, resorts and governmental facilities. Approximately 71%
of the LandCare pro forma combined revenues for the nine month period ended
September 30, 1998 were attributable to maintenance services, which include
line clearing for utility customers, and 29% were attributable to landscape
installation services.
INDUSTRY OVERVIEW
The commercial and institutional segment of the landscape and tree services
industry is comprised of companies that install and maintain exterior
landscapes and companies that perform tree services on behalf of property
owners and managers. According to data published by Lawn and Landscape
magazine, the commercial and institutional segment of this industry generated
approximately $20 billion in revenues in 1997. LandCare estimates that
approximately $15 billion of this amount represented landscape installation and
maintenance services and $5 billion represented tree services, including line
clearing for utilities. Most of the more than 10,000 participants in this
industry are small companies operating in a limited geographic area. During
recent years, the industry has experienced significant growth due to the
consolidation of the commercial real estate market, the trend towards
outsourcing of landscape and tree services and a growing recognition of the
economic and aesthetic benefits of landscaping. These industry data do not
include revenues attributable to chemical lawn spraying because few landscape
services firms provide this service.
Real Estate Ownership Consolidation. In recent years, ownership of commercial
real estate throughout the United States has become increasingly consolidated.
Real estate investment trusts and other national property owners are driving
this consolidation by purchasing office buildings, multi-family residential
complexes, shopping centers, hotels and resorts. These national property owners
and management companies tend to seek landscape and tree services firms with
the capacity to service all of their properties in a particular region.
LandCare believes, therefore, that a national or multi-regional presence and
greater scale is a significant competitive advantage in the commercial and
institutional landscape segment. LandCare believes that a service provider with
both landscape and tree services capabilities will have a competitive advantage
as national property owners and managers seek to reduce the number of vendors
with which they do business.
Increased Outsourcing. Commercial property owners and managers are
increasingly outsourcing their landscape and tree services needs to third party
providers in order to focus on their core competencies, reduce costs and obtain
higher-quality service. Landscape services contractors typically have greater
purchasing power,
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higher labor efficiency and greater expertise than in-house service crews. In
addition, by outsourcing these functions, commercial property owners and
managers shift to outside vendors the recruiting and training burdens
associated with these labor-intensive tasks. Governmental entities and
institutions such as universities and hospitals are beginning to outsource
their landscape and tree services needs. Most municipal and county governments
own significant numbers of properties which require ongoing landscape and tree
services (including office buildings, schools, parks and golf courses).
Line Clearing Services. Electric and gas utilities, railroads, pipeline
companies and governmental entities own extensive rights-of-way or road
systems. Regular trimming of overhanging trees and clearing electric lines of
limbs and branches damaged by storms is an important element in keeping these
rights-of-way functioning. LandCare management expects deregulation to increase
competition in the utility sector, which should lead utilities to seek to lower
their costs by outsourcing non-core functions. Consolidation among utilities or
other right-of-way owners should lead to more multi-regional contracts for
right-of-way maintenance. Due to the magnitude of most right-of-way and road
systems (often in the thousands of miles), only line clearing companies with
substantial capacity can meet the needs of right-of-way owners.
Landscaping Trends. Attractive landscaping enhances the value of a property
and has a strong correlation to higher occupancy and rental rates in commercial
and residential rental properties. To remain appealing, landscaping requires
ongoing maintenance and proper irrigation. Landscaping also provides important
environmental benefits. Plants and trees reduce noise levels, moderate
temperatures of buildings and enhance work environments. Increasingly, local
zoning regulations require minimum amounts of landscaping and open space in all
new developments, and municipalities in drier climates are mandating improved
water management techniques for landscaping of new properties. Fulfilling these
mandates requires landscaping companies to have greater expertise in installing
and maintaining sophisticated irrigation systems and in modern horticultural
techniques, such as xeriscaping, which is the planting of native plants that do
not require significant amounts of water for survival.
SERVICES PROVIDED
LandCare provides maintenance and installation services to the commercial and
institutional markets. Maintenance services include landscape maintenance and
tree maintenance services. LandCare's services are described below:
Landscape Maintenance.
Landscape maintenance services accounted for approximately 47% of LandCare's
pro forma combined revenues for the nine month period ended September 30, 1998.
LandCare's landscape maintenance services consist of general upkeep and minor
upgrades of a property's grounds, including grass cutting, weeding, pruning,
leaf removal, trimming and edging, mulching, grass reseeding, fertilizing,
replacing dead plants and inspecting plants for insects and disease. Upgrade
projects may include periodic replacement of annual plants to provide
seasonally appropriate color and adding plants, lawn or ground cover to improve
the property's appearance. LandCare also provides irrigation system maintenance
and repair. Irrigation systems are becoming more sophisticated and may have
remote monitoring capability, which permits LandCare to determine remotely
whether the system is operating properly and expedite problem diagnosis and
correction. LandCare also applies dry fertilizers, herbicides and insecticides
on lawns, trees and shrubs but generally does not spray these in liquid form on
lawns. Maintenance services also include snow removal in colder climates. Most
landscape maintenance services are provided under one or two year contracts,
with fixed monthly fees to cover basic upkeep service and a schedule of
additional fees for upgrade projects.
Tree Maintenance.
Tree maintenance services accounted for approximately 24% of LandCare's pro
forma combined revenues for the nine month period ended September 30, 1998.
Most landscape maintenance companies do not provide
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tree services because they require different skills and an investment in
specialized equipment, although five of the Acquired Companies provide tree
services to their commercial and institutional customers. LandCare intends to
provide both landscape and tree services in more markets. LandCare's tree
services can be broadly divided into two categories as described below:
Line Clearing. Line clearing services consist primarily of trimming trees
away from power lines, pipelines, roads and other rights-of-way. These
services also include deploying crews on an emergency basis to remove tree
branches obstructing power lines and vegetation management (primarily
application of herbicides) to maintain access along a right-of-way. Line
clearing contracts typically are awarded for three- to five-year terms
through a bidding process and cover the entire right-of-way in a relatively
large geographic area, such as one or more counties. Line clearing
contracts typically have lower gross margins than landscape maintenance and
installation services.
Commercial Tree Maintenance. Most trees require regular pruning to
maintain health and appearance through improved air circulation, light
penetration and the removal of dead or diseased branches. Pruning large
trees requires the service provider either to climb the tree or use a
bucket truck to reach the tree's upper limbs and a chipper to grind the
debris. Some of the Acquired Companies employ certified arborists skilled
in trimming trees properly and diagnosing and treating diseases.
Increasingly, commercial property owners are realizing the benefit of
annual or multi-year contracts to provide regular inspection and
maintenance of their trees.
Landscape Installation.
Landscape installation accounted for approximately 29% of LandCare's pro
forma combined revenues for the nine month period ended September 30, 1998.
LandCare's landscape installation services include softscape, hardscape and
irrigation systems at newly-constructed facilities or in connection with the
renovation of any existing property. Softscape typically includes planting
ornamental and shade trees, plants, shrubbery and grasses compatible with soil
and climate conditions. Hardscape projects may include installing walkways,
exterior lighting, patios, decks, fences and driveways, as well as fountains,
waterfalls and ponds. In larger or more complex projects, LandCare subcontracts
hardscape work. Most modern landscaping designs require both drainage and
irrigation systems to ensure that standing water does not occur after rain and
that sufficient water is available to maintain the health of plants, grasses
and trees. In drier regions or where water is a limited resource, LandCare
often uses xeriscaping. On larger installation projects, the landscape design
is usually performed by an independent landscape architect hired by the
property owner or the owner's architect. On smaller projects, LandCare's in-
house landscape architects may provide the design. LandCare performs most
installation projects under firm price contracts and is paid on a staged basis
as the work is performed.
STRATEGY
LandCare's strategy is to become a leading national provider of comprehensive
landscape and tree services to the commercial and institutional markets by
implementing its operating strategy, emphasizing continued internal growth and
expanding through acquisitions.
Operating Strategy.
LandCare believes that there are significant opportunities to increase its
profitability. The key elements of LandCare's current operating strategy
include focusing on commercial and institutional markets, operating on a
decentralized basis, achieving operating efficiencies, and attracting and
retaining quality labor and supervisory personnel.
Internal Growth.
A principal component of LandCare's strategy is to continue its internal
growth. The key elements of LandCare's internal growth strategy include
building market density; establishing regional and national market coverage;
becoming a single source provider of landscape and tree services; and
developing enhanced sales and marketing programs.
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Acquisitions.
The key elements of LandCare's acquisition strategy include entering new
geographic markets and expanding within existing markets.
ACQUISITION PROGRAM
Although LandCare faces competition for acquisition candidates, it believes
it is an attractive acquiror because of: (i) LandCare's strategy for creating a
national, comprehensive and professionally managed landscape and tree services
provider that emphasizes the development of long-term customer relationships at
the local, regional and national levels and uses sophisticated marketing
programs; (ii) LandCare's decentralized operating philosophy; (iii) the
potential for owners of the acquired businesses to participate in LandCare's
growth while realizing liquidity; (iv) LandCare's increased name recognition
and its access to financial resources; and (v) the potential for increased
profitability of the acquired company due to purchasing economies, the adoption
of "best practices" and centralization of various administrative functions. To
date, consolidation in the landscape and tree services industry has been
limited.
Important LandCare criteria for choosing an acquisition candidate include:
(i) the quality of its management and supervisory personnel; (ii) revenues,
profitability and historical growth; (iii) the market area served and the
candidate's reputation; (iv) the composition and size of the customer base; and
(v) the types of landscape and/or tree services provided. The principals of the
Acquired Companies typically have substantial experience in the industry, are
active in industry trade associations and are personally acquainted with the
owners of numerous acquisition targets. As consideration for future
acquisitions, LandCare intends to use various combinations of its common stock,
cash and notes. The major factors in establishing the purchase price of any
acquired company are historical operating results, future prospects of the
target and the ability of the target to complement the services offered by
LandCare.
LandCare obtained a bank credit line of $50 million from First National Bank
of Chicago (the "LandCare Credit Facility") to be used for working capital and
acquisitions. On July 28, 1998, the LandCare Credit Facility was amended to
increase the Credit Facility to $55 million and to add Bankers Trust Company
and Nations Bank, N.A. as co-lenders under the facility. As of September 30,
1998, LandCare had outstanding borrowings under the Credit Facility totaling
$49.8 million. During September 1998, LandCare entered into a separate short-
term revolving credit facility (the "Short-Term Facility") with NationsBank,
N.A., as sole lender, for up to $20 million. During October 1998, the Short-
Term Facility was amended to increase the borrowing capacity to $25 million.
Borrowings under the Short-Term Facility bear interest on the same basis as the
LandCare Credit Facility. There was no amount outstanding under the Short-Term
Facility at September 30, 1998.
On November 9, 1998, the LandCare Credit Facility was amended to, among other
things, increase the borrowing capacity available and to provide for additional
banks to participate in the LandCare Credit Facility (the "Amended LandCare
Credit Facility"). All amounts outstanding under the LandCare Credit Facility
and the Short-Term Facility were paid off with the proceeds from the Amended
LandCare Credit Facility, and the LandCare Credit Facility and the Short-Term
Facility were canceled. Under the Amended LandCare Credit Facility, LandCare's
borrowing capacity was increased to $110 million from $55 million. In addition,
First Chicago NBD assigned its interest as administrative and collateral agent
to NationsBank, N.A., and Bankers Trust Company became documentation agent of
the Amended LandCare Credit Facility. Additionally, the number of banks
participating in the facility increased from three to seven.
OPERATIONS
Landscape Maintenance.
LandCare's maintenance contracts provide for regular visits to the property
by a maintenance crew. These crews, which typically consist of two to six
workers and a crew supervisor, may spend several hours to several
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days a week at a particular site, depending on its size, although most crews
typically visit a site once a week. For some large properties, LandCare
provides one or more workers who work full-time on-site. LandCare's maintenance
crews perform basic upkeep services as detailed in the maintenance contract,
such as grass cutting, weeding, edging, mulching, raking, pruning and checking
irrigation systems. In addition to the basic services outlined in the contract,
maintenance crews also undertake various upgrade projects on a separately
charged basis, such as planting annual flowers, ornamental trees and shrubs and
adding ground cover. Some of the Acquired Companies have specially trained
maintenance technicians responsible for maintaining and repairing irrigation
systems. In regions with cold winters, LandCare provides ice and snow removal
during winter months. LandCare performs other exterior maintenance tasks for
the convenience of customers, such as parking lot sweeping. Equipment involved
in landscape maintenance includes lawn mowers, small power equipment such as
edgers, trimmers and leaf blowers, as well as hand-held tools and pick-up
trucks and trailers to transport crews and equipment.
New maintenance contracts often result from existing relationships with
customers who own or manage multiple properties, as well as LandCare's
marketing efforts. Once LandCare completes a landscape installation project, it
is often selected to perform regular, ongoing maintenance of the site. LandCare
performs substantially all maintenance work under contracts. LandCare's current
maintenance contracts range from $300 to $30,000 per month for basic upkeep
service and usually have initial terms of one or two years, with automatic
month-to-month extensions thereafter. Most contracts specify additional fees
for upgrade projects such as periodic replacement of annual flowers.
Landscape Installation.
Installation crews generally range from two to fifteen people. A supervisor
manages the project in the field and coordinates the work of any
subcontractors. In installing softscape portions of a landscape project,
LandCare's work crew performs fine grading and flower and plant bed
preparation, followed by plantings specified by the design. In most instances,
LandCare subcontracts the sodding work. LandCare's work crew may also install
the hardscape portion of a landscape project such as walkways, decks, patios,
exterior lighting, fences and driveways. On larger or more complicated
projects, LandCare may subcontract the hardscape work. LandCare typically
deploys separate crews for irrigation system installation. Equipment used in
installation projects includes small front end loaders, graders, augers and
trenching machines to install irrigation system piping. Equipment and plant
materials are transported to the site by trailer.
A significant portion of LandCare's installation business results from
existing relationships with real estate developers, general contractors and
independent landscape architects. Most contracts resulting from these
relationships are time and materials contracts, with a dollar limit. LandCare
also obtains installation contracts in response to invitations to bid issued to
a select number of landscape contractors chosen because of their reputation,
resources and expertise. Most contracts resulting from bids are fixed price
contracts, and final design, terms, price and timing of the project may be
negotiated prior to awarding the contract.
On larger projects, the landscape design work is usually performed by an
independent landscape architect hired by the property owner or the owner's
architect. On smaller projects, LandCare can provide in-house design
capability, including registered landscape architects. LandCare uses CAD
software to assist in preparing design drawings and computer software to
estimate the amount of time, labor, materials and equipment needed to complete
a project and its cost to enable it to price potential projects, whether
negotiated or bid on.
Tree Services.
Line Clearing. LandCare conducts its line clearing operations through Trees,
Inc. ("Trees"), one of the Founding Companies. Trees employs approximately 450
work crews, ranging from two to five people per crew and organizes workers into
bucket crews or climbing crews. Bucket crews work with specialized trucks
equipped with mounted, hydraulic aerial lifts for tree trimming. Climbing crews
are utilized in less accessible areas where the use of aerial lifts is not
practical. In these cases, crew members use special climbing gear to
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manually climb the trees. Trees has approximately 710 trucks, approximately
half of which are equipped with aerial lifts and half pull chippers which shred
wood debris. Crew members use a variety of equipment, including chainsaws,
trimming tools and safety gear, and may also utilize hydraulic power saws and
pruners, cable and bracing equipment. In its vegetation management activities,
LandCare employs a variety of specialized mowing, trimming and herbicide
spraying equipment to control vegetation along rights-of-way.
Line clearing services comprised approximately 20% of LandCare's pro forma
combined revenues for the nine month period ended September 30, 1998. LandCare
currently has contracts with seventeen public utilities in twelve states, under
which LandCare keeps power lines free of obstructions from overhanging trees,
vegetation and limbs and branches damaged by storms. LandCare usually completes
service of the utility customer's entire system in two to four years, at which
time the trees and other vegetation must again be cut back to keep the power
lines clear. Work is planned for the entire system based on power outage
reports (known as reliability reports), previous trimming history and field
surveys. With the aid of circuit maps, LandCare prepares work schedules which
designate the areas to be serviced, routes to be used and the number and size
of the work crews.
Line clearing contracts, which typically have terms of three to five years,
are awarded through a bidding process by which the customer solicits bids from
a limited number of pre-qualified companies. To pre-qualify for a bid list,
LandCare must meet criteria established by the customer, such as having
appropriate machinery and equipment, satisfactory insurance coverage and
acceptable safety procedures. Once the customer has established its bid list,
it awards contracts primarily on the basis of price, but productivity and
reputation are also important factors.
Commercial Tree Service. LandCare provides periodic pruning of trees,
typically annually, and field evaluations by LandCare's tree specialists for
commercial and institutional customers. Based on these inspections, LandCare
recommends, as necessary, deadwood removal, deep root fertilization, pruning to
improve air circulation and light penetration and disease treatments. Much of
this work results from service calls from customers not under contract,
typically as a result of storm damage or disease. LandCare offers regularly
scheduled tree care as part of its standard maintenance contract.
CUSTOMERS
LandCare has a diverse customer base, with more than 7,500 customers, none of
whom accounted for more than 10% of LandCare's pro forma combined revenues for
the nine month period ended September 30, 1998. LandCare performs landscape
maintenance and installation services for a number of leading regional and
national property owners and managers, including Trammell Crow Company,
Marriott International, Inc., Camden Property Trust and Gables Residential
Trust, each of which represented no more than 2% of LandCare's pro forma
combined revenues for the nine month period ended September 30, 1998. Trees has
line clearing contracts with several large utilities, including PacifiCorp,
Houston Lighting & Power Company and Texas Utilities Company, which together
accounted for 52% of Trees' total revenues for the nine month period ended
September 30, 1998 and individually represented 3.9%, 3.6% and 3.0% of
LandCare's pro forma combined revenues for the nine month period ended
September 30, 1998, respectively. Management at the Acquired Companies has
developed and maintained relationships with key customers by emphasizing
customer satisfaction and high quality service.
SALES AND MARKETING
LandCare's principal marketing strategy is to continue its emphasis on
developing and maintaining relationships with the senior management of large
national and regional property owners and managers, as well as large
corporations. LandCare seeks to become a preferred vendor to these property
owners and managers and corporate customers. To facilitate this strategy,
LandCare has hired experienced sales and marketing personnel for LandCare's
national account sales and marketing program. LandCare representatives also
attend
national and regional conventions, including those sponsored by trade
associations such as the Building Owners
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and Managers Association and the Institute of Real Estate Managers. Members of
these associations include large and small property owners and managers.
LandCare also advertises in selected trade journals to increase LandCare's name
recognition with potential customers.
LandCare will also focus on establishing and maintaining relationships with
utilities in order to be named to their pre-qualified bidder lists. Trees has
established relationships with a number of major utility companies, and
LandCare intends to build on those relationships. To pre-qualify for bid lists,
LandCare's large account managers will market LandCare's capacity to serve the
utility customer's line clearing and vegetation management needs as well as its
reputation for quality service.
LandCare also intends to capitalize on the developing trend toward
outsourcing by institutions and state and local governments by marketing its
services to these entities. LandCare intends to extend the current marketing
efforts of the Acquired Companies to these potential customers through the
involvement of senior management and, in the future, experienced sales people
focused on this effort.
SOURCES OF SUPPLY
LandCare purchases its green goods primarily from local or regional wholesale
nurseries on an as-needed basis. From time to time, however, LandCare will
purchase green goods in advance of its anticipated needs when it can take
advantage of favorable pricing by paying in cash, often at the end of the
nurseries' season when inventories are being liquidated. In most instances,
alternative sources of supply for the green goods used by LandCare exist,
although there are occasional shortages of plants in a particular region. In
this event, LandCare has been able to substitute similar plants acceptable to
the customer. Arteka maintains its own tree nursery for use primarily in its
own operations. LandCare also believes that, as it builds regional density, it
will be able to purchase green goods in sufficient quantities to permit it to
realize purchasing economies through discounts from suppliers.
The equipment used by LandCare in its landscape maintenance business
primarily consists of pick-up trucks, walk-behind and riding mowers, as well as
hand-held equipment such as edgers, weed trimmers and blowers. The equipment
used in LandCare's installation business includes a variety of hand-held
equipment, as well as stake-bed and pick-up trucks, front end loaders, graders,
augers, trenching machines and small tractors. The major components of
irrigation systems installed by LandCare include sprinkler heads, clocks,
valves, control systems and PVC pipe. For its tree services business, LandCare
purchases small and large trucks, including bucket trucks, as well as chippers
and chainsaws. Most of the equipment and vehicles used by LandCare are
generally available from a number of manufacturers. LandCare is establishing
relationships with a number of manufacturers and expects to take advantage of
volume discounts and manufacturers' fleet purchase programs. LandCare believes
that it is not materially dependent on any one of its suppliers and that its
relationships with its suppliers are good.
EMPLOYEES
As of September 30, 1998, LandCare employed approximately 7,000 persons. Of
this number, approximately 500 were sales, administrative and management
personnel and the remainder were hourly and salaried site workers and
supervisory personnel. Approximately 200 of Trees' employees are covered by
collective bargaining agreements, and two of the Acquired Companies contract
with union labor for certain installation projects. LandCare experiences high
turnover rates among its hourly workers, a significant portion of whom are
immigrants, and intense competition for qualified supervisory personnel.
LandCare has not experienced any strikes or work stoppages and believes its
relationship with its employees is satisfactory.
RECRUITING, TRAINING AND SAFETY
LandCare recruits its supervisory and mid-level management personnel either
from within the industry or from local colleges and technical schools, where it
targets students in horticultural or landscape management
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programs. Recruiting is also conducted by means of advertisements locally and
in trade magazines. LandCare provides its existing hourly employees with
opportunities for internal advancement by promoting capable site workers to
positions of increasing supervisory responsibility, such as job foreman,
workcrew supervisor or branch manager. LandCare recruits its seasonal labor
force through word-of-mouth, as well as through employment agencies and local
help wanted advertisements.
LandCare is committed to focusing on and emphasizing continual training and
safety in the workplace. To ensure quality service and workplace safety,
LandCare has established training programs for its employees at all levels of
its operations, including orientation programs for new employees, on-the-job
training, employee bonuses and incentive programs for exceptional safety
records and periodic training and safety seminars. For example, Trees maintains
a certification program in aerial tree cutting, which generally takes employees
three to six months to complete. Several of the Acquired Companies also provide
training programs in chemical application. LandCare has and intends to continue
to implement a "best practices" safety program throughout its operations to
ensure that employees comply with safety standards established by LandCare, its
insurance carriers and federal, state and local laws and regulations.
FACILITIES; VEHICLES AND MAINTENANCE
In addition to their principal operating offices, the Acquired Companies
operate an aggregate of 75 branch offices. Branch offices are typically located
on approximately one or two acre sites and are comprised of a small office for
administrative personnel, shop space for servicing equipment and an area for
parking LandCare vehicles and larger equipment. LandCare also maintains
auxillary facilities for vehicle maintenance and storage of materials and
equipment. With the exception of one LandCare-owned site, all of LandCare's
facilities are leased, some from related parties. LandCare believes that its
facilities are adequate for its current needs.
As of September 30, 1998, LandCare operated a fleet of approximately 2,800
vehicles, ranging from pick-up and stake-bed trucks to bucket trucks and dump
trucks. It believes that these vehicles generally are well-maintained and
adequate for LandCare's current operations. LandCare performs regular
maintenance of its own vehicles. LandCare believes that it can purchase
vehicles at lower prices due to its increased purchasing volume.
LandCare leases its principal executive and administrative offices at 2603
Augusta, Suite 1300, Houston, Texas.
RISK MANAGEMENT, INSURANCE AND LITIGATION
The primary risks in LandCare's operations are workers' compensation, third-
party property damage and bodily injury claims. The third-party exposure exists
through daily operations and utilization of over-the-road vehicles. LandCare
currently maintains workers' compensation and liability insurance, which it
considers sufficient to insure against these risks. LandCare's insurance is
written on a fully insured basis with minimal deductibles.
LandCare is, from time to time, a party to litigation arising in the normal
course of its business, most of which involves claims for personal injury and
property damage incurred in connection with its operations. LandCare is not
currently involved in any litigation, nor is LandCare aware of any threatened
litigation, that it believes is likely to have a material adverse effect on its
financial condition or results of operations.
LandCare generally offers one-year warranties on the landscape installation
work it performs, which includes warranties on the green goods that it provides
to customers. LandCare has established reserves for warranty claims which it
considers adequate. Historically, warranty claims have been insignificant, and
LandCare does not expect warranty claims will have a material effect on its
future business, results of operations or financial condition.
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COMPETITION
The landscape and tree services industry is highly competitive. LandCare
believes that the principal competitive factors in the commercial and
institutional markets are (i) customer relationships, (ii) price, (iii)
quality, timeliness and reliability of services provided, and (iv) geographic
scope of operations.
Most of LandCare's landscape services competitors are small, owner-operated
companies operating in a limited geographic area (other than the commercial
landscaping subsidiary of ServiceMaster). However, there are a few large,
private landscape service companies which operate in multiple markets and have
periodically acquired some small landscape companies.
Competition in the line clearing market is characterized by a small number of
large companies, led by Asplundh Tree Expert Company ("Asplundh"). LandCare
believes Asplundh's share of the line clearing market is significant. LandCare
believes that the services currently offered by Trees are competitive with
those of Asplundh although more restricted geographically. Utility customers
are increasingly seeking to reduce the number of vendors with whom they do
business.
The commercial tree services market is characterized by a large group of
small competitors, most of which are owner-operated businesses operating in
limited geographic areas and a few larger companies that operate in one or more
regions. LandCare believes that its ability to offer tree services as part of
its maintenance contracts provides a competitive advantage.
Some of LandCare's private and public competitors and potential competitors
have greater name recognition and greater financial resources than LandCare
with which to finance acquisition and development opportunities. LandCare
cannot predict whether other large companies will enter the landscape and tree
services industry.
REGULATION AND ENVIRONMENTAL MATTERS
LandCare is subject to various federal, state and local laws and regulations
relating to the employment of immigrants, workplace health and safety in the
landscape and tree services industry, the application of fertilizers,
herbicides, pesticides and other chemicals, noise and air pollution from power
equipment and local zoning regulations which may require improved water
management techniques. Immigration laws require LandCare to confirm the legal
status of its immigrant labor force. The Immigration and Naturalization Service
periodically conducts random inspections of LandCare's compliance with U.S.
immigration laws. The Occupational Safety and Health Administration ("OSHA")
requires companies that offer line clearance services to provide their workers
with a comprehensive program of electrical hazard recognition training. OSHA
prohibits workers from coming within ten feet of an electrical conductor unless
they are trained to recognize electrical hazards. Each state also has its own
electrical hazard recognition training and certification regulations. In
addition, California regulates the distance trees and other vegetation must be
cut back from power lines. Many states require licensing for the commercial
application of chemical sprays, a service which LandCare performs primarily in
connection with its line clearing operations. Such licenses are usually
conditioned on a showing of technical competence and adequate bonding and
insurance. The United States Department of Agriculture also regulates the
storage and use of pesticides and fertilizers. The Federal Insecticide,
Fungicide and Rodenticide Act and the Environmental Pesticide Control Act of
1972 also apply to the use of certain pesticides, herbicides and other
chemicals. Pursuant to its authority under the 1990 Clean Air Act, the
Environmental Protection Agency has recently implemented regulations that limit
the use of some types of gasoline powered engines that emit high levels of
hydrocarbons and other airborne pollutants, such as those found in many
lawnmowers. Across the country, a number of local governments have also passed
noise pollution ordinances that prohibit or otherwise restrict the use of leaf
blowers. In addition, several states in which LandCare operates require
LandCare to have a landscape contractor's license. Drivers of larger trucks are
required by the U.S. Department of Transportation or state regulations to have
commercial drivers' licenses. To the extent LandCare stores its own supply of
fuel for its equipment and fleet of vehicles, it is subject to federal and
state laws that regulate bulk fuel storage tanks. LandCare's management
believes that LandCare
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has all required licenses to conduct its operations and is in substantial
compliance with applicable regulatory requirements. LandCare's operations are
also affected by local zoning regulations, which increasingly require minimum
amounts of landscaping in new developments, and in drier climates, improved
water management techniques. There can be no assurance that the regulatory
environment in which LandCare operates will not change significantly in the
future. LandCare's failure to comply with these laws and regulations could
subject it to substantial fines and the loss of its licenses.
Prior to each respective LandCare Acquisition, LandCare completed evaluations
of the properties owned or leased by the Acquired Company and engaged an
independent environmental consulting firm to conduct or review assessments of
environmental conditions at these properties.
For approximately twenty years, a facility that has been owned and operated
by Trees was used as a stockpile facility for a large quantity of wood chips
derived from tree trimming operations that were conducted by Trees and other
contractors of the Houston Lighting & Power Company. Although the facility has
not been operated in approximately four years and the property was purchased by
an entity controlled by the current Trees stockholders, it is possible that
Trees may face liability for further closure activities at the facility or for
cleanup in the event any contamination is discovered with respect to the
facility. State and county records indicate that the facility is considered a
closed site. LandCare has obtained an agreement from the purchaser of the
property indemnifying LandCare from any loss arising from this property and to
assume all of the legal obligations and liabilities associated with the
property.
YEAR 2000 COMPLIANCE
Numerous computer programs and electronic circuitry components that rely on
two-digit date codes rather than four-digit date codes may be unable to
differentiate between the years 1900 and 2000. If not corrected, many of these
computer programs and applications and date-sensitive devices could fail or
produce erroneous results when processing dates after December 31, 1999 (the
"Year 2000 Issue"). The Year 2000 Issue affects virtually all companies and
organizations, including LandCare.
LandCare uses a number of information technology ("IT") applications in its
operations, including computer networking systems, accounting and financial
reporting applications and other general office use applications. LandCare also
employs numerous non-IT devices with embedded electronic circuits in its
operations, including landscape installation and maintenance equipment,
elevators, building security systems, and voice mail and other communications
systems. Both the IT and non-IT systems and devices used by LandCare could fail
as a result of the Year 2000 Issue.
LandCare engaged a Houston-based consulting firm (the "Consulting Firm") to
assist it in developing and implementing a plan to achieve Year 2000 compliance
(the "Year 2000 Plan") for both the IT systems and non-IT systems and devices
used by LandCare. LandCare expects that its final Year 2000 Plan will consist
of the following phases: (i) inventory and assessment; (ii) remediation; and
(iii) testing/validation. As it works with the Consulting Firm on the
development of its final Year 2000 Plan, LandCare is currently in the inventory
and assessment phase for both its IT and non-IT systems and for identifying
material third-party Year 2000 readiness.
In November 1998, the Consulting Firm completed an audit of the IT and non-IT
systems and devices at representative LandCare facilities. Specifically, the
Consulting Firm performed the following audit functions at such representative
facilities: (i) reviewed hardware, software, user-developed systems and
spreadsheets and other computer equipment for Year 2000 compliance; (ii)
identified Year 2000 risks associated with the non-IT systems and devices used
by LandCare; (iii) created a list of vendors and other third parties with whom
LandCare has a material relationship to be contacted regarding their own Year
2000 readiness; and (iv) developed models for assessing and addressing
LandCare's Year 2000 risks. The Consulting Firm's final report includes an
analysis of the current state of LandCare's systems, LandCare's Year 2000
risks, recommendations for system changes and assessment of third-party
readiness, remediation cost estimates, and a detailed
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implementation timetable for remediating non-compliant systems and devices and
post-remediation testing. LandCare expects to finalize development of its Year
2000 Plan during December 1998 and believes that it would be able to fully
implement the remediation and testing phases of this Year 2000 Plan prior to
the end of 1999.
LandCare has paid the Consulting Firm approximately $31,000 in fees relating
to their audit of LandCare's facilities and development of LandCare's Year 2000
Plan. Until it develops the final Year 2000 Plan with the Consulting Firm,
LandCare cannot fully estimate the extent of costs relating to achieving Year
2000 compliance. Based on the information currently available to it and its
assessment efforts to date, LandCare has budgeted expenditures aggregating
$750,000 to achieve full Year 2000 compliance. LandCare has not deferred any
normally scheduled information systems and technology projects as a result of
the Year 2000 Issue. LandCare's currently-budgeted Year 2000 expenditures do
not include any amounts that might be required to be expended if any of
LandCare's principal suppliers or other critical vendors do not achieve Year
2000 readiness on a timely basis. LandCare believes, however, that neither the
remediation costs associated with its Year 2000 Plan nor any costs that might
be associated with partial or incomplete Year 2000 compliance (on the part of
LandCare or third parties with whom it has a material relationship) will have a
material adverse effect on LandCare's financial condition or operations.
LandCare believes that few, if any, of its computer applications or equipment
containing embedded date-sensitive devices constitute functions critical to
LandCare's ongoing daily operations. The pervasiveness of the Year 2000 Issue
nonetheless makes it likely that previously unidentified issues will require
remediation and testing during the ordinary course of business in the early
months of 2000. In such case, LandCare believes that transactions could be
processed manually while IT and other systems are remediated and that such
interruptions would have only a minor effect on LandCare's operations. If all
LandCare's principal suppliers were not Year 2000 compliant, LandCare believes
that any resulting product delivery delays or other disruptions could have a
material adverse effect on LandCare's financial condition or operations.
Prolonged loss of electrical power, telephone line service or other basic
business services could have a material adverse effect on LandCare's financial
condition or operations.
LandCare expects to develop various contingency plans in connection with
implementing its overall Year 2000 Plan.
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LANDCARE SELECTED FINANCIAL DATA AND OTHER INFORMATION
For financial statement presentation purposes, Trees, Inc., one of the
Founding Companies, has been designated as the accounting acquiror. The
acquisition of the remaining Founding Companies and LandCare were accounted for
using the purchase method of accounting, with the results of operations
included from June 9, 1998, the effective date used for accounting purposes. As
used in this discussion, "LandCare" means (i) Trees, restated to give
retroactive effect to the merger with Clean Cut, which has been accounted for
as a pooling-of-interests, prior to June 9, 1998 and (ii) LandCare and the
Founding Companies on that date and thereafter and the Subsequent Acquisitions
from their respective dates of acquisition. The following selected financial
data for LandCare as of December 31, 1996 and 1997 and for the years ended
December 31, 1995, 1996 and 1997 have been derived from audited financial
statements included elsewhere herein. The selected financial data for LandCare
as of December 31, 1993, 1994 and 1995 and for the years ended December 31,
1993 and 1994 have been derived from unaudited financial statements not
included herein. The summary financial information below should be read in
conjunction with the historical and unaudited pro forma financial statements
and notes thereto included elsewhere herein. The following historical financial
information may not be indicative of LandCare's future financial results of
operations. Results of operations for interim periods are not necessarily
indicative of the results to be expected in subsequent interim periods or for
the full fiscal year.
<TABLE>
<CAPTION>
NINE
MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- --------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- ------- -------- ------- ------- ------- -------
(UNAUDITED)
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL OPERATING
RESULTS (1)
Revenues................ $101,908 $47,998 $ 65,950 $58,619 $54,922 $48,942 $48,284
Cost of services........ 80,496 40,384 55,889 47,905 45,351 46,206 43,872
-------- ------- -------- ------- ------- ------- -------
Gross profit............ 21,412 7,614 10,061 10,714 9,571 2,736 4,412
Selling, general and
administrative
expenses............... 13,093 4,961 6,709 6,989 4,855 4,555 4,028
-------- ------- -------- ------- ------- ------- -------
Income from operations.. 8,319 2,653 3,352 3,725 4,716 (1,819) 384
Other income (expense),
net.................... (641) 216 135 (332) (660) (567) (732)
-------- ------- -------- ------- ------- ------- -------
Income (loss) before
income taxes........... 7,678 2,869 3,487 3,393 4,056 (2,386) (348)
Income tax provision
(benefit).............. 3,413 1,141 1,375 1,275 1,580 (929) (137)
-------- ------- -------- ------- ------- ------- -------
Net income (loss)....... $ 4,265 $ 1,728 $ 2,112 $ 2,118 $ 2,476 $(1,457) $ (211)
======== ======= ======== ======= ======= ======= =======
Net income (loss) per
share:
Basic.................. $ 0.48 $ 0.49 $ 0.59 $ 0.60 $ 0.70 $ (0.41) $ (0.06)
Diluted (3)............ $ 0.48 $ 0.49 $ 0.59 $ 0.60 $ 0.70 $ (0.41) $ (0.06)
Shares used in computing
net income (loss) per
share:
Basic.................. 8,809 3,552 3,552 3,552 3,552 3,552 3,552
Diluted................ 8,851 3,552 3,552 3,552 3,552 3,552 3,552
LANDCARE--PRO FORMA
OPERATING RESULTS DATA
(2)
Revenues................ $228,023 $263,779
Cost of services........ 178,311 206,547
-------- --------
Gross profit............ 49,712 57,232
Selling, general and
administrative
expenses............... 32,021 40,641
-------- --------
Income from operations.. 17,691 16,591
Other income (expense),
net.................... (4,198) (4,294)
-------- --------
Income before income
taxes.................. 13,493 12,297
Income tax provision.... 6,073 5,534
-------- --------
Net income.............. $ 7,420 $ 6,763
======== ========
Net income per share:
Basic.................. $ 0.42 $ 0.38
Diluted (3)............ $ 0.40 $ 0.37
Shares used in computing
pro forma net income
per share:
Basic.................. 17,735 17,735
Diluted................ 18,435 18,435
HISTORICAL FINANCIAL
POSITION AT PERIOD END
(1)
Current assets.......... $ 55,064 $ 13,368 $11,879 $10,527 $ 7,696 $ 9,825
Current liabilities..... 30,972 12,437 9,517 11,954 7,972 10,264
Working capital
(deficit).............. 24,092 931 2,362 (1,427) (276) (439)
Total assets............ 186,793 24,114 21,713 21,535 19,538 21,424
Non-current
liabilities............ 62,914 3,497 5,551 5,172 9,407 8,321
Shareholders' equity.... 92,907 8,180 6,645 4,409 2,159 2,839
Book value per share
(4).................... $ 5.59 $ 2.30 $ 1.87 $ 1.24 $ 0.61 $ 0.80
</TABLE>
62
<PAGE>
- --------
(1) For financial statement purposes, Trees, one of the Founding Companies (as
defined in footnote 2 below), was identified as the accounting acquiror.
Accordingly, the accompanying historical financial information included
herein represents (i) the historical results of Trees, (ii) the retroactive
restatement of one of the companies acquired by LandCare which was
accounted for as a pooling-of-interests, (iii) the acquisition of the
remaining Founding Companies from June 9, 1998 and (iv) the acquisition of
the eleven companies acquired by LandCare subsequent to June 9, 1998 and
before September 30, 1998, all of which were included from their respective
acquisition dates.
(2) The Pro Forma Operating Results Data assume that the acquisition of the
Founding Companies and Subsequent Acquisitions and the LandCare IPO were
closed January 1, 1997, and are not necessarily indicative of the results
LandCare would have achieved had these events actually then occurred or of
LandCare's future results. Pro forma adjustments reflected herein include
adjustments to reflect exclusion of certain operations not acquired in the
acquisition of the Acquired Companies, compensation and rent differentials,
amortization of goodwill related to the acquisition of the Acquired
Companies, income taxes related to certain of the Acquired Companies which
were S-Corporations, distributions made by the S-Corporations prior to
their acquisition by LandCare, and receipt and application of proceeds
received in the LandCare IPO.
(3) Diluted net income per share reflects adjustments to net income related to
interest expense on convertible debt.
(4) The historical book value per share is computed by dividing total
shareholders' equity by the total number of common shares outstanding at
the end of the period.
63
<PAGE>
LANDCARE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "LandCare
Selected Financial Data and Other Information" and the (i) LandCare financial
statements and the related Notes thereto, (ii) the unaudited pro forma combined
financial statements of LandCare and the related Notes thereto and (iii) the
individual financial statements of the Acquired Companies and the related Notes
thereto in each case appearing elsewhere in this Proxy Statement/Prospectus.
INTRODUCTION
On June 9, 1998, LandCare completed its initial public offering of 5,659,900
shares of its common stock (including the shares issued upon the subsequent
exercise of an over-allotment option). Simultaneous with the completion of the
IPO, LandCare acquired: Trees, Inc. ("Trees"), Four Seasons Landscape and
Maintenance, Inc. ("Four Seasons"), Southern Tree & Landscape Co., Inc.
("Southern Tree"), D.R. Church Landscape Co., Inc. ("Church"), Ground Control
Landscaping, Inc. ("Ground Control"), Arteka Corporation ("Arteka") and Desert
Care Landscaping, Inc. ("Desert Care") (collectively referred to herein as the
Founding Companies) for $19.9 million in cash and 5,162,645 shares of LandCare
common stock (the "Mergers").
Subsequent to June 9, 1998 and through September 30, 1998, LandCare acquired
12 additional commercial landscape and tree services companies (collectively
with the Founding Companies referred to herein as the "Initial Acquired
Companies"). Of these additional acquired businesses, 2 were accounted for as
pooling-of-interests (the "Pooled Companies") and the remaining 10 businesses
were accounted for under the purchase method of accounting (the "Purchased
Companies"). For financial statement purposes, the historic financial
statements of LandCare have been retroactively restated to give effect to one
of the Pooled Companies. The remaining Pooled Company was deemed to be
immaterial and, accordingly, has been reflected from the acquisition date in
the accompanying financial statements. The LandCare business plan provides for
it to continue to acquire additional companies, through merger or purchase, to
expand its national operations.
For financial statement purposes, Trees, one of the Founding Companies, was
identified as the "accounting acquiror." Accordingly, the accompanying
historical financial information included herein represents: (i) the historical
results of Trees from January 1, 1995, (ii) the retroactive restatement to
January 1, 1995 of Clean Cut, Inc. ("Clean Cut"), one of the Pooled Companies,
(iii) the acquisition of the remaining Founding Companies effective June 9,
1998 and (iv) the acquisition of the Purchased Companies and one of the Pooled
Companies from their respective acquisition dates.
LandCare intends to continue aggressively pursuing acquisition opportunities.
It is believed that the merger with ServiceMaster will provide LandCare with
the liquidity required to continue its acquisition plan. If the merger with
ServiceMaster is not approved by the LandCare stockholders, LandCare will be
required to seek additional sources of capital through one or more funding
sources that may include borrowings under its credit facility or offerings of
debt and/or equity securities of LandCare. Since the IPO and prior to October
30, 1998, LandCare's stock price has fluctuated from a high of $10.06 to a low
of $5.00. The ability of LandCare to effectively use its common stock for
future acquisition consideration is dependent on the market price for LandCare
stock, and a low stock price results in acquisitions made with LandCare stock
being more expensive. Although management believes that LandCare will generate
sufficient cash flow from operations to fund its future operations, there can
be no assurances that sufficient capital will be available to LandCare at the
time it is required for acquisition opportunities or on terms acceptable to
LandCare, thereby possibly curtailing its aggressive acquisition plan.
LandCare has experienced and expects to continue to experience variability in
revenue and net income as a result of the seasonal nature of certain of its
businesses. Generally, LandCare's revenues from installation projects are
concentrated during the warmer months of April to October. Revenues from
maintenance contracts remain relatively constant throughout the year, except in
colder climates where landscape maintenance
64
<PAGE>
contracts typically do not generate revenues in the winter unless snow removal
is contracted for by the customer. As a result, the gross margin from landscape
maintenance contracts can vary seasonally because LandCare recognizes revenues
from the monthly payments from its landscape maintenance services in full when
they are due, rather than in proportion to the work performed. LandCare
generally reports higher profit margins from landscape maintenance services
during winter months and significantly lower profit margins during peak service
periods in late spring and summer. LandCare has not performed an analysis to
estimate the impact of accounting for revenue in proportion to the work
performed as compared with accounting for revenue from the monthly payments
from its landscape maintenance services in full when they are due; however,
LandCare believes that combined gross margins would not have been or expect to
be materially different than historical actual gross margins. Most line
clearing contracts are not affected by seasonality. Line clearing contracts
typically have a lower gross profit margin than landscape maintenance and
installation services. Historically, the Founding Companies' maintenance
services have not been cyclical and have not been significantly affected by
changes in economic conditions. However, the Founding Companies' landscape
services operations have experienced significant fluctuations based on weather,
economic conditions, the commercial real estate market and other factors beyond
the control of LandCare. The Founding Companies collectively have a
geographically broad customer mix which may tend to mitigate regional seasonal
and cyclical trends. There can be no assurance, however, that period-to-period
differences will not occur in the future or that pronounced cyclical or
seasonal patterns will not emerge.
The following table sets forth certain selected LandCare historical financial
data and such data as a percentage of historical revenues for the periods
indicated (with amounts shown in thousands, except percentages):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31 30
--------------------------------------------- ------------------------------
1997 % 1996 % 1995 % 1998 % 1997 %
------- ----- ------- ----- ------- ----- -------- ----- ------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $65,950 100.0% $58,619 100.0% $54,922 100.0% $101,908 100.0% $47,998 100.0%
Cost of services........ 55,889 84.7 47,905 81.7 45,351 82.6 80,496 79.0 40,384 84.1
------- ----- ------- ----- ------- ----- -------- ----- ------- -----
Gross profit........... 10,061 15.3 10,714 18.3 9,571 17.4 21,412 21.0 7,614 15.9
Selling, general and
administrative......... 6,709 10.2 6,989 11.9 4,855 8.8 12,573 12.3 4,961 10.3
Goodwill amortization... -- -- -- -- -- -- 520 0.5 -- --
------- ----- ------- ----- ------- ----- -------- ----- ------- -----
Income from
operations............ 3,352 5.1 3,725 6.4 4,716 8.6 8,319 8.2 2,653 5.6
Interest and other
income (expense), net.. 135 0.2 (332) (0.6) (660) (1.2) (641) (0.7) 216 0.4
------- ----- ------- ----- ------- ----- -------- ----- ------- -----
Income before income
taxes.................. $ 3,487 5.3% $ 3,393 5.8% $ 4,056 7.4% $ 7,678 7.5% $ 2,869 6.0%
======= ===== ======= ===== ======= ===== ======== ===== ======= =====
</TABLE>
LANDCARE HISTORICAL RESULTS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
AND 1997
Revenues. LandCare's historical revenues increased by $53.9 million, or
112.3%, to $101.9 million for the nine months ended September 30, 1998 from
$48.0 million for the corresponding period of 1997. The increase in revenues
was primarily due to the acquisition of the Founding Companies and the
Purchased Companies, which accounted for $40.8 million of the increase in
historical revenues. Excluding the acquisition of the Founding and Purchased
Companies, revenues increased between the corresponding periods due to the
addition of new utility line clearing contracts and the expansion of several
other contracts by utility customers at Trees and an increase in landscape
maintenance and installation jobs at Clean Cut.
Gross profit. LandCare's historical gross profit increased by $13.8 million,
or 181.2%, to $21.4 million for the nine months ended September 30, 1998 from
$7.6 million for the corresponding period of 1997 primarily due to the
acquisition of the Founding Companies and the Purchased Companies. Excluding
the acquisition of the Founding Companies and the Purchased Companies, gross
profit increased due to the inclusion of overtime billings on two utility line
clearing contracts at Trees whose contracts bill on time and materials. In
addition, cost control measures were implemented at Clean Cut during 1998,
which reduced the amount of overtime pay and resulted in improved margins. As a
percentage of historical revenues, historical gross profit increased to 21.0%
for the nine months ended September 30, 1998 from 15.9% for the corresponding
period of 1997.
65
<PAGE>
Selling, general and administrative expenses. Historical selling, general and
administrative expenses increased by $8.1 million, or 163.9%, to $13.1 million
for the nine months ended September 30, 1998 from $5.0 million for the
corresponding period of 1997. As a percentage of historical revenues, selling,
general and administrative expenses increased to 12.8% for the nine months
ended September 30, 1998 from 10.3% for the corresponding period of 1997. The
increase in selling, general and administrative expenses was primarily due to
the acquisition of the Founding Companies and the Purchased Companies,
including associated goodwill amortization, and the addition of LandCare's
corporate overhead.
Interest and other expense, net. Interest and other expense, net, increased
to an expense of $0.6 million in the nine month period ended September 30, 1998
compared to income of $0.2 million for the corresponding period of 1997. The
increase in interest and other expense, net, was primarily due to an increase
in outstanding borrowings under the credit facility of LandCare used primarily
to fund the cash portion of the purchase price of the Purchased Companies. In
addition, Trees received a non-recurring insurance settlement totaling $0.5
million during 1997.
LANDCARE HISTORICAL RESULTS FOR THE YEARS ENDED 1997 AND 1996
Revenues. LandCare's historical revenues increased by $7.3 million, or 12.5%,
to $65.9 million for the year ended December 31, 1997 from $58.6 million for
the corresponding period of 1996. Trees' revenues increased by $4.4 million
between the periods due primarily to budget increases by utility customers on
several line clearing contracts, partially offset by the loss of a line
clearing contract in a competitive bidding process. Clean Cut's revenues
increased by $2.9 million between the periods primarily due to an increase in
landscape maintenance contracts.
Gross Profit. LandCare's gross profit decreased by $0.6 million, or 6.1%, to
$10.1 million for the year ended December 31, 1997 from $10.7 million for the
corresponding period of 1996. As a percentage of revenues, gross profit
decreased to 15.3% for the year ended 1997, compared to 18.3% for the year
ended 1996. The decrease in gross profit was primarily due to start up costs
and inefficiencies associated with new contracts at Trees and an increase in
labor costs at Clean Cut associated with the addition of landscape maintenance
contracts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $0.3 million, or 4.0%, to $6.7 million for
the year ended December 31, 1997, compared to $7.0 million for the
corresponding period of 1996. As a percentage of revenues, selling, general and
administrative expenses decreased to 10.2% for the year ended December 31, 1997
compared to 11.9% for the corresponding period of 1996. The primary reason for
the decrease was a reduction in owners' compensation expense at Trees partially
offset by higher office expenses at Clean Cut associated with the opening of a
new branch office.
Interest and other expense, net. Interest and other expense, net, increased
by $0.5 million for the year ended December 31, 1997 compared to the
corresponding period of 1996 due to the receipt of a $0.5 million non-recurring
insurance settlement at Trees during 1997.
LANDCARE HISTORICAL RESULTS FOR THE YEARS ENDED 1996 AND 1995
Revenues. LandCare's historical revenues increased by $3.7 million, or 6.7%,
to $58.6 million for the year ended December 31, 1996, compared to $54.9
million for the corresponding period of 1995. The increase in revenues was
primarily due to a $3.3 million increase in landscape maintenance revenues at
Clean Cut attributable to the addition of new maintenance contracts. Revenues
at Trees increased by $0.2 million primarily due to budget increases from
utility customers on several line clearing contracts. These increases were
partially offset by a $1.3 million reduction resulting from the loss of a
significant line clearing contract in a competitive bidding process and a $1.3
million reduction from a one-time project completed in 1995.
Gross profit. LandCare's gross profit increased by $1.1 million, or 11.9%, to
$10.7 million for the year ended 1996, compared to $9.6 million for the
corresponding period of 1995. As a percentage of revenue, gross
66
<PAGE>
profit increased to 18.3% for the year ended December 31, 1996 from 17.4% for
the corresponding period of 1995. The increase in gross profit was primarily
due to the conversion of a fixed price contract into a time and materials
contract at Trees, offset by a decrease at Clean Cut resulting from higher
labor costs associated with the new maintenance contracts.
Selling, general and administrative expenses. Historical selling, general and
administrative expenses increased by $2.1 million, or 44.0%, to $7.0 million
for the year ended December 31, 1996, compared to $4.9 million for the
corresponding period of 1995. As a percentage of combined revenue, selling,
general and administrative expenses increased to 11.9% for the year ended
December 31, 1996, compared to 8.8% for the corresponding period of 1995. The
increase in selling, general and administrative expenses was primarily due to
an increase in owners' compensation at Trees and Clean Cut and the addition of
several administrative personnel at Clean Cut.
Interest and other expense, net. Interest and other expense, net, decreased
by $0.4 million, to $0.3 million for the year ended December 31, 1996 from $0.7
million for the corresponding period of 1995. The primary reason for the
decrease was a reduction in interest expense resulting from lower average
outstanding debt at Trees during 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, LandCare had working capital of $24.1 million and
$59.5 million of outstanding long-term debt (including $6.4 million of
convertible subordinated notes). Net cash used in operating activities for the
nine months ended September 30, 1998 totaled $1.3 million and included an
increase in accounts receivable of $5.7 million resulting from increased
billings associated with LandCare's revenue growth and a decrease in accounts
payable of $4.3 million. Net cash used in investing activities totaled $50.0
million for the nine months ended September 30, 1998, of which $42.9 million
represents the cash consideration paid for the Founding Companies and the
Purchased Companies (excluding Trees), net of cash acquired. Net cash provided
by financing activities totaled $49.5 million for the nine months ended
September 30, 1998 and was comprised primarily of $37.1 million of net proceeds
from the IPO and $50.7 million of borrowings under the LandCare credit
facility. These amounts were offset by $29.9 million of debt repayments at the
Initial Acquired Companies and $8.0 million of distributions to Trees'
stockholders representing the cash paid for Trees in the Merger.
Effective June 9, 1998, LandCare entered into a credit agreement with The
First National Bank of Chicago NBD (the "LandCare Credit Facility"). The
LandCare Credit Facility provided LandCare with a revolving line of credit of
up to $50 million, which could be used for general corporate purposes,
including the repayment or refinancing of indebtedness of the Founding
Companies and financing future acquisitions, capital expenditures and working
capital. During July 1998, the LandCare Credit Facility was amended to increase
the borrowing capacity to $55 million and to add Bankers Trust Company and
NationsBank, N.A. as co-lenders under the facility. The LandCare Credit
Facility was secured by the stock of the Initial Acquired Companies. As of
September 30, 1998, LandCare had outstanding borrowings under the LandCare
Credit Facility totaling $49.8 million.
During September 1998, LandCare entered into a separate short-term revolving
credit facility (the "LandCare Short-Term Facility") with NationsBank, N.A., as
sole lender, for up to $20 million. During October 1998, the LandCare Short-
Term Facility was amended to increase the borrowing capacity to $25 million.
Borrowings under the LandCare Short-Term Facility bear interest on the same
basis as the LandCare Credit Facility. There was no amount outstanding under
the LandCare Short-Term Facility at September 30, 1998.
On November 9, 1998, the LandCare Credit Facility was further amended to,
among other things, increase the borrowing capacity available and to provide
for additional banks to participate in the LandCare Credit Facility (the
"Amended LandCare Credit Facility"). Under the Amended LandCare Credit
Facility, the
67
<PAGE>
borrowing capacity of LandCare was increased to $110 million from $55 million.
In addition, First Chicago NBD assigned its interest as administrative and
collateral agent to NationsBank, N.A., and Bankers Trust Company became
documentation agent of the Amended LandCare Credit Facility. Additionally, the
number of banks participating in the facility increased from three to seven.
Borrowings under the Amended LandCare Credit Facility bear interest at the
bank's designated prime lending rate, plus a margin ranging from zero to 75
basis points depending on the ratio of LandCare's total debt to its earnings
before interest, taxes, depreciation and amortization (the "Leverage Ratio"),
as calculated on the last day of the most recently reported fiscal quarter. At
the option of LandCare, borrowings under the Amended LandCare Credit Facility
may bear interest based on the Eurodollar rate plus a margin ranging from 125
to 225 basis points depending on the Leverage Ratio. In addition, commitment
fees of 30 to 50 basis points are payable quarterly on the unused portion of
the borrowing capacity. The Amended LandCare Credit Facility contains a
provision for standby letters of credit up to $10 million. The Amended LandCare
Credit Facility prohibits the payment of dividends by LandCare, restricts
LandCare's incurring or assuming other indebtedness and requires LandCare to
comply with certain customary financial covenants, including a minimum net
worth, leverage ratio and minimum fixed charge coverage ratio. The Amended
LandCare Credit Facility will terminate and all amounts outstanding thereunder,
if any, will be due and payable on November 9, 2001.
68
<PAGE>
COMPARATIVE MARKET PRICES AND DIVIDENDS
ServiceMaster common stock trades on the NYSE under the symbol SVM and
LandCare common stock trades on the NYSE under the symbol GRW. The following
table sets forth for the periods indicated the high and low sale prices per
share of ServiceMaster common stock and of LandCare common stock on the NYSE
and the cash dividends paid per share on ServiceMaster common stock. LandCare
common stock began trading on the NYSE on June 4, 1998 in connection with the
initial public offering of LandCare common stock. No information regarding
sales prices of LandCare common stock is included prior to that date because no
public trading market existed for LandCare common stock and because LandCare
was formed in connection with its initial public offering. For current price
information, stockholders are encouraged to consult publicly available sources.
<TABLE>
<CAPTION>
SERVICEMASTER LANDCARE
-------------------------------- ------------
CASH
HIGH LOW DISTRIBUTIONS PAID HIGH LOW
------ ------ ------------------ ------ -----
<S> <C> <C> <C> <C> <C>
1996
First Quarter.................. $ 9.93 $ 8.61 0.07 1/8 $ -- $ --
Second Quarter................. 10.45 9.17 0.07 1/8 -- --
Third Quarter.................. 11.00 9.55 0.07 1/2 -- --
Fourth Quarter................. 11.83 10.55 0.07 1/2 -- --
1997
First Quarter.................. 12.33 10.92 0.07 1/2 -- --
Second Quarter................. 15.92 12.09 0.07 1/2 -- --
Third Quarter.................. 19.67 15.17 0.08 -- --
Fourth Quarter................. 19.50 14.00 0.08 -- --
1998
First Quarter.................. 19.63 16.50 0.08 -- --
Second Quarter (since June 4,
1998 for LandCare)............ 25.50 17.92 0.08 8.75 8.00
Third Quarter.................. 24.75 19.75 0.08 10.06 5.38
Fourth Quarter................. 23.81 16.00 0.09 10.00 5.00
1999
First Quarter (through January
4, 1999)...................... 22.00 21.06 9.75 9.69
</TABLE>
On October 30, 1998, the last full trading day prior to the joint public
announcement by ServiceMaster and LandCare of the execution of the merger
agreement, the last reported sales price on the NYSE of ServiceMaster common
stock was $21.125 and of LandCare common stock was $8.00. On [ ],
the most recent practicable date prior to the date of this Proxy
Statement/Prospectus, the last reported sales price on the NYSE of
ServiceMaster common stock was $[ ] and of LandCare common stock was
$[ ].
ServiceMaster has consistently increased its annual distribution on its
shares over the last 27 years. ServiceMaster's current policy is to continue to
increase its annual dividend payment. However, the timing and amount of future
dividends will be at the discretion of the ServiceMaster Board of Directors and
will depend on, among other things, ServiceMaster's results of operations,
corporate finance objectives and cash requirements.
On January 4, 1999, there were 17,221,054 shares of LandCare common stock
issued and outstanding and held of record by approximately 113 stockholders.
LandCare has never declared or paid any dividends.
69
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT OF LANDCARE
The following table sets forth information as of January 4, 1999 with respect
to the beneficial ownership of LandCare common stock by: (i) all beneficial
holders of 5% or more of the outstanding shares of LandCare common stock; (ii)
each LandCare director individually; (iii) each LandCare executive officer
individually; and (iv) all LandCare directors and executive officers as a
group. Except as indicated below, the address of each such person is c/o
LandCare USA, Inc., 2603 Augusta, Suite 1300, Houston, Texas 77057.
<TABLE>
<CAPTION>
OPTIONS
EXERCISABLE
NAME OF BENEFICIAL SOLE VOTING AND WITHIN OTHER BENEFICIAL TOTAL BENEFICIAL PERCENT
OWNER(1) INVESTMENT POWER 60 DAYS OWNERSHIP OWNERSHIP OF CLASS
- ------------------ ---------------- ----------- ---------------- ---------------- --------
<S> <C> <C> <C> <C> <C>
Notre Capital Ventures
II, L.L.C.(2)
Three Riverway, Suite
630
Houston, Texas 77056... 1,565,158(3) -- -- 1,565,158 9.07%
J. Ezra Merkin(4)
450 Park Avenue, Suite
3201
New York, N.Y. 10022... 1,290,400 -- -- 1,290,400 7.48
Ronald L. Stanfa........ 50,000 10,000 1,565,158(5) 1,625,158 9.42
Linda T. Benge(2)....... 727,841 -- -- 727,841 4.22
David K. Luse(2)........ 652,592 -- 24,927(6) 652,592 3.93
Bruce A. Church(2)...... 419,363 -- -- 419,363 2.43
Mark S. Yahn(2)......... 360,000 -- -- 360,000 2.09
Roger S. Braswell(2).... 6,250 -- 331,084(7) 337,334 1.95
William F. Murdy(2)..... 302,500 -- 12,500(8) 315,000 1.82
Harold D. Cranston(2)... 223,742 -- 28,707(9) 252,449 1.46
Jeff A. Meyer(2)........ 229,612 -- -- 229,612 1.33
Fred M. Ferreira........ 32,000 10,000 12,500(8) 54,500 *
Clark A. Johnson........ 30,000 10,000 -- 40,000 *
Patrick J. Norton....... 30,000 10,000 12,500(8) 52,500 *
Peter C. Forbes(2)...... 100,000 -- 2,000 102,000 *
William L. Fiedler(2)... 110,000 -- -- 110,000 *
Kenneth V. Garcia(2).... 110,000 -- -- 110,000 *
All directors and
executive officers as a
group (15 persons)..... 3,438,900 40,000 1,989,376 5,468,276 31.68%
</TABLE>
- --------
*Indicates less than 1.0%.
(1) While ServiceMaster is not included in the preceding LandCare security
ownership table, as a result of the Voting Agreements entered into by
certain LandCare stockholders with respect to the proposed merger with
ServiceMaster, ServiceMaster may be deemed to beneficially own the LandCare
common stock subject to such Voting Agreements. ServiceMaster disclaims
beneficial ownership of such shares of LandCare common stock. See "The
Merger--Voting Agreements."
(2) Denotes individual who is subject to a Voting Agreement. See "The Merger--
Voting Agreements."
(3) Includes (i) 268,750 shares of LandCare common stock issuable on conversion
of certain convertible notes held by Notre Capital Ventures II, L.L.C.
("Notre") and (ii) 1,296,408 shares of restricted LandCare common stock.
Notre has agreed to convey the underlying 268,750 shares of LandCare common
stock issuable on conversion of such convertible notes to various other
third parties.
70
<PAGE>
(4) J. Ezra Merkin is the General Partner of Gabriel Capital, L.P., which owns
of record 521,322 shares of LandCare common stock. Mr. Merkin is also the
sole shareholder and president of Ariel Management Corp., the investment
advisor to Ariel Fund Limited, which owns of record 769,078 shares of
LandCare common stock. Both Gabriel Capital, L.P. and Ariel Fund Limited
are managed investment vehicles. Mr. Merkin has the power to vote and to
direct the voting of and the power to dispose and direct the disposition of
the combined 1,290,400 shares held of record by Gabriel Capital, L.P. and
Ariel Fund Limited, and may therefore be deemed to be the beneficial owner
of these shares.
(5) Mr. Stanfa is a Managing Director of Notre and is, accordingly, deemed to
beneficially own the 1,565,158 shares of LandCare common stock held by
Notre.
(6) Represents shares of LandCare common stock held in various trusts for the
benefit of Mr. Luse's minor children. Mr. Luse does not serve as trustee or
otherwise direct or control the voting or have investment power with
respect to these shares and disclaims beneficial ownership thereof.
(7) Represents shares of LandCare common stock owned by Southern Shade Tree
Co., Inc., of which Mr. Braswell and his spouse are the sole stockholders.
(8) Represents shares of LandCare common stock issuable on conversion of
certain convertible notes held by Notre and which shares Notre has agreed
to convey to Mr. Murdy, Mr. Ferreira and Mr. Norton as indicated on the
table.
(9) Represents shares of LandCare common stock held by Mr. Cranston as
custodian for his minor son.
71
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
SERVICEMASTER/LANDCARE CONSOLIDATED COMPANY
The following tables set forth ServiceMaster's pro forma consolidated
summaries of operations for the nine months ended September 30, 1998 and the
year ended December 31, 1997 and the pro forma condensed consolidated balance
sheet as of September 30, 1998. "Pro Forma Merger Adjustments" reflected in the
tables give effect to the merger and the related purchase accounting
adjustments as if the merger had occurred at September 30, 1998 for purposes of
the Pro Forma Condensed Consolidated Balance Sheet, and on January 1, 1997 and
1998, respectively, for purposes of the Pro Forma Consolidated Summaries of
Operations.
THE PRO FORMA FINANCIAL DATA DOES NOT PURPORT TO REPRESENT WHAT
SERVICEMASTER'S FINANCIAL POSITION AS OF SEPTEMBER 30, 1998 OR RESULTS OF
OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 OR THE YEAR ENDED
DECEMBER 31, 1997 WOULD ACTUALLY HAVE BEEN HAD THE MERGER IN FACT OCCURRED ON
THAT DATE OR AT THE BEGINNING OF THE PERIODS INDICATED OR TO PROJECT
SERVICEMASTER'S FINANCIAL POSITION OR RESULTS OF OPERATIONS FOR ANY FUTURE DATE
OR PERIOD.
The Pro Forma Operating Results Data assume that the acquisition of the
companies combined in connection with the LandCare initial public offering (the
"Founding Companies"), the companies acquired or probable of acquisition, by
LandCare after the initial public offering and prior to December 31, 1998 (the
"Subsequent Acquisitions") and the LandCare initial public offering (the "IPO")
were closed January 1, 1997, and are not necessarily indicative of the results
LandCare would have achieved had these events actually occurred or indicative
of LandCare's future results. The Founding Companies and the Subsequent
Acquisitions are referred to as the "Acquired Companies." Pro forma adjustments
reflected herein include adjustments to reflect exclusion of certain operations
not acquired in the acquisitions of the Acquired Companies, compensation and
rent differentials, amortization of goodwill related to the acquisitions of the
Acquired Companies, income taxes related to certain of the Acquired Companies,
which were S-Corporations, distributions made by the S-Corporations prior to
their acquisition by LandCare, and receipt and application of proceeds received
in the LandCare IPO.
The merger will be accounted for under the "purchase" method of accounting,
whereby the purchase price will be allocated based upon the fair value of the
assets acquired and the liabilities assumed. The pro forma merger adjustments
are based upon currently available information and certain assumptions which
ServiceMaster believes are reasonable in the circumstances. These adjustments
include additional interest cost and amortization expense. The actual
acquisition adjustments are subject to change based upon more precise
appraisals, evaluations and estimates of fair value, which are not currently
available and may differ substantially from the pro forma merger adjustments.
Financial effects of potential operating synergies attainable upon the
combination of LandCare and ServiceMaster are not reflected. The tables and
accompanying notes should be read in conjunction with ServiceMaster's and
LandCare's historical financial statements and the related notes thereto.
72
<PAGE>
THE SERVICEMASTER COMPANY
PRO FORMA CONSOLIDATED SUMMARY OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
SERVICEMASTER LANDCARE MERGER SERVICEMASTER
HISTORICAL PRO FORMA ADJUSTMENTS PRO FORMA
------------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUE....... $3,499,508 $228,023 $ $3,727,531
OPERATING COSTS AND
EXPENSES:
Cost of services
rendered and products
sold................... 2,702,538 178,311 2,880,849
Selling and
administrative
expenses............... 499,554 32,021 2,053 (1) 533,628
---------- -------- ------- ----------
Total operating costs
and expenses........... 3,202,092 210,332 2,053 3,414,477
---------- -------- ------- ----------
OPERATING INCOME........ 297,416 17,691 (2,053) 313,054
NON-OPERATING EXPENSE
(INCOME):
Interest expense........ 71,044 4,529 462 (2) 76,035
Interest and investment
income................. (11,916) (331) (12,247)
---------- -------- ------- ----------
Income before income
taxes.................. 238,288 13,493 (2,515) 249,266
Provision for income
taxes.................. 96,262 6,073 (187)(2) 102,148
---------- -------- ------- ----------
Net Income.............. $ 142,026 $ 7,420 $(2,329) $ 147,117
========== ======== ======= ==========
Basic shares
outstanding............ 286,938 9,235 (3) 296,173
Net Income Per Share--
Basic.................. $ 0.49 $ 0.50
========== ==========
Diluted shares
outstanding............ 296,603 9,235 (3) 305,838
Net Income Per Share--
Diluted................ $ 0.48 $ 0.48
========== ==========
</TABLE>
73
<PAGE>
THE SERVICEMASTER COMPANY
PRO FORMA CONSOLIDATED SUMMARY OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
SERVICEMASTER LANDCARE MERGER SERVICEMASTER
HISTORICAL PRO FORMA ADJUSTMENTS PRO FORMA
------------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUE........ $3,961,502 $263,779 $ $4,225,281
OPERATING COSTS AND
EXPENSES:
Cost of services rendered
and products sold....... 3,058,160 206,547 3,264,707
Selling and
administrative
expenses................ 559,409 40,641 2,738 (1) 602,788
---------- -------- ------- ----------
Total operating costs and
expenses................ 3,617,569 247,188 2,738 3,867,435
---------- -------- ------- ----------
OPERATING INCOME......... 343,933 16,591 (2,738) 357,786
NON-OPERATING EXPENSE
(INCOME):
Interest expense......... 76,447 5,597 600 (2) 82,644
Interest and investment
income.................. (14,304) (1,303) (15,607)
Minority interest........ 7,511 -- 7,511
---------- -------- ------- ----------
Income before income
taxes................... 274,279 12,297 (3,338) 283,238
Provision for income
taxes (ServiceMaster pro
forma corporate form)... 110,809 5,534 (242)(2) 116,101
---------- -------- ------- ----------
Net Income (ServiceMaster
pro forma corporate
form)................... $ 163,470 $ 6,763 $(3,095) $ 167,138
========== ======== ======= ==========
Basic shares
outstanding............. 285,944 9,235 (3) 295,179
Net Income Per Share--
Basic (ServiceMaster pro
forma corporate form)... $ 0.57 $ 0.57
========== ==========
Diluted shares
outstanding............. 299,640 9,235 (3) 308,875
Net Income Per Share--
Diluted (ServiceMaster
pro forma corporate
form) .................. $ 0.55 $ 0.54
========== ==========
</TABLE>
- --------
ServiceMaster's per share data reflect the three-for-two share split in August
1998.
ServiceMaster converted from partnership to corporate form in a tax-free
exchange for shareholders on December 26, 1997. Prior to the conversion, the
partnership was not subject to federal income taxes, as its taxable income was
allocated to its equity holders. As a result of the conversion, ServiceMaster
became a taxable entity and is responsible for such payments. The results of
ServiceMaster shown above have been restated to adjust the actual historical
partnership information to a pro forma basis that assumes that reincorporation
had occurred as of the beginning of the year. The pro forma provision for
income taxes has been calculated assuming that ServiceMaster's effective tax
rate was approximately 40 percent of pretax earnings. Actual historical
partnership net income was $264,076, and partnership basic and diluted net
income per share was $.93 and $.89, respectively.
74
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED SUMMARIES OF OPERATIONS
PERIODS ENDED SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
The pro forma merger adjustments reflect the assumed impact of the
consummation of the merger upon ServiceMaster's existing operations for the
periods presented. Pro forma adjustments consist of:
(1) Amortization of intangible assets is increased based upon $238 million of
acquired intangible assets recorded in the acquisition (see note (5) to the
ServiceMaster Company Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 1998). The allocation is preliminary and subject to change
during 1999 as additional information is obtained. The pro forma merger
adjustment represents the incremental amortization in excess of amounts
reflected by LandCare. Acquisition intangible assets are expected to be
amortized over 40 years.
(2) Reflects interest on cash flows related to dividend payments on the shares
issued in the merger and the related tax effect.
(3) Represents the number of ServiceMaster shares estimated to be issued in the
merger as calculated in note (5) to The ServiceMaster Company Pro Forma
Condensed Consolidated Balance Sheet as of September 30, 1998.
75
<PAGE>
THE SERVICEMASTER COMPANY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
SERVICEMASTER LANDCARE MERGER SERVICEMASTER
HISTORICAL PRO FORMA ADJUSTMENTS PRO FORMA
------------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and marketable
securities......... $ 115,516 $ 1,161 $ $ 116,677
Accounts and notes
receivable, net.... 399,540 54,908 454,448
Inventories and
other current
assets............. 187,144 10,831 197,975
---------- -------- --------- ----------
Total current
assets........... 702,200 66,900 -- 769,100
---------- -------- --------- ----------
Intangible assets,
primarily trade
names and goodwill,
net................ 1,822,088 127,681 237,190 (6) 2,059,278
(127,681)(4)
Property and
equipment, net..... 201,946 42,197 244,143
Notes receivable,
long-term
securities, and
other assets....... 157,230 1,530 158,760
---------- -------- --------- ----------
Total assets...... $2,883,464 $238,308 $ 109,509 $3,231,281
========== ======== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities... $ 674,554 $ 40,108 $ 9,073 (5) $ 723,735
Long-term debt........ 1,177,334 89,643 1,266,977
Other long-term
obligations.......... 129,589 5,823 135,412
Shareholders' equity:
Common stock........ 2,969 177 92 (6) 3,061
(177)(4)
Additional paid-in
capital............ 784,124 98,877 203,078 (6) 987,202
(98,877)(4)
Retained earnings... 148,710 3,680 (3,680)(4) 148,710
Restricted stock.... (3,604) -- -- (3,604)
Treasury stock, at
cost............... (30,212) -- -- (30,212)
---------- -------- --------- ----------
Shareholders'
equity............. 901,987 102,734 100,436 1,105,157
---------- -------- --------- ----------
Total liabilities
and shareholders'
equity........... $2,883,464 $238,308 $ 109,509 $3,231,281
========== ======== ========= ==========
</TABLE>
76
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma merger adjustments to the consolidated balance sheet reflect the
acquisition of all the shares of LandCare at the time the merger is consummated
in exchange for shares of ServiceMaster, payment of legal and investment
banking fees and lease termination and other costs associated with the merger.
Specific descriptions of the pro forma transaction adjustments follow:
(4) The existing stockholders' equity and intangible assets balances of
LandCare are eliminated as a result of the merger.
(5) Represents legal, investment banking fees and other costs related to the
transaction and the anticipated costs associated with the planned closing
of certain LandCare administrative facilities.
(6) The merger will be accounted for as a purchase; therefore, an allocation of
the purchase price to assets and liabilities of LandCare is required to
reflect fair values. The pro forma adjustments to reflect a preliminary
allocation of purchase price is summarized below. The preliminary
allocation is subject to change as additional information is obtained.
<TABLE>
<S> <C>
Purchase price.................................................. $203,170
Fees and other transaction costs--see Note (5).................. 9,073
--------
Purchase price to be allocated.................................. 212,243
Net tangible liabilities acquired............................... (24,947)
--------
Acquired intangible assets...................................... $237,190
========
</TABLE>
The purchase price reflects the acquisition of 17.7 million shares of
LandCare common stock at $11.00 per share and 2.6 million LandCare options
at $11.00 per share less the $7.90 per share average exercise price in
exchange for 9.2 million ServiceMaster shares (at an average closing price
of $22.00 per share).
77
<PAGE>
LEGAL OPINION
Certain legal matters with respect to the ServiceMaster common stock to be
issued in the merger will be passed on by Vernon T. Squires, the General
Counsel of ServiceMaster. Mr. Squires beneficially owned 475,693 shares of
ServiceMaster common stock at January 4, 1999.
Arthur Andersen L.L.P., special tax counsel to LandCare, will deliver an
opinion to LandCare concerning certain U.S. federal income tax consequences of
the merger.
EXPERTS
The financial statements and schedules of ServiceMaster incorporated by
reference in this Proxy Statement/Prospectus and elsewhere in this registration
statement have been audited by Arthur Andersen LLP, independent public
accountants as indicated in their reports with respect thereto, which are
incorporated by reference herein, in reliance upon the authority of said firm
as experts in accounting and auditing in giving said reports.
The audited financial statements of LandCare and certain Acquired Companies
included in this Proxy Statement/Prospectus and elsewhere in this registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
78
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
ServiceMaster and LandCare file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information we file at the SEC's public reference
facilities at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
Regional Offices at Seven World Trade Center, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the public from
commercial document retrieval services and at the web site maintained by the
SEC at http://www.sec.gov.
ServiceMaster filed a Registration Statement on Form S-4 to register with the
SEC the ServiceMaster common stock to be issued to LandCare stockholders in the
merger. This Proxy Statement/Prospectus is a part of that Registration
Statement and constitutes a prospectus of ServiceMaster in addition to being a
proxy statement of LandCare for its special meeting. As allowed by SEC rules,
this Proxy Statement/Prospectus does not contain all the information you can
find in the Registration Statement or the exhibits to the Registration
Statement.
The SEC allows ServiceMaster to "incorporate by reference" information into
this Proxy Statement/Prospectus, which means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
Proxy Statement/ Prospectus, except for any information superseded by
information in this Proxy Statement/Prospectus. This Proxy Statement/Prospectus
incorporates by reference the documents set forth below that ServiceMaster has
previously filed with the SEC. These documents contain important information
about ServiceMaster and its finances.
<TABLE>
<CAPTION>
SERVICEMASTER SEC FILINGS
(FILE NO. 1-14762) PERIOD
------------------------- ------
<S> <C>
Annual Report on Form 10-K Year ended December 31, 1997
Quarterly Reports on Form 10-Q Quarters ended March 31, 1998, June 30,
1998 and September 30, 1998
Current Reports on Form 8-K Report dated April 21, 1998
Report dated January 4, 1999
</TABLE>
ServiceMaster is also incorporating by reference additional documents that it
may file with the SEC between the date of this Proxy Statement/Prospectus and
the date of the LandCare special meeting.
Documents of ServiceMaster incorporated by reference are available without
charge, excluding all exhibits unless we have specifically incorporated by
reference an exhibit in this Proxy Statement/Prospectus. LandCare stockholders
may obtain ServiceMaster documents incorporated by reference in this Proxy
Statement/ Prospectus by requesting them in writing or by telephone from
ServiceMaster at the following address:
The ServiceMaster Company
Attention: Secretary
One ServiceMaster Way
Downers Grove, Illinois 60515
Telephone: (630) 271-1300
If you would like to request documents from ServiceMaster, please do so by
[ ], 1999 to receive them before the LandCare special meeting.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS TO VOTE ON THE MERGER. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM
WHAT IS CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS. THIS PROXY
STATEMENT/PROSPECTUS IS DATED [ ], 1999. YOU SHOULD NOT
ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND NEITHER THE MAILING OF THE
PROXY STATEMENT/PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF SERVICEMASTER
COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
79
<PAGE>
INDEX TO LANDCARE USA, INC. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Basis of Presentation................................................... F-1
Unaudited Pro Forma Combined Balance Sheet as of September 30, 1998..... F-3
Unaudited Pro Forma Combined Statement of Operations for the Year Ended
December 31, 1997...................................................... F-4
Unaudited Pro Forma Combined Statement of Operations for the Nine Months
Ended September 30, 1998............................................... F-5
Notes to Unaudited Pro Forma Combined Financial Statements.............. F-6
LANDCARE USA, INC.
Report of Independent Public Accountants................................ F-10
Consolidated Balance Sheets............................................. F-11
Consolidated Statements of Operations................................... F-12
Consolidated Statements of Shareholders' Equity......................... F-13
Consolidated Statements of Cash Flows................................... F-14
Notes to Consolidated Financial Statements.............................. F-15
HISTORICAL FINANCIAL STATEMENTS
TREES, INC.
Report of Independent Public Accountants................................ F-32
Consolidated Balance Sheets............................................. F-33
Consolidated Statements of Operations................................... F-34
Consolidated Statements of Shareholders' Equity......................... F-35
Consolidated Statements of Cash Flows................................... F-36
Notes to Consolidated Financial Statements.............................. F-37
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
Report of Independent Public Accountants................................ F-44
Balance Sheets.......................................................... F-45
Statements of Operations................................................ F-46
Statements of Shareholders' Equity...................................... F-47
Statements of Cash Flows................................................ F-48
Notes to Financial Statements........................................... F-49
CLEAN CUT, INC.
Report of Independent Public Accountants................................ F-56
Combined Balance Sheets................................................. F-57
Combined Statements of Operations....................................... F-58
Combined Statements of Shareholders' Equity (Deficit)................... F-59
Combined Statements of Cash Flows....................................... F-60
Notes to Combined Financial Statements.................................. F-61
SOUTHERN TREE & LANDSCAPE CO., INC.
Report of Independent Public Accountants................................ F-67
Balance Sheets.......................................................... F-68
Statements of Operations................................................ F-69
Statements of Shareholders' Equity (Deficit)............................ F-70
Statements of Cash Flows................................................ F-71
Notes to Financial Statements........................................... F-72
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
D.R. CHURCH LANDSCAPE CO., INC.
Report of Independent Public Accountants................................ F-79
Consolidated Balance Sheets............................................. F-80
Consolidated Statements of Operations................................... F-81
Consolidated Statements of Shareholders' Equity......................... F-82
Consolidated Statements of Cash Flows................................... F-83
Notes to Consolidated Financial Statements.............................. F-84
SCHUMACHER LANDSCAPING, INC.
Report of Independent Public Accountants................................ F-91
Balance Sheets.......................................................... F-92
Statements of Operations................................................ F-93
Statements of Stockholders' Equity...................................... F-94
Statements of Cash Flows................................................ F-95
Notes to Financial Statements........................................... F-96
LANDSCAPE WEST, INC.
Report of Independent Public Accountants................................ F-101
Balance Sheets.......................................................... F-102
Statements of Operations................................................ F-103
Statements of Shareholder's Equity...................................... F-104
Statements of Cash Flows................................................ F-105
Notes to Financial Statements........................................... F-106
GOLDEN BEAR ARBORISTS, INC.
Report of Independent Public Accountants................................ F-112
Combined Balance Sheets................................................. F-113
Combined Statements of Operations....................................... F-114
Combined Statements of Shareholder's Equity............................. F-115
Combined Statements of Cash Flows....................................... F-116
Notes to Combined Financial Statements.................................. F-117
GROUND CONTROL LANDSCAPING, INC.
Report of Independent Public Accountants................................ F-122
Balance Sheets.......................................................... F-123
Statements of Operations................................................ F-124
Statements of Stockholders' Equity...................................... F-125
Statements of Cash Flows................................................ F-126
Notes to Financial Statements........................................... F-127
E/G MANAGEMENT, INC.
Report of Independent Public Accountants................................ F-134
Balance Sheets.......................................................... F-135
Statements of Operations................................................ F-136
Statements of Shareholders' Equity...................................... F-137
Statements of Cash Flows................................................ F-138
Notes to Financial Statements........................................... F-139
ARTEKA CORPORATION
Report of Independent Public Accountants................................ F-146
Combined Balance Sheets................................................. F-147
Combined Statements of Operations....................................... F-148
Combined Statements of Shareholder's Equity............................. F-149
Combined Statements of Cash Flows....................................... F-150
Notes to Combined Financial Statements.................................. F-151
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
LANDESIGNS, INC.
Report of Independent Public Accountants................................ F-160
Balance Sheet........................................................... F-161
Statement of Operations................................................. F-162
Statement of Shareholder's Equity....................................... F-163
Statement of Cash Flows................................................. F-164
Notes to Financial Statements........................................... F-165
DESERT CARE LANDSCAPING, INC.
Report of Independent Public Accountants................................ F-169
Balance Sheets.......................................................... F-170
Statements of Operations................................................ F-171
Statements of Shareholders' Equity...................................... F-172
Statements of Cash Flows................................................ F-173
Notes to Financial Statements........................................... F-174
R. L. COMPANY, INC.
Report of Independent Public Accountants................................ F-180
Balance Sheets.......................................................... F-181
Statements of Operations................................................ F-182
Statements of Shareholder's Equity...................................... F-183
Statements of Cash Flows................................................ F-184
Notes to Financial Statements........................................... F-185
REAL PROPERTY MAINTENANCE, INC.
Report of Independent Public Accountants................................ F-191
Balance Sheets.......................................................... F-192
Statements of Operations................................................ F-193
Statements of Shareholders' Equity...................................... F-194
Statements of Cash Flows................................................ F-195
Notes to Financial Statements........................................... F-196
LANDCARE USA, INC.
Report of Independent Public Accountants................................ F-202
Balance Sheets.......................................................... F-203
Statements of Operations................................................ F-204
Statements of Stockholders' Equity...................................... F-205
Statements of Cash Flows................................................ F-206
Notes to Financial Statements........................................... F-207
</TABLE>
<PAGE>
LANDCARE USA, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma financial statements give effect to the
acquisitions by LandCare USA, Inc. (LandCare), of the outstanding capital stock
of Trees, Inc. (Trees), Four Seasons Landscape and Maintenance, Inc. (Four
Seasons), Southern Tree and Landscape Company (Southern Tree), D.R. Church
Landscape Co., Inc. (Church), Ground Control Landscaping, Inc. (Ground
Control), Arteka Corporation (Arteka) and Desert Care Landscaping, Inc. (Desert
Care) (collectively, the Founding Companies) and the outstanding capital stock
of Clean Cut, Inc. (Clean Cut), Gator and Gator Landscaping Co., Inc. (Gator),
Continental Landscape Management, Inc. (Continental), Landscape West, Inc.
(Landscape West), Landscape Resources, Inc. (Landscape Resources), R.L.
Company, Inc. (Redwood), Greentree Incorporated of Georgia (Greentree), Pacific
Environmental Landscape Maintenance, Inc. (Pacific Environmental), Lighthouse
Nursery, Inc. (Lighthouse), Schumacher Landscaping, Inc. (Schumacher), Golden
Bear Arborists, Inc. (Golden Bear), Real Property Maintenance, Inc. (RPM),
Arteka Southeast Corporation (Arteka SE), Albuquerque Grounds Maintenance, Inc.
(Albuquerque), Landtrends, Inc. (Landtrends), Miramar Wholesale Nurseries, Inc.
(Miramar), Sun States Property Maintenance Systems, Inc. (Sun States), E/G
Management, Inc. (E/G Management), Landscape Techniques, Inc. (Landscape
Techniques), Divine & Associates, Inc. d/b/a Eagle Landscaping (Eagle),
Serviscape, Inc. (Serviscape), Austin Natural Resources, Inc. d/b/a Natural
Resources (Natural Resources), and Landesigns, Inc. (Landesigns) (the
Subsequent Acquisitions together with the Founding Companies, the Acquired
Companies). The unaudited pro forma financial statements do not give effect to
the acquisitions of Horticultural Industries, Inc. (Horticultural) and Grounds
Management Contractors, Inc. (Grounds Management) as they are not material to
the pro forma financial statements. The Founding Companies' acquisitions
occurred concurrently with the consummation of LandCare's initial public
offering of 5,000,000 shares of its common stock on June 9, 1998, and were
accounted for using the "purchase" method of accounting. Trees, one of the
Founding Companies, has been identified as the accounting acquiror in
accordance in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 97 which states that the combining company which
receives the largest portion of voting rights in the combined corporation is
presumed to be the acquiror for accounting purposes. On June 29, 1998, the
Company sold 659,900 shares of its common stock pursuant to an over-allotment
option with the underwriters. The sale by the Company of the 5,659,900 shares
of its common stock, together with the Founding Companies' acquisitions, is
hereinafter referred to as the IPO. During the third quarter of 1998,
acquisitions were completed which included Clean Cut, Horticultural, Arteka SE,
Greentree, Landscape Resources, Landscape West, Lighthouse, Pacific
Environmental, Redwood, Schumacher, Gator and Continental, with all except
Clean Cut and Gator accounted for using the purchase method of accounting.
During the fourth quarter of 1998, acquisitions completed by LandCare, or which
were probable of completion included: Golden Bear, RPM, Albuquerque,
Landtrends, Miramar, Grounds Management, Sun States, E/G Management, Landscape
Techniques, Eagle, Servicescape, Natural Resources, Landesigns, and Ewing all
of which will be accounted for using the purchase method of accounting.
The unaudited pro forma balance sheet gives effect to the acquisitions of
Golden Bear, RPM, Albuquerque, Landtrends, Miramar, Grounds Management, Sun
States, E/G Management, Landscape Techniques, Eagle, Serviscape, Natural
Resources and Landesigns as if they had occurred on September 30, 1998. The
unaudited pro forma statements of operations give effect to the IPO, the
acquisition of the Founding Companies and the Subsequent Acquisitions as if
they had occurred on January 1, 1997.
LandCare has preliminarily analyzed the benefits that it expects to be
realized from reductions in salaries, bonuses and certain benefits to the
owners. To the extent the owners of the Acquired Companies have agreed
prospectively to reductions in salary, bonuses and benefits, these reductions
have been reflected in the unaudited pro forma statements of operations.
Additionally, reductions in lease expense pursuant to the renegotiation of
certain leases and reductions in interest expense resulting from the repayment
of the Founding Companies' existing lines of credit and long-term debt and the
refinancing and planned refinancing of the
F-1
<PAGE>
Subsequent Acquisitions' existing lines of credit and long-term debt have been
reflected in the pro forma statements of operations. It is anticipated that
other potential cost savings will be realized which will be offset by costs
related to LandCare's new corporate management and by the costs associated with
being a public company. However, because these factors cannot be accurately
quantified at this time, they have not been included in the pro forma financial
information of LandCare.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what
LandCare's financial position or results of operations would actually have been
if such transactions had in fact occurred on those dates and are not
necessarily representative of LandCare's financial position or results of
operations for any future period. Since the Acquired Companies were not under
common control or management, historical combined results may not be comparable
to, or indicative of, future performance. The unaudited pro forma financial
statements should be read in conjunction with the other financial statements
and notes thereto included elsewhere in this Registration Statement.
F-2
<PAGE>
LANDCARE USA, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET--SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PURCHASE PRO FORMA PRO FORMA
LANDCARE ACQUISITIONS ADJUSTMENTS TOTAL
---------- ------------ ----------- ---------
ASSETS
------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...... $ 1,161 $ 1,933 $(1,933) $ 1,161
Accounts receivable, net....... 45,745 9,163 -- 54,908
Inventories.................... 4,271 1,877 -- 6,148
Other current assets........... 3,887 796 -- 4,683
-------- ------- ------- --------
Total current assets......... 55,064 13,769 (1,933) 66,900
PROPERTY AND EQUIPMENT, net...... 34,537 8,317 (657) 42,197
OTHER ASSETS, net................ 1,159 371 -- 1,530
GOODWILL......................... 96,033 54 31,594 127,681
-------- ------- ------- --------
Total assets................. $186,793 $22,511 $29,004 $238,308
======== ======= ======= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY
-----------------------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued
expenses...................... $ 26,037 $ 5,154 $ -- $ 31,191
Lines of credit and other short
term borrowings............... 2,449 1,010 -- 3,459
Current maturities of long-term
debt.......................... 721 2,145 (15) 2,851
Deferred tax liabilities....... 215 239 (37) 417
Other current liabilities...... 1,550 640 -- 2,190
-------- ------- ------- --------
Total current liabilities.... 30,972 9,188 (52) 40,108
LONG-TERM DEBT, net ............. 57,788 3,566 28,289 89,643
LONG-TERM PAYABLE TO RELATED
PARTY, net ..................... 1,756 297 -- 2,053
OTHER LONG-TERM LIABILITIES...... 618 10 -- 628
DEFERRED TAX LIABILITY........... 2,752 282 108 3,142
-------- ------- ------- --------
COMMITMENTS AND CONTINGENCIES
Total liabilities............ 93,886 13,343 28,345 135,574
STOCKHOLDERS' EQUITY:
Common stock................... 166 464 (453) 177
Additional paid-in capital..... 89,061 71 9,745 98,877
Retained earnings.............. 3,680 9,160 (9,160) 3,680
Treasury stock, at cost........ -- (527) 527 --
-------- ------- ------- --------
Total stockholders' equity... 92,907 9,168 659 102,734
-------- ------- ------- --------
Total liabilities and
stockholders' equity........ $186,793 $22,511 $29,004 $238,308
======== ======= ======= ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-3
<PAGE>
LANDCARE USA, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PURCHASE PRO FORMA PRO FORMA
LANDCARE ACQUISITIONS ADJUSTMENTS TOTAL
---------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
REVENUES........................ $65,950 $198,062 $ (233) $263,779
COST OF SERVICES................ 55,889 150,920 (262) 206,547
------- -------- ------ --------
Gross profit................ 10,061 47,142 29 57,232
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES........ 6,709 42,439 (8,507) 40,641
------- -------- ------ --------
Income from operations...... 3,352 4,703 8,536 16,591
OTHER INCOME (EXPENSE):
Interest expense.............. (601) (2,042) (2,954) (5,597)
Other income (expense), net... 736 567 -- 1,303
------- -------- ------ --------
INCOME BEFORE INCOME TAXES...... 3,487 3,228 5,582 12,297
INCOME TAX PROVISION............ 1,375 1,756 2,403 5,534
------- -------- ------ --------
NET INCOME...................... $ 2,112 $ 1,472 $3,179 $ 6,763
======= ======== ====== ========
BASIC NET INCOME PER SHARE...... $ 0.59 $ 0.38
======= ========
DILUTED NET INCOME PER SHARE.... $ 0.59 $ 0.37
======= ========
SHARES USED IN COMPUTING PRO
FORMA BASIC NET INCOME PER
SHARE.......................... 3,552 17,735
======= ========
SHARES USED IN COMPUTING PRO
FORMA DILUTED NET INCOME PER
SHARE.......................... 3,552 18,435
======= ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-4
<PAGE>
LANDCARE USA, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PURCHASE PRO FORMA PRO FORMA
LANDCARE ACQUISITIONS ADJUSTMENTS TOTAL
---------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
REVENUES........................ $101,908 $126,125 $ (10) $228,023
COST OF SERVICES................ 80,496 97,841 (26) 178,311
-------- -------- ------- --------
Gross profit................ 21,412 28,284 16 49,712
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES........ 13,093 22,996 (4,068) 32,021
-------- -------- ------- --------
Income from operations...... 8,319 5,288 4,084 17,691
OTHER INCOME (EXPENSE):
Interest expense.............. (847) (1,396) (2,286) (4,529)
Other income (expense), net... 206 125 -- 331
-------- -------- ------- --------
INCOME BEFORE INCOME TAXES...... 7,678 4,017 1,798 13,493
INCOME TAX PROVISION............ 3,413 1,809 851 6,073
-------- -------- ------- --------
NET INCOME...................... $ 4,265 $ 2,208 $ 947 $ 7,420
======== ======== ======= ========
BASIC NET INCOME PER SHARE...... $ 0.48 $ 0.42
======== ========
DILUTED NET INCOME PER SHARE.... $ 0.48 $ 0.40
======== ========
SHARES USED IN COMPUTING PRO
FORMA BASIC NET INCOME PER
SHARE.......................... 8,809 17,735
======== ========
SHARES USED IN COMPUTING PRO
FORMA DILUTED NET INCOME PER
SHARE.......................... 8,851 18,435
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-5
<PAGE>
LANDCARE USA, INC.
NOTES TO THE UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL:
LandCare USA, Inc. ("LandCare" or the "Company") was formed to become a
national provider of comprehensive landscape and tree services to the
commercial and institutional markets. LandCare conducted no operations prior to
the IPO and acquired the Founding Companies simultaneously with the
consummation of the IPO, with the Subsequent Acquisitions occurring from August
3, 1998 through December 31, 1998.
The pro forma balance sheet reflects the consolidated financial position of
LandCare as restated for the effects of the business combination with Clean Cut
accounted for using the "pooling-of-interests" method of accounting
("Historical LandCare" column). The "Purchase Acquisitions" column gives effect
to the acquisitions of Golden Bear, RPM, Albuquerque, Landtrends, Miramar, Sun
States, E/G Management, Landscape Techniques, Eagle, Serviscape, Natural
Resources and Landesigns as if they had occurred on September 30, 1998.
The pro forma statements of operations reflect the consolidated results of
operations of LandCare as restated for the effects of the business combination
with Clean Cut accounted for using the pooling-of-interests method of
accounting ("Historical LandCare" column). The "Purchase Acquisitions" column
reflects the pre-acquisition results of operations of the companies acquired
using the purchase method of accounting and one company acquired using the
pooling-of-interests method of accounting that was deemed to be immaterial.
The historical financial statements included elsewhere herein have been
included in accordance with Securities and Exchange Commission Rule 3-05.
2. ACQUISITION OF COMPANIES:
The aggregate consideration paid by LandCare for the Subsequent Acquisitions
consisted of approximately $61.6 million in cash, 4,334,566 shares of common
stock and $6.4 million of subordinated convertible notes. The consideration
paid by LandCare for each of the Subsequent Acquisitions was determined by
negotiation between representatives of each Acquired Company and was based
primarily upon the pro forma adjusted net income of each Acquired Company.
F-6
<PAGE>
LANDCARE USA, INC.
NOTES TO THE UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the purchase of the acquisitions completed [or probable of
completion] subsequent to September 30, 1998 comprised of (i) the issuance
of 1,092,046 shares of common stock and $30.7 million of cash exchanged for
the assets or common stock of the companies acquired, and (ii) the
estimated excess purchase price paid over fair value of assets acquired of
$31.6 million reflected as additional goodwill.
(b) Records the net deferred income tax liability attributable to the balance
sheet adjustments and temporary differences between the financial reporting
and tax bases of assets and liabilities held in S Corporations.
(c) Records the distribution of certain real estate and their related
liabilities to Golden Bear in connection with its merger with LandCare.
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) ADJUSTMENTS
------- ---- ----- -----------
ASSETS
------
<S> <C> <C> <C> <C>
Cash and cash equivalents................... $(1,933) $-- $ -- $(1,933)
Accounts receivable, net.................... -- -- -- --
Inventories................................. -- -- -- --
Other current assets........................ -- -- -- --
------- ---- ----- -------
Total current assets.................... $(1,933) $-- $ -- $(1,933)
Property and equipment, net................. -- -- (657) (657)
Other assets, net........................... -- -- -- --
Goodwill.................................... 31,523 71 -- 31,594
------- ---- ----- -------
Total assets............................ $29,590 $ 71 $(657) $29,004
======= ==== ===== =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C> <C>
Accounts payable and accrued expenses....... $ -- $-- $ -- $ --
Lines of credit and other short term
borrowings................................. -- -- -- --
Current maturities of long-term debt........ -- -- (15) (15)
Deferred tax liability...................... -- (37) -- (37)
Other current liabilities................... -- -- -- --
------- ---- ----- -------
Total current liabilities............... $ -- $(37) $ (15) $ (52)
------- ---- ----- -------
Long-term debt, net of current maturities... 28,622 -- (333) 28,289
Long-term payable to related party, net of
current maturities......................... -- -- -- --
Deferred tax liability...................... -- 108 -- 108
------- ---- ----- -------
Total liabilities....................... 28,622 71 (348) 28,345
Stockholders' equity:
Common stock.............................. (453) -- -- (453)
Additional paid-in capital................ 9,745 -- -- 9,745
Retained earnings......................... (8,851) -- (309) (9,160)
Treasury stock, at cost................... 527 -- -- 527
------- ---- ----- -------
Total stockholders' equity.............. 968 -- (309) 659
------- ---- ----- -------
Total liabilities and stockholders'
equity................................. $29,590 $ 71 $(657) $29,004
======= ==== ===== =======
</TABLE>
F-7
<PAGE>
LANDCARE USA, INC.
NOTES TO THE UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS:
Year ended December 31, 1997
(a)Reflects the nursery operations of Church that were not acquired in the IPO.
(b) Reflects the reduction in operations for the distribution of certain real
estate, equipment and vehicles to Trees, Four Seasons, Ground Control and
Golden Bear that were not acquired in the IPO or Subsequent Acquisitions.
(c) Reflects the $5.7 million reduction in salaries, bonuses and benefits to
the owners of the Acquired Companies to which they agreed in connection
with the IPO and Subsequent Acquisitions and the reversal of the $5.8
million non-cash compensation charge related to the issuance of 804,240
shares of common stock to management and directors of and consultants to
the Company offset by the recurring portion of salary expenses of
management.
(d) Reflects the amortization of goodwill to be recorded as a result of the IPO
and Subsequent Acquisitions over a 40-year estimated life.
(e) Reflects the reduction and elimination of interest expense due to the
repayment and refinancing of the existing debt of the Acquired Companies.
(f) Reflects the increase in certain related party rental and lease expenses
that were agreed to prospectively.
(g) Reflects an increase in interest expense as a result of funding the cash
portion of the purchase price of the Acquired Companies with borrowings
under the Company's Credit Facility.
(h) Reflects the incremental provision for federal and state income taxes
relating to the statement of operations adjustments and to reflect income
taxes on S corporation income as if these entities had been taxable as
C corporations during the periods presented.
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) (F) (G) (H) ADJUSTMENTS
----- ---- ------- ------- ------ ---- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $(233) $-- $ -- $ -- $ -- $-- $ -- $ -- $ (233)
Cost of services........ (247) (15) -- -- -- -- -- -- (262)
----- ---- ------- ------- ------ ---- ------- ------- ------
Gross profit.......... 14 15 -- -- -- -- -- -- 29
Selling, general and
administrative
expenses............... (29) (87) (11,528) 3,196 -- (59) -- -- (8,507)
----- ---- ------- ------- ------ ---- ------- ------- ------
Income from
operations........... 43 102 11,528 (3,196) -- 59 -- -- 8,536
Other income (expense):
Interest expense...... -- 34 -- -- 1,450 -- (4,438) -- (2,954)
Other income
(expense), net....... -- -- -- -- -- -- -- -- --
----- ---- ------- ------- ------ ---- ------- ------- ------
Income before income
taxes.................. 43 136 11,528 (3,196) 1,450 59 (4,438) -- 5,582
Income tax provision.... -- -- -- -- -- -- -- 2,403 2,403
----- ---- ------- ------- ------ ---- ------- ------- ------
Net income.............. $ 43 $136 $11,528 $(3,196) $1,450 $ 59 $(4,438) $(2,403) $3,179
===== ==== ======= ======= ====== ==== ======= ======= ======
</TABLE>
F-8
<PAGE>
LANDCARE USA, INC.
NOTES TO THE UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
5. UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS:
Nine Months ended September 30, 1998
(a) Reflects the nursery operations of Church that were not acquired in the
IPO.
(b) Reflects the reduction in operations for the distribution of certain real
estate, equipment and vehicles to Trees, Four Seasons, Ground Control and
Golden Bear that were not acquired in the IPO or Subsequent Acquisitions.
(c) Reflects the $4.3 million reduction in salaries, bonuses and benefits to
the owners of the Acquired Companies to which they agreed in connection
with the IPO and Subsequent Acquisitions and the reversal of the $1.4
million non-cash compensation charge related to the issuance of 190,000
shares of common stock to management and directors of and consultants to
the Company offset by a $0.1 million charge for the recurring portion of
salary expenses of management.
(d) Reflects the amortization of goodwill to be recorded as a result of the IPO
and Subsequent Acquisitions over a 40-year estimated life.
(e) Reflects the reduction and elimination of interest expense due to the
repayment and refinancing of the existing debt of the Acquired Companies.
(f) Reflects the reduction in certain related party rental and lease expenses
that were agreed to prospectively.
(g) Reflects an increase in interest expense as a result of funding the cash
portion of the purchase price of the Acquired Companies with borrowings
under the Company's Credit Facility.
(h) Reflects the incremental provision for federal and state income taxes
relating to the statement of operations adjustments and to reflect income
taxes on S corporation income as if these entities had been taxable as
C corporations during the periods presented.
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) (F) (G) (H) ADJUSTMENTS
---- ---- ------- ------- ---- ----- ------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $(10) $-- $ -- $ -- $-- $ -- $ -- $ -- $ (10)
Cost of services........ (15) (11) -- -- -- -- -- -- (26)
---- ---- ------- ------- ---- ----- ------- ----- -------
Gross profit.......... 5 11 -- -- -- -- -- -- 16
Selling, general and
administrative
expenses............... (4) (37) (6,001) 1,861 -- 113 -- -- (4,068)
---- ---- ------- ------- ---- ----- ------- ----- -------
Income from
operations........... 9 48 6,001 (1,861) -- (113) -- -- 4,084
Other income (expense):
Interest expense...... -- 24 -- -- 823 -- (3,133) -- (2,286)
Other income
(expense), net....... -- -- -- -- -- -- -- -- --
---- ---- ------- ------- ---- ----- ------- ----- -------
Income before income
taxes.................. 9 72 6,001 (1,861) 823 (113) (3,133) -- 1,798
Income tax provision.... -- -- -- -- -- -- -- 851 851
---- ---- ------- ------- ---- ----- ------- ----- -------
Net income.............. $ 9 $ 72 $ 6,001 $(1,861) $823 $(113) $(3,133) $(851) $ 947
==== ==== ======= ======= ==== ===== ======= ===== =======
</TABLE>
F-9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To LandCare USA, Inc.
We have audited the accompanying consolidated balance sheets of LandCare USA,
Inc. and subsidiaries (the Company) as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. The
consolidated financial statements give retroactive effect to the merger with
one of the Pooled Companies on August 5, 1998, which has been accounted for as
a "pooling-of-interests" as described in Note 1. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997,
after giving retroactive effect to the merger with one of the Pooled Companies
as described in Note 1, in conformity with generally accepted accounting
principles.
As discussed in Note 2, the accompanying financial statements reflect the
Company on a historical basis with Trees, Inc., as the accounting acquiror
restated for the effect of pooling-of-interests transactions.
ARTHUR ANDERSEN LLP
Houston, Texas
August 3, 1998
F-10
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
--------------- SEPTEMBER 30
1996 1997 1998
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents....................... $ 4,370 $ 2,924 $ 1,161
Accounts receivable, net........................ 6,320 9,758 45,745
Inventories..................................... 115 109 4,271
Deferred tax asset.............................. 229 -- --
Other current assets............................ 845 577 3,887
------- ------- --------
Total current assets.......................... 11,879 13,368 55,064
PROPERTY AND EQUIPMENT, net....................... 9,366 10,298 34,537
GOODWILL, net..................................... -- -- 96,033
OTHER ASSETS...................................... 468 448 1,159
------- ------- --------
Total assets.................................. $21,713 $24,114 $186,793
======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses........... $ 7,141 $ 6,640 $ 26,037
Line of credit and other short-term borrowings.. 1,442 1,827 2,449
Payable to related party........................ -- 2,644 --
Current maturities of long-term debt............ 165 582 721
Current maturities of long-term payable to
related party.................................. 203 -- --
Deferred tax liability.......................... -- 37 215
Other current liabilities....................... 566 707 1,550
------- ------- --------
Total current liabilities..................... 9,517 12,437 30,972
LONG-TERM DEBT, net............................... 736 1,230 59,544
LONG-TERM PAYABLE TO RELATED PARTY, net........... 2,741 -- --
OTHER LONG-TERM LIABILITIES....................... 377 515 618
DEFERRED TAX LIABILITY............................ 1,697 1,752 2,752
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 5,000,000
shares authorized; none outstanding............ -- -- --
Common stock, $0.01 par value, 100,000,000
shares authorized; 3,551,664, 3,551,664 and
16,624,463 shares outstanding.................. 36 36 166
Additional paid-in capital...................... 801 632 89,061
Retained earnings............................... 5,808 7,512 3,680
------- ------- --------
Total shareholders' equity.................... 6,645 8,180 92,907
------- ------- --------
Total liabilities and shareholders' equity.... $21,713 $24,114 $186,793
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES........................ $54,922 $58,619 $65,950 $47,998 $101,908
COST OF SERVICES................ 45,351 47,905 55,889 40,384 80,496
------- ------- ------- ------- --------
Gross profit.................. 9,571 10,714 10,061 7,614 21,412
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES........ 4,855 6,989 6,709 4,961 13,093
------- ------- ------- ------- --------
Income from operations........ 4,716 3,725 3,352 2,653 8,319
OTHER INCOME (EXPENSE):
Interest expense.............. (802) (504) (601) (406) (847)
Other income (expense), net... 142 172 736 622 206
------- ------- ------- ------- --------
INCOME BEFORE INCOME TAXES...... 4,056 3,393 3,487 2,869 7,678
INCOME TAX PROVISION............ 1,580 1,275 1,375 1,141 3,413
------- ------- ------- ------- --------
NET INCOME...................... $ 2,476 $ 2,118 $ 2,112 $ 1,728 $ 4,265
======= ======= ======= ======= ========
NET INCOME PER SHARE:
Basic......................... $ 0.70 $ 0.60 $ 0.59 $ 0.49 $ 0.48
Diluted....................... $ 0.70 $ 0.60 $ 0.59 $ 0.49 $ 0.48
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic......................... 3,552 3,552 3,552 3,552 8,809
Diluted....................... 3,552 3,552 3,552 3,552 8,851
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON STOCK PAID-IN EARNINGS SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994.... 3,552 $ 36 $ 724 $1,399 $ 2,159
Conversion of Pooled Company
from S Corporation to C
Corporation recorded as
capital distributions...... -- -- (119) -- (119)
Dividends paid by Pooled
Company.................... -- -- -- (107) (107)
Net income.................. -- -- -- 2,476 2,476
------ ---- ------- ------ -------
BALANCE, December 31, 1995.... 3,552 36 605 3,768 4,409
Conversion of Pooled Company
from S Corporation to C
Corporation recorded as
capital contributions...... -- -- 196 -- 196
Dividends paid by Pooled
Company.................... -- -- -- (78) (78)
Net income.................. -- -- -- 2,118 2,118
------ ---- ------- ------ -------
BALANCE, December 31, 1996.... 3,552 36 801 5,808 6,645
Conversion of Pooled Company
from S Corporation to C
Corporation recorded as
capital distributions...... -- -- (169) -- (169)
Dividends paid by Pooled
Company.................... -- -- -- (408) (408)
Net income.................. -- -- -- 2,112 2,112
------ ---- ------- ------ -------
BALANCE, December 31, 1997.... 3,552 36 632 7,512 8,180
Conversion of Pooled Company
from S Corporation to C
Corporation recorded as
capital contributions...... -- -- 364 -- 364
Acquisition of Founding
Companies and LandCare..... 5,859 59 42,123 -- 42,182
IPO, net of offering costs.. 5,660 56 36,984 -- 37,040
Distribution to
stockholders............... -- -- -- (8,026) (8,026)
Acquisition of Purchased
Companies.................. 1,332 13 8,955 -- 8,968
Equity of Acquired Company
treated as immaterial
pooling-of-interest........ 222 2 3 (18) (13)
Dividends paid by Pooled
Company.................... -- -- -- (53) (53)
Net income (unaudited)...... -- -- -- 4,265 4,265
------ ---- ------- ------ -------
BALANCE, September 30, 1998
(unaudited).................. 16,625 $166 $89,061 $3,680 $92,907
====== ==== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income..................... $ 2,476 $ 2,118 $ 2,112 $ 1,728 $ 4,265
Adjustments to reconcile net
income to net cash provided by
operating activities
Depreciation and
amortization................ 2,224 2,291 2,365 1,732 3,167
Conversion of Pooled Company
from S Corporation to C
Corporation recorded as
capital contributions
(distributions)............. (119) 196 (169) (72) 364
Gain on sale of equipment.... (14) (21) (78) (94) --
Deferred income tax provision
(benefit)................... 613 (162) 321 208 3,190
Changes in assets and
liabilities--
Accounts receivable, net... (1,969) 670 (3,439) (3,273) (5,663)
Other current assets and
liabilities............... (492) 174 453 (84) (1,575)
Inventory.................. 9 (20) 6 -- --
Other assets and other..... (45) (84) 306 (15) (804)
Accounts payable and
accrued expenses.......... 557 401 (694) (374) (4,253)
------- ------- ------- ------- --------
Net cash provided by
(used in) operating
activities.............. 3,240 5,563 1,183 (244) (1,309)
------- ------- ------- ------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sales of property
and equipment................. 29 31 110 100 --
Purchases of property and
equipment..................... (1,381) (1,102) (3,068) (2,898) (7,043)
Cash paid for Founding
Companies, net of cash
acquired...................... -- -- -- -- (11,796)
Cash paid for Purchased
Companies, net of cash
acquired...................... -- -- -- -- (31,143)
------- ------- ------- ------- --------
Net cash used in
investing activities.... (1,352) (1,071) (2,958) (2,798) (49,982)
------- ------- ------- ------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Debt issuance costs............ -- -- -- -- (275)
Proceeds from long-term debt... 877 29 711 1,126 50,662
Net proceeds from short-term
borrowings.................... 437 123 385 109 --
Payments of long-term debt..... (2,180) (2,727) (359) (311) (29,872)
Proceeds from issuance of
Common Stock, net of offering
costs......................... -- -- -- -- 37,092
Distribution to stockholders... (107) (78) (408) (118) (8,079)
------- ------- ------- ------- --------
Net cash provided by
(used in) financing
activities.............. (973) (2,653) 329 806 49,528
------- ------- ------- ------- --------
NET INCREASE (DECREASE) IN CASH.. 915 1,839 (1,446) (2,236) (1,763)
CASH, beginning of period........ 1,616 2,531 4,370 4,370 2,924
------- ------- ------- ------- --------
CASH, end of period.............. $ 2,531 $ 4,370 $ 2,924 $ 2,134 $ 1,161
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period
for--
Interest...................... $ 757 $ 474 $ 582 $ 109 $ 508
Income taxes.................. 897 757 769 580 2,065
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
LandCare USA, Inc., a Delaware corporation ("LandCare" and collectively with
its subsidiaries the "Company"), was founded in 1997 to be a national provider
of comprehensive landscape and tree services to the commercial and
institutional markets and to pursue the consolidation of the highly fragmented
landscape and tree service industry. On June 9, 1998, LandCare completed its
initial public offering (the "IPO") of 5,000,000 shares of its common stock
(the "Common Stock"). Simultaneous with the completion of the IPO, LandCare
acquired: Trees, Inc. ("Trees"), Four Seasons Landscape and Maintenance, Inc.
("Four Seasons"), Southern Tree & Landscape Co., Inc. ("Southern Tree"), D.R.
Church Landscape Co., Inc. ("Church"), Ground Control Landscaping, Inc.
("Ground Control"), Arteka Corporation ("Arteka"), and Desert Care Landscaping,
Inc. ("Desert Care"), (collectively referred to herein as the "Founding
Companies") for $19.9 million in cash and 5,162,645 shares of Common Stock (the
"Mergers"). In connection with the IPO, the Company granted the underwriters an
option to acquire an additional 750,000 shares of Common Stock at $8.00 per
share to cover over-allotments. On June 29, 1998, the underwriters exercised
such over-allotment option in part, electing to acquire 659,900 shares of
Common Stock.
Subsequent to June 9, 1998 and through September 30, 1998, the Company
acquired 12 additional commercial landscape and tree services companies
(collectively with the Founding Companies referred to as the "Acquired
Companies"). Of these additional businesses acquired, 2 were accounted for as
pooling-of-interests (the "Pooled Companies"), with the remaining 10 businesses
accounted for under the purchase method of accounting (the "Purchased
Companies"). For financial statement purposes, the historical financial
statements of the Company have been retroactively restated to give effect to
one of the Pooled Companies. The remaining Pooled Company was deemed to be
immaterial and accordingly, has been reflected from the acquisition date in the
accompanying financial statements. The Company intends to continue to acquire
additional companies, through merger or purchase, to expand its national
operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
For financial statement purposes, Trees, one of the Founding Companies, was
identified as the accounting acquiror. Accordingly, the accompanying financial
information included herein represents (i) the historical results of Trees from
January 1, 1995, (ii) the retroactive restatement to January 1, 1995 of one of
the Pooled Companies, (iii) the acquisition of the remaining Founding Companies
effective June 9, 1998, and (iv) the acquisition of the Purchased Companies and
one of the Pooled Companies, deemed to be immaterial, from their respective
acquisition dates. The allocations of the purchase price to the assets acquired
and the liabilities assumed from the Founding Companies and the Purchased
Companies have been initially assigned and recorded based on preliminary
estimates of fair value and may be revised as additional information concerning
the valuation of such assets and liabilities becomes available.
Interim Financial Information
The interim financial statements as of September 30, 1998 and for each of the
nine months ended September 30, 1997 and 1998 are unaudited, and certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements have been included. Due to seasonality and other factors, the
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year.
F-15
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash deposits and accounts receivable.
The Company maintains cash balances at financial institutions which may at
times be in excess of federally insured levels.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
Inventories
Inventories consist of materials, parts and supplies held for use in the
ordinary course of business and are stated at the lower of cost or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
Goodwill
Goodwill represents the excess of cost over the estimated fair value of
identifiable assets of the businesses acquired using the "purchase" method of
accounting. Goodwill is stated at cost, net of accumulated amortization, and is
being amortized over a forty-year life using the straight-line method. The
Company reviews the recoverability of goodwill and other long-lived assets
including other intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may be impaired.
Revenue Recognition
The Company recognizes revenue from tree trimming and line clearing service
contracts when services are performed. Revenues from tree trimming and line
clearing service contracts are recognized based on the amount of labor and
materials incurred.
The Company's revenues also consist of maintenance revenues and installation
revenues. The Company's landscape maintenance contracts are for terms of one to
two years and payments to the Company are remitted in equal monthly payments
over the term of the contract. Revenues from landscape maintenance contracts
are recognized on the straight-line method while costs incurred under the
contracts can be expected to vary based on seasonal factors. Monthly
maintenance payments are recognized as they become due because the contracts
F-16
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
are fully cancelable without cause upon notice of 30 to 60 days or less by
either the Company or the customer. Should the Company elect to cancel a
contract, the customer would have no standing under either contract law or
equity to require additional services or obtain a refund (other than for
nonperformance prior to cancellation), notwithstanding that the customer may
have paid amounts which clearly exceeded the fair value of the services
received in those months in anticipation of lower priced services later in the
year.
Revenues from installation services are recognized when the services are
performed and billable under the terms of the applicable contract. The balances
billed but not paid by customers pursuant to retainage provisions in
installation contracts will be due upon completion of the contracts and
acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance at each balance sheet date
will be collected within the subsequent fiscal year.
Cost of Services
Cost of services represents direct labor and associated costs (such as
benefits and workers' compensation expense), materials, supervisory personnel,
and equipment and vehicle costs, such as fuel, insurance and depreciation.
Warranty Costs
A reserve for warranty costs is recorded based upon the historical level of
warranty claims, property damage costs and management's estimate of future
costs.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount to be
realized. The provision of income taxes is the tax payable for the year and the
change during the year in deferred tax assets and liabilities.
One of the Pooled Companies was an S Corporation for income tax purposes and,
accordingly, any income tax liabilities for the periods prior to the
acquisition date are the responsibility of the respective stockholders. For
purposes of these consolidated financial statements, federal and state income
taxes have been provided as if this company had filed C Corporation tax returns
for the preacquisition periods. The current income tax expense (benefit) of
this S Corporation is reflected in the consolidated financial statements in the
provision (benefit) for income taxes and as an increase (decrease) to
additional paid-in capital.
Major Customers and Risk Concentration
The Company had sales of approximately 18, 16, 13 and 10 percent of total
sales to four major customers for the year ended December 31, 1995 and sales of
approximately 20, 19 and 18 percent and 20, 18 and 16 percent of total sales to
three major customers for the years ended December 31, 1996 and 1997,
respectively.
Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, lines of credit and long-term debt. The Company believes that
the carrying value of these instruments on the accompanying balance sheets
approximates their fair value.
F-17
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications and Adjustments
Certain reclassifications and adjustments have been made to the prior-period
amounts to conform to current-period presentations.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a new fair value-
based method of accounting for employee stock options or similar equity
instruments and the current intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25. Entities
electing to remain with the accounting in APB Opinion No. 25 must make pro
forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated financial statements.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 for the year ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the SFAS No. 133 at the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the Company's election, before
January 1, 1998).
The Company has not yet quantified the impacts of adopting SFAS No. 133 on
the financial statements and has not determined the timing of or method of
adoption.
F-18
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. BUSINESS COMBINATIONS:
Poolings
During the third quarter of 1998, the Company completed the acquisition of
all of the capital stock of the Pooled Companies in exchange for 1,910,749
shares of LandCare Common Stock. The acquisitions were accounted for as
"poolings-of-interests" transactions in accordance with the requirements of
Accounting Principles Board Opinion No. 16. For financial statement purposes,
the historical financial statements have been retroactively restated to give
effect to one of the Pooled Companies, which has been deemed to be material.
The remaining Pooled Company was deemed to be immaterial and accordingly, has
not been included in the retroactive restatement.
The following tables summarize the restated stockholders' equity, revenues,
net income and per share data of the Company, after giving effect to the
acquisition of the Pooled Company deemed to be material (in thousands, except
share data):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
As previously reported..... 1,863,137 $19 $689 $8,360 $9,068
Acquisition accounted for
as a pooling-of-
interests................. 1,688,527 17 (57) (848) (888)
--------- --- ---- ------ ------
As restated................ 3,551,664 $36 $632 $7,512 $8,180
========= === ==== ====== ======
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
As previously reported..... 1,863,137 $19 $689 $6,382 $7,090
Acquisition accounted for
as a pooling-of-
interests................. 1,688,527 17 112 (574) (445)
--------- --- ---- ------ ------
As restated................ 3,551,664 $36 $801 $5,808 $6,645
========= === ==== ====== ======
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
As previously reported..... 1,863,137 $19 $689 $4,670 $5,378
Acquisition accounted for
as a pooling-of-
interests................. 1,688,527 17 (84) (902) (969)
--------- --- ---- ------ ------
As restated................ 3,551,664 $36 $605 $3,768 $4,409
========= === ==== ====== ======
</TABLE>
F-19
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
NET NET NET
REVENUES INCOME REVENUES INCOME REVENUES INCOME
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues and net income--
As reported.............. $45,498 $2,280 $45,672 $1,712 $50,085 $1,978
Subsequent acquisitions.. 9,424 196 12,947 406 15,865 134
------- ------ ------- ------ ------- ------
As restated.............. $54,922 $2,476 $58,619 $2,118 $65,950 $2,112
======= ====== ======= ====== ======= ======
Basic and diluted net
income per share:
As reported.............. $ 0.88 $ 0.92 $ 1.06
Subsequent acquisitions.. (0.18) (0.32) (0.47)
------ ------ ------
As restated.............. $ 0.70 $ 0.60 $ 0.59
====== ====== ======
</TABLE>
Purchases
Simultaneous with the IPO, LandCare acquired the seven Founding Companies for
$19.9 million in cash and 5,162,645 shares of Common Stock. Subsequent to June
9, 1998 and through September 30, 1998, the Company acquired the Purchased
Companies for aggregate consideration of $31.1 million in cash, 1,331,771
shares of Common Stock valued at $9.0 million and $6.4 million of convertible
notes. The allocations of the purchase price to the assets acquired and the
liabilities assumed from the Founding and Purchased Companies have been
initially assigned and recorded based on preliminary estimates of fair value
and may be revised as additional information concerning the valuation of such
assets and liabilities becomes available. In connection with the acquisition of
the Founding Companies and the Purchased Companies, LandCare recognized
goodwill of $96.0 million representing the excess of purchase price over fair
value of the net assets acquired. Goodwill associated with the Company's
acquisitions is recorded as an intangible asset and amortized over a period not
to exceed 40 years. Management has reviewed all of the factors and related
future cash flows which it considered in arriving at the consideration paid for
the Founding Companies and the Purchased Companies and has determined that
there was no persuasive evidence that an amortization period of less than 40
years would be appropriate.
The unaudited pro forma financial information presented below includes the
income statement data of LandCare combined with the Acquired Companies from the
beginning of each period as if the acquisitions had been completed on January
1.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -----------------------
1997 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues............................... $210,719 $152,141 $182,171
Net income............................. 6,194 4,300 5,684
Net income per share:
Basic................................ $ 0.37 $ 0.26 $ 0.34
Diluted.............................. 0.36 0.25 0.33
Shares used in computing net income:
Basic................................ 16,625 16,625 16,625
Diluted.............................. 17,308 17,308 17,308
</TABLE>
F-20
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma adjustments included in the preceding table regarding the Acquired
Companies primarily relates to (i) certain reductions in salaries and benefits
paid to the former owners of the Acquired Companies to which they agreed
prospectively, (ii) certain reductions in lease expense paid to the former
owners of the Acquired Companies to which they agreed prospectively, (iii)
amortization of goodwill related to the Founding and Purchased Companies, (iv)
elimination of the non-recurring, non-cash compensation charges related to
shares of Common Stock issued to management, (v) interest expense on borrowings
for the cash portion of the purchase price of the Purchased Companies, and (vi)
interest expense on the subordinated convertible notes issued in connection
with the acquisition of certain Purchased Companies. In addition, an
incremental tax provision has been recorded as if all of the Acquired Companies
had been subject to federal and state corporate income taxes for the applicable
periods presented.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31
USEFUL LIVES ------------------ SEPTEMBER 30
IN YEARS 1996 1997 1998
------------ -------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land......................... N/A $ 309 $ 309 $ 309
Transportation equipment..... 5 20,918 21,681 46,448
Machinery and equipment...... 5-10 4,944 6,244 17,656
Buildings and improvements... 30 270 289 8,043
Office furniture and
equipment................... 5 362 521 3,742
-------- -------- --------
Total.................... 26,803 29,044 76,198
Less--Accumulated
depreciation................ (17,437) (18,746) (41,661)
-------- -------- --------
Property and equipment,
net..................... $ 9,366 $ 10,298 $ 34,537
======== ======== ========
</TABLE>
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------- SEPTEMBER 30
1996 1997 1998
------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable, trade...................... $6,610 $8,225 $47,800
Receivable from equipment financing............. -- 1,766 8
Accounts receivable, affiliated................. 64 121 369
Accounts receivable, other...................... 25 61 416
Allowance for doubtful accounts................. (379) (415) (2,848)
------ ------ -------
$6,320 $9,758 $45,745
====== ====== =======
</TABLE>
F-21
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable, trade.......................... $1,623 $1,206 $11,895
Accrued compensation and benefits................ 2,488 2,026 6,314
Accrued insurance premiums....................... 2,475 2,700 1,317
Warranty accrual................................. 335 335 1,530
Income tax payable............................... -- -- 2,665
Other accrued expenses........................... 220 373 2,316
------ ------ -------
$7,141 $6,640 $26,037
====== ====== =======
</TABLE>
6. LINE OF CREDIT AND LONG-TERM DEBT:
Line of Credit
Prior to the merger of Trees and one of the Pooled Companies with LandCare,
the Company maintained revolving lines of credit with financial institutions,
one which provided for borrowings up to the lesser of $500,000 of the Company's
loan limit as defined by the agreement, the others which total $3.3 million.
These lines of credit bore interest ranging from the prime rate to the prime
rate plus 0.75 percent, which was 8.5% to 9.25% at December 31, 1997. The lines
of credit were secured by accounts receivable, other rights to payment, general
intangibles, inventory and equipment of the Company, and personal guarantees of
stockholders. These lines of credit were subject to certain covenants,
including the maintenance of certain tangible net worth and working capital
levels and restrictions on dividend payments and change in executive
management. Advances outstanding on the lines of credit at December 31, 1996
and 1997 were approximately $1.4 million and $1.8 million, respectively.
The Company also had irrevocable standby letters of credit of approximately
$2,537,000 pledged against the Company's workers' compensation insurance plan.
These letters of credit were secured by accounts receivable.
In April 1998, the Company entered into an additional line of credit for $1.5
million that expired in 2004. No amount was drawn down on this line of credit.
The personal guarantees and lines of credit referred to above were active
during periods prior to the Merger of Trees and one of the Pooled Companies
with LandCare. In connection with the acquisition of these Companies by
LandCare, the outstanding balances on the lines of credit and long-term debt
were repaid by LandCare.
Credit Facility
Effective June 9, 1998, the Company entered into a credit agreement with The
First National Bank of Chicago (the "Credit Facility"). The Credit Facility
provided the Company with a revolving line of credit of up to $50 million,
which could be used for general corporate purposes, including the repayment or
refinancing of indebtedness of the Acquired Companies and financing future
acquisitions, capital expenditures and working capital. During July 1998, the
Credit Facility was amended to increase the borrowing capacity to $55 million
and to add Bankers Trust Company and NationsBank, N.A. as co-lenders under the
facility. The Credit Facility is secured by the stock of the Acquired
Companies. Advances under the Credit Facility bear interest at the bank's
designated prime lending rate. At the Company's option, the loans may bear
interest based on the
F-22
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Eurodollar rate plus a margin ranging from 57.5 to 120 basis points. Commitment
fees of 17.5 to 30 basis points per annum are payable on the total facility.
The Credit Facility contains a provision for standby letters of credit up to $5
million. The Credit Facility prohibits the payment of dividends by the Company,
restricts the Company's incurring or assuming other indebtedness and requires
the Company to comply with certain financial covenants, including a minimum net
worth, leverage ratio and minimum fixed charge coverage ratio. The Credit
Facility will terminate and all amounts outstanding thereunder, if any, will be
due and payable on May 31, 2001. As of September 30, 1998, the Company had
outstanding borrowings under the Credit Facility totaling $49.8 million.
During September 1998, the Company entered into a separate short-term
revolving credit facility (the "Short-Term Facility") with NationsBank, N.A. as
sole lender for up to $20 million. During October 1998, the Short-Term Facility
was amended to increase the borrowing capacity to $25 million. Borrowings under
the Short-Term Facility bear interest on the same basis as the Credit Facility.
There were no amounts outstanding under the Short-Term Facility at September
30, 1998.
Convertible Subordinated Notes
Convertible subordinated notes totaling $6.4 million were issued to the
former owners of two of the Purchased Companies as partial consideration for
the acquisition of their companies (the "Notes"). Interest on $5.4 million of
the Notes is payable quarterly at 5.7%. These Notes are convertible into
unregistered shares of LandCare Common Stock at $10.00 per share on or after
September 22, 1999. In the event of a change in control as defined in such
Note, on or prior to March 22, 1999, the conversion price adjusts to $6.67 per
share. The remaining Notes of $1.0 million bear interest payable quarterly at
5.6%. These Notes are convertible into unregistered shares of LandCare Common
Stock at $10.00 per share on or after March 4, 2000, and the conversion price
does not adjust in the event of a change in control. All of the Notes mature on
March 31, 2002.
Other Long-Term Debt
Other long-term debt totaled $3.4 million as of September 30, 1998 and was
comprised of secured debt, unsecured debt and capitalized lease obligations at
certain of the Acquired Companies.
F-23
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------- SEPTEMBER 30
1996 1997 1998
------ ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to a financial institution in
monthly installments of $13,301 including
interest at a rate equal to 30-day commercial
paper plus 2.2%, secured by equipment due
2002........................................... $ 707 $ 599 $ --
Note payable to former shareholder payable in
monthly installments of $35,335 including
interest of 8.0%, due 2006..................... 2,848 2,644 --
Note payable to a financial institution in
monthly installments of $37,916 including
interest at 9.25% secured by accounts
receivable, other rights to payment, general
intangibles, inventory and equipment due 1999.. -- 732 --
Note payable to financial institution in various
monthly installments including interest at
10.00% secured by land, due 2001............... 140 138 --
Note payable to related party, interest at
11.18%, due 2007............................... 96 88 --
Capital leases of equipment payable in monthly
installments of approximately $5,000 including
interest at 9.2%, maturing in 2002............. -- 241 260
Note payable to a financial institution,
including interest of 7.43%, due in 2002....... -- -- 500
Note payable to various financial institutions
in total monthly installments of $19,000
including interest ranging from 1.9% to 16.6%,
secured by certain vehicles, machinery and
equipment, with payments due in varying
maturities ranging from 1998-2003.............. -- -- 500
Capital leases of equipment payable in monthly
installments of approximately $27,418 including
interest ranging from 8.6% to 20.7%, maturing
in 1998-2003................................... -- -- 616
Note payable to former shareholder, including
interest of 9.0% with payments due in varying
maturities ranging from 2001-2004.............. -- -- 333
Convertible subordinated notes payable to former
owners of two of the Purchased Companies, with
interest ranging from 5.6% to 5.7%, maturing
2002........................................... -- -- 6,351
Note payable to a financial institution, with
interest of 57.5 to 120 basis points over the
Eurodollar rate which was 6.2% at September 30,
1998, due 2001................................. -- -- 37,000
Note payable to a financial institution bearing
interest at the higher of the Corporate Base
Rate or Fed Funds Effective Rate plus 50 basis
points, which was 8.5% at September 30, 1998,
due 2001....................................... -- -- 12,800
Other........................................... 54 14 1,905
------ ------- -------
3,845 4,456 60,265
Less--Current portion........................... (368) (3,226) (721)
------ ------- -------
$3,477 $ 1,230 $59,544
====== ======= =======
</TABLE>
The aggregate maturities of long-term debt and capital lease obligations at
September 30, 1998, are as follows (in thousands) (unaudited):
<TABLE>
<S> <C>
Year ending September 30--
1999............................................................. $ 721
2000............................................................. 1,542
2001............................................................. 50,347
2002............................................................. 6,743
2003............................................................. 912
-------
$60,265
=======
</TABLE>
F-24
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. CAPITAL STOCK:
On June 9, 1998, the Company completed the IPO, which involved the sale by
the Company of 5,000,000 shares of Common Stock at a price to the public of
$8.00 per share. In connection with the IPO, the Company granted the
underwriters an option to acquire up to 750,000 additional shares of Common
Stock at $8.00 per share to cover over-allotments. On June 29, 1998, the
underwriters exercised such over-allotment option in part, electing to acquire
659,900 shares of Common Stock. The net proceeds to the Company from the IPO
(after deducting underwriting discounts, commissions and IPO expenses) were
approximately $37.1 million. Of this amount, $19.9 million was used to pay the
cash portion of the purchase price relating to the Mergers of the Founding
Companies and the remainder was used to repay approximately $16.6 million of
outstanding indebtedness of the Founding Companies.
As a result of the Merger, the Company's historical capital structure as of
December 31, 1997 has been restated to give effect to the exchange of Trees'
then outstanding shares for 1,863,137 shares of LandCare Common Stock. In
addition, the Company's historical capital structure as of December 31, 1997
has been restated to give effect to the issuance of 1,688,527 shares issued in
connection with the acquisition of one of the Pooled Companies. Prior to and in
conjunction with the IPO and the Mergers, the Company issued (i) 1,565,158
shares of Common Stock to Notre; (ii) 994,240 shares of Common Stock to
management, consultants and directors of LandCare; and (iii) 3,299,508 shares
of Common Stock (excluding 1,863,137 shares issued to Trees) to owners of the
Founding Companies as a result of the Mergers.
During July 1998, the Company's registration statement registering 5,000,000
additional shares of Common Stock to be issued from time-to-time in connection
with future acquisitions was declared effective by the Securities and Exchange
Commission. Subsequent to July 1998 and through September 30, 1998, the Company
issued 3,242,520 shares of the 5,000,000 registered shares in connection with
the acquisition of the Pooled Companies and the Purchased Companies.
8. EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
established new standards for computing and presenting earnings per share. The
provisions of the statement are effective for fiscal years ending after
December 15, 1997, and accordingly have been adopted in the accompanying
financial statements.
F-25
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The years ended December 31, 1995, 1996 and 1997 and the nine months ended
September 30, 1997 represent the results of operations of Trees and the shares
of common stock presented to calculate earnings per share for these periods are
those issued to Trees in the Mergers, restated to give effect to the
retroactive restatement for one of the Pooled Companies. The computation of
historical net income per share for the nine-month period ended September 30,
1998 is based on the weighted average of Common Stock outstanding as of
September 30, 1998 which includes shares as follows (unaudited):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE SHARES,
SEPTEMBER 30,
TOTAL 1998
---------- ---------------
<S> <C> <C>
Issued in consideration for acquisition of
Founding Companies............................ 5,162,645 3,301,384
Issued in consideration for Pooled Companies... 1,910,749 1,735,739
Sold pursuant to the IPO and the over-
allotment..................................... 5,659,900 2,406,705
Issued to Notre................................ 1,565,158 682,248
Issued in consideration for the Purchased
Companies..................................... 1,331,771 249,785
Issued to management, consultants and
directors..................................... 994,240 433,386
---------- ---------
Weighted average shares outstanding--Basic..... 16,624,463 8,809,247
Issuance of options to Founding Companies...... 767,819 --
Issuance of options to Pooled Companies........ 191,076 2,226
Issuance of options to Purchased Companies..... 243,273 1,620
Issuance of options to management, consultants
and directors................................. 907,500 10,489
Issuance of convertible notes to Purchased
Companies..................................... 633,139 27,466
Issuance of options pursuant to IPO and the
over-allotment................................ 659,900 --
---------- ---------
Weighted average shares outstanding--Dilutive.. 20,027,170 8,851,048
========== =========
</TABLE>
Basic and diluted net income per share is computed based on the following
information (in thousands, except per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
----------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income....................... $ 2,476 $ 2,118 $ 2,112 $ 1,728 $ 4,265
BASIC:
Basic weighted average shares.. 3,552 3,552 3,552 3,552 8,809
DILUTED:
Basic weighted average shares.. 3,552 3,552 3,552 3,552 8,809
Dilutive securities:
Subordinated convertible
notes....................... -- -- -- -- 28
Options...................... -- -- -- -- 14
------- ------- ------- -------- --------
Diluted weighted average shares.. 3,552 3,552 3,552 3,552 8,851
======= ======= ======= ======== ========
NET INCOME PER SHARE:
Basic.......................... $ 0.70 $ 0.60 $ 0.59 $ 0.49 $ 0.48
======= ======= ======= ======== ========
Diluted........................ $ 0.70 $ 0.60 $ 0.59 $ 0.49 $ 0.48
======= ======= ======= ======== ========
</TABLE>
F-26
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES:
The Company intends to file a consolidated federal income tax return which
includes the operations of the Founding Companies for periods subsequent to the
Mergers. The Founding Companies and the Acquired Companies will each file a
"short period" federal income tax return through the date of the Mergers.
Interim period income tax provisions are based upon estimates of annual
effective tax rates, and events may occur which will cause such rates to vary.
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
---------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Federal--
Current.............................................. $ 910 $1,321 $1,030
Deferred............................................. 539 (138) 149
------ ------ ------
1,449 1,183 1,179
------ ------ ------
State--
Current.............................................. 57 132 164
Deferred............................................. 74 (40) 32
------ ------ ------
131 92 196
------ ------ ------
Total provision...................................... $1,580 $1,275 $1,375
====== ====== ======
</TABLE>
The provision for income taxes differs from an amount computed at the
statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
----------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Federal income tax at statutory rates................ $1,420 $1,188 $1,221
State income taxes................................... 256 121 127
Nondeductible expenses............................... 36 42 79
Other................................................ (132) (76) (52)
------ ------ ------
$1,580 $1,275 $1,375
====== ====== ======
</TABLE>
F-27
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The significant items giving rise to the deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets--
Accrued expenses........................................ $ 734 $ 734
Allowance for doubtful accounts......................... 156 156
Basis difference in equipment........................... 74 76
State taxes............................................. 48 48
Other................................................... 109 105
------- -------
Total deferred tax assets............................. 1,121 1,119
------- -------
Deferred tax liabilities--
Cash to accrual adjustment.............................. (670) (947)
Bases differences in property and equipment............. (1,894) (1,938)
Other................................................... (25) (23)
------- -------
Total deferred tax liabilities........................ (2,589) (2,908)
------- -------
Net deferred tax liability............................ $(1,468) $(1,789)
======= =======
</TABLE>
One of the Pooled Companies was an S Corporation for income tax purposes and,
accordingly, any income tax liabilities for the periods prior to the
acquisition date are the responsibility of the respective stockholders. For
purpose of these consolidated financial statements, federal and state income
taxes have been provided as if this company had filed C Corporation tax returns
for the preacquisition periods. Current income tax expense (benefit) of this S
Corporation for the years ended December 31, 1995, 1996 and 1997 of ($119,000),
$196,000 and ($169,000), respectively, is reflected in the consolidated
financial statements in the provision (benefit) for income taxes and as an
increase (decrease) to additional paid-in capital.
10. RELATED-PARTY TRANSACTIONS:
The Company made lease payments to an affiliate for equipment. Total payments
made under this lease agreement were approximately $145,000, $78,000 and
$87,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
The Company purchased tools, equipment and supplies from a company owned by
the shareholders of the Company. Purchases for the years ended December 31,
1995, 1996 and 1997 were approximately $375,000, $293,000 and $540,000,
respectively.
11. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases facilities, land, equipment and vehicles under operating
lease agreements, including leases with related parties. These leases are
noncancellable and expire on various dates through 2003. The lease agreements
are subject to renewal under essentially the same terms and conditions as the
original leases.
F-28
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments for operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998............................................................... $1,376
1999............................................................... 1,339
2000............................................................... 1,334
2001............................................................... 1,314
2002............................................................... 1,314
Thereafter......................................................... 301
------
$6,978
======
</TABLE>
Total rent expense under all operating leases, including operating leases
with related parties, was approximately $875,000, $896,000, and $840,000 for
the years ended December 31, 1995, 1996 and 1997, respectively.
Litigation
The Company is involved in legal proceedings that have arisen in the ordinary
course of business. While it is not possible to predict the outcome of such
proceedings with certainty, management does not believe the outcomes of such
legal proceedings will have a material adverse effect on the Company's
financial position, liquidity or results of operations.
Insurance
The Company carries a standard range of insurance coverage, including
business auto liability, general liability, workers' compensation, excess
liability, commercial property and an umbrella policy. The Company has not
incurred significant claims or losses on any of these insurance policies.
Trees was self-insured for medical claims up to $50,000 per year per covered
individual. Additionally, Trees was responsible for workers' compensation
claims up to $350,000 per accident. Claims in excess of these amounts were
covered by a stop-loss policy. Under the state's policy, Trees had several
letters of credit totaling $2,537,000 that expired on March 31, 1998. The
Company has recorded reserves for its portion of self-insured claims based on
estimated claims incurred through December 31, 1995, 1996 and 1997. Subsequent
to the mergers and the IPO, the Company terminated these policies and entered
into premium based policies and is no longer self-insured. However, reserves
remain on the records of the Company for prior insurance claims.
Long-Term Incentive Plan
In February 1998, the Board of Directors and the Company's stockholders
approved the Company's 1998 Long-Term Incentive Plan (the "Plan"), which
provides for the granting or awarding of incentive or nonqualified stock
options, stock appreciation rights, restricted or deferred stock, dividend
equivalents and other incentive awards to directors, officers and key employees
of and consultants to the Company. The number of shares authorized and reserved
for issuance under the Plan is the greater of 2,000,000 shares or 15 percent of
the aggregate number of shares of Common Stock outstanding at the date of
grant. The terms of the option awards will be established by the compensation
committee of the Company's board of directors.
In February 1998, options to purchase 100,000 shares of Common Stock were
issued at an exercise price of $6.00 per share. The Company granted
nonqualified stock options to purchase a total of 570,000 shares of Common
Stock to key employees of the Company at $8.00 per share in conjunction with
the IPO and Mergers.
F-29
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition, the Company granted options to purchase a total of 767,819 shares
of Common Stock to certain employees of the Founding Companies at $8.00 per
share. All of these options will vest at the rate of 20 percent per year,
commencing on the first anniversary of the IPO (June 9, 1999) and will expire
ten years from the date of grant or three months following termination of
employment.
Nonemployee Directors' Stock Plan
In February 1998, the Company's stockholders approved the 1998 Nonemployee
Directors' Stock Plan (the "Directors' Plan"), which provides for the granting
or awarding of stock options and stock appreciation rights to nonemployee
directors of the Company. The number of shares authorized and reserved for
issuance under the Directors' Plan is 250,000 shares. The Directors' Plan
provides for the automatic grant of options to purchase 10,000 shares to each
nonemployee director serving at the IPO date (June 9, 1998).
Each nonemployee director was granted options to purchase an additional
10,000 shares at the time of the initial election. In addition, each director
will be automatically granted options to purchase 5,000 shares at each annual
meeting of the stockholders occurring more than two months after the date of
the director's initial election. All options will be exercisable at the fair
market value at the date of grant and are immediately vested upon grant.
Options were granted to four members of the board of directors to purchase
10,000 shares of Common Stock at $8.00 per share effective on the IPO date.
These options will expire the earlier of ten years from the date of grant or
one year after termination of service as a director.
The Directors' Plan allows nonemployee directors to receive shares (deferred
shares) at future settlement dates in lieu of cash. The number of deferred
shares will have an aggregate fair market value equal to the fees payable to
the directors.
Employee 401(k) Retirement Plan
The Company maintains a 401(k) employee savings and retirement plan (the
Plan) which provides that all qualified employees may defer the maximum income
allowed under current tax law and the Company will match a predetermined
percentage of the first 3 percent of elective deferrals. The Company's policy
is to fund the matching contribution on an annual basis. The matching
contribution for the years ended December 31, 1995, 1996 and 1997 was
approximately $16,000, $29,000 and $31,000, respectively, and is included in
accrued expenses at December 31, 1995, 1996 and 1997. In addition to the
matching contribution, the Company may make discretionary contributions
allocated to eligible participants. No discretionary contributions were made
for the years ended December 31, 1995, 1996 and 1997.
Executive Benefit Plan
Trees established executive retirement and survivor benefit agreements for
certain executives, providing for fiscal annual benefits payable over a period
of 10 years in the event of the employee's death, disability or retirement at
age 65. A portion of the future liability is being funded by investing in life
insurance policies with a cash surrender value of $322,000 and $339,000 at
December 31, 1996 and 1997. The cost of these benefits is being charged to
expense and accrued using a present value method over the expected terms of
employment. The charge to expense was approximately $137,000 for the years
ended December 31, 1995, 1996 and 1997. The Company's obligation under the Plan
is $377,000 and $515,000 at December 31, 1996 and 1997.
F-30
<PAGE>
LANDCARE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
On November 1, 1998, LandCare and The ServiceMaster Company ("ServiceMaster")
entered into a Plan of Reorganization and Agreement and Plan of Merger ("the
Merger Agreement") pursuant to which LandCare will become a subsidiary of
ServiceMaster (the "ServiceMaster Merger"). The Merger Agreement is subject to
LandCare stockholder approval, regulatory approvals and certain other closing
conditions and termination events. Under the terms of the Merger Agreement,
ServiceMaster will exchange a fraction of a share of ServiceMaster common stock
for each share of LandCare Common Stock (the "Exchange Ratio"). The Exchange
Ratio is based on a collar that adjusts the Exchange Ratio if the ServiceMaster
Final Average Closing Price (defined below) exceeds $20.00 per share or is less
than $16.36 per share, such that the fractional share of the ServiceMaster
common stock will not be more than $11.00 per share and, subject to certain
conditions, will not be less than $9.00 per share. The "Final Average Closing
Price" is the average of the closing prices of ServiceMaster common stock on
the New York Stock Exchange on the 20 consecutive trading days ending three
trading days prior to the date of the LandCare stockholder meeting scheduled to
be held to consider the ServiceMaster Merger. If the Final Average Closing
Price is more than $16.35 per share and not more than $20.00 per share, then
the Exchange Ratio will be 0.55. If the Final Average Closing Price is more
than $20.00 per share, then the Exchange Ratio will be adjusted to result in a
value of LandCare Common Stock of $11.00 per share. If the Final Average
Closing Price is less than $16.36 per share, then ServiceMaster may elect to
not permit the adjustment of the Exchange Ratio as discussed above, which would
thereby result in the fractional share of the ServiceMaster common stock being
less than $9.00 per share. In such event, LandCare may elect to terminate the
Merger Agreement. The ServiceMaster Merger is expected to be completed by the
end of the first quarter of 1999.
On November 9, 1998, the Credit Facility was amended to, among other things,
increase the borrowing capacity available and to provide for additional banks
to participate in the Credit Facility (the "Amended Credit Facility"). Under
the Amended Credit Facility, the Company's borrowing capacity was increased to
$110 million from $55 million. In addition, First Chicago assigned its interest
as administrative and collateral agent to NationsBank, N.A., and Bankers Trust
Company became documentation agent of the Amended Credit Facility.
Additionally, the number of banks participating under the Credit Facility
increased from three to seven. Borrowings under the Amended Credit Facility
bear interest at the bank's designated prime lending rate, plus a margin
ranging from zero to 75 basis points. At the Company's option, borrowings under
the Amended Credit Facility may bear interest based on the Eurodollar rate plus
a margin ranging from 125 to 225 basis points. In addition, commitment fees of
30 to 50 basis points are payable quarterly on the unused portion of the
borrowing capacity. The Amended Credit Facility contains a provision for
standby letters of credit up to $10 million.
Subsequent to September 30, 1998, and through December 15, 1998, the Company
completed ten additional acquisitions (the "Additional Acquisitions") for
approximately $23.4 million in cash and 596,591 shares of Common Stock.
Annualized revenues for the Additional Acquisitions were $49.4 million. All of
the Additional Acquisitions will be accounted for under the purchase method of
accounting.
F-31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Trees, Inc.:
We have audited the accompanying consolidated balance sheets of Trees, Inc.
(the Company), as defined in Note 1 to the financial statements, as of March
31, 1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended March 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of March 31, 1998, and the results of their operations and their cash flows
for each of the three years in the period ended March 31, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
April 24, 1998
F-32
<PAGE>
TREES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31
----------------
1997 1998
------- -------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 3,060 $ 2,626
Accounts receivable, net................................... 4,861 6,298
Deferred tax asset......................................... 742 412
Other current assets....................................... 206 702
------- -------
Total current assets..................................... 8,869 10,038
PROPERTY AND EQUIPMENT, net.................................. 8,395 10,339
OTHER ASSETS................................................. 322 345
------- -------
Total assets............................................. $17,586 $20,722
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses...................... $ 5,070 $ 6,279
Current maturities of long-term debt....................... 112 117
Current maturities of long-term payable to related party... 207 225
------- -------
Total current liabilities................................ 5,389 6,621
LONG-TERM DEBT, net.......................................... 569 453
LONG-TERM PAYABLE TO RELATED PARTY, net...................... 2,591 2,366
DEFERRED TAX LIABILITY....................................... 1,859 1,765
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, 1,000,000 shares authorized,
710,000 shares issued and 708,000 shares outstanding...... 710 710
Retained earnings.......................................... 6,470 8,809
Treasury stock, 2,000 shares, at cost...................... (2) (2)
------- -------
Total shareholders' equity............................... 7,178 9,517
------- -------
Total liabilities and shareholders' equity............... $17,586 $20,722
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
TREES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
REVENUES............................................. $47,142 $44,847 $52,604
COST OF SERVICES..................................... 41,054 39,046 46,025
------- ------- -------
Gross profit..................................... 6,088 5,801 6,579
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......... 3,224 4,264 3,241
------- ------- -------
Income from operations........................... 2,864 1,537 3,338
OTHER INCOME (EXPENSE):
Interest expense................................... (590) (306) (264)
Other income, net.................................. 142 205 719
------- ------- -------
INCOME BEFORE INCOME TAXES........................... 2,416 1,436 3,793
INCOME TAX PROVISION................................. 896 553 1,454
------- ------- -------
NET INCOME........................................... $ 1,520 $ 883 $ 2,339
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE>
TREES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED TREASURY SHAREHOLDERS'
STOCK EARNINGS STOCK EQUITY
------ -------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, March 31, 1995.................. $710 $4,067 $ (2) $4,775
Net income............................. -- 1,520 -- 1,520
---- ------ ---- ------
BALANCE, March 31, 1996.................. 710 5,587 (2) 6,295
Net income............................. -- 883 -- 883
---- ------ ---- ------
BALANCE, March 31, 1997.................. 710 6,470 (2) 7,178
Net income............................. -- 2,339 -- 2,339
---- ------ ---- ------
BALANCE, March 31, 1998.................. $710 $8,809 $ (2) $9,517
==== ====== ==== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
<PAGE>
TREES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 1,520 $ 883 $ 2,339
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation.................................... 2,079 2,050 2,311
Gain on sale of equipment....................... (10) (15) (96)
Deferred income tax provision (benefit)......... 308 (308) 236
Changes in assets and liabilities--
Accounts receivable, net...................... (386) 312 (1,437)
Other current assets.......................... 20 (21) (496)
Other assets.................................. (68) (55) (23)
Accounts payable and accrued expenses......... 222 121 1,209
------- ------- -------
Net cash provided by operating activities... 3,685 2,967 4,043
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment..... 24 29 130
Purchases of property and equipment............... (371) (953) (4,289)
------- ------- -------
Net cash used in investing activities....... (347) (924) (4,159)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt...................... 866 -- --
Payments on long-term debt........................ (2,551) (1,986) (318)
------- ------- -------
Net cash used in financing activities....... (1,685) (1,986) (318)
------- ------- -------
NET INCREASE (DECREASE) IN CASH..................... 1,653 57 (434)
CASH, beginning of period........................... 1,350 3,003 3,060
------- ------- -------
CASH, end of period................................. $ 3,003 $ 3,060 $ 2,626
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest........................................ $ 570 $ 287 $ 247
Income taxes.................................... 703 769 789
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
TREES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Trees, Inc. includes the financial statements of Tree Holding Company, Inc.
(a Texas corporation) and its wholly owned subsidiary, Trees, Inc. (a Nevada
corporation) (collectively, the Company). The Company, which is headquartered
in Houston, Texas, was founded in 1953 and serves customers in 13 states. The
Company provides tree trimming and line clearing services primarily to utility
customers, but also provides commercial and residential tree services to
customers in Houston, Texas.
The Company and its shareholders intend to enter into a definitive agreement
with LandCare USA, Inc. (LandCare), pursuant to which all outstanding shares of
the Company's common stock will be exchanged for cash and shares of LandCare's
common stock concurrently with the consummation of an initial public offering
of the common stock of LandCare.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts and results of
operations of the Company and its subsidiary. All significant intercompany
transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash deposits and accounts
receivable. The Company maintains cash balances at financial institutions which
may at times be in excess of federally insured levels.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
Revenue Recognition
The Company recognizes revenue when services are performed. Revenues from
tree trimming, line clearing service contracts are recognized based on the
amount of labor and materials incurred.
F-37
<PAGE>
TREES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cost of Services
Cost of services represents direct labor and associated costs (such as
benefits and workers' compensation expense), materials, supervisory personnel
and equipment and vehicle costs, such as fuel, insurance and depreciation.
Warranty Costs
A reserve for warranty costs is recorded based upon the historical level of
warranty claims, property damage costs and management's estimate of future
costs.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount to be
realized. The provision for income taxes is the tax payable for the year and
the change during the year in deferred tax assets and liabilities.
Major Customers and Risk Concentration
The Company had sales of approximately 18, 16, 13 and 10 percent of total
sales to four major customers for the year ended March 31, 1996 and sales of
approximately 20, 19 and 18 percent and 20, 18, and 16 percent of total sales
to three major customers for the years ended March 31, 1997 and 1998,
respectively.
Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, lines of credit and long-term debt. The
Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications and Adjustments
Certain reclassifications and adjustments have been made to the prior-period
amounts to conform to current-period presentations.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 in fiscal 1998.
F-38
<PAGE>
TREES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED MARCH 31
USEFUL LIVES ----------------
IN YEARS 1997 1998
------------ ------- -------
<S> <C> <C> <C>
Land....................................... -- $ 129 $ 129
Transportation equipment................... 5 20,730 22,129
Machinery and equipment.................... 5-10 4,311 5,672
Office furniture and equipment............. 5 127 164
Buildings and improvements................. 30 258 258
------- -------
Total.................................. 25,555 28,352
Less--Accumulated depreciation............. (17,160) (18,013)
------- -------
Property and equipment, net............ $ 8,395 $10,339
======= =======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31
--------------
1997 1998
------ ------
<S> <C> <C>
Accounts receivable, trade................................ $4,385 $6,121
Receivable from equipment financing....................... -- 250
Accounts receivable, other................................ 15 19
Income tax refund......................................... 644 63
Allowance for doubtful accounts........................... (183) (155)
------ ------
$4,861 $6,298
====== ======
</TABLE>
As of March 31, 1998, the Company has recorded a $0.3 million receivable from
equipment financing associated with cash expended for leased equipment that was
reimbursed by the company underwriting the related operating leases in April
1998.
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
MARCH 31
-------------
1997 1998
------ ------
<S> <C> <C>
Accounts payable, trade.................................... $ 752 $1,527
Accrued compensation and benefits.......................... 1,138 1,985
Accrued insurance costs.................................... 2,307 2,402
Warranty accrual........................................... 235 235
Other accrued expenses..................................... 638 130
------ ------
$5,070 $6,279
====== ======
</TABLE>
F-39
<PAGE>
TREES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LINE OF CREDIT AND LONG-TERM DEBT:
Line of Credit
The Company has a revolving credit agreement with a financial institution,
which provides for borrowings up to the lesser of $500,000 or the Company's
loan limit as defined by the agreement. Advances made under this agreement will
bear interest at the prime rate, will be secured by accounts receivable and
equipment of the Company, and will be subject to certain covenants including
the maintenance of certain tangible net worth and working capital levels and
restrictions on dividend payments and change in executive management. There
were no advances outstanding on this line of credit at March 31, 1997 and 1998.
The Company has irrevocable standby letters of credit of approximately
$1,328,000 pledged against the Company's workers' compensation insurance plan.
These letters of credit are secured by accounts receivable. Fees associated
with these letters of credit were approximately $17,000 for the year ended
March 31, 1998.
Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31
--------------
1997 1998
------ ------
<S> <C> <C>
Note payable to a financial institution in monthly
installments of $13 including interest at a rate equal to 30-
day commercial paper plus 2.2%, secured by equipment due
2002......................................................... $ 681 $ 570
Note payable to former shareholder payable in monthly
installments of $35 including interest of 8.0%, due 2006..... 2,798 2,591
------ ------
3,479 3,161
Less--Current portion......................................... (319) (342)
------ ------
$3,160 $2,819
====== ======
</TABLE>
The aggregate maturities of long-term debt at March 31, 1998, are as follows
(in thousands):
<TABLE>
<S> <C>
Year ending March 31--
1999............................................................. 345
2000............................................................. 374
2001............................................................. 404
2002............................................................. 437
2003............................................................. 337
Thereafter....................................................... 1,264
------
Total.......................................................... $3,161
======
</TABLE>
F-40
<PAGE>
TREES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES:
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
--------------------
1996 1997 1998
------------ -------
<S> <C> <C> <C>
Federal--
Current............................................ $ 472 $ 729 $ 1,035
Deferred........................................... 287 (264) 203
----- ----- -------
759 465 1,238
----- ----- -------
State--
Current............................................ 117 131 182
Deferred........................................... 20 (43) 34
----- ----- -------
137 88 216
----- ----- -------
Total provision.................................. $ 896 $ 553 $ 1,454
===== ===== =======
</TABLE>
The provision for income taxes differs from an amount computed at the
statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH
31
------------------
1996 1997 1998
---- ---- ------
<S> <C> <C> <C>
Federal income tax at statutory rates................. $846 $502 $1,330
State income taxes.................................... 89 57 137
Nondeductible expenses................................ 24 50 39
Other................................................. (63) (56) (52)
---- ---- ------
$896 $553 $1,454
==== ==== ======
</TABLE>
The significant items giving rise to the deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets--
Accrued expenses................................... $ 698 $ 280
Allowance for doubtful accounts.................... 81 84
State taxes........................................ 50 62
Other.............................................. 40 109
------- -------
Total deferred tax assets........................ 869 535
------- -------
Deferred tax liabilities--
Bases differences in property and equipment........ (1,986) (1,888)
------- -------
Total deferred tax liabilities................... (1,986) (1,888)
------- -------
Net deferred tax liability....................... $(1,117) $(1,353)
======= =======
</TABLE>
F-41
<PAGE>
TREES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. RELATED-PARTY TRANSACTIONS:
The Company makes lease payments to an affiliate for equipment. Total
payments made under this lease agreement were approximately $109,000, $81,000
and $85,000 for the years ended March 31, 1996, 1997 and 1998, respectively.
The Company purchases tools, equipment and supplies from a company owned by
the shareholders of the Company. Purchases for the years ended March 31, 1996,
1997 and 1998, were approximately $420,000, $289,000 and $579,000,
respectively.
8. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases equipment and vehicles under operating lease agreements,
including leases with related parties. These leases are noncancelable and
expire on various dates through 2003. The lease agreements are subject to
renewal under essentially the same terms and conditions as the original leases.
Future minimum lease payments for operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending March 31--
1999............................................................. $1,413
2000............................................................. 1,278
2001............................................................. 1,273
2002............................................................. 1,257
2003............................................................. 1,254
------
$6,475
======
</TABLE>
Total rent expense under all operating leases, including operating leases
with related parties, was approximately $701,000, $324,000 and $572,000 for the
years ended March 31, 1996, 1997 and 1998, respectively.
Litigation
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results
of operations.
Insurance
The Company carries a standard range of insurance coverage, including
business auto liability, general liability, workers' compensation, excess
liability, commercial property and an umbrella policy. The Company has not
incurred significant claims or losses on any of these insurance policies.
The Company is self-insured for medical claims up to $50,000 per year per
covered individual. Additionally, the Company is responsible for workers'
compensation claims up to $350,000 per accident. Claims in excess of these
amounts are covered by a stop-loss policy. Under the state's policy, the
Company has several letters of credit totaling $1,328,000 which expire March
31, 1999. The Company has recorded reserves for its portion of self-insured
claims based on estimated claims incurred through March 31, 1996, 1997 and
1998.
F-42
<PAGE>
TREES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Employee 401(k) Retirement Plan
The Company maintains a 401(k) employee savings and retirement plan (the
Plan) which provides that all qualified employees may defer the maximum income
allowed under current tax law and the Company will match a predetermined
percentage of the first 3 percent of elective deferrals. The Company's policy
is to fund the matching contribution on an annual basis. The matching
contribution for fiscal 1996 and 1997 was approximately $29,000 and $31,000,
respectively, and is included in accrued expenses at March 31, 1996 and 1997.
No matching contributions were made during the year ended March 31, 1998. In
addition to the matching contribution, the Company may make discretionary
contributions allocated to eligible participants. No discretionary
contributions were made for fiscal 1996, 1997 or 1998.
Executive Benefit Plan
The Company has established executive retirement and survivor benefit
agreements for certain executives of the Company, providing for fiscal annual
benefits payable over a period of 10 years in the event of the employee's
death, disability or retirement at age 65. A portion of the future liability is
being funded by investing in life insurance policies with a cash surrender
value of $322,000 and $344,000 at March 31, 1997 and 1998. The cost of these
benefits is being charged to expense and accrued using a present value method
over the expected terms of employment. The charge to expense was approximately
$137,000 each of the years ended March 31, 1996, 1997 and 1998. The Company's
obligation under the Plan is $412,000 and $549,000 at March 31, 1997 and 1998.
9. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In March 1998, the Company and its shareholders entered into a definitive
agreement with a wholly owned subsidiary of LandCare providing for the merger
of the Company with the subsidiary of LandCare (the Merger). Equipment of
approximately $26,000, which is included in the balance sheet at March 31,
1998, was distributed to the shareholders. Had these distributions been made at
March 31, 1998, the effect on the Company's balance sheet would have been to
decrease shareholders' equity by approximately $26,000. In addition, selling,
general and administrative expenses would have been reduced by approximately
$6,000 assuming the transaction had occurred January 1, 1997.
On November 1, 1998, LandCare and The ServiceMaster Company ("ServiceMaster")
entered into a Plan of Reorganization and Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which LandCare will become a subsidiary of
ServiceMaster. The Merger Agreement is subject to LandCare stockholder
approval, regulatory approvals and certain other closing conditions and
termination events.
F-43
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Four Seasons Landscape and Maintenance, Inc.:
We have audited the accompanying balance sheets of Four Seasons Landscape and
Maintenance, Inc. as of December 31, 1997 and 1996, and the related statements
of operations, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Four Seasons Landscape and
Maintenance, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 13, 1998
F-44
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
------------- MARCH 31
1996 1997 1998
------ ------ -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 120 $ 397 $ 770
Accounts receivable, net........................... 937 1,480 1,132
Inventories........................................ 23 36 148
Deferred tax asset................................. 212 165 165
Other current assets............................... 66 50 256
------ ------ ------
Total current assets............................. 1,358 2,128 2,471
PROPERTY AND EQUIPMENT, net.......................... 1,189 1,240 1,232
OTHER ASSETS......................................... 17 25 36
------ ------ ------
Total assets..................................... $2,564 $3,393 $3,739
====== ====== ======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses.............. $1,227 $1,604 $1,921
Line of credit..................................... 200 -- 75
Current maturities of long-term debt............... 109 38 39
Other current liabilities.......................... 33 33 33
------ ------ ------
Total current liabilities........................ 1,569 1,675 2,068
LONG-TERM DEBT, net.................................. 147 103 93
DEFERRED TAX LIABILITY............................... 242 286 309
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, 100,000 shares
authorized, 1,215.5 shares outstanding............ 1 1 1
Additional paid-in capital......................... 11 11 11
Retained earnings.................................. 594 1,317 1,257
------ ------ ------
Total shareholders' equity....................... 606 1,329 1,269
------ ------ ------
Total liabilities and shareholders' equity....... $2,564 $3,393 $3,739
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
------------------------- --------------------
1995 1996 1997 1997 1998
------- ------- ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES..................... $12,000 $13,367 $16,066 $ 3,529 $ 3,830
COST OF SERVICES............. 9,255 10,106 11,067 2,467 2,547
------- ------- ------- --------- ---------
Gross profit............. 2,745 3,261 4,999 1,062 1,283
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES..... 2,829 3,319 3,754 965 1,385
------- ------- ------- --------- ---------
Income (loss) from
operations.............. (84) (58) 1,245 97 (102)
OTHER INCOME (EXPENSE):
Interest expense........... (37) (43) (37) (12) (3)
Other income (expense),
net....................... (9) 12 (9) (15) 5
------- ------- ------- --------- ---------
INCOME (LOSS) BEFORE INCOME
TAXES....................... (130) (89) 1,199 70 (100)
INCOME TAX PROVISION
(BENEFIT)................... (65) (50) 476 28 (40)
------- ------- ------- --------- ---------
NET INCOME (LOSS)............ $ (65) $ (39) $ 723 $ 42 $ (60)
======= ======= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994............ $ 1 $11 $ 698 $ 710
Net loss............................ -- -- (65) (65)
--- --- ------ ------
BALANCE, December 31, 1995............ 1 11 633 645
Net loss............................ -- -- (39) (39)
--- --- ------ ------
BALANCE, December 31, 1996............ 1 11 594 606
Net income.......................... -- -- 723 723
--- --- ------ ------
BALANCE, December 31, 1997............ 1 11 1,317 1,329
Net loss (unaudited)................ -- -- (60) (60)
--- --- ------ ------
BALANCE, March 31, 1998 (unaudited)... $ 1 $11 $1,257 $1,269
=== === ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31 MARCH 31
--------------------- --------------------
1995 1996 1997 1997 1998
----- ----- ----- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss).............. $ (65) $ (39) $ 723 $ 42 $ (60)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities--
Depreciation................. 404 331 319 71 82
Losses on sales of assets.... (6) (15) (13) -- --
Deferred income tax provision
(benefit)................... (29) (24) 92 (30) 23
Changes in assets and
liabilities--
Accounts receivable, net... (278) 49 (543) (103) 348
Inventories................ 2 27 (13) (13) (112)
Other assets............... 20 24 7 14 (217)
Accounts payable and
accrued expenses.......... 125 109 377 280 317
Other, net................. 14 (2) 1 (41) --
----- ----- ----- --------- ---------
Net cash provided by
operating activities.... 187 460 950 220 381
----- ----- ----- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sales of property
and equipment................. -- -- 30 -- --
Purchases of property and
equipment..................... (310) (553) (394) (21) (74)
----- ----- ----- --------- ---------
Net cash used in
investing activities.... (310) (553) (364) (21) (74)
----- ----- ----- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from line of credit
and long-term debt............ 175 225 -- -- 75
Payments on line of credit and
long-term debt................ (105) (132) (309) (241) (9)
----- ----- ----- --------- ---------
Net cash provided by
(used in) financing
activities.............. 70 93 (309) (241) 66
----- ----- ----- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS............ (53) -- 277 (42) 373
CASH AND CASH EQUIVALENTS,
beginning of period............. 173 120 120 120 397
----- ----- ----- --------- ---------
CASH AND CASH EQUIVALENTS, end of
period.......................... $ 120 $ 120 $ 397 $ 78 $ 770
===== ===== ===== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for--
Interest..................... $ 37 $ 43 $ 37 $ 12 $ 3
Income taxes................. 4 27 7 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Four Seasons Landscape and Maintenance, Inc. (the Company), a California
corporation, headquartered in Foster City, California, was founded in 1973 and
operates primarily in northern California with six branches in the Bay Area and
two branches in Sacramento. The Company provides commercial landscape
maintenance and offers commercial tree maintenance services for its customers.
The Company and its shareholders intend to enter into a definitive agreement
with LandCare USA, Inc. (LandCare), pursuant to which all outstanding shares of
the Company's common stock will be exchanged for cash and shares of LandCare's
common stock (the Merger) concurrently with the consummation of an initial
public offering of the common stock of LandCare.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements as of March 31, 1998 and for each of the
three months ended March 31, 1997 and 1998 are unaudited, and certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements have been included. Due to seasonality and other factors, the
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash deposits and accounts
receivable. The Company maintains cash balances at financial institutions which
may at times be in excess of federally insured levels.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
Inventories
Inventories consist of parts and supplies held for use in the ordinary course
of business and are stated at the lower of cost or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
F-49
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
Revenue Recognition
The Company's revenues consist of landscape maintenance revenues. The
Company's landscape maintenance contracts are for terms of one to two years and
payments to the Company are remitted in equal monthly payments over the term of
the contract. Revenues from landscape maintenance contracts are recognized on
the straight-line method while costs incurred under the contracts can be
expected to vary materially based on seasonal factors. Monthly maintenance
payments are recognized as they become due because the contracts are fully
cancelable without cause upon notice of 60 days or less by either the Company
or the customer. Should the Company elect to cancel a contract, the customer
would have no standing under either contract law or equity to require
additional services or obtain a refund (other than for nonperformance prior to
cancellation), notwithstanding that the customer may have paid amounts which
clearly exceeded the fair value of the services received in those months in
anticipation of lower priced services later in the year.
Cost of Services
Cost of services represents direct labor and associated costs (such as
benefits and workers' compensation expense), materials, supervisory personnel
and equipment and vehicle costs, such as fuel, insurance and depreciation.
Warranty Costs
For certain contracts, the Company warrants plant life up to 90 days after
installation. A reserve for warranty costs is recorded based upon the
historical level of warranty claims and management's estimate of future costs.
Seasonality
The Company has experienced and expects to continue to experience variability
in revenue and net income as a result of the seasonal nature of the Company's
business. Generally, the Company's revenues from landscape maintenance
contracts remain relatively constant throughout the year; however, the related
cost of services varies due to seasonality. As a result, the gross margin from
landscape maintenance contracts can vary seasonally.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount to be
realized. The provision for income taxes is the tax payable for the year and
the change during the year in deferred tax assets and liabilities.
Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, a line of credit and debt. The Company
believes that the carrying value of these instruments on the accompanying
balance sheets approximates fair value.
F-50
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 for the year ended December 31, 1998.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31
USEFUL LIVES --------------
IN YEARS 1996 1997
------------- ------ ------
<S> <C> <C> <C>
Transportation equipment.................... 5 $1,700 $1,801
Machinery and equipment..................... 5-10 608 724
Leasehold improvements...................... Life of lease 216 230
Office furniture and equipment.............. 5 85 170
------ ------
Total................................... 2,609 2,925
Less--Accumulated depreciation.............. (1,420) (1,685)
------ ------
Property and equipment, net............. $1,189 $1,240
====== ======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------
1996 1997
---- ------
<S> <C> <C>
Accounts receivable, trade.................................. $973 $1,569
Income tax refund........................................... 41 --
Accounts receivable, other.................................. 16 11
Allowance for doubtful accounts............................. (93) (100)
---- ------
$937 $1,480
==== ======
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1996 1997
------ ------
<S> <C> <C>
Accounts payable, trade.................................... $ 408 $ 484
Accrued compensation and benefits.......................... 583 611
Accrued insurance premiums................................. 136 65
Income tax payable......................................... -- 344
Warranty accrual........................................... 100 100
------ ------
$1,227 $1,604
====== ======
</TABLE>
F-51
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. LINE OF CREDIT AND LONG-TERM DEBT:
Line of Credit
The Company has a $600,000 line of credit with a financial institution that
is secured by accounts receivable, other rights to payment, general
intangibles, inventory and equipment. In addition, it is guaranteed by
shareholders of the Company. Interest is at the financial institution's prime
rate plus .75 percent, which was 9 percent at December 31, 1996. The line of
credit expires on September 1, 1998, and there was a total of $200,000 and no
amounts outstanding on the line at December 31, 1996 and 1997, respectively.
Subsequent to December 31, 1997, the Company has drawn down $75,000 on its line
of credit.
Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1996 1997
------ -----
<S> <C> <C>
Note payable to a financial institution in monthly installments
of $4 including interest at 8.71%, secured by accounts
receivable, other rights to payment, general intangibles,
inventory and equipment due 2001.............................. $ 177 $ 141
Notes payable to a financial institution in total monthly
installments of $9 including interest at 8.25%, secured by
accounts receivable, other rights to payment, general
intangibles, inventory and equipment due 1997................. 79 --
------ -----
256 141
Less--Current portion.......................................... (109) (38)
------ -----
$ 147 $ 103
====== =====
</TABLE>
The aggregate maturities of long-term debt as of December 31, 1997, are as
follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998.............................................................. $ 38
1999.............................................................. 42
2000.............................................................. 45
2001.............................................................. 16
----
$141
====
</TABLE>
6. INCOME TAXES:
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996 1997
----- ----- ----
<S> <C> <C> <C>
Federal--
Current.............................................. $ (33) $ (25) $296
Deferred............................................. (23) (19) 72
----- ----- ----
(56) (44) 368
----- ----- ----
State--
Current.............................................. (3) (1) 88
Deferred............................................. (6) (5) 20
----- ----- ----
(9) (6) 108
----- ----- ----
Total provision.................................... $ (65) $ (50) $476
===== ===== ====
</TABLE>
F-52
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes differs from an amount computed at the
statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax at statutory rates................... $(46) $(31) $419
State income taxes...................................... (6) (4) 70
Fuel tax credit......................................... (21) (23) (22)
Nondeductible expenses.................................. 8 8 9
---- ---- ----
$(65) $(50) $476
==== ==== ====
</TABLE>
The significant items giving rise to the deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1996 1997
----- ------
<S> <C> <C>
Deferred tax assets--
Accrued expenses........................................ $ 176 $ 139
Allowance for doubtful accounts......................... 54 44
State taxes............................................. 4 11
----- ------
Total deferred tax assets............................. 234 194
----- ------
Deferred tax liabilities--
Bases differences in property and equipment............. (142) (193)
Other................................................... (122) (122)
----- ------
Total deferred tax liabilities........................ (264) (315)
----- ------
Net deferred tax liability............................ $ (30) $ (121)
===== ======
</TABLE>
7. RELATED-PARTY TRANSACTIONS:
The Company leases facilities from companies whose owners are shareholders of
the Company. The total amount of rent expense incurred under these leases was
$185,110, $218,899 and $228,239 for the years ended December 31, 1995, 1996 and
1997, respectively.
8. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases various facilities, equipment and vehicles under operating
lease agreements, including leases with related parties. These leases are
noncancelable and expire on various dates through 2002. The lease agreements
are subject to renewal under essentially the same terms and conditions as the
original leases.
Future minimum lease payments for operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998.............................................................. $273
1999.............................................................. 206
2000.............................................................. 143
2001.............................................................. 70
2002.............................................................. 12
----
$704
====
</TABLE>
F-53
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Total rent expense under all operating leases, including operating leases
with related parties, was $215,460, $251,778 and $301,480 for the years ended
December 31, 1995, 1996 and 1997, respectively.
Litigation
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results
of operations.
Insurance
The Company carries a standard range of insurance coverage, including
business auto liability, general liability, workers' compensation, commercial
property and an umbrella policy. The Company has not incurred significant
claims or losses on any of these insurance policies.
From May 1, 1996, through April 30, 1997, the Company was self-insured for
medical claims up to $35,000 per year per covered individual with a maximum
payout of approximately $250,000. Claims in excess of this amount were covered
by a stop loss policy. The Company has recorded reserves for its portion of
self-insured claims based on estimated claims.
Employee 401(k) Retirement Plan
The Company offers its employees a 401(k) profit-sharing plan (the Plan)
which covers all employees at least 21 years of age who have completed at least
one year of service subsequent to employment. The Plan allows for employee
contributions through salary reductions up to the statutory limits. Employer
matching contributions are made at 20 percent of the employee's contribution
and were $19,000, $20,000 and $23,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
Stock Award Incentive Program
In May 1997, the Company instituted a stock award incentive program that
authorizes the shareholders of the Company to grant up to 135 shares to
participants at the shareholders' discretion. The shares are not distributed
except in the event of a change in control. If a change in control occurs,
participants become fully vested immediately prior to the change and shares of
common stock are issued. If a change in control does not occur, the shares earn
cash value over a five-year vesting period from the date of grant. The cash
value earned as of December 31, 1997 was de minimus. As of March 31, 1998, the
Company has recorded compensation expense of approximately $200,000 to
recognize the effect of the pending Merger.
9. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In March 1998, the Company and its shareholders entered into a definitive
agreement with a wholly owned subsidiary of LandCare, providing for the merger
of the Company with the subsidiary of LandCare. Equipment of approximately
$34,000, which is included in the balance sheet at December 31, 1997, was
distributed to the shareholders. Had these distributions been made at December
31, 1997, the effect on the Company's balance sheet would have been to decrease
shareholders' equity by approximately $34,000. In addition, selling, general
and administrative expenses would have been reduced by approximately $16,000
assuming the transactions had occurred January 1, 1997.
F-54
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Concurrently with the Merger, the Company entered into an agreement with the
shareholders to lease land used in the Company's operations for negotiated
amounts and terms.
On November 1, 1998, LandCare and The ServiceMaster Company ("ServiceMaster")
entered into a Plan of Reorganization and Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which LandCare will become a subsidiary of
ServiceMaster. The Merger Agreement is subject to LandCare stockholder
approval, regulatory approvals and certain other closing conditions and
termination events.
F-55
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Clean Cut, Inc.
We have audited the accompanying combined balance sheet of the companies
identified in Note 1 to the combined financial statements (collectively, the
Group), as of December 31, 1997, and the related combined statements of
operations, shareholders' equity and cash flows for the year then ended. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
combined financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Group as of
December 31, 1997, and the results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
August 3, 1998
F-56
<PAGE>
CLEAN CUT, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1998
----------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 25 $ 90
Accounts receivable, net............................. 2,744 3,326
Related party receivables............................ 121 120
Inventories.......................................... 109 158
Other current assets................................. 111 266
------ ------
Total current assets............................... 3,110 3,960
PROPERTY AND EQUIPMENT, net............................ 1,277 1,370
OTHER ASSETS........................................... 110 165
------ ------
Total assets....................................... $4,497 $5,495
====== ======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses................ $1,238 $1,847
Line of credit....................................... 1,509 962
Current maturities of long-term debt................. 467 476
Other current liabilities............................ 707 921
------ ------
Total current liabilities.......................... 3,921 4,206
LONG-TERM DEBT, net.................................... 747 552
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $1 par value, 100,000 shares
authorized, 1,000 shares outstanding................ 1 1
Additional paid-in capital........................... 66 66
Retained earnings (deficit).......................... (223) 685
Treasury stock....................................... (15) (15)
------ ------
Total shareholders' equity (deficit)............... (171) 737
------ ------
Total liabilities and shareholders' equity
(deficit)......................................... $4,497 $5,495
====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-57
<PAGE>
CLEAN CUT, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30
DECEMBER 31 --------------
1997 1997 1998
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES............................................ $15,865 $7,420 $9,434
COST OF SERVICES.................................... 12,321 5,599 6,426
------- ------ ------
Gross profit.................................... 3,544 1,821 3,008
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........ 3,021 1,561 1,903
------- ------ ------
Income from operations.......................... 523 260 1,105
OTHER INCOME (EXPENSE):
Interest expense.................................. (273) (118) (142)
Other income (expense), net....................... (8) (10) (9)
------- ------ ------
NET INCOME.......................................... $ 242 $ 132 $ 954
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-58
<PAGE>
CLEAN CUT, INC. AND AFFILIATES
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL RETAINED SHAREHOLDERS'
COMMON PAID-IN EARNINGS TREASURY EQUITY
STOCK CAPITAL (DEFICIT) STOCK (DEFICIT)
------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996...................... $ 1 $66 $ (57) $(15) $ (5)
Net income............... -- -- 242 -- 242
Distributions............ -- -- (408) -- (408)
--- --- ----- ---- -----
BALANCE, December 31,
1997...................... $ 1 $66 $(223) $(15) $(171)
Net income (unaudited)... -- -- 954 -- 954
Distributions
(unaudited)............. -- -- (46) -- (46)
--- --- ----- ---- -----
BALANCE, June 30, 1998
(unaudited)............... $ 1 $66 $ 685 $(15) $ 737
=== === ===== ==== =====
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-59
<PAGE>
CLEAN CUT, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30
DECEMBER 31 ------------
1997 1997 1998
----------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 242 $ 132 $ 954
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization.................... 240 153 153
Changes in assets and liabilities--
Accounts receivable, net....................... (376) (713) (582)
Inventories.................................... 6 12 (49)
Other assets................................... 37 (129) (210)
Accounts payable and accrued expenses.......... (474) (34) 609
Other, net....................................... 141 172 215
----- ----- -----
Net cash provided by (used in) operating
activities.................................. (184) (407) 1,090
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................ (433) (393) (196)
----- ----- -----
Net cash used in investing activities........ (433) (393) (196)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of short term
borrowings........................................ 385 2 (547)
Distributions to shareholders...................... (408) (92) (46)
Proceeds from long-term debt....................... 711 955 9
Payments of long-term debt......................... (47) (47) (245)
----- ----- -----
Net cash provided by (used in) financing
activities.................................. 641 818 (829)
----- ----- -----
NET INCREASE IN CASH AND CASH EQUIVALENTS............ 24 18 65
CASH AND CASH EQUIVALENTS, beginning of period....... 1 1 25
----- ----- -----
CASH AND CASH EQUIVALENTS, end of period............. $ 25 $ 19 $ 90
===== ===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest......................................... $ 273 $ 115 $ 147
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-60
<PAGE>
CLEAN CUT, INC. AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The financial statements of Clean Cut, Inc., a Texas corporation, and
affiliates (collectively, the Group) combine the financial statements of D & G
Partnership (a Texas Partnership) and Clean Cut Landscaping (a Texas S
Corporation). The Group is headquartered in Austin, Texas, was founded in 1986,
and operates primarily in Texas and Florida with branches in Austin, San
Antonio, Houston, and Orlando. The Group provides commercial and residential
landscape maintenance and installation.
The Group had working capital deficits at December 31, 1997 and June 30,
1998. The Group has funded its operations with cash flows from operations and
short-term borrowings from lenders. Management expects that operations will
generate sufficient cash flows to meet the Group's working capital needs during
1998.
The Group and its shareholders intend to enter into a definitive agreement
with LandCare USA, Inc. (LandCare), pursuant to which all outstanding shares of
the Group's common stock will be exchanged for shares of LandCare's common
stock (the Merger).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements as of June 30, 1998 and for each of the six
months ended June 30, 1997 and 1998 are unaudited, and certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements have
been included. Due to seasonality and other factors, the results of operations
for the interim periods are not necessarily indicative of the results for the
entire fiscal year.
Cash and Cash Equivalents
The Group considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Group to concentration of
credit risk consist principally of cash deposits and accounts receivable. The
Group maintains cash balances at financial institutions which may at times be
in excess of federally insured levels.
Allowance for Doubtful Accounts
The Group maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
Inventories
Inventories consist of parts and supplies held for use in the ordinary course
of business and are stated at the lower of cost or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
F-61
<PAGE>
CLEAN CUT, INC. AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
Revenue Recognition
The Group's revenues consist of landscape maintenance revenues and
installation revenues. The Group's landscape maintenance contracts are
typically for one year and payments to the Group are remitted in equal monthly
payments over the term of the contract. Revenues from maintenance contracts are
recognized based on the straight-line method while costs incurred under the
contracts can be expected to vary materially based on seasonal factors. Monthly
maintenance payments are recognized as they become due because the contracts
are fully cancelable without cause upon notice of 30 days or less by either the
Group or the customer. Should the Group elect to cancel a contract, the
customer would have no standing under either contract law or equity to require
additional services or obtain a refund (other than for nonperformance prior to
cancellation), notwithstanding that the customer may have paid amounts which
clearly exceeded the fair value of the services received in those months in
anticipation of lower priced services later in the year.
Revenues from installation contracts are recognized when the services are
performed and billable under the terms of the applicable contract. The balances
billed but not paid by customers pursuant to retainage provisions in
installation contracts will be due upon completion of the contracts and
acceptance by the customer. Based on the Group's experience with similar
contracts in recent years, the retention balance at each balance sheet date
will be collected within the subsequent fiscal year.
Cost of Services
Cost of services represents direct labor and associated costs (such as
benefits and workers' compensation expense), materials, supervisory personnel,
and equipment and vehicle costs, such as fuel, insurance and depreciation.
Warranty Costs
For certain contracts, the Group warrants plant life up to a year after
installation. A reserve for warranty costs is recorded based upon the
historical level of warranty claims and management's estimate of future costs.
Seasonality
The Group experienced and expects to continue to experience variability in
revenue and net income as a result of the seasonal nature of the Group's
business. Revenues from landscape maintenance contracts remain relatively
constant throughout the year; however, the related costs of services vary due
to seasonality. As a result, the gross margin from landscape maintenance
contracts can vary seasonally.
Income Taxes
Clean Cut, Inc. and Clean Cut Landscaping, have elected S Corporation status
as defined by the Internal Revenue Code, whereby Clean Cut, Inc. and Clean Cut
Landscaping are not subject to taxation for federal purposes. Under S
Corporation status, the shareholders report their shares of the Group's taxable
earnings or losses in their personal tax returns. Clean Cut, Inc. and Clean Cut
Landscaping will terminate their S Corporation status concurrently with the
effective date of the Merger.
F-62
<PAGE>
CLEAN CUT, INC. AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
D & G Partnership is a Texas Partnership. As such, income taxes are not
levied at the Partnership level, but rather on the individual partners.
Accordingly, no recognition has been given to income taxes in the accompanying
financial statements with regards to D & G Partnership.
Shareholder's Equity
The equity structure of the Group is as follows at December 31, 1997:
<TABLE>
<CAPTION>
SHARES
AUTHORIZED ISSUED AND PAR
SHARES OUTSTANDING VALUE
---------- ----------- -----
<S> <C> <C> <C>
Clean Cut, Inc. ................................ 100,000 1,000 $ 1
D&G Partnership................................. -- -- --
</TABLE>
Financial Instruments
The Group's financial instruments consist of cash, accounts receivable,
accounts payable, lines of credit and debt. The Group believes that the
carrying value of these instruments on the accompanying balance sheets
approximates their fair value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Group will adopt SFAS No. 131 for the year ended December 31, 1998.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31
IN YEARS 1997
------------- -----------
<S> <C> <C>
Land............................................ N/A $ 180
Transportation equipment........................ 5 227
Machinery and equipment......................... 5-10 1,290
Leasehold improvements.......................... Life of lease 31
Office furniture and equipment.................. 5 357
------
Total....................................... 2,085
Less--Accumulated depreciation.................. (808)
------
Property and equipment, net................. $1,277
======
</TABLE>
F-63
<PAGE>
CLEAN CUT, INC. AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Accounts receivable, trade.................................... $2,989
Allowance for doubtful accounts............................... (245)
------
$2,744
======
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Outstanding checks in excess of cash balance.................. $ 318
Accounts payable, trade....................................... 267
Accrued compensation and benefits............................. 208
Accrued sales and payroll tax payable......................... 345
Warranty accrual.............................................. 100
------
$1,238
======
Other current liabilities consist of the following (in thousands):
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Pre-billed revenue............................................ $ 645
Other......................................................... 62
------
$ 707
======
</TABLE>
5. LINE OF CREDIT AND LONG-TERM DEBT:
Line of Credit
As of December 31, 1997, the Group had lines of credit totaling $3.3 million
with a financial institution that are secured by accounts receivable, general
intangibles, inventory, equipment and other rights to payment. In addition,
they are guaranteed by shareholders of the Group. Interest is at the financial
institution's prime rate plus .75 percent, which was 9.25% at December 31,
1997. The lines of credit expire 1998 through 2000. There was a total of
approximately $1.5 million outstanding on these lines of credit at December 31,
1997.
In April 1998, the Group entered into an additional line of credit for $1.5
million that expires in 2004. No amount has been drawn down on this line of
credit as of June 30, 1998.
F-64
<PAGE>
CLEAN CUT, INC. AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Note payable to a financial institution in monthly
installments of $38 including interest at 9.25% secured by
accounts receivable, general intangibles, inventory,
equipment and other rights to payment due 1999.............. $ 732
Note payable to financial institution in various monthly
installments including interest at 10.00% secured by land,
due 2001.................................................... 138
Note payable to related party in monthly installments of $.7
including interest at 11.18%, due 2007...................... 89
Capital leases of equipment payable in monthly installments
of approximately $5 including interest at 9.2%, maturing in
2002........................................................ 241
Other........................................................ 14
------
Total.................................................... 1,214
Less--Current portion........................................ (467)
------
$ 747
======
</TABLE>
The aggregate maturities of long-term debt and capital lease obligations as
of December 31, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998............................................................ $ 467
1999............................................................ 376
2000............................................................ 56
2001............................................................ 187
2002 and thereafter............................................. 128
------
$1,214
======
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Group leases an aircraft and property from companies whose owners are
shareholders of the Company. The total amount of rent expense incurred under
these leases was $58,640 for the year ended December 31, 1997.
In June 1996, the Group borrowed $54,000 from one of its shareholders in
order to fund its near-term working capital requirements.
At December 31, 1997, the Group had a receivable from one of its shareholders
of $23,149. This receivable relates to services performed by the Group for the
shareholder. Additional borrowings were made to employees and other
shareholders, resulting in receivable balances of $51,783 and $69,501
respectively, at December 31, 1997.
F-65
<PAGE>
CLEAN CUT, INC. AND AFFILIATES
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Group leases various facilities, equipment, vehicles and land under
operating lease agreements, including leases with related parties. The lease
agreements are subject to renewal under essentially the same terms and
conditions as the original leases. At December 31, 1997, all operating leases
had an initial or remaining term of less than one year.
Total rent expense under all operating leases, including operating leases
with related parties, was approximately $512,000 for the year ended December
31, 1997.
Litigation
The Group is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcomes of such legal actions will
have a material adverse effect on the Group's financial position or results of
operations.
Insurance
The Group carries a standard range of insurance coverage, including business
auto liability, general liability, and workers' compensation. The Group has not
incurred significant claims or losses on any of these insurance policies.
8. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On August 5, 1998, the Group and its shareholders entered into a definitive
agreement with a wholly owned subsidiary of LandCare, providing for the merger
of the Group with the subsidiary of LandCare.
On November 1, 1998, LandCare and The ServiceMaster Company ("ServiceMaster")
entered into a Plan of Reorganization and Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which LandCare will become a subsidiary of
ServiceMaster. The Merger Agreement is subject to LandCare stockholder
approval, regulatory approvals and certain other closing conditions and
termination events.
F-66
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Southern Tree & Landscape Co., Inc.:
We have audited the accompanying balance sheet of Southern Tree & Landscape
Co., Inc., as of December 31, 1997, and the related statements of operations,
shareholders' equity (deficit) and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Southern Tree & Landscape Co.,
Inc., as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 20, 1998
F-67
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1997 1998
----------- -----------
(UNAUDITED)
-----------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash................................................. $ 49 $ 9
Accounts receivable, net............................. 1,810 1,867
Inventories.......................................... 619 704
Deferred tax asset................................... 77 77
Other current assets................................. 305 426
------ ------
Total current assets............................... 2,860 3,083
PROPERTY AND EQUIPMENT, net.......................... 2,146 2,115
------ ------
Total assets....................................... $5,006 $5,198
====== ======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses................ $1,754 1,489
Lines of credit...................................... 1,858 1,858
Payable to related parties........................... 39 333
Current maturities of long-term debt................. 346 344
Other current liabilities............................ -- 34
------ ------
Total current liabilities.......................... 3,997 4,058
LONG-TERM DEBT, net.................................... 820 759
DEFERRED TAX LIABILITY................................. 72 134
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, 100,000 shares
authorized, 2,900 shares outstanding................ 3 3
Retained earnings.................................... 114 244
------ ------
Total shareholders' equity......................... 117 247
------ ------
Total liabilities and shareholders' equity......... $5,006 $5,198
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
YEAR ENDED --------------------
DECEMBER 31, 1997 1997 1998
----------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.............................. $14,176 $ 3,368 $ 3,502
COST OF SERVICES...................... 11,617 2,651 2,675
------- --------- ---------
Gross profit...................... 2,559 717 827
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................. 1,766 475 514
------- --------- ---------
Income from operations............ 793 242 313
OTHER INCOME (EXPENSE):
Interest expense.................... (429) (106) (95)
Other income, net................... 26 6 --
------- --------- ---------
INCOME BEFORE INCOME TAXES............ 390 142 218
INCOME TAX PROVISION.................. 158 58 88
------- --------- ---------
NET INCOME............................ $ 232 $ 84 $ 130
======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
RETAINED SHAREHOLDERS'
COMMON EARNINGS EQUITY
STOCK (DEFICIT) (DEFICIT)
------ --------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1996....................... $ 3 $(118) $(115)
Net income..................................... -- 232 232
--- ----- -----
BALANCE, December 31, 1997....................... 3 114 117
Net income (unaudited)......................... -- 130 130
--- ----- -----
BALANCE, March 31, 1998 (unaudited).............. $ 3 $ 244 $ 247
=== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31
DECEMBER 31, -----------------
1997 1997 1998
------------ ----------- -----
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 232 $ 84 $ 130
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation............................... 311 62 93
Loss on sale of property and equipment..... 5 -- --
Deferred income tax provision.............. (87) -- 62
Changes in assets and liabilities--
Accounts receivable, net................. (106) (1) (57)
Inventories.............................. (37) (77) (85)
Other current assets..................... (174) (66) (121)
Accounts payable and accrued expenses.... 312 (63) (265)
Payable to related parties............... 39 14 294
Other current liabilities................ -- -- 34
------- ----- -----
Net cash provided by (used in)
operating activities.................. 495 (47) 85
------- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and
equipment................................... 2 -- --
Purchases of property and equipment.......... (1,130) (112) (62)
------- ----- -----
Net cash used in investing activities.. (1,128) (112) (62)
------- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit and long-term
debt........................................ 843 259 --
Payments on lines of credit and long-term
debt........................................ (176) (115) (63)
------- ----- -----
Net cash provided by (used in)
financing activities.................. 667 144 (63)
------- ----- -----
NET INCREASE (DECREASE) IN CASH................ 34 (15) (40)
CASH, beginning of period...................... 15 15 49
------- ----- -----
CASH, end of period............................ $ 49 $ -- $ 9
======= ===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for--
Interest................................... $ 429 $ 101 $ 95
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Southern Tree & Landscape Co., Inc. (the Company), a North Carolina
corporation headquartered in Charlotte, North Carolina, was founded in 1977 and
operates primarily in North Carolina and South Carolina with four branches in
North Carolina and one branch in South Carolina. The Company provides
commercial landscape installation and maintenance and also offers commercial
tree services for customers. The Company is a subsidiary of Southern Shade Tree
Co. (the Parent).
Effective December 31, 1997, the Company and the Parent entered into a
reorganization in which certain net assets of the Parent were transferred to
the Company in exchange for 1,900 shares of the Company's common stock. The
transaction was accounted for as a reorganization of companies under common
control in a manner similar to a pooling of interests. After the
reorganization, approximately 83% of the Company was owned by the Parent.
The Company had a working capital deficit at December 31, 1997 and March 31,
1998. The Company has funded its operations with cash flows from operations and
short-term borrowings from lenders. Management expects that operations will
generate sufficient cash flows to meet the Company's working capital needs
during 1998.
The Company and its shareholders intend to enter into a definitive agreement
with LandCare USA, Inc. (LandCare), pursuant to which all outstanding shares of
the Company's common stock will be exchanged for cash and shares of LandCare's
common stock concurrently with the consummation of an initial public offering
of the common stock of LandCare.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements as of March 31, 1998 and for each of the
three months ended March 31, 1997 and 1998 are unaudited, and certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements have been included. Due to seasonality and other factors, the
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
Inventories
Inventories consist primarily of trees and shrubs held for use in the
ordinary course of business and are stated at the lower of cost or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
F-72
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
Revenue Recognition
The Company's revenues consist of maintenance revenues and installation
revenues. The Company's landscape maintenance contracts are for one year and
payments to the Company are remitted in equal monthly payments over the term of
the contract. Revenues from maintenance contracts are recognized on the
straight-line method while costs incurred under the contracts can be expected
to vary materially based on seasonal factors. Monthly maintenance payments are
recognized as they become due because the contracts are fully cancelable
without cause upon notice of 60 days or less by either the Company or the
customer. Should the Company elect to cancel a contract, the customer would
have no standing under either contract law or equity to require additional
services or obtain a refund (other than for nonperformance prior to
cancellation), notwithstanding that the customer may have paid amounts which
clearly exceeded the fair value of the services received in those months in
anticipation of lower priced services later in the year.
Revenues from installation contracts are recognized when the services are
performed and billable under the terms of the applicable contract. The balances
billed but not paid by customers pursuant to retainage provisions in
installation contracts will be due upon completion of the contracts and
acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance at each balance sheet date
will be collected within the subsequent fiscal year.
Cost of Services
Cost of services represents direct labor and associated costs (such as
benefits and workers' compensation expense), materials, supervisory personnel,
and equipment and vehicle costs, such as fuel, insurance and depreciation.
Warranty Costs
For certain contracts, the Company warrants plant life up to a year after
installation. A reserve for warranty costs is recorded based upon the
historical level of warranty claims and management's estimate of future costs.
Seasonality
The Company has experienced and expects to continue to experience variability
in revenue and net income as a result of the seasonal nature of the Company's
business. Revenues from landscape maintenance contracts remain relatively
constant throughout the year; however, the related cost of services vary due to
seasonality. As a result, the gross margin from landscape maintenance contracts
can vary seasonally.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates
F-73
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount to be realized. The provision for income
taxes is the tax payable for the year and the change during the year in
deferred tax assets and liabilities.
Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, lines of credit and debt. The Company believes that the
carrying value of these instruments on the accompanying balance sheet
approximates their fair value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 for the year ended December 31, 1998.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31
IN YEARS 1997
------------- -----------
<S> <C> <C>
Transportation equipment........................ 5 $ 804
Machinery and equipment......................... 5-10 1,914
Leasehold improvements.......................... Life of lease 423
Office furniture and equipment.................. 5 345
Buildings and improvements...................... 30 90
-------
Total....................................... 3,576
Less--Accumulated depreciation.................. (1,430)
-------
Property and equipment, net................. $ 2,146
=======
</TABLE>
F-74
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Accounts receivable, trade.................................... $1,854
Retainage..................................................... 35
Allowance for doubtful accounts............................... (79)
------
$1,810
======
</TABLE>
Other current assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Prepaid expenses.............................................. $189
Advance to related party...................................... 83
Other current assets.......................................... 33
----
$305
====
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Accounts payable, trade...................................... $1,319
Income tax payable........................................... 188
Warranty accrual............................................. 123
Accrued compensation and benefits............................ 64
Other accrued expenses....................................... 60
------
$1,754
======
</TABLE>
5. LINES OF CREDIT AND LONG-TERM DEBT:
Lines of Credit
The Company and the Parent jointly obtained lines of credit and a term loan
with a financial institution. The maximum amount allowed to the Company under
the $1.6 million line of credit held jointly with the Parent is $1.2 million,
with the remainder available to the Parent. The Company also has a $650,000
line of credit with the same financial institution. The lines of credit are
secured by accounts receivable, other rights to payment, general intangibles,
inventory and equipment. The lines of credit are also guaranteed by
shareholders of the Company. The lines of credit are cross collateralized
between the Company and the Parent. The interest rate on the lines of credit is
at the financial institutions prime rate plus one percent, which was 9.5
percent at December 31, 1997. The lines of credit expire on November 30, 1998.
The Company had $1.2 million and $650,000 outstanding at December 31, 1997.
Under the lines of credit and term loan agreement, the Company is required to
comply with certain financial covenants and restrictions. As the Company and
the Parent jointly hold the lines of credit and term loan, a violation of
covenants by one entity may cause the other entity to be in default. The
Company was not in compliance with certain covenants as of December 31, 1997.
Subsequent to December 31, 1997, the Company obtained waivers for all covenant
violations.
F-75
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Long-Term Debt
Long-term debt as of December 31, 1997, consists of the following (in
thousands):
<TABLE>
<S> <C>
Notes payable to various financial institutions in total monthly
installments of approximately $20 including interest ranging from
8.99% to 10.5%, secured by certain vehicles, machinery and equipment
with payments due in varying maturities ranging from 1998-2002....... $ 538
Notes payable to other creditors in total monthly installments of
approximately $2 including interest ranging from 8.53% to 10%,
secured by certain vehicles, machinery and equipment with payments
due in varying maturities ranging from 1998-2001..................... 99
Lease payable to various leasing companies in total monthly
installments of approximately $20 including interest ranging from
8.88% to 21%, secured by certain vehicles, machinery and equipment
with payments due in varying maturities ranging from 1998-2002....... 529
------
Total............................................................. 1,166
Less--Current portion................................................. (346)
------
<CAPTION>
$ 820
<S> <C>
======
</TABLE>
On January 26, 1998, the Company entered into a debt agreement with a
shareholder. Under the terms of this agreement, the Company borrowed $125,000
with a 12 percent interest rate. The note matures on April 26, 1998.
The aggregate maturities of long-term debt as of December 31, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998............................................................ $ 346
1999............................................................ 244
2000............................................................ 226
2001............................................................ 194
2002............................................................ 156
------
$1,166
======
</TABLE>
6. INCOME TAXES:
The components of the provision for income taxes as of December 31, 1997 are
as follows (in thousands):
<TABLE>
<S> <C>
Federal--
Current........................................................... $199
Deferred.......................................................... (71)
----
128
----
State--
Current........................................................... 47
Deferred.......................................................... (17)
----
30
----
Total provision................................................. $158
====
</TABLE>
F-76
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes as of December 31, 1997 differs from an amount
computed at the statutory rate as follows (in thousands):
<TABLE>
<S> <C>
Federal income tax at statutory rates............................... $137
State income taxes.................................................. 19
Nondeductible expenses.............................................. 2
----
$158
====
</TABLE>
The significant items giving rise to the deferred tax assets and liabilities
as of December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets--
Accrued expenses.................................................. $101
Net operating loss carryforward................................... 62
Other............................................................. 3
----
Total deferred tax assets....................................... 166
----
Deferred tax liabilities--
Bases differences in property and equipment....................... 135
Other............................................................. 26
----
Total deferred tax liabilities.................................. 161
----
Net deferred tax asset.......................................... $ 5
====
</TABLE>
7. RELATED-PARTY TRANSACTIONS:
The Company leases a facility under an operating lease from an entity owned
by shareholders of the Company. Rent expense on the lease was approximately
$66,000 for the year ended December 31, 1997.
During the year ended December 31, 1997, the Company purchased equipment
parts and supplies of approximately $57,000 from an affiliated entity.
The Company reimburses the Parent for various administrative services
performed by the Parent on behalf of the Company. In 1997, such payments
totaled approximately $370,000. As of December 31, 1997, the Company made
advances of approximately $83,000 to the Parent for expenses paid and services
performed by the Parent.
During the year ended December 31, 1997, the Company purchased inventory of
approximately $113,000 from an affiliated entity. At March 31, 1998,
approximately $193,000 was owed to the Parent for expenses paid and services
performed by the Parent.
8. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases various facilities, equipment and vehicles under operating
lease agreements, including leases with related parties. These leases are
noncancelable and expire on various dates through 2002. Certain lease
agreements are subject to renewal under essentially the same terms and
conditions as the original leases.
F-77
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments for operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998............................................................ $ 747
1999............................................................ 659
2000............................................................ 430
2001............................................................ 142
2002............................................................ 77
------
$2,055
======
</TABLE>
Total rent expense under all operating leases, including operating leases
with related parties, was approximately $844,000 for the year ended December
31, 1997.
Stock Redemption Agreements
Under the terms of the stock redemption agreements executed in August 1997,
if a shareholder desires to dispose of his shares of common stock (Offered
Shares), the Company has the exclusive right to purchase the Offered Shares
within 30 days from the shareholder. If the Company does not elect to purchase
the Offered Shares, the remaining shareholders have 30 days to purchase the
portion of the Offered Shares not purchased by the Company.
Litigation
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results
of operations.
Insurance
The Company carries a standard range of insurance coverage, including
business auto liability, general liability, workers' compensation, commercial
property and an umbrella policy. The Company has not incurred significant
claims or losses on any of these insurance policies.
Employee 401(k) Retirement Plan
The Company participates in a 401(k) profit-sharing plan (the Plan) with
related companies which covers eligible employees at least 21 years of age who
have completed at least one-half year of service. The Plan allows for employee
contributions through salary reductions of up to 20 percent of total
compensation, subject to the statutory limits. The Company matches 25 percent
of the employee's contribution, up to 4 percent of the employee's total
compensation. Employer matching contributions totaled approximately $11,000 for
1997. The Company did not make any discretionary profit-sharing contributions
in 1997.
9. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In March 1998, the Company and its shareholders entered into a definitive
agreement with a wholly owned subsidiary of LandCare, providing for the merger
of the Company with the subsidiary of LandCare (the Merger).
Concurrently with the Merger, the Company entered into an agreement with the
shareholders to lease a building used in the Company's operations for
negotiated amounts and terms.
On November 1, 1998, LandCare and The ServiceMaster Company ("ServiceMaster")
entered into a Plan of Reorganization and Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which LandCare will become a subsidiary of
ServiceMaster. The Merger Agreement is subject to LandCare stockholder
approval, regulatory approvals and certain other closing conditions and
termination events.
F-78
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To D.R. Church Landscape Co., Inc.:
We have audited the accompanying consolidated balance sheets of D.R. Church
Landscape Co., Inc., and subsidiary, as of December 31, 1996 and 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of D.R. Church
Landscape Co., Inc., and subsidiary as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 13, 1998
F-79
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- MARCH 31,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash............................................. $ 22 $ 136 $ 649
Accounts receivable, net......................... 2,077 2,971 1,338
Related party receivable......................... -- -- 25
Inventories...................................... 96 134 209
Deferred tax asset............................... 411 136 136
------ ------ ------
Total current assets........................... 2,606 3,377 2,357
PROPERTY AND EQUIPMENT, net........................ 1,482 1,917 1,976
DEFERRED TAX ASSET................................. -- 243 238
OTHER ASSETS....................................... 203 75 144
------ ------ ------
Total assets................................... $4,291 $5,612 $4,715
====== ====== ======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses............ $1,091 $1,560 $1,130
Line of credit................................... 551 140 --
Current maturities of long-term debt............. 282 366 486
Current maturities of long-term payable to
related parties................................. -- 106 5
------ ------ ------
Total current liabilities...................... 1,924 2,172 1,621
LONG-TERM DEBT, net................................ 589 765 736
LONG-TERM PAYABLE TO RELATED PARTIES, net.......... -- 15 15
DEFERRED TAX LIABILITY............................. 16 -- --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 150,000 shares
authorized, 65,076, 62,878 and 61,961 shares
issued, 62,446, 62,253 and 61,035 shares
outstanding..................................... 6 6 6
Retained earnings................................ 1,824 2,677 2,372
Treasury stock, 2,630, 625 and 926 shares, at
cost............................................ (68) (23) (35)
------ ------ ------
Total shareholders' equity..................... 1,762 2,660 2,343
------ ------ ------
Total liabilities and shareholders' equity..... $4,291 $5,612 $4,715
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-80
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
------------------------ ----------------
1995 1996 1997 1997 1998
------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES.......................... $9,141 $10,951 $13,257 $ 946 $ 963
COST OF SERVICES.................. 6,121 7,624 8,906 803 787
------ ------- ------- ------- -------
Gross profit.................. 3,020 3,327 4,351 143 176
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES.......... 2,136 3,591 2,864 590 661
------ ------- ------- ------- -------
Income (loss) from
operations................... 884 (264) 1,487 (447) (485)
OTHER INCOME (EXPENSE):
Interest expense................ (94) (117) (184) (32) (31)
Other income, net............... 37 78 97 18 14
------ ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME
TAXES............................ 827 (303) 1,400 (461) (502)
INCOME TAX PROVISION (BENEFIT).... 329 (120) 547 (170) (197)
------ ------- ------- ------- -------
NET INCOME (LOSS)................. $ 498 $ (183) $ 853 $ (291) $ (305)
====== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-81
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED TREASURY SHAREHOLDERS'
STOCK EARNINGS STOCK EQUITY
------ -------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994.............. $ 6 $1,509 $ -- $1,515
Repurchase of common stock............ -- -- (3) (3)
Net income............................ -- 498 -- 498
--- ------ ---- ------
BALANCE, December 31, 1995.............. 6 2,007 (3) 2,010
Repurchase of common stock............ -- -- (65) (65)
Net loss.............................. -- (183) -- (183)
--- ------ ---- ------
BALANCE, December 31, 1996.............. 6 1,824 (68) 1,762
Sale of common stock held in
treasury............................. -- -- 45 45
Net income............................ -- 853 -- 853
--- ------ ---- ------
BALANCE, December 31, 1997.............. 6 2,677 (23) 2,660
Repurchase of common stock
(unaudited).......................... -- -- (12) (12)
Net loss (unaudited).................. -- (305) -- (305)
--- ------ ---- ------
BALANCE, March 31, 1998 (unaudited)..... $ 6 $2,372 $(35) $2,343
=== ====== ==== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-82
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31 MARCH 31
------------------------- --------------
1995 1996 1997 1997 1998
------- ------- -------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................. $ 498 $ (183) $ 853 $ (291) $ (305)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities--
Depreciation.................... 246 389 480 87 107
Gain on sale of property and
equipment...................... -- -- (9) -- --
Deferred income tax provision
(benefit)...................... (26) (347) 16 -- 5
Changes in assets and
liabilities--
Accounts receivable, net...... (630) (22) (894) 938 1,608
Inventories................... (31) -- (38) 1 (75)
Other assets.................. (100) 29 128 149 (69)
Accounts payable and accrued
expenses..................... 920 108 469 (65) (430)
------ ------- -------- ------ ------
Net cash provided by (used
in) operating activities... 877 (26) 1,005 819 841
------ ------- -------- ------ ------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of property and
equipment........................ -- -- 11 -- --
Purchases of property and
equipment........................ (832) (712) (917) (59) (166)
------ ------- -------- ------ ------
Net cash used in investing
activities................. (832) (712) (906) (59) (166)
------ ------- -------- ------ ------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from line of credit and
long-term debt................... 204 1,051 2,460 -- 188
Payments on line of credit and
long-term debt................... (183) (251) (2,490) (749) (338)
Cash received (paid) for treasury
stock............................ (3) (65) 45 (8) (12)
------ ------- -------- ------ ------
Net cash provided by
financing activities....... 18 735 15 (757) (162)
------ ------- -------- ------ ------
NET INCREASE (DECREASE) IN CASH..... 63 (3) 114 3 513
CASH, beginning of year............. (38) 25 22 22 136
------ ------- -------- ------ ------
CASH, end of year................... $ 25 $ 22 $ 136 25 649
====== ======= ======== ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for--
Interest........................ $ 94 $ 117 $ 184 $ 32 $ 31
Income taxes.................... 36 80 36 170 137
</TABLE>
The accompanying notes are an integral part of these consolidated financial
F-83
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
D.R. Church Landscape Co., Inc. (the Company), and its wholly owned
subsidiary Royal Oaks Nursery, Inc. (both Illinois corporations), are
headquartered in Lombard, Illinois. The Company was founded in 1963 and
operates primarily in the greater Chicago and Milwaukee areas with branches in
Wadsworth, Illinois and Milwaukee, Wisconsin. The Company provides commercial
landscape installation and maintenance and also provides snow removal services.
The Company and its shareholders intend to enter into a definitive agreement
with LandCare USA, Inc. (LandCare), pursuant to which all outstanding shares of
the Company's common stock will be exchanged for cash and shares of LandCare's
common stock concurrently with the consummation of an initial public offering
of the common stock of LandCare.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts and results of
operations of the Company and its subsidiary. All significant intercompany
transactions have been eliminated in consolidation.
Interim Financial Information
The interim financial statements as of March 31, 1998 and for each of the
three months ended March 31, 1997 and 1998 are unaudited, and certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements have been included. Due to seasonality and other factors, the
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash deposits and accounts
receivable. The Company maintains cash balances at financial institutions which
may at times be in excess of federally insured levels.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon estimated
collectibility of all accounts receivable.
Inventories
Inventories consist of materials and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
F-84
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
Revenue Recognition
The Company's revenues consist of maintenance revenues and installation
revenues. The Company's landscape maintenance contracts are for terms of seven
to eight months and payments to the Company are remitted in equal monthly
payments over the term of the contract. Revenues from landscape maintenance
contracts are recognized on the straight-line method while costs incurred under
the contracts can be expected to vary materially based on seasonal factors.
Monthly maintenance payments are recognized as they become due because the
contracts are fully cancelable without cause upon notice of 60 days or less by
either the Company or the customer. Should the Company elect to cancel a
contract, the customer would have no standing under either contract law or
equity to require additional services or obtain a refund (other than for
nonperformance prior to cancellation), notwithstanding that the customer may
have paid amounts which clearly exceeded the fair value of the services
received in those months in anticipation of lower priced services later in the
year.
Revenues from installation services are recognized when the services are
performed and billable under the terms of the applicable contract. The balances
billed but not paid by customers pursuant to retainage provisions in
installation contracts will be due upon completion of the contracts and
acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance at each balance sheet date
will be collected within the subsequent fiscal year.
Cost Of Services
Cost of services represents direct labor and associated costs (such as
benefits and workers' compensation expense), materials, supervisory personnel
and equipment and vehicle costs, such as fuel, insurance and depreciation.
Warranty Costs
For certain contracts, the Company warrants plants, trees and hardscape for
up to one year after installation. A reserve for warranty costs is recorded
based upon the historical level of warranty claims and management's estimate of
future costs.
Seasonality
The Company has experienced and expects to continue to experience variability
in revenue and net income as a result of the seasonal nature of the Company's
business. Generally, the Company's revenues from installation projects are
concentrated during the warmer months of April to October. Revenues from
landscape maintenance contracts typically do not generate revenues in the
winter. As a result, the gross margin from landscape maintenance contracts can
vary seasonally.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates
F-85
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount to be realized. The provision for income
taxes is the tax payable for the year and the change during the year in
deferred tax assets and liabilities.
Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 in the year ended December 31, 1998.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31
USEFUL LIVES ----------------
IN YEARS 1996 1997
------------- ------- -------
<S> <C> <C> <C>
Transportation equipment.................. 5 $ 2,041 $ 2,677
Machinery and equipment................... 5-10 3,020 3,248
Leasehold improvements.................... Life of lease 53 74
------- -------
Total................................. 5,114 5,999
Less--Accumulated depreciation............ (3,632) (4,082)
------- -------
Property and equipment, net........... $ 1,482 $ 1,917
======= =======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1996 1997
------ ------
<S> <C> <C>
Accounts receivable, trade................................ $2,584 $3,404
Retainage................................................. 234 308
Allowance for doubtful accounts........................... (741) (741)
------ ------
$2,077 $2,971
====== ======
</TABLE>
F-86
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1996 1997
------ ------
<S> <C> <C>
Accounts payable, trade.................................... $ 292 $ 259
Accrued compensation and benefits.......................... 153 202
Income tax payable......................................... 362 853
Accrued professional fees.................................. 200 177
Other accrued expenses..................................... 84 69
------ ------
$1,091 $1,560
====== ======
</TABLE>
5. LINE OF CREDIT AND LONG-TERM DEBT:
Line of Credit
The Company has a $1.4 million line of credit with a financial institution
that is secured by accounts receivable, bearing interest at the financial
institution's prime rate plus 0.75 percent, which was 9 percent and 9.25
percent at December 31, 1996 and 1997, respectively. The line of credit expires
on February 1, 1998, and there was a total of $551,000 and $140,000 outstanding
on the line at December 31, 1996 and 1997, respectively.
Long-term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------
1996 1997
----- -----
<S> <C> <C>
Notes payable to financial institutions in total monthly
installments of approximately $19 including interest ranging
from 8.57% to 9.50%, secured by vehicles and equipment with
payment due in varying maturities ranging from 1999-2001........ $ 443 $ 501
Notes payable to financial institutions in total monthly
installments of approximately $8 including interest at financial
institution's prime rate plus 1.25%, which was 9.50% and 9.75%
at December 31, 1996 and 1997, respectively, secured by vehicles
and equipment with final payment due 1998....................... 46 16
Note payable to a shareholder in monthly installments of $.7
including interest at 9.00%, secured by a vehicle with final
payment due 2001................................................ -- 21
Note payable to a shareholder including interest at 9.00%,
unsecured and due on demand..................................... -- 100
Capital leases of vehicles payable in monthly installments of
approximately $19 including interest at 6.25%, with varying
maturities ranging from 1999-2002............................... 175 607
Capital leases of equipment payable in monthly installments of
approximately $5 including interest at 6.25%, with varying
maturities ranging from 1998-1999............................... 207 7
----- -----
871 1,252
Less- Current portion............................................ (282) (472)
----- -----
$ 589 $ 780
===== =====
</TABLE>
F-87
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of long-term debt and capital lease obligations as
of December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998............................................................ $ 472
1999............................................................ 371
2000............................................................ 286
2001............................................................ 123
------
$1,252
======
</TABLE>
6. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1995 1996 1997
---- ----- ----
<S> <C> <C> <C>
Federal--
Current............................................... $289 $ 185 $434
Deferred.............................................. (21) (284) 13
---- ----- ----
268 (99) 447
---- ----- ----
State--
Current............................................... 66 42 97
Deferred.............................................. (5) (63) 3
---- ----- ----
61 (21) 100
---- ----- ----
Total provision..................................... $329 $(120) $547
==== ===== ====
</TABLE>
The provision (benefit) for income taxes differs from an amount computed at
the statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1995 1996 1997
---- ----- ----
<S> <C> <C> <C>
Federal income tax at statutory rates.................. $290 $(106) $482
State income taxes..................................... 39 (14) 65
---- ----- ----
$329 $(120) $547
==== ===== ====
</TABLE>
The significant items giving rise to the deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Deferred tax assets--
Allowance for doubtful accounts............................. $370 $286
Accrued expenses............................................ 82 169
Other....................................................... 19 17
---- ----
Total deferred tax assets................................. 471 472
==== ====
Deferred tax liabilities--
Bases differences in property and equipment................. (32) (42)
Other....................................................... (44) (51)
---- ----
Total deferred tax liabilities............................ (76) (93)
---- ----
Net deferred tax assets................................... $395 $379
==== ====
</TABLE>
F-88
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. RELATED-PARTY TRANSACTIONS:
The Company entered into agreements with the shareholders and other related
entities for the leases of office buildings and property used for nursery
operations. The Company also leases vehicles, landscaping and office equipment
from a shareholder. Total lease payments to shareholders were $216,000,
$242,000 and $273,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
8. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases various facilities, equipment, vehicles and land under
operating lease agreements, including leases with related parties. These leases
expire on various dates through 2001. The lease agreements are subject to
renewal under essentially the same terms and conditions as the original leases.
Future minimum lease payments for operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998.............................................................. $249
1999.............................................................. 166
2000.............................................................. 116
2001.............................................................. 92
----
$623
====
</TABLE>
Total rent expense under all operating leases, including operating leases
with related parties, was approximately $233,000, $338,000 and $327,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.
Litigation
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's consolidated financial position
or consolidated results of operations.
Insurance
The Company carries a standard range of insurance coverage, including
business auto liability, general liability, workers' compensation, commercial
property and an umbrella policy. The Company has not incurred significant
claims or losses on any of these insurance policies.
The Company is self-insured for medical claims up to $10,000 per year per
covered individual. Claims in excess of these amounts are covered by a stop-
loss policy.
Employee Stock Ownership Plan
The Company participates in an Employee Stock Ownership Plan (the Plan) which
covers all employees who have completed at least 1,000 hours of service as of
the first year of employment ending July 1, the first day of the Plan year.
Participation in the Plan is based on the total compensation paid to employees
during the Plan year. The Company makes discretionary stock or cash
contributions to the Plan, which were $85,000 in cash during 1995, $50,000 in
cash and $50,000 in common stock during 1996 and $50,000 in common stock during
1997.
F-89
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In March 1998, the Company and its shareholders entered into a definitive
agreement with a wholly owned subsidiary of LandCare, providing for the merger
of the Company with the subsidiary of LandCare (the Merger). Royal Oaks
Nursery, Inc. and the related operating assets and liabilities, were not
acquired in the Merger. Approximately $19,000 of cash, $43,000 of related party
receivables and $19,000 of property and equipment, net, which are included in
the consolidated balance sheet at December 31, 1997 were sold to shareholders
of the Company. In addition, shareholders of the Company will assume
liabilities of approximately $3,000, which are included in the consolidated
balance sheet at December 31, 1997. Revenue would have been reduced by
approximately $233,000 and income from operations would have been increased by
approximately $43,000 for the year ended December 31, 1997 assuming the
transaction had occurred January 1, 1997. Had these distributions been made at
December 31, 1997, the effect on the Company's balance sheet would have been to
decrease shareholders' equity by approximately $78,000.
Concurrently with the Merger, the Company entered into an agreement with the
shareholders to lease land, equipment and buildings used in the Company's
operations for negotiated amounts and terms.
On November 1, 1998, LandCare and The ServiceMaster Company ("ServiceMaster")
entered into a Plan of Reorganization and Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which LandCare will become a subsidiary of
ServiceMaster. The Merger Agreement is subject to LandCare stockholder
approval, regulatory approvals and certain other closing conditions and
termination events.
F-90
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Schumacher Landscaping, Inc.:
We have audited the accompanying balance sheet of Schumacher Landscaping,
Inc. (the Company), as of December 31, 1997, and the related statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 4, 1998
F-91
<PAGE>
SCHUMACHER LANDSCAPING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1998
----------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 80 $ 33
Accounts receivable, net............................. 2,602 4,319
Receivable from affiliate............................ 840 1,290
Inventories.......................................... 24 59
Other current assets................................. 19 355
------ ------
Total current assets............................... 3,565 6,056
PROPERTY AND EQUIPMENT, net............................ 1,323 1,840
OTHER ASSETS........................................... 19 28
------ ------
Total assets....................................... $4,907 $7,924
====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses................ $1,936 $2,324
Line of credit and other short-term borrowings....... 708 1,895
Current maturities of long-term debt................. 321 433
Other current liabilities............................ 232 275
------ ------
Total current liabilities.......................... 3,197 4,927
LONG-TERM DEBT, net.................................... 428 1,256
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value, 1,000 shares authorized,
100 shares outstanding.............................. 1 1
Retained earnings.................................... 1,281 1,740
------ ------
Total stockholders' equity......................... 1,282 1,741
------ ------
Total liabilities and stockholders' equity......... $4,907 $7,924
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-92
<PAGE>
SCHUMACHER LANDSCAPING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30
DECEMBER 31 --------------
1997 1997 1998
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES............................................ $12,029 $4,630 $6,699
COST OF SERVICES.................................... 9,717 3,802 5,293
------- ------ ------
Gross profit.................................... 2,312 828 1,406
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........ 1,500 662 878
------- ------ ------
Income from operations.......................... 812 166 528
------- ------ ------
OTHER INCOME (EXPENSE):
Interest expense.................................. (260) (113) (116)
Other income (expense), net....................... 78 40 47
------- ------ ------
NET INCOME.......................................... $ 630 $ 93 $ 459
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-93
<PAGE>
SCHUMACHER LANDSCAPING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED STOCKHOLDERS'
STOCK EARNINGS EQUITY
------ -------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1996........................ $ 1 $1,271 $1,272
Distributions................................... -- (620) (620)
Net income...................................... -- 630 630
---- ------ ------
BALANCE, December 31, 1997........................ 1 1,281 1,282
Net income (unaudited).......................... -- 459 459
---- ------ ------
BALANCE, June 30, 1998 (unaudited)................ $ 1 $1,740 $1,741
==== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-94
<PAGE>
SCHUMACHER LANDSCAPING, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31 ENDED JUNE 30
----------- --------------
1997 1997 1998
----------- ----- -------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 630 $ 93 $ 459
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 302 136 204
Losses on sales of assets...................... 5 -- 1
Changes in assets and liabilities--
Accounts receivable, net..................... (335) (942) (1,717)
Receivable from affiliate.................... 375 (114) (450)
Inventories.................................. (12) (62) (35)
Other current assets and liabilities......... (28) (69) (109)
Costs in excess of billings and estimated
earnings.................................... 33 (186) (231)
Billings in excess of costs and estimated
earnings.................................... 19 (1) 38
Accounts payable and accrued expenses........ 770 809 388
------- ----- -------
Net cash provided by (used in) operating
activities................................ 1,759 (336) (1,452)
------- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in cash surrender value of officers' life
insurance....................................... 2 -- (1)
Purchases of property and equipment.............. (180) (88) (111)
------- ----- -------
Net cash used in investing activities...... (178) (88) (112)
------- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) from line of credit and
other short-term borrowings..................... (677) 465 1,187
Proceeds from long-term debt..................... -- -- 500
Payments on long-term debt....................... (303) (137) (170)
Distributions to stockholders.................... (620) -- --
------- ----- -------
Net cash provided by (used in) financing
activities................................ (1,600) 328 1,517
------- ----- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS.......... (19) (96) (47)
CASH AND CASH EQUIVALENTS, beginning of period..... 99 99 80
------- ----- -------
CASH AND CASH EQUIVALENTS, end of period........... $ 80 $ 3 $ 33
======= ===== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest....................................... $ 259 $ 102 $ 122
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-95
<PAGE>
SCHUMACHER LANDSCAPING, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Schumacher Landscaping, Inc. (the Company), a Massachusetts corporation,
headquartered in Boston, Massachusetts, was founded in 1968 and operates
primarily in the northeastern United States. The Company provides landscape and
maintenance services to commercial customers.
The Company and its stockholders intend to enter into a definitive agreement
with LandCare USA, Inc. (LandCare), pursuant to which all outstanding shares of
the Company's common stock will be exchanged for cash and convertible notes
(the Merger).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements as of June 30, 1998 and for each of the six
months ended June 30, 1997 and 1998 are unaudited, and certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements have
been included. Due to seasonality and other factors, the results of operations
for the interim periods are not necessarily indicative of the results for the
entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash deposits and accounts receivable.
The Company maintains cash balances at financial institutions which may at
times be in excess of federally insured levels.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
Inventories
Inventories consist of parts and supplies held for use in the ordinary course
of business and are stated at the lower of cost or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
F-96
<PAGE>
SCHUMACHER LANDSCAPING, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
The Company's revenues consist of landscape maintenance revenues and
installation revenues. The Company's landscape maintenance contracts are
typically for one year and payments to the Company are remitted in equal
monthly payments over the term of the contract. Revenues from maintenance
contracts are recognized on the straight-line method while costs incurred under
the contracts can be expected to vary materially based on seasonal factors.
Monthly maintenance payments are recognized as they become due because the
contracts are fully cancelable without cause upon notice of 30 days or less by
either the Company or the customer. Should the Company elect to cancel a
contract, the customer would have no standing under either contract law or
equity to require additional services or obtain a refund (other than for
nonperformance prior to cancellation), notwithstanding that the customer may
have paid amounts which clearly exceeded the fair value of the services
received in those months in anticipation of lower priced services later in the
year.
Revenues from installation contracts are recognized when the services are
performed and billable under the terms of the applicable contract. The balances
billed but not paid by customers pursuant to retainage provisions in
installation contracts will be due upon completion of the contracts and
acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance at each balance sheet date
will be collected within the subsequent fiscal year.
Cost of Services
Cost of services represents direct labor and associated costs (such as
benefits and workers' compensation expense), materials, supervisory personnel,
and equipment and vehicle costs, such as fuel, insurance and depreciation.
Warranty Costs
For certain contracts, the Company warrants plant life up to a year after
installation. A reserve for warranty costs is recorded based upon the
historical level of warranty claims and management's estimate of future costs.
Seasonality
The Company experienced and expects to continue to experience variability in
revenue and net income as a result of the seasonal nature of the Company's
business. Revenues from landscape maintenance contracts remain relatively
constant throughout the year; however, the related costs of services vary due
to seasonality. As a result, the gross margin from landscape maintenance
contracts can vary seasonally.
Income Taxes
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the stockholders report their shares of
the Company's taxable earnings or losses in their personal tax returns. The
Company will terminate its S Corporation status concurrently with the effective
date of the transaction.
Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, line of credit and debt. The Company believes that the
carrying value of these instruments on the accompanying balance sheets
approximates their fair value.
F-97
<PAGE>
SCHUMACHER LANDSCAPING, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 for the year ended December 31, 1998.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31
IN YEARS 1997
------------- -----------
<S> <C> <C>
Transportation equipment........................ 5 $ 1,113
Machinery and equipment......................... 5-10 952
Leasehold improvements.......................... Life of lease 68
Office furniture and equipment.................. 5 250
-------
Total....................................... $ 2,383
Less--Accumulated depreciation.................. (1,060)
-------
Property and equipment, net................. $ 1,323
=======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Accounts receivable, trade.................................... $2,756
Accounts receivable, other.................................... 13
Allowance for doubtful accounts............................... (167)
------
$2,602
======
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Accounts payable, trade....................................... $1,422
Accrued compensation and benefits............................. 294
Warranty accrual.............................................. 220
------
$1,936
======
</TABLE>
F-98
<PAGE>
SCHUMACHER LANDSCAPING, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
5. LINE OF CREDIT AND LONG-TERM DEBT:
Line of Credit
As of December 31, 1997, the Company had a line of credit with a financial
institution totaling $1.5 million that is secured by all business assets. In
addition, the line of credit is guaranteed by a $2.0 million assignment of a
life insurance policy on the Company's stockholder and personally guaranteed by
the stockholder. Interest is at the financial institution's prime rate plus one
percent, which was 9.5% at December 31, 1997. The line of credit expires in
March 1998. The Company had $568,000 outstanding at December 31, 1997.
Vendor Loans
The Company has negotiated various agreements with several vendors to convert
trade accounts payable balances into notes payable. The payments along with
accrued interest are due one year from the date of the agreement. The interest
rates range from the prime rate, which was 8.5% at December 31, 1997 to 10%.
The balance outstanding under these agreements at December 31, 1997 was
$140,000.
Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Note payable to various financial institutions in total monthly
installments of approximately $14 including interest ranging from
8.0% to 18.0%, secured by certain vehicles, machinery and
equipment with payments due in varying maturities ranging from
1998 to 2002...................................................... $ 350
Capital leases of equipment payable in monthly installments of
approximately $23 including interest ranging from 8.91% to 24.10%,
due in varying maturities ranging from 1998 to 2000............... 399
-----
Total.......................................................... 749
Less--Current portion.............................................. (321)
-----
$ 428
=====
</TABLE>
The aggregate maturities of long-term debt and capital lease obligations as
of December 31, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998............................................................. $321
1999............................................................. 228
2000............................................................. 126
2001............................................................. 60
2002............................................................. 14
----
$749
====
</TABLE>
6. RELATED-PARTY TRANSACTIONS:
At December 31, 1997, amounts due to the Company from a corporation wholly
owned by a stockholder of the Company, represent various cash and other
advances and interest charges. The Company has received collateral assignments
of beneficial interests in certain realty trusts located in Massachusetts. The
Company has recorded interest income for the year ended December 31, 1997 of
$108,000 relating to amounts due from affiliate.
F-99
<PAGE>
SCHUMACHER LANDSCAPING, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
During the year ended December 31, 1997, the Company subcontracted laborers
from a corporation which is wholly owned by a stockholder of the Company.
Amounts due from the related company at December 31, 1997 was $9,000.
7. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases its office and warehouse buildings under an operating
lease agreement which expires in 2000. The lease is subject to escalation for
real estate taxes. Rent expense for this operating lease for the year ended
December 31, 1997 was approximately $75,000.
Future minimum lease payments for the operating lease are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998.............................................................. $ 70
1999.............................................................. 70
2000.............................................................. 70
----
$210
====
</TABLE>
The Company also leases various items of equipment under short-term rental
agreements. Total rent expense for all vehicles and equipment was approximately
$160,000 for the year ended December 31, 1997.
Litigation
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcomes of such legal actions will
have a material adverse effect on the Company's financial position or results
of operations.
Insurance
The Company carries a standard range of insurance coverage, including
business auto liability, general liability, and workers' compensation. The
Company has not incurred significant claims or losses on any of these insurance
policies.
The Company is self-insured for medical claims up to $15,000 per year per
covered individual. Claims in excess of these amounts are covered by a stop-
loss policy.
Employee 401(k) Retirement Plan
In 1997, the Company began to participate in a qualified 401(k) retirement
plan (the Plan) which covers eligible employees at least 18 years of age who
have completed six months of service and have been employed by the Company for
1,000 hours. The Company contributes once a year at its discretion. The
Company's contribution to the Plan for the year ended December 31, 1997 was
approximately $13,000.
8. EVENTS SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On September 22, 1998, the Company and its stockholders entered into a
definitive agreement with a wholly owned subsidiary of LandCare, providing for
the merger of the Company with the subsidiary of LandCare.
On November 1, 1998, LandCare and The ServiceMaster Company ("ServiceMaster")
entered into a Plan of Reorganization and Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which LandCare will become a subsidiary of
ServiceMaster. The Merger Agreement is subject to LandCare stockholder
approval, regulatory approvals and certain other closing conditions and
termination events.
F-100
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Landscape West, Inc.:
We have audited the accompanying balance sheet of Landscape West, Inc. (the
Company), as of December 31, 1997, and the related statements of operations,
shareholder's equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
October 5, 1998
F-101
<PAGE>
LANDSCAPE WEST, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1998
----------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 60 $ 125
Accounts receivable, net............................. 1,353 1,654
Related party receivable............................. 326 719
Inventories.......................................... 138 147
Other current assets................................. 145 97
------ ------
Total current assets............................... 2,022 2,742
PROPERTY AND EQUIPMENT, net............................ 1,929 2,106
OTHER ASSETS........................................... 76 170
------ ------
Total assets....................................... $4,027 $5,018
====== ======
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses................ $ 901 $1,156
Line of credit and other short-term borrowings....... 728 570
Current maturities of long-term debt................. 481 450
------ ------
Total current liabilities.......................... 2,110 2,176
LONG-TERM DEBT, net.................................... 598 1,376
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, $100 par value, 750 shares authorized,
30 shares outstanding............................... 3 3
Retained earnings.................................... 1,316 1,463
------ ------
Total shareholder's equity......................... 1,319 1,466
------ ------
Total liabilities and shareholder's equity......... $4,027 $5,018
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-102
<PAGE>
LANDSCAPE WEST, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31 ENDED JUNE 30
----------- --------------
1997 1997 1998
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES............................................ $11,408 $5,519 $6,029
COST OF SERVICES.................................... 9,090 4,177 4,672
------- ------ ------
Gross profit.................................... 2,318 1,342 1,357
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........ 1,764 900 1,111
------- ------ ------
Income from operations.......................... 554 442 246
------- ------ ------
OTHER INCOME (EXPENSE):
Interest expense.................................. (150) (70) (90)
Other income (expense), net....................... 1 6 (9)
------- ------ ------
NET INCOME.......................................... $ 405 $ 378 $ 147
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-103
<PAGE>
LANDSCAPE WEST, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDER'S
STOCK EARNINGS EQUITY
------ -------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1996........................ $ 3 $1,361 $1,364
Distributions................................... -- (450) (450)
Net income...................................... -- 405 405
--- ------ ------
BALANCE, December 31, 1997........................ 3 1,316 1,319
Net income (unaudited).......................... -- 147 147
--- ------ ------
BALANCE, June 30, 1998 (unaudited)................ $ 3 $1,463 $1,466
=== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-104
<PAGE>
LANDSCAPE WEST, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31 JUNE 30
----------- --------------
1997 1997 1998
----------- ----- -------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 405 $ 378 $ 147
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 572 278 314
Losses (gains) on sales of assets.............. 29 (2) --
Changes in assets and liabilities--
Accounts receivable, net..................... (172) (110) (694)
Inventories.................................. (35) (4) (9)
Other current assets......................... (190) (120) 48
Other assets................................. (8) (5) (94)
Accounts payable and accrued expenses........ 131 (85) 255
----- ----- -------
Net cash provided by (used in) operating
activities................................ 732 330 (33)
----- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............. (967) (446) (497)
----- ----- -------
Net cash used in investing activities...... (967) (446) (497)
----- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) line of credit
and other short-term borrowings................. 98 (19) (158)
Proceeds from long-term debt..................... 774 352 1,791
Payments on long-term debt....................... (554) (209) (1,038)
Distributions to shareholder..................... (65) -- --
----- ----- -------
Net cash provided by financing activities.. 253 124 595
----- ----- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......... 18 8 65
CASH AND CASH EQUIVALENTS, beginning of period..... 42 42 60
----- ----- -------
CASH AND CASH EQUIVALENTS, end of period........... $ 60 $ 50 $ 125
===== ===== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest....................................... $ 147 $ 68 $ 91
NON CASH TRANSACTIONS:
Distribution to shareholder...................... $ 385 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-105
<PAGE>
LANDSCAPE WEST, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Landscape West, Inc. (the Company), a California corporation, headquartered
in Anaheim, California, was founded in 1962 and operates primarily in southern
California. The Company provides commercial landscape maintenance services to
its customers.
On August 4, 1998, the Company and its shareholder entered into a definitive
agreement with a wholly owned subsidiary of LandCare USA, Inc. (LandCare),
providing for the merger of the Company with the subsidiary of LandCare. All
outstanding shares of the Company's common stock were exchanged for cash and
shares of LandCare's common stock (the Merger).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements as of June 30, 1998 and for each of the six
months ended June 30, 1997 and 1998 are unaudited, and certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements have
been included. Due to seasonality and other factors, the results of operations
for the interim periods are not necessarily indicative of the results for the
entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash deposits and accounts receivable.
The Company maintains a cash balance at a financial institution which may at
times be in excess of federally insured levels.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
Inventories
Inventories consist of parts and supplies held for use in the ordinary course
of business and are stated at the lower of cost or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
F-106
<PAGE>
LANDSCAPE WEST, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
The Company's revenues consist of landscape maintenance revenues. The
Company's landscape maintenance contracts are typically for one year and
payments to the Company are remitted in equal monthly payments over the term of
the contract. Revenues from maintenance contracts are recognized on the
straight-line method while costs incurred under the contracts can be expected
to vary materially based on seasonal factors. Monthly maintenance payments are
recognized as they become due because the contracts are fully cancelable
without cause upon notice of thirty days or less by either the Company or the
customer. Should the Company elect to cancel a contract, the customer would
have no standing under either contract law or equity to require additional
services or obtain a refund (other than for nonperformance prior to
cancellation), notwithstanding that the customer may have paid amounts which
clearly exceeded the fair value of the services received in those months in
anticipation of lower priced services later in the year.
Cost of Services
Cost of services represents direct labor and associated costs (such as
benefits and workers' compensation expense), materials, supervisory personnel,
and equipment and vehicle costs, such as fuel, insurance and depreciation.
Seasonality
The Company has experienced and expects to continue to experience variability
in gross margin and net income as a result of the seasonal nature of the
Company's business. Generally, revenues from landscape maintenance contracts
remain relatively constant throughout the year; however, the related costs of
services vary due to seasonality. As a result, the gross margin from landscape
maintenance contracts can vary seasonally.
Income Taxes
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their shares of
the Company's taxable earnings or loss in their personal tax returns. The
Company will terminate its S Corporation status concurrently with the effective
date of the Merger.
Major Customers and Risk Concentration
The Company had sales of approximately eleven percent of total sales to one
major customer for the year ended December 31, 1997.
Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, lines of credit and debt. The Company
believes that the carrying value of these instruments on the accompanying
balance sheets approximates their fair value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-107
<PAGE>
LANDSCAPE WEST, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 for the year ended December 31, 1998.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31
USEFUL LIVES -----------
IN YEARS 1997
------------- -----------
<S> <C> <C>
Transportation equipment........................ 5 $ 2,512
Machinery and equipment......................... 5-10 910
Leasehold improvements.......................... Life of lease 23
Office furniture and equipment.................. 5 155
-------
Total....................................... $ 3,600
Less--Accumulated depreciation.................. (1,671)
-------
Property and equipment, net................. $ 1,929
=======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1997
-----------
<S> <C>
Accounts receivable, trade.................................... $1,393
Allowance for doubtful accounts............................... (40)
------
$1,353
======
</TABLE>
Other current assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1997
-----------
<S> <C>
Prepaid expenses.............................................. $120
Other current assets.......................................... 25
----
$145
====
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1997
-----------
<S> <C>
Accounts payable, trade....................................... $629
Accrued compensation and benefits............................. 255
Other accrued expenses........................................ 17
----
$901
====
</TABLE>
F-108
<PAGE>
LANDSCAPE WEST, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
5. LINE OF CREDIT AND LONG-TERM DEBT:
Line of Credit
As of December 31, 1997, the Company had a line of credit totaling $0.8
million with a financial institution that is secured by all business assets and
is personally guaranteed by the shareholder. Interest is at prime, which was
8.5% at December 31, 1997. The Company had $728,000 outstanding on the line of
credit at December 31, 1997.
On March 1, 1998, the Company restructured the line of credit by replacing
its existing line of credit with a new line of credit with the same financial
institution, which credit line totals $1 million, is secured by all business
assets and bears interest at prime.
Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1997
-----------
<S> <C>
Various notes payable to a financial institution in monthly
installments all less than $1 including interest ranging
from 1.9% to 5.9%, secured by autos, with varying
maturities ranging from 1998 to 2000...................... $ 131
Various notes payable to a financial institution in monthly
installments ranging from $4 to $14 including interest
ranging from 8.75% to 9.5% secured by all business assets,
with varying maturities ranging from 1998--2000........... 924
Capital leases of office space and equipment payable in
monthly installments all less than $2 including interest
ranging from 10.3% to 11.25%, with varying maturities
through 1999.............................................. 24
------
Total.................................................. 1,079
Less--Current portion...................................... 481
------
$ 598
======
</TABLE>
The aggregate maturities of long-term debt and capital lease obligations as
of December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998............................................................ $ 481
1999............................................................ 421
2000............................................................ 177
------
$1,079
======
</TABLE>
Certain notes outstanding at December 31, 1997 were replaced with a term note
totaling $1.5 million that is being paid in increments of $25,000 per month
payable in full by March 1, 2004. The Company also signed another term note
with the same financial institution on June 1, 1998, totaling $250,000 payable
in monthly increments of $6,945 maturing on June 1, 2001 bearing interest at
twenty-five basis points over the current prime rate.
F-109
<PAGE>
LANDSCAPE WEST, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
6. RELATED-PARTY TRANSACTIONS:
The Company advances money and purchases supplies from an entity that is
controlled by the Company's sole shareholder. At December 31, 1997, amounts due
from this affiliate totaled approximately $59,000.
The Company leases facilities from the Company's sole shareholder on a month-
to-month basis. Total rent expense paid under these leases for the year ended
December 31, 1997 was approximately $236,000.
The Company advances money to the Company's sole shareholder. The amounts
advanced are payable on demand and accrued interest at 5.55% during 1997. At
December 31, 1997, amounts due from the owner totaled approximately $267,000 in
addition to accrued interest of approximately $16,000.
In December 1997, the Company had a receivable of $11,541 from a related
entity owned by the sole shareholder.
7. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases property, equipment, and vehicles under various operating
lease agreements, including leases with related parties. These leases consist
of cancelable and noncancelable leases which expire on various dates through
the year 2008. The cancelable leases can be terminated at any time by the
Company with thirty days notice to the lessor. All lease agreements are subject
to renewal under essentially the same terms and conditions as the original
leases.
Future minimum lease payments for the operating lease are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998............................................................ $ 352
1999............................................................ 403
2000............................................................ 397
2001............................................................ 381
2002............................................................ 367
Thereafter...................................................... 2,020
------
$3,920
======
</TABLE>
Total rent expense under all operating leases, including operating leases
with related parties, was approximately $453,000 for the year ended December
31, 1997.
Litigation
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcomes of such legal actions will
have a material adverse effect on the Company's financial position or results
of operations.
Insurance
The Company carries a standard range of insurance coverage, including
business auto liability, general liability, and workers' compensation. The
Company has not incurred significant claims or losses on any of these insurance
policies.
F-110
<PAGE>
LANDSCAPE WEST, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Employee 401(k) Pension Plan
In 1997, the Company adopted a 401(k) plan that covers all employees who have
attained the age of 21 and have been employed with the Company one year.
Employees may voluntarily elect to defer the maximum income allowed under
current tax law. The Company may make discretionary contributions of up to four
percent of a participant's compensation on an annual basis. Discretionary
contributions for the year ended December 31, 1997 were approximately $8,700.
8. EVENTS SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On November 1, 1998, LandCare and The ServiceMaster Company ("ServiceMaster")
entered into a Plan of Reorganization and Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which LandCare will become a subsidiary of
ServiceMaster. The Merger Agreement is subject to LandCare stockholder
approval, regulatory approvals and certain other closing conditions and
termination events.
F-111
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Golden Bear Arborists, Inc.:
We have audited the accompanying combined balance sheet of the companies
identified in Note 1 to the combined financial statements (collectively, the
Group), as of June 30, 1998, and the related combined statements of operations,
shareholder's equity and cash flows for the year then ended. These combined
financial statements are the responsibility of the Group's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the Group as of June
30, 1998, and the combined results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
December 17, 1998
F-112
<PAGE>
GOLDEN BEAR ARBORISTS, INC. AND AFFILIATE
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE
30 SEPTEMBER 30
1998 1998
------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 107 $ --
Accounts receivable, net............................... 1,662 2,168
Receivable from related party.......................... 44 16
Inventories............................................ 24 25
------ ------
Total current assets................................. 1,837 2,209
PROPERTY AND EQUIPMENT, net.............................. 3,936 3,917
OTHER ASSETS............................................. 36 36
------ ------
Total assets......................................... $5,809 $6,162
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................. $ 387 $ 858
Line of credit and other short-term borrowings......... 400 500
Current maturities of long-term debt................... 1,143 1,266
------ ------
Total current liabilities............................ 1,930 2,624
LONG-TERM DEBT, net...................................... 1,940 1,614
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock........................................... 76 76
Additional paid-in capital............................. 18 18
Retained earnings...................................... 1,845 1,830
------ ------
Total shareholder's equity........................... 1,939 1,924
------ ------
Total liabilities and shareholder's equity........... $5,809 $6,162
====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-113
<PAGE>
GOLDEN BEAR ARBORISTS, INC. AND AFFILIATE
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
12 MONTHS
ENDED THREE MONTHS ENDED
JUNE 30 SEPTEMBER 30
--------- ------------------
1998 1997 1998
--------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................... $10,478 $ 2,638 $ 2,818
COST OF SERVICES............................ 7,527 1,991 2,166
------- --------- ---------
Gross profit.............................. 2,951 647 652
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES.................... 2,081 456 601
------- --------- ---------
Income from operations.................... 870 191 51
------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense.......................... (210) (65) (65)
Other income (expense), net............... (77) 3 (1)
------- --------- ---------
NET INCOME.................................. $ 583 $ 129 $ (15)
======= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-114
<PAGE>
GOLDEN BEAR ARBORISTS, INC. AND AFFILIATE
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1997............ $76 $18 $1,262 $1,356
Net income...................... -- -- 583 583
--- --- ------ ------
BALANCE, June 30, 1998............ 76 18 1,845 1,939
Net income (unaudited).......... -- -- (15) (15)
--- --- ------ ------
BALANCE, September 30, 1998
(unaudited)...................... $76 $18 $1,830 $1,924
=== === ====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-115
<PAGE>
GOLDEN BEAR ARBORISTS, INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
12 MONTHS THREE MONTHS
ENDED ENDED
JUNE 30 SEPTEMBER 30
--------- --------------
1998 1997 1998
--------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 583 $ 129 $ (15)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization..................... 535 138 151
Changes in assets and liabilities--
Accounts receivable, net......................... 61 (151) (506)
Inventories...................................... 10 -- (1)
Accounts payable and accrued expenses............ (146) (24) 471
------- ------ ------
Net cash provided by (used in) operating
activities..................................... 1,043 92 100
------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................. (1,765) (468) (132)
------- ------ ------
Net cash used in investing activities............. (1,765) (468) (132)
------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) from line of credit and
other short-term borrowings........................ 83 280 100
Proceeds (payments) on related-party receivable..... (705) (218) 28
Proceeds from long-term debt........................ 1,971 337 60
Payments on long-term debt.......................... (673) (162) (263)
------- ------ ------
Net cash provided by (used in) financing
activities....................................... 676 237 (75)
------- ------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS............. (46) (139) (107)
CASH AND CASH EQUIVALENTS, beginning of period........ 153 153 107
------- ------ ------
CASH AND CASH EQUIVALENTS, end of period.............. $ 107 $ 14 $ --
======= ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest......................................... $ 194 $ 46 $ 71
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-116
<PAGE>
GOLDEN BEAR ARBORISTS, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Golden Bear Arborists, Inc. (Golden Bear) and its affiliate (collectively,
the Group) combine the financial statements of the following companies under
common control and ownership: Golden Bear Arborists, Inc. and RealGreen, Inc.
(both California corporations). The Group, headquartered in Los Angeles,
California was founded in 1968, incorporated in 1981, and operates primarily in
the Los Angeles area and southern California. The Group provides commercial
landscape installation, maintenance and commercial tree services for its
customers.
The Group and its shareholder entered into a definitive agreement with a
wholly owned subsidiary of LandCare USA, Inc. (LandCare), providing for the
merger of the Group with the subsidiary of LandCare. All outstanding shares of
the Group's common stock were exchanged for cash and convertible notes (the
Merger). Real estate of approximately $657,000, which is included in the
unaudited balance sheet at September 30, 1998, was distributed to the sole
shareholder. Had these distributions been made at September 30, 1998, the
effect on the Company's balance sheet would have been to decrease property by
$657,000, decrease debt by $348,000 and decrease shareholder's equity by
$309,000. In addition, cost of services would have been reduced by
approximately $24,000 and interest expense would have been reduced by
approximately $12,000 for the nine months ended September 30, 1998.
On November 1, 1998, LandCare and The ServiceMaster Company ("ServiceMaster")
entered into a Plan of Reorganization and Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which LandCare will become a subsidiary of
ServiceMaster. The Merger Agreement is subject to LandCare stockholder
approval, regulatory approvals and certain other closing conditions and
termination events.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements as of September 30, 1998 and for each of the
three months ended September 30, 1997 and 1998 are unaudited, and certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements have been included. Due to seasonality and other factors, the
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year.
Cash and Cash Equivalents
The Group considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Group to concentration of
credit risk consist principally of cash deposits and accounts receivable. The
Group maintains cash balances at financial institutions which may at times be
in excess of federally insured levels.
Allowance for Doubtful Accounts
The Group maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
Inventories
Inventories consist of parts and supplies held for use in the ordinary course
of business and are stated at the lower of cost or market.
F-117
<PAGE>
GOLDEN BEAR ARBORISTS, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
Revenue Recognition
The Group's revenues consist of tree trimming revenues, landscape maintenance
revenues and installation revenues. The Group typically has tree trimming
contracts with municipalities, under which they provide services on an as
needed basis. The Group also makes bid proposals for many one time jobs. The
Group recognizes revenues in the period in which the services are performed.
Revenues from maintenance contracts are recognized on the straight-line method
while costs incurred under the contracts can be expected to vary materially
based on seasonal factors.
Revenues from installation contracts are recognized when the services are
performed and billable under the terms of the applicable contract. The balances
billed but not paid by customers pursuant to retainage provisions in
installation contracts will be due upon completion of the contracts and
acceptance by the customer. Based on the Group's experience with similar
contracts in recent years, the retention balance at each balance sheet date
will be collected within the subsequent fiscal year.
Cost of Services
Cost of services represents direct labor and associated costs (such as
benefits and workers' compensation expense), materials, supervisory personnel,
and equipment and vehicle costs, such as fuel, insurance and depreciation.
Income Taxes
The Group has elected S Corporation status as defined by the Internal Revenue
Code, whereby the Group is not subject to taxation for federal purposes. Under
S Corporation status, the shareholder reports his share of the Group's taxable
earnings or losses in his personal tax returns. The Group will terminate its S
Corporation status concurrently with the effective date of the Merger.
Shareholder's Equity
The equity structure of the Group is as follows at June 30, 1998 and
September 30, 1998:
<TABLE>
<CAPTION>
SHARES
AUTHORIZED ISSUED AND PAR
SHARES OUTSTANDING VALUE
---------- ----------- -----
<S> <C> <C> <C>
Golden Bear Arborists, Inc. .................... 10,000 10,000 None
RealGreen, Inc. ................................ 10,000 500 $100
</TABLE>
F-118
<PAGE>
GOLDEN BEAR ARBORISTS, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Financial Instruments
The Group's financial instruments consist of cash, accounts receivable,
accounts payable, line of credit and debt. The Group believes that the carrying
values of these instruments on the accompanying balance sheet approximates its
fair value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Group will adopt SFAS No. 131 for the year ended December 31, 1998.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES JUNE 30,
IN YEARS 1998
------------ --------
<S> <C> <C>
Land.................................................. -- $ 500
Transportation equipment.............................. 5-10 3,705
Machinery and equipment............................... 7-10 1,871
Buildings and improvements............................ 30 550
Office furniture and equipment........................ 7 310
------
Total............................................... $6,936
Less--Accumulated depreciation........................ (3,000)
------
Property and equipment, net......................... $3,936
======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE
30,
1998
-------
<S> <C>
Accounts receivable, trade.......................................... $ 1,646
Retainage........................................................... 26
Allowance for doubtful accounts..................................... (10)
-------
$ 1,662
=======
</TABLE>
F-119
<PAGE>
GOLDEN BEAR ARBORISTS, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
1998
--------
<S> <C>
Accounts payable, trade............................................. $152
Accrued compensation and benefits................................... $235
----
$387
====
</TABLE>
5. LINE OF CREDIT AND LONG-TERM DEBT:
Line of Credit
As of June 30, 1998, the Group had a line of credit totaling $500,000 with a
financial institution that is secured by certain business assets. Interest is
at the financial institution's prime rate (Union Bank Reference Rate) plus 1.5
percentage points, which was 10.0 percent at June 30, 1998. The line of credit
expired and was renewed in August 1998. There was $400,000 outstanding on this
facility at June 30, 1998.
Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1998
--------
<S> <C>
Notes payable to various financial institutions in total monthly
installments of approximately $36 including interest ranging from
0.9% to 16.23%, secured by certain vehicles with payments due in
varying maturities ranging from 1998-2003......................... $ 1,162
Notes payable to various financial institutions in total monthly
installments of approximately $61 including interest ranging from
4.43% to 11.88%, secured by certain equipment with payments due in
varying maturities ranging from 1998-2002......................... 1,326
Notes payable to various financial institutions in total monthly
installments of approximately $6 including interest ranging from
6.36% to 9.75%, secured by certain property with payments due in
varying maturities ranging from 2010-2023......................... 595
-------
Total............................................................ 3,083
Less--Current portion.............................................. (1,143)
-------
$ 1,940
=======
</TABLE>
The aggregate maturities of long-term debt obligations as of June 30, 1998,
are as follows (in thousands):
<TABLE>
<S> <C>
Year ending June 30--
1999............................................................. $ 1,143
2000............................................................. 785
2001............................................................. 384
2002............................................................. 166
2003 and thereafter.............................................. 605
-------
$ 3,083
=======
</TABLE>
F-120
<PAGE>
GOLDEN BEAR ARBORISTS, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. RELATED-PARTY TRANSACTIONS:
The Group makes advances to and receives advances from the sole shareholder.
At June 30, 1998, the Group had advances to the sole shareholder of $44,000.
7. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Group leases various equipment and vehicles under operating lease
agreements. These leases expire on various dates through 1999. The lease
agreements are subject to renewal under essentially the same terms and
conditions as the original lease.
Future minimum lease payments for operating leases are as follows:
<TABLE>
<S> <C>
Year ended June 30--
1999............................................................. $64,752
2000............................................................. 10,794
</TABLE>
Litigation
The Group is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcomes of such legal actions will
have a material adverse effect on the Group's financial position or results of
operations.
Insurance
The Group carries a standard range of insurance coverage, including business
auto liability, general liability, and workers' compensation. The Group has not
incurred significant claims or losses on any of these insurance policies.
F-121
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ground Control Landscaping, Inc.:
We have audited the accompanying balance sheet of Ground Control Landscaping,
Inc. as of December 31, 1997, and the related statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ground Control Landscaping,
Inc. as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 13, 1998
F-122
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1997 1998
----------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash................................................. $ 94 $ --
Accounts receivable, net............................. 965 1,114
Inventories.......................................... 34 42
Deferred tax asset................................... 103 103
Other current assets................................. 150 209
------ ------
Total current assets............................... 1,346 1,468
PROPERTY AND EQUIPMENT, net............................ 2,855 2,923
OTHER ASSETS........................................... 156 80
------ ------
Total assets....................................... $4,357 $4,471
====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses................ $ 988 $1,029
Line of credit....................................... 434 517
Current maturities of long-term debt................. 180 182
------ ------
Total current liabilities.......................... 1,602 1,728
LONG-TERM DEBT, net.................................... 1,588 1,556
DEFERRED TAX LIABILITY................................. 145 147
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 1,000 shares authorized,
450 shares outstanding.............................. -- --
Additional paid-in capital........................... 4 4
Retained earnings.................................... 1,060 1,078
Treasury stock, 550 shares, at cost.................. (42) (42)
------ ------
Total stockholders' equity......................... 1,022 1,040
------ ------
Total liabilities and stockholders' equity......... $4,357 $4,471
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-123
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31
DECEMBER 31 --------------------
1997 1997 1998
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................... $8,979 $ 2,654 $ 2,324
COST OF SERVICES............................ 6,663 1,687 1,857
------ --------- ---------
Gross profit............................ 2,316 967 467
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 1,510 397 389
------ --------- ---------
Income from operations.................. 806 570 78
OTHER EXPENSE:
Interest expense.......................... (151) (21) (49)
Other expense, net........................ (16) 2 1
------ --------- ---------
INCOME BEFORE INCOME TAXES.................. 639 551 30
INCOME TAX PROVISION........................ 248 214 12
------ --------- ---------
NET INCOME.................................. $ 391 $ 337 $ 18
====== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-124
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996.. $-- $ 4 $ 669 $ (42) $ 631
Net income................ -- -- 391 -- 391
---- --- ------ ----- ------
BALANCE, December 31, 1997.. $-- $ 4 $1,060 $ (42) $1,022
Net income (Unaudited).... -- -- 18 -- 18
---- --- ------ ----- ------
BALANCE, March 31, 1998
(Unaudited)................ $-- $ 4 $1,078 $ (42) $1,040
==== === ====== ===== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-125
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31
DECEMBER 31, -------------------
1997 1997 1998
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................. $ 391 $337 $ 18
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation............................. 267 62 76
Loss on sale of property and equipment... 32 -- --
Deferred income tax provision............ 9 -- 2
Changes in assets and liabilities--
Accounts receivable, net............... (135) (203) (149)
Inventories............................ (34) -- (8)
Other assets........................... (90) 63 17
Accounts payable and accrued expenses.. 19 198 41
------- -------- ---------
Net cash provided by (used in)
operating activities................ 459 457 (3)
------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and
equipment................................. 52 -- --
Purchases of property and equipment........ (662) (202) (144)
------- -------- ---------
Net cash used in investing
activities.......................... (610) (202) (144)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and long-term
debt...................................... 1,671 28 366
Payments on line of credit and long-term
debt...................................... (1,551) (88) (313)
------- -------- ---------
Net cash provided by (used in)
financing activities................ 120 (60) 53
------- -------- ---------
NET INCREASE (DECREASE) IN CASH.............. (31) 195 (94)
CASH, beginning of period.................... 125 125 94
------- -------- ---------
CASH, end of period.......................... $ 94 $ 320 $ --
======= ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for--
Interest................................. $ 152 $ 21 $ 49
Income taxes............................. 135 85 130
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-126
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Ground Control Landscaping, Inc. (the Company), a Florida corporation,
headquartered in Orlando, Florida, was founded in 1978 and operates primarily
in Florida with branches in Tampa and Orlando. The Company provides commercial
landscape installation and maintenance services.
The Company had a working capital deficit at December 31, 1997 and March 31,
1998. The Company has funded its operations with cash flows from operations and
short-term borrowings from lenders. Management expects that operations will
generate sufficient cash flows to meet the Company's working capital needs
during 1998.
The Company and its stockholders intend to enter into a definitive agreement
with LandCare USA, Inc. (LandCare), pursuant to which all outstanding shares of
the Company's common stock will be exchanged for cash and shares of LandCare's
common stock concurrently with the consummation of an initial public offering
of the common stock of LandCare.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements as of March 31, 1998 and for each of the
three months ended March 31, 1997 and 1998 are unaudited, and certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements have been included. Due to seasonality and other factors, the
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash deposits and accounts
receivable. The Company maintains cash balances at financial institutions which
may at times be in excess of federally insured levels.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
Inventories
Inventories consist of materials and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
F-127
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Non-Cash Investing and Financing Activities
In June 1997, the Company purchased its corporate headquarters facility in
Orlando, Florida for $1.5 million. The Company paid $140,000 in cash and
financed the balance with a mortage note issued to the seller (See Note 5).
Revenue Recognition
The Company's revenues consist of landscape maintenance revenues and
installation revenues. The Company's landscape maintenance contracts are for
terms of one to two years and payments to the Company are remitted in varying
monthly amounts based on services performed. Revenues from landscape
maintenance contracts are recognized based on agreed upon monthly contract
payments. Revenues from installation services are recognized when the services
are performed and billable under the terms of the applicable contract.
The balances billed but not paid by customers pursuant to retainage
provisions in installation contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience
with similar contracts in recent years, the retention balance at each balance
sheet date will be collected within the subsequent fiscal year.
Cost of Services
Cost of services represents direct labor and associated costs (such as
benefits and workers' compensation expense), materials, supervisory personnel
and equipment and vehicle costs, such as fuel, insurance and depreciation.
Warranty Costs
For certain contracts, the Company warrants plant life for up to one year
after installation. A reserve for warranty costs is recorded based upon the
historical level of warranty claims and management's estimate of future costs.
Seasonality
The Company has experienced and expects to continue to experience variability
in revenues and net income as a result of the seasonal nature of the Company's
business. Revenues from landscape maintenance contracts remain relatively
constant throughout the year; however, the related cost of services varies due
to seasonality. As a result, the gross margin from landscape maintenance
contracts can vary seasonally.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount to be
realized. The provision for income taxes is the tax payable for the year and
the change during the year in deferred tax assets and liabilities.
Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, a line of credit and debt. The Company believes that the
carrying value of these instruments on the accompanying balance sheet
approximates their fair value.
F-128
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 in the year ended December 31, 1998.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31
IN YEARS 1997
------------ -----------
<S> <C> <C>
Land............................................. -- $ 219
Transportation equipment......................... 5 1,204
Machinery and equipment.......................... 3-10 292
Office furniture and equipment................... 5 188
Buildings and improvements....................... 30 1,910
------
Total........................................ 3,813
Less--Accumulated depreciation................... (958)
------
Property and equipment, net.................. $2,855
======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Accounts receivable, trade.................................. $881
Retainage................................................... 99
Allowance for doubtful accounts............................. (15)
----
$965
====
</TABLE>
Other current assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Deposits on materials....................................... $ 82
Costs in excess of billings................................. 45
Other current assets........................................ 23
----
$150
====
</TABLE>
F-129
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Accounts payable, trade....................................... $334
Accrued compensation and benefits............................. 174
Self-insurance reserves....................................... 245
Income tax payable............................................ 107
Warranty accrual.............................................. 104
Other accrued expenses........................................ 24
----
$988
====
</TABLE>
5. LINE OF CREDIT AND LONG-TERM DEBT:
Line of Credit
The Company has a $500,000 line of credit with a financial institution that
is secured by the receivables and equipment of the Company, as well as a life
insurance policy insuring the primary stockholder (waived until March 1998).
The stockholders personally guarantee all amounts borrowed. In addition,
interest is at the financial institution's prime rate plus 1 percent, which was
9.5 percent at December 31, 1997. There was a total of $434,000 outstanding on
this facility as of December 31, 1997. Under the Credit Agreement, the Company
is required to comply with certain financial covenants and restrictions. The
Company was not in compliance with certain covenants as of December 31, 1997.
Subsequent to year end, the Company obtained waivers for all covenant
violations.
Long-term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Notes payable to a financial institution in monthly installments
of approximately $14 including interest ranging from 9% to 10%,
secured by certain vehicles and equipment due in varying
maturities ranging from 1998-2000................................ $ 250
Note payable to a construction company in monthly installments of
approximately $13 including interest at 9.5%, secured by property
due 2013......................................................... 1,330
Note payable to a bank in monthly installments of approximately $2
including interest at 8.5%, secured by land and property due
2008............................................................. 188
------
1,768
Less--Current portion............................................. (180)
------
$1,588
======
</TABLE>
The aggregate maturities of long-term debt as of December 31, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998............................................................ $ 180
1999............................................................ 130
2000............................................................ 65
2001............................................................ 50
2002............................................................ 54
Thereafter...................................................... 1,289
------
$1,768
======
</TABLE>
F-130
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES:
The components of the provision for income taxes as of December 31, 1997 are
as follows (in thousands):
<TABLE>
<S> <C>
Federal--
Current............................................................ $204
Deferred........................................................... 8
----
212
----
State--
Current............................................................ 35
Deferred........................................................... 1
----
36
----
Total provision.................................................. $248
====
</TABLE>
The provision for income taxes as of December 31, 1997 differs from an amount
computed at the statutory rate as follows (in thousands):
<TABLE>
<S> <C>
Federal income tax at statutory rates............................... $223
State income taxes.................................................. 23
Nondeductible expenses.............................................. 5
Fuel tax credit..................................................... (3)
----
$248
====
</TABLE>
The significant items giving rise to the deferred tax assets and liabilities
as of December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets--
Accrued expenses................................................ $ 64
Other........................................................... 7
-----
Total deferred tax assets..................................... 71
-----
Deferred tax liabilities--
Bases differences in property and equipment..................... (64)
Accrued expenses................................................ (32)
Other........................................................... (17)
-----
Total deferred tax liabilities................................ (113)
-----
Net deferred tax liability.................................... $ (42)
=====
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases various facilities, equipment and vehicles under operating
lease agreements. These leases expire on various dates through 2002 and include
purchase and renewal provisions.
F-131
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments for operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998.............................................................. $135
1999.............................................................. 128
2000.............................................................. 89
2001.............................................................. 34
2002.............................................................. 4
----
$390
====
</TABLE>
Total rent expense under all operating leases was $149,000 for the period
ended December 31, 1997.
Litigation
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results
of operations.
Insurance
The Company carries a standard range of insurance coverage, including
business auto liability, general liability, workers' compensation and an
umbrella policy. The Company has not incurred significant claims or losses on
any of these insurance policies.
The Company is self-insured for workers' compensation. The policy is on a
claims-made basis and provides for a maximum loss exposure to the Company,
including premiums, of approximately $240,000. Claims in excess of this amount
are covered by a stop-loss policy. The Company has recorded reserves for its
portion of self-insured claims based on estimated claims.
Employee Retirement Plan
The Company participates in a retirement plan (the Plan) for employees with
two full years of service in a management or supervisory position. Eligible
employees vest in the Plan over 20 years beginning five years after qualifying
for the Plan. The benefit is payable over 20 years to participants over 65-
years old based on Plan specifications. The Company's obligation under the Plan
as of December 31, 1997 is $75,000. The Company is funding its obligation by
investing in life insurance policies with a cash surrender value of $131,000 at
December 31, 1997.
8. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In March 1998, the Company and its stockholders entered into a definitive
agreement with a wholly owned subsidiary of LandCare, providing for the merger
of the Company with the subsidiary of LandCare (the Merger). Land and net
property and equipment of approximately $2.1 million, which is included in the
balance sheet at December 31, 1997, was distributed to the stockholders. In
addition, stockholders of the Company assumed liabilities of approximately $1.5
million, which are included in the consolidated balance sheet at December 31,
1997. Selling, general and administrative expenses would have been reduced by
approximately $62,000, interest expense, net would have been reduced by
approximately $89,000 and income before income taxes would have been increased
by approximately $151,000 assuming the transaction had occurred January 1,
1997. Had these distributions been made at December 31, 1997, the effect on the
Company's balance sheet would have been to decrease stockholders' equity by
approximately $545,000.
F-132
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Concurrently with the merger with LandCare, the Company entered into an
agreement with the stockholders to lease land and buildings used in the
Company's operations for negotiated amounts and terms.
On November 1, 1998, LandCare and The ServiceMaster Company ("ServiceMaster")
entered into a Plan of Reorganization and Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which LandCare will become a subsidiary of
ServiceMaster. The Merger Agreement is subject to LandCare stockholder
approval, regulatory approvals and certain other closing conditions and
termination events.
F-133
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To E/G Management, Inc.:
We have audited the accompanying balance sheet of E/G Management, Inc. (the
Company), as of December 31, 1997, and the related statements of operations,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 6, 1998
F-134
<PAGE>
E/G MANAGEMENT, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1997 1998
----------- ------------
ASSETS
------ (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash................................................ $ 183 $ 25
Accounts receivable, net............................ 817 1,436
Deferred tax asset.................................. 20 41
Other current assets................................ 92 161
------ ------
Total current assets.............................. 1,112 1,663
PROPERTY AND EQUIPMENT, net........................... 417 474
OTHER ASSETS.......................................... 29 22
------ ------
Total assets...................................... $1,558 $2,159
====== ======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses............... $ 534 $ 674
Lines of credit..................................... 376 397
Current maturities of long-term debt................ 28 80
Other current liabilities........................... 153 221
------ ------
Total current liabilities......................... 1,091 1,372
LONG-TERM DEBT, net................................... 32 26
DEFERRED TAX LIABILITY................................ 49 60
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000 shares
authorized, 1,000 shares outstanding............... -- --
Additional paid-in capital.......................... 3 3
Retained earnings................................... 383 698
------ ------
Total shareholders' equity........................ 386 701
------ ------
Total liabilities and shareholders' equity........ $1,558 $2,159
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-135
<PAGE>
E/G MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------
1997 1997 1998
------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.......................................... $7,105 $5,264 $6,560
COST OF SERVICES.................................. 6,377 4,699 5,480
------ ------ ------
Gross profit.................................. 728 565 1,080
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...... 535 353 530
------ ------ ------
Income from operations........................ 193 212 550
------ ------ ------
OTHER INCOME (EXPENSE):
Interest expense................................ (10) (6) (20)
Other income (expense), net..................... 73 41 8
------ ------ ------
INCOME BEFORE INCOME TAXES........................ 256 247 538
INCOME TAX PROVISION.............................. 113 109 223
------ ------ ------
NET INCOME........................................ $ 143 $ 138 $ 315
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-136
<PAGE>
E/G MANAGEMENT, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996........... $-- $ 3 $240 $243
Net income......................... -- -- 143 143
---- ---- ---- ----
BALANCE, December 31, 1997........... -- 3 383 386
Net income (unaudited)............. -- -- 315 315
---- ---- ---- ----
BALANCE, September 30, 1998
(unaudited)......................... $-- $ 3 $698 $701
==== ==== ==== ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-137
<PAGE>
E/G MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER
DECEMBER 31 30
----------- ------------
1997 1997 1998
----------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $143 $ 138 $ 315
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation..................................... 78 53 78
Deferred income tax provision.................... 45 34 (10)
Changes in assets and liabilities--
Accounts receivable, net....................... (214) (234) (619)
Other current assets and liabilities........... 14 42 (22)
Other assets................................... 5 (1) 7
Costs in excess of billings and estimated
earnings...................................... (24) (20) (40)
Accounts payable and accrued expenses.......... 140 71 140
Billings in excess of costs and estimated
earnings...................................... 26 57 61
---- ----- -----
Net cash provided by (used in) operating
activities.................................. 213 140 (90)
---- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................ (199) (150) (135)
---- ----- -----
Net cash used in investing activities........ (199) (150) (135)
---- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) from lines of credit....... 123 (13) 21
Proceeds from long-term debt....................... 62 42 81
Payments on long-term debt......................... (28) (16) (35)
---- ----- -----
Net cash provided by financing activities.... 157 13 67
---- ----- -----
NET INCREASE (DECREASE) IN CASH...................... 171 3 (158)
CASH, beginning of period............................ 12 12 183
---- ----- -----
CASH, end of period.................................. $183 $ 15 $ 25
==== ===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest......................................... $ 23 $ 15 $ 23
Income taxes..................................... $ 63 $ -- $ 33
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-138
<PAGE>
E/G MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
E/G Management, Inc. (the Company), an Arizona corporation, headquartered in
Phoenix, Arizona, was founded in 1991, and operates primarily in the Salt River
Valley of Arizona and in Las Vegas and Reno, Nevada. The Company provides
landscape, lawn and irrigation construction and maintenance services to its
customers.
The Company and its shareholders intend to enter into a definitive agreement
with LandCare USA, Inc. (LandCare), pursuant to which all outstanding shares of
the Company's common stock will be exchanged for cash.
On November 1, 1998, LandCare and The ServiceMaster Company ("ServiceMaster")
entered into a Plan of Reorganization and Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which LandCare will become a subsidiary of
ServiceMaster. The Merger Agreement is subject to LandCare stockholder
approval, regulatory approvals and certain other closing conditions and
termination events.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements as of September 30, 1998 and for each of the
nine months ended September 30, 1997 and 1998 are unaudited, and certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements have been included. Due to seasonality and other factors, the
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash deposits and accounts receivable.
The Company maintains cash balances at financial institutions which may at
times be in excess of federally insured levels.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
F-139
<PAGE>
E/G MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
The Company's revenues consist of landscape maintenance revenues and
installation revenues. The Company's landscape maintenance contracts are for
terms of one year and payments to the Company are remitted in equal monthly
payments over the term of the contract. Revenues from these maintenance
contracts are recognized on the straight-line method while the costs incurred
under the contracts can be expected to vary materially based on seasonal
factors. Monthly maintenance payments are recognized as they become due because
the contracts are fully cancelable without cause upon notice of 30 days or less
by either the Company or the customer. Should the Company elect to cancel a
contract, the customer would have no standing under either contract law or
equity to require additional services or obtain a refund (other than for
nonperformance prior to cancellation), notwithstanding that the customer may
have paid amounts which clearly exceeded the fair value of the services
received in those months in anticipation of lower priced services later in the
year.
Revenues from installation contracts are recognized when the services are
performed and billable under the terms of the applicable contract. The balances
billed but not paid by customers pursuant to retainage provisions in
installation contracts will be due upon completion of the contracts and
acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance at each balance sheet date
will be collected within the subsequent fiscal year.
Cost of Services
Cost of services represents direct labor and associated costs (such as
benefits and workers' compensation expense), materials, supervisory personnel,
and equipment and vehicle costs, such as fuel, insurance and depreciation.
Warranty Costs
For certain contracts, the Company warrants plant life up to a year after
installation. A reserve for warranty costs is recorded based upon the
historical level of warranty claims and management's estimate of future costs.
Seasonality
The Company experienced and expects to continue to experience variability in
revenue and net income as a result of the seasonal nature of the Company's
business. Revenues from landscape maintenance contracts remain relatively
constant throughout the year; however, the related costs of services vary due
to seasonality. As a result, the gross margin from landscape maintenance
contracts can vary seasonally.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount to be
realized. The provision of income taxes is the tax payable for the year and the
change during the year in deferred tax assets and liabilities.
Major Customers and Risk Concentration
The Company had sales of approximately 19 percent of total sales to one major
customer during the year ended December 31, 1997.
F-140
<PAGE>
E/G MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, lines of credit and debt. The Company believes that the
carrying values of these instruments on the accompanying balance sheet
approximates their fair value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 for the year ended December 31, 1998.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31
IN YEARS 1997
------------ -----------
<S> <C> <C>
Transportation equipment......................... 5 $ 253
Machinery and equipment.......................... 5-10 323
Office furniture and equipment................... 5 9
-----
Total........................................ $ 585
Less--Accumulated depreciation................... (168)
-----
Property and equipment, net.................. $ 417
=====
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Accounts receivable, trade.................................... $863
Accounts receivable, other.................................... 9
Allowance for doubtful accounts............................... (55)
----
$817
====
</TABLE>
F-141
<PAGE>
E/G MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Costs in excess of billings................................... $83
Other......................................................... 9
---
$92
===
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Accounts payable, trade....................................... $335
Accrued compensation and benefits............................. 119
Other accrued expenses........................................ 23
----
$477
====
</TABLE>
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Customer deposits............................................. $ 80
Warranty accrual.............................................. 45
Billings in excess of costs................................... 26
Other......................................................... 2
----
$153
====
</TABLE>
5. LINE OF CREDIT AND LONG-TERM DEBT:
Line of Credit
As of December 31, 1997, the Company had a line of credit totaling $600,000
with a financial institution. Interest is at the financial institution's prime
rate plus 2 percent, which was 10.5% at December 31, 1997. The line of credit
matures on June 1, 1999. The Company had $320,000 outstanding at December 31,
1997.
As of December 31, 1997, the Company had another line of credit totaling
$100,000 with a financial institution. Interest is at the financial
institution's prime rate plus 2 percent, which was 10.5% at December 31, 1997.
The line of credit matures on June 1, 1998 at which time all outstanding
amounts shall be converted into a term note payable monthly in 48 equal
installments maturing on June 3, 2002. The Company had $55,834 outstanding at
December 31, 1997.
F-142
<PAGE>
E/G MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Notes payable to a financial institution in total monthly
installments of $2 including interest from 10.5% to 11% secured by
equipment, with varying maturities from 1998 to 2002.............. $55
Capital lease of equipment payable in monthly installments of
approximately $1 including interest at 12.25%, due in 1998........ 5
---
Total.......................................................... 60
Less--Current portion.............................................. 28
---
$32
===
</TABLE>
The aggregate maturities of long-term debt and capital lease obligations as
of December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998............................................................... $28
1999............................................................... 19
2000............................................................... 10
2001............................................................... 3
---
$60
===
</TABLE>
6. INCOME TAXES:
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Federal--
Current..................................................... $ 53
Deferred.................................................... 36
----
89
----
State--
Current..................................................... 14
Deferred.................................................... 10
----
24
----
Total provision........................................... $113
====
</TABLE>
The provision for income taxes differs from an amount computed at the
statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Federal income tax at statutory rates......................... $ 90
State income taxes............................................ 18
Nondeductible expenses........................................ 5
----
$113
====
</TABLE>
F-143
<PAGE>
E/G MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
The significant items giving rise to the deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Deferred tax assets--
Allowance for doubtful accounts............................. $ 24
Other....................................................... 2
-----
Total deferred tax assets................................. 26
-----
Deferred tax liabilities--
Bases differences in property and equipment................. (43)
Accrued expenses............................................ 21
Other....................................................... (33)
-----
Total deferred tax liabilities............................ (55)
-----
Net deferred tax liability................................ $ (29)
=====
</TABLE>
7. RELATED-PARTY TRANSACTIONS:
The Company leases facilities from one of the shareholders of the Company on
a month-to-month basis. The total amount of rent expense incurred under this
lease was $30,000 for the year ended December 31, 1997.
The Company also leases equipment from a company owned by one of the
shareholders of the Company. The total amount of rent expense incurred under
this lease was approximately $90,000 for the year ended December 31, 1997.
In 1997, the Company paid approximately $34,000 to a company owned by one of
the shareholders of the Company for fees related to maintenance contracts
assigned to the Company.
8. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases various facilities, equipment and vehicles under operating
lease agreements, including leases with related parties. These leases expire on
various dates through 2001. The lease agreements are subject to renewal under
essentially the same terms and conditions as the original leases.
Total rent expense under all operating leases, including operating leases
with related parties, was approximately $202,000 for the year ended December
31, 1997.
Future minimum lease payments for operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998.............................................................. $ 55
1999.............................................................. 46
2000.............................................................. 14
----
$115
====
</TABLE>
Litigation
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcomes of such legal actions will
have a material adverse effect on the Company's financial position or results
of operations.
F-144
<PAGE>
E/G MANAGEMENT, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Insurance
The Company carries a standard range of insurance coverage, including
business auto liability, general liability, and workers' compensation. The
Company has not incurred significant claims or losses on any of these insurance
policies.
Employee 401(k) Retirement Plan
Effective January 1, 1997, the Company offers its employees a 401(k)
retirement plan (the Plan) which covers all employees at least 21 years of age
who have completed at least one year of service prior to enrollment. The Plan
allows for employee contributions through salary reductions up to the statutory
limits. The Company is obligated to contribute annually an amount equal to 25%
of the elective deferrals up to 4% of the employee's compensation.
Additionally, the Company can make contributions at its discretion. In 1997,
the Company made discretionary contributions of $20,000 to the Plan in addition
to the approximately $5,000 of matching contributions.
9. EVENTS SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On December 1, 1998, the Company and its shareholders entered into a
definitive agreement with a wholly owned subsidiary of LandCare, providing for
the merger of the Company with the subsidiary of LandCare.
F-145
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Arteka Corporation:
We have audited the accompanying combined balance sheets of the companies
identified in Note 1 to the combined financial statements (collectively, the
Group) as of December 31, 1997 and 1996, and the related combined statements of
operations, shareholder's equity and cash flows for the years then ended. These
combined financial statements are the responsibility of the Group's management.
Our responsibility is to express an opinion on these combined financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
combined financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Group as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 13, 1998
F-146
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
------------- MARCH 31
1996 1997 1998
------ ------ -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash............................................... $ 5 $ 268 $ 73
Accounts receivable, net........................... 1,743 2,105 1,318
Related-party receivable........................... 120 -- --
Inventories........................................ 1,020 1,000 1,034
Other current assets............................... 30 207 285
------ ------ ------
Total current assets............................. 2,918 3,580 2,710
PROPERTY AND EQUIPMENT, net.......................... 714 1,539 1,548
OTHER ASSETS......................................... 30 1,554 1,564
------ ------ ------
Total assets..................................... $3,662 $6,673 $5,822
====== ====== ======
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses.............. $1,332 $1,554 $ 364
Lines of credit.................................... 410 100 1,131
Current maturities of long-term debt............... 233 2,510 2,516
Current maturities of long-term payable to related
party............................................. -- 87 108
Deferred tax liability............................. 323 38 38
Other current liabilities.......................... 123 90 94
------ ------ ------
Total current liabilities........................ 2,421 4,379 4,251
LONG-TERM DEBT, net.................................. 439 301 140
LONG-TERM PAYABLE TO RELATED PARTY, net.............. -- 911 692
DEFERRED TAX LIABILITY............................... 74 179 179
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock....................................... 10 10 10
Retained earnings.................................. 718 893 550
------ ------ ------
Total shareholder's equity....................... 728 903 560
------ ------ ------
Total liabilities and shareholder's equity....... $3,662 $6,673 $5,822
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
F-147
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31 ENDED MARCH 31
-------------- ----------------
1996 1997 1997 1998
------ ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES.................................... $7,052 $7,366 $ 245 $ 893
COST OF SERVICES............................ 5,055 5,227 318 618
------ ------ ------- -------
Gross profit............................ 1,997 2,139 (73) 275
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 1,722 2,136 383 726
------ ------ ------- -------
Income from operations.................. 275 3 (456) (451)
OTHER INCOME (EXPENSES):
Interest expense.......................... (129) (95) (23) (103)
Other income, net......................... 32 16 -- 1
------ ------ ------- -------
INCOME (LOSS) BEFORE INCOME TAXES........... 178 (76) (479) (553)
INCOME TAX PROVISION (BENEFIT).............. 75 (251) (364) (210)
------ ------ ------- -------
NET INCOME (LOSS)........................... $ 103 $ 175 $(115) $(343)
====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
F-148
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDER'S
STOCK EARNINGS EQUITY
------ -------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1995........................ $10 $ 615 $ 625
Net income...................................... -- 103 103
--- ----- -----
BALANCE, December 31, 1996........................ 10 718 728
Net income...................................... -- 175 175
--- ----- -----
BALANCE, December 31, 1997........................ 10 893 903
Net loss (unaudited)............................ -- (343) (343)
--- ----- -----
BALANCE, March 31, 1998 (unaudited)............... $10 $ 550 $ 560
=== ===== =====
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-149
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31 ENDED MARCH 31
------------- ---------------
1996 1997 1997 1998
----- ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $ 103 $ 175 $ (115) $ (343)
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation and amortization.............. 165 208 60 94
Gain on sale of property................... (4) (3) -- --
Deferred income tax provision (benefit).... 62 (251) (364) --
Imputed interest expense................... -- -- -- 42
Changes in assets and liabilities--
Accounts receivable, net................. (717) (9) 1,284 787
Inventories.............................. 144 20 (9) (34)
Other assets............................. (48) (116) (181) (97)
Accounts payable and accrued expenses.... 746 (2) (799) (1,190)
Other, net............................... (50) (14) 13 4
----- ------ ------ -------
Net cash provided by (used in)
operating activities.................. 401 8 (111) (737)
----- ------ ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired.. -- (45) -- --
Proceeds from sales of property and
equipment................................... 122 -- -- --
Purchases of property and equipment.......... (390) (246) -- (94)
----- ------ ------ -------
Net cash used in investing activities.. (268) (291) -- (94)
----- ------ ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net line-of-credit borrowings (repayments)... (424) (310) 163 1,031
Net long-term borrowings (repayments)........ 294 (144) (57) (197)
Borrowings from (repayments to) related
party....................................... -- 1,000 -- (198)
----- ------ ------ -------
Net cash provided by (used in)
financing activities.................. (130) 546 106 636
----- ------ ------ -------
NET INCREASE (DECREASE) IN CASH................ 3 263 (5) (195)
CASH, beginning of period...................... 2 5 5 268
----- ------ ------ -------
CASH, end of period............................ $ 5 $ 268 $ -- $ 73
===== ====== ====== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for--
Interest................................... $ 129 $ 95 $ 23 $ 61
Income taxes............................... 5 9 1 --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-150
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The financial statements of Arteka Corporation (Arteka) and affiliates
(collectively, the Group) combine the financial statements of the following
companies under common control and ownership: Arteka Corporation, Arteka
Natural Green Corporation, Arteka Nurseries, Inc., and Southwest Lawn
Maintenance, Inc., a wholly owned subsidiary of Arteka Corporation (all
Minnesota corporations). The Group is headquartered in Eden Prairie, Minnesota,
was founded in 1973 and operates in four locations in the Twin Cities area. The
Group provides commercial landscape installation and maintenance services,
operates a tree nursery, which primarily provides trees to its own operations,
and provides snow removal services.
The Company had a working capital deficit at December 31, 1997 and March 31,
1998. The Company has funded its operations with cash flows from operations and
short-term borrowings from lenders. Management expects that operations will
generate sufficient cash flows to meet the Company's working capital needs
during 1998.
The Group and its shareholder intend to enter into a definitive agreement
with LandCare USA, Inc. (LandCare), pursuant to which all outstanding shares of
the Group's common stock will be exchanged for cash and shares of LandCare's
common stock concurrently with the consummation of an initial public offering
of the common stock of LandCare.
Acquisitions
Management and Maintenance, Inc.--Effective December 31, 1997, the Group
acquired certain equipment and service contracts from Management and
Maintenance, Inc. (MMI). MMI's owner also entered into a three-year noncompete
agreement with the Group. The noncompete agreement was valued at $15,000. The
Group recorded the equipment and service contracts on its December 31, 1997
balance sheet based on the amounts paid to MMI's owner.
As consideration for the purchase, the Group paid MMI's owner $10,000 in
cash; issued to MMI's owner a $580,000 note payable; and agreed to a
performance payment due January 1, 1999, equal to 10 percent of the gross
revenues generated under the purchased contracts or $80,000 whichever is
greater. The Group also entered into a three-year lease with MMI's owner
beginning January 1, 1998, to lease certain office space owned by MMI's owner.
The lease requires annual rent of approximately $24,000 payable in even monthly
installments.
Southwest Lawn Maintenance, Inc.--Effective December 31, 1997, the Group
purchased all the outstanding stock of Southwest Lawn Maintenance, Inc. (SWL).
Prior to the acquisition, SWL was engaged in the same business as the Group.
The Group accounted for the acquisition as a business combination using
purchase accounting. The purchase price was allocated among the assets and
liabilities of SWL which resulted in goodwill of approximately $1.5 million.
The Group is amortizing the goodwill over 40 years.
The Group acquired SWL for $50,000 in cash plus a $1,735,000 note payable to
SWL's former shareholder. The Group has recorded the note at its estimated fair
value of $1,658,000. In conjunction with the SWL acquisition, the Group entered
into a one-year lease beginning January 1, 1998, with SWL's former shareholder
to rent SWL's offices owned by SWL's former shareholder. The lease requires
annual rent of $30,000 payable in even monthly installments.
As part of the acquisition, SWL's former shareholder granted the Group the
option to terminate the acquisition, the related lease and the note payable
under certain circumstances. If the Group exercises the option, SWL's former
shareholder will be entitled to retain the $50,000 cash payment plus will be
entitled to receive an additional payment of $10,000. The agreement also grants
SWL's former shareholder the right to accelerate the amounts due under the
$1,735,000 note.
F-151
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In conjunction with the acquisitions, liabilities were assumed as follows (in
thousands):
<TABLE>
<S> <C>
Fair value of assets acquired, net of cash acquired.............. $ 1,144
Goodwill......................................................... 1,437
Cash paid, net of cash acquired.................................. (45)
Issuance of convertible notes.................................... (2,318)
-------
Liabilities...................................................... $ 218
=======
</TABLE>
The following unaudited pro forma summary presents information as if the SWL
acquisition had occurred at January 1, 1997. The pro forma information is
provided for information purposes only. It is based on historical information
and does not necessarily reflect the actual results that would have occurred
nor is it necessarily indicative of future results of operations of the
combined enterprise (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
(UNAUDITED)
<S> <C>
Pro forma revenue............................................ $9,249
Pro forma net income......................................... 432
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The combined financial statements include the accounts and the results of
operations of the Group for all periods during which the companies were under
common control. All significant intercompany transactions have been eliminated
in combination.
Interim Financial Information
The interim financial statements as of March 31, 1998 for each of the three
months ended March 31, 1997 and 1998 are unaudited, and certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements have
been included. Due to seasonality and other factors, the results of operations
for the interim periods are not necessarily indicative of the results for the
entire fiscal year.
Concentration of Credit Risk
Financial instruments which potentially subject the Group to a concentration
of credit risk consist principally of cash deposits and accounts receivable.
The Group maintains cash balances at financial institutions which may at times
be in excess of federally insured levels.
Allowance for Doubtful Accounts
The Group maintains an allowance for doubtful accounts based upon the
estimated collectability of all accounts receivable.
F-152
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Inventories
Inventories consist of growing stock held by Arteka Nurseries, Inc., and
parts and supplies held for use in the ordinary course of business by Arteka
Natural Green Corporation. The book value of these inventories is as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1996 1997
------ ------
<S> <C> <C>
Growing stock............................................... $ 933 $ 897
Parts and supplies.......................................... 87 103
------ ------
$1,020 $1,000
====== ======
</TABLE>
Parts and supplies inventories are stated at the lower of cost or market.
Growing stock includes planting and growing costs. Harvesting costs are
expensed as incurred. Inventory is relieved and cost of services is charged as
growing stock is harvested or lost as the result of casualty.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
Revenue Recognition
The Group's revenues consist of maintenance revenues, installation revenues
and snow removal revenues. The Group's landscape maintenance contracts are for
terms of seven to eight months and payments to the Group are remitted in equal
monthly payments over the term of the contract. Revenues from landscape
maintenance contracts are recognized on the straight-line method while costs
incurred under the contracts can be expected to vary materially based on
seasonal factors. Monthly maintenance payments are recognized as they become
due because the contracts are fully cancelable without cause upon notice of 60
days or less by either the Company or the customer. Should the Company elect to
cancel a contract, the customer would have no standing under either contract
law or equity to require additional services or obtain a refund (other than for
nonperformance prior to cancellation), notwithstanding that the customer may
have paid amounts which clearly exceeded the fair value of the services
received in those months in anticipation of lower priced services later in the
year.
The Group recognizes installation and snow removal revenue when services are
performed and billable under the terms of the applicable contract.
The balances billed but not paid by customers pursuant to retainage
provisions in installation contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Group's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
Cost of Services
Cost of services represents direct labor and associated costs (such as
benefits and workers' compensation expense), materials, supervisory personnel
and equipment and vehicle costs, such as fuel, insurance and depreciation.
F-153
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Warranty Costs
For certain contracts, the Group warrants plant life for the first year after
installation. A reserve for warranty costs is recorded based upon the
historical level of warranty claims and management's estimate of future costs.
Seasonality
The Group has experienced and expects to continue to experience variability
in revenue and net income as a result of the seasonal nature of the Group's
business. Generally, the Group's revenues from installation projects are
concentrated during the warmer months of April to October. Revenues from
landscape maintenance contracts typically do not generate revenues in the
winter; however, snow removal services provided in the winter partially offset
these decreases. As a result, the gross margin from landscape maintenance can
vary seasonally.
Income Taxes
The Group, with the exception of Arteka Nurseries, Inc., accounts for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes." Under SFAS No. 109, deferred income taxes
are recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting amounts
at each year-end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount to be realized. The provision for income taxes is the tax
payable for the year and the change during the year in deferred tax assets and
liabilities.
During 1997, Arteka Nurseries, Inc. (the Nursery) elected S Corporation
status as defined by the Internal Revenue Code, whereby the Nursery is not
subject to taxation for federal purposes. Under S Corporation status, the
shareholders report their shares of the Nursery's taxable earnings or losses in
their personal tax returns.
Shareholder's Equity
The equity structure of the Group is as follows at each December 31, 1996 and
1997 and March 31, 1998:
<TABLE>
<CAPTION>
SHARES
AUTHORIZED ISSUED AND
SHARES OUTSTANDING PAR VALUE
---------- ----------- ---------
<S> <C> <C> <C>
Arteka Corporation....................... 2,500 1,000 No par
Arteka Natural Green Corporation......... 25,000 10,000 $ 1.00
Arteka Nurseries, Inc.................... 25,000 10,000 No par
</TABLE>
Financial Instruments
The Group's financial instruments consist of cash, accounts receivable,
accounts payable, lines of credit, and debt. The Group believes that the
carrying value of these instruments on the accompanying balance sheets
approximates their fair value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-154
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Group will adopt SFAS No. 131 in the year ended December 31, 1998.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ---------------
IN YEAR 1996 1997
------------- ------ -------
<S> <C> <C> <C>
Machinery and equipment.................... 5-10 $1,356 $ 2,345
Leasehold improvements..................... Life of lease 122 122
Office furniture and equipment............. 5 207 212
------ -------
Total.................................. 1,685 2,679
Less--Accumulated depreciation............. (971) (1,140)
------ -------
Property and equipment, net............ $ 714 $ 1,539
====== =======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Accounts receivable, trade................................ $1,459 $1,673
Retainage................................................. 280 394
Accounts receivable, other................................ 48 85
Allowance for doubtful accounts........................... (44) (47)
------ ------
$1,743 $2,105
====== ======
</TABLE>
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Goodwill.................................................... $ -- $1,472
Other....................................................... 30 82
------ ------
$ 30 $1,554
====== ======
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Accounts payable, trade.................................... $ 717 $1,046
Accrued compensation and benefits.......................... 466 286
Warranty accrual........................................... 95 91
Other accrued expenses..................................... 54 131
------ ------
$1,332 $1,554
====== ======
</TABLE>
F-155
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------
1996 1997
------ -----
<S> <C> <C>
Customer deposits........................................... $ 123 $ 3
Performance payment......................................... -- 80
Other....................................................... -- 7
------ -----
$ 123 $ 90
====== =====
</TABLE>
5. LINE OF CREDIT AND LONG-TERM DEBT:
Line of Credit
The Group has two lines of credit which provide for borrowings up to $1.3
million with a financial institution that are secured by accounts receivable
and bear interest at prime plus 1.25 percent which was 9.5 percent and 9.75
percent at December 31, 1996 and 1997, respectively. Each of the lines of
credit expire in April 1998. The Group had $410,000, $100,000 and $1.1 million
outstanding under these lines of credit at December 31, 1996 and 1997, and
March 31, 1998, respectively.
Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1996 1997
----- -------
<S> <C> <C>
Note payable to a financial institution in monthly
installments of $14 including interest at 9.25%,
secured by certain of the Group's equipment, due
November 1999.......................................... $ 439 $ 302
Notes payable to various equipment vendors in total
monthly installments of approximately $10 including
interest ranging from 7.5% to 10.9%, secured by certain
of the Group's equipment due in varying maturities
ranging from 1998--2001................................ 233 221
Note payable to a financial institution in monthly
installments of $2 including interest at 9.75%, secured
by certain of the Group's equipment, due July 2000..... -- 48
Note payable to the Group's sole shareholder in monthly
installments of $16 including interest at 9.5%, due
February 2005.......................................... -- 1,000
Note payable to former SWL owner including imputed
interest at 10% due June 1998.......................... -- 1,658
Note payable to MMI owner in two payments of $145 on
January 9, 1998 and $435 on July 1, 1998 including
interest of 10%........................................ -- 580
----- -------
672 3,809
Less--Current portion................................... (233) (2,597)
----- -------
$ 439 $ 1,212
===== =======
</TABLE>
F-156
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of long-term debt as of December 31, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998............................................................ $2,597
1999............................................................ 391
2000............................................................ 151
2001............................................................ 139
2002............................................................ 153
Thereafter...................................................... 378
------
$3,809
======
</TABLE>
6. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1996 1997
----- ------
<S> <C> <C>
Federal--
Current................................................... $ (1) $ 3
Deferred.................................................. 58 (248)
---- ------
57 (245)
---- ------
State--
Current................................................... 14 (1)
Deferred.................................................. 4 (5)
---- ------
18 (6)
---- ------
Total provision......................................... $ 75 $ (251)
==== ======
</TABLE>
The provision (benefit) for income taxes differs from an amount computed at
the statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------
1996 1997
----- ------
<S> <C> <C>
Federal income tax at statutory rates..................... $ 62 $ (27)
State income taxes........................................ 12 (4)
Nondeductible expenses.................................... 1 2
Effect of the conversion of Arteka Nurseries, Inc. to an S
Corporation.............................................. -- (230)
Valuation allowance....................................... -- 8
----- ------
$ 75 $ (251)
===== ======
</TABLE>
F-157
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The significant items giving rise to the deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Deferred tax assets--
Allowance for doubtful accounts.......................... $ 20 $ 21
Accrued expenses......................................... 4 2
Net operating loss....................................... 19 27
State taxes.............................................. 39 12
----- -----
Total deferred tax assets.............................. 82 62
----- -----
Valuation allowance........................................ -- (8)
Deferred tax liabilities--
Bases differences in property and equipment.............. (50) (131)
Bases differences in inventory........................... (349) (60)
Other.................................................... (80) (80)
----- -----
Total deferred tax liabilities......................... (479) (271)
----- -----
Net deferred tax liability............................. $(397) $(217)
===== =====
</TABLE>
7. RELATED-PARTY TRANSACTIONS:
The Group leases certain of its property and facilities from the Group's sole
shareholder. These leases are five-year leases which expire in 2002. The future
annual minimum payments under these leases are approximately $84,000.
In December 1997, the Group borrowed $1,000,000 from its sole shareholder in
order to fund its near-term working capital requirements. See Note 5 for a
discussion of the terms of this borrowing.
In December 1996, the Group had a receivable from its sole shareholder of
$120,014. This receivable relates to services performed by the Group for its
sole shareholder.
8. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Group leases various facilities, equipment and land under operating lease
agreements, including leases with related parties. These leases are
noncancelable and expire on various dates through 2002. The lease agreements
are subject to renewal under essentially the same terms and conditions as the
original leases.
Future minimum lease payments for operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998.............................................................. $146
1999.............................................................. 108
2000.............................................................. 108
2001.............................................................. 84
2002.............................................................. 84
----
$530
====
</TABLE>
Total rent expense under all operating leases, including operating leases
with related parties, was approximately $144,000 for each of the years ended
December 31, 1996 and 1997.
F-158
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Litigation
The Group is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Group's combined financial position or
combined results of operations.
Insurance
The Group carries a standard range of insurance coverage, including business
auto liability, general liability, workers' compensation, excess liability,
commercial property and an umbrella policy. The Group has not incurred
significant claims or losses on any of these insurance policies.
Employee 401(k) Retirement Plan
The Group offers its employees a 401(k) profit-sharing plan (the Plan) which
covers all employees at least 21 years of age who have completed at least one-
half year of service (6 months) subsequent to employment. The Plan allows for
employee contributions through salary reductions of up to 15 percent of total
compensation, subject to the statutory limits. Employer matching contributions
are made solely at the discretion of the Group and were $14,827 and $15,936 for
1996 and 1997, respectively.
9. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In March 1998, the Group and its shareholder entered into a definitive
agreement with a wholly owned subsidiary of LandCare, providing for the merger
of the Group with the subsidiary of LandCare (the Merger). In connection with
the Merger, the Company will make cash distributions of up to $600,000 prior to
the Merger which represents the Company's estimated S Corporation accumulated
adjustment account. Had these transactions been recorded at March 31, 1998, the
effect on the accompanying unaudited balance sheet would be an increase in
liabilities of $600,000 and a decrease in shareholders' equity of $600,000.
Concurrently with the Merger, the Group entered into an agreement with the
shareholder to lease land and buildings used in the Group's operations for
negotiated amounts and terms.
On November 1, 1998, LandCare and The ServiceMaster Company ("ServiceMaster")
entered into a Plan of Reorganization and Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which LandCare will become a subsidiary of
ServiceMaster. The Merger Agreement is subject to LandCare stockholder
approval, regulatory approvals and certain other closing conditions and
termination events.
F-159
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Landesigns, Inc.:
We have audited the accompanying balance sheet of Landesigns, Inc. (the
Company), as of October 31, 1998, and the related statements of operations,
shareholder's equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of October 31,
1998, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
December 18, 1998
F-160
<PAGE>
LANDESIGNS, INC.
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31
1998
----------
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 318
Accounts receivable, net.......................................... 1,274
Other current assets.............................................. 5
------
Total current assets............................................ 1,597
PROPERTY AND EQUIPMENT, net......................................... 576
OTHER ASSETS........................................................ 5
------
Total assets.................................................... $2,178
======
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
<S> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses............................. $ 530
Current maturities of long-term debt.............................. 90
------
Total current liabilities....................................... 620
LONG-TERM DEBT, net................................................. 59
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, no par value, 2,500 shares authorized, 500 shares
outstanding...................................................... 10
Retained earnings................................................. 1,489
------
Total shareholder's equity...................................... 1,499
------
Total liabilities and shareholder's equity...................... $2,178
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-161
<PAGE>
LANDESIGNS, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31
1998
----------
<S> <C>
REVENUES.......................................................... $6,128
COST OF SERVICES.................................................. 4,647
------
Gross profit.................................................. 1,481
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 591
------
Income from operations........................................ 890
------
OTHER INCOME (EXPENSE):
Interest expense................................................ (12)
Other income.................................................... 36
------
NET INCOME........................................................ $ 914
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-162
<PAGE>
LANDESIGNS, INC.
STATEMENT OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDER'S
STOCK EARNINGS EQUITY
------ -------- -------------
<S> <C> <C> <C>
BALANCE, October 31, 1997......................... $10 $1,334 $ 1,344
Distributions.................................... -- (759) (759)
Net income....................................... -- 914 914
--- ------ -------
BALANCE, October 31, 1998......................... $10 $1,489 $ 1,499
=== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-163
<PAGE>
LANDESIGNS, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31
1998
----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 914
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation....................................................... 191
Gain on sales of assets............................................ (4)
Changes in assets and liabilities--
Accounts receivable, net.......................................... (113)
Other current assets.............................................. (5)
Accounts payable and accrued expenses............................. 60
-----
Net cash provided by operating activities........................ 1,043
-----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................. (279)
Proceeds from sales of property and equipment....................... 12
-----
Net cash used in investing activities............................ (267)
-----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt........................................ 103
Payments on long-term debt.......................................... (95)
Distributions to shareholder........................................ (659)
-----
Net cash used in financing activities............................ (651)
-----
NET INCREASE IN CASH AND CASH EQUIVALENTS............................ 125
CASH AND CASH EQUIVALENTS, beginning of period....................... 193
-----
CASH AND CASH EQUIVALENTS, end of period............................. $ 318
=====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest........................................................... $ 12
Non-cash transactions
Distributions to shareholder....................................... $ 100
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-164
<PAGE>
LANDESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Landesigns, Inc. (the Company), a Nevada corporation headquartered in Las
Vegas, Nevada, was founded in 1986 and operates primarily in Nevada and
California. The Company provides commercial landscape installation and
maintenance services to its customers in the Las Vegas area and in Southern
California.
The Company and its shareholder intend to enter into a definitive agreement
with a wholly owned subsidiary of LandCare USA, Inc. (LandCare), providing for
the merger of the Company with the subsidiary of LandCare.
On November 1, 1998, LandCare and The ServiceMaster Company ("ServiceMaster")
entered into a Plan of Reorganization and Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which LandCare will become a subsidiary of
ServiceMaster. The Merger Agreement is subject to LandCare stockholder
approval, regulatory approvals and certain other closing conditions and
termination events.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash deposits and accounts receivable.
The Company maintains cash balances at financial institutions, which may at
times be in excess of federally insured levels.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
Expenditures for major additions or improvements that extend the useful lives
of assets are capitalized. Minor replacements, maintenance and repairs that do
not improve or extend the life of such assets are expensed as incurred.
Disposals are removed at cost less accumulated depreciation, and any resulting
gain or loss is reflected in other income.
Revenue Recognition
The Company's revenues consist of maintenance revenues and installation
revenues. The Company's landscape maintenance contracts are for one year and
payments to the Company are remitted in equal monthly payments over the term of
the contract. Revenues from maintenance contracts are recognized on the
straight-line method while costs incurred under the contracts can be expected
to vary materially based on seasonal factors. Monthly maintenance payments are
recognized as they become due because the contracts are fully cancelable
without cause upon notice of 60 days or less by either the Company or the
customer. Should the Company elect to cancel a contract, the customer would
have no standing under either contract law or equity to require additional
services or obtain a refund (other than for nonperformance prior to
cancellation), notwithstanding that the customer may have paid amounts which
clearly exceeded the fair value of services received in those months in
anticipation of lower priced services later in the year.
F-165
<PAGE>
LANDESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revenues from installation contracts are recognized when the services are
performed and billable under the terms of the applicable contract. The balances
billed but not paid by customers pursuant to retainage provisions in
installation contracts will be due upon completion of the contracts and
acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance at the balance sheet date will
be collected within the subsequent fiscal year.
Cost of Services
Cost of services represents direct labor and associated costs (such as
benefits and workers' compensation expense), materials, supervisory personnel,
and equipment and vehicle costs, such as fuel, insurance and depreciation.
Warranty Costs
For certain contracts, the Company warrants plant life for the first year
after installation. A reserve for warranty costs is recorded based upon the
historical level of warranty claims and management's estimate of future costs.
Seasonality
The Company has experienced and expects to continue to experience variability
in revenue and net income as a result of the seasonal nature of the Company's
business. Generally, revenues from landscape maintenance contracts remain
relatively constant throughout the year; however, the related costs of services
vary due to seasonality. As a result, the gross margin from landscape
maintenance contracts can vary seasonally.
Income Taxes
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholder reports his share of the
Company's taxable earnings or losses in his personal tax returns. The Company
will terminate its S Corporation status concurrently with the effective date of
the transaction.
Major Customers and Risk Concentration
The Company had sales of approximately 50%, 15% and 11% of total sales to
three major customers for the year ended October 31, 1998.
Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, and debt. The Company believes that the
carrying value of these instruments on the accompanying balance sheet
approximates their fair value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-166
<PAGE>
LANDESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 for the year ended October 31, 1999.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES OCTOBER 31
IN YEARS 1998
------------ ----------
<S> <C> <C>
Transportation equipment............................ 5 $ 468
Machinery and equipment............................. 5-10 952
Office furniture and equipment...................... 5 17
------
Total........................................... $1,437
Less--Accumulated depreciation...................... (861)
------
Property and equipment, net..................... $ 576
------
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31
1998
----------
<S> <C>
Accounts receivable, trade........................................ $ 974
Retainage......................................................... 331
Allowance for doubtful accounts................................... (31)
------
$1,274
======
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31
1998
----------
<S> <C>
Accounts payable, trade.......................................... $352
Accrued compensation and benefits................................ 98
Warranty accrual................................................. 80
----
$530
====
</TABLE>
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31
1998
----------
<S> <C>
Various notes payable to a financial institution with monthly
principal and interest payments ranging from $1 to $3 at
interest rates ranging from 6.9 % to 7.9 % with varying
maturities ranging from 1999-2001 ............................ $149
Less--Current portion.......................................... (90)
----
Total...................................................... $ 59
====
</TABLE>
F-167
<PAGE>
LANDESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of long-term debt as of October 31, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
Year ending October 31 --
1999................................................................. $ 90
2000................................................................. 44
2001................................................................. 15
2002................................................................. --
2003................................................................. --
Thereafter........................................................... --
----
$149
====
</TABLE>
The Company paid all of its outstanding debt subsequent to October 31, 1998.
6. RELATED-PARTY TRANSACTIONS:
The Company purchases landscaping materials including trees, plants and
shrubbery, from an entity wholly-owned by the Company's sole shareholder. Total
purchases from the related party for the twelve months ended October 31, 1998
were approximately $206,000.
The Company also leases its office building and certain landscaping equipment
from the Company's sole shareholder and an entity owned by the shareholder. The
leases are classified as operating leases with month-to-month terms. Total rent
expense under these leases for the twelve months ended October 31, 1998 was
approximately $90,000.
7. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcomes of such legal actions will
have a material adverse effect on the Company's financial position or results
of operations.
Insurance
The Company carries a standard range of insurance coverage, including
business auto liability, general liability, and workers' compensation. The
Company has not incurred significant claims or losses on any of these insurance
policies.
8. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In December 1998, the Company and its shareholder entered into a letter of
intent with a wholly owned subsidiary of LandCare, providing for the merger of
the Company with the subsidiary of LandCare (the Merger). Concurrently with the
merger, the Company will enter into an agreement with the shareholder to lease
buildings used in the Company's operations for negotiated amounts and terms.
Automobiles valued at approximately $25,000, which amount is included in the
balance sheet at October 31, 1998, will be distributed to the Company's
shareholder. Had this distribution been made at October 31, 1998, the effect on
the Company's balance sheet would have been a decrease in shareholder's equity
of $25,000. In addition, selling, general and administrative expenses would
have been reduced by approximately $11,000 assuming the distribution had
occurred November 1, 1997.
F-168
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Desert Care Landscaping, Inc.:
We have audited the accompanying balance sheet of Desert Care Landscaping,
Inc. as of December 31, 1997, and the related statements of operations,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Desert Care Landscaping, Inc.
as of December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 13, 1998
F-169
<PAGE>
DESERT CARE LANDSCAPING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1997 1998
----------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash................................................. $ 172 --
Accounts receivable, net............................. 1,086 918
Related-party receivable............................. 113 --
Other current assets................................. 16 31
------ ------
Total current assets............................... 1,387 949
PROPERTY AND EQUIPMENT, net............................ 1,007 1,021
OTHER ASSETS........................................... 29 26
------ ------
Total assets....................................... $2,423 $1,996
====== ======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses................ $ 437 $ 494
Line of credit....................................... -- 300
Current maturities of long-term debt................. 186 191
Other current liabilities............................ 53 56
------ ------
Total current liabilities.......................... 676 1,041
LONG-TERM DEBT, net.................................... 379 332
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000 shares
authorized, 100 shares outstanding.................. -- --
Additional paid-in capital........................... 50 50
Retained earnings.................................... 1,318 573
------ ------
Total shareholders' equity......................... 1,368 623
------ ------
Total liabilities and shareholders' equity......... $2,423 $1,996
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-170
<PAGE>
DESERT CARE LANDSCAPING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31
DECEMBER 31 --------------------
1997 1997 1998
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................... $6,481 $ 1,492 $ 1,297
COST OF SERVICES............................ 5,119 1,179 1,200
------ --------- ---------
Gross profit............................ 1,362 313 97
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 672 155 175
------ --------- ---------
Income (loss) from operations........... 690 158 (78)
OTHER INCOME (EXPENSE):
Interest expense.......................... (64) (17) (14)
Other income, net......................... 13 2 7
------ --------- ---------
NET INCOME (LOSS)........................... $ 639 $ 143 $ (85)
====== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-171
<PAGE>
DESERT CARE LANDSCAPING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996............ $ $ 50 $ 819 $ 869
Distributions....................... -- -- (140) (140)
Net income.......................... -- -- 639 639
---- ---- ------ ------
BALANCE, December 31, 1997............ -- 50 1,318 1,368
Distributions (unaudited)........... -- -- (660) (660)
Net loss (unaudited)................ -- -- (85) (85)
---- ---- ------ ------
BALANCE, March 31, 1998 (unaudited)... $ $ 50 $ 573 $ 623
==== ==== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-172
<PAGE>
DESERT CARE LANDSCAPING, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31
DECEMBER 31 --------------
1997 1997 1998
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ 639 $ 143 $ (85)
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation................................... 181 38 49
Gain on sales of assets........................ 5 -- 2
Changes in assets and liabilities--
Accounts receivable, net..................... (83) 43 168
Related-party receivable..................... 133 (85) 113
Accounts payable and accrued expenses........ (124) 22 57
Other, net................................... (34) 4 (14)
------- ------ ------
Net cash provided by operating activities.. 717 165 290
------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment.... 8 -- --
Purchases of property and equipment.............. (320) (9) (60)
------- ------ ------
Net cash used in investing activities...... (312) (9) (60)
------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit and long-term
debt............................................ 973 -- 575
Payments on lines of credit and long-term debt... (1,150) (114) (317)
Distributions to shareholders.................... (140) (100) (660)
------- ------ ------
Net cash used in financing activities...... (317) (214) (402)
------- ------ ------
NET INCREASE (DECREASE) IN CASH.................... 88 (58) (172)
CASH, beginning of period.......................... 84 84 172
------- ------ ------
CASH, end of period................................ $ 172 $ 26 $ --
======= ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest....................................... $ 64 $ 17 $ 14
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-173
<PAGE>
DESERT CARE LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Desert Care Landscaping, Inc. (the Company), an Arizona corporation, was
founded in 1992 and operates primarily in Arizona with two branches in Phoenix.
The Company provides commercial landscape installation and maintenance
services. The Company also provides native plant reclamation, which consists of
temporary removal of native plants, maintaining them during a construction
period and replacing them following construction.
The Company had a working capital deficit at March 31, 1998. The Company has
funded its operations with cash flows from operations and short-term borrowings
from lenders. Management expects that operations will generate sufficient cash
flows to meet the Company's working capital needs during 1998.
The Company and its shareholders intend to enter into a definitive agreement
with LandCare USA, Inc. (LandCare), pursuant to which all outstanding shares of
the Company's common stock will be exchanged for cash and shares of LandCare's
common stock concurrently with the consummation of an initial public offering
of the common stock of LandCare.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements as of March 31, 1998 for each of the three
months ended March 31, 1997 and 1998 are unaudited, and certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary to fairly present the finacial position, results of
operations and cash flows with respect to the interim financial statements have
been included. Due to seasonality and other factors, the results of operations
for the interim periods are not necessarily indicative of the results for the
entire fiscal year.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash deposits and accounts
receivable. The Company maintains cash balances at financial institutions which
may at times be in excess of federally insured levels.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
F-174
<PAGE>
DESERT CARE LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
The Company's revenues consist of maintenance revenues and installation
revenues. The Company's landscape maintenance contracts are for terms of one to
two years and payments to the Company are remitted in equal monthly payments
over the term of the contract. Revenues from landscape maintenance contracts
are recognized on the straight-line method while costs incurred under the
contracts can be expected to vary based on seasonal factors. Monthly
maintenance payments are recognized as they become due because the contracts
are fully cancelable without cause upon notice of 60 days or less by either the
Company or the customer. Should the Company elect to cancel a contract, the
customer would have no standing under either contract law or equity to require
additional services or obtain a refund (other than for nonperformance prior to
cancellation), notwithstanding that the customer may have paid amounts which
clearly exceeded the fair value of the services received in those months in
anticipation of lower priced services later in the year.
Revenues from installation services are recognized when the services are
performed and billable under the terms of the applicable contract. The balances
billed but not paid by customers pursuant to retainage provisions in
installation contracts will be due upon completion of the contracts and
acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance at each balance sheet date
will be collected within the subsequent fiscal year.
Cost of Services
Cost of services represents direct labor and associated costs (such as
benefits and workers' compensation expense), materials, supervisory personnel
and equipment and vehicle costs, such as fuel, insurance and depreciation.
Warranty Costs
For certain contracts, the Company warrants plant life for a 90-day period
after installation and tree life and irrigation work for a one-year period
after installation. A reserve for warranty costs is recorded based upon the
historical level of warranty claims and management's estimate of future costs.
Seasonality
The Company has experienced and expects to continue to experience variability
in revenue and net income as a result of the seasonal nature of the Company's
business. Revenues from landscape maintenance contracts remain relatively
constant throughout the year. As a result, the gross margin from landscape
maintenance contracts can vary seasonally.
Income Taxes
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their shares of
the Company's taxable earnings or losses in their personal tax returns. The
Company will terminate its S Corporation status concurrently with the effective
date of this offering.
Major Customers and Risk Concentration
The Company had sales of approximately 22 percent of total sales to two major
customers during the year ended December 31, 1997.
Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, lines of credit and debt. The Company believes that the
carrying value of these instruments on the accompanying balance sheet
approximates fair value.
F-175
<PAGE>
DESERT CARE LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 in the year ended December 31, 1998.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 1997
------------- ------------
<S> <C> <C>
Transportation equipment..................... 5 $ 707
Machinery and equipment...................... 5-10 634
Leasehold improvements....................... 10 15
Office furniture and equipment............... Life of lease 96
------
Total...................................... 1,452
Less--Accumulated depreciation............... (445)
------
Property and equipment, net................ $1,007
======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Accounts receivable, trade................................. $ 911
Retainage.................................................. 103
Accounts receivable, other................................. 104
Allowance for doubtful accounts............................ (32)
------
$1,086
======
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Accounts payable, trade.................................... $247
Accrued compensation and benefits.......................... 99
Warranty accrual........................................... 80
Other accrued expenses..................................... 11
----
$437
====
</TABLE>
F-176
<PAGE>
DESERT CARE LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Customer deposits............................................ $50
Other........................................................ 3
---
$53
===
</TABLE>
5. LINES OF CREDIT AND LONG-TERM DEBT:
Lines of Credit
The Company has a $400,000 revolving line of credit with a financial
institution that is secured by accounts receivable and equipment. Certain
shareholders of the Company have personally guaranteed all amounts borrowed
under this facility. There was zero and $240,000 outstanding on this facility
at December 31, 1997 and March 31, 1998, respectively. The line of credit
expires on June 1, 1998.
The Company has a $100,000 nonrevolving line of credit with a financial
institution that is secured by accounts receivable and certain equipment.
Certain shareholders of the Company have personally guaranteed all amounts
borrowed. This facility will convert to a term loan effective June 1, 1998.
There was zero and $40,000 outstanding on this facility at December 31, 1997
and March 31, 1998, respectively.
Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Notes payable to a financial institution in total monthly
installments of $7 including interest ranging from 4.9% to
10.25%, secured by various equipment and personal guarantees from
certain shareholders, due in 1999 through 2001................... $198
Notes payable to a financial institution in total monthly
installments of approximately $3 including interest at prime plus
2%, which was 10.5% at December 31, 1997, and 10.74%, secured by
various equipment, receivables and personal guarantees from
certain shareholders, due in 1998 through 2002................... 106
Notes payable to a financial institution in total monthly
installments of $2 including interest at 9.8% and 9.9%, secured
by various vehicles and personal guarantees from certain
shareholders, with final payment due 2001........................ 76
Notes payable to a financial institution in total monthly
installments of $3 including interest ranging from 8.9% to 10.5%,
secured by various vehicles and personal guarantees from certain
shareholders, due in 1998 through 2001........................... 69
Notes payable to a financial institution in total monthly
installments of $2 including interest at 9% and 9.5%, secured by
various vehicles and personal guarantees from certain
shareholders, due in 1999 through 2001........................... 59
Notes payable to a financial institution in total monthly
installments of $2 including interest at 8.9% and 9.5%, secured
by various vehicles and personal guarantees from certain
shareholders, due 1999 through 2001.............................. 42
Notes payable to a financial institution in total monthly
installments of $1 including interest at 10.9% and 12.4%, secured
by various equipment, due in 1998 through 2000 .................. 15
----
565
Less--Current portion............................................. (186)
----
$379
====
</TABLE>
F-177
<PAGE>
DESERT CARE LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of long-term debt as of December 31, 1997, are as
follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998.............................................................. $186
1999.............................................................. 165
2000.............................................................. 142
2001.............................................................. 63
2002.............................................................. 9
----
$565
====
</TABLE>
6. RELATED-PARTY TRANSACTIONS:
The Company leased facilities under operating leases from a company that is
owned by the shareholders of the Company. Rent expense incurred under these
leases was approximately $94,000 for the year ended December 31, 1997.
Additionally, the Company both sells trees to and purchases trees from this
related party. The amounts related to these transactions for the year ended
December 31, 1997 were trees sold of approximately $10,000 and trees purchased
of approximately $73,000.
7. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases various facilities, equipment and vehicles under operating
lease agreements, including leases with related parties. These leases are
noncancelable and expire on various dates through 2002. The lease agreements
are subject to renewal under essentially the same terms and conditions as the
original leases.
Future minimum lease payments for operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998.............................................................. $163
1999.............................................................. 147
2000.............................................................. 108
2001.............................................................. 90
2002.............................................................. 90
----
$598
====
</TABLE>
Total rent expense under all operating leases, including operating leases
with related parties, was approximately $145,000 for the year ended December
31, 1997.
Litigation
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results
of operations.
Insurance
The Company carries a standard range of insurance coverage, including
business auto liability, general liability, workers' compensation, commercial
property and an umbrella policy. The Company has not incurred significant
claims or losses on any of these insurance policies.
F-178
<PAGE>
DESERT CARE LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Profit-Sharing Plan
The Company offers its employees a profit-sharing plan (the Plan) which
covers all employees at least 21 years of age who have completed at least 1,000
hours of service in a 12-month period subsequent to employment. The Company may
declare a discretionary contribution annually which is placed into a trust fund
for the benefit of Plan participants. There was no discretionary profit-sharing
contribution for the year ended December 31, 1997.
8. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In March 1998, the Company and its shareholders entered into a definitive
agreement with a wholly owned subsidiary of LandCare, providing for the merger
of the Company with the subsidiary of LandCare (the Merger). In connection with
the Merger, the Company will make cash distributions of approximately $760,000
prior to the Merger which represents the Company's estimated S Corporation
accumulated adjustment account. Had these transactions been recorded at March
31, 1998, the effect on the accompanying unaudited balance sheet would be a
decrease in assets of $172,000, an increase in liabilities of $588,000 and a
decrease in shareholders' equity of $760,000.
Concurrently with the Merger, the Company entered into an agreement with the
shareholders to lease land, equipment and buildings used in the Company's
operations for negotiated amounts and terms.
On November 1, 1998, LandCare and The ServiceMaster Company ("ServiceMaster")
entered into a Plan of Reorganization and Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which LandCare will become a subsidiary of
ServiceMaster. The Merger Agreement is subject to LandCare stockholder
approval, regulatory approvals and certain other closing conditions and
termination events.
F-179
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To R.L. Company, Inc.:
We have audited the accompanying balance sheet of R.L. Company, Inc. (the
Company), as of December 31, 1997, and the related statements of operations,
shareholder's equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
October 5, 1998
F-180
<PAGE>
R.L. COMPANY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1998
----------- -----------
ASSETS
------ (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 337 $ 516
Marketable securities................................ 347 377
Accounts receivable, net............................. 513 577
Inventories.......................................... 79 97
Other current assets................................. 242 207
------ ------
Total current assets............................... 1,518 1,774
PROPERTY AND EQUIPMENT, net............................ 976 934
------ ------
Total assets....................................... $2,494 $2,708
====== ======
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses................ $ 430 $ 521
Current portion of long-term debt.................... 181 179
Deferred tax liability............................... 346 383
------ ------
Total current liabilities.......................... 957 1,083
LONG-TERM DEBT, net.................................... 282 199
DEFERRED TAX LIABILITY................................. 130 152
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, $10 par value, 7,500 shares authorized,
300 shares outstanding.............................. 3 3
Retained earnings.................................... 1,122 1,271
------ ------
Total shareholder's equity......................... 1,125 1,274
------ ------
Total liabilities and shareholder's equity......... $2,494 $2,708
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-181
<PAGE>
R.L. COMPANY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30
DECEMBER 31 --------------
1997 1997 1998
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES............................................ $6,130 $2,868 $3,172
COST OF SERVICES.................................... 4,141 1,891 2,041
------ ------ ------
Gross profit.................................... 1,989 977 1,131
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........ 1,670 753 770
------ ------ ------
Income from operations.......................... 319 224 361
------ ------ ------
OTHER INCOME (EXPENSE):
Interest expense.................................. (32) (13) (18)
Other income (expense), net....................... (86) (26) (92)
------ ------ ------
INCOME BEFORE INCOME TAXES.......................... 201 185 251
INCOME TAX PROVISION................................ 81 74 102
------ ------ ------
NET INCOME.......................................... $ 120 $ 111 $ 149
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-182
<PAGE>
R.L. COMPANY, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDER'S
STOCK EARNINGS EQUITY
------ -------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1996........................ $ 3 $1,002 $1,005
Net income...................................... -- 120 120
--- ------ ------
BALANCE, December 31, 1997........................ 3 1,122 1,125
Net income (unaudited).......................... -- 149 149
--- ------ ------
BALANCE, June 30, 1998 (unaudited)................ $ 3 $1,271 $1,274
=== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-183
<PAGE>
R.L. COMPANY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30
DECEMBER 31 ------------
1997 1997 1998
----------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 120 $ 111 $ 149
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 267 119 144
Deferred income tax provision.................... 34 17 58
Changes in assets and liabilities--
Accounts receivable, net....................... 121 69 (64)
Inventories.................................... 18 3 (18)
Other current assets........................... (30) 19 35
Marketable securities.......................... (88) (2) (30)
Accounts payable and accrued expenses.......... 181 174 91
----- ----- -----
Net cash provided by operating activities.... 623 510 365
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................ (221) (273) (103)
----- ----- -----
Net cash used in investing activities........ (221) (273) (103)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt......................... (144) (30) (83)
----- ----- -----
Net cash used in financing activities........ (144) (30) (83)
----- ----- -----
NET INCREASE IN CASH AND CASH EQUIVALENTS............ 258 207 179
CASH AND CASH EQUIVALENTS, beginning of period....... 79 79 337
----- ----- -----
CASH AND CASH EQUIVALENTS, end of period............. $ 337 $ 286 $ 516
===== ===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest......................................... $ 50 $ 23 $ 17
Income taxes..................................... 31 5 2
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-184
<PAGE>
R.L. COMPANY, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
R.L. Company, Inc. (the Company), a California corporation headquartered in
Santa Rosa, California, was founded in 1972, and operates primarily in Sonoma,
Marin, Solano and Sacramento counties in California. The Company provides
landscape installation and maintenance services.
On August 14, 1998, the Company and its shareholder entered into a definitive
agreement with a wholly owned subsidiary of LandCare USA, Inc. (LandCare),
providing for the merger of the Company with the subsidiary of LandCare. All
outstanding shares of the Company's common stock were exchanged for cash and
shares of LandCare's common stock (the Merger). An investment in stock of
approximately $63,000, which is included in the balance sheet at December 31,
1997, was distributed to the sole shareholder. Had this distribution been made
at December 31, 1997, the effect on the Company's balance sheet would have been
to decrease other current assets and shareholder's equity by $63,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements as of June 30, 1998 and for each of the six
months ended June 30, 1997 and 1998 are unaudited, and certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements have
been included. Due to seasonality and other factors, the results of operations
for the interim periods are not necessarily indicative of the results for the
entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Marketable Securities
All of the Company's marketable securities are classified as trading
securities and accordingly, are reflected in the December 31, 1997 Balance
Sheet at fair value, with the realized and unrealized gains and losses included
in other income (expense). At December 31, 1997, the trading securities had a
cost of $220,000 and a market value of $397,000 with gross unrealized holding
gains totaling $127,000, reflecting a decrease of $18,000 for the year ended
December 31, 1997.
Other Current Assets
The Company owns stock in a private mutual insurance company and is recorded
at cost.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash deposits, marketable
securities and accounts receivable. The Company maintains cash balances at
financial institutions which may at times be in excess of federally insured
levels.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
F-185
<PAGE>
R.L. COMPANY, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Inventories
Inventories consist of parts and supplies held for use in the ordinary course
of business and are stated at the lower of cost or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
Revenue Recognition
The Company's revenues consist of maintenance revenues and installation
revenues. The Company's landscape maintenance contracts are for terms of one to
two years and payments to the Company are remitted in equal monthly payments
over the term of the contract. Revenues from maintenance contracts are
recognized on the straight-line method while the costs incurred under the
contracts can be expected to vary materially based on seasonal factors. Monthly
maintenance payments are recognized as they become due because the contracts
are fully cancelable without cause upon notice of 60 days or less by either the
Company or the customer. Should the Company elect to cancel a contract, the
customer would have no standing under either contract law or equity to require
additional services or obtain a refund (other than for nonperformance prior to
cancellation), notwithstanding that the customer may have paid amounts which
clearly exceeded the fair value of the services received in those months in
anticipation of lower priced services later in the year.
Revenues from installation contracts are recognized when the services are
performed and billable under the terms of the applicable contract. The balances
billed but not paid by customers pursuant to retainage provisions in
installation contracts will be due upon completion of the contracts and
acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance at each balance sheet date
will be collected within the subsequent fiscal year.
Cost of Services
Cost of services represents direct labor and associated costs (such as
benefits and workers' compensation expense), materials, supervisory personnel,
and equipment and vehicle costs, such as fuel, insurance and depreciation.
Seasonality
The Company experienced and expects to continue to experience variability in
revenue and net income as a result of the seasonal nature of the Company's
business. Revenues from commercial and residential landscape maintenance
contracts remain relatively constant throughout the year; however, the related
costs of services vary due to seasonality. As a result, the gross margin from
landscape maintenance contracts can vary seasonally.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes are
F-186
<PAGE>
R.L. COMPANY, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each year-end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount to be realized. The provision for income taxes is the tax
payable for the year and the change during the year in deferred tax assets and
liabilities.
Major Customers and Risk Concentration
The Company had sales of approximately twelve percent of total sales to one
major customer for the year ended December 31, 1997.
Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
marketable securities, accounts receivable, accounts payable, lines of credit
and debt. The Company believes that the carrying value of these instruments on
the accompanying balance sheets approximates their fair value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 for the year ended December 31, 1998.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31
IN YEARS 1997
------------- -----------
<S> <C> <C>
Transportation equipment........................ 7 $ 1,330
Machinery and equipment......................... 3-5 613
Leasehold improvements.......................... Life of lease 91
Office furniture and equipment.................. 5-10 288
-------
Total....................................... $ 2,322
Less--Accumulated depreciation.................. (1,346)
-------
Property and equipment, net................. $ 976
=======
</TABLE>
F-187
<PAGE>
R.L. COMPANY, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Accounts receivable, trade................................... $558
Allowance for doubtful accounts.............................. (45)
----
$513
====
</TABLE>
Other current assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Prepaid insurance............................................ $ 99
Investment in private stock, at cost......................... 63
Other........................................................ 80
----
$242
====
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Accounts payable, trade....................................... $ 89
Accrued compensation and benefits............................. 266
Income tax payable............................................ 69
Other......................................................... 6
----
$430
====
</TABLE>
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Note payable to a financial institution in monthly installments of
$3 including interest ranging from 11.5% to 12.0%, secured by
vehicles and equipment, due 2001................................. $106
Note payable to various financial institutions in total monthly
installments of approximately $16 including interest ranging from
1.9% to 10.25%, secured by certain vehicles, machinery and
equipment with varying maturities through 2001................... 357
----
Total......................................................... 463
Less--Current portion............................................. 181
----
$282
====
</TABLE>
The aggregate maturities of long-term debt as of December 31, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998.............................................................. $181
1999.............................................................. 162
2000.............................................................. 88
2001.............................................................. 32
----
$463
====
</TABLE>
F-188
<PAGE>
R.L. COMPANY, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES:
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Federal--
Current..................................................... $32
Deferred.................................................... 31
---
63
---
State--
Current..................................................... 15
Deferred.................................................... 3
---
18
---
Total provision........................................... $81
===
</TABLE>
The provision for income taxes differs from an amount computed at the
statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Federal income tax at statutory rates......................... $70
State income taxes............................................ 12
Other......................................................... (1)
---
$81
===
</TABLE>
The significant items giving rise to the deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Deferred tax assets--
Accrued expenses............................................ $ 28
Allowance for doubtful accounts............................. 20
Other....................................................... 44
-----
Total deferred tax assets................................. 92
-----
Deferred tax liabilities--
Bases differences in property and equipment................. (77)
Unrealized gain on investments.............................. (62)
Cash to accrual adjustment.................................. (429)
-----
Total deferred tax liabilities............................ (568)
-----
Net deferred tax liability................................ $(476)
=====
</TABLE>
F-189
<PAGE>
R.L. COMPANY, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcomes of such legal actions will
have a material adverse effect on the Company's financial position or results
of operations.
Insurance
The Company carries a standard range of insurance coverage, including
business auto liability, general liability, commercial property, workers'
compensation and an umbrella policy. The Company has not incurred significant
claims or losses on any of these insurance policies.
Employee 401(k) Profit Sharing Plan
The Company has a 401(k) profit sharing plan which is available to
substantially all full-time employees who have attained the age of 21 and
completed 1,000 hours of service with the Company. Non-elective contributions
are made for each plan year to a maximum of 25% of the participants' first 4%
of contributions. Elective contributions are made at the discretion of the
Company. Non-elective contributions to the plan were approximately $10,000 for
the year ended December 31, 1997. No elective contributions were made during
the year.
8. EVENTS SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On November 1, 1998, LandCare and The ServiceMaster Company ("ServiceMaster")
entered into a Plan of Reorganization and Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which LandCare will become a subsidiary of
ServiceMaster. The Merger Agreement is subject to LandCare stockholder
approval, regulatory approvals and certain other closing conditions and
termination events.
F-190
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Real Property Maintenance, Inc.:
We have audited the accompanying balance sheet of Real Property Maintenance,
Inc. (the Company), as of December 31, 1997, and the related statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
December 4, 1998
F-191
<PAGE>
REAL PROPERTY MAINTENANCE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1997 1998
----------- ------------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................... $ 20 $ 149
Accounts receivable, net............................ 664 398
Related party receivable............................ 12 --
Inventories......................................... 7 18
Prepaid expenses.................................... 25 9
Other current assets................................ 10 38
------ ------
Total current assets.............................. 738 612
PROPERTY AND EQUIPMENT, net........................... 885 864
OTHER ASSETS.......................................... 4 4
------ ------
Total assets...................................... $1,627 $1,480
====== ======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses............... $ 566 $ 383
Line of credit...................................... -- 70
Current maturities of long-term debt................ 167 112
Other current liabilities........................... -- 7
------ ------
Total current liabilities......................... 733 572
LONG-TERM DEBT........................................ 732 750
SHAREHOLDERS' EQUITY:
Common stock, no par value, 1,000 shares authorized,
125 shares outstanding.............................
Retained earnings................................... 94 94
Total shareholders' equity........................ 68 64
------ ------
Total liabilities and shareholders' equity........ 162 158
------ ------
$1,627 $1,480
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-192
<PAGE>
REAL PROPERTY MAINTENANCE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30
DECEMBER 31 --------------
1997 1997 1998
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES............................................ $4,474 $3,097 $4,138
COST OF SERVICES.................................... 3,301 2,464 3,377
------ ------ ------
Gross profit.................................... 1,173 633 761
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........ 580 337 359
------ ------ ------
Income from operations.......................... 593 296 402
------ ------ ------
OTHER INCOME (EXPENSE):
Interest expense.................................. (76) (53) (63)
Other income (expense), net....................... (24) (12) 11
------ ------ ------
NET INCOME.......................................... $ 493 $ 231 $ 350
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-193
<PAGE>
REAL PROPERTY MAINTENANCE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
------ -------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1996........................ $ 94 $(116) $ (22)
Distributions................................... -- (309) (309)
Net income...................................... -- 493 493
---- ----- -----
BALANCE, December 31, 1997........................ 94 68 162
Distributions (unaudited)....................... -- (354) (354)
Net income (unaudited).......................... -- 350 350
---- ----- -----
BALANCE, September 30, 1998 (unaudited)........... $ 94 $ 64 $ 158
==== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-194
<PAGE>
REAL PROPERTY MAINTENANCE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER
YEAR ENDED 30
DECEMBER 31 ------------
1997 1997 1998
----------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 493 $ 231 $ 350
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 220 158 202
Loss (gain) on sale of assets.................... 18 14 (10)
Changes in assets and liabilities--
Accounts receivable, net....................... (455) (117) 266
Receivable from affiliate...................... 34 64 12
Inventories.................................... 1 2 (11)
Other current assets........................... 48 (44) (28)
Prepaid expenses............................... (3) (60) 16
Accounts payable and accrued expenses.......... 265 80 (173)
Other current liabilities...................... -- -- 7
----- ----- -----
Net cash provided by operating activities.... 621 328 631
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment...... 9 2 20
Purchases of property and equipment................ (114) (92) (31)
----- ----- -----
Net cash used in investing activities........ (105) (90) (11)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit....................... -- -- 70
Payments on long-term debt......................... (269) (222) (207)
Distributions to shareholders...................... (309) (98) (354)
----- ----- -----
Net cash used in financing activities........ (578) (320) (491)
----- ----- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... (62) (82) 129
CASH AND CASH EQUIVALENTS, beginning of period....... 82 82 20
----- ----- -----
CASH AND CASH EQUIVALENTS, end of period............. $ 20 $ 0 $ 149
===== ===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest......................................... $ 76 $ 63 $ 53
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-195
<PAGE>
REAL PROPERTY MAINTENANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Real Property Maintenance, Inc. (the Company), a Colorado corporation
headquartered in Denver, Colorado, was founded in 1974, reorganized in 1988,
and operates primarily in the midwestern United States. The Company provides
landscape, construction and maintenance, and snow removal services to
commercial customers.
On October 27, 1998, the Company and its shareholders entered into a
definitive agreement with a wholly owned subsidiary of LandCare USA, Inc.
(LandCare), providing for the merger of the Company with the subsidiary of
LandCare. All outstanding shares of the Company's common stock were exchanged
for cash and stock (the Merger).
On November 1, 1998, LandCare and The ServiceMaster Company ("ServiceMaster")
entered into a Plan of Reorganization and Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which LandCare will become a subsidiary of
ServiceMaster. The Merger Agreement is subject to LandCare stockholder
approval, regulatory approvals and certain other closing conditions and
termination events.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements as of September 30, 1998 and for each of the
nine months ended September 30, 1997 and 1998 are unaudited, and certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements have been included. Due to seasonality and other factors, the
results of operations for the interim periods are not necessarily indicative of
the results for the entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash deposits and accounts receivable.
The Company maintains cash balances at financial institutions which may at
times be in excess of federally insured levels.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
Inventories
Inventories consist of parts and supplies held for use in the ordinary course
of business and are stated at the lower of cost or market.
F-196
<PAGE>
REAL PROPERTY MAINTENANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
Revenue Recognition
The Company's revenues consist of landscape maintenance revenues and
installation revenues. The Company's landscape maintenance contracts are
typically for seven months and payments to the Company are remitted in equal
monthly payments over the term of the contract. Revenues from maintenance
contracts are recognized on the straight-line method while costs incurred under
the contracts can be expected to vary materially based on seasonal factors.
Monthly maintenance payments are recognized as they become due because the
contracts are fully cancelable without cause upon notice of 30 days or less by
either the Company or the customer. Should the Company elect to cancel a
contract, the customer would have no standing under either contract law or
equity to require additional services or obtain a refund (other than for
nonperformance prior to cancellation), notwithstanding that the customer may
have paid amounts which clearly exceeded the fair value of the services
received in those months in anticipation of lower priced services later in the
year.
The Company recognizes installation and snow removal revenue when services
are performed and billable under the terms of the applicable contract.
Revenues from installation contracts are recognized when the services are
performed and billable under the terms of the applicable contract. The balances
billed but not paid by customers pursuant to retainage provisions in
installation contracts will be due upon completion of the contracts and
acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance at each balance sheet date
will be collected within the subsequent fiscal year.
Cost of Services
Cost of services represents direct labor and associated costs (such as
benefits and workers' compensation expense), materials, supervisory personnel,
and equipment and vehicle costs, such as fuel, insurance and depreciation.
Warranty Costs
For installation contracts, the Company warrants plant life for one year
after installation. The warranty period can be extended if the Company is
retained for maintenance after the installation is complete. A reserve for
warranty costs is recorded based upon the historical level of warranty claims
and management's estimate of future costs.
Seasonality
The Company experienced and expects to continue to experience variability in
revenue and net income as a result of the seasonal nature of the Company's
business. Revenues from landscape maintenance contracts
F-197
<PAGE>
REAL PROPERTY MAINTENANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
remain relatively constant throughout the year; however, the related costs of
services vary due to seasonality. As a result, the gross margin from landscape
maintenance contracts can vary seasonally. Revenues from snow removal are
subject to the unpredictable weather conditions.
Income Taxes
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their shares of
the Company's taxable earnings or losses in their personal tax returns. The
Company will terminate its S Corporation status concurrently with the effective
date of the merger with LandCare.
Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, line of credit and debt. The Company believes that the
carrying value of these instruments on the accompanying balance sheets
approximate their fair value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 for the year ended December 31, 1998.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31
IN YEARS 1997
------------ -----------
<S> <C> <C>
Transportation equipment......................... 5 $ 931
Machinery and equipment.......................... 5-10 523
Office furniture and equipment................... 5 161
------
Total........................................ $1,615
Less--Accumulated depreciation................... (730)
------
Property and equipment, net.................. $ 885
======
</TABLE>
F-198
<PAGE>
REAL PROPERTY MAINTENANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Accounts receivable, trade.................................... $741
Allowance for doubtful accounts............................... (77)
----
$664
====
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Accounts payable, trade....................................... $332
Accrued compensation and benefits............................. 204
Warranty accrual.............................................. 30
----
$566
====
</TABLE>
5. LINE OF CREDIT AND LONG-TERM DEBT:
Line of Credit
As of December 31, 1997, the Company had a line of credit totaling $200,000
with a financial institution that is secured by all business assets. Interest
is at the financial institution's prime rate plus one percent, which was 8.5%
at December 31, 1997. The line of credit expires in July 1998. There were no
advances outstanding on the line of credit at December 31, 1997.
Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
Note payable to various financial institutions in total monthly
installments of approximately $17 including interest ranging from
4.9% to 11.25%, secured by certain vehicles, machinery and
equipment with payments due in varying maturities ranging from
1999-2002......................................................... $537
Note payable to a related entity maturing on December 31, 1999 with
monthly interest payments of 1.0% over prime rate................. 290
Note payable to a financial institution with monthly interest
payments of 1.0% over prime rate, secured by vehicles, all
inventory, accounts, equipment and general intangible, principal
payment due September 2001........................................ 50
Capital leases of equipment payable in monthly installments of
approximately $1 including interest ranging from 8.5% to 13.8%,
maturing in 1998-2000 ............................................ 22
----
Total.......................................................... 899
Less--Current portion.............................................. 167
----
$732
====
</TABLE>
F-199
<PAGE>
REAL PROPERTY MAINTENANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of long-term debt and capital lease obligations as
of December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998.............................................................. $167
1999.............................................................. 478
2000.............................................................. 127
2001.............................................................. 121
2002 and thereafter............................................... 6
----
$899
====
</TABLE>
6. RELATED-PARTY TRANSACTIONS :
Receivable from affiliate
At December 31, 1997, amounts due to the Company from shareholders, which
represent various cash advances, are approximately $12,000. The Company does
not have interest income recorded for the year ended December 31, 1997 relating
to amounts due from shareholders of the Company.
7. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases its office and warehouse buildings under operating lease
agreements expiring in December 1999 and January 2000. The leases are subject
to escalation for real estate taxes. Rent expense for these operating leases
for the year ended December 31, 1997 was approximately $75,000.
Future minimum lease payments for the operating lease are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998............................................................... $15
1999............................................................... 15
2000............................................................... 8
---
$38
===
</TABLE>
The Company also leases various items of equipment under daily or short-term
rental agreements. Total rent expense for all vehicles and equipment was
approximately $19,000 for the year ended December 31, 1997.
Litigation
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcomes of such legal actions will
have a material adverse effect on the Company's financial position or results
of operations.
Insurance
The Company carries a standard range of insurance coverage, including
business auto liability, general liability, and workers' compensation. The
Company has not incurred significant claims or losses on any of these insurance
policies.
F-200
<PAGE>
REAL PROPERTY MAINTENANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
The Company is self-insured for medical claims up to $15,000 per plan year
per covered individual and an aggregate of $145,000 per plan year. Claims in
excess of these amounts are covered by a stop-loss policy.
Employee 401(k) Retirement Plan
In 1986, the Company began to participate in a qualified 401(k) retirement
plan (the Plan) which covers eligible employees at least 21 years of age, who
have completed 1,000 hours of service and have been employed by the Company for
at least one year. The Company contributes monthly, matching 50% up to 6% of
the employee's contribution. The Company's contribution to the Plan for the
year ended December 31, 1997 was approximately $12,000.
F-201
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To LandCare USA, Inc.:
We have audited the accompanying balance sheet of LandCare USA, Inc., as of
December 31, 1997, and the related statements of operations, stockholders'
equity and cash flows for the period from inception (October 9, 1997) to
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LandCare USA, Inc., as of
December 31, 1997, and the results of its operations and its cash flows for the
period from inception (October 9, 1997) to December 31, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 6, 1998
F-202
<PAGE>
LANDCARE USA, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
CASH AND CASH EQUIVALENTS............................. $ 9 $ 11
DEFERRED OFFERING COSTS............................... 218 3,129
------- -------
Total assets...................................... $ 227 $ 3,140
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
ACCRUED LIABILITIES AND AMOUNTS DUE TO A STOCKHOLDER.. $ 203 $ 3,114
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par, 5,000,000 shares
authorized, none issued............................ -- --
Common stock, $.01 par, 100,000,000 shares
authorized, 2,369,398 and 2,559,398 shares
outstanding........................................ 24 26
Additional paid-in capital.......................... 5,782 7,148
------- -------
Retained deficit.................................... (5,782) (7,148)
------- -------
Total stockholders' equity........................ 24 26
------- -------
Total liabilities and stockholders' equity........ $ 227 $ 3,140
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-203
<PAGE>
LANDCARE USA, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 9, 1997) THREE MONTHS ENDED
TO DECEMBER 31, 1997 MARCH 31, 1998
-------------------- ------------------
(UNAUDITED)
<S> <C> <C>
REVENUES............................... $ -- $ --
COMPENSATION EXPENSE RELATING TO
ISSUANCE OF COMMON STOCK TO MANAGEMENT
AND CONSULTANTS....................... 5,782 1,366
-------- --------
LOSS BEFORE INCOME TAXES............... (5,782) (1,366)
-------- --------
INCOME TAX BENEFIT..................... -- --
NET LOSS............................... $ (5,782) $ (1,366)
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-204
<PAGE>
LANDCARE USA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
INITIAL CAPITALIZATION BY
NOTRE (October 9, 1997).... 78,258 $ 1 $ -- $ -- $ 1
Issuance of shares to
Notre.................... 1,486,900 15 -- -- 15
Issuance of management,
consultant and director
shares................... 804,240 8 5,782 -- 5,790
Net loss.................. -- -- -- (5,782) (5,782)
--------- --- ------ ------- -------
BALANCE, December 31, 1997.. 2,369,398 24 5,782 (5,782) 24
Issuance of management,
consultant and director
shares (unaudited)....... 190,000 2 1,366 -- 1,368
Net loss (unaudited)...... -- -- -- (1,366) (1,366)
--------- --- ------ ------- -------
BALANCE, March 31, 1998
(unaudited)................ 2,559,398 $26 $7,148 $(7,148) $ 26
========= === ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-205
<PAGE>
LANDCARE USA, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 9, 1997)
TO DECEMBER 31, THREE MONTHS ENDED
1997 MARCH 31, 1998
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................ $(5,782) $(1,366)
------- -------
Adjustments to reconcile net loss to net
cash provided by operating activities--
Compensation expense related to
issuance of common stock to
management and consultants........... 5,782 1,366
------- -------
Changes in assets and liabilities--
Increase in deferred offering
costs.............................. (218) (2,911)
Increase in accrued liabilities and
amounts due to stockholders........ 203 2,911
------- -------
Net cash used in operating
activities....................... (15) --
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock....................... 24 2
------- -------
Net cash provided by financing
activities....................... 24 2
------- -------
NET INCREASE IN CASH AND CASH
EQUIVALENTS.............................. 9 2
CASH AND CASH EQUIVALENTS, beginning of
period................................... -- 9
------- -------
CASH AND CASH EQUIVALENTS, end of period.. $ 9 $ 11
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-206
<PAGE>
LANDCARE USA, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
LandCare USA, Inc. (LandCare or the Company), a Delaware corporation, was
founded in October 1997 to become a leading national provider of landscape,
lawncare, tree trimming, line clearing and other related services. LandCare
intends to acquire seven businesses (the Mergers), complete an initial public
offering of its common stock (the IPO) and, subsequent to the IPO, continue to
acquire, through merger or purchase, similar companies to expand its national
operations. The accompanying financial statements reflect the activities of
LandCare prior to the acquisitions of the Founding Companies and the IPO.
Reference is made to the consolidated financial statements of LandCare USA,
Inc. and subsidiaries included elsewhere herein.
LandCare has not conducted any operations, and all activities to date have
related to the IPO and the Mergers. All expenditures to date have been funded
by the majority stockholder, Notre Capital Ventures II, L.L.C. (Notre), on
behalf of the Company. Notre has committed to fund the organization expenses
and Offering costs. As of December 31, 1997 and March 31, 1998, costs of
approximately $0.2 million and $3.1 million (unaudited), respectively, have
been incurred by Notre in connection with the IPO. LandCare has treated these
costs as deferred offering costs. LandCare is dependent upon the IPO to execute
the pending Mergers. There is no assurance that the pending Mergers discussed
below will be completed or that LandCare will be able to generate future
operating revenues.
The Company has an absence of a combined operating history, and LandCare's
future success is dependent upon a number of factors which include, among
others, the ability to integrate operations, reliance on the identification and
integration of satisfactory acquisition candidates, reliance on acquisition
financing and the ability to manage growth and attract and retain qualified
management and sales personnel as well as the need for additional capital.
2. INTERIM FINANCIAL INFORMATION:
Interim Financial Information
The interim financial statements as of March 31, 1998 and for the three
months then ended are unaudited, and certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. In the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim financial statements have been included.
Due to seasonality and other factors, the results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
Use Of Estimates And Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. STOCKHOLDERS' EQUITY:
Common Stock and Preferred Stock
LandCare effected a 78.2579-for-one stock dividend in March 1998, for each
share of common stock of the Company (Common Stock) then outstanding. In
addition, the Company increased the number of authorized shares of Common Stock
to 100,000,000 and authorized 5,000,000 shares of $.01 par value preferred
stock. The effects of the Common Stock dividend have been retroactively
reflected on the balance sheet and in the accompanying notes.
F-207
<PAGE>
LANDCARE USA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In connection with the organization and initial capitalization of LandCare,
the Company issued 78,258 shares of Common Stock at $.01 per share to Notre.
Notre incurred approximately $15,000 of expenses on behalf of the Company for
which the Company issued 1,486,900 shares to Notre in October 1997.
In November 1997, the Company issued a total of 804,240 shares of Common
Stock to management and directors of and consultants to the Company at a price
of $.01 per share. As a result, the Company recorded a nonrecurring, noncash
compensation charge of $5.8 million representing the difference between the
amount paid for the shares and an estimated fair value of the shares on the
date of sale, as if the Founding Companies were combined. During the first
quarter of 1998, the Company issued an additional 190,000 shares to management
and directors of the Company at a price of $.01 per share. As a result, the
Company recorded a nonrecurring, noncash compensation charge of $1.4 million
representing the difference between the amount paid for the shares (the
exercise price, in the case of the options granted) and an estimated fair value
of the shares on the date of sale, as if the Founding Companies were combined.
Restricted Voting Common Stock
In March 1998, the Company authorized 2,000,000 shares of $.01 par value
restricted voting common stock (Restricted Common Stock) and the primary
stockholder exchanged 1,296,408 shares of Common Stock for an equal number of
shares of Restricted Common Stock. The holder of Restricted Common Stock is
entitled to elect one member of the Company's board of directors and to 0.1 of
one vote for each share on all other matters on which they are entitled to
vote. Holders of Restricted Common Stock are not entitled to vote on the
election of any other directors.
Each share of Restricted Common Stock will automatically convert to Common
Stock on a share-for-share basis (a) in the event of a disposition of such
share of Restricted Common Stock by the holder thereof (other than a
distribution which is a distribution by a holder to its partners or beneficial
owners or a transfer to a related party of such holder (as defined in Sections
267, 707, 318 and/or 4946 of the Internal Revenue Code of 1986, as amended)),
(b) in the event any person acquires beneficial ownership of 15 percent or more
of the total number of outstanding shares of Common Stock of the Company, (c)
any bona fide offer to acquire 15 percent or more of the total number of
outstanding shares of Common Stock of the Company, or (d) in the event a
majority of the aggregate number of votes which may be cast by the holders of
outstanding shares of Common Stock and Restricted Common Stock entitled to vote
approve such conversion. After June 30, 2000, the board of directors may elect
to convert any remaining shares of Restricted Common Stock into shares of
Common Stock in the event 80 percent or more of the originally outstanding
shares of Restricted Common Stock have been previously converted into shares of
Common Stock.
Long-term Incentive Plan
In February 1998, the Board of Directors and the Company's stockholders
approved the Company's 1998 Long-Term Incentive Plan (the Plan), which provides
for the granting or awarding of incentive or nonqualified stock options, stock
appreciation rights, restricted or deferred stock, dividend equivalents and
other incentive awards to directors, officers and key employees of and
consultants to the Company. The number of shares authorized and reserved for
issuance under the Plan is the greater of 2,000,000 shares or 15 percent of the
aggregate number of shares of Common Stock outstanding at the date of grant.
The terms of the option awards will be established by the compensation
committee of the Company's board of directors. The Company intends to file a
registration statement registering the issuance of shares upon exercise of
options granted under this Plan. In February 1998, options to purchase 100,000
shares of Common Stock were issued at an exercise price of $6.00 per share. The
compensation charge of $0.1 million representing the difference between the
exercise
F-208
<PAGE>
LANDCARE USA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
price and the estimated fair values of the options on the date of grant related
to these options will be amortized over the 5 year vesting period. The Company
expects to grant nonqualified stock options to purchase a total of 570,000
shares of Common Stock to key employees of the Company at the initial public
offering price upon consummation of the IPO. In addition, the Company expects
to grant options to purchase a total of 767,819 shares of Common Stock to
certain employees of the Founding Companies at the initial public offering
price per share. All of these options will vest at the rate of 20 percent per
year, commencing on the first anniversary of the IPO and will expire ten years
from the date of grant or three months following termination of employment.
Nonemployee Directors' Stock Plan
In February 1998, the Company's stockholders approved the 1998 Nonemployee
Directors' Stock Plan (the Directors' Plan), which provides for the granting or
awarding of stock options and stock appreciation rights to nonemployee
directors of the Company. The number of shares authorized and reserved for
issuance under the Directors' Plan is 250,000 shares. The Directors' Plan
provides for the automatic grant of options to purchase 10,000 shares to each
nonemployee director serving at the commencement of the IPO.
Each nonemployee director will be granted options to purchase an additional
10,000 shares at the time of the initial election. In addition, each director
will be automatically granted options to purchase 5,000 shares at each annual
meeting of the stockholders occurring more than two months after the date of
the director's initial election. All options will be exercised at the fair
market value at the date of grant and are immediately vested upon grant.
Options will be granted to each of three future and one current member of the
board of directors to purchase 10,000 shares of Common Stock at the initial
public offering price per share effective upon the consummation of the IPO.
These options will expire the earlier of 10 years from the date of grant or one
year after termination of service as a director.
The Directors' Plan allows nonemployee directors to receive shares (deferred
shares) at future settlement dates in lieu of cash. The number of deferred
shares will have an aggregate fair market value equal to the fees payable to
the directors.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a new fair value-
based method of accounting for employee stock options or similar equity
instruments and the current intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25. Entities
electing to remain with the accounting in APB Opinion No. 25 must make pro
forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated financial statements.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 in the year ended December 31, 1998.
F-209
<PAGE>
LANDCARE USA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. EVENTS SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
Wholly owned subsidiaries of LandCare have signed definitive agreements to
acquire by merger or share exchange seven companies (the Founding Companies) to
be effective contemporaneously with the IPO. The companies to be acquired are
Trees, Inc., Four Seasons Landscape and Maintenance, Inc., Southern Tree &
Landscape Co., D. R. Church Landscape Co., Inc., Ground Control Landscaping,
Inc., Arteka Corporation and Desert Care Landscaping, Inc. LandCare will
acquire the Founding Companies for cash and 5.2 million shares of Common Stock.
In March 1998, LandCare filed a registration statement on Form S-1 for the
sale of 5,000,000 shares of its Common Stock. On June 9, 1998, LandCare
completed its IPO of 5,000,000 shares of its Common Stock.
F-210
<PAGE>
APPENDIX A
PLAN OF REORGANIZATION AND AGREEMENT AND PLAN OF MERGER
DATED AS OF
NOVEMBER 1, 1998
BY AND AMONG
LANDCARE USA, INC.,
THE SERVICEMASTER COMPANY
AND
SVM ACQUISITION CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1
THE MERGER................................................................ A-1
Section 1.1 The Merger.................................................. A-1
Section 1.2 Conversion of Shares........................................ A-1
Section 1.3 Surrender and Payment....................................... A-3
Section 1.4 Stock Options............................................... A-4
Section 1.5 Fractional Shares........................................... A-5
Section 1.6 Adjustments................................................. A-6
ARTICLE 2
THE SURVIVING CORPORATION................................................. A-6
Section 2.1 Certificate of Incorporation................................ A-6
Section 2.2 Bylaws...................................................... A-6
Section 2.3 Directors and Officers...................................... A-6
ARTICLE 3
LANDCARE WARRANTIES....................................................... A-7
Section 3.1 Organization................................................ A-7
Section 3.2 Corporate Authorization; Validity of Agreement; Board
Action................................................................. A-7
Section 3.3 Consents and Approvals; No Violations....................... A-7
Section 3.4 Capitalization.............................................. A-8
Section 3.5 Subsidiaries; Capitalization of Subsidiaries................ A-9
Section 3.6 SEC Reports and Financial Statements........................ A-9
Section 3.7 Disclosure Documents........................................ A-9
Section 3.8 Absence of Certain Changes.................................. A-10
Section 3.9 No Undisclosed Liabilities.................................. A-11
Section 3.10 Employee Benefit Plans..................................... A-11
Section 3.11 Compliance with Law........................................ A-12
Section 3.12 Litigation................................................. A-12
Section 3.13 No Default................................................. A-12
Section 3.14 Taxes...................................................... A-12
Section 3.15 Contracts.................................................. A-15
Section 3.16 Transactions with Affiliates............................... A-16
Section 3.17 Environmental Matters...................................... A-16
Section 3.18 Intellectual Property...................................... A-17
Section 3.19 Opinion of Financial Advisor............................... A-17
Section 3.20 Finders and Investment Bankers............................. A-17
Section 3.21 Takeover Statutes.......................................... A-17
Section 3.22 Insurance.................................................. A-17
Section 3.23 Supportive Stockholder Actions............................. A-17
ARTICLE 4
WARRANTIES OF SERVICEMASTER AND MERGER SUBSIDIARY......................... A-18
Section 4.1 Organization................................................ A-18
Section 4.2 Corporate Authorization; Validity of Agreement; Necessary
Action................................................................. A-18
Section 4.3 Consents and Approvals; No Violations....................... A-19
Section 4.4 Capitalization.............................................. A-19
Section 4.5 SEC Reports and Financial Statements........................ A-19
Section 4.6 Absence of Certain Changes.................................. A-20
Section 4.7 No Undisclosed Liabilities.................................. A-20
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 4.8 Litigation.................................................. A-20
Section 4.9 Compliance with Law......................................... A-20
Section 4.10 No Default................................................. A-20
Section 4.11 Disclosure Documents....................................... A-21
Section 4.12 Opinion of Financial Advisor............................... A-21
ARTICLE 5
COVENANTS OF LANDCARE..................................................... A-21
Section 5.1 Conduct of Business by LandCare Pending the Merger.......... A-21
Section 5.2 LandCare Stockholders Meeting............................... A-22
Section 5.3 Access to Information....................................... A-23
Section 5.4 No Solicitation............................................. A-23
Section 5.5 Corporate Organization...................................... A-24
Section 5.6 Pipeline Acquisitions....................................... A-24
Section 5.7 Redemption of Convertible Notes............................. A-26
ARTICLE 6
COVENANTS OF SERVICEMASTER................................................ A-27
Section 6.1 Obligations of Merger Subsidiary............................ A-27
Section 6.2 Indemnification............................................. A-27
ARTICLE 7
COVENANTS OF SERVICEMASTER AND LANDCARE................................... A-27
Section 7.1 Diligent Efforts............................................ A-27
Section 7.2 Certain Filings............................................. A-28
Section 7.3 Public Announcements........................................ A-28
Section 7.4 Further Assurances.......................................... A-28
Section 7.5 Notices of Certain Events................................... A-28
Section 7.6 Preparation of the Registration Statement and the LandCare
Proxy Statement........................................................ A-28
Section 7.7 Letters of LandCare's Accountants........................... A-29
Section 7.8 Affiliates.................................................. A-29
Section 7.9 NYSE Listing................................................ A-29
Section 7.10 Regulatory Matters and Approvals........................... A-29
Section 7.11 Tax Treatment.............................................. A-29
Section 7.12 Representations............................................ A-30
Section 7.13 Material Consents.......................................... A-30
ARTICLE 8
CONDITIONS TO THE MERGER.................................................. A-30
Section 8.1 Conditions to the Obligations of Each Party................. A-30
Section 8.2 Additional Conditions to the Obligations of ServiceMaster
and Merger Subsidiary.................................................. A-30
Section 8.3 Additional Conditions to the Obligations of LandCare........ A-30
ARTICLE 9
TERMINATION............................................................... A-31
Section 9.1 Termination................................................. A-31
Section 9.2 Waiver...................................................... A-32
Section 9.3 Closing..................................................... A-32
Section 9.4 Effect of Termination; Termination Fee...................... A-32
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 10
MISCELLANEOUS.............................................................. A-33
Section 10.1 Notices..................................................... A-33
Section 10.2 Survival of Representations and Warranties.................. A-33
Section 10.3 Amendments; No Waivers...................................... A-33
Section 10.4 Expenses.................................................... A-34
Section 10.5 Successors and Assigns...................................... A-34
Section 10.6 Governing Law............................................... A-34
Section 10.7 Counterparts; Effectiveness................................. A-34
Section 10.8 Headings.................................................... A-34
Section 10.9 No Third Party Beneficiaries................................ A-34
</TABLE>
iii
<PAGE>
PLAN OF REORGANIZATION AND AGREEMENT AND PLAN OF MERGER
This Plan of Reorganization and Agreement and Plan of Merger (this
"Agreement") has been made as of November 1, 1998 (the "date hereof") among
LandCare USA, Inc., a Delaware corporation ("LandCare"), The ServiceMaster
Company, a Delaware corporation ("ServiceMaster"), and SVM Acquisition
Corporation, a Delaware corporation and a wholly-owned subsidiary of
ServiceMaster ("Merger Subsidiary").
WHEREAS, the respective boards of directors of ServiceMaster, Merger
Subsidiary and LandCare have approved, and declared advisable and in the best
interests of their respective stockholders, this Agreement and the acquisition
of LandCare by ServiceMaster on the terms and conditions set forth herein.
WHEREAS, ServiceMaster has entered into Voting Agreements with stockholders
of LandCare who collectively own approximately 30% of LandCare's Common Stock
outstanding on the date hereof (the "Voting Agreements").
The parties hereto agree as follows:
ARTICLE 1
THE MERGER
Section 1.1 The Merger.
(a) Upon the terms and subject to the conditions set forth in this Agreement,
at the Effective Time (as hereinafter defined), Merger Subsidiary shall be
merged (the "Merger") with and into LandCare in accordance with the General
Corporation Law of the State of Delaware ("Delaware Law"), whereupon the
separate existence of Merger Subsidiary shall cease, and LandCare shall
continue as the surviving corporation (the "Surviving Corporation").
(b) As soon as practicable after satisfaction or, to the extent permitted
hereunder, waiver of all conditions to the Merger set forth herein, LandCare
and Merger Subsidiary will file a certificate of merger with the Secretary of
State of the State of Delaware and make all other filings or recordings
required by Delaware Law in connection with the Merger. The Merger shall become
effective at such time as the certificate of merger is duly filed with the
Secretary of State of the State of Delaware or at such later time as is agreed
by ServiceMaster and LandCare and specified in the certificate of merger (the
"Effective Time").
(c) The Merger shall have the effects set forth in Section 259 of the
Delaware Law.
Section 1.2 Conversion of Shares.
(a) At the Effective Time:
(i) each share of common stock, par value $0.01 per share (the "LandCare
Common Stock"), of LandCare (the "Shares") held by LandCare as treasury
stock immediately prior to the Effective Time shall be canceled, and no
consideration shall be delivered in exchange therefor;
(ii) each share of common stock of Merger Subsidiary outstanding
immediately prior to the Effective Time shall be converted into and become
one share of common stock of the Surviving Corporation and shall constitute
the only outstanding share of capital stock of the Surviving Corporation;
and
(iii) subject to Section 1.5, each Share outstanding immediately prior to
the Effective Time shall be converted into the right to receive a fraction
(herein called the "Exchange Ratio") of one share common stock, par value
$0.01 per share, of ServiceMaster ("ServiceMaster Common Stock"). The
shares of ServiceMaster Common Stock to be received as consideration
pursuant hereto (together with cash in lieu
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of fractional shares of ServiceMaster Common Stock as specified below) are
referred to herein as the "Merger Consideration."
(b) Adjustment of Exchange Ratio.
(i) The Exchange Ratio shall be 0.55 in the event that the average of the
closing prices (the "Final Average Closing Price") of ServiceMaster Common
Stock on the New York Stock Exchange (the "NYSE") Composite Transaction
Tape (as reported in The Wall Street Journal or, if not reported thereby,
any other authoritative source) on the 20 consecutive Trading Days (as
hereinafter defined) ending on the third Trading Day prior to the Scheduled
Meeting Date is more than $16.35 per share and not more than $20.00 per
share. The term "Scheduled Meeting Date" means the date specified in the
LandCare Proxy Statement (as hereinafter defined) distributed to LandCare's
stockholders as the date on which the meeting at which LandCare's
stockholders will vote on the Merger is scheduled to occur; provided that
if such meeting shall actually be held on a later date, then if
ServiceMaster and LandCare shall both agree, the period during which the
Final Average Closing Price shall be determined may be changed to a period
of 20 consecutive Trading Days ending not more than three Trading Days
before the date on which such meeting shall actually occur. "Trading Day"
means any day on which the NYSE is open for trading. "LandCare Stockholders
Meeting" means the meeting at which the record holders of LandCare Common
Stock shall actually vote with respect to the Merger.
(ii) In the event that the Final Average Closing Price is more than
$20.00, then the Exchange Ratio shall be the quotient derived by dividing
$11 by the Final Average Closing Price.
(iii) In the event the Final Average Closing Price is less than $16.36,
then unless ServiceMaster shall otherwise notify LandCare in writing prior
to the date immediately prior to the date upon which the LandCare
Stockholders Meeting is then scheduled to occur (the "Freeze Deadline"),
the Exchange Ratio shall automatically adjust to the smallest decimal which
when multiplied by the Final Average Closing Price will equal $9.00. If
ServiceMaster shall notify LandCare in writing prior to the Freeze Deadline
that ServiceMaster elects not to permit the adjustment prescribed by the
preceding sentence, then: (i) the Exchange Ratio shall be 0.55 (or such
greater number as ServiceMaster shall specify in ServiceMaster's notice to
LandCare), (ii) LandCare shall have the right to reschedule the LandCare
Stockholders Meeting up to ten days later than the date upon which it
otherwise would have been held (provided that without the agreement of
LandCare and ServiceMaster such rescheduling shall not cause the period
used to determine the Final Average Closing Price to change), and (iii)
LandCare shall have the right to terminate this Agreement by giving written
notice to ServiceMaster.
(iv) If any adjustment is made to the Exchange Ratio pursuant to this
Section 1.2(b), then such adjusted Exchange Ratio shall be rounded to four
decimal places, rounding upward from 0.00005.
(v) LandCare shall set the date for the LandCare Stockholders Meeting;
provided that without ServiceMaster's consent, such date shall not be
earlier than February 15, 1999 and shall not be later than the later of
February 15, 1999 or the 45th day after the Securities and Exchange
Commission (the "SEC") shall have declared the Registration Statement
effective. The parties may by agreement change the date on which the
LandCare Stockholders Meeting will occur.
(c) From and after the Effective Time, all Shares converted in accordance
with Section 1.2(a)(iii) shall no longer be outstanding and shall automatically
be canceled and shall cease to exist, and each holder of a certificate
representing any such Shares shall cease to have any rights with respect
thereto, except the right to receive the Merger Consideration and any dividends
payable pursuant to Section 1.3(f) upon surrender in accordance with Section
1.3, without interest.
For purposes of this Agreement, "Person" or "person" means an individual, a
corporation, a limited liability company, a partnership, an association, a
trust or any other entity or organization, including a government or political
subdivision or any agency or instrumentality thereof. For purposes of this
Agreement, the word "Subsidiary" when used with respect to any Person means any
other corporation or other entity of which a majority of the securities or
other ownership interests having ordinary voting power to elect a majority
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of the board of directors or other persons performing similar functions are
directly or indirectly owned by such Person. For purposes of this Agreement,
any reference to any event, change or effect having a material adverse effect
on or with respect to any entity (or group of entities taken as a whole) means
such event, change or effect, in the aggregate with such other events, changes
or effects, which is materially adverse to the business, financial condition,
operations, results of operations or prospects of such entity (or group of
entities taken as a whole).
Section 1.3 Surrender and Payment.
(a) Prior to the Effective Time, ServiceMaster shall appoint an agent
reasonably acceptable to LandCare (the "Exchange Agent") for the purpose of
exchanging certificates representing Shares for the Merger Consideration.
Immediately following the Effective Time, ServiceMaster shall deposit with the
Exchange Agent, for the benefit of the holders of certificates formerly
representing Shares, the Merger Consideration issuable pursuant to Section
1.2(a)(iii) in exchange for outstanding Shares. Promptly after the Effective
Time, ServiceMaster will send, or will cause the Exchange Agent to send, to
each holder of Shares at the Effective Time (i) a letter of transmittal for use
in such exchange (which shall specify that delivery of the Merger Consideration
shall be effected, and risk of loss and title to the certificates representing
ServiceMaster Common Stock and LandCare Common Stock shall pass, only upon
proper deliver of the certificates formerly representing Shares to the Exchange
Agent) and (ii) instructions for use in effecting the surrender of the
certificates formerly representing Shares in exchange for the Merger
Consideration.
(b) Each holder of Shares that have been converted into a right to receive
the Merger Consideration, upon surrender to the Exchange Agent of a certificate
or certificates formerly representing such Shares, together with a properly
completed and duly executed letter of transmittal covering such Shares and such
other documents as may reasonably be required by the Exchange Agent, will be
entitled to receive the Merger Consideration payable in respect of such Shares
and any dividends payable pursuant to Section 1.3(f). Until so surrendered,
each such certificate shall, after the Effective Time, represent for all
purposes only the right to receive the Merger Consideration and any dividends
payable pursuant to Section 1.3(f), without interest.
(c) If any portion of the Merger Consideration is to be paid to a Person
other than the registered holder of the Shares formerly represented by the
certificate or certificates surrendered in exchange therefor, it shall be a
condition to such payment that the certificate or certificates so surrendered
shall be properly endorsed or otherwise be in proper form for transfer and that
the Person requesting such payment shall pay to the Exchange Agent any transfer
or other taxes required as a result of such payment to a Person other than the
registered holder of such Shares represented by the certificate or certificates
so surrendered or establish to the satisfaction of the Exchange Agent that such
tax has been paid or is not applicable.
(d) After the Effective Time, there shall be no further registration of
transfers of Shares. If, after the Effective Time, certificates formerly
representing Shares are presented to the Surviving Corporation, they shall be
canceled and exchanged for the consideration provided for, and in accordance
with the procedures set forth, in this Article 1.
(e) Any portion of the Merger Consideration made available to the Exchange
Agent pursuant to Section 1.3(a) that remains unclaimed by the holders of
Shares one year after the Effective Time shall be returned to ServiceMaster,
upon demand, and any such holder who has not exchanged his Shares for the
Merger Consideration in accordance with this Section 1.3 prior to that time
shall thereafter look only to ServiceMaster for payment of the Merger
Consideration and any dividends payable pursuant to Section 1.3(f) in respect
of his Shares. Neither ServiceMaster, LandCare nor the Exchange Agent shall be
liable to any person in respect of any shares of ServiceMaster Common Stock,
any dividends or distributions with respect thereto or any cash in lieu of
fractional shares of ServiceMaster Common Stock, in each case, delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law. If any certificate representing Shares shall not have been
surrendered prior to two years after the Effective Time (or immediately prior
to such earlier date on which any Merger Consideration, any dividends or
distributions payable to the holder of such certificate or any
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cash payable to the holder of such certificate formerly representing LandCare
Common Stock pursuant to this Article 1, would otherwise escheat to or become
the property of any Governmental Entity (as hereinafter defined)), any such
Merger Consideration, dividends or distributions in respect of such certificate
or such cash shall, to the extent permitted by applicable law, become the
property of the Surviving Corporation, free and clear of all claims or interest
of any person previously entitled thereto.
(f) No dividends or other distributions with respect to ServiceMaster Common
Stock issued in connection with the Merger shall be paid to the holder of any
unsurrendered certificates formerly representing Shares until such certificates
are surrendered as provided in this Section 1.3. Subject to the effect of
applicable laws, following the surrender of such certificates, there shall be
paid, without interest, to the record holder of ServiceMaster Common Stock
issued in exchange therefor at the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
payable prior to or on the date of such surrender with respect to such whole
shares of ServiceMaster Common Stock and not previously paid, less the amount
of any withholding taxes which may be required thereon.
(g) The Exchange Agent shall invest any cash deposited with the Exchange
Agent, as directed by ServiceMaster, on a daily basis. Any interest and other
income resulting from such investments shall be paid to ServiceMaster.
(h) If any certificate representing Shares shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such certificate, the Exchange
Agent shall issue in exchange for such lost, stolen or destroyed certificate
the Merger Consideration and, if applicable, any unpaid dividends and
distributions on shares of ServiceMaster Common Stock deliverable in respect
thereof and any cash in lieu of fractional shares, in each case, due to such
person pursuant to this Agreement.
Section 1.4 Stock Options.
(a) As soon as practicable following the date of this Agreement, the Board of
Directors of LandCare (and, if appropriate, any committee administering its
1998 Long-Term Incentive Plan and 1998 Non-Employee Director's Stock Plan (the
"LandCare Option Plans")) shall adopt such resolutions or take such other
actions as may be required to effect the following:
(i) adjust the terms of all outstanding LandCare Stock Options (defined
below) granted under the LandCare Option Plans and the terms of the
LandCare Option Plans, to provide that at the Effective Time, each LandCare
Stock Option outstanding immediately prior to the Effective Time shall be
deemed to constitute an option to acquire, on the same terms and conditions
as were applicable under such LandCare Stock Option (subject to adjustments
and lapsing of restrictions, vesting or acceleration of exercisability of
LandCare Stock Options required by this Section 1.4), the same number of
shares of ServiceMaster Common Stock as the holder of such LandCare Stock
Option would have been entitled to receive pursuant to the Merger had such
holder exercised such LandCare Stock Option in full immediately prior to
the Effective Time, at a price per share equal to the quotient derived by
dividing the Exchange Ratio into the exercise price per share at which the
LandCare Common Stock shall have been purchasable on exercise of such
LandCare Stock Option prior to the Effective Time; and
(ii) make such other changes to the LandCare Option Plans as it deems
appropriate to give effect to the Merger (subject to approval of
ServiceMaster, which shall not be unreasonably withheld).
(b) At the Effective Time and subject to the last sentence to this Section
1.4(b), all conditions and restrictions relating to all outstanding LandCare
Stock Options which have been granted pursuant to the LandCare Option Plans
(the "LandCare Stock Options"), including limitations on exercisability, risks
of forfeiture and conditions and restrictions requiring continued performance
of services with respect to the exercisability or settlement of such LandCare
Stock Options, shall immediately lapse. LandCare shall use
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diligent efforts to cause the individuals listed in Section 1.4(b) of the
LandCare Disclosure Schedule (as hereinafter defined) (hereinafter referred to
as the "Senior Option Holders") to waive the complete lapsing of conditions and
restrictions relating to exercisability of LandCare Stock Options set forth
above, and accept a modified vesting schedule whereby one-half of each Senior
Option Holder's LandCare Stock Options shall vest and thereafter be exercisable
as provided in the respective LandCare Option Agreement on the date six months
immediately following the Effective Time, and the remaining one-half of such
LandCare Stock Options shall vest and thereafter be exercisable as provided in
the respective LandCare Option Agreement on the first anniversary of the
Effective Time; provided, however, in the event a Senior Option Holder's
employment is terminated by LandCare without Cause (as defined in the
respective Senior Option Holder's employment agreement with LandCare) or if the
Senior Option Holder elects to terminate his employment with LandCare for Good
Reason (as defined in the respective Senior Option Holder's employment
agreement with LandCare) the unvested portion of such Senior Option Holder's
LandCare Stock Options shall immediately vest and be exercisable for a period
of three months following termination of employment.
(c) As soon as practicable after the Effective Time, ServiceMaster shall
deliver to the holders of LandCare Stock Options appropriate notices setting
forth such holders' rights pursuant to the respective LandCare Option Plans and
the agreements evidencing the grants of such LandCare Stock Options shall
continue in effect on the same terms and conditions (except as expressly
provided above).
(d) ServiceMaster shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of ServiceMaster Common Stock for
delivery on exercise of the LandCare Stock Options assumed in accordance with
this Section 1.4. As soon as reasonably practicable after the Effective Time,
ServiceMaster shall file a registration statement on Form S-8 (or any successor
or other appropriate form) with respect to the shares of ServiceMaster Common
Stock subject to such LandCare Stock Options and shall use reasonable efforts
to maintain the effectiveness of such registration statement or registration
statements (and maintain the current status of the prospectus or prospectuses
contained therein) for so long as such LandCare Stock Options remain
outstanding.
Section 1.5 Fractional Shares.
(a) No certificates or scrip representing fractional shares of ServiceMaster
Common Stock shall be issued upon the surrender for exchange of certificates
formerly representing Shares, no dividend or distribution of ServiceMaster
shall relate to such fractional share interests and such fractional share
interests will not entitle the owner thereof to vote or to any rights of a
stockholder of ServiceMaster.
(b) As promptly as practicable following the Effective Time, ServiceMaster
shall cause the Exchange Agent to determine the excess of (i) the number of
whole shares of ServiceMaster Common Stock delivered to the Exchange Agent by
ServiceMaster pursuant to Section 1.3(a) hereof over (ii) the aggregate number
of whole shares of ServiceMaster Common Stock to be distributed to former
holders of Shares pursuant to Section 1.3(b) hereof (such excess being herein
called the "Excess Shares"). Following the Effective Time, the Exchange Agent
shall, on behalf of former holders of certificates representing Shares, sell
the Excess Shares at then-prevailing prices on the NYSE, all in the manner
provided in this Section.
(c) The sale of the Excess Shares by the Exchange Agent shall be executed on
the NYSE through one or more member firms of the NYSE and shall be executed in
round lots to the extent practicable. ServiceMaster shall cause the Exchange
Agent to use reasonable efforts to complete the sale of the Excess Shares as
promptly following the Effective Time as, in the Exchange Agent's sole
judgment, is practicable consistent with obtaining the best execution of such
sales in light of prevailing market conditions. Until the net proceeds of such
sale or sales have been distributed to the holders of certificates formerly
representing Shares, the Exchange Agent shall hold such proceeds in trust for
such holders (the "Common Stock Trust"). The Surviving Corporation shall pay
all commissions, transfer taxes and other out-of-pocket transaction costs,
including the expenses and compensation of the Exchange Agent incurred in
connection with such sale of the Excess Shares. The Exchange Agent shall
determine the portion of the Common Stock Trust to which each former holder of
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Shares is entitled, if any, by multiplying the amount of the aggregate net
proceeds comprising the Common Stock Trust by a fraction, the numerator of
which is the amount of the fractional share interest to which such former
holder of Shares is entitled (after taking into account all Shares held at the
Effective Time by such holder) and the denominator of which is the aggregate
amount of fractional share interests to which all former holders of Shares are
entitled.
(d) Notwithstanding subsections (a), (b) and (c) above, the Surviving
Corporation may elect at its option, exercised prior to the Effective Time, in
lieu of the issuance and sale of Excess Shares and the making of the payments
herein above contemplated, to pay each former holder of Shares an amount in
cash equal to the product obtained by multiplying (i) the fractional share
interest to which such former holder (after taking into account all Shares held
at the Effective Time by such holder) would otherwise be entitled by (ii) the
closing price for a share of ServiceMaster Common Stock as reported on the NYSE
Composite Transaction Tape (as reported in The Wall Street Journal, or, if not
reported thereby, any other authoritative source) on the Closing Date (as
hereinafter defined), and, in such case, all references herein to the cash
proceeds of the sale of the Excess Shares and similar references shall be
deemed to mean and refer to the payments calculated as set forth in this
subsection (d).
(e) As soon as practicable after the determination of the amount of cash, if
any, to be paid to holders of certificates formerly representing Shares with
respect to any fractional share interests, ServiceMaster shall cause the
Exchange Agent to make available such amounts to such holders of certificates
formerly representing Shares, subject to surrender of such certificates in
accordance with Section 1.3. For purposes of this Section 1.5, Shares of any
holder represented by two or more certificates may be aggregated, and in no
event shall any holder be paid an amount in cash in respect of more than one
share of ServiceMaster Common Stock.
Section 1.6 Adjustments. In the event of any stock dividend in respect of
outstanding ServiceMaster Common Stock, or of any split, combination or
reclassification of the outstanding ServiceMaster Common Stock or of any
issuance of any other securities in exchange or in substitution for outstanding
shares of ServiceMaster Common Stock at any time during the period from the
date of this Agreement to the Effective Time, LandCare and ServiceMaster shall
make such adjustment to the Merger Consideration as LandCare and ServiceMaster
shall mutually agree so as to preserve the economic benefits that LandCare and
ServiceMaster each reasonably expected on the date of this Agreement to receive
as a result of the consummation of the Merger and the other transactions
contemplated by this Agreement.
ARTICLE 2
THE SURVIVING CORPORATION
Section 2.1 Certificate of Incorporation. The certificate of incorporation of
Merger Subsidiary in effect at the Effective Time shall be the certificate of
incorporation of the Surviving Corporation until amended in accordance with
applicable law.
Section 2.2 Bylaws. The bylaws of Merger Subsidiary in effect at the
Effective Time shall be the bylaws of the Surviving Corporation until amended
in accordance with applicable law.
Section 2.3 Directors and Officers. From and after the Effective Time, until
successors are duly elected or appointed and qualified in accordance with the
Delaware Law and the certificate of incorporation and bylaws of the Surviving
Corporation, the directors and officers of Merger Subsidiary at the Effective
Time shall be the directors and officers of the Surviving Corporation, and the
directors and officers of LandCare immediately prior to the Effective Time
shall cease to be directors and officers of LandCare at the Effective Time.
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ARTICLE 3
LANDCARE WARRANTIES
References in this Agreement to the "LandCare Disclosure Schedule" mean the
document captioned "LandCare Disclosure Schedule" as constituted upon its
delivery to ServiceMaster prior to ServiceMaster's execution and delivery of
this Agreement. LandCare warrants to ServiceMaster and Merger Subsidiary,
subject in the case of the warranties in each particular section below to the
exceptions set forth in the corresponding section of the LandCare Disclosure
Schedule:
Section 3.1 Organization. Each of LandCare and its Subsidiaries is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, and has all requisite corporate
power and authority and all necessary governmental approvals to own, lease and
operate its properties and to carry on its business as now being conducted,
except where the failure to be so organized, existing and in good standing or
to have such power, authority and governmental approvals would not have a
material adverse effect on LandCare and its Subsidiaries taken as a whole. Each
of LandCare and its Subsidiaries is duly qualified or licensed to do business
and in good standing in each jurisdiction in which the property owned, leased
or operated by it or the nature of the business conducted by it makes such
qualification or licensing necessary, except where the failure to be so duly
qualified or licensed and in good standing would not, in the aggregate, have a
material adverse effect on LandCare and its Subsidiaries taken as a whole.
Section 3.2 Corporate Authorization; Validity of Agreement; Board Action.
(a) LandCare has full corporate power and authority to execute and deliver
this Agreement and, subject to obtaining any necessary approval of its
stockholders as contemplated by Section 5.2 with respect to the adoption of
this Agreement, to consummate the transactions contemplated hereby. The
execution, delivery and performance by LandCare of this Agreement, and the
consummation by it of the transactions contemplated hereby, have been duly and
validly authorized by its board of directors and, except for obtaining the
approval of the stockholders of LandCare as contemplated by Section 5.2 with
respect to the adoption of this Agreement, no other corporate action or
proceedings on the part of LandCare is necessary to authorize the execution and
delivery by LandCare of this Agreement, and the consummation by it of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by LandCare and, assuming this Agreement constitutes a valid and
binding obligation of ServiceMaster and Merger Subsidiary, constitutes a valid
and binding obligation of LandCare, enforceable against LandCare in accordance
with its terms, except that (i) such enforcement may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereafter in effect,
affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject
to equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(b) The affirmative vote of the holders of a majority of the LandCare Common
Stock outstanding at the record date for the LandCare Stockholders Meeting is
the only vote of the holders of any class or series of capital stock of
LandCare necessary to adopt this Agreement, and thus to approve of the
transactions contemplated by this Agreement.
Section 3.3 Consents and Approvals; No Violations. Except for all filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Securities Act of 1933, as amended (the
"Securities Act"), the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), the state securities or "blue sky" laws, state
takeover laws, and except for the adoption of this Agreement by the
stockholders of LandCare and the filing of the certificate of merger as
required by Delaware Law, neither the execution, delivery or performance of
this Agreement nor the consummation by LandCare of the transactions
contemplated hereby nor compliance by LandCare with any of the provisions
hereof will:
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(a) conflict with or result in any breach of any provision of the certificate
of incorporation or bylaws or similar organizational documents of LandCare or
of any of its Subsidiaries;
(b) require any filing with, or permit, authorization, consent or approval
of, any court, arbitral tribunal, administrative agency or commission or other
governmental or other regulatory authority, commission or agency (a
"Governmental Entity"), except where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings would not have a
material adverse effect on LandCare and its Subsidiaries taken as a whole and
would not, or would not be reasonably likely to, materially impair the ability
of LandCare, ServiceMaster or Merger Subsidiary to consummate the transactions
contemplated by this Agreement;
(c) result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
termination, amendment, cancellation or acceleration) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, guarantee,
other evidence of indebtedness (collectively, the "Debt Instruments"), lease,
license, contract, agreement or other instrument or obligation to which
LandCare or any of its Subsidiaries is a party or by which any of them or any
of their properties or assets may be bound (a "LandCare Agreement"), except for
any violation, breach or default which would not have a material adverse effect
on LandCare and its Subsidiaries taken as a whole;
(d) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to LandCare, any of its Subsidiaries or any of their properties or
assets, except for any violation which would not have a material adverse effect
on LandCare and its Subsidiaries taken as a whole; or
(e) result in the creation or imposition of any mortgage, lien, pledge,
charge, encumbrance or other security interest on any asset of LandCare or any
of its Subsidiaries, except for any such results which would not have a
material adverse effect on LandCare and its Subsidiaries taken as a whole.
Section 3.4 Capitalization.
(a) The authorized capital stock of LandCare consists of 102,000,000 shares
of LandCare Common Stock (including shares of LandCare Common Stock issued upon
the conversion of LandCare's Restricted Voting Common Stock) and 5,000,000
shares of preferred stock, par value $.01 per share ("LandCare Preferred
Stock"). As of the close of business on the date hereof, (i) 16,624,463 shares
of LandCare Common Stock were issued and outstanding and no shares of LandCare
Common Stock were held in treasury and (ii) no shares of LandCare Preferred
Stock were issued and outstanding or held in treasury. All outstanding shares
of the capital stock of LandCare are, and all shares which may be issued
pursuant to the exercise of LandCare Stock Options will be, when issued in
accordance with the respective terms thereof, duly authorized, validly issued,
fully paid and non-assessable.
(b) As of the date hereof, options to acquire an aggregate of 2,185,673
shares of LandCare Common Stock are outstanding under the LandCare Option
Plans. Schedule 3.4(b) lists each holder of an option under the LandCare Option
Plans, the number of shares of LandCare Common Stock issuable with respect to
each such option (assuming full vesting) and the exercise price of such option.
No option issued by the LandCare is or purports to be an "incentive stock
option" within the meaning of Section 422 of the Code (as hereinafter defined).
(c) There are no bonds, debentures, notes or other indebtedness having voting
rights (or convertible into securities having such rights) ("Voting Debt") of
LandCare or any of its Subsidiaries issued and outstanding. There are no shares
of capital stock of LandCare authorized, issued or outstanding and there are no
existing options, warrants, calls, preemptive rights, subscriptions or other
rights, convertible securities, agreements, arrangements or commitments of any
character, relating to the issued or unissued capital stock of LandCare or any
of its Subsidiaries, obligating LandCare or any of its Subsidiaries to issue,
transfer or sell or cause to be issued, transferred or sold any shares of
capital stock or Voting Debt of, or other equity interest in, LandCare
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or any of its Subsidiaries or securities convertible into or exchangeable for
such shares or equity interests or obligations of LandCare or any of its
Subsidiaries to grant, extend or enter into any such option, warrant, call,
subscription or other right, convertible security, agreement, arrangement or
commitment.
(d) There are no outstanding contractual obligations of LandCare or any of
its Subsidiaries to repurchase, redeem or otherwise acquire any capital stock
of LandCare or any Subsidiary or affiliate of LandCare or to provide funds to
make any investment (in the form of a loan, capital contribution or otherwise)
in any Subsidiary or any other entity. None of LandCare or its Subsidiaries is
required to redeem, repurchase or otherwise acquire shares of capital stock of
LandCare, or any of its Subsidiaries, respectively, as a result of the
transactions contemplated by this Agreement.
(e) Except for the Voting Agreements identified in the preamble to this
Agreement, there are no voting trusts or other agreements or understandings to
which LandCare or any of its Subsidiaries is a party with respect to the voting
of the capital stock of LandCare or any of the Subsidiaries.
Section 3.5 Subsidiaries; Capitalization of Subsidiaries. Schedule 3.5 sets
forth a complete and correct list of the direct and indirect Subsidiaries of
LandCare. All of the outstanding shares of capital stock of, or other ownership
interests in, each Subsidiary of LandCare, is owned by LandCare, directly or
indirectly, free and clear of any mortgage, lien, pledge, charge, encumbrance
or other security interest (including any restriction on the right to vote,
sell or otherwise dispose of such capital stock or other ownership interests),
and all such shares or other ownership interests have been validly issued and
are fully paid and nonassessable.
Section 3.6 SEC Reports and Financial Statements.
(a) LandCare has filed with the SEC and has heretofore made available to
ServiceMaster true and complete copies of, all forms, reports, schedules,
statements and other documents required to be filed by it and its Subsidiaries
since the LandCare's inception under the Exchange Act and the Securities Act
(as such documents have been amended since the time of their filing,
collectively, the "LandCare SEC Documents"). As of their respective dates or,
if amended, as of the date of the last such amendment, the LandCare SEC
Documents, including, without limitation, any financial statements and
schedules included therein, (i) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading and (ii) complied in
all material respects with the applicable requirements of the Exchange Act and
the Securities Act, as the case may be, and the applicable rules and
regulations of the SEC thereunder.
(b) Each of the consolidated financial statements included in LandCare SEC
Documents and the Third Quarter Financial Statements (as hereinafter defined)
has been prepared from, and is in accordance with, the books and records of
LandCare and/or its consolidated Subsidiaries, complies in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto, has been prepared in
accordance with United States generally accepted accounting principles ("GAAP")
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presents in all material respects
the consolidated financial position and the consolidated results of operations
(and changes in financial position, if any) of LandCare and its consolidated
Subsidiaries as at the dates thereof or for the periods presented therein
(subject, in the case of unaudited interim financial statements, to normal year
end adjustments and lack of footnote disclosures). "Third Quarter Financial
Statements" means the unaudited consolidated and consolidating balance sheets
and statements of income and changes in stockholders' equity of LandCare as of
and for the three and nine months ended September 30, 1998 attached hereto as
Schedule 3.6.
Section 3.7 Disclosure Documents.
(a) None of the information supplied or to be supplied by LandCare
specifically for inclusion or incorporation by reference in (i) the
registration statement on Form S-4 to be filed with the SEC by
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ServiceMaster in connection with the issuance of ServiceMaster Common Stock in
connection with the Merger (the "Registration Statement") will, at the time the
Registration Statement is filed with the SEC, at any time it is amended or
supplemented or at the time it becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading or
(ii) the proxy statement of LandCare to be filed by LandCare with the SEC in
connection with the Merger (the "LandCare Proxy Statement") will, at the date
it is first mailed to the stockholders of LandCare or at the time of the
LandCare Stockholders Meeting, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(b) The LandCare Proxy Statement will comply as to form in all material
respects with the requirements of the Exchange Act, except that no
representation or warranty is made by LandCare with respect to statements made
or incorporated by reference therein based on information supplied by
ServiceMaster specifically for inclusion or incorporation by reference in the
LandCare Proxy Statement.
(c) At the time of the filing of any disclosure document filed after the date
hereof pursuant to the Securities Act, the Exchange Act or any state securities
law (other than the LandCare Proxy Statement, each a "LandCare Disclosure
Document"), and at the time of distribution thereof and until the Closing Date,
each such LandCare Disclosure Document (as supplemented or amended) will not
contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements made therein, in the light of
the circumstances under which they were made, not misleading.
Section 3.8 Absence of Certain Changes. Since June 30, 1998, LandCare and its
Subsidiaries have conducted their respective businesses and operations in the
ordinary course of business. Since June 30, 1998 there has not occurred:
(a) any events, changes or effects (including the incurrence of any
liabilities of any nature, whether or not accrued, contingent or otherwise)
having, or which would be reasonably likely to have, in the aggregate, a
material adverse effect on LandCare and its Subsidiaries taken as a whole;
(b) any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to the equity
interests of LandCare or of any of its Subsidiaries, other than dividends paid
by wholly-owned Subsidiaries;
(c) any change by LandCare or any of its Subsidiaries in accounting
principles or methods, except for any such change required by reason of a
change in GAAP;
(d) any amendment of any term of any outstanding security of LandCare or any
of its Subsidiaries that would materially increase the obligations of LandCare
or of such Subsidiary under such security;
(e) any incurrence or assumption by LandCare or any of its Subsidiaries of
any indebtedness for borrowed money other than (i) under existing credit
facilities (or any renewals, replacements or extensions that do not increase
the aggregate commitments thereunder), (ii) in the ordinary course of business
(it being understood that any indebtedness incurred prior to the date hereof in
respect of capital expenditures shall be considered to have been in the
ordinary course of business) or (iii) in connection with any acquisition or
capital expenditure permitted by Section 5.1 or the transactions contemplated
hereby;
(f) any guarantee, endorsement or other incurrence or assumption of liability
(whether directly, contingently or otherwise) by LandCare or any of its
Subsidiaries for the obligations of any other person (other than any wholly-
owned Subsidiary of LandCare), other than in the ordinary course of business;
(g) any making of any loan, advance or capital contribution to or investment
in any person by LandCare or any of its Subsidiaries other than (i) any
acquisition permitted by Section 5.6, (ii) loans, advances or capital
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contributions to or investments in wholly-owned Subsidiaries of LandCare or
(iii) loans or advances to employees of LandCare or any of its Subsidiaries
made in the ordinary course of business;
(h) any contract or agreement entered into by LandCare or any of its
Subsidiaries on or prior to the date hereof relating to any material
acquisition or disposition of any assets or business or any modification,
amendment, assignment, termination or relinquishment by LandCare or any of its
Subsidiaries of any contract, license or other right (including any insurance
policy naming it or any of its Subsidiaries as a beneficiary or a loss payable
payee) that would have a material adverse effect on LandCare and its
Subsidiaries taken as a whole, other than transactions, commitments, contracts
or agreements in the ordinary course of business and those contemplated by this
Agreement; or
(i) any employment, deferred compensation, severance, retirement or other
similar agreement entered into with any director, officer or employee of
LandCare or any of its Subsidiaries (or any amendment to any such existing
agreement), grant of any severance or termination pay to any director, officer
or employee of LandCare or any of its Subsidiaries or change in compensation or
other benefits payable to any director, officer or employee of LandCare or any
of its Subsidiaries pursuant to any severance or retirement plans or policies
thereof, in each case other than in the ordinary course of business.
For purposes of this Agreement, "ordinary course of business" with respect to
LandCare and/or its Subsidiaries shall be determined by reference to the period
subsequent to the time LandCare became subject to the Exchange Act and with
respect to any particular Subsidiary, subsequent to the time that such
Subsidiary became a Subsidiary of LandCare.
Section 3.9 No Undisclosed Liabilities. Except (i) to the extent disclosed in
LandCare SEC Documents filed prior to the date of this Agreement and (ii) for
liabilities and obligations incurred since September 30, 1998 in the ordinary
course of business, neither LandCare nor any of its Subsidiaries has incurred
any liabilities or obligations of any nature, whether or not accrued,
contingent or otherwise, that have, or would be reasonably likely to have,
individually or in the aggregate, a material adverse effect on LandCare and its
Subsidiaries taken as a whole. Schedule 3.9 sets forth each instrument
evidencing indebtedness of LandCare and its Subsidiaries which will accelerate
or become due or payable, or result in a right of redemption or repurchase on
the part of the holder of such indebtedness, or with respect to which any other
payment or amount will become due or payable, in any such case with or without
due notice or lapse of time, as a result of this Agreement or the transactions
contemplated hereby.
Section 3.10 Employee Benefit Plans.
(a) Schedule 3.10(a) contains an accurate and complete list of (i) each
"employee benefit plan" (as such term is defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")
contributed to, maintained or sponsored by LandCare or any of its Subsidiaries,
or with respect to which LandCare or any of its Subsidiaries has any liability
or potential liability; and (ii) each other retirement, savings, thrift,
deferred compensation, severance, stock ownership, stock purchase, stock
option, performance, bonus, incentive, vacation or holiday pay, travel, fringe
benefit, hospitalization or other medical, disability, life or other insurance,
and any other welfare benefit policy, trust, understanding or arrangement of
any kind, whether written or oral, contributed to, maintained or sponsored by
LandCare or any of its Subsidiaries for the benefit of any present or former
employee, officer or director of LandCare or any of its Subsidiaries, or with
respect to which LandCare or any of its Subsidiaries has any liability or
potential liability. Each item listed on Schedule 3.10(a) is referred to herein
as a "Benefit Plan."
(b) Schedule 3.10(b) contains an accurate and complete list of each
collective bargaining agreement and each other agreement, arrangement,
commitment, understanding, plan, or policy of any kind, whether written or
oral, with or for the benefit of any current or former employee, officer,
director or consultant of LandCare or any of its Subsidiaries (including,
without limitation, each employment, compensation, termination or
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consulting agreement or arrangement). Each item listed on Schedule 3.10(b) is
referred to herein as a "Compensation Commitment."
(c) Each Benefit Plan that is intended to be qualified within the meaning of
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code")
and each trust which forms a part of any such Benefit Plan (i) has received a
determination from the Internal Revenue Service (the "IRS") that such Benefit
Plan is qualified under Section 401(a) of the Code and that such related trust
is exempt from taxation under Section 501(a) of the Code, and nothing has
occurred since the date of such determination that could adversely affect the
qualification of such Benefit Plan or the exemption from taxation of such
related trust; and (ii) is in compliance with the requirements of Sections
401(a)(4) and 410(b) of the Code for each plan year of such Benefit Plan
commencing on or before the Closing Date.
(d) Neither LandCare nor any of its Subsidiaries currently contribute to,
maintain, sponsor or have any liability with respect to any "employee pension
benefit plan" (as such term is defined in Section 3(2) of ERISA) that is
subject to Section 302 of ERISA or Section 412 of the Code, and neither
LandCare nor any of its Subsidiaries has contributed to, maintained or
sponsored or have any liability with respect to any such employee pension
benefit plan for any time preceding the Closing Date.
(e) None of the Benefit Plans or Compensation Commitments obligates LandCare
or any of its Subsidiaries to pay any separation, severance, termination or
similar benefit solely as a result of any transaction contemplated by this
Agreement or solely as a result of a change in control or ownership within the
meaning of Section 280G of the Code.
(f) (i) Each Benefit Plan and any related trust, insurance contract or fund
has been maintained, funded and administered in compliance with its respective
terms and the terms of any applicable collective bargaining agreements and in
compliance with all applicable laws and regulations, including, but not limited
to, ERISA and the Code; (ii) there has been no application for or waiver of the
minimum funding standards imposed by Section 412 of the Code with respect to
any Benefit Plan, and neither LandCare nor any of its Subsidiaries is aware of
any facts or circumstances that would materially change the funded status of
any such Benefit Plan; (iii) no asset of LandCare or any of its Subsidiaries
that is to be acquired by ServiceMaster, directly or indirectly, pursuant to
this Agreement is subject to any lien under ERISA or the Code; (iv) neither
LandCare nor any of its Subsidiaries has incurred any liability under Title IV
of ERISA (other than for contributions not yet due) or to the Pension Benefit
Guaranty Corporation (other than for payment of premiums not yet due); and (v)
there are no pending or threatened actions, suits, investigations or claims
with respect to any Benefit Plan or Compensation Commitment (other than routine
claims for benefits) which could result in liability to LandCare or any of its
Subsidiaries (whether direct or indirect), and neither LandCare nor any of its
Subsidiaries has knowledge of any facts which could give rise to (or be
expected to give rise to) any such actions, suits, investigations or claims.
(g) (i) LandCare and each of its Subsidiaries has complied with the health
care continuation requirements of Part 6 of Title I of ERISA; and (ii) LandCare
and its Subsidiaries have no obligation under any Benefit Plan or otherwise to
provide health benefits to former employees of LandCare or any of its
Subsidiaries or any other person, except as specifically required by Part 6 of
Title I of ERISA.
(h) (i) Neither LandCare nor any of its Subsidiaries has incurred any
liability on account of a "partial withdrawal" or a "complete withdrawal"
(within the meaning of Sections 4205 and 4203, respectively, of ERISA) from any
Benefit Plan subject to Title IV of ERISA which is a "multiemployer plan" (as
such term is defined in Section 3(37) of ERISA) (a "Multiemployer Plan"), no
such liability has been asserted, and there are no events or circumstances
which could result in any such partial or complete withdrawal; and (ii) neither
LandCare nor any of its Subsidiaries is bound by any contract or agreement or
has any obligation or liability described in Section 4204 of ERISA. To the best
knowledge of LandCare and each of its Subsidiaries, each Multiemployer Plan
complies in form and has been administered in accordance with the requirements
of
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ERISA and, where applicable, the Code; and each Multiemployer Plan is qualified
under Section 401(a) of the Code as amended to the date hereof.
(i) The actions contemplated by this Agreement will not give rise to any
liability with respect to any "employee welfare benefit plan" (as such term is
defined in Section 3(1) of ERISA) that is a "multiemployer plan" (as such term
is defined in Section 3(37) of ERISA).
(j) Neither LandCare nor any ERISA Affiliate has any liability or potential
liability with respect to any "employee benefit plan" (as defined in Section
3(3) of ERISA) solely by reason of being treated as a single employer under
Section 414 of the Code with any trade, business or entity.
(k) Neither LandCare nor any of its Subsidiaries has, contributes to,
maintains or sponsors or has any liability with respect to any employee benefit
plan, agreement or arrangement applicable to employees of LandCare or any of
its Subsidiaries located outside the United States (the "Foreign Plans").
(l) With respect to each Benefit Plan and each Compensation Commitment,
LandCare or the appropriate Subsidiary of LandCare has made available to
ServiceMaster true, complete and correct copies of (to the extent applicable)
(i) all documents pursuant to which the Benefit Plan or Compensation Commitment
is maintained, funded and administered, (ii) the most recent annual report
(Form 5500 series) filed with the IRS (with applicable attachments), (iii) the
most recent financial statement, (iv) the most recent actuarial valuation of
benefit obligations, and (v) the most recent determination letter received from
the IRS and the most recent application to the IRS for such determination
letter.
Section 3.11 Compliance with Law. LandCare and its Subsidiaries have complied
with all laws, statutes, regulations, rules, ordinances and judgments, decrees,
orders, writs and injunctions, of any court or Governmental Entity relating to
any of the property owned, leased or used by them, or applicable to their
business, including, but not limited to, equal employment opportunity,
discrimination, occupational safety and health, environmental, insurance
regulatory, antitrust laws, ERISA and laws relating to Taxes (as hereinafter
defined), except to the extent that any such non-compliance would not have a
material adverse effect on LandCare and its Subsidiaries taken as a whole.
Section 3.12 Litigation. There is no suit, claim, action, proceeding, review
or investigation pending or, to the knowledge of LandCare, threatened against
or affecting, LandCare or any of its Subsidiaries which, individually or in the
aggregate, is reasonably likely to have a material adverse effect on LandCare
and its Subsidiaries taken as a whole, or would, or would be reasonably likely
to, materially impair the ability of LandCare to consummate the transactions
contemplated by this Agreement.
Section 3.13 No Default. The business of LandCare and each of its
Subsidiaries is not being conducted in default or violation of any term,
condition or provision of (a) its respective certificate of incorporation or
bylaws or similar organizational documents, or (b) any LandCare Agreement,
excluding from the foregoing clause (b) defaults or violations that would not
have a material adverse effect on LandCare and its Subsidiaries taken as a
whole and would not, or would not be reasonably likely to, materially impair
the ability of LandCare, ServiceMaster or Merger Subsidiary to consummate the
transactions contemplated by this Agreement.
Section 3.14 Taxes.
(a) Definitions. For purposes of all of Section 3.14:
(i) The term "LandCare" includes LandCare and each Subsidiary of
LandCare, including without limitation any corporation or other entity that
became or becomes a Subsidiary of the Company prior to the Effective Time.
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(ii) The term "Tax" means any federal, state, local or foreign income,
gross receipts, franchise, estimated, alternative minimum, add-on minimum,
sales, use, transfer, registration, value added, excise, natural resources,
severance, stamp, occupation, premium, windfall profit, environmental,
customs, duties, real property, personal property, capital stock, social
security, unemployment, disability, payroll, license, employee or other
withholding, or other tax, of any kind whatsoever, including any interest,
penalties or additions to tax or additional amounts in respect of the
foregoing.
(iii) The term "Return" means any returns, declarations, reports, claims
for refund, amended returns, information returns or other documents
(including any related or supporting schedules, statements or information)
filed or required to be filed in connection with the determination,
assessment or collection of any Tax, or the administration of any laws,
regulations or administrative requirements relating to any Tax.
(b) Tax Filings and Payments.
(i) All Returns (as hereinafter defined) required to be filed on or
before the date hereof and the date of the Closing by or on behalf of
LandCare have been duly filed on a timely basis and such Returns are true,
correct and complete in all material respects, except that such returns may
contain inadvertent errors and omissions which are not material.
(ii) LandCare has timely paid or made adequate provision for all Taxes
and, no other material Taxes are payable by LandCare with respect to items
or periods covered by such Returns (whether or not shown on or reportable
on such Returns).
(iii) LandCare has made or will make adequate provision for all Taxes
payable for any periods that end on or before the Closing for which no
Returns have yet been filed and for any periods that begin before the
Closing and end after the Closing to the extent such Taxes are attributable
to the portion of any such period ending at the Closing.
(iv) The charges, accruals and reserves for current Taxes (excluding
reserves for deferred Taxes) reflected on the books of LandCare are not
materially less than the Tax liabilities accruing or payable by LandCare in
respect of periods prior to the date hereof and such charges, accruals and
reserves are reflected on LandCare's most recent financial statements.
(v) LandCare is not delinquent in the payment of any Taxes or has
requested any extension of time within which to file or send any Return,
which Return has not since been filed or sent and which Taxes have not been
paid.
(vi) No deficiencies exist for any Taxes or any penalties, interest or
assessments nor have any been proposed, asserted, or assessed against
LandCare that are not adequately reserved for.
(vii) There is no dispute or claim concerning any material Tax liability
of LandCare either (A) claimed or raised by any authority in writing or (B)
as to which LandCare has knowledge based upon personal contact with any
agent of such authority.
(viii) There is no pending audit, examination, or, to LandCare's
knowledge, any investigation of any Return by any authority nor has
LandCare received any notice of such audit, examination, or investigation.
(ix) LandCare has not waived any statute of limitations in respect of
Taxes or granted any extension of the limitations period applicable to any
claim of Taxes.
(x) LandCare is not subject to liability for Taxes of any person (other
than LandCare or any other member of the affiliated group of corporations
that files a consolidated federal income tax return, of which LandCare is
the common parent), including, without limitation, liability arising from
the application of U.S. Treasury Regulation section 1.1502-6 or any
analogous provision of state, local or foreign law.
(xi) LandCare is not nor has it ever been a party to any tax sharing
agreement with any entity.
(xii) To LandCare's knowledge, no claim has ever been made by an
authority in a jurisdiction where LandCare does not file Returns that it is
or may be subject to taxation by that jurisdiction.
(xiii) There are no liens on any of the assets of LandCare that arose in
connection with any failure (or alleged failure) to pay any Taxes.
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(xiv) LandCare has withheld and paid over and complied with all material
information reporting and backup withholding requirements, including,
without limitation, maintenance of required records with respect thereto,
in connection with amounts paid or owing to any employee, independent
contractor, creditor, stockholder, or other third party.
(xv) LandCare does not expect any authority to assess any additional
Taxes for any period for which Returns have been filed except to an extent
consistent with LandCare's past experience as reflected in its publicly
released financial statements.
(xvi) LandCare has delivered to ServiceMaster correct and complete copies
of all Returns, examination reports, and statements of deficiencies
assessed against or agreed to by LandCare.
(xvii) LandCare is not a party to any safe harbor lease within the
meaning of Section 168(f)(8) of the Code, as in effect prior to the
amendment by the Tax Equity and Fiscal Responsibility Act of 1982.
(xviii) All material net operating losses, credits and other tax
attributes utilized by LandCare during any taxable year ending on or prior
to the Closing were fully and properly available to LandCare under all
applicable tax laws, regulations and administrative interpretations
thereof.
(c) Tax Characteristics of LandCare.
(i) To LandCare's knowledge, no stockholder of LandCare who owns more
than 5% of LandCare's Common Stock is a "foreign person" (as that term is
defined in Section 1445(f)(3) of the Code).
(ii) LandCare is not a "consenting corporation" under Section 341(f) of
the Code.
(iii) LandCare has not entered into any compensatory agreement with
respect to the performance of services which payment thereunder would
result in a nondeductible expense to LandCare pursuant to Sections 162(m)
or 280G of the Code or an excise tax to the recipient of such payment
pursuant to Section 4999 of the Code.
(iv) LandCare has not agreed, nor is it required to make, any adjustment
under Section 481(a) of the Code by reason of a change in accounting method
or otherwise.
(v) To LandCare's knowledge, LandCare will not be required as a result of
any "closing agreement" described in Section 7121 of the Code (or any
corresponding provision of state, local or foreign income Tax law), to
include any item of income in, or exclude any item of deduction from,
taxable income for any taxable period (or portion thereof) ending after the
Closing.
(vi) LandCare will not be required as a result of any deferred
intercompany gain described in Treasury Regulation Section 1.1502-13 or any
excess loss account described in Treasury Regulation Section 1.1502-19 (or
any corresponding or similar provision or administrative rule of federal,
state, local or foreign income tax law), to include any item of income in
taxable income for any period (or portion thereof) ending after the Closing
Date.
(vii) Not later than December 1, 1998, LandCare will supply a schedule to
ServiceMaster showing: (A) the amount of any net operating loss, net
capital loss, unused credits, unused foreign tax or excess charitable
contribution; and (B) the amount of any deferred gain or loss arising out
of any deferred intercompany transaction.
Section 3.15 Contracts. Each material LandCare Agreement is valid, binding
and enforceable and in full force and effect, except where failure to be valid,
binding and enforceable and in full force and effect would not have a material
adverse effect on LandCare and its Subsidiaries taken as a whole, and there are
no defaults thereunder, except those defaults that would not have a material
adverse effect on LandCare and its Subsidiaries taken as a whole. Neither
LandCare nor any of its Subsidiaries is a party to any agreement that expressly
and materially limits the ability of LandCare or any of its Subsidiaries to
compete in or conduct any line of business or compete with any person or in any
geographic area or during any period of time. All material contracts of
LandCare and its Subsidiaries will continue to be legal, valid, binding and
enforceable, and in full force and effect, on identical terms following the
consummation of the Merger.
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Section 3.16 Transactions with Affiliates. Except to the extent disclosed in
LandCare SEC Documents filed prior to the date of this Agreement, since June
30, 1998 there have been no material transactions, agreements, arrangements or
understandings between LandCare or its Subsidiaries, on the one hand, and the
affiliates of LandCare (other than wholly-owned Subsidiaries of LandCare) or
other Persons, on the other hand, that would be required to be disclosed under
Item 404 of Regulation S-K under the Securities Act.
Section 3.17 Environmental Matters. Except as set forth in LandCare SEC
Documents filed prior the date hereof:
(a) For purposes of this Agreement, "Environmental, Health and Safety
Requirements" shall mean all federal, state, local and foreign statutes,
regulations, ordinances and other provisions having the force or effect of law,
all judicial and administrative orders and determinations, all contractual
obligations and all common law concerning public health and safety, worker
health and safety, and pollution or protection of the environment, including
without limitation all those relating to the presence, use, production,
generation, handling, transportation, treatment, storage, disposal,
distribution, labeling, testing, processing, discharge, release, threatened
release, control, or cleanup of any hazardous materials, substances or wastes,
chemical substances or mixtures, pesticides, pollutants, contaminants, toxic
chemicals, petroleum products or byproducts, asbestos, polychlorinated
biphenyls, noise or radiation, each as amended.
(b) Each of LandCare and its Subsidiaries has complied and is in compliance
with all Environmental, Health, and Safety Requirements, except for any
noncompliance that would not, in the aggregate, have a material adverse effect
on LandCare and its Subsidiaries taken as a whole.
(c) Without limiting the generality of the foregoing, each of LandCare and
its Subsidiaries has obtained and complied with, and is in compliance with, all
permits, licenses and other authorizations that are required pursuant to
Environmental, Health and Safety Requirements ("Environmental Permits") for the
occupation of its facilities and the operation of its business, except for any
failure to maintain or comply with Environmental Permits that would not, in the
aggregate, have a material adverse effect on LandCare and its Subsidiaries
taken as a whole.
(d) Neither LandCare, nor any of its Subsidiaries has received any written or
oral notice, report or other information regarding any actual or alleged
violation of Environmental, Health and Safety Requirements, or any liabilities
or potential liabilities (whether accrued, absolute, contingent, unliquidated
or otherwise), including any investigatory, remedial or corrective obligations,
relating to any of them or its facilities arising under Environmental, Health
and Safety Requirements, except for such notices, reports or other information,
the subject of which would not, in the aggregate, have a material adverse
effect on LandCare and its Subsidiaries taken as a whole.
(e) None of LandCare or its Subsidiaries, or their respective predecessors,
has treated, stored, disposed of, arranged for or permitted the disposal of,
transported, handled or released any substance, including without limitation
any hazardous substance, or owned or operated any property or facility (and no
such property or facility is contaminated by any such substance) in a manner
that has given or would give rise to liabilities, including any liability for
response costs, corrective action costs, personal injury, property damage,
natural resources damages or attorney fees, pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), the Solid Waste Disposal Act, as amended ("SWDA"), or any other
Environmental, Health and Safety Requirements, except for such liabilities that
would not, in the aggregate, have a material adverse effect on LandCare and its
Subsidiaries taken as a whole.
(f) Neither this Agreement nor the consummation of the transaction that is
the subject of this Agreement will result in any obligations for site
investigation or cleanup, or notification to or consent of government agencies
or third parties, pursuant to any of the so-called "transaction-triggered" or
"responsible property transfer" Environmental, Health and Safety Requirements.
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(g) Neither LandCare nor its Subsidiaries has, either expressly or by
operation of law, assumed, undertaken or otherwise become subject to any
liability, including without limitation any obligation for corrective or
remedial action, of any other person or entity relating to Environmental,
Health and Safety Requirements except that the Company acquires ownership of
businesses by merging the entity owning the business with a subsidiary of the
Company and in such acquisitions the resulting subsidiary would be subject to
the liabilities to which the merging entity was subject.
(h) No facts, events or conditions relating to the past or present
facilities, properties or operations of LandCare, its Subsidiaries or any of
their predecessors will prevent, hinder or limit continued compliance with
Environmental, Health and Safety Requirements, give rise to any investigatory,
remedial or corrective obligations pursuant to Environmental, Health and Safety
Requirements or give rise to any other liabilities (whether accrued, absolute,
contingent, unliquidated or otherwise) pursuant to Environmental, Health and
Safety Requirements, including without limitation any relating to onsite or
offsite releases or threatened releases of hazardous materials, substances or
wastes, personal injury, property damage or natural resources damage, except
for such liabilities which would not, in the aggregate, have a material adverse
effect on LandCare and its Subsidiaries taken as a whole.
Section 3.18 Intellectual Property. LandCare and its Subsidiaries own or have
a valid license to use all patents, trademarks, service marks, trade names,
copyrights, trade secrets and other intellectual property rights (collectively,
the "LandCare Intellectual Property") necessary to carry on their respective
business as currently conducted; and neither LandCare nor any of its
Subsidiaries has received any notice of infringements of or conflict with, and
to LandCare's knowledge, there are no infringements of or conflicts with, the
rights of others with respect to the use of any of LandCare Intellectual
Property that, in either such case, would have a material adverse effect on
LandCare.
Section 3.19 Opinion of Financial Advisor. LandCare has received the written
opinion of BT Alex. Brown Incorporated ("BT Alex. Brown") to the effect that,
as of the date hereof, the Merger Consideration to be received by the holders
of Shares in connection with the Merger is fair to such holders from a
financial point of view. LandCare has delivered or made available to
ServiceMaster a copy of such opinion.
Section 3.20 Finders and Investment Bankers. No broker, finder or investment
banker is entitled to any brokerage, finder's or other fee or commission, or to
the reimbursement of any of its expenses, in connection with the transactions
contemplated by this Agreement or any similar transaction based upon
arrangements made by or on behalf of LandCare, except for the arrangements
between LandCare and BT Alex. Brown under which the aggregate payments will not
exceed $1.2 million. LandCare shall supply ServiceMaster not later than
November 5, 1998 with the engagement letter for BT Alex. Brown and all other
agreements or understandings affecting the amount that may be payable by
LandCare to BT Alex. Brown.
Section 3.21 Takeover Statutes. To the best of LandCare's knowledge, no "fair
price," "moratorium," "control share acquisition" or other similar antitakeover
statute or regulation enacted under state or federal laws in the United States
(each, a "Takeover Statute") applicable to LandCare or any of its Subsidiaries
is applicable to the Merger or the other transactions contemplated by this
Agreement.
Section 3.22 Insurance. The LandCare Disclosure Schedule lists the insurance
policies covering LandCare on the date hereof and on the date hereof each such
policy is in full force and effect. Neither LandCare nor any Subsidiary of
LandCare is in default with respect to its obligations under any insurance
policy maintained by it, and neither LandCare nor any LandCare Subsidiary
(since the time any such Subsidiary became a Subsidiary of LandCare) has been
denied insurance coverage at any time for any reason.
Section 3.23 Supportive Stockholder Actions.
(a) Every person listed in Section 3.23(a) of the LandCare Disclosure
Schedule has executed in the capacity of stockholder a Voting Agreement in a
form substantially identical to the Voting Agreement executed
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on the date hereof between ServiceMaster and Linda T. Benge. The persons listed
in Section 3.23(a) of the LandCare Disclosure Schedule collectively own and
have the right to vote approximately 30% shares of LandCare Common Stock
outstanding on the date hereof.
(b) LandCare has obtained Voting and Share Substitution Agreements from each
of the persons listed in Section 3.23(b) of the LandCare Disclosure Schedule in
substantially the form previously provided to ServiceMaster and each such
agreement is enforceable against the person listed in Section 3.23(b) of the
LandCare Disclosure Schedule who is a party to that Agreement in accordance
with its terms.
(c) Agreements complying with Section 1.4 (b) have been obtained from the
five individuals cited in Section 1.4(b) of the LandCare Disclosure Schedule
and each such Agreement is enforceable against the individual party to it in
accordance with its terms.
(d) LandCare will provide ServiceMaster with two original executed copies of
each such agreement cited in this Section 3.23 not later than November 5, 1998.
ARTICLE 4
WARRANTIES OF
SERVICEMASTER AND MERGER SUBSIDIARY
References in this Agreement to the "ServiceMaster Disclosure Schedule" mean
the document captioned "ServiceMaster Disclosure Schedule" as constituted upon
its delivery to LandCare prior to LandCare's execution and delivery of this
Agreement. ServiceMaster warrants to LandCare, subject in the case of the
warranties in each particular section below to the exceptions set forth in the
corresponding section of the ServiceMaster Disclosure Schedule:
Section 4.1 Organization. ServiceMaster is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Merger Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Each of ServiceMaster and its
Subsidiaries has all requisite corporate or other power and authority and all
necessary governmental approvals to own, lease and operate its properties and
to carry on its business as now being conducted, except where the failure to be
so organized, existing and in good standing or to have such power, authority
and governmental approvals would not have a material adverse effect on
ServiceMaster and its subsidiaries taken as a whole. ServiceMaster and each of
its Subsidiaries is duly qualified or licensed to do business and in good
standing in each jurisdiction in which the property owned, leased or operated
by it or the nature of the business conducted by it makes such qualification or
licensing necessary, except where the failure to be so duly qualified or
licensed and in good standing would not in the aggregate, have a material
adverse effect on ServiceMaster and its Subsidiaries taken as a whole. Merger
Subsidiary has not heretofore conducted any business other than in connection
with this Agreement and the transactions contemplated hereby.
Section 4.2 Corporate Authorization; Validity of Agreement; Necessary Action.
ServiceMaster and Merger Subsidiary have full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance by ServiceMaster
and Merger Subsidiary of this Agreement and the consummation by ServiceMaster
and Merger Subsidiary of the transactions contemplated hereby have been duly
and validly authorized by their respective boards of directors and no other
corporate action or proceedings on the part of ServiceMaster and Merger
Subsidiary are necessary to authorize the execution and delivery by
ServiceMaster and Merger Subsidiary of this Agreement, and the consummation by
ServiceMaster and Merger Subsidiary of the transactions contemplated hereby.
This Agreement has been duly executed and delivered by ServiceMaster and Merger
Subsidiary, and, assuming this Agreement constitutes a valid and binding
obligation of LandCare, constitutes a valid and binding obligation of each of
ServiceMaster and Merger Subsidiary, enforceable against each of them in
accordance with their terms, except that (i) such enforcement may be subject to
applicable bankruptcy, insolvency or other similar laws,
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now or hereafter in effect, affecting creditors' rights generally, and (ii) the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought. ServiceMaster Common Stock
to be issued in connection with the Merger will when issued be duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights. No vote of the holders of ServiceMaster Common Stock is necessary for
ServiceMaster to consummate the Merger or to issue the shares of ServiceMaster
Common Stock to be issued in connection with the Merger or for Merger
Subsidiary to consummate the Merger.
Section 4.3 Consents and Approvals; No Violations. Except for filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Exchange Act, the Securities Act, the HSR
Act, state Securities or "blue sky" laws and any applicable state takeover
laws, and the filing of the Certificate of Merger as required by Delaware Law,
neither the execution, delivery or performance of this Agreement by
ServiceMaster and Merger Subsidiary nor the consummation by ServiceMaster and
Merger Subsidiary of the transactions contemplated hereby nor compliance by
ServiceMaster and Merger Subsidiary with any of the provisions hereof will:
(a) conflict with or result in any breach of any provision of the certificate
of incorporation or bylaws of ServiceMaster or Merger Subsidiary or any other
Subsidiary of ServiceMaster;
(b) require any filing with, or permit, authorization, consent or approval
of, any Governmental Entity, except where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings would not have a
material adverse effect on ServiceMaster and its Subsidiaries taken as a whole
and would not, or would not be reasonably likely to, materially impair the
ability of LandCare, ServiceMaster and Merger Subsidiary to consummate the
transactions contemplated by this Agreement;
(c) result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
termination, amendment, cancellation or acceleration) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, guarantee,
other evidence of indebtedness, lease, license, contract, agreement or other
instrument or obligation to which ServiceMaster or any of its Subsidiaries is a
party or by which any of them or any of their properties or assets may be bound
other than any violation, breach or default which would not have a material
adverse effect on ServiceMaster and its Subsidiaries taken as a whole; or
(d) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to ServiceMaster, any of its Subsidiaries or any of their properties
or assets, other than any violation which would not have a material adverse
effect on ServiceMaster and its Subsidiaries taken as a whole.
Section 4.4 Capitalization. The authorized capital stock of ServiceMaster
consists of 1,000,000,000 shares of ServiceMaster Common Stock and 11,000,000
shares of preferred stock, par value $0.01 per share (the "ServiceMaster
Preferred Stock"). As of the close of business on October 23, 1998, (a)
296,104,099 shares of ServiceMaster Common Stock were issued and outstanding
and (b) no shares of ServiceMaster Preferred Stock were issued and outstanding.
As of the close of business on September 30, 1998, 1,552,369 shares of
ServiceMaster Common Stock were held in treasury. All of the issued and
outstanding shares of ServiceMaster Common Stock are duly authorized, validly
issued, fully paid and non-assessable.
Section 4.5 SEC Reports and Financial Statements.
(a) ServiceMaster has filed with the SEC and has heretofore made available to
LandCare true and complete copies of, all forms, reports, schedules, statements
and other documents required to be filed by it since December 31, 1996 under
the Exchange Act and the Securities Act (as such documents have been amended
since the time of their filing, collectively, the "ServiceMaster SEC
Documents"). As of their respective dates or, if amended, as of the date of the
last such amendment, ServiceMaster SEC Documents, including, without
limitation, any financial statements and schedules included therein (i) did not
contain any
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untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading and (ii)
complied in all material respects with the applicable requirements of the
Exchange Act and the Securities Act, as the case may be, and the applicable
rules and regulations of the SEC thereunder.
(b) Each of the consolidated financial statements included in ServiceMaster
SEC Documents complies in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, has been prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly presents in all material respects the consolidated
financial position and the consolidated results of operations and cash flows
(and changes in financial position, if any) of ServiceMaster and its
consolidated Subsidiaries as at the dates thereof or for the periods presented
therein (subject, in the case of unaudited interim financial statements, to
normal year end adjustments and lack of footnote disclosures).
Section 4.6 Absence of Certain Changes. Except as disclosed in ServiceMaster
SEC Documents filed with the SEC prior to the date hereof, since June 30, 1998,
ServiceMaster and its Subsidiaries have conducted their respective businesses
and operations in the ordinary course of business consistent with past
practice. Since June 30, 1998, there has not occurred: (i) any events, changes
or effects (including the incurrence of any liabilities of any nature, whether
or not accrued, contingent or otherwise) having or, which would be reasonably
likely to have, in the aggregate, a material adverse effect on ServiceMaster
and its Subsidiaries taken as a whole; (ii) any declaration, setting aside or
payment of any distribution (whether in cash, shares or property) with respect
to the equity interests of ServiceMaster or of any of its Subsidiaries, other
than regular quarterly cash dividends or dividends paid by wholly-owned
Subsidiaries; or (iii) any change by ServiceMaster or any of its Subsidiaries
in accounting principles or methods, except for any such change required by
reason of a change in GAAP.
Section 4.7 No Undisclosed Liabilities. Except (i) to the extent disclosed in
ServiceMaster SEC Documents filed prior to the date of this Agreement and (ii)
for liabilities and obligations incurred in the ordinary course of business
consistent with past practice, since September 30, 1998, neither ServiceMaster
nor any of its Subsidiaries has incurred any liabilities or obligations of any
nature, whether or not accrued, contingent or otherwise, that have, or would be
reasonably likely to have, individually or in the aggregate, a material adverse
effect on ServiceMaster and its Subsidiaries taken as a whole.
Section 4.8 Litigation. There is no suit, claim, action, proceeding, review
or investigation pending or, to the knowledge of ServiceMaster, threatened
against or affecting, ServiceMaster or any of its Subsidiaries which,
individually or in the aggregate, is reasonably likely to have a material
adverse effect on ServiceMaster and its Subsidiaries taken as a whole, or
would, or would be reasonably likely to, materially impair the ability of
ServiceMaster to consummate the transactions contemplated by this Agreement.
Section 4.9 Compliance with Law. ServiceMaster and its Subsidiaries have
complied with all laws, statutes, regulations, rules, ordinances and judgments,
decrees, orders, writs and injunctions, of any court or Governmental Entity
relating to any of the property owned, leased or used by them, or applicable to
their business, including, but not limited to, equal employment opportunity,
discrimination, occupational safety and health, environmental, insurance,
regulatory, antitrust laws, ERISA and laws relating to Taxes, except to the
extent that any such non-compliance would not have a material adverse effect on
ServiceMaster and its Subsidiaries taken as a whole.
Section 4.10 No Default. The business of ServiceMaster and each of its
Subsidiaries is not being conducted in default or violation of any term,
condition or provision of (i) its respective certificate of incorporation or
bylaws or similar organizational documents, or (ii) agreements to which
ServiceMaster and its Subsidiaries are parties, excluding from the foregoing
clause (ii) defaults or violations that would not have a material adverse
effect on ServiceMaster and its Subsidiaries taken as a whole and would not, or
would not be
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reasonably likely to, materially impair the ability of ServiceMaster, LandCare
or Merger Subsidiary to consummate transactions contemplated by this Agreement.
Section 4.11 Disclosure Documents. None of the information supplied or to be
supplied by ServiceMaster specifically for inclusion or incorporation by
reference in (i) the Registration Statement will, at the time the Registration
Statement is filed with the SEC, at any time it is amended or supplemented or
at the time it becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading or (ii) the LandCare
Proxy Statement will, at the date it is first mailed to LandCare stockholders
or at the time of LandCare Stockholders Meeting, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Registration
Statement will comply as to form in all material respects with the requirements
of the Securities Act, except that no representation or warranty is made by
ServiceMaster with respect to statements made or incorporated by reference in
either the Registration Statement or the LandCare Proxy Statement based on
information supplied by LandCare specifically for inclusion or incorporation by
reference therein.
Section 4.12 Opinion of Financial Advisor. ServiceMaster has received an
opinion from CS First Boston dated the date of this Agreement to the effect
that, as of such date, the consideration to be paid by ServiceMaster in the
Merger is fair to ServiceMaster from a financial point of view.
ARTICLE 5
COVENANTS OF LANDCARE
Section 5.1 Conduct of Business by LandCare Pending the Merger. LandCare
covenants and agrees that prior to the Effective Time or the date, if any, on
which this Agreement is earlier terminated pursuant to Section 9.1 hereof,
unless ServiceMaster and Merger Subsidiary shall otherwise consent in writing
or except as otherwise contemplated by this Agreement:
(a) the businesses of LandCare and its Subsidiaries will be conducted only in
the ordinary and usual course; LandCare will use its reasonable best efforts to
preserve intact its business organization and goodwill, keep available the
services of its officers and employees and maintain satisfactory relationships
with customers and others having business relationships with it and its
Subsidiaries; and LandCare will promptly notify ServiceMaster and Merger
Subsidiary of any event or occurrence or emergency not in the ordinary and
usual course of the business of LandCare or any of its Subsidiaries or material
to the business of LandCare and its Subsidiaries, taken as a whole;
(b) LandCare will not (i) amend its certificate of incorporation or bylaws or
(ii) split, combine or reclassify the outstanding Shares or declare, set aside
or pay any dividend payable in cash, stock or property with respect to the
Shares, other than dividends paid by any of its Subsidiaries to LandCare;
(c) neither LandCare nor any of its Subsidiaries will issue or agree to issue
any additional shares of, or rights of any kind to acquire shares of, its
capital stock of any class, other than (i) the issuance of shares of capital
stock of a Subsidiary of LandCare to LandCare, (ii) with respect to LandCare,
Shares issuable upon exercise of LandCare Stock Options outstanding on the date
hereof, (iii) options to purchase Shares issued to employees of enterprises
acquired in Additional Acquisitions closed after the date hereof provided that
the number of Shares subject to options issued with respect to any particular
Additional Acquisition shall not exceed 10% of the number of Shares issued in
that Acquisition and the exercise price for such Option shall not be lower than
$11 per Share; (iv) Shares issuable in connection with the conversion of any of
the notes set forth in the Section of LandCare Disclosure Schedule
corresponding to Section 3.4(c) and (v) the issuance of shares of capital stock
as expressly permitted under Section 5.6 of this Agreement.
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(d) neither LandCare nor any of its Subsidiaries will enter into or agree to
enter into any new or amended contract or agreement with any labor unions
representing employees of LandCare or any of its Subsidiaries;
(e) except permitted by Section 5.4 or by Section 5.6, LandCare will not
authorize, recommend, propose or announce an intention to authorize, recommend
or propose, or enter into an agreement in principle or an agreement with
respect to any merger, consolidation or business combination (other than the
Merger), any acquisition or disposition of a material amount of assets or
securities (including, without limitation, the assets or securities of any of
its Subsidiaries) or any material change in its capitalization, or enter, other
than in the ordinary course of business, into a material contract;
(f) neither LandCare nor any of its Subsidiaries shall modify, amend or
terminate any of the material LandCare Agreements or waive, release or assign
any material rights or claims, except in the ordinary course of business;
(g) neither LandCare nor any of its Subsidiaries shall: (i) grant any
increase in the compensation payable or to become payable by LandCare or any of
its Subsidiaries to any officer or management employee other than scheduled
annual increases in the ordinary course of business; (ii) adopt any new, or
amend or otherwise increase, or accelerate the payment or vesting of the
amounts payable or to become payable under any existing, bonus, incentive
compensation, deferred compensation, severance, profit sharing, stock option,
stock purchase, insurance, pension, retirement or other employee benefit plan
agreement or arrangement; (iii) enter into any, or amend any existing,
employment, consulting or severance agreement with or, except in accordance
with the existing written policies of LandCare, grant any severance or
termination pay to any officer, director or employee of LandCare or any of its
Subsidiaries; (iv) make any additional contributions to any grantor trust
created by LandCare to provide funding for non-tax-qualified employee benefits
or compensation; or (v) provide any new severance program or rights;
(h) to the extent within their control, neither LandCare nor any of its
Subsidiaries shall permit any material insurance policy naming it as a
beneficiary or a loss payable payee to be canceled or terminated, except in the
ordinary course of business;
(i) except for increases in the aggregate principal amount of LandCare's
senior credit facility of up to $125 million, neither LandCare nor any of its
Subsidiaries shall: (i) incur or assume any debt except for borrowings under
existing credit facilities in the ordinary course of business; (ii) assume,
guarantee, endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person, except in
the ordinary course of business; (iii) make any loans, advances or capital
contributions to, or investments in, any other person (other than to wholly-
owned Subsidiaries of LandCare, customary loans or advances to employees in the
ordinary course of business and short-term investments pursuant to customary
cash management systems of LandCare in the ordinary course of business); or
(iv) make or commit to make any material capital expenditure in an amount or
character that is not consistent with LandCare's past practices;
(j) neither LandCare nor any of its Subsidiaries shall change any of the
accounting principles used by it unless required by GAAP;
(k) except upon the prior written consent of ServiceMaster, LandCare shall
not make any Tax election; and
(l) neither LandCare nor any Subsidiary of LandCare shall agree in writing or
otherwise to take (i) any action that it is prohibited from taking by this
Section 5.1, or (ii) any action that would constitute or is likely to cause or
result in a breach of any covenant, agreement, representation or warranty set
forth herein.
Section 5.2 LandCare Stockholders Meeting. The board of directors of LandCare
shall unanimously recommend to the stockholders of LandCare the adoption of
this Agreement and declare the approval of this Agreement advisable and
LandCare shall take all reasonably lawful action to solicit such adoption by
its
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stockholders. Notwithstanding the previous sentence, the board of directors of
LandCare may withdraw or modify its recommendation that stockholders approve
this Agreement and its finding that such approval is advisable if the board of
directors of LandCare, after having consulted with outside counsel, determines
that the refusal to do so would constitute a breach by the board of directors
of LandCare of their fiduciary duties under applicable laws; provided, the
board of directors of LandCare may not approve or recommend (and in connection
therewith, withdraw or modify its approval or recommendation with respect to
this Agreement) an Acquisition Transaction (as hereinafter defined) unless such
Acquisition Transaction is a bona fide unsolicited written proposal from a
third party that the board of directors of LandCare determines in good faith is
more favorable to the stockholders of LandCare than the Merger; provided,
further, that the board of directors shall continue to take all action
necessary to convene the LandCare Stockholders Meeting and shall submit for (or
shall not withdraw from) the consideration of the stockholders of LandCare the
adoption of this Agreement (even if the board of directors of LandCare is
permitted to withdraw or modify its approval with respect to this agreement or
is permitted to approve or recommend an Acquisition Transaction to its
stockholders pursuant to this sentence).
Section 5.3 Access to Information. LandCare will give ServiceMaster, its
counsel, financial advisors, auditors and other authorized representatives full
access throughout the period prior to the Effective Time to all of the offices,
properties, business and marketing plans, books, files and records of LandCare
and the Subsidiaries of LandCare, will furnish to ServiceMaster, its counsel,
financial advisors, auditors and other authorized representatives such
financial and operating data and other information as such persons may request
and will instruct LandCare's employees, counsel and financial advisors to
cooperate with ServiceMaster in its investigation of the business of LandCare
and its Subsidiaries and to promptly answer and respond to any questions and
inquiries of ServiceMaster. LandCare will furnish promptly to ServiceMaster and
Merger Subsidiary (a) a copy of each report, schedule and other document filed
or received by it pursuant to the requirements of Federal or state securities
laws and (b) all such other information concerning its business, properties and
personnel as ServiceMaster or Merger Subsidiary may reasonably request;
provided that no investigation pursuant to this Section 5.3 shall affect any
representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Merger.
Section 5.4 No Solicitation.
(a) LandCare warrants to ServiceMaster that the board of directors of
LandCare has (i) made such assessments of LandCare's value and has taken such
other actions as to satisfy the fiduciary duties of its board of directors that
must be satisfied to enable LandCare to enter into this Agreement and to render
this Agreement binding upon LandCare in accordance with its terms and (ii) has
adopted a resolution approving this Agreement and declaring its advisability.
(b) LandCare agrees that, prior to the Effective Time, it shall not, and
shall not authorize or permit any of its Subsidiaries or any of its or its
Subsidiaries' directors, officers, employees, agents or representatives,
directly or indirectly, to solicit, initiate or knowingly encourage (including
by way of furnishing or disclosing non-public information) any inquiries or the
making of any proposal with respect to any merger, consolidation or other
business combination involving LandCare or the acquisition of all or any
material portion of the assets or capital stock of LandCare (an "Acquisition
Transaction") or negotiate, explore or otherwise engage in substantive
discussions with any person (other than ServiceMaster, Merger Subsidiary or
their respective directors, officers, employees, agents and representatives),
or enter into any agreement, with respect to any Acquisition Transaction or
enter into any agreement, arrangement or understanding requiring it to abandon,
terminate or fail to consummate the Merger or any other transactions
contemplated by this Agreement.
(c) Notwithstanding subsection (b) above:
(i) LandCare may provide non-public information to and seek to negotiate
an Acquisition Transaction with a person (the "Competitor") provided that
the Competitor shall make a bona fide unsolicited written
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proposal to make an Acquisition Transaction for all the capital stock or
assets of LandCare on Superior Terms. For purposes of this Agreement, terms
will be deemed to be "Superior Terms" only if the proposal of such
Competitor is more favorable than the Merger to the stockholders of
LandCare as determined in good faith by the board of directors of LandCare.
A proposal to acquire LandCare on Superior Terms is herein called a
"Qualified Competing Proposal." LandCare shall prior to entering into an
agreement with respect to a Qualified Competing Proposal pay or cause to be
paid to ServiceMaster the amount specified in Section 9.4(b). Nothing
contained in this Agreement shall prevent the board of directors of
LandCare from complying with Rule 14c-2 under the Exchange Act with regard
to an Acquisition Transaction.
(ii) If LandCare receives a Qualified Competing Proposal, LandCare will
nevertheless (i) permit its stockholders to vote on the adoption of this
Agreement and (ii) not take any action that would preclude LandCare from
consummating the Merger if this Agreement is adopted by LandCare's
stockholders or make the Merger any less advantageous to ServiceMaster if
this Agreement is adopted by LandCare's stockholders. If this Agreement is
adopted by LandCare's stockholders (i) LandCare will consummate the Merger
and (ii) shall not consummate any Acquisition Transaction contemplated by a
Qualified Competing Proposal.
(d) Upon executing this Agreement, LandCare shall immediately advise
ServiceMaster in writing regarding (i) the identity of any other persons or
entities with whom LandCare has had direct or indirect contact since January 1,
1998 regarding a possible Acquisition Transaction and (ii) the status of any
discussions or negotiations regarding a possible Acquisition Transaction
involving any such person or entity. LandCare warrants that LandCare is not
bound by any contract or agreement that would require it to take any action
which would violate any restriction contained in Section 5.4(b). Hereafter,
LandCare shall advise ServiceMaster in writing of the receipt, directly or
indirectly, of any inquiries or proposals relating to an Acquisition
Transaction promptly upon such receipt and of its intention to enter into any
agreement relating to an Acquisition Transaction which is a Qualified Competing
Proposal at least 48 hours prior to executing any such agreement, and promptly
advise ServiceMaster in writing of any actions taken pursuant to Section 5.4(c)
hereof and furnish to ServiceMaster either a copy of such proposal or a written
summary of such proposal.
Section 5.5 Corporate Organization. Notwithstanding anything to the contrary
contained in this Agreement or in the disclosure schedules hereto, LandCare and
each of its Subsidiaries shall take all actions necessary in order to be duly
qualified and in good standing on the Effective Time with the Secretary of
State in each jurisdiction in which the character of its properties owned or
held under lease or the nature of its activities makes such qualification
necessary.
Section 5.6 Pipeline Acquisitions.
(a) LandCare has delivered to ServiceMaster prior to the execution of this
Agreement a schedule captioned "Pipeline Schedule" which as constituted when so
delivered to ServiceMaster prior to execution of this Agreement is herein
called the "Pipeline Schedule." LandCare warrants to ServiceMaster that the
Pipeline Schedule shows: (i) every enterprise with which LandCare has entered
into a letter of intent or binding acquisition agreement contemplating the
acquisition of such enterprise by LandCare which is in existence on the date
hereof (except that the acquisition of Albuquerque Landscape identified in
Section 5.6(f) shall not be deemed to be part of the Pipeline Schedule); (ii)
the purchase price for such enterprise specified in such letter of intent or
acquisition agreement; and (iii) the annual revenues and proforma EBITDA that
LandCare estimates such enterprise generated in the trailing 12 months prior to
the execution of the letter of intent with respect to that enterprise.
(b) LandCare shall not enter into any letter of intent or agreement to make
any acquisition of any business enterprise or consummate any acquisition of any
business enterprise after the date hereof except that LandCare may enter into
purchase agreements for the enterprises shown on the Pipeline Schedule on terms
that comply with the requirements in Section 5.6(d) and may consummate such
acquisitions and except that LandCare shall
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have the right to make additional acquisitions of enterprises not shown on the
Pipeline Schedule that comply with the requirements set forth in paragraphs (c)
and (d) of this Section 5.6.
(c) LandCare may without ServiceMaster's consent acquire businesses not shown
on the Pipeline Schedule provided that the standards in Section 5.6(d) and the
following additional standards are met with respect to each such acquisition:
(i) the purchase price payable for such business shall not exceed .8
times trailing twelve month revenues or six times trailing twelve month pro
forma EBITDA for the business (both calculated in the same manner used to
calculate trailing 12 month revenues and pro forma EBITDA for purposes of
the Pipeline Schedule and for purposes of this requirement all debt
obligations to which the acquired enterprise shall be subject (net of
excess cash) shall count as part of the purchase price);
(ii) such business shall have generated during the trailing 12 months and
shall be likely to continue to generate pro forma EBITDA margins of at
least 10%; and
(iii) such business has a quality and potential comparable to the
businesses shown on the Pipeline Schedule on the date hereof.
(d) The following requirements shall apply to every acquisition made by
LandCare after the date hereof ("New Acquisitions"):
(i) LandCare shall not use its LandCare Common Stock for any New
Acquisition unless that such stock shall be valued for purposes of that
acquisition at:
(A) not less than the actual average closing price for LandCare
Common Stock during a five Trading Day period ending within two Trading
Days prior to the closing of the New Acquisition;
(B) not less than $9 per LandCare share; and
(C) not less than $1 per LandCare share issued in the New Acquisition
below the "Applicable ServiceMaster Deal Price." For purposes of this
Section 5.6, the "Applicable ServiceMaster Deal Price" for purposes of
any particular New Acquisition shall be equal to the Applicable
Exchange Ratio times the average closing price per share for
ServiceMaster Common Stock for the period of 20 consecutive Trading
Days ending on the third Trading Day before the date on which the
particular New Acquisition closes. The "Applicable Exchange Ratio"
shall be the Exchange Ratio that would have been applicable if the
Scheduled Meeting Date coincided with the date on which the New
Acquisition shall close.
(ii) LandCare shall limit the shares of LandCare Common Stock issuable in
New Acquisitions so that in the aggregate the shares of LandCare Common
Stock issued in such transactions will result in aggregate Deal Losses of
not more than $1 million. For purposes of this requirement, the Deal Loss
in any particular New Acquisition shall be the product derived by
multiplying the number of shares of LandCare Common Stock issued in that
New Acquisition times the amount by which the Applicable Service Master
Deal Price shall exceed the value per share for which shares of LandCare
Common Stock were valued for purposes of that New Acquisition.
(iii) LandCare shall not use LandCare Shares in any particular New
Acquisition unless the characteristics of the persons receiving such stock
and all other relevant considerations with respect to that New Acquisition
are such that the use of such stock will not cause either LandCare or
ServiceMaster to breach any of the requirements of the federal securities
laws.
(iv) The terms governing each New Acquisition will include (i) warranties
to LandCare and indemnifications from the sellers comparable to the scope
and value of the warranties usually obtained by LandCare in acquisitions
made after its acquisition of its "founding companies" and prior to the
date hereof and (ii) other terms as favorable to LandCare as the comparable
terms in acquisitions made after its acquisition of its "founding
companies" and prior to the date hereof. The indemnification and other
rights that continue after the closing of a New Acquisition shall be on
terms such that LandCare's rights will not be impaired or diminished in
value by the consummation of the Merger. Without ServiceMaster's consent,
such terms shall not allow the sellers to use stock to satisfy their
indemnification obligations and shall
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prohibit the sellers from transferring any interest in the shares of
LandCare Common Stock they receive in the deal (or in the ServiceMaster
shares issued in the Merger to replace those Shares) for a period of one
year after their New Acquisition closes.
(e) ServiceMaster shall have the right to terminate this Agreement if by the
Scheduled Meeting Date:
(A) LandCare shall not have completed and closed Qualified New
Acquisitions that meet the following criteria: (i) the aggregate
purchase price for the Qualified Pipeline Acquisitions shall not be
more than 5% in excess of the aggregate of the projected acquisition
prices projected on the Pipeline Schedule for New Acquisitions shown on
that Schedule and closed prior to the Scheduled Meeting Date; and (ii)
the aggregate purchase price for Qualified Post Pipeline Acquisitions
shall not exceed the maximum price permitted by clause (i) in Section
5.6(c); and (iii) the trailing 12 month revenues for the Qualified New
Acquisitions (measured as of the time each such New Acquisition closed)
shall not be less than $46.6 million; and (iv) the trailing 12 month
EBITDA for the Qualified New Acquisitions (measured as of the time each
such New Acquisition closed) shall not be less than $5.9 million; or
(B) LandCare shall have made any New Acquisitions after the date
hereof (other than Albuquerque Landscape) that are contrary to the
requirements in paragraphs (c) or (d) in this Section 5.6; or
(C) the aggregate trailing 12 month revenues of all businesses
acquired in New Acquisitions closed prior to the Scheduled Meeting Date
shall exceed $70 million.
For purposes of this Section 5(e):
(i) New Acquisitions shown on the Pipeline Schedule that in
ServiceMaster's reasonable judgment satisfy the requirements paragraph (d)
of this Section 5.6 are herein called "Qualified Pipeline Acquisitions."
(ii) New Acquisitions not listed on the Pipeline Schedule that in
ServiceMaster's reasonable judgment satisfy the requirements paragraphs (c)
and (d) of this Section 5.6 are herein called "Qualified Post Pipeline
Acquisitions."
(iii) The term "Qualified New Acquisitions" means all Qualified Pipeline
Acquisitions and all Qualified Post Pipeline Acquisitions that shall have
closed prior to the Scheduled Meeting Date.
(iv) In the event ServiceMaster or any ServiceMaster subsidiary shall
acquire any enterprise shown on the Pipeline Schedule, then for purposes of
this Section 5.6(e) LandCare shall be deemed to have acquired such
enterprise on the terms specified in the Pipeline Schedule for that
enterprise.
(f) In the event LandCare shall within the next two weeks close its
acquisition of Albuquerque Landscape on the terms provided in the definitive
agreements governing that acquisition in effect on the date hereof, then (i)
such acquisition shall not be required to meet any of the standards prescribed
by this Section 5.6 but (ii) such acquisition shall not be deemed a New
Acquisition and shall not be taken into account in determining whether
ServiceMaster shall have a termination right under the provisions in Section
5.6(e).
(g) LandCare shall supply ServiceMaster at such time as ServiceMaster shall
reasonably request in order to enable ServiceMaster to prepare for the Closing
and to determine whether applicable closing conditions have been satisfied all
information ServiceMaster shall reasonably request about New Acquisitions.
Section 5.7 Redemption of Convertible Notes. LandCare shall use diligent
efforts to cause each of the convertible notes of LandCare described in the
section of LandCare Disclosure Schedule corresponding to Section 3.4(c) to be
redeemed and repaid in full for an amount less than the greater of (unless
otherwise agreed by ServiceMaster) (i) the outstanding principal amount of such
note plus accrued interest or (ii) the then market value of the LandCare shares
into which the notes would be convertible if the conversion were governed by
the conversion ratio applicable after a change in control.
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ARTICLE 6
COVENANTS OF SERVICEMASTER
Section 6.1 Obligations of Merger Subsidiary. ServiceMaster will take all
action necessary to cause Merger Subsidiary to perform its obligations under
this Agreement and to consummate the Merger on the terms and conditions set
forth in this Agreement.
Section 6.2 Indemnification.
(a) From and after the Effective Time, ServiceMaster and the Surviving
Corporation jointly and severally shall indemnify, to the full extent permitted
under Delaware Law, the present and former directors and officers of LandCare
and its Subsidiaries (the "Indemnified Parties") in respect of actions taken
prior to and including the Effective Time in connection with their duties as
directors or officers of LandCare or its Subsidiaries (including the
transactions contemplated hereby) for a period of not less than six years from
the Effective Time; provided that, in the event any claim or claims are
asserted or made within such six-year period, all rights to indemnification in
respect of any such claim or claims shall continue until final disposition of
any and all such claims. Without limitation of the foregoing, in the event any
Indemnified Party becomes involved in such capacity in any action, proceeding
or investigation in connection with any matter, including the transactions
contemplated hereby, occurring prior to and including the Effective Time, the
Surviving Corporation, to the extent permitted and on such conditions as may be
required by applicable law, will periodically advance expenses to such
Indemnified Party for his legal and other out-of-pocket expenses (including the
cost of any investigation and preparation) incurred in connection therewith.
(b) For not less than six years after the Effective Time, ServiceMaster or
the Surviving Corporation shall maintain in effect directors' and officers'
liability insurance covering the persons who are currently covered by
LandCare's existing directors' and officers' liability insurance with respect
to actions that shall have taken place prior to the Effective Time, on terms
and conditions no less favorable to such persons than those in effect on the
date hereof under LandCare's existing directors' and officers' liability
insurance; provided, however, that in no event shall ServiceMaster or the
Surviving Corporation be required to pay in any year an amount to maintain such
insurance covering the Indemnified Parties in excess of twice the amount paid
by LandCare as of the Closing Date for such coverage; provided further that if
the annual premiums of such insurance coverage exceed such amount,
ServiceMaster shall be obligated to obtain a policy with a premium equal to
such amount.
ARTICLE 7
COVENANTS OF SERVICEMASTER AND LANDCARE
Section 7.1 Diligent Efforts. Subject to the terms and conditions of this
Agreement, each party will use its diligent efforts to take, or cause to be
taken, all action and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate the
transactions contemplated by this Agreement; provided that nothing herein shall
require ServiceMaster to hold, manage or operate any assets separately or to
enter into any sale or divestiture of assets. LandCare, ServiceMaster and
Merger Subsidiary shall each furnish to one another and to one another's
counsel all such information as may be required in order to accomplish the
foregoing actions. In connection with and without limiting the foregoing,
LandCare and ServiceMaster shall (i) take all action necessary to ensure that
no state takeover statute or similar statute or regulation is or becomes
applicable to the Merger, this Agreement or any of the other transactions
contemplated hereby and (ii) if any state takeover statute or similar statute
or regulation becomes applicable to the Merger, this Agreement or any of the
other transactions contemplated hereby, take all action necessary to ensure
that the Merger and the other transactions contemplated hereby may be
consummated as promptly as practicable on the terms contemplated by this
Agreement and otherwise to minimize the effect of such statute or regulation on
the Merger and the other transactions contemplated by this Agreement.
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Section 7.2 Certain Filings. LandCare and ServiceMaster shall cooperate with
one another (i) in connection with the preparation of the Registration
Statement and the LandCare Proxy Statement, (ii) in determining whether any
other action by or in respect of, or filing with, any governmental body, agency
or official, or authority or any actions, consents, approvals or waivers are
required to be obtained from parties to any material contracts in connection
with the consummation of the transactions contemplated by this Agreement and
(iii) in seeking any such actions, consents, approvals or waivers or making any
such filings, furnishing information required in connection therewith or with
the Registration Statement and the LandCare Proxy Statement and seeking timely
to obtain any such actions, consents, approvals or waivers.
Section 7.3 Public Announcements. ServiceMaster and LandCare will consult
with each other before issuing any press release or making any public statement
with respect to this Agreement and the transactions contemplated hereby and,
except as may be required by applicable law or any listing agreement with any
national securities exchange, will not issue any such press release or make any
such public statement prior to such consultation.
Section 7.4 Further Assurances. At and after the Effective Time, the officers
and directors of the Surviving Corporation will be authorized to execute and
deliver, in the name and on behalf of LandCare or Merger Subsidiary, any deeds,
bills of sale, assignments or assurances and to take and do, in the name and on
behalf LandCare or Merger Subsidiary, any other actions and things to vest,
perfect or confirm of record or otherwise in the Surviving Corporation any and
all right, title and interest in, to and under any of the rights, properties or
assets of LandCare acquired or to be acquired by the Surviving Corporation as a
result of, or in connection with, the Merger.
Section 7.5 Notices of Certain Events. LandCare and ServiceMaster shall
promptly notify the other of:
(a) any notice or other communication from any person alleging that the
consent of such person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental or regulatory
agency or authority in connection with the transactions contemplated by this
Agreement;
(c) any actions, suits, claims, investigations or proceedings commenced or,
to the best of its knowledge threatened against, relating to or involving or
otherwise affecting LandCare or any of its Subsidiaries, on the one hand, or
ServiceMaster or Merger Subsidiary, on the other hand, which relate to the
consummation of the transactions contemplated by this Agreement; and
(d) any action, event or occurrence that would constitute a breach of any
representation, warranty, covenant or agreement of it set forth in this
Agreement.
Section 7.6 Preparation of the Registration Statement and the LandCare Proxy
Statement. As soon as practicable following the date of this Agreement,
LandCare and ServiceMaster shall jointly prepare and file with the SEC the
LandCare Proxy Statement and ServiceMaster shall prepare and file with the SEC
the Registration Statement, in which the LandCare Proxy Statement will be
included. Each of LandCare and ServiceMaster shall use best efforts to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing. LandCare will use its reasonable best efforts
to cause the LandCare Proxy Statement to be mailed to the stockholders of
LandCare as promptly as practicable after the Registration Statement is
declared effective under the Securities Act. ServiceMaster shall also take any
action (other than qualifying to do business in any jurisdiction in which it is
not now so qualified or to file a general consent to service of process)
required to be taken under any applicable state securities laws in connection
with the issuance of ServiceMaster Common Stock in the Merger and LandCare
shall furnish all information concerning LandCare and the holders of the Shares
as may be reasonably requested in connection with any such action. No filing
of, or amendment or supplement to, the Registration Statement will be made by
ServiceMaster or to the LandCare Proxy Statement will be made by LandCare or
ServiceMaster without
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providing the other party the opportunity to review and comment thereon.
ServiceMaster will advise LandCare, promptly after it receives notice thereof,
of the time when the Registration Statement has become effective or any
supplement or amendment has been filed, the issuance of any stop order, the
suspension of the qualification of ServiceMaster Common Stock issuable in
connection with the Merger for offering or sale in any jurisdiction, or any
request by the SEC for amendment of the LandCare Proxy Statement or the
Registration Statement or comments thereon and responses thereto or requests by
the SEC for additional information. If at any time prior to the Effective Time
any information relating to LandCare or ServiceMaster, or any of their
respective affiliates, officers or directors, should be discovered by LandCare
or ServiceMaster which should be set forth in an amendment or supplement to any
of the Registration Statement or the LandCare Proxy Statement, so that any of
such documents would not include any misstatement of a material fact or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, the party which
discovers such information shall promptly notify the other party hereto and an
appropriate amendment or supplement describing such information shall be
promptly filed with the SEC and, to the extent required by law, disseminated to
the stockholders of LandCare.
Section 7.7 Letters of LandCare's Accountants. LandCare shall use its
reasonable best efforts to cause to be delivered to ServiceMaster two letters
from LandCare's independent accountants, one dated a date within two business
days before the date on which the Registration Statement shall become effective
and one dated a date within two business days before the Closing Date, each
addressed to ServiceMaster, in form and substance reasonably satisfactory to
ServiceMaster and customary in scope and substance for comfort letters
delivered by independent public accountants in connection with registration
statements similar to the Registration Statement.
Section 7.8 Affiliates. Not less than 30 days prior to the Effective Time,
LandCare shall deliver to ServiceMaster a list of names and addresses of each
person who, in the reasonable judgment of LandCare, is an affiliate of LandCare
within the meaning of Rule 145 of the rules and regulations promulgated under
the Securities Act (each such person, an "Affiliate"). Each person who shall
execute a Voting Agreement shall be deemed an affiliate of LandCare and shall
be so designated on the list contemplated in the preceding sentence. LandCare
shall provide ServiceMaster such information and documents as ServiceMaster
shall reasonably request for purposes of reviewing such list. ServiceMaster
shall be entitled to place Rule 145 legends on the certificates evidencing any
shares of ServiceMaster Common Stock to be received by the Affiliates in the
Merger.
Section 7.9 NYSE Listing. ServiceMaster shall use its reasonable best efforts
to cause the shares of ServiceMaster Common Stock to be issued in connection
with the Merger to be approved for listing on the New York Stock Exchange,
subject to official notice of issuance, as promptly as practicable after the
date hereof, and in any event prior to the Closing Date.
Section 7.10 Regulatory Matters and Approvals. Each of LandCare and
ServiceMaster shall (and ServiceMaster shall cause Merger Subsidiary to) give
any notices to, make any filings with and use its reasonable best efforts to
obtain any authorizations, consents and approvals of, Governmental Entities in
connection with the transactions contemplated by this Agreement. Without
limiting the generality of the foregoing, LandCare and ServiceMaster shall each
file any Notification and Report Forms and related material that it may be
required to file in connection with the transactions contemplated by this
Agreement with the Federal Trade Commission and the Antitrust Division of the
United States Department of Justice under the HSR Act, shall each use its
reasonable best efforts to obtain an early termination of the applicable
waiting period, and shall each make any further filings pursuant thereto that
may be necessary, proper or advisable.
Section 7.11 Tax Treatment. Each of ServiceMaster and LandCare shall use
reasonable best efforts to cause the Merger to qualify as a reorganization
under the provisions of Section 368(a) of the Code, including, without
limitation, forbearing from taking any action that would cause the Merger not
to qualify as a reorganization under the provisions of Section 368(a) of the
Code.
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Section 7.12 Representations. Each of LandCare, on the one hand, and
ServiceMaster and Merger Subsidiary, on the other, (i) will use their
reasonable best efforts to take all action necessary to render true and correct
as of the Closing its representations and warranties contained in this
Agreement, (ii) will refrain from taking any action that would render any such
representation or warranty untrue or incorrect as of such time and (iii) will
perform or cause to be satisfied each agreement, covenant or condition to be
performed or satisfied by it.
Section 7.13 Material Consents. Between the date of this Agreement and the
Closing Date, LandCare and ServiceMaster and each of their respective
Subsidiaries shall in good faith use their reasonable best efforts to obtain
all consents and approvals of all lenders, lessors, vendors, customers and
other persons necessary to permit the transactions contemplated by this
Agreement to be consummated without violating any loan agreement, lease or
other material contract to which LandCare, ServiceMaster or any of their
respective Subsidiaries is a party or by which LandCare, ServiceMaster or any
of their respective Subsidiaries is bound.
ARTICLE 8
CONDITIONS TO THE MERGER
Section 8.1 Conditions to the Obligations of Each Party. The obligations of
LandCare, ServiceMaster and Merger Subsidiary to consummate the Merger are
subject to the satisfaction of the following conditions:
(a) this Agreement shall have been adopted by the stockholders of LandCare in
accordance with Delaware Law;
(b) any applicable waiting period under the HSR Act relating to the Merger
shall have expired or been terminated;
(c) no judgment, injunction, order or decree shall prohibit the consummation
of the Merger;
(d) the Registration Statement shall have become effective under the
Securities Act and shall not be the subject of any stop order or proceedings
seeking a stop order;
(e) the shares of ServiceMaster Common Stock issuable to the stockholders of
LandCare in the Merger as contemplated by this Agreement shall have been
approved for listing on the New York Stock Exchange, subject to official notice
of issuance; and
(f) this Agreement shall not have been terminated in accordance with its
terms.
Section 8.2 Additional Conditions to the Obligations of ServiceMaster and
Merger Subsidiary. The obligations of ServiceMaster and Merger Subsidiary to
consummate the Merger are subject to the satisfaction of the following
additional conditions: (i) the representations and warranties of LandCare as
set forth in this Agreement shall be true and correct in all material respects
as if made on and as of the Effective Time (other than those representations
and warranties which address matters only as of a certain date, which shall be
true and correct in all material respects as of such certain date), (ii)
LandCare shall have complied with or performed in all material respects all
agreements and covenants required to be complied with or performed by it under
this Agreement at or prior to the Closing Date, and (iii) ServiceMaster shall
have received from each person who is, immediately prior to the Effective Time,
a director or officer of LandCare or any of its Subsidiaries his written
resignation, effective as of the Effective Time, from each position as a
director of LandCare and each Subsidiary.
Section 8.3 Additional Conditions to the Obligations of LandCare. The
obligations of LandCare to consummate the Merger are subject to the
satisfaction of the following additional condition: the representations and
warranties of ServiceMaster and Merger Subsidiary as set forth in this
Agreement shall be true and correct
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in all material respects as if made on and as of the Effective Time (other than
those representations and warranties which address matters only as of a certain
date, which shall be true and correct in all material respects as of such
certain date) and ServiceMaster and Merger Subsidiary shall have complied with
or performed in all material respects all agreements and covenants required to
be complied with or performed by it under this Agreement at or prior to the
Closing Date.
ARTICLE 9
TERMINATION AND CLOSING
Section 9.1 Termination. This Agreement may be terminated and the Merger may
be abandoned at any time prior to the Effective Time (notwithstanding any
approval of this Agreement by the stockholders of LandCare):
(a) by mutual written consent of LandCare, ServiceMaster and Merger
Subsidiary;
(b) by either LandCare or ServiceMaster, if the Merger has not been
consummated by May 1, 1999; provided that no party may terminate this Agreement
pursuant to this subsection if such party's failure to fulfill any of its
obligations under this Agreement shall have been the primary and but-for reason
that the Effective Time shall not have occurred on or before said date and
provided further that in no event shall ServiceMaster's failure to permit an
adjustment in the Exchange Ratio under Section 1.2(b)(iii) preclude or impair
ServiceMaster's right to terminate under this clause (b);
(c) by either LandCare or ServiceMaster, if there shall be any judgment,
injunction, order or decree enjoining ServiceMaster or LandCare from
consummating the transactions contemplated by this Agreement is entered and
such judgment, injunction, order or decree shall have become final and
nonappealable;
(d) by either LandCare or ServiceMaster, if this Agreement shall not have
been adopted by the stockholders of LandCare at the LandCare Stockholders
Meeting;
(e) by ServiceMaster or Merger Subsidiary, if the board of directors of
LandCare shall (i) withdraw, modify or change its recommendation or approval in
respect of this Agreement in a manner adverse to ServiceMaster or (ii) have
recommended any proposal other than by ServiceMaster or Merger Subsidiary in
respect of an Acquisition Transaction; and
(f) by ServiceMaster or Merger Subsidiary, if any corporation, partnership,
person, other entity or group (as defined in Section 13(d)(3) of the Exchange
Act) other than ServiceMaster or Merger Subsidiary or any of their respective
Subsidiaries or affiliates shall have become the beneficial owner of more than
40% of the outstanding LandCare Common Stock (either on a primary or a fully
diluted basis).
(g) by ServiceMaster, if LandCare shall have breached (regardless of the
knowledge of ServiceMaster of such breach at or subsequent to the date of this
Agreement) in any material respect any of its representations, warranties,
covenants or agreements contained herein;
(h) by ServiceMaster if the Committee acting under the 1998 Long-Term
Incentive Plan, LandCare's Board of Directors and all other necessary persons
shall not have taken all actions necessary to cause the conversions prescribed
by Section 1.4(a) to occur automatically upon consummation of the Merger; or
(i) by LandCare, if a Qualified Competing Proposal is made to LandCare,
subject to the restrictions set forth in Section 5.4(c)(ii); provided that the
right to terminate described in this subsection shall not be effective unless
and until LandCare shall have paid to ServiceMaster the fee described in
Section 9.4(b); provided further that the right to terminate described in this
subsection shall immediately expire and be of no force or effect if LandCare's
stockholders approve the Merger; or
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(j) by LandCare, if ServiceMaster or Merger Subsidiary shall have breached
(regardless of the knowledge of LandCare of such breach at or subsequent to the
date of this Agreement) in any material respect any of its representations,
warranties, covenants or agreements contained herein; or
(k) by LandCare if LandCare shall become entitled to terminate under Section
1.2(b)(iii); or
(l) by ServiceMaster if the right to termination shall arise under Section
5.6(e).
Such right of termination shall be exercised by written notice of termination
given by the terminating party to the other parties hereto in the manner
hereinafter provided. Any such right of termination shall not be an exclusive
remedy hereunder but shall be in addition to any other legal or equitable
remedies that may be available to any non-defaulting party hereto arising out
of any default hereunder by any other party hereto.
Section 9.2 Waiver. At any time prior to the Effective Time, the parties
hereto, by action taken by or pursuant to resolutions of their respective
boards of directors, may (a) extend the time for the performance of any of the
obligations or other acts of the parties hereto, (b) waive any inaccuracies in
the representations and warranties contained herein or in any document
delivered pursuant hereto, and (c) except for adoption of this Agreement by the
stockholders of LandCare waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid if set forth in an instrument in
writing signed on behalf of such party.
Section 9.3 Closing. Subject to the satisfaction of the conditions contained
in Article 8 hereof, the closing of the Merger (the "Closing") shall take place
at the offices of Kirkland & Ellis in Chicago, Illinois as soon as practicable
after the satisfaction or waiver of all of the conditions to the Merger or at
such other time and place as LandCare, ServiceMaster, and Merger Subsidiary
shall agree (the "Closing Date").
Section 9.4 Effect of Termination; Termination Fee.
(a) If this Agreement is terminated pursuant to Section 9.1 hereof, this
Agreement shall become void and of no effect with no liability on the part of
any party hereto, except that the agreements contained in Sections 9.4(b),
9.4(c) and 10.4 hereof shall survive the termination hereof and except that no
such termination shall relieve any party from liability for breach of this
Agreement or failure by it to perform its obligations hereunder.
(b) If this Agreement shall be terminated pursuant to clause (d), (e), (f),
(g), (h), or (i) in Section 9.1, then LandCare shall promptly, but in no event
later than two business days after the date of such termination, pay
ServiceMaster a termination fee equal to the sum of (i) $7,577,045 plus (ii)
$0.44 multiplied by the aggregate number of shares of LandCare Common Stock
(other than any shares of LandCare Common Stock issued upon the exercise of
LandCare Stock Options) issued subsequent to the date hereof and on or prior to
the date of termination of this Agreement pursuant to Section 9.1. In no event
shall LandCare be required to pay more than one termination fee pursuant to
this Section 9.4(b).
(c) If this Agreement shall be terminated by ServiceMaster pursuant to its
termination rights in Section 5.6(e), then LandCare shall promptly, but in no
event later than two business days after the date of such termination, pay
ServiceMaster an amount, not to exceed $1,000,000, equal to the actual and
reasonably documented out-of-pocket expenses incurred by ServiceMaster directly
attributable to the proposed acquisition of LandCare and incurred since October
15, 1998, including negotiation and execution of this Agreement and the
attempted completion of the Merger, which fee and amount shall be payable in
cash in same day funds.
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ARTICLE 10
MISCELLANEOUS
Section 10.1 Notices. All notices, requests and other communications to any
party hereunder shall be in writing (including facsimile, telex or similar
writing) and shall be given,
If to ServiceMaster or Merger Subsidiary, to:
One ServiceMaster Way
Downers Grove, IL 60515
Attention: General Counsel
Facsimile: (630) 271-5870
with a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Robert H. Kinderman
Facsimile: (312) 861-2200
If to LandCare, to:
2603 Augusta
Suite 1300
Houston, TX 77057
Attention: General Counsel
Facsimile: (713) 965-0343
with a copy to:
Bracewell & Patterson L.L.P.
South Tower Pennzoil Place
711 Louisiana Street
Houston, TX 77002
Attention: Thomas Adkins
Facsimile: (713) 221-1212
or such other address, telecopy or telex number as such party may hereafter
specify for the purpose by notice to the other parties hereto. Each such
notice, request or other communication shall be effective (a) if given by
facsimile or telex, upon confirmation of receipt, or (b) if given by any other
means, when delivered at the address specified in this Section 10.1.
Section 10.2 Survival of Representations and Warranties. The representations
and warranties contained herein shall not survive the Effective Time.
Section 10.3 Amendments; No Waivers.
(a) Any provision of this Agreement may be amended or waived prior to the
Effective Time if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by LandCare, ServiceMaster and Merger
Subsidiary or in the case of a waiver, by the party against whom the waiver is
to be effective; provided that after the adoption of this Agreement by the
stockholders of LandCare, no such amendment or waiver shall, without the
further approval of such stockholders, alter or change the amount or kind of
consideration to be received in exchange for the Shares (except as contemplated
by Section 1.02(b)).
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(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
Section 10.4 Expenses. Except as provided in Section 9.4 hereof, each party
shall pay its own costs and expenses relating to this Agreement and the
transactions contemplated hereby, except that each of ServiceMaster and
LandCare shall bear and pay one-half of the costs and expenses incurred in
connection with the filing, printing and mailing of the Registration Statement
and the LandCare Proxy Statement (including SEC filing fees).
Section 10.5 Successors and Assigns. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns; provided that no party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the consent of the other parties hereto.
Section 10.6 Governing Law. This Agreement shall be construed in accordance
with and governed by the law of the State of Delaware, without giving effect to
any choice of law or conflict of law rules or provisions (whether of the State
of Delaware or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Delaware.
Section 10.7 Counterparts; Effectiveness. This Agreement may be signed in any
number of counterparts (including by means of telecopied signature pages), each
of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument. This Agreement shall become
effective when each party hereto shall have received counterparts hereof signed
by all of the other parties hereto.
Section 10.8 Headings. Section headings used in this Agreement are for
convenience only and shall be ignored in the construction and interpretation
hereof.
Section 10.9 No Third Party Beneficiaries. Except for Section 6.2 hereof, no
provision of this Agreement is intended to, or shall, confer any third party
beneficiary or other rights or remedies upon any person other than the parties
hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.
The Servicemaster Company
/s/ Phillip B. Rooney
By: _________________________________
Name: Phillip B. Rooney
Title: Vice Chairman
SVM Acquisition Corporation
/s/ Phillip B. Rooney
By: _________________________________
Name: Phillip B. Rooney
Title: Vice President
Landcare USA, Inc.
/s/ William F. Murdy
By: _________________________________
Name: William F. Murdy
Title: Chief Executive Officer
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APPENDIX B
OPINION OF BT ALEX. BROWN INCORPORATED
November 1, 1998
Board of Directors
LandCare USA, Inc.
Three River Way
Houston, Texas 77056
Members of the Board:
LandCare USA, Inc., a Delaware corporation ("GRW"), and The ServiceMaster
Company, a Delaware corporation ("SVM"), and SVM Acquisition Corporation, a
Delaware corporation and a wholly-owned subsidiary of SVM ("Merger
Subsidiary"), have entered into a Plan of Reorganization and Agreement and Plan
of Merger dated as of November 1, 1998 (the "Merger Agreement"). The Merger
Agreement provides, among other things, for the merger of GRW with and into
Merger Subsidiary (the "Transaction"), as a result of which GRW will become a
wholly-owned subsidiary of SVM. As set forth more fully in the Merger
Agreement, as a result of the Transaction, each share of the Common Stock, par
value $0.01 per share, of GRW ("GRW Common Stock") will be converted into the
right to receive a fraction (the "Exchange Ratio") of one share Common Stock,
par value $0.01 per share, of SVM ("SVM Common Stock"). The Exchange Ratio
shall be 0.55 in the event that the average of the closing prices (the "Final
Average Closing Price") of SVM Common Stock on the 20 consecutive trading days
ending on the third trading day prior to GRW's shareholder vote is more than
$16.35 per share and not more than $20.00 per share. In the event that the
Final Average Closing Price is more than $20.00 per share then the Exchange
Ratio shall be the quotient derived by dividing $11.00 by the Final Average
Closing Price. In the event that the Final Average Closing Price is less than
$16.36 per share, then unless SVM shall otherwise notify GRW, the Exchange
Ratio shall automatically adjust to the smallest decimal which when multiplied
by the Final Average Closing Price will equal $9.00 per share. If SVM shall
notify GRW that SVM elects not to permit the adjustment prescribed in the
preceding sentence, then (i) the Exchange Ratio shall be 0.55 (or such greater
number as SVM shall specify), and (ii) GRW shall have the right to terminate
the Merger Agreement. The terms and conditions of the Merger are more fully set
forth in the Merger Agreement.
You have requested BT Alex. Brown's opinion, as investment bankers, as to
whether the Exchange Ratio is fair, from a financial point of view, to the
holders of GRW Common Stock.
In connection with this opinion, BT Alex. Brown has reviewed certain publicly
available financial and other information concerning GRW and SVM, certain
internal analyses and other information furnished to it by GRW, and certain
third-party analyses furnished to it by or on behalf of SVM. BT Alex. Brown
also has held discussions with members of the senior managements of GRW and SVM
regarding the businesses and prospects of their respective companies. In
addition, BT Alex. Brown has (i) reviewed the reported prices and trading
activity for GRW Common Stock and SVM Common Stock, (ii) compared certain
financial and stock market information for GRW and SVM with similar information
for certain other companies whose securities are publicly traded, (iii)
reviewed the financial terms of certain recent business combinations which it
deemed comparable in whole or in part, (iv) reviewed the terms of the Merger
Agreement and certain related documents, and (v) performed such other studies
and analyses and considered such other factors as it deemed appropriate.
BT Alex. Brown has not assumed responsibility for independent verification
of, and has not independently verified, any information, whether publicly
available or furnished to it, concerning GRW or SVM, including, without
limitation, any financial information, forecasts or projections considered in
connection with the rendering of this opinion. Accordingly, for purposes of
this opinion, BT Alex. Brown has assumed and relied upon the accuracy and
completeness of all such information and BT Alex. Brown has not conducted a
physical inspection of any of the properties or assets, and has not prepared or
obtained any independent evaluation or appraisal of any of the assets or
liabilities, of GRW or SVM. With respect to the financial forecasts and
projections made available to BT Alex. Brown and used in its analyses, BT Alex.
Brown has assumed that such financial forecasts and projections have been
reasonably prepared on bases reflecting the best currently
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available estimates and judgments of the management of GRW or SVM, as the case
may be, as to the matters covered thereby. In rendering this opinion, BT Alex.
Brown expresses no view as to the reasonableness of such forecasts and
projections or the assumptions on which they are based. This opinion is
necessarily based upon economic, market and other conditions as in effect on,
and the information made available to it as of, the date hereof. BT Alex. Brown
expresses no opinion as to the price at which GRW Common Stock or SVM Common
Stock will trade following the announcement or the consummation of the
Transaction.
For purposes of rendering this opinion and based on the your direction and
with your consent, BT Alex. Brown has assumed that, in all respects material to
its analysis, the representations and warranties of GRW and SVM contained in
the Merger Agreement are true and correct, GRW and SVM will each perform all of
the covenants and agreements to be performed by it under the Merger Agreement,
and all conditions to the obligations of each of GRW and SVM to consummate the
Transaction will be satisfied without any waiver thereof, including, without
limitation, (i) the adoption of the Merger Agreement by GRW's stockholders,
(ii) the expiration or termination of any applicable waiting period under the
Hart-Scott-Rodino Act, (iii) GRW's consummation of certain Qualified New
Acquisitions pursuant to Section 5.6 of the Merger Agreement, and (iv) the SVM
Common Stock issuable to GRW stockholders in the Transaction as contemplated by
the Merger Agreement shall have been approved for listing on the New York Stock
Exchange. In addition, you have informed BT Alex. Brown, and accordingly for
purposes of rendering this opinion BT Alex. Brown has assumed that the
Transaction will be free of Federal tax to GRW and its respective shareholders.
BT Alex. Brown has also assumed that all material governmental, regulatory or
other approvals and consents required in connection with the consummation of
the Transaction will be obtained and that in connection with obtaining any
necessary governmental, regulatory or other approvals and consents, or any
amendments, modifications or waivers to any agreements, instruments or orders
to which either GRW or SVM is a party or is subject or by which it is bound, no
limitations, restrictions or conditions will be imposed or amendments,
modifications or waivers made that would have a material adverse effect on GRW
or SVM or materially reduce the contemplated benefits of the Transaction to
GRW.
This opinion is addressed to, and for the use and benefit of, the Board of
Directors of GRW and is not a recommendation to the shareholders of GRW as to
how they should vote with respect to matters relating to the proposed
Transaction. This opinion is limited to the fairness, from a financial point of
view, to GRW of the Exchange Ratio, and BT Alex. Brown expresses no opinion as
to the merits of the underlying decision by GRW to engage in the Transaction.
In connection with our engagement, BT Alex. Brown was not authorized to
solicit, and did not solicit, third party indications of interest with respect
to the acquisition of all or a part of GRW, nor have we reviewed with GRW or
its Board of Directors any other potential transactions in lieu of the
Transaction.
BT Alex. Brown is a registered broker-dealer and member of the New York Stock
Exchange. BT Alex. Brown will be paid a fee for rendering this fairness opinion
to GRW, a portion of which is contingent upon consummation of the Transaction
and a portion of which is payable upon delivery of this opinion. BT Alex. Brown
has, from time to time, provided investment banking and other financial
services to GRW or its affiliates (including, acting as lead managing
underwriter in connection with GRW's initial public offering of GRW Common
Stock in June 1998), for which it has received customary compensation. BT Alex.
Brown maintains a market in GRW Common Stock and regularly publishes research
reports regarding the facility services industry and the businesses and
securities of GRW and other publicly owned companies in such industry. In the
ordinary course of business, BT Alex. Brown and its affiliates may actively
trade or hold the securities of both GRW and SVM for their own account and the
account of customers and, accordingly, may at any time hold a long or short
position in securities of GRW and SVM.
Based upon and subject to the foregoing, it is BT Alex. Brown's opinion as
investment bankers that the Exchange Ratio is fair, from a financial point of
view, to the holders of GRW Common Stock.
Very truly yours,
/s/ BT Alex. Brown Incorporated
BT Alex. Brown Incorporated
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The ServiceMaster Company (the "Company") is incorporated under the laws of
the State of Delaware. Section 145 of the DGCL, inter alia ("Section 145")
provides that a Delaware corporation may indemnify any persons who were, are or
are threatened to be made, parties to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the corporation's best interests and, with respect
to any criminal action or proceeding, had no reasonable cause to believe that
his conduct was illegal. A Delaware corporation may indemnify any persons who
are, were or are threatened to be made, a party to any threatened, pending or
completed action or suit by or in the right of the corporation by reason of the
fact that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests, provided that no indemnification is permitted without judicial
approval if the officer, director, employee or agent is adjudged to be liable
to the corporation. Where an officer, director, employee or agent is successful
on the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses that such officer or
director has actually and reasonably incurred.
Article Ten of the Restated Certificate ("Article Ten") provides that no
person shall have any liability of any kind by reason of a Relevant Loss
(defined below) caused in whole or in part by any act or failure to act which
occurred while such person was an officer or director of the Company except:
(i) obligations arising under the express terms of any written contract to
which such person is a party; (ii) the obligation to return to the Company an
amount up to the value actually realized by such person by stealing or by any
other action which constitutes a criminal felony; (iii) any liability imposed
by contract or applicable law which is founded on, arises from or is related to
activities by such person (or such person's agents or affiliates) which are in
competition with any business of the Company or any of its affiliates; and (iv)
any other liability from which it shall not be possible to exempt such person
under applicable law either as constituted on the date on which the Restated
Certificate was filed with the Secretary of State of Delaware (the "Filing
Date") or at any time thereafter. The term "Relevant Loss" designates and
includes any loss, damage or expense of any kind (i) experienced for any reason
by the Company or by any entity controlled by the Company; (ii) which any
person may experience by reason of any purchase (or failure to purchase),
maintenance of an interest in, sale (or failure to sell) or failure to obtain
payment of any amount due on any note, debenture, preferred stock, common stock
or other security issued or issuable by the Company or (iii) which shall
otherwise be caused in whole or in part by or arise in connection with (or
would not have occurred but for) such person's service as a director or officer
of the Company. In addition, Article Ten provides that every director of the
Company shall be exempt (except to the extent expressly set forth therein) from
any personal liability to the Company or any of the Company's stockholders for
monetary damages for breach of fiduciary duty as a director to the fullest
extent permitted by (i) Section 102(b)(7) of the DGCL as constituted on the
Filing Date or (ii) any provision of the law of the State of Delaware as
constituted at any time after the December 11, 1991.
Except as otherwise provided in the Restated Certificate, Article Eleven of
the Restated Certificate ("Article Eleven") provides that the Company shall
indemnify any person against, and shall reimburse, such person for any amount
which such person shall pay to satisfy, settle or otherwise deal with, any
attempt to
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impose any liability or obligation of any kind upon such person if such attempt
or such liability or obligation or both shall arise in connection with or by
reason of, or would not have arisen but for, Covered Service (defined below) by
such person (or any agreement by such person to serve as a director or officer
of the Company or to provide other Covered Service) including, but not limited
to: (i) any claim resulting from any loss, injury, damage, harm or other
disadvantage which the Company, any affiliate, any employee plan or any person
who acquires, holds, or disposes of any interest in any security issued by the
Company suffers or is alleged to have suffered; (ii) any claim resulting from
any act or failure to act by any person which is (or is alleged to be) beyond
the scope of his or her authority, contrary to instructions or orders or
contrary to his or her duties or applicable law; and (iii) any attempt by any
governmental authority or other person to impose any fine or penalty or to
obtain any other recovery by reason of any actual or alleged breach of any law
or other governmental requirement.
The term "Covered Service" designates and includes: (a) service as a director
or officer of the Company; (b) service by a person while he or she is an
officer or director of the Company (i) as an agent or representative of the
Company, (ii) in any other capacity with the Company, (iii) as a director,
officer, employee, agent or representative of, or in any other capacity with,
any affiliate, (iv) in any capacity with any Employee Plan (as defined
therein), and (v) in any other capacity in which such person shall have been
asked to serve by the Company's Board of Directors or Chief Executive Officer;
(c) any services which constituted "Covered Service" under the Amended and
Restated Agreement of United Partnership for ServiceMaster Limited Partnership;
and (d) any other service of any kind by any person with any organization or
entity of any kind (whether or not affiliated with the Company) which shall be
designated in writing as Covered Service by a majority of the members of the
Company's Board of Directors or by the Company's Chief Executive Officer.
Service is deemed to constitute "Covered Service" if it is so designated by the
terms in the preceding sentence regardless of whether it shall have been
performed prior to, at, or after the time Article Eleven became part of the
Company's Certificate of Incorporation. Any person is entitled to rely upon any
written confirmation provided by the Company's Chief Executive Officer or by
the Company's Board of Directors that service by such person in any capacity
specified in such confirmation will constitute Covered Service and to rely upon
the protection afforded by Article Eleven in connection with such service.
Except to the extent the Company shall otherwise expressly agree in writing,
the Company is not obligated under Article Eleven to reimburse any person for
or otherwise indemnify any person against: (a) any obligation the person may
have under any written contract except to the extent such obligation arises by
reason of any action taken by such person to satisfy, settle or otherwise deal
with any claim against which such person is entitled to indemnification from
the Company under Article Eleven or otherwise; (b) any income taxes payable by
reason of salary, bonus or other income or gain actually realized by such
person in connection with any Covered Service; (c) any liability imposed by
contract or applicable law which is founded on, arises from or is related to
activities by such person (or such person's agents or affiliates) which are in
competition with any business of the Company or any of its affiliates; and (d)
any obligation to pay an amount up to the value personally realized by such
person by stealing or by any other action which constitutes a criminal felony.
Except as otherwise provided in the Restated Certificate, the Company is not
obligated under Article Eleven to indemnify any person in connection with a
proceeding (or part thereof) initiated by such person unless such proceeding
(or part thereof) was authorized by the Board of Directors of the Company.
Article Eleven provides that each person who was or is made a party or is
threatened to be made a party to or is otherwise involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was a director or officer of the
Company, agreed to serve as a director or officer of the Company or is or was
providing any other Covered Service, whether the basis of such proceeding is
alleged action in an official capacity as a director or officer of the Company
or in any other Covered Service position, shall, except as otherwise provided
therein, be indemnified and hold harmless by the Company to the fullest extent
authorized by Delaware law against all expense, liability and loss (including
attorneys' fees, judgments, fines, excise taxes or penalties arising under the
Employee Retirement Income Security Act, as amended from time to time, and
amounts paid in settlement) reasonably incurred or suffered
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by such person in connection therewith and such indemnification shall continue
as to a person who has ceased to be a director or officer of the Company or to
provide any other Covered Service and shall inure to the heirs, executors and
administrators of such person.
Article Eleven provides that the Company shall reimburse any Covered Person
(as defined therein) for any payment made by such person for any legal fees or
other expenses reasonably incurred by such person in order to investigate,
evaluate, defend against, pay in full, settle or otherwise deal with (i) any
Covered Claim (as defined therein) or (ii) any development or state of facts
which could give rise to a Covered Claim.
Article Eleven also provides that any officer of the Company or any member of
its Board of Directors shall have the right and power to execute on behalf of
the Company any written contract with any other person providing
indemnification or other protection to such other person in connection with
service by such other person as a director or officer of the Company or in
connection with any other Covered Service by such person, and any such contract
shall be legal, valid and binding upon the Company and shall be enforceable
against the Company in accordance with its terms to the maximum extent
permitted by Article Eleven or by applicable law, if it shall be approved by a
majority of the members of the Company's Board of Directors exclusive of the
person to whom indemnification is provided by such contract. The rights of any
person under any particular contract made in accordance with the provisions of
the preceding sentence shall not be impaired or eliminated (i) by reason of the
fact that all or any one or more of the members of the Board who approved such
contracts shall be parties to contracts affording them similar protection
(regardless of when those other contracts shall have been approved or signed)
or shall otherwise have been provided with protection similar to that provided
in the particular contract or shall be subject to the same claims against which
the particular contract is intended to protect or (ii) for any other reason
whatsoever. It is expressly intended that each person with whom the Company
shall enter into a written contract to provide indemnification or other
protection in connection with such person's service as an officer or director
of the Company or in connection with other Covered Service by such person shall
be entitled to rely upon (and shall conclusively be presumed to have relied
upon) the rights which such contract purports to provide to such person. No
separate written contract shall however be necessary in order for any person to
obtain any indemnification or payment to which Article Eleven purports to
entitle such person, and any Covered Person who has no separate contact of any
kind with the Company shall be entitled to receive all indemnification,
payments and other benefits which the provisions in Article Eleven purport to
provide to such Covered Person.
The rights to indemnification and payment provided by Article Eleven are not
exclusive of any other right of any kind which any person may have or at any
time acquire under or by reason of any other provision in the Restated
Certificate, the Company's By-Laws, any agreement, any law or other action by
any governmental authority, or otherwise.
Article Eleven authorizes the Company to purchase and maintain insurance on
behalf of any person who is or was a director or officer of the Company, or is
or was serving in any other capacity with the Company, any Employee Plan or any
other organization against any expense, liability or loss, whether or not the
Company would have the power to indemnify such person against such expense,
liability or loss under the provisions of Article Eleven, under applicable law
or otherwise.
In addition, Section 145 further authorizes a corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation or enterprise, against any liability asserted against him and
incurred by him in any such capacity, arising out of his status as such,
whether or not the corporation would otherwise have the power to indemnify him
under Section 145.
All of the Company's directors and the officers are covered by insurance
policies maintained and held in effect by the Company against certain
liabilities for actions taken in such capacities, including liabilities under
the Securities Act of 1933.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. See Exhibit Index.
(b) FINANCIAL STATEMENT SCHEDULES.
Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the financial
statements or the notes thereto.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933, as amended,
and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended,
shall be deemed to be part of this Registration Statement as of the time it
was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
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(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, HEREUNTO DULY AUTHORIZED, IN THE CITY OF DOWNERS
GROVE, STATE OF ILLINOIS, ON JANUARY 6, 1999.
The ServiceMaster Company, As
Registrant
/s/ Vernon T. Squires
By: _________________________________
Vernon T. Squires
Senior Vice President and General
Counsel
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS VERNON T. SQUIRES AND STEVEN C. PRESTON AND ERIC
R. ZARNIKOW, AND EACH OF THEM, AS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS
WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION FOR HIM AND IN HIS NAME,
PLACE AND STEAD, IN ANY AND ALL CAPACITIES TO SIGN ANY AND ALL AMENDMENTS
(INCLUDING PRE-EFFECTIVE AND POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION
STATEMENT, AND TO FILE THE SAME WITH ALL EXHIBITS THERETO AND OTHER DOCUMENTS
IN CONNECTION THEREWITH WITH THE SECURITIES AND EXCHANGE COMMISSION GRANTING
UNTO SAID ATTORNEYS-IN-FACT AND AGENTS FULL POWER AND AUTHORITY TO DO AND
PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN AND
ABOUT THE PREMISES, AS FULLY AS TO ALL INTENTS AND PURPOSES AS HE MIGHT OR
COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-
FACT AND AGENTS OR THEIR OR HIS SUBSTITUTE OR SUBSTITUTES MAY LAWFULLY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED ON JANUARY 6, 1999 BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ C. William Pollard Chairman and Director of The ServiceMaster
___________________________________________ Company
C. William Pollard
/s/ Carlos H. Cantu President, Chief Executive Officer and
___________________________________________ Director of The ServiceMaster Company
Carlos H. Cantu
/s/ Steven C. Preston Senior Vice President and Chief Financial
___________________________________________ Officer of The ServiceMaster Company
Steven C. Preston
/s/ Charles W. Stair Vice Chairman and Director of The
___________________________________________ ServiceMaster Company
Charles W. Stair
/s/ Phillip B. Rooney Vice Chairman and Director of The
___________________________________________ ServiceMaster Company
Phillip B. Rooney
/s/ Paul W. Berezny, Jr. Director of The ServiceMaster Company
___________________________________________
Paul W. Berezny, Jr.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Henry O. Boswell Director of The ServiceMaster Company
___________________________________________
Henry O. Boswell
/s/ Brian Griffths Director of The ServiceMaster Company
___________________________________________
Brian Griffiths
/s/ Sidney E. Harris Director of The ServiceMaster Company
___________________________________________
Sidney E. Harris
/s/ Herbert P. Hess Director of The ServiceMaster Company
___________________________________________
Herbert P. Hess
/s/ Michele M. Hunt Director of The ServiceMaster Company
___________________________________________
Michele M. Hunt
/s/ Gunther H. Knoedler Director of The ServiceMaster Company
___________________________________________
Gunther H. Knoedler
/s/ James D. McLennan Director of The ServiceMaster Company
___________________________________________
James D. McLennan
/s/ Vincent C. Nelson Director of The ServiceMaster Company
___________________________________________
Vincent C. Nelson
/s/ Dallen W. Peterson Director of The ServiceMaster Company
___________________________________________
Dallen W. Peterson
/s/ Steven S Reinemund Director of The ServiceMaster Company
___________________________________________
Steven S Reinemund
/s/ Burton E. Sorensen Director of The ServiceMaster Company
___________________________________________
Burton E. Sorensen
/s/ David K. Wessner Director of The ServiceMaster Company
___________________________________________
David K. Wessner
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
The exhibits listed below are filed as part of or incorporated by reference
in this Registration Statement. Where such filing is made by incorporation by
reference to a previously filed report, such report is identified in
parentheses.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2 Plan of Reorganization and Agreement and Plan of Merger, dated
November 1, 1998, by and among LandCare USA, Inc., The ServiceMaster
Company and SVM Acquisition Corporation (included as Appendix A to
the Proxy Statement/Prospectus which forms a part of this
Registration Statement).
4.1 Shareholder Rights Agreement between The ServiceMaster Company and
the Harris Trust and Savings Bank as adopted on December 12, 1997 is
incorporated by reference to Exhibit 3 to the Current Report on Form
8-K as filed by ServiceMaster Limited Partnership on December 29,
1997 (the "SMLP December 29, 1997 8-K" and to Exhibit 3 to the
Current Report on Form 8-K as filed by The ServiceMaster Company on
Form 8-K on February 26, 1998 (second of three 8-K reports filed on
that date) (the "Company February 26, 1998 8-K, No. 2").
4.2 The ServiceMaster Company Certificate of Designation, Preferences
and Rights of Junior Participating Preferred Stock, Series A, is
incorporated by reference to Exhibit 4 to the SMLP December 29, 1997
8-K and to Exhibit 4 to the Company February 26, 1998 8-K, No. 2.
4.3 Indenture dated as of August 15, 1997 among The ServiceMaster
Company (as successor to ServiceMaster Limited Partnership and The
ServiceMaster Company Limited Partnership) and the Harris Trust and
Savings Bank as trustee is incorporated by reference to Exhibit 4.1
to Registration Statement on Form S-3 of the ServiceMaster Limited
Partnership and ServiceMaster Incorporated of Delaware filed with
the Securities and Exchange Commission on July 28, 1997 (the "July
28, 1997 Registration Statement").
4.4 First Supplemental Indenture dated as of August 15, 1997 among The
ServiceMaster Company (as successor to ServiceMaster Limited
Partnership and The ServiceMaster Company Limited Partnership) and
the Harris Trust and Savings Bank as trustee, is incorporated by
reference to Exhibit 4.4 to the Report on Form 10-K as filed by
ServiceMaster on May 15, 1998 (the "1998 10-K").
4.5 Second Supplemental Indenture dated as of January 1, 1998 among The
ServiceMaster Company (as successor to ServiceMaster Limited
Partnership and The ServiceMaster Company Limited Partnership) and
the Harris Trust and Savings Bank as trustee is incorporated by
reference to Exhibit 2 to the Current Report on Form 8-K as filed by
The ServiceMaster Company on Form 8-K on February 26, 1998 (first of
three 8-K reports filed on that date).
4.6 Third Supplemental Indenture dated as of March 2, 1998 among The
ServiceMaster Company and the Harris Trust and Savings Bank as
trustee is incorporated by reference to Exhibit 4.3 to the Current
Report on Form 8-K as filed by The ServiceMaster Company on February
27, 1998 (the "Company February 27, 1998 8-K").
4.7 Form of 6.95% Note due August 14, 2007 is incorporated by reference
to Exhibit 4.1 to the July 28, 1997 Registration Statement.
4.8 Form of 7.45% Note due August 14, 2027 is incorporated by reference
to Exhibit 4.2 to the July 28, 1997 Registration Statement.
4.9 Form of 7.10% Note due March 1, 2018 is incorporated by reference to
Exhibit 4.1 to the Company February 27, 1998 8-K.
4.10 Form of 7.25% Note due March 1, 2038 is incorporated by reference to
Exhibit 4.2 to the Company February 27, 1998 8-K.
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
5 Opinion of General Counsel of the Registrant.
8 Opinion of Arthur Andersen LLP.
23.1 Consent of General Counsel of the Registrant (included in Exhibit
5).
23.2 Consent of Arthur Andersen LLP (included in Exhibit 8).
23.3 Consent of Arthur Andersen LLP.
23.4 Consent of Arthur Andersen LLP.
24 Power of Attorney (included on the signature page to this
Registration Statement).
99 Form of LandCare proxy (to be filed by amendment).
</TABLE>
II-9
<PAGE>
EXHIBIT 5
---------
[Letterhead of ServiceMaster]
January 6, 1999
The ServiceMaster Company
One ServiceMaster Way
Downers Grove, Illinois 60515-1700
Re: The ServiceMaster Company
S-4 Registration Statement
LandCare Merger
I am providing this letter in my capacity as Senior Vice President and
General Counsel of The ServiceMaster Company, a Delaware corporation
("ServiceMaster") in connection with the registration under the Securities Act
of 1933 (the "Securities Act") of common stock and related preferred stock
purchase rights (which are herein collectively called the "ServiceMaster
Shares") that are issuable by ServiceMaster upon consummation of a merger (the
"Merger") of a ServiceMaster subsidiary into LandCare USA, Inc. ("LandCare").
Pursuant to the Merger, LandCare will become a wholly owned ServiceMaster
subsidiary and the LandCare stock outstanding prior to the Merger will be
converted into the ServiceMaster Shares at an exchange ratio determined as
prescribed in the Plan of Reorganization and Agreement and Plan of Merger dated
as of November 1, 1998 among ServiceMaster, LandCare, and SVM Acquisition
Corporation (the "Merger Agreement").
Subject to the assumptions identified in this letter, I advise
ServiceMaster that in my opinion the ServiceMaster Shares issued upon
consummation of the Merger in accordance with the terms of the Merger Agreement
will upon issuance be validly issued, fully paid and nonassessable.
For purposes of this letter I have assumed that: the registration statement
on Form S-4 will become effective under the Securities Act and will be
distributed to the appropriate LandCare stockholders in accordance with the
requirements of applicable law; the Merger will receive the requisite approval
by the LandCare stockholders; the representations and warranties in the Merger
Agreement are true; and the other closing conditions specified in the Merger
Agreement will be satisfied prior to consummation of the Merger.
<PAGE>
I consent to the filing of this letter as an exhibit to the Registration
Statement and to the recitation in each prospectus issued under the Registration
Statement that I have issued the opinions in this letter. In giving this
consent, I do not thereby admit that I come within the category of persons whose
consent is required under Section 7 of the Securities Act or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Vernon T. Squires
Vernon T. Squires
Senior Vice President and General Counsel
The ServiceMaster Company
<PAGE>
Exhibit 8
January 6, 1999
Mr. William L. Fiedler
LandCare USA, Inc.
2603 Augusta, Suite 1300
Houston, Texas 77057
Dear Mr. Fiedler:
You have requested our opinion as to certain U.S. federal income tax
consequences under the Internal Revenue Code of 1986, as amended (the "Code"),
resulting from the Plan of Reorganization and Agreement and Plan of Merger (the
"Merger Agreement"), dated November 1, 1998 among The ServiceMaster Company, a
Delaware corporation ("ServiceMaster"), SVM Acquisition, Inc., a Delaware
corporation and direct wholly owned subsidiary of ServiceMaster ("Sub") and
LandCare USA, Inc., a Delaware corporation ("LandCare"). Pursuant to the terms
of the Merger Agreement and at the Effective Time, Sub will merge with and into
LandCare, with LandCare continuing as the surviving corporation (the "Merger").
At the Effective Time, each share of LandCare Common Stock will be converted
into a fraction of one share of ServiceMaster common stock.
No fractional shares will be issued, and LandCare shareholders will receive cash
in exchange for their portion (if any) of the merger consideration attributable
to fractional shares. We understand that under applicable Delaware corporate
law, LandCare shareholders have no rights to dissent to the Merger. Terms not
otherwise defined herein shall have the meanings ascribed to them in the Merger
Agreement.
We have not considered any nonincome tax, state, local or foreign income tax
consequences, and, therefore, do not express any opinion regarding the treatment
that would be given the merger by the applicable authorities on any nonincome
tax or any state, local or foreign tax issues. We also express no opinion on
nontax issues, such as corporate law or securities law matters, including, but
not limited to, all securities law disclosure requirements.
In rendering our opinion, we have relied upon the facts, information,
assumptions and representations as contained in the Merger Agreement, including
all attachments thereto. We have also relied on additional representations made
by the management of ServiceMaster, Sub, and LandCare, respectively (which are
set forth in the letters of ServiceMaster and LandCare attached hereto). We have
<PAGE>
Mr. William L. Fiedler
Page 2
January 6, 1999
assumed that these facts, information, assumptions and representations are
complete and accurate and have not independently audited or otherwise verified
any of these facts, information, assumptions or representations. We have also
assumed authenticity of original documents, the accuracy of copies and the
genuineness of signatures. A misstatement or omission of any fact or a change or
amendment in any of the facts, information, assumptions or representations we
have relied upon may require a modification of all or a part of this opinion.
The conclusions set forth below are based upon the Code, the Treasury
Regulations, and existing administrative and judicial interpretations thereof as
of January 6, 1999, all of which are subject to change. If there is a change,
including a change having a retroactive effect, in the Code, the Treasury
Regulations or public rulings thereunder, the current Internal Revenue Service
(the "Service") rulings or releases, or in the prevailing judicial
interpretation of the foregoing, the opinion expressed herein would necessarily
have to be re-evaluated in light of any such changes. We have no responsibility
to update this opinion for events, transactions, changes in the above-listed law
and authority or circumstances occurring after January 6, 1999. All section
references are to the Code unless otherwise stated.
This opinion is solely for the benefit of LandCare and its stockholders and is
not intended to be relied upon by any other parties. We express no opinion on
the U.S. federal income tax consequences to holders of LandCare Common Stock who
are subject to special treatment under U.S. federal income tax law, including,
for example, non-U.S. persons, financial institutions, dealers in securities,
insurance companies, tax-exempt entities, holders who acquired LandCare Common
Stock pursuant to the exercise of employee stock option or right or otherwise as
compensation, and holders who acquired LandCare Common Stock as part of a hedge,
straddle or conversion transaction. Although you do hereby have our express
consent to inform ServiceMaster and Sub of our opinion by including copies of
this letter as an exhibit to the Merger Agreement and as an exhibit in the
Registration Statement on Form S-4 of ServiceMaster with respect to the Merger
(the "Registration Statement") and by making reference to us and our opinion in
the Proxy Statement forming a part of the Registration Statement, we assume no
responsibility for any tax or other consequences to them. Instead, each of these
parties are urged to consult and rely upon the advice of their respective
advisors. Except to the extent expressly permitted hereby, and without the prior
written consent of this firm, this letter may not be quoted in whole or in part
or otherwise referred to in any documents or delivered to any other person or
entity. We have reviewed the Registration Statement description of "Certain
Federal Income Tax Considerations" and concur with the description.
<PAGE>
Mr. William L. Fiedler
Page 3
January 6, 1999
We are of the opinion, based upon our interpretation of the Code, the Treasury
regulations, existing administrative and judicial interpretations thereof and
the foregoing facts, information, assumptions and representations, all assumed
to be accurate as of the date hereof, that the following U.S. federal income tax
consequences should result:
(i) The Merger should be treated as a tax-free reorganization within
the meaning of Section 368(a) of the Code;
(ii) No gain or loss will be recognized by the holders of LandCare
Common Stock who exchange all of their LandCare Common Stock
solely for ServiceMaster Common Stock pursuant to the Merger
(except with respect to any cash received in lieu of fractional
shares of ServiceMaster Common Stock, if any).
(iii) LandCare, Sub and ServiceMaster will each be a party to the
reorganization within the meaning of Section 368(b) of the Code,
(iv) No gain or loss will be recognized by LandCare, Sub or
ServiceMaster as a result of the Merger, and,
(v) The aggregate tax basis of the ServiceMaster Common Stock
received by holders of LandCare Common Stock who exchange all of
their LandCare Common Stock solely for ServiceMaster Common
Stock pursuant to the Merger will be the same as the aggregate
tax basis of the LandCare Common Stock surrendered in exchange
therefor (reduced by any basis amount allocable to the
fractional share interest in ServiceMaster Common Stock for
which cash is received);
(vi) Cash received by a holder of LandCare Common Stock in lieu of a
fractional share interest in ServiceMaster Common Stock will be
treated as received in redemption of such fractional share
interest, and a holder of LandCare Common Stock should generally
recognize capital gain or loss for U.S. federal income tax
purposes measured by the difference between the amount of cash
received and the portion of the tax basis of the share of
LandCare Common Stock allocable to such fractional share
interest; and
<PAGE>
Mr. William L. Fiedler
Page 4
January 6, 1999
(vii) The holding period of a share of ServiceMaster Common Stock
received in the Merger (including fractional share interests
deemed received and redeemed as described above) will include
the holder's holding period in the LandCare Common Stock
surrendered in the exchange therefor.
This opinion is not binding on the Service or the courts. There can be no
assurance that the Service or the courts will not take positions contrary to the
position expressed herein. The opinion expressed herein reflects our assessment
of the probable outcome of any litigation and other adversarial proceedings
based solely on an analysis of the existing U.S. federal income tax authorities
relating to the issues.
Very truly yours,
/s/ Arthur Andersen LLP
- -----------------------------
Arthur Andersen LLP
<PAGE>
[ServiceMaster Letterhead]
January 6, 1999
Arthur Andersen LLP
711 Louisiana, Suite 1300
Houston, Texas 77002
RE: Representations by Management of The ServiceMaster Company and SVM
Acquisition Corporation, Inc.
Ladies and Gentlemen:
We have requested your opinion as to certain U.S. federal income tax
consequences under the Internal Revenue Code of 1986, as amended (the "Code"),
resulting from the Plan of Reorganization and Agreement and Plan of Merger (the
"Agreement"), dated as of November 1, 1998, among The ServiceMaster Company, a
Delaware corporation ("ServiceMaster"), SVM Acquisition Corporation, a Delaware
corporation and a direct wholly owned subsidiary of ServiceMaster ("Sub") and
LandCare USA, Inc., a Delaware corporation ("LandCare"). Pursuant to the terms
of the Agreement and at the Effective Time, Sub will merge with and into
LandCare, with LandCare continuing as the surviving corporation.
At the Effective Time, each share of LandCare Common Stock will be converted
into a fraction (herein called the "Exchange Ratio") of one share of
ServiceMaster common stock. If the average of the closing prices of Service
Master common stock on the NYSE on the 20 consecutive trading days ending on the
third trading day prior to the date of the LandCare special meeting (as defined
in the Agreement, such average price is referred to as the ServiceMaster Average
Trading Price) is more than $16.35 per share and not more than $20.00 per share,
the Exchange Ratio will be 0.55. In the event that the ServiceMaster Average
Closing Price is more than $20.00, then the Exchange Ratio will be the quotient
derived by dividing $11.00 by the ServiceMaster Average Closing Price (that is,
the Exchange Ratio will adjust so that exactly $11.00 of ServiceMaster common
stock valued at the ServiceMaster Average Closing Price will be paid for each
share of LandCare Common Stock). In the event that the ServiceMaster Average
Closing Price is less than $16.36, then unless ServiceMaster otherwise notifies
LandCare in writing immediately prior to the date upon which the LandCare
special meeting is then scheduled to occur (the "Freeze Deadline"), the Exchange
Ratio will automatically adjust to the smallest decimal which when multiplied by
the ServiceMaster Average Closing Price will equal $9.00 (that is, the Exchange
Ratio will adjust so that exactly $9.00 of ServiceMaster common stock valued at
the ServiceMaster Average Closing Price will be paid for each share of LandCare
common stock. If ServiceMaster notifies LandCare in writing prior to the Freeze
Deadline that ServiceMaster elects not to permit the upward adjustment of the
Exchange Ratio, then the Exchange Ratio will be 0.55 (or such greater number as
ServiceMaster shall specify to LandCare).
The Certificate of Incorporation and Bylaws of Sub in effect at the Effective
Time shall be the Certificate of Incorporation and Bylaws of LandCare until
amended in accordance
<PAGE>
with applicable law. In rendering your opinion, you may rely on and assume to
be accurate, without further inquiry, the following certification and
representations made to you on behalf of ServiceMaster and Sub.
Terms not otherwise defined herein shall have the meanings ascribed to them in
the Agreement.
DECLARATION
1. The undersigned is familiar with the business and affairs of
ServiceMaster and Sub, has examined and is familiar with the tax
representations set forth below, and has made such investigations of
factual matters as are reasonably necessary for the purposes of making
the declarations and representations herein. The undersigned is
familiar with the Agreement and all documents relating thereto
(collectively, the "Merger Documents").
2. No event has come to the attention of the undersigned that causes the
undersigned to believe that any of the information relating to the
Merger (including, but not limited to, all representations, warranties,
covenants, and undertakings) set forth in the Merger Documents, insofar
as such information relates to ServiceMaster and Sub, or to the plans
and intentions of such entities, contains any untrue statement of fact
or omits to state a fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
3. The Agreement represents the full and complete agreement between
ServiceMaster, Sub and LandCare regarding the Merger, and there are no
other written or oral agreements regarding the Merger.
4. The undersigned understands that the following representations form the
basis of the opinion of Arthur Andersen LLP, tax advisor to LandCare,
and that any change or inaccuracy in the facts described in such
representations could adversely alter such opinion.
REPRESENTATIONS
To the best of the knowledge and belief of the undersigned, the following
representations regarding the Agreement are true, correct, and complete as of
the date hereof and will be true, correct, and complete at the Effective Time,
and no additional information is or will be required to make the following
representations not misleading as of such dates:
1) The ratio for the exchange of shares of LandCare Common Stock
for ServiceMaster Common Stock in the Merger was negotiated through
arm's length bargaining. The fair market value of (i) the
ServiceMaster Common Stock and (ii) cash in lieu of fractional shares
to
-2-
<PAGE>
be received by each holder of LandCare Common Stock will be
approximately equal to the fair market value of the LandCare Common
Stock surrendered in the Merger.
2) Following the Merger, LandCare will hold at least 90 percent
of the fair market value of its net assets and at least 70 percent of
the fair market value of its gross assets held immediately prior to
the Merger. For purposes of this representation, (i) amounts paid by
LandCare to dissenters, if any, (ii) amounts paid by LandCare to
shareholders who receive cash or other property (including cash in
lieu of fractional shares of ServiceMaster Common Stock) in connection
with the Merger, (iii) amounts used by LandCare to pay its expenses
incurred in connection with the Merger, and (iv) all redemptions and
distributions (except for dividends paid in amounts that are
consistent with amounts normally paid by LandCare) made by LandCare
immediately preceding the Merger, will be treated as assets of
LandCare held immediately prior to the Merger.
3) Following the Merger, LandCare will hold at least 90 percent
of the fair market value of the net assets and at least 70 percent of
the fair market value of the gross assets of Sub held immediately
prior to the Merger. For purposes of this representation, assets
transferred from ServiceMaster to Sub are not included as assets of
Sub immediately before the Merger where such assets are used to pay
LandCare shareholders who receive cash or other property (including
cash in lieu of fractional shares of ServiceMaster Common Stock) in
the Merger, to pay reorganization expenses, to pay creditors of
LandCare or to enable Sub to satisfy state minimum capitalization
requirements (where the money is returned to ServiceMaster as part of
the transaction).
4) Prior to the Merger, ServiceMaster will be in "Control" of
Sub. For purposes of this letter, "Control" shall consist of direct
ownership of shares of stock possessing at least eighty percent (80%)
of the total combined voting power of shares of all classes of stock
entitled to vote and at least eighty percent (80%) of the total number
of shares of all other classes of stock of the corporation. For
purposes of determining Control, a person shall not be considered to
own shares of voting stock if rights to vote such shares (or to
restrict or otherwise control the voting of such shares) are held by a
third party (including a voting trust) other than an agent of such
person.
5) ServiceMaster has no plan or intention to cause LandCare to
issue additional shares after the Merger, or take any other action,
that would result in ServiceMaster losing Control of LandCare.
6) Neither ServiceMaster nor a "Related Corporation" has a plan
or intention to reacquire any of the ServiceMaster Common Stock issued
to the LandCare shareholders in the Merger. For purposes of this
-3-
<PAGE>
letter, a "Related Corporation" means any person related to
ServiceMaster within the meaning of Treasury Regulation Section 1.368-
1(e)(3).
7) Except as specified in Section 10.4 of the Agreement,
ServiceMaster, Sub, LandCare, and the shareholders of LandCare will
pay their respective expenses, if any, incurred in connection with the
Merger.
8) ServiceMaster and Sub will not fund any payments to
shareholders of LandCare who exercise dissenters' rights, if any, nor
will ServiceMaster and Sub reimburse LandCare for any such payments.
9) Sub will have no liabilities assumed by LandCare, and will not
transfer to LandCare any assets subject to liabilities in the Merger.
10) There is no intercorporate indebtedness existing between
ServiceMaster and LandCare or between Sub and LandCare that was
issued, acquired, or will be settled at a discount.
11) Sub will be merged with and into LandCare pursuant to the
provisions of the General Corporation Law of the State of Delaware.
12) Holders of LandCare Stock will have unrestricted rights of
ownership of ServiceMaster Common Stock received in the Merger, and
their ability to retain the ServiceMaster Common Stock received in the
Merger will not be limited in any way.
13) ServiceMaster has no plan or intention to liquidate
LandCare, to merge LandCare with and into another corporation, to sell
or otherwise dispose of the stock of LandCare, or to cause LandCare to
sell or otherwise dispose of any of its assets or of any of the assets
acquired from Sub except for (i) dispositions of assets made by
LandCare in the ordinary course of business, (ii) transfers to members
of the "Qualified Group," or (iii) transfers of assets to partnerships
in which members of the Qualified Group (a) own (in the aggregate)
more than a thirty three and one-third percentage interest (33-1/3%)
in the capital and profits of the partnership, or (b) own more than
twenty percent (20%) capital and profits interest in the partnership
and perform active and substantial management functions for the
partnership. For purposes of this letter, the term "Qualified Group"
means one or more chains of corporations connected through stock
ownership with ServiceMaster, but only if ServiceMaster owns directly
an amount of stock constituting Control in at least one other
corporation, and an amount of stock constituting Control in each of
the corporations is owned directly by one of the other corporations.
14) Neither ServiceMaster nor a Related Corporation owns, or will
acquire prior to the Effective Time, any shares of LandCare Stock.
ServiceMaster does not own, nor has it owned during the past five
years, any shares of LandCare Stock.
-4-
<PAGE>
15) Following the transaction, ServiceMaster will cause
LandCare to continue its historic business or use a significant
portion of its historic business assets in a business. For this
purpose, LandCare refers to itself and all members of its Qualified
Group as if they were a single corporation.
16) Neither ServiceMaster nor Sub is an "investment company" as
defined in Sections 368(a)(2)(F)(iii) and 368(a)(2)(F)(iv) of the
Code.
17) No stock of Sub will be issued in the Merger.
18) The payment of cash in lieu of issuing fractional shares of
ServiceMaster Common Stock is solely for the purpose of avoiding the
expense and inconvenience to ServiceMaster of issuing fractional
shares and does not represent separately bargained-for consideration.
The total cash consideration that will be paid in the Merger to the
holders of LandCare Stock instead of issuing fractional shares of
ServiceMaster Common Stock will not exceed one percent of the total
consideration that will be issued in the Merger to the holders of
LandCare Stock.
19) The principle purposes of ServiceMaster for participating
in the Merger are bona fide business purposes unrelated to taxes.
ServiceMaster believes that the Merger represents a significant step
forward in the commercial landscaping business of its TruGreen
subsidiary.
20) The terms of the Agreement are the product of arm's length
negotiations.
21) The Merger is pursuant to an agreement that was not binding
on or before January 28, 1998.
It is understood that (i) your opinions will be based on the representations set
forth herein and on the statements contained in the Merger Documents (including
all schedules and exhibits thereto), and (ii) your opinions will be subject to
certain limitations and qualifications including that they may not be relied
upon if any such representations are not accurate in all respects. It is further
understood that your opinions will not address any tax consequence of the Merger
or any action taken in connection therewith except as expressly set forth in
such opinions.
Very truly yours,
The ServiceMaster Company
A Delaware corporation
_______________________________
By: __________________________
Title: ________________________
-5-
<PAGE>
[LandCare Letterhead]
January 6, 1999
Arthur Andersen LLP
711 Louisiana, Suite 1300
Houston, Texas 77002
RE: Representations by Management of LandCare USA, Inc.
Ladies and Gentlemen:
We have requested your opinion as to certain U.S. federal income tax
consequences under the Internal Revenue Code of 1986, as amended (the "Code"),
resulting from the Plan of Reorganization and Agreement and Plan of Merger (the
"Agreement"), dated as of November 1, 1998, among The ServiceMaster Company, a
Delaware corporation ("ServiceMaster"), SVM Acquisition Corporation, Inc., a
Delaware corporation and a direct wholly owned subsidiary of ServiceMaster
("Sub") and LandCare USA, Inc., a Delaware corporation ("LandCare"). Pursuant
to the terms of the Agreement and at the Effective Time, Sub will merge with and
into LandCare, with LandCare continuing as the surviving corporation (the
Merger).
At the Effective Time, each share of LandCare common stock will be
converted into a fraction (herein called the "Exchange Ratio") of one share of
ServiceMaster common stock. If the average of the closing prices of
ServiceMaster common stock on the NYSE on the 20 consecutive trading days ending
on the third trading day prior to the date of the LandCare special meeting (as
defined in the Agreement, such average price is referred to as the ServiceMaster
Average Closing Price) is more than $16.35 per share and not more than $20.00
per share, the Exchange Ratio will be 0.55. In the event that the ServiceMaster
Average Closing Price is more than $20.00, then the Exchange Ratio will be the
quotient derived by dividing $11.00 by the ServiceMaster Average Closing Price
(that is, the Exchange Ratio will adjust so that exactly $11.00 of ServiceMaster
common stock valued at the ServiceMaster Average Closing Price will be paid for
each share of LandCare Common Stock). In the event that the ServiceMaster
Average Closing Price is less than $16.36, then unless ServiceMaster otherwise
notifies LandCare in writing immediately prior to the date upon which the
LandCare special meeting is then scheduled to occur (the "Freeze Deadline"), the
Exchange Ratio will automatically adjust to the smallest decimal which when
multiplied by the ServiceMaster Average Closing Price will equal $9.00 (that is,
the Exchange Ratio will adjust so that exactly $9.00 of
<PAGE>
2
ServiceMaster common stock valued at the ServiceMaster Average Closing Price
will be paid for each share of LandCare common stock.
If ServiceMaster notifies LandCare in writing prior to the Freeze Deadline
that ServiceMaster elects not to permit the upward adjustment of the Exchange
Ratio, then the Exchange Ratio will be 0.55 (or such greater number as
ServiceMaster shall specify to LandCare).
The Certificate of Incorporation and Bylaws of Sub in effect at the
Effective Time shall be the Certificate of Incorporation and Bylaws of LandCare
until amended in accordance with applicable law. In rendering your opinion, you
may rely on and assume to be accurate, without further inquiry, the following
certification and representations made to you on behalf of LandCare.
Terms not otherwise defined herein shall have the meanings ascribed to them
in the Agreement.
DECLARATION
1. The undersigned is familiar with the business and affairs of LandCare,
has examined and is familiar with the tax representations set forth below, and
has made such investigations of factual matters as are reasonably necessary for
the purposes of making the declarations and representations herein. The
undersigned is familiar with the Agreement and all documents relating thereto
(collectively, the "Merger Documents").
2. No event has come to the attention of the undersigned that causes the
undersigned to believe that any of the information relating to the Merger
(including, but not limited to, all representations, warranties, covenants, and
undertakings) set forth in the Merger Documents, insofar as such information
relates to LandCare, or to the plans and intentions of such entities, contains
any untrue statement of fact or omits to state a fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
3. The Agreement represents the full and complete agreement between
ServiceMaster, Sub and LandCare regarding the Merger, and there are no other
written or oral agreements regarding the Merger.
4. The undersigned understands that the following representations form the
basis of the opinion of Arthur Andersen LLP, tax advisor to LandCare, and that
any change or inaccuracy in the facts described in such representations could
adversely alter such opinion.
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REPRESENTATIONS
To the best of the knowledge and belief of the undersigned, the following
representations regarding the Agreement are true, correct, and complete as of
the date hereof and will be true, correct, and complete at the Effective Time,
and no additional information is or will be required to make the following
representations not misleading as of such dates:
1) The ratio for the exchange of shares of LandCare common stock in the
Merger was negotiated through arm's length bargaining. The fair market value of
(i) the ServiceMaster common stock and (ii) cash in lieu of fractional shares to
be received by each holder of LandCare common stock will be approximately equal
to the fair market value of the LandCare common stock surrendered in the Merger.
2) Following the Merger, LandCare will hold at least 90 percent of the
fair market value of its net assets and at least 70 percent of the fair market
value of its gross assets held immediately prior to the Merger. For purposes of
this representation, (i) amounts paid by LandCare to shareholders who receive
cash or other property (including cash in lieu of fractional shares of
ServiceMaster common stock) in connection with the Merger, (ii) amounts used by
LandCare to pay its expenses incurred in connection with the Merger, and (iii)
all redemptions and distributions (except for dividends paid in amounts that are
consistent with amounts normally paid by LandCare) made by LandCare immediately
preceding the Merger, will be treated as assets of LandCare held immediately
prior to the Merger.
3) Neither LandCare nor a "Related Corporation" has redeemed or acquired,
or will redeem or acquire, any LandCare stock prior to and in connection with
the Merger. For purposes of this letter, a "Related Corporation" means any
person related to ServiceMaster within the meaning of Treasury Regulation
Section 1.368-1(e)(3) (determined without regard to paragraph (e)(3)(i)(A) of
that section. LandCare has not made, and will not make, an "extraordinary
distribution" (as determined under Treasury Regulations Section 1.368-
1T(e)(1)(ii)(A)) to its shareholders prior to and in connection with the Merger.
4) LandCare has no plan or intention to issue additional shares of its
stock that would result in ServiceMaster losing control of LandCare. For
purposes of this representation and the following representations, control means
the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent of
the total number of shares of all other classes of stock of the corporation.
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4
5) Except as specified in Section 10.4 of the Agreement, ServiceMaster,
Sub, LandCare, and the shareholders of LandCare will pay their respective
expenses, if any incurred in connection with the Merger.
6) There is no intercorporate indebtedness existing between LandCare and
ServiceMaster or between LandCare and Sub that was issued, acquired, or will be
settled at a discount.
7) In the Merger, shares of LandCare stock representing control of
LandCare will be exchanged solely for voting stock of ServiceMaster. For
purposes of this representation, shares of LandCare stock exchanged for cash or
other property (including cash in lieu of fractional shares of ServiceMaster
common stock) originating with ServiceMaster will be treated as outstanding
LandCare stock on the date of the Merger.
8) At the time of the Merger, LandCare will not have outstanding any
warrants, options, convertible securities, or any other type of right pursuant
to which any person could acquire stock in LandCare that, if exercised or
converted, would affect ServiceMaster's acquisition or retention of control of
LandCare.
9) At the time of the Merger, Sub will be merged with and into LandCare
pursuant to the provisions of the General Corporation Law of the State of
Delaware.
10) Holders of LandCare stock will have unrestricted rights of ownership of
ServiceMaster common stock received in the Merger, and their ability to retain
the ServiceMaster common stock received in the Merger will not be limited in any
way.
11) None of the compensation to be received by any stockholder-employees of
LandCare will be separate consideration for, or allocable to, any of their
shares of LandCare stock; none of the shares of ServiceMaster common stock to be
received by any stockholder-employees will be separate consideration for, or
allocable to, any employment agreement; and the compensation to be paid to any
stockholder-employees will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's length for
similar services.
12) The payment of cash in lieu of issuing fractional shares of
ServiceMaster common stock is solely for the purpose of avoiding the expense and
inconvenience to ServiceMaster of issuing fractional shares and does not
represent separately bargained-for consideration. The total cash consideration
that will be paid in the Merger to the holders of LandCare stock instead of
issuing fractional shares of ServiceMaster common stock will not exceed one
percent of the total consideration that will be issued in the Merger to the
holders of LandCare stock.
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13) On the date of the Merger, the fair market value of the assets of
LandCare will equal or exceed the sum of its liabilities, plus the amount of
liabilities, if any, to which its assets are subject.
14) In connection with the Merger, LandCare has not sold, transferred or
otherwise disposed of any of its assets as would prevent ServiceMaster or
members of its qualified group (within the meaning of Treasury Regulation 1.368-
1(d)(4)(ii)) from causing LandCare after the Merger to continue the historic
business of LandCare or to use a significant portion of LandCare's historic
business assets in a business.
15) The principal purposes of LandCare for participating in the Merger are
bona fide business purposes germane to the continuance of LandCare's business
and are unrelated to taxes. LandCare's principal business purposes for
participation in the Merger relate to: (i) enhancing LandCare's ability to
finance on an acceptable basis its business plan (including its acquisition
program) and (ii) providing many of LandCare's stockholders with a significant
gain on their investment.
16) LandCare is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
17) No payments will be made to the stockholders of LandCare with respect
to dissenters' rights under the DGCL.
18) LandCare has declared no dividends that remain unpaid with respect to
the LandCare common stock.
19) LandCare is not an investment company as defined in Sections
368(a)(2)(F)(iii) and 368(a)(2)(F)(iv) of the Code.
20) The liabilities of LandCare, and the liabilities to which the assets of
LandCare are subject were incurred by LandCare in the ordinary course of
business.
21) The nonstatutory LandCare Stock Options issued pursuant to the LandCare
Stock Plan were not traded on an established securities market and were not
transferable prior to the Merger.
22) The terms of the Agreement are the product of arm's length
negotiations.
23) The Merger is pursuant to an agreement that was not binding on or
before January 28, 1998.
It is understood that (i) your opinions will be based on the
representations set forth herein and on the statements contained in the Merger
Documents (including all
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schedules and exhibits thereto), and (ii) your opinions will be subject to
certain limitations and qualifications including that they may not be relied
upon if any such representations are not accurate in all respects. It is further
understood that your opinions will not address any tax consequence of the Merger
or any action taken in connection therewith except as expressly set forth in
such opinions.
Very truly yours,
LandCare USA, Inc.
A Delaware corporation
/s/ William L. Fiedler
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By: William L. Fiedler
Title: Secretary
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
Chicago, Illinois
January 6, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
- --------------------------
ARTHUR ANDERSEN LLP
Houston, Texas
January 6, 1999
