AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LANDCARE USA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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DELAWARE 0780 76-0562801
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
WILLIAM F. MURDY
CHIEF EXECUTIVE OFFICER
5850 SAN FELIPE
SUITE 500
HOUSTON, TEXAS 77057
(800) 492-1101
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND AGENT FOR SERVICE)
------------------------
COPY TO:
WILLIAM D. GUTERMUTH WILLIAM L. FIEDLER
BRACEWELL & PATTERSON, L.L.P. LANDCARE USA, INC.
SOUTH TOWER PENNZOIL PLACE 5850 SAN FELIPE
711 LOUISIANA STREET, SUITE SUITE 500
2900 HOUSTON, TEXAS 77057
HOUSTON, TEXAS 77002-2781
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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(c)
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. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value per
share......................... 5,000,000 $8.25 $41,250,000 $12,169
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
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 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
5,000,000 SHARES
(LOGO)
LANDCARE USA, INC.
COMMON STOCK
------------------------
This Prospectus covers 5,000,000 shares of common stock, $.01 par value
(the "Common Stock"), which may be offered and issued by LandCARE USA, Inc.
(the "Company") from time to time in connection with merger or acquisition
transactions entered into by the Company. It is expected that the terms of
acquisitions involving the issuance of securities covered by this Prospectus
will be determined by direct negotiations with the owners or controlling persons
of the businesses or assets to be merged with or acquired by the Company, and
that shares of Common Stock issued will be valued at prices reasonably related
to the market prices of Common Stock either at the time the terms of a merger or
acquisition are agreed upon or at or about the time shares are delivered. No
underwriting discounts or commissions will be paid, although finder's fees may
be paid from time to time with respect to specific mergers or acquisitions. Any
person receiving any such fees may be deemed to be an underwriter within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
The Company currently has 15,722,043 shares of its Common Stock listed on
the New York Stock Exchange, of which 5,659,900 are registered and available for
unrestricted trading in the public market unless owned by affiliates of the
Company. Application will be made to list the shares of Common Stock offered
hereby on the New York Stock Exchange. On June 30, 1998, the closing price of
the Common Stock on the New York Stock Exchange was $8.3125 per share as
published in THE WALL STREET JOURNAL on July 1, 1998. The Company is subject to
the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and in accordance therewith files reports and
other information with the Securities and Exchange Commission.
All expenses of this offering will be paid by the Company. The Company is a
Delaware corporation and all references herein to the Company refer to the
Company and its subsidiaries. The executive offices of the Company are located
at 5850 San Felipe, Suite 500, Houston, Texas 77057, and the Company's telephone
number is (713) 965-0336.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 11 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
PROSPECTUS SUMMARY
IN CONNECTION WITH ITS INITIAL PUBLIC OFFERING ON JUNE 9, 1998 (THE
"IPO"), LANDCare USA, INC. ACQUIRED, IN SEPARATE MERGER TRANSACTIONS (THE
"MERGERS") IN EXCHANGE FOR CASH AND SHARES OF ITS COMMON STOCK, SEVEN
COMPANIES (EACH A "FOUNDING COMPANY" AND, COLLECTIVELY, THE "FOUNDING
COMPANIES") ENGAGED IN COMPREHENSIVE LANDSCAPE AND TREE SERVICES. UNLESS
OTHERWISE INDICATED, ALL REFERENCES TO THE "COMPANY" HEREIN INCLUDE THE
FOUNDING COMPANIES, AND REFERENCES HEREIN TO "LANDCare" MEAN LANDCare USA,
INC. PRIOR TO THE CONSUMMATION OF THE MERGERS.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE PRO FORMA COMBINED
AND INDIVIDUAL HISTORICAL FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL
REFERENCES TO COMMON STOCK INCLUDE BOTH COMMON STOCK, $0.01 PAR VALUE, AND
RESTRICTED VOTING COMMON STOCK, $0.01 PAR VALUE (THE "RESTRICTED COMMON
STOCK"), OF THE COMPANY.(1)
THE COMPANY
LandCARE was founded in 1997 to be a national provider of comprehensive
landscape and tree services to the commercial and institutional markets. On June
9, 1998, LandCARE acquired in separate, concurrent transactions seven companies
engaged in comprehensive landscape and tree services. These Founding Companies
are: Arteka Corporation, located in Eden Prairie, Minnesota; Desert Care
Landscaping, Inc., located in Phoenix, Arizona; D.R. Church Landscape Co., Inc.,
located in Lombard, Illinois; Four Seasons Landscape and Maintenance, Inc.,
located in Foster City, California; Ground Control Landscaping, Inc., located in
Orlando, Florida; Southern Tree & Landscape Co., Inc., located in Charlotte,
North Carolina; and Trees, Inc., located in Houston, Texas. The Company 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." The Company 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 the Company include office buildings, multi-
family residential complexes, shopping centers, corporate and university
campuses, parks, hotels, resorts and governmental facilities. Approximately 75%
of the Company's pro forma combined revenues in 1997 were attributable to
maintenance services, which include line clearing for utility customers, and 25%
were attributable to installation services. The seven Founding Companies have
been in business an average of 25 years and had pro forma combined revenues of
$116.2 million in 1997 and $26.6 million in the first three months of 1998.
Historical combined revenues increased at a compound annual growth rate of
approximately 10% from 1995 through 1997. In addition to emphasizing internal
growth, the Company has an aggressive acquisition program.
According to data published by LAWN AND LANDSCAPE magazine, the commercial
and institutional segment of the landscape and tree services industry generated
approximately $20 billion in revenues in 1996. The Company estimates that
approximately $15 billion of this amount represented landscape maintenance and
installation and $5 billion represented tree services. Most of the more than
10,000 participants in this industry are small, owner-operated companies
operating in a limited geographic area. During recent years, this 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.
In recent years, ownership of commercial real estate throughout the United
States has become increasingly consolidated. Commercial property owners and
managers, as well as governmental entities and
- ------------
(1) Notre Capital Ventures II L.L.C. ("Notre") holds 1,296,408 shares of
Restricted Common Stock, which are entitled to elect one member of the
Company's Board of Directors and to one-tenth (0.1) of one vote for each
share held on all other matters on which they are entitled to vote.
Restricted Common Stock is convertible into one share of Common Stock under
certain circumstances. See "Description of Capital Stock -- Common Stock
and Restricted Stock."
3
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institutions such as universities and hospitals, are increasingly outsourcing
their landscape and tree services needs. As a result, regional and national
property owners and management companies are seeking providers with the capacity
to service all of their properties in a particular region. The Company believes,
therefore, that a landscape and tree services provider with a multi-regional or
national presence and greater scale will have a significant advantage over its
competitors. Moreover, the Company believes that its combination of landscape
and tree services capabilities will prove attractive to property owners and
managers as they seek to reduce the number of vendors with which they do
business. The Company performs services for properties owned or managed by a
number of leading property owners and managers, including Trammell Crow,
Marriott and CB Commercial. Trees, Inc., one of the Founding Companies, has line
clearing contracts with large utilities, including PacifiCorp, Houston Lighting
& Power and Texas Utilities.
The Company's landscape maintenance services consist primarily of general
upkeep and minor upgrades of a customer's property, including grass cutting,
weeding, pruning, leaf removal, trimming and edging, mulching, grass reseeding,
fertilization and replacement of plants providing seasonal color. Landscape
installation consists of installing ornamental and shade trees, plants,
shrubbery and grasses, as well as installing walkways, exterior lighting,
fountains and drainage and irrigation systems. The Company's tree services
consist primarily of line clearing for utilities, as well as commercial and
residential tree maintenance services. The Company plans to offer periodic tree
maintenance to many of its commercial customers as part of an overall landscape
maintenance agreement, thereby reducing the number of required vendors and
reducing its customers' need for emergency tree services.
OPERATING STRATEGY. The Company believes that there are significant
opportunities to increase the profitability of the Founding Companies and any
subsequently acquired businesses. The key elements of the Company's operating
strategy are:
FOCUS ON COMMERCIAL AND INSTITUTIONAL MARKETS. The Company believes
that the commercial and institutional markets are attractive because of (i)
the potential for preferred relationships with regional and national
property owners and managers, real estate developers, corporations, general
contractors and landscape architects, (ii) the diverse types of properties
served, such as office buildings, multi-family residential complexes,
shopping centers, corporate and university campuses, parks, hotels, resorts
and governmental facilities, (iii) the opportunity to generate recurring
revenue through maintenance contracts, and (iv) the recognition by building
owners and managers of the importance of landscaping in enhancing the value
and marketability of their properties.
OPERATE ON DECENTRALIZED BASIS. The Company manages the Founding
Companies and intends to manage the subsequently acquired companies on a
decentralized basis with local management retaining responsibility for the
day-to-day operations, profitability and internal growth of the business.
Although the Company intends to maintain strong central operating and
financial control over businesses it acquires, without which inconsistent
operating and financial practices could result, its decentralized operating
structure will allow it to capitalize on the considerable local and
regional market knowledge and customer relationships possessed by local
management.
ACHIEVE OPERATING EFFICIENCIES. The Company expects there will be
significant opportunities to achieve operating efficiencies and cost
savings through purchasing economies and the adoption of "best practices"
operating programs. The Company intends to use its increased purchasing
power to gain volume discounts in areas such as materials, equipment, spare
parts and vehicle purchases and workers' compensation and other insurance
coverage. The Company expects that its operating efficiency also can be
enhanced by implementing, on a Company-wide basis, selected business
practices used by one or more of the Founding Companies which have proven
successful (also known as "best practices"), in areas such as management
information systems, recruiting and training programs, safety and risk
management programs, sales training and materials and human resource
management, and can also be enhanced by expanding branch networks to
increase route density and improve labor utilization.
4
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ATTRACT AND RETAIN QUALITY LABOR AND SUPERVISORY PERSONNEL. Most
companies in the landscape and tree services industry experience high labor
turnover and difficulty in attracting sufficient numbers of supervisory
personnel. The Company expects to better attract and retain supervisory and
management level employees, the lack of which could adversely limit the
Company's growth and scope of operations, because it offers (i) an enhanced
career path from working for a multi-branch, public company, including the
opportunity to gain increased responsibility at a branch office, (ii) the
opportunity to realize a more stable income and (iii) improved health
insurance, retirement, profit sharing and other benefits, which the Company
expects to be able to offer at little or no additional cost to the Company
due to its ability to negotiate with benefit providers on a higher-volume
basis.
INTERNAL GROWTH. A principal component of the Company's strategy is to
continue its internal growth. The key elements of the Company's internal growth
strategy are:
BUILD MARKET DENSITY. The Company intends to develop its branch
network in each of the markets it serves to enable it to serve more
commercial and institutional properties efficiently, to improve labor and
equipment utilization and to attract employees who live near
newly-established branches.
ESTABLISH REGIONAL AND NATIONAL MARKET COVERAGE. The Company intends
to provide comprehensive landscaping and tree services on a multi-regional
and ultimately a national basis. This will enable the Company to capitalize
on existing and future relationships with major regional and national
property owners and managers. The Company believes it can establish
preferred provider relationships with these regional and national property
owners and managers to service all or a significant number of their
properties.
BECOME SINGLE SOURCE PROVIDER. The Company intends to provide its
customers with both landscape and tree services in order to become the
single source for all of its customers' installation and maintenance
requirements. The Company believes that becoming a single source provider
will allow it to take advantage of the trend toward vendor consolidation in
the commercial real estate market and the developing trend toward
outsourcing by institutions and state and local governments.
DEVELOP ENHANCED SALES AND MARKETING PROGRAM. The Company intends to
establish a national account sales and marketing program, which will
emphasize the Company's full service capabilities. This program will target
large regional and national property owners as well as large corporations.
The Company also intends to establish a sales and marketing program
targeted toward institutions and governmental entities beginning to
outsource their landscape and tree services requirements. The Company
expects that its sales force, which currently includes twenty full-time
sales and/or marketing personnel, will expand as the Company increases in
size.
Although the Company believes that this strategy will prove successful, no
assurance can be given of continued internal growth among the Founding Companies
and subsequently acquired businesses. See "Risk Factors -- Risks Related to
Operating and Internal Growth Strategy."
ACQUISITION PROGRAM. In addition to emphasizing internal growth, the
Company has an aggressive acquisition program. Although the Company expects to
face competition for acquisition candidates, it believes that it will be viewed
as an attractive acquiror by other landscape and tree services companies due to
its: (i) strategy for creating a national company, (ii) increased financial
strength and visibility as a public company, (iii) increased opportunities to
cross-market to regional and national property owners and managers, (iv)
decentralized operations, which leverage the strengths of local management and
(v) ability to achieve operating efficiencies. The Company's acquisition program
focuses both on entering new markets through significant acquisitions, as well
as expanding within existing markets through acquisitions of smaller companies.
Although there are various risks related to the Company's acquisition strategy
and no acquisitions, other than the Founding Companies, have been made as of the
date of this Prospectus, the Company believes that its strategy will enable it
to compete successfully for landscape and tree services
5
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companies and increase its geographic coverage, customer base and range of
services offered. See "Risk Factors -- Risks Related to the Company's
Acquisition Strategy."
ACQUISITION OF THE FOUNDING COMPANIES
Upon completion of the IPO, LandCARE acquired the seven Founding Companies
for an aggregate of $19.7 million and 5,162,645 shares of Common Stock. The
Founding Companies are wholly-owned subsidiaries of LandCARE, and the Company's
operations are conducted through the Founding Companies and will be conducted
through any subsequently acquired businesses. As of the completion of the IPO
and the Mergers, the Company's executive officers and directors, former
stockholders of the Founding Companies and entities affiliated with them
beneficially owned approximately 60% of the outstanding shares of Common Stock.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
DIVIDEND POLICY
The Company intends to retain all of its future earnings, if any, to
finance the expansion of its business and for general corporate purposes and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. See "Dividend Policy."
RECENT DEVELOPMENTS
During 1997 and 1998, members of the management team and certain
consultants were assembled by the Company's financial sponsor, Notre, to pursue
the consolidation of the Founding Companies. Notre, a consolidator of
highly-fragmented industries, provided the Company with expertise regarding the
consolidation process and advanced the Company the funds needed to pay
organizational and IPO expenses. Mr. Ronald L. Stanfa, a director of the
Company, is a Managing Director of Notre. See "Certain Transactions." In
connection with the organization of LandCARE, during the fourth quarter of 1997
and the first quarter of 1998, LandCARE sold an aggregate of 994,240 shares of
Common Stock to management and directors of, and consultants to, the Company for
$0.01 per share. As a result, LandCARE recorded non-recurring, non-cash
compensation charges of $5.8 million in the fourth quarter of 1997 and $1.4
million in the first quarter of 1998, representing the difference between the
amount paid for the shares and the estimated fair value of the shares on the
date of sale, as if the Founding Companies had then been combined (collectively,
the "Compensation Charge"). LandCARE also issued an option to purchase 100,000
shares of Common Stock at an exercise price of $6.00 per share to Mr. Harold D.
Cranston, its Chief Operating Officer. The compensation charge of $0.1 million
representing the difference between the exercise price and the estimated fair
value of the option on the date of grant will be amortized over the five year
vesting period.
On June 9, 1998, the Company consummated the IPO and the Mergers. In
connection therewith, the Company issued 5,000,000 shares of Common Stock at a
price of $8.00 per share (less underwriting discounts and commissions).
On June 29, 1998, the Company consummated the sale of 659,900 shares of
Common Stock at a price of $8.00 per share (less underwriting discounts and
commissions), which were issued to the Company's underwriters in the IPO in
connection with their exercise of an option to purchase up to 750,000 additional
shares of Common Stock to cover over-allotments.
MERGER CONSIDERATION
The aggregate consideration paid by LandCARE in the Mergers consisted of
approximately $19.7 million in cash and 5,162,645 shares of Common Stock. The
consideration paid by LandCARE for each Founding Company was determined by
negotiations between LandCARE and representatives of each
6
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Founding Company and was based primarily on the pro forma adjusted net income of
each Founding Company. In conjunction with the Mergers, two of the Founding
Companies, both S Corporations, will distribute a total of up to $1.4 million to
their stockholders, representing substantially all of their previously taxed
undistributed earnings and tax payments on current earnings (the "S Corporation
Distributions"). In order to fund the S Corporation Distributions, these two
Founding Companies will borrow up to a total of $1.2 million from existing
sources, which borrowings will be included in the debt to be repaid by LandCARE
from the net proceeds of the IPO. For a more detailed description of these
transactions, see "Certain Transactions -- Organization of the Company."
7
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SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LandCARE acquired the Founding Companies in connection with the IPO. For
financial statement presentation purposes, however, Trees, Inc. ("Trees"), one
of the Founding Companies, has been identified as the "accounting acquiror."
The following table presents summary pro forma combined financial data for the
Company, as adjusted for (i) the effects of the Mergers, (ii) the effects of
certain pro forma adjustments to the historical financial statements described
below and (iii) the consummation of the IPO and the application of the net
proceeds therefrom. See "Selected Financial Data," the Unaudited Pro Forma
Combined Financial Statements and the Notes thereto and the historical Financial
Statements of the Founding Companies and the Notes thereto included elsewhere in
this Prospectus.
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PRO FORMA COMBINED
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YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
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STATEMENT OF OPERATIONS DATA(1):
Revenues(2)..................... $116,177 $26,639
Cost of services................ 91,920 22,028
------------------ -------------------------
Gross profit.................... 24,257 4,611
Selling, general and
administrative expenses(3).... 13,608 3,500
Goodwill amortization(4)........ 1,257 314
------------------ -------------------------
Operating income................ 9,392 797
Interest and other income
net(5)........................ 871 54
------------------ -------------------------
Income before income taxes...... 10,263 851
Income tax provision(6)......... 4,612 383
------------------ -------------------------
Net income...................... $ 5,651 $ 468
================== =========================
Net income per share............ $ 0.44 $ 0.04
================== =========================
Shares used in computing pro
forma net income per
share(7)...................... 12,981,285 12,981,285
</TABLE>
MARCH 31, 1998
--------------------------------
PRO FORMA
COMBINED AS ADJUSTED(8)
---------- ---------------
BALANCE SHEET DATA(9)
Working capital (deficit)(11)... $(18,676)(10) $ 12,583
Total assets.................... 97,694 97,786
Long-term debt, including
current maturities(11)........ 11,359 --
Stockholders' equity(11)........ 43,650 81,760
- ------------
(1) Assumes that the Mergers and the IPO were closed on January 1, 1997 and is
not necessarily indicative of the results the Company would have obtained
had these events actually then occurred or of the Company's future results.
(2) Reflects a pro forma reduction in revenues of $0.2 million and $10,000 for
the year ended December 31, 1997 and for the three months ended March 31,
1998, respectively, associated with the nursery operations of Church, which
were not acquired in the Mergers.
(3) Reflects an aggregate of approximately $2.6 million and $1.1 million for
the year ended December 31, 1997 and the three months ended March 31, 1998,
respectively, in pro forma reductions in salary, bonuses and benefits to
the owners of the Founding Companies to which they have agreed (the
"Compensation Differential") and $0.1 million for the year ended December
31, 1997 in reductions in lease expense as a result of renegotiation of
certain leases (the "Rent Differential"). These data do
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
8
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not include the non-recurring portion of the non-cash Compensation Charge
of $5.8 million and $1.4 million for the year ended December 31, 1997 and
the three months ended March 31, 1998, respectively.
(4) Consists of the amortization of goodwill to be recorded as a result of the
Mergers, computed on the basis described in Notes to the Unaudited Pro
Forma Combined Financial Statements.
(5) Reflects $1.1 million and $0.3 million for the year ended December 31, 1997
and the three months ended March 31, 1998, respectively, in pro forma
reductions in interest expense as the result of the repayment of the
Founding Companies' existing debt (the "Interest Differential").
(6) Assumes all income is subject to an annual effective corporation tax rate
of 40%, and the non-deductibility of goodwill amortization.
(7) Includes (i) 5,162,645 shares issued to owners of the Founding Companies,
(ii) 994,240 shares issued to the management, consultants and directors of
LandCARE, (iii) 1,565,158 shares issued to Notre, and (iv) 5,259,242 of the
5,659,900 shares sold in the IPO necessary to pay the cash portion of the
Merger consideration, expenses of this IPO and repayment of the Founding
Companies' existing debt. The 400,658 shares excluded reflect the net cash
proceeds to LandCARE. Excludes options to purchase 1,377,819 shares of
Common Stock granted upon consummation of the IPO at the IPO price of $8.00
per share.
(8) Adjusted for the sale of 5,659,900 shares of Common Stock sold in the IPO
and the application of the net proceeds therefrom. See "Use of Proceeds."
(9) The Pro Forma Combined Balance Sheet Data assume that the Mergers were
consummated on March 31, 1998.
(10) Includes a $19.7 million payable, representing the cash portion of the
Merger consideration and borrowings related to the S Corporation
Distributions of $1.2 million, paid from a portion of the net proceeds of
the IPO.
(11) Arteka Nurseries, Inc. and Desert Care are S Corporations. In conjunction
with the Mergers, these Founding Companies will make the S Corporation
Distributions to their stockholders totaling up to $1.4 million. In order
to fund the S Corporation Distributions, these two Founding Companies will
borrow a total of $1.2 million from existing sources, all of which will be
repaid from the net proceeds of the IPO. Additionally, prior to the
Mergers, Trees, Four Seasons and Ground Control distributed to their
stockholders certain real estate, equipment and vehicles and associated
liabilities, and Church distributed its nursery operations, having an
aggregate net book value of $0.7 million (the "Other Assets").
Accordingly, pro forma long-term debt has been decreased by $1.5 million,
pro forma stockholders' equity has been reduced by $0.7 million, and pro
forma net income has been increased by $0.2 million and $0.1 million for
the year ended December 31, 1997 and the three months ended March 31, 1998,
respectively.
9
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SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
The following table presents summary financial data for each of the
individual Founding Companies for each of their three most recent fiscal years
and for each of the three months ended March 31, 1997 and 1998. Operating income
has not been adjusted for the anticipated increase in income attributable to the
Compensation Differential and Rent Differential, or to take into account
increased costs associated with the Company's new corporate management and with
being a public company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Introduction."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31(1) MARCH 31
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
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TREES:
Revenues........................ $ 47,142 $ 44,847 $ 50,085 $ 11,321 $ 13,840
Gross profit.................... 6,088 5,801 6,517 1,420 1,481
Operating income(2)............. 2,864 1,537 2,829 255 763
FOUR SEASONS:
Revenues........................ 12,000 13,367 16,066 3,529 3,830
Gross profit.................... 2,745 3,261 4,999 1,062 1,283
Operating income (loss)(2)...... (84) (58) 1,245 97 (102)
SOUTHERN TREE:
Revenues........................ 12,639 13,263 14,176 3,368 3,502
Gross profit.................... 2,320 1,809 2,559 717 827
Operating income(2)............. 708 263 793 242 313
CHURCH:
Revenues........................ 9,141 10,951 13,257 946 963
Gross profit.................... 3,020 3,327 4,351 143 176
Operating income (loss)(2)...... 884 (264) 1,487 (447) (485)
GROUND CONTROL:
Revenues........................ 5,574 8,409 8,979 2,654 2,324
Gross profit.................... 1,371 1,827 2,316 967 467
Operating income (loss)(2)...... (122) 225 806 570 78
ARTEKA:
Revenues........................ 6,117 7,052 7,366 245 893
Gross profit.................... 2,049 1,997 2,139 (73) 275
Operating income (loss)(2)...... 188 275 3 (456) (451)
DESERT CARE:
Revenues........................ 4,350 5,598 6,481 1,492 1,297
Gross profit.................... 817 1,201 1,362 313 97
Operating income (loss)(2)...... 266 334 690 158 (78)
</TABLE>
- ------------
(1) The financial data presented for Trees is for the fiscal years ended March
31, 1996 and 1997 and for the twelve months ended December 31, 1997.
(2) Operating income has not been adjusted for the Compensation Differential and
Rent Differential. The Compensation Differential was $2.6 million and $1.1
million for the year ended December 31, 1997 and the three months ended
March 31, 1998, respectively, and the Rent Differential was $0.1 million for
the year ended December 31, 1997.
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RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS
INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS
PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING AN INVESTMENT IN THE COMMON STOCK.
ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATING FOUNDING
COMPANIES. LandCARE was founded in 1997 but conducted no operations and
generated no revenues prior to the Mergers on June 9, 1998. The Founding
Companies operated as separate independent entities prior to the IPO, and there
can be no assurance that the Company will be able to integrate the operations of
these businesses successfully or to institute the necessary systems and
procedures, including accounting and financial reporting systems, to manage the
combined enterprise on a profitable basis and to report the results of the
operations of the combined entities on a timely basis. The Company's management
team has been assembled only recently, and there can be no assurance that the
management team will be able to manage the combined entity effectively or
successfully implement the Company's acquisition and internal growth strategies
as its operating strategy. The pro forma combined historical financial results
of the Founding Companies cover periods when the Founding Companies and LandCARE
were not under common control or management and, therefore, may not be
indicative of the Company's future financial or operating results. The inability
of the Company to integrate the Founding Companies successfully would have a
material adverse effect on the Company's business, financial condition and
results of operations and would make it unlikely that the Company's acquisition
strategy will be successful. See "Business -- Strategy" and "Management."
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY. The Company intends
to grow significantly through the acquisition of additional commercial landscape
and tree service companies. Because most participants in the commercial
landscape and tree services industry are small, owner-operated companies, the
Company expects that its acquisition strategy will primarily involve the
acquisition of numerous, relatively small companies. The Company expects to face
competition for these acquisition candidates, particularly from a few relatively
large public or private companies that have begun or may begin to pursue the
acquisition of landscape and tree service companies. Some of these companies
have greater financial resources and name recognition in the industry than the
Company. This competition may limit the number of acquisitions that the Company
is able to consummate and may lead to higher acquisition prices. There can be no
assurance that the Company will be able to identify, acquire or manage
profitably additional businesses or to integrate successfully any acquired
businesses into the Company without substantial costs, delays or other
operational or financial problems. Furthermore, acquisitions involve a number of
special risks, including failure of the acquired business to achieve expected
results, diversion of management's attention, failure to retain key personnel of
the acquired business and risks associated with unanticipated events or
liabilities, some or all of which could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Founding Companies or other businesses acquired in the
future will achieve anticipated revenues and earnings. See "Business --
Strategy."
RISKS RELATED TO ACQUISITION FINANCING. The timing, size and success of
the Company's acquisition efforts and the associated capital requirements cannot
be readily predicted. The Company currently intends to finance future
acquisitions by using shares of its Common Stock, which may comprise a
significant portion of the acquisition consideration. If the Common Stock does
not maintain a sufficient market value, if potential acquisition candidates are
unwilling to accept Common Stock as part of the consideration for the sale of
their businesses or if the Company's competitors offer acquisition candidates
substantially more cash than equity or debt securities, the Company may be
required to utilize more of its cash resources, if available, in order to
initiate and maintain its acquisition strategy. If the Company's cash resources
are insufficient to effect its acquisition strategy, its growth will be limited
unless it is able to obtain additional capital through debt or equity
financings. The Company has obtained a bank line of credit of $50 million from
the First National Bank of Chicago ("First Chicago") for working capital and
acquisitions. As of June 30, 1998, the Company had an available balance of $50
million under the line of credit. The line of credit is
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subject to customary financial covenants and drawing conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
RISKS RELATED TO OPERATING AND INTERNAL GROWTH STRATEGY. Key components of
the Company's strategy are to increase the profitability and continue the
internal growth of the Founding Companies and subsequently acquired businesses.
The Company intends to operate on a decentralized basis and attract and retain
quality labor and supervisory personnel. Without proper overall business
controls, the Company's decentralized operating strategy may result in
inconsistent operating and financial practices at the Founding Companies and
subsequently acquired businesses. This, in turn, could adversely affect the
Company's business, financial condition and results of operations, as could the
Company's failure to attract and retain a sufficient number of hourly and
supervisory personnel to meet its staffing needs. The continued internal growth
of the Founding Companies and subsequently acquired businesses will be affected
by various factors, including the demand for landscaping and tree services as
well as the Company's ability to establish relationships with regional and
national property owners and managers, expand the range of services offered to
meet its customers' exterior maintenance requirements and establish regional and
national account sales and marketing programs. Customer dissatisfaction or
performance problems at a single acquired company could have an adverse effect
on the reputation of the Company and hinder the Company's sales and marketing
initiatives. Some of these factors are beyond the Company's control, and there
can be no assurance that the Company's operating and internal growth strategies
will be successful or that the Company will be able to generate sufficient cash
flow to support both its operations and its continued internal growth. See
"Business -- Strategy."
NEED FOR EFFECTIVE CONTROLS ON COMPANY'S EXPANSION. The Company intends to
expand its business principally through the acquisition of other companies.
Management intends to expend significant time and effort in evaluating,
completing and integrating acquisitions and opening new branches. To manage its
expansion, the Company must maintain effective accounting, financial reporting,
financial control and other operating systems and procedures, and management
must continually evaluate the adequacy of those systems, procedures and controls
and its management structure. There can be no assurance that the Company's
systems, procedures and controls or its management structure will be adequate to
support the Company's operations as they expand. Failure to manage its growth
efficiently and effectively would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business --Strategy."
DEPENDENCE ON REVENUES FROM TREES, INC. In calendar year 1997 and in the
three months ended March 31, 1998, Trees, Inc., one of the Founding Companies,
had revenues of $50.1 million and $13.8 million, respectively, and operating
income of $2.8 million and $0.8 million, respectively, accounting for 43.1% and
30.1% of the Company's 1997 pro forma combined revenues and operating income,
respectively, and 52.0% and 95.8% of the Company's first quarter 1998 pro forma
combined revenues and operating income, respectively. The Company is dependent
on Trees for a significant portion of its revenues and operating income. Trees
derives most of its revenues from line clearing services, which typically have
lower gross margins than landscape maintenance and installation services. During
calendar year 1997, Trees derived approximately 96% of its revenues from 20
utility customers, three of which accounted for approximately 54% of its total
revenues. As a result, the loss of any one of Trees' large customers could have
a material adverse effect on the overall revenues and profitability of the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Trees -- Results of Operations."
DEPENDENCE ON LABOR FORCE. The landscape and tree services industry is
labor intensive, and industry participants, including the Founding Companies,
experience high turnover rates among hourly workers and intense competition for
qualified supervisory personnel. In addition, several of the Founding Companies,
like many landscape service providers in colder climates, employ all or most of
their labor force for only part of the year, which decreases their ability to
maintain a stable, experienced work force. To the extent that the Company is
unable to re-employ seasonal employees during annual peak employment periods, it
will encounter increased recruiting, training and other employment costs. If the
Company were
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unable to recruit a sufficient number of hourly workers and qualified
supervisory personnel, it would be forced to limit growth or reduce the scope of
its operations. See "Business -- Employees."
RELIANCE ON IMMIGRANT EMPLOYEES. Immigrants comprise a significant portion
of the workforce in the landscape and tree services industry. Any change to
existing U.S. immigration policy that restricts the ability of foreign workers
to obtain employment in the United States is likely to contribute to a shortage
of available labor. Immigration laws require the Company to confirm the legal
status of its immigrant labor force. From time to time, the Company may
unknowingly employ illegal immigrants. The Company, as a significant employer of
immigrant laborers, is subject to periodic, random searches by the Immigration
and Naturalization Service ("INS"). If the INS finds illegally employed
immigrants, the Company would suffer the loss of a portion of its labor force
and possibly fines, which could be substantial in amount. Any violation of
immigration laws by the Company could have a material adverse affect on the
Company. See "Business -- Regulation."
COMPETITION. The landscape and tree services markets are highly
competitive and are served by numerous small, owner-operated companies operating
in limited geographic areas. The Company also competes with a few large, private
landscape service companies operating in multiple markets which, to date, have
acquired a small number of landscape companies. TruGreen-ChemLawn, a division of
ServiceMaster Co., has acquired several commercial landscape service companies,
although it continues to focus primarily on residential lawn spraying. Because a
significant portion of the Company's landscape and tree services business is
competitively bid, price is an important competitive factor. Some of the
Company's competitors may have lower overhead cost structures and could outbid
the Company for landscape and tree service contracts by offering their services
at a lower price than is profitable for the Company. Competition in the line
clearing market is characterized by a small number of large companies, led by
Asplundh Tree Expert Company ("Asplundh"), that have the financial resources
necessary to meet the significant capital requirements of this industry segment.
The Company may face competition for acquisition targets from the small number
of large companies in both the landscape and tree services segments. These
companies may have greater name recognition and greater financial resources than
the Company with which to finance acquisition and development opportunities and
the ability to pay higher prices, which could limit the Company's acquisition
program. See "Business -- Competition."
SEASONALITY OF THE LANDSCAPE SERVICES INDUSTRY, Landscape maintenance and
installation services are subject to weather-related seasonal variations. Since
the Company recognizes revenues from the monthly payments from its landscape
maintenance services in full when they are due, rather than in proportion to
costs expected to be incurred over annual terms, the Company generally reports
higher profit margins from landscape maintenance services during winter months
and lower profit margins during peak service periods in late spring and summer.
In markets served by the Founding Companies that do not have a year-round
growing season, the demand for landscape services decreases significantly during
winter months. Although those Founding Companies operating in colder climates
offer snow removal services during the winter, these services do not compensate
for the decrease in landscape maintenance revenues during winter months.
Accordingly, the Company may have lower revenues and operating results in the
first and fourth quarters of each year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Seasonality and
Cyclicality."
INCLEMENT WEATHER RISKS. Extended periods of inclement weather can have an
adverse effect on the Company's ability to initiate or complete landscape
installation projects and perform maintenance services, typically resulting in
inefficient utilization of labor and duplication of work. As a result, inclement
weather may have an adverse effect on the Company's revenues and profitability.
CYCLICAL NATURE OF LANDSCAPE INSTALLATION. The landscape installation
business is highly cyclical and reflects the trends of the commercial real
estate construction industry. Factors influencing the level of commercial real
estate construction include interest rates and the availability of financing,
inflation, local occupancy rates, demand for commercial space and general
economic conditions. As a result, the installation segment of the Company's
business will be adversely affected by a decline in commercial real estate
construction activity in the markets it serves. In addition, on installation
projects for which there is
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inadequate project financing or cost overruns, the Company may have difficulty
in obtaining payment for all or a portion of its services. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality and Cyclicality."
RISKS ASSOCIATED WITH MAINTENANCE CONTRACTS. A significant portion of the
Company's landscape maintenance and line clearing contracts are terminable at
will by either party on 30 to 90 days' notice, with terms generally ranging from
one to two years for landscape maintenance contracts and three to five years for
line clearing contracts. In the past, the Company has experienced non-renewal
rates on its maintenance contracts ranging from 10% to 20%. Termination or
non-renewal of a landscape maintenance contract occurs primarily because of
turnover of property ownership or management or because of a competitor's
bidding the job at a lower price than the Company. Because of the relatively
large size of the Company's line clearing contracts with utilities, the
termination or non-renewal of a large contract could have a material adverse
effect on the Company's results of operations. There can be no assurance that
the Company's customers will not terminate their contracts or renew their
contracts upon expiration. Termination or non-renewal of contracts by a
significant number of the Company's customers would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Operations."
CLAIMS EXPOSURE; INSURANCE. Many of the services provided by the Company
pose the risk of serious personal injury to the Company's site employees. The
Company's employees regularly use dangerous equipment, such as lawn mowers,
edgers, tractors and chain saws, and work in hazardous areas, such as in trees
or near power lines. As a result, there is a significant risk of work-related
injury and workers' compensation claims. Workers' compensation insurance has
been a significant operating expense at each Founding Company. The Company
currently maintains workers' compensation insurance which it considers
sufficient to insure against these risks. The Founding Companies also operate
large numbers of vehicles on public roads and, therefore, are subject to claims
for personal injury or property damage. The Company also maintains liability
insurance for bodily injury and property damage on a fully-insured basis with
minimal deductibles. The Company could become subject to one or more as yet
unasserted claims which, if decided adversely to the Company, could have a
material adverse effect on the Company's operating results. To the extent that
the Company experiences a material increase in the frequency or severity of
accidents or workers' compensation claims, or unfavorable developments on
existing claims, the Company's operating results and financial condition could
be materially adversely affected. Significant increases in the Company's claim
and insurance costs, to the extent not offset by revenue increases, would reduce
the Company's profitability. See "Business -- Risk Management, Insurance and
Litigation."
REGULATION. The Company 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 requiring improved water
management techniques. Although the Company believes it is in substantial
compliance with applicable laws and regulations and has all licenses required to
operate its business, there can be no assurance that the regulatory environment
in which the Company operates will not change significantly in the future. The
Company's failure to comply with applicable laws and regulations could subject
it to the temporary loss of a portion of its labor force, substantial fines or
the loss of its licenses and/or some of its employees which, in turn, would have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Regulation."
RISK OF UNIONIZATION. Most of the Company's operations are non-union.
There can be no assurance, however, that some or all of the Company's labor
force will not unionize in the future. Because of its size and increased
visibility as a public company, the Company believes that the risk of
unionization may increase as a result of the IPO. Due to the highly labor
intensive and price competitive nature of the landscape and tree services
industry, the cost to the Company of unionization of its labor force could be
substantial. Unionization would likely increase the Company's wage scale, which
in turn could adversely affect the Company's profitability and ability to bid
jobs competitively with smaller, non-unionized
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companies. Union activity or a union workforce could increase the risk to the
Company of a strike, which would adversely affect the Company's results of
operations and relationships with its customers. Furthermore, if the Company's
workforce were to unionize, it could adversely affect the Company's acquisition
strategy for a variety of reasons, including a reluctance of non-union
acquisition targets to become affiliated with a unionized company. See
"Business -- Employees."
RELIANCE ON KEY PERSONNEL. The Company is highly dependent on the
continuing efforts of its executive officers and the senior management of the
Founding Companies, and the Company likely will depend on the senior management
of any significant business it acquires in the future. The business or prospects
of the Company could be adversely affected if any of these persons does not
continue in his or her management role until the Company is able to attract and
retain qualified replacements. See "Management."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS. As of the completion of
the Mergers and the IPO, the Company's executive officers and directors, former
stockholders of the Founding Companies and entities affiliated with them
beneficially owned approximately 60% of the outstanding shares of Common Stock.
These persons, if acting in concert, could exercise control over the Company's
affairs, elect the entire Board of Directors and control the outcome of any
matter submitted to a vote of stockholders. See "Principal Stockholders."
NO PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF SHARE PRICE. Prior to
the IPO, there was no public market for the Common Stock. The offering prices
for the Common Stock to be issued pursuant to this registration statement will
be determined by negotiation between the Company and certain owners of the
companies to be acquired, and may bear no relationship to the price at which the
Common Stock will trade after a particular acquisition. The Common Stock is
listed on the New York Stock Exchange; however, there can be no assurance that
an active trading market will be sustained subsequent to the IPO or a particular
acquisition. After an acquisition, the market price of the Common Stock may be
subject to significant fluctuations in response to numerous factors, including
the timing of any acquisitions by the Company, variations in the Company's
annual or quarterly financial results or those of its competitors, changes by
financial research analysts in their estimates of the future earnings of the
Company, conditions in the economy in general or in the Company's industry in
particular, unfavorable publicity or changes in applicable laws and regulations
(or judicial or administrative interpretations thereof) affecting the Company or
the landscaping and tree services industry generally. From time to time, the
stock market experiences significant price and volume volatility, which may
affect the market price of the Common Stock for reasons unrelated to the
Company's performance.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON
STOCK. As of the consummation of the Mergers and the IPO, 13,381,993 shares of
Common Stock were outstanding. The 5,659,900 shares sold in the IPO (other than
shares that may have been or that may subsequently be purchased by affiliates of
the Company) are freely tradable. The remaining outstanding shares may be resold
publicly only following their registration under the Securities Act, or pursuant
to an available exemption from registration (such as provided by Rule 144
following a one year holding period for previously unregistered shares). The
holders of these remaining shares have certain rights to have their shares
registered in the future under the Securities Act, but may not exercise such
registration rights, and have agreed with the Company that they will not sell,
transfer or otherwise dispose of any of their shares, for two years following
the consummation of the IPO. See "Shares Eligible for Future Sale." As of the
consummation of the IPO, there were also outstanding options to purchase up to a
total of 1,477,819 shares of Common Stock. In addition, the 5,000,000 shares to
be issued pursuant to this registration statement may be freely traded after
their issuance to persons not affiliated with the Company unless their resale is
contractually restricted.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. LandCARE'S
Certificate of Incorporation (the "Certificate of Incorporation"), authorizes
the Board of Directors to issue, without stockholder approval, one or more
series of preferred stock having such preferences, powers and relative,
participating, optional and other rights (including preferences over the Common
Stock respecting dividends and distributions and voting rights) as the Board of
Directors may determine. The existence of this "blank-check"
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<PAGE>
preferred stock could render more difficult or discourage an attempt to obtain
control of the Company by means of a tender offer, merger, proxy contest or
otherwise. In addition, the Certificate of Incorporation provides for a
classified Board of Directors, which may also have the effect of inhibiting or
delaying a change in control of the Company. Certain provisions of the Delaware
General Corporation Law may also discourage takeover attempts that have not been
approved by the Board of Directors. See "Description of Capital Stock."
SIGNIFICANT MATERIALITY OF GOODWILL. The Company's balance sheet
immediately following the IPO and consummation of the acquisition of the
Founding Companies included an amount designated as "goodwill" that
represented 51.4% of total assets and 61.5% of stockholders' equity. Goodwill
arises when an acquiror pays more for a business than the fair value of the
tangible and separately measurable intangible net assets. Generally accepted
accounting principles require that this and all other intangible assets be
amortized over the period benefited. Management determined that the period
benefited by the goodwill will be no less than 40 years. If management were not
to separately recognize a material intangible asset having a benefit period less
than 40 years, or were not to give effect to shorter benefit periods of factors
giving rise to a material portion of the goodwill, earnings reported in periods
immediately following the acquisition would be overstated. In later years, the
Company would be burdened by a continuing charge against earnings without the
associated benefit to income valued by management in arriving at the
consideration paid for the businesses. Earnings in later years also could be
significantly affected if management determined then that the remaining balance
of goodwill was impaired. Management reviewed with its independent accountants
all of the factors and related future cash flows which it considered in arriving
at the amount incurred to acquire each of the Founding Companies. Management
concluded that the anticipated future cash flows associated with intangible
assets recognized in the acquisitions will continue indefinitely, and there is
no persuasive evidence that any material portion will dissipate over a period
shorter than 40 years.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the New York Stock Exchange since
June 4, 1998. On June 30, 1998, the last sale price of the Common Stock was
$8.3125 per share, as published in THE WALL STREET JOURNAL on July 1, 1998. At
June 30, 1998, there were approximately 58 stockholders of record of the
Company's Common Stock. The following table sets forth the range of high and low
sale prices for the Common Stock for the period from June 4 through June 30,
1998.
HIGH LOW
----- -----
June 4, 1998 -- June 30, 1998........... $8.75 $8.00
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THE COMPANY
LandCARE was founded in 1997 to be a national provider of comprehensive
landscape and tree services to the commercial and institutional markets. The
Company 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 the Company include
office buildings, multi-family residential complexes, shopping centers,
corporate and university campuses, parks, hotels and resorts. The Company is
also a national provider of line clearing services to utilities. Approximately
75% of the Company's pro forma combined revenues in 1997 were attributable to
maintenance services, which include line clearing for utility customers, and 25%
were attributable to installation services. Upon consummation of the IPO,
LandCARE acquired seven Founding Companies, which have been in business an
average of 25 years. Pro forma combined revenues of the Founding Companies were
$116.2 million in 1997 and $26.6 million for the three months ended March 31,
1998. Historical combined revenues increased at a compound annual growth rate of
approximately 10% from 1995 through 1997. For a description of the transactions
pursuant to which these businesses were acquired, see "Certain Transactions."
The following is a description of the Founding Companies:
TREES, INC. -- Trees, Inc. ("Trees") headquartered in Houston, Texas, was
founded in 1953 and serves customers in 13 states. Trees provides line clearing
services primarily to utility customers and provides commercial and residential
tree services to customers in Houston. Trees had calendar year 1997 revenues of
$50.1 million and currently has approximately 1,325 year-round employees. In
calendar year 1997, line clearing services accounted for approximately 96% of
Trees' revenues. Linda T. Benge, the President and Chief Executive Officer of
Trees, has been employed by Trees for over 17 years. Subsequent to the IPO, she
signed a five-year employment agreement with Trees to serve as President and
Chief Executive Officer of Trees and is currently a director of the Company.
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC. -- Four Seasons Landscape and
Maintenance, Inc. ("Four Seasons"), headquartered in Foster City, California,
was founded in 1973 and operates in northern California, with six branches in
the Bay Area and two branches in Sacramento. Four Seasons provides commercial
landscape maintenance and commercial tree services but does not provide
landscape installation services. Four Seasons had revenues of $16.1 million in
1997 and had approximately 440 employees at peak season. James R. Marcus, the
founder and Chairman of Four Seasons, has been employed by Four Seasons for over
25 years. Harold D. Cranston was employed by Four Seasons for 10 years.
Subsequent to the IPO, Mr. Marcus signed a five-year employment agreement with
Four Seasons to serve as Chairman of Four Seasons and is currently a Director of
Corporate Development of the Company. Subsequent to the IPO, Mr. Cranston signed
a five-year employment agreement with the Company to serve as its Chief
Operating Officer and is currently a director of the Company.
SOUTHERN TREE & LANDSCAPE CO., INC. -- Southern Tree & Landscape Co., Inc.
("Southern Tree"), headquartered in Charlotte, North Carolina, was founded in
1977 and operates in North Carolina and South Carolina with four branches in
North Carolina and one branch in South Carolina. Southern Tree provides
commercial landscape installation and maintenance services, as well as
commercial tree services. Southern Tree had revenues of $14.2 million in 1997
and had over 300 employees at peak season. In 1997, landscape maintenance and
installation each accounted for 44% of Southern Tree's revenues, with the
remaining 12% attributable to tree sales. Roger S. Braswell, the founder of
Southern Tree, has been employed by Southern Tree for over 20 years and has
approximately 30 years of industry experience. Subsequent to the IPO, Mr.
Braswell signed a five-year employment agreement with Southern Tree to serve as
a Vice President and is currently a Director of Corporate Development and a
director of the Company.
D.R. CHURCH LANDSCAPE CO., INC. -- D.R. Church Landscape Co., Inc.
("Church"), headquartered in Lombard, Illinois, was founded in 1963 and
operates in the greater Chicago and Milwaukee areas, with branches in Lombard
and Wadsworth, Illinois and Milwaukee, Wisconsin. Church provides commercial
landscape installation and maintenance services, as well as snow removal. Church
had revenues of $13.3 million in 1997 and had approximately 250 employees at
peak season. In 1997, landscape maintenance and installation services accounted
for 49% and 51% of Church revenues, respectively. Bruce A. Church, the
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President of Church, has been employed by Church for over 20 years and has over
24 years of industry experience. Subsequent to the IPO, he signed a five-year
employment agreement with Church to serve as President of Church and is
currently a director of the Company.
GROUND CONTROL LANDSCAPING, INC. -- Ground Control Landscaping, Inc.
("Ground Control"), headquartered in Orlando, Florida, was founded in 1978 and
operates branches in Tampa and Orlando. Ground Control provides commercial
landscape installation and maintenance services. Ground Control had revenues of
$9.0 million in 1997 and had approximately 175 employees at peak season. In
1997, landscape maintenance and installation services accounted for 43% and 57%
of Ground Control's revenues, respectively. Mark S. Yahn, the founder and Chief
Executive Officer of Ground Control, has been employed by Ground Control for
over 20 years. Subsequent to the IPO, he signed a five-year employment agreement
with Ground Control to serve as Chief Executive Officer of Ground Control and is
currently a director of the Company.
ARTEKA CORPORATION -- Arteka Corporation, Arteka Natural Green Corporation
and Arteka Nurseries, Inc. (collectively, "Arteka"), headquartered in Eden
Prairie, Minnesota, were founded beginning in 1973 and operate in four locations
in the Twin Cities area. Arteka provides commercial landscape installation and
maintenance services, operates a tree nursery which primarily provides trees for
its own operations and provides snow removal. Arteka had revenues of $7.4
million in 1997 and had approximately 115 employees at peak season. Arteka
purchased two landscape maintenance service companies on December 31, 1997, with
combined 1997 revenues of $2.6 million. On a pro forma combined basis for these
two acquisitions made in December 1997, landscape maintenance and installation
services accounted for 44% and 56% of Arteka's revenues, respectively. David K.
Luse, the founder of Arteka, has been employed by Arteka for 25 years.
Subsequent to the IPO, Mr. Luse signed a five-year employment agreement with
Arteka to serve as Vice-President, and is currently a Director of Corporate
Development and a director of the Company.
DESERT CARE LANDSCAPING, INC. -- Desert Care Landscaping, Inc. ("Desert
Care") was founded in 1992 and operates two branches in Phoenix. Desert Care
provides commercial landscape installation and maintenance services. Desert Care
also provides native plant reclamation, which consists of temporarily removing
native plants, maintaining them during a construction period and replacing them
following construction. Desert Care had revenues of $6.5 million in 1997 and had
approximately 165 employees at peak season. In 1997, landscape maintenance and
installation services accounted for 41% and 59% of Desert Care's revenues,
respectively. Jeff A. Meyer, the founder, President and Chief Executive Officer
of Desert Care, has been employed by Desert Care for over five years and has
over 17 years of industry experience. Subsequent to the IPO, he signed a
five-year employment agreement with Desert Care to serve as President and Chief
Executive Officer of Desert Care and is currently a director of the Company.
DIVIDEND POLICY
The Company intends to retain all of its future earnings, if any, to
finance the expansion of its business and for general corporate purposes,
including future acquisitions and, therefore, does not anticipate paying any
cash dividends on its Common Stock for the foreseeable future. In addition, the
Company's credit facility includes restrictions on the ability of the Company to
pay cash dividends without the consent of the lender.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization at March 31, 1998, (i) on
a pro forma combined basis to give effect to the Mergers, the S Corporation
Distributions and the distribution of the Other Assets, and (ii) pro forma
combined, as adjusted, to give effect to the Mergers, the S Corporation
Distributions, the distribution of the Other Assets, the IPO and the application
of a portion of the estimated net proceeds therefrom. This table should be read
in conjunction with the Company's Unaudited Pro Forma Combined Financial
Statements and the Notes thereto included elsewhere in this Prospectus.
MARCH 31, 1998
-------------------------
PRO FORMA
COMBINED AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Long-term obligations, including
current maturities(1)................ $ 11,359 $ --
Stockholders' equity:
Preferred Stock: $0.01 par
value, 5,000,000 shares
authorized;
none issued................... -- --
Common Stock: $0.01 par value,
100,000,000 shares authorized;
7,722,043 issued and
outstanding pro forma
combined; and 13,381,943
shares issued and outstanding,
pro forma
as adjusted(2)................ 77 134
Additional paid-in capital........... 34,789 72,842
Retained earnings.................... 8,784 8,784
---------- -----------
Total stockholders' equity...... 43,650 81,760
---------- -----------
Total capitalization....... $ 55,009 $ 81,760
========== ===========
- ------------
(1) Does not include amounts outstanding under the Founding Companies' short
term lines of credit which totaled $3.9 million at March 31, 1998 which were
repaid with the net proceeds of the IPO. For a description of the Company's
long-term obligations, see Notes to the Founding Companies' Financial
Statements.
(2) Excludes 100,000 shares of Common Stock subject to options with an exercise
price of $6.00 per share granted to the Company's Chief Operating Officer in
February 1998 and 1,377,819 shares of Common Stock subject to options
granted upon consummation of the IPO with an exercise price equal to the IPO
price. See "Management -- 1998 Long-Term Incentive Plan" and "-- 1998
Non-Employee Directors' Stock Plan."
19
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LandCARE acquired the Founding Companies in connection with the
consummation of the IPO. For financial statement presentation purposes, Trees
was identified as the "accounting acquiror." The following selected financial
data for Trees as of March 31, 1997 and 1998 and for the years ended March 31,
1996, 1997 and 1998 have been derived from audited financial statements of Trees
included elsewhere in this Prospectus. The selected historical financial data
for Trees as of March 31, 1994, 1995 and 1996 and for the years ended March 31,
1994 and 1995 have been derived from audited financial statements not included
in this Prospectus. The selected Unaudited Pro Forma Combined Financial Data
present data for the Company, adjusted for (i) the effects of the Mergers, (ii)
the effects of certain pro forma adjustments to the historical financial
statements described below and (iii) the consummation of the IPO and the
application of the net proceeds therefrom. See the Unaudited Pro Forma Combined
Financial Statements and the Notes thereto and the historical Financial
Statements of LandCARE and certain of the Founding Companies and the Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
TREES
Revenues........................ $ 43,753 $ 42,024 $ 47,142 $ 44,847 $ 52,604
Cost of services................ 39,873 38,775 41,054 39,046 46,025
--------- --------- --------- --------- ---------
Gross profit.................... 3,880 3,249 6,088 5,801 6,579
Selling, general and
administrative expenses....... 3,502 2,791 3,224 4,264 3,241
--------- --------- --------- --------- ---------
Operating income................ 378 458 2,864 1,537 3,338
Interest and other income
(expense), net................ (678) (476) (448) (101) 455
--------- --------- --------- --------- ---------
Income before income taxes...... (300) (18) 2,416 1,436 3,793
Income tax provision
(benefit)..................... (137) (31) 896 553 1,454
--------- --------- --------- --------- ---------
Net income...................... $ (163) $ 13 $ 1,520 $ 883 $ 2,339
========= ========= ========= ========= =========
</TABLE>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ -------------
PRO FORMA COMBINED(1)
Revenues(2)..................... $116,177 $ 26,639
Cost of services................ 91,920 22,028
------------ -------------
Gross profit.................... 24,257 4,611
Selling, general and
administrative expenses(3)..... 13,608 3,500
Goodwill amortization(4)........ 1,257 314
------------ -------------
Operating income................ 9,392 797
Interest and other income,
net(5)......................... 871 54
------------ -------------
Income before income taxes...... 10,263 851
Income tax provision(6)......... 4,612 383
------------ -------------
Net income...................... $ 5,651 $ 468
============ =============
Net income per share............ $ 0.44 $ 0.04
============ =============
Shares used in computing pro
forma net income per
share(7)....................... 12,981,285 12,981,285
(FOOTNOTES ON FOLLOWING PAGE)
20
<PAGE>
<TABLE>
<CAPTION>
MARCH 31
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
TREES
Working capital................. $ 2,200 $ 1,122 $ 3,191 $ 3,480 $ 3,417
Total assets.................... 19,875 18,491 18,700 17,586 20,722
Long-term debt, net of current
maturities.................... 2,077 1,384 750 3,160 2,819
Stockholders' equity............ 8,184 7,963 9,305 7,178 9,517
</TABLE>
- ------------
(1) Assumes that the Mergers and the IPO were consummated on January 1, 1997 and
is not necessarily indicative of the results the Company would have obtained
had these events actually then occurred or of the Company's future results.
(2) Reflects a pro forma reduction in revenues of $0.2 million and $10,000 for
the year ended December 31, 1997 and for the three months ended March 31,
1998, respectively, associated with the nursery operations of Church, which
were not acquired in the Mergers.
(3) Reflects the Compensation Differential of approximately $2.6 million and
$1.1 million for the year ended December 31, 1997 and the three months ended
March 31, 1998, respectively, and the Rent Differential of approximately
$0.1 million for the year ended December 31, 1997. These data do not include
the non-recurring portions of the non-cash Compensation Charge of $5.8
million and $1.4 million for the year ended December 31, 1997 and the three
months ended March 31, 1998, respectively.
(4) Consists of the amortization of goodwill to be recorded as a result of the
Mergers, computed on the basis described in Notes to the Unaudited Pro Forma
Combined Financial Statements.
(5) Reflects $1.1 million and $0.3 million for the year ended December 31, 1997
and the three months ended March 31, 1998, respectively, in pro forma
reductions in interest expense of the Founding Companies as the result of
the repayment of the Founding Companies' existing debt (the "Interest
Differential").
(6) Assumes all income is subject to an annual effective corporation tax rate of
40%, and the non-deductibility of goodwill amortization.
(7) Includes (i) 5,162,645 shares issued to owners of the Founding Companies,
(ii) 994,240 shares issued to the management and directors of and
consultants to LandCARE, (iii) 1,565,158 shares issued to Notre and (iv)
5,259,242 of the 5,659,900 shares sold in the IPO necessary to pay the cash
portion of the Merger consideration, expenses of the IPO and repayment of
the Founding Companies' existing debt. The 400,658 shares excluded reflect
the net cash proceeds to LandCARE. Excludes options to purchase 1,377,819
shares of Common Stock granted upon consummation of the IPO.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the Founding Companies' Financial Statements and related
Notes thereto appearing elsewhere in this Prospectus.
There are a number of statements in this Prospectus which address
activities, events or developments which the Company expects or anticipates will
or may occur in the future, including such matters as the Company's strategy for
internal growth and improved profitability, additional capital expenditures
(including the amount and nature thereof), acquisitions of assets and
businesses, industry trends and other such matters. These statements are based
on certain assumptions and analyses made by the Company in light of its
perception of historical trends, current business and economic conditions and
expected future developments as well as other factors it believes are reasonable
or appropriate. However, whether actual results and developments will conform
with the Company's expectations and predictions is subject to a number of risks
and uncertainties, including the Risk Factors discussed in this Prospectus;
general economic, market or business conditions; the business opportunities (or
lack thereof) that may be presented to and pursued by the Company; and changes
in laws or regulations and other factors, most of which are beyond the control
of the Company. Consequently, there can be no assurance that the actual results
or developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations.
INTRODUCTION
The Company's revenues are derived from providing landscape and tree
services to the commercial and institutional markets. The Company 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." The Company 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 the Company include office buildings,
multi-family residential complexes, shopping centers, corporate and university
campuses, parks, hotels, resorts and governmental facilities. Approximately 75%
of the Company's pro forma combined revenues in 1997 were attributable to
maintenance services, which include line clearing for utility customers, and 25%
were attributable to installation services. Upon consummation of the IPO,
LandCARE acquired the seven Founding Companies, which have been in business an
average of 25 years. Pro forma combined revenues of the Founding Companies were
$116.2 million in 1997 and $26.6 million for the three months ended March 31,
1998. Historical combined revenues increased at a compound annual growth rate of
approximately 10% from 1995 through 1997. In addition to emphasizing internal
growth, the Company has an aggressive acquisition program.
The Founding Companies operated throughout the periods presented as
independent, privately-owned entities, and their results of operations reflect
this and their varying tax structures (S Corporations or C Corporations) which
have influenced the historical level of owners' compensation. Selling, general
and administrative expenses as a percentage of revenue may not be comparable
among the individual Founding Companies because the levels of owners'
compensation may differ among them. The owners of the Founding Companies have
contractually agreed to certain reductions in both their compensation and
benefits. The Compensation Differential of $2.6 million for 1997 and $1.1
million for the three months ended March 31, 1998 have been reflected as pro
forma adjustments in the accompanying Unaudited Pro Forma Combined Statement of
Operations presented elsewhere in this Prospectus.
The Company has obtained a bank line of credit facility of $50 million from
First Chicago, which has been available since the consummation of the IPO. As of
June 30, 1998, the Company had an available balance of $50 million under the
line of credit. This credit facility will be used for working capital and
acquisitions. In addition, the Company repaid, from the net proceeds of the IPO,
the Founding Companies' debt. Accordingly, the Interest Differential of $1.1
million for 1997 and $0.3 million for the three months
22
<PAGE>
ended March 31, 1998 have been reflected as pro forma adjustments in the
Unaudited Pro Forma Combined Statements of Operations presented elsewhere in
this Prospectus. The Company also believes that opportunities will exist to
increase its profitability through implementation of the Company's operating
strategy, as well as internal growth and expansion through acquisitions. It is
the Company's objective that the potential increase in profitability associated
with the Company's operating strategy will at least offset the costs related to
the Company's new corporate management and by the costs attributable to being a
public company. However, because these costs cannot be accurately quantified at
this time, they have not been considered in the pro forma financial information
included herein.
From November 1997 through March 1998, the Company sold an aggregate of
994,240 shares of Common Stock to management, directors and certain consultants
of the Company for $0.01 per share. As a result, LandCARE recorded
non-recurring, non-cash compensation charges of $5.8 million and $1.4 million
during 1997 and the first quarter of 1998, respectively, representing the
difference between the amount paid for the shares and the estimated fair value
of the shares on the date of the sale. LandCARE also issued options to purchase
100,000 shares of Common Stock at an exercise price of $6.00 per share to its
Chief Operating Officer. The compensation charge of $0.1 million related to
these options will be amortized over the five year vesting period.
The Mergers were accounted for using the purchase method of accounting.
Trees was designated as the "accounting acquiror" in the Mergers. Accordingly,
the Company recorded goodwill of $50.3 million, representing the excess of the
fair value of the Merger consideration paid over the fair value of the net
assets acquired from the other Founding Companies, plus the fair value of shares
issued to Notre, directors and management of and consultants to the Company. The
goodwill will be amortized over its estimated useful life of 40 years as a
non-cash charge to operating income. The pro forma effect of this amortization
expense, which is not deductible for tax purposes, is expected to be
approximately $1.3 million per year. See "Risk Factors -- Significant
Materiality of Goodwill" and "Certain Transactions -- Organization of the
Company."
A brief description of the accounting classifications used to present the
results of operations of the Founding Companies is as follows:
REVENUES. The Founding Companies' revenues consist of maintenance revenues
and installation revenues. Generally, the Company's landscape maintenance
contracts are for terms of one to two years and payments to the Company are
remitted monthly over the term of the contract. In colder climates, most
landscape maintenance contracts cover seven to nine months of the year. Revenues
from maintenance contracts are recognized as monthly bills are rendered.
Generally, the Company's line clearing contracts are for terms of three to five
years, and payments to the Company are remitted monthly based on work performed
during the month. Revenues from the Company's landscape installation projects
are recognized when the services are performed and billable under the terms of
the applicable contract. Revenues include only the net profit realized by the
Company from the use of subcontractors. This net profit has historically been
approximately 1% of the Company's revenues.
COST OF SERVICES. Cost of services represents direct labor and associated
costs (such as benefits and workers' compensation expense), materials,
supervisory personnel, operating facilities' rent and equipment and vehicle
costs, such as fuel, insurance and depreciation. The Company's landscape and
tree services businesses are labor intensive, and accordingly, a substantial
portion of the costs incurred to complete a project are labor related. As a
result, fluctuations in the cost of labor will have a significant effect on the
Founding Companies' profitability.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include owners' compensation, selling and other
administrative costs. In addition, the costs of training and safety programs are
included in this category.
SEASONALITY AND CYCLICALITY
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
23
<PAGE>
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
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 the Company 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. The
Company 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. The Company has not performed an
analysis to estimate the impact of accounting for revenue in proportion to the
work performed as compared to accounting for revenue from the monthly payments
from its landscape maintenance services in full when they are due, however, the
Company 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 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 the
Company. 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.
RESULTS OF OPERATIONS -- COMBINED
The historical combined results of operations of the Founding Companies for
the periods presented do not represent historical combined results of operations
presented in accordance with generally accepted accounting principles, but are
only a summation of the revenue, cost of services, selling, general and
administrative expenses, other income and expense and net income of the
individual Founding Companies. The historical combined results also exclude the
effect of pro forma adjustments and, therefore, may not be indicative of the
Company's post-combination results of operations for a number of reasons,
including the following: (i) the Founding Companies were not under common
control or management during the periods presented, (ii) the Founding Companies
used different tax structures (S Corporations or C Corporations) during the
periods presented, (iii) the Company will incur incremental costs related to its
post-combination corporate management and the costs of being a publicly-traded
company, (iv) the Company used the purchase method of accounting to record the
Mergers, resulting in the recording and amortization of goodwill and (v) the
historical combined data do not reflect the Compensation Differential or the
potential benefits and cost savings the Company expects to realize when
operating as a combined entity.
The following table sets forth selected combined statement of operations
data of the Founding Companies on a historical basis and as a percentage of
total revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
---------------------------------------------------------------- --------------------
1995(1)(2) 1996(1)(2) 1997(1)(2) 1997(2)
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 96,963 100.0% $ 103,487 100.0% $ 116,410 100.0% $ 23,555 100.0%
Cost of services..................... 78,553 81.0 84,264 81.4 92,167 79.2 19,006 80.7
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 18,410 19.0 19,223 18.6 24,243 20.8 4,549 19.3
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1998(2)
--------------------
Revenues............................. $ 26,649 100.0%
Cost of services..................... 22,043 82.7
--------- ---------
Gross profit......................... 4,606 17.3
========= =========
- ------------
(1) The financial data included for Trees is for the fiscal years ended March
31, 1996 and 1997 and the year ended December 31, 1997.
(2) Includes the results associated with the nursery operations of Church, which
were not acquired in the Mergers.
24
<PAGE>
COMBINED RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 1997
REVENUES. Revenues increased by $3.0 million, or 13.1%, from $23.6 million
for the three months ended March 31, 1997 to $26.6 million for the corresponding
period of 1998 primarily due to an increase of $2.5 million in maintenance
revenues for utility line clearing at Trees resulting from the addition of a new
contract with a major utility during 1998 and expansion of several other
contracts by utility customers. Landscape maintenance revenues increased by $0.8
million due to the acquisition by Arteka of two companies which have extensive
snow removal operations during the fourth quarter of 1997 and the addition of
landscape maintenance contracts at Four Seasons and Southern Tree. Landscape
installation revenues decreased by $0.4 million between the periods due to
unusually high levels of rainfall resulting in delays on installation projects
at Ground Control and Desert Care.
GROSS PROFIT. Gross profit increased by $0.1 million, or 1.3%, from $4.5
million for the three months ended March 31, 1997 to $4.6 million for the
corresponding period of 1998. As a percentage of revenues, gross profit
decreased from 19.3% for the three months ended March 31, 1997 to 17.3% for the
corresponding period of 1998. This decrease in gross margin was primarily due to
(i) startup costs associated with new contracts at Trees, (ii) the inclusion of
two large high margin installation jobs at Ground Control during the first
quarter of 1997 and (iii) lower gross margins realized on installation projects
in 1998 at Ground Control and Desert Care due to inefficiencies experienced due
to unusually high levels of rainfall. These margin decreases were partially
offset by higher gross margins at Four Seasons, Southern Tree and Arteka.
COMBINED RESULTS FOR 1997 COMPARED TO 1996
REVENUES. Combined revenues increased by $12.9 million, or 12.5%, from
$103.5 million in 1996 to $116.4 million in 1997, primarily due to an increase
in maintenance revenues of $11.7 million. This increase in maintenance revenues
was primarily attributable to a $5.2 million increase at Trees resulting from
the addition of a new contract with a major utility during 1997 and expansion of
several other contracts by utility customers. Landscape maintenance revenues
also increased by $6.5 million due to the addition of new maintenance contracts
at the other Founding Companies. Landscape installation revenues increased by
$1.2 million, primarily at Desert Care, Church and Arteka.
GROSS PROFIT. Combined gross profit increased by $5.0 million, or 26.1%,
from $19.2 million in 1996 to $24.2 million in 1997. Approximately $4.2 million
of the increase in combined gross profit was related to increased revenues at
Trees, Four Seasons, Church and Southern Tree. As a percentage of revenues,
gross profit increased from 18.6% in 1996 to 20.8% in 1997. This margin increase
was primarily due to improved operating efficiencies at Four Seasons resulting
from increased revenues at two new branches opened in 1996 and, to a lesser
extent, margin improvement programs including (i) elimination of less profitable
maintenance contracts, (ii) institution of cost saving programs, including the
bulk purchasing of fertilizer and irrigation parts and (iii) initiation of
higher margin commercial tree maintenance services. The gross margin was also
positively affected by higher margins on larger installation projects at Church
and Ground Control.
COMBINED RESULTS FOR 1996 COMPARED TO 1995
REVENUES. Combined revenues increased by $6.5 million, or 6.7%, from $97.0
million in 1995 to $103.5 million in 1996. This increase in combined revenues
was principally due to an increase of $3.3 million in landscape maintenance
revenues at the Founding Companies. Landscape installation revenues increased by
$3.2 million, primarily at Desert Care, Church and Ground Control. These
increases were partially offset by a $3.4 million reduction in revenues at Trees
resulting from the loss of two line clearing contracts in a competitive bidding
process, the reduction in scope of another contract and a $1.2 million decrease
from a one-time project completed in 1995. These declines at Trees were
partially offset by budget increases by utility customers on several other
contracts.
25
<PAGE>
GROSS PROFIT. Combined gross profit increased by $0.8 million, or 4.4%,
from $18.4 million in 1995 to $19.2 million in 1996. As a percentage of
revenues, gross profit was 19.0% in 1995 compared to 18.6% in 1996.
COMBINED LIQUIDITY AND CAPITAL RESOURCES
On a combined basis, the Founding Companies generated $2.6 million of net
cash from operating activities for the three months ended March 31, 1998.
Combined net cash used in investing activities totaled $2.5 million due
primarily to the purchase of vehicles and equipment. Combined net cash used in
financing activities totaled $0.1 million, due primarily to repayments on
long-term debt totaling $1.5 million and S Corporation distributions totaling
$0.7 million at Desert Care. These repayments were offset by $2.2 million of
additional borrowings used to fund equipment purchases and working capital by
several of the Founding Companies. As of March 31, 1998, the Founding Companies
had combined working capital of $1.7 million and combined long-term debt of $7.1
million.
On a combined basis, the Founding Companies generated $6.0 million of net
cash from operating activities during 1997. Combined net cash used in investing
activities totaled $5.9 million due primarily to the purchase of vehicles and
equipment totaling $5.9 million. Combined net cash provided by financing
activities totaled $0.5 million, due primarily to borrowings totaling $6.9
million used to fund equipment purchases and working capital by several of the
Founding Companies. These borrowings were partially offset by repayments on
long-term debt totaling $6.4 million by the Founding Companies. As of December
31, 1997, the Founding Companies had combined working capital of $4.7 million
and combined long-term debt of $7.8 million.
The Company intends to aggressively pursue acquisition opportunities. The
Company expects to fund future acquisitions through the issuance of additional
Common Stock, borrowings under its credit facility discussed below and with cash
flows from operations.
The Company has obtained a three-year credit facility of $50 million from
First Chicago. The credit facility, which is guaranteed by each of the Founding
Companies, will be used to fund acquisitions and working capital requirements.
The credit facility is subject to various loan covenants, including (i)
maintenance of certain financial ratios, (ii) restrictions on additional
indebtedness, and (iii) restrictions on liens, guarantees, advances and
dividends, and is subject to customary drawing conditions.
TREES -- RESULTS OF OPERATIONS
Trees, headquartered in Houston, Texas, was founded in 1953 and serves
customers in 13 states. Trees provides line clearing services primarily to
utility customers and commercial and residential tree services to customers in
Houston.
The following table sets forth the selected statement of operations data
and such results as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
----------------------------------------------------------------
1996 1997 1998
-------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 47,142 100.0% $ 44,847 100.0% $ 52,604 100.0%
Cost of services..................... 41,054 87.1 39,046 87.1 46,025 87.5
--------- --------- --------- --------- --------- ---------
Gross profit......................... 6,088 12.9 5,801 12.9 6,579 12.5
Selling, general and administrative
expenses........................... 3,224 6.8 4,264 9.5 3,241 6.2
--------- --------- --------- --------- --------- ---------
Income from operations............... 2,864 6.1 1,537 3.4 3,338 6.3
Interest and other income (expense),
net................................ (448) (1.0) (101) (0.2) 455 0.9
--------- --------- --------- --------- --------- ---------
Income before income
taxes.............................. $ 2,416 5.1% $ 1,436 3.2% $ 3,793 7.2%
========= ========= ========= ========= ========= =========
</TABLE>
26
<PAGE>
TREES' RESULTS FOR THE YEAR ENDED MARCH 31, 1998 COMPARED TO THE YEAR ENDED
MARCH 31, 1997
REVENUES. Revenues increased by $7.8 million, or 17.3%, from $44.8 million
for the year ended March 31, 1997 to $52.6 million for the year ended March 31,
1998. This increase in revenues was attributable to the addition of several new
contracts and budget increases by utility customers on several other contracts,
partially offset by the loss of a line clearing contract in a competitive
bidding process.
GROSS PROFIT. Gross profit increased by $0.8 million, or 13.4%, from $5.8
million for the year ended March 31, 1997 to $6.6 million for the year ended
March 31, 1998. As a percentage of revenues, gross profit decreased from 12.9%
for the year ended March 31, 1997 to 12.5% for the year ended March 31, 1998.
This decrease in gross margin was primarily due to startup costs and
inefficiencies associated with new contracts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $1.1 million, or 24.0%, from $4.3 million
for the year ended March 31, 1997 to $3.2 million for the corresponding period
of 1998. As a percentage of revenues, selling, general and administrative
expenses decreased from 9.5% for the year ended March 31, 1997 to 6.2% for the
year ended March 31, 1998 due to a decrease in owners' compensation. Owners
compensation at Trees has been determined by the principal stockholder based
upon various factors including the recent operating results and available cash
balances.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income, net,
increased by $0.6 million, from a net expense of $0.1 million for the year ended
March 31, 1997 to net income of $0.5 million for the corresponding period of
1998, due primarily to the receipt of a $0.5 million insurance settlement.
TREES' RESULTS FOR THE YEAR ENDED MARCH 31, 1997 COMPARED TO THE YEAR ENDED
MARCH 31, 1996
REVENUES. Revenues decreased by $2.3 million, or 4.9%, from $47.1 million
for the year ended March 31, 1996 to $44.8 million for the year ended March 31,
1997. The decrease in revenues was primarily due to a $3.4 million reduction
resulting from the loss of two line clearing contracts in a competitive bidding
process, the reduction in scope on another contract and a $1.2 million reduction
from a one-time project completed in 1995. These declines were partially offset
by budget increases from utility customers on several other contracts.
GROSS PROFIT. Gross profit decreased by $0.3 million, or 4.7%, from $6.1
million in March 31, 1996 to $5.8 million in March 31, 1997 due to the decrease
in revenues. As a percentage of revenues, gross profit remained constant at
12.9% during both periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.1 million, or 32.3%, from $3.2 million
for the year ended March 31, 1996 to $4.3 million for the corresponding period
of 1997, due to a $1.0 million increase in owners' compensation. As a percentage
of revenues, selling, general and administrative expenses increased from 6.8% in
1996 to 9.5% in 1997.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other expense, net
decreased by $0.3 million, from $0.4 million of expense, net for the year ended
March 31, 1996 to $0.1 million of expense, net for the corresponding period of
1997. The primary reason for the decrease was a reduction in interest expense
resulting from lower average outstanding debt during the year ended March 31,
1997.
TREES' LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, Trees' working capital was $3.4 million, compared to
$3.5 million at March 31, 1997. Trees' principal capital requirements are to
fund its working capital and the purchase of vehicles and equipment.
Historically, these requirements have been met by cash flow from operations and,
to a lesser extent, borrowings under Trees' credit facility and notes payable to
equipment manufacturers and distributors.
Net cash provided by operating activities totaled $3.7 million, $3.0
million and $4.0 million for the years ended March 31, 1996, 1997 and 1998,
respectively. Net cash used in investing activities totaled $0.3 million, $0.9
million and $4.1 million for the years ended March 31, 1996, 1997 and 1998,
respectively. Capital expenditures for these periods consisted primarily of
vehicle and equipment purchases.
27
<PAGE>
During fiscal year 1998, Trees invested more heavily in vehicles and equipment
than in prior periods in order to support its new contracts. Net cash used in
financing activities for the years ended March 31, 1996, 1997 and 1998 totaled
$1.7 million, $2.0 million and $0.3 million, respectively. The primary component
of cash used in financing activities related to the repayment of long-term debt.
During the years ended March 31, 1996, 1997 and 1998, Trees repaid $2.6 million,
$2.0 million and $0.3 million, respectively, of outstanding borrowings.
Trees has a revolving credit facility which provides for borrowings up to
the lesser of $0.5 million or the loan limit defined by the credit agreement.
Accounts receivable and equipment secure borrowings under the credit facility.
As of March 31, 1997 and 1998, there were no borrowings outstanding under the
credit facility.
FOUR SEASONS -- RESULTS OF OPERATIONS
Four Seasons, headquartered in Foster City, California, was founded in 1973
and operates in northern California, with six branches in the Bay Area and two
branches in Sacramento. Four Seasons provides commercial landscape maintenance
and commercial tree maintenance services but does not provide landscape
installation services.
The following table sets forth the selected statement of operations data
and such results as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
---------------------------------------------------------------- --------------------
1995 1996 1997 1997
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 12,000 100.0% $ 13,367 100.0% $ 16,066 100.0% $ 3,529 100.0%
Cost of services..................... 9,255 77.1 10,106 75.6 11,067 68.9 2,467 70.0
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 2,745 22.9 3,261 24.4 4,999 31.1 1,062 30.0
Selling, general and administrative
expenses........................... 2,829 23.6 3,319 24.8 3,754 23.4 965 27.3
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... (84) (0.7) (58) (0.4) 1,245 7.7 97 2.7
Interest and other income (expense),
net................................ (46) (0.4) (31) (0.2) (46) (0.2) (27) (0.7)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes.... $ (130) (1.1)% $ (89) (0.6)% $ 1,199 7.5% $ 70 2.0%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1998
--------------------
Revenues............................. $ 3,830 100.0%
Cost of services..................... 2,547 66.5
--------- ---------
Gross profit......................... 1,283 33.5
Selling, general and administrative
expenses........................... 1,385 36.2
--------- ---------
Income from operations............... (102) (2.7)
Interest and other income (expense),
net................................ 2 0.1
--------- ---------
Income (loss) before income taxes.... $ (100) (2.6)%
========= =========
FOUR SEASONS' RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1997
REVENUES. Revenues increased by $0.3 million, or 8.5%, from $3.5 million
for the three months ended March 31, 1997 to $3.8 million for the corresponding
period of 1998. This increase in revenues was attributable to the addition of
several maintenance contracts and an increase in commercial tree maintenance
services.
GROSS PROFIT. Gross profit increased by $0.2 million, or 20.8%, from $1.1
million for the three months ended March 31, 1997 to $1.3 million for the
corresponding period of 1998. As a percentage of revenues, gross profit
increased from 30.0% for the three months ended March 31, 1997 to 33.5% for the
corresponding period of 1998 due to lower labor utilization in the first quarter
of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.4 million, or 43.5%, from $1.0 million
for the three months ended March 31, 1997 to $1.4 million for the corresponding
period of 1998. As a percentage of revenues, selling, general and administrative
expenses increased from 27.3% for the three months ended March 31, 1997 to 36.2%
for the corresponding period of 1998 primarily due to a $0.5 million increase in
owners' compensation.
28
<PAGE>
FOUR SEASONS' RESULTS FOR 1997 COMPARED TO 1996
REVENUES. Revenues increased by $2.7 million, or 20.2%, from $13.4 million
for the year in 1996 to $16.1 million in 1997. This increase was attributable to
the addition of new maintenance contracts, the addition of two branches during
1996, and, to a lesser extent, the initiation of commercial tree maintenance
services in late 1996.
GROSS PROFIT. Gross profit increased by $1.7 million, or 53.3%, from $3.3
million for 1996 to $5.0 million for 1997. As a percentage of revenues, gross
profit increased from 24.4% in 1996 to 31.1% in 1997. Four Seasons improved its
gross margin due to higher revenues at the two new branches opened during 1996
and, to a lesser extent, margin improvement programs including (i) the
elimination of less profitable maintenance contracts, (ii) the institution of
cost savings programs, including the bulk purchase of fertilizer and irrigation
parts and (iii) the initiation of a higher margin commercial tree maintenance
service.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.5 million, or 13.1%, from $3.3 million
for 1996 to $3.8 million for 1997, primarily due to the addition of
administrative personnel associated with the opening of the two new branch
locations during 1996 and the expansion of Four Seasons' corporate headquarters
in 1996. As a percentage of revenues, selling, general and administrative
expenses decreased from 24.8% for 1996 to 23.4% for 1997 due to the increase in
revenues at the two new branches.
FOUR SEASONS' RESULTS FOR 1996 COMPARED TO 1995
REVENUES. Revenues increased by $1.4 million, or 11.4%, from $12.0 million
for 1995 to $13.4 million for 1996. This increase in revenues resulted from the
addition of new maintenance contracts at existing branches and, to a lesser
extent, the addition of two new branches during 1996.
GROSS PROFIT. Gross profit increased by $0.6 million, or 18.8%, from $2.7
million for 1995 to $3.3 million for 1996. As a percentage of revenues, gross
profit increased from 22.9% in 1995 to 24.4% in 1996 due to implementation of
the cost savings programs, which began in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.5 million, or 17.3%, from $2.8 million
for 1995 to $3.3 million for 1996. As a percentage of revenues, selling, general
and administrative expenses increased from 23.6% for 1995 to 24.8% for 1996,
primarily due to an increase in payroll and related benefits in connection with
the addition of administrative personnel associated with the opening of the two
new branches during 1996 and the relocation and expansion of the Company's
headquarters during 1996.
FOUR SEASONS' LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, Four Seasons' working capital was $0.4 million,
compared to working capital of $0.5 million at December 31, 1997. Net cash
provided by operating activities for the three months ended March 31, 1997 and
1998 was $0.2 million and $0.4 million, respectively. Net cash used in investing
activities was $0.0 million and $0.1 million for the three months ended March
31, 1997 and 1998, respectively. Net cash used in investing activities was
primarily related to the purchase of vehicles and equipment. Net cash provided
by (used in) financing activities totaled $(0.2) million and $0.1 million for
the three months ended March 31, 1997 and 1998, respectively. During the three
months ended March 31, 1997, Four Seasons incurred additional borrowings related
to the purchase of equipment, vehicles and commercial tree service equipment.
As of December 31, 1997, Four Seasons' working capital was $0.5 million,
compared to a working capital deficit of $0.2 million at December 31, 1996. Four
Seasons' principal capital requirements are to fund its working capital and the
purchase and improvement of facilities, vehicles and equipment. Four Seasons has
historically satisfied these requirements with cash flow from operations and, to
a lesser extent, with borrowings under its credit facility and notes payable to
a financial institution.
Net cash provided by operating activities for 1995, 1996 and 1997 was $0.2
million, $0.5 million and $1.0 million, respectively. Net cash used in investing
activities was $0.3 million, $0.6 million and $0.4
29
<PAGE>
million for 1995, 1996 and 1997, respectively. Cash used in investing activities
was primarily related to the purchase of vehicles and equipment. Net cash
provided by (used in) financing activities was $0.1 million, $0.1 million and
$(0.3) million for 1995, 1996 and 1997, respectively. In 1995, 1996 and 1997,
Four Seasons repaid outstanding long-term borrowings of $0.1 million, $0.1
million and $0.3 million, respectively. In 1995 and 1996, Four Seasons incurred
additional borrowings of $0.2 million related to the purchase of equipment,
vehicles and commercial tree services equipment and the establishment of new
branches.
Four Seasons has a line of credit which provides for borrowings up to $0.6
million. Borrowings under the line of credit are secured by accounts receivable,
inventory and equipment. The line of credit is guaranteed by the shareholders of
the company. Borrowings outstanding on the line of credit as of December 31,
1996 were $0.2 million. There were no borrowings outstanding on the line of
credit as of December 31, 1997.
SOUTHERN TREE -- RESULTS OF OPERATIONS
Southern Tree, headquartered in Charlotte, North Carolina, was founded in
1977 and operates in North Carolina and South Carolina, with four branches in
North Carolina and one branch in South Carolina. Southern Tree provides
commercial landscape installation and maintenance and also offers commercial
tree services.
The following table sets forth the selected statement of operations data
and such results as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------
1997 1998
-------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues............................. $ 3,368 100.0% $ 3,502 100.0%
Cost of services..................... 2,651 78.7 2,675 76.4
--------- --------- --------- ---------
Gross profit......................... 717 21.3 827 23.6
Selling, general and administrative
expenses........................... 475 14.1 514 14.7
--------- --------- --------- ---------
Income from operations............... 242 7.2 313 8.9
Interest and other income (expenses),
net................................ (100) (3.0) (95) (2.7)
--------- --------- --------- ---------
Income before income taxes........... $ 142 4.2% $ 218 6.2%
========= ========= ========= =========
</TABLE>
SOUTHERN TREE'S RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1997
REVENUES. Revenues increased by $0.1 million, or 4.0%, from $3.4 million
for the three months ended March 31, 1997 to $3.5 million for the corresponding
period of 1998 due to an increase in landscape maintenance revenues.
GROSS PROFIT. Gross profit increased by $0.1 million, or 15.3%, from $0.7
million for the three months ended March 31, 1997 to $0.8 million for the
corresponding period of 1998. As a percentage of revenues, gross profit
increased from 21.3% for the three months ended March 31, 1997 to 23.6% for the
corresponding period of 1998. This increase was attributable to improved labor
utilization and savings realized on workers' compensation insurance.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 8.2% for the three months ended March 31,
1998 compared to the corresponding period of 1997. As a percentage of revenues,
selling, general and administrative expenses increased from 14.1% for the three
months ended March 31, 1997 to 14.7% for the corresponding period of 1998, due
primarily to additions to the sales staff.
30
<PAGE>
SOUTHERN TREE'S LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, Southern Tree had a working capital deficit of $1.0
million, compared to a working capital deficit of $1.1 million as of December
31, 1997. Net cash provided by (used in) operating activities totaled $(0.1)
million and $0.1 million for the three months ended March 1997 and 1998,
respectively. Net cash used in investing activities totaled $0.1 million for
each of the three months ended March 31, 1997 and 1998 and was primarily
attributable to vehicle and equipment purchases. For the three months ended
March 31, 1997 and 1998, net cash provided by (used in) financing activities
totaled $0.1 million and $(0.1) million, respectively, due primarily to the
purchase of vehicles and equipment. In addition, Southern Tree repaid $0.1
million of outstanding borrowings during each of the three months ended March
1997 and 1998.
As of December 31, 1997, Southern Tree had a working capital deficit of
$1.1 million. Southern Tree's principal capital requirements are to fund its
working capital and the purchase and improvements of facilities, vehicles and
equipment. Historically, these requirements have been met with cash flow from
operating activities and with borrowings under bank lines of credit and notes
payable to equipment manufacturers and distributors.
Net cash provided by operating activities totaled $0.5 million for 1997.
Net cash used in investing activities totaled $1.1 million and was primarily
attributable to vehicle and equipment purchases. During 1997, net cash provided
by financing activities totaled $0.7 million, due primarily to the purchase of
vehicles and equipment. In addition, Southern Tree repaid $0.2 million of
outstanding borrowings during 1997.
Southern Tree has lines of credit, which provide for borrowings of up to
$1.9 million. Borrowings under the lines of credit are secured by accounts
receivable, inventory, equipment and other intangibles. In addition, borrowings
under the lines of credit are guaranteed by Southern Tree's shareholders. The
lines of credit expire on November 30, 1998 and were fully drawn as of March 31,
1998.
CHURCH -- RESULTS OF OPERATIONS
Church, headquartered in Lombard, Illinois, was founded in 1963 and
operates in the greater Chicago and Milwaukee areas, with branches in Lombard
and Wadsworth, Illinois and Milwaukee, Wisconsin. Church provides commercial
landscape installation and maintenance and also provides snow removal services.
The following table sets forth the selected statement of operations data
and such results as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
---------------------------------------------------------------- --------------------
1995 1996 1997 1997
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 9,141 100.0% $ 10,951 100.0% $ 13,257 100.0% $ 946 100.0%
Cost of services........................ 6,121 67.0 7,624 69.6 8,906 67.2 803 84.9
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit............................ 3,020 33.0 3,327 30.4 4,351 32.8 143 15.1
Selling, general and administrative
expenses.............................. 2,136 23.3 3,591 32.8 2,864 21.6 590 62.3
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations.................. 884 9.7 (264) (2.4) 1,487 11.2 (447) (47.2)
Interest and other income (expense),
net................................... (57) (0.6) (39) (0.4) (87) (0.6) (14) (1.5)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes....... $ 827 9.1% $ (303) (2.8)% $ 1,400 10.6% $ (461) (48.7)%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1998
--------------------
Revenues................................ $ 963 100.0%
Cost of services........................ 787 81.7
--------- ---------
Gross profit............................ 176 18.3
Selling, general and administrative
expenses.............................. 661 68.6
--------- ---------
Income from operations.................. (485) (50.3)
Interest and other income (expense),
net................................... (17) (1.8)
--------- ---------
Income (loss) before income taxes....... $ (502) (52.1)%
========= =========
31
<PAGE>
CHURCH'S RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 1997
REVENUES. Revenues increased $0.1 million, or 1.8%, from $0.9 million for
the three months ended March 31, 1997 to $1.0 million for the corresponding
period of 1998. Revenues derived from snow removal services decreased $0.1
million, due to the mild winter conditions experienced in the Chicago and
Milwaukee metropolitan areas during the first quarter of 1998. Due to the
unseasonably warm conditions, Church's installation and maintenance crews were
able to begin landscaping work which normally would have commenced in the
spring.
GROSS PROFIT. Gross profit increased by $0.1 million, or 23.1%, from $0.1
million for the three months ended March 31, 1997 to $0.2 million for the
corresponding period of 1998. As a percentage of revenues, gross profit
increased from 15.1% for the three months ended March 31, 1997 to 18.3% for the
corresponding period of 1998. This increase in gross margin was due to the early
startup of landscape installation and maintenance projects.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.1 million, or 12.0%, from $0.6 million
for the three months ended March 31, 1997 to $0.7 million for the corresponding
period of 1998, due primarily to salary increases implemented in late 1997 and
the addition of several administrative personnel in the first quarter of 1998.
As a percentage of revenue, selling, general and administrative expenses
increased from 62.3% for the three months ended March 31, 1997 to 68.6% for the
corresponding period of 1998.
CHURCH'S RESULTS FOR 1997 COMPARED TO 1996
REVENUES. Revenues increased by $2.3 million, or 21.1%, from $11.0 million
for 1996 to $13.3 million for 1997. Maintenance revenues increased $1.6 million
primarily due to the addition of new maintenance contracts totaling $1.3 million
and an increase of $0.3 million in snow removal revenue. Installation revenues
increased by $0.7 million as a result of Church's obtaining larger installation
projects.
GROSS PROFIT. Gross profit increased by $1.1 million, or 30.8%, from $3.3
million for 1996 to $4.4 million for 1997. As a percentage of revenues, gross
profit increased from 30.4% for 1996 to 32.8% for 1997 primarily due to higher
margins experienced on larger installation jobs during 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $0.7 million, or 20.2%, from $3.6 million
for 1996 to $2.9 million for 1997. As a percentage of revenues, selling, general
and administrative expenses decreased from 32.8% for 1996 to 21.6% for 1997.
This decrease was partially due to a non-recurring 1996 accrual recorded by
Church to fully reserve for a potentially uncollectible receivable from one
installation job totaling approximately $0.9 million. Excluding this one-time
charge, selling, general and administrative expenses as a percentage of revenue
decreased from 24.6% in 1996 to 21.6% in 1997, due to lower owners' compensation
and ESOP plan contributions paid during 1997.
CHURCH'S RESULTS FOR 1996 COMPARED TO 1995
REVENUES. Revenues increased by $1.9 million, or 19.8%, from $9.1 million
for 1995 to $11.0 million for 1996. Landscape installation revenues increased
$0.9 million in 1996 and new maintenance contracts were added totaling $0.9
million of revenues.
GROSS PROFIT. Gross profit increased by $0.3 million, or 10.2%, from $3.0
million for 1995 to $3.3 million for 1996. As a percentage of revenues, gross
profit decreased from 33.0% for 1995 to 30.4% for 1996, principally due to an
increase in equipment costs and the cost of green goods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.5 million, or 68.1%, from $2.1 million
for 1995 to $3.6 million for 1996. As a percent of revenues, selling, general
and administrative expenses increased from 23.3% for 1995 to 32.8% for the
corresponding period of 1996. This increase was due to a non-recurring 1996
accrual recorded by Church to fully reserve for one installation job totaling
approximately $0.9 million. Excluding this one-time charge, selling, general
32
<PAGE>
and administrative expenses as a percentage of revenue increased from 23.3% in
1995 to 24.6% in 1996, due to an increase in owners' compensation and
contributions to Church's ESOP plan of approximately $0.5 million.
CHURCH'S LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, Church had working capital of $0.7 million, compared
to working capital of $1.2 million as of December 31, 1997. The primary reason
for the decrease in working capital between March 31, 1998 and December 31, 1997
was lower billings associated with landscape installation and maintenance
services during the winter months. Net cash provided by operating activities
totaled $0.8 million for each of the three months ended March 31, 1997 and 1998.
Net cash used in investing activities totaled $0.1 million and $0.2 million for
the three months ended March 31, 1997 and 1998, respectively. Cash used in
financing activities totaled $0.8 million and $0.2 million for the three months
ended March 31, 1997 and 1998, respectively. During the three months ended March
31, 1997 and 1998, Church repaid outstanding debt of $0.8 million and $0.3
million, respectively.
At December 31, 1997, Church's working capital was $1.2 million, compared
to $0.7 million at December 31, 1996. Church's principal capital requirements
are to fund its working capital and the purchase and improvement of facilities,
vehicles and equipment. Historically, these requirements have been met by cash
flow from operations and, to a lesser extent, with borrowings under Church's
credit facility and notes payable to financial institutions.
Net cash provided by (used in) operating activities for 1995, 1996 and 1997
was $0.9 million, $(0.1) million and $1.0 million, respectively. In 1996, the
Company's earnings were more than offset by working capital changes related to
an increase in accounts receivable. Net cash used in investing activities was
primarily attributable to vehicle and equipment purchases and totaled $0.8
million, $0.7 million and $0.9 million for 1995, 1996 and 1997, respectively.
Net cash provided by financing activities totaled $0.1 million, $0.7 million and
$0.1 million for 1995, 1996 and 1997, respectively. Cash provided by financing
activities related primarily to increased borrowings to purchase vehicles and
equipment. In addition, Church repaid $0.2 million, $0.3 million and $2.5
million of outstanding borrowings during 1995, 1996 and 1997, respectively.
Church has a line of credit which provides for borrowings of up to $1.4
million. Borrowings under the line of credit are secured by accounts receivable.
As of December 31, 1996 and 1997, there was a total of $0.6 million and $0.1
million outstanding under the line of credit.
GROUND CONTROL -- RESULTS OF OPERATIONS
Ground Control, headquartered in Orlando, Florida, was founded in 1978 and
operates branches in Tampa and Orlando. Ground Control provides commercial
landscape installation and maintenance services.
The following table sets forth the selected statement of operations data
and such results as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
------------------------------------------
1997 1998
-------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues............................. $ 2,654 100.0% $ 2,324 100.0%
Cost of services..................... 1,687 63.6 1,857 80.0
--------- --------- --------- ---------
Gross profit......................... 967 36.4 467 20.0
Selling, general and administrative
expenses........................... 397 14.9 389 16.7
--------- --------- --------- ---------
Income from operations............... 570 21.5 78 3.3
Interest and other (expenses), net... (19) (0.7) (48) (2.0)
--------- --------- --------- ---------
Income (loss) before income taxes.... $ 551 20.8% $ 30 1.3%
========= ========= ========= =========
</TABLE>
33
<PAGE>
GROUND CONTROL'S RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1997
REVENUES. Revenues decreased by $0.4 million, or 12.4%, from $2.7 million
for the three months ended March 31, 1997 to $2.3 million for the corresponding
period of 1998. The decrease in revenues was due to (i) the abnormally high
levels of rain experienced in the Orlando, Florida area during the first quarter
of 1998, resulting in delays on several planned installation projects and (ii)
the inclusion of two large high margin installation projects in the first
quarter of 1997.
GROSS PROFIT. Gross profit decreased by $0.5 million, or 51.7%, from $1.0
million for the three months ended March 31, 1997 to $0.5 million for the
corresponding period of 1998. As a percentage of revenues, gross profit
decreased from 36.4% for the three months ended March 31, 1997 to 20.0% for the
corresponding period of 1998. The decrease in gross profit was partially
attributable to the inclusion of high margin projects during the first quarter
of 1997. Gross profit was also negatively affected by the inclement weather
during the first quarter of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were unchanged at $0.4 million for each of the three
months ended March 31, 1997 and 1998. As a percentage of revenues, selling,
general and administrative expenses increased from 14.9% for the three months
ended March 31, 1997 to 16.7% for the corresponding period of 1998 due to the
decrease in revenues.
GROUND CONTROL'S LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998 and December 31, 1997, Ground Control had a working
capital deficit of $0.3 million. Net cash provided by operating activities
totaled $0.5 million and $0.0 million for the three months ended March 31, 1997
and 1998, respectively. Net cash used in investing activities totaled $0.2
million and $0.1 million for the three months ended March 31, 1997 and 1998,
respectively, and was comprised primarily of vehicle and equipment purchases.
Net cash provided by (used in) financing activities totaled $(0.1) million and
$0.1 million for the three months ended March 31, 1997 and 1998, respectively.
Ground Control's principal capital requirements are to fund its working
capital and the purchase and improvement of facilities, vehicles and equipment.
Historically, these requirements have been met with cash generated from
operating activities and borrowings under a bank line of credit and notes
payable to equipment manufacturers and distributors. The working capital deficit
was due to an increase in accounts payable and accrued expenses.
Net cash provided by operating activities totaled $0.5 million for 1997.
Net cash used in investing activities totaled $0.6 million and was comprised
primarily of vehicle and equipment purchases. Net cash provided by financing
activities totaled $0.1 million for 1997. Ground Control entered into various
notes payable to fund the purchase of vehicles and equipment.
Ground Control has a line of credit which provides for borrowings of up to
$0.5 million. Accounts receivable and equipment and a life insurance policy
insuring the company's primary shareholder secure borrowings under the line of
credit. As of December 31, 1997, there was a total of $0.4 million of borrowings
outstanding under the line of credit.
34
<PAGE>
ARTEKA -- RESULTS OF OPERATIONS
Arteka, headquartered in Eden Prairie, Minnesota, was founded in 1973 and
operates in four locations in the Twin Cities area. Arteka provides commercial
landscape installation and maintenance services, operates a tree nursery which
provides trees primarily for its own operations and provides snow removal
services. Arteka purchased two landscape maintenance service companies on
December 31, 1997 with combined 1997 revenues of $2.6 million.
The following table sets forth the selected statement of operations data
and such results as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
------------------------------------------ ------------------------------------------
1996 1997 1997 1998
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 7,052 100.0% $ 7,366 100.0% $ 245 100.0% $ 893 100.0%
Cost of services..................... 5,055 71.7 5,227 71.0 318 129.8 618 69.2
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 1,997 28.3 2,139 29.0 (73) (29.8) 275 30.8
Selling, general and administrative
expenses........................... 1,722 24.4 2,136 29.0 383 156.3 726 81.3
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... 275 3.9 3 0.0 (456) (186.1) (451) (50.5)
Interest and other income (expense),
net................................ (97) (1.4) (79) (1.0) (23) (9.4) (102) (11.4)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes.... $ 178 2.5% $ (76) (1.0)% $ (479) (195.5)% $ (553) (61.9)%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
ARTEKA'S RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 1997
REVENUES. Revenues increased by $0.7 million, or 264.5%, from $0.2 million
for the three months ended March 31, 1997 to $0.9 million for the corresponding
period of 1998, due primarily to the acquisition of two landscape maintenance
companies during the fourth quarter of 1997. Substantially all of Arteka's
revenues during the first calendar quarter were derived from snow removal
services.
GROSS PROFIT. Gross profit increased by $0.4 million from a loss of $0.1
million for the three months ended March 31, 1997 to a profit of $0.3 million
for the corresponding period of 1998. As a percentage of revenues, gross profit
increased from (29.8)% for the three months ended March 31, 1997 to 30.8% for
the corresponding period of 1998 primarily due to higher margins realized on
snow removal services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.3 million, or 89.6%, from $0.4 million
for the three months ended March 31, 1997 to $0.7 million for the corresponding
period of 1998. This increase was primarily attributable to the effect of the
two acquisitions completed during the fourth quarter of 1997 and an increase of
$0.1 million in owners' compensation. As a percentage of revenues, selling,
general and administrative expenses decreased from 156.3% for the three months
ended March 31, 1997 to 81.3% for the corresponding period of 1998.
ARTEKA'S RESULTS FOR 1997 COMPARED TO THE YEAR 1996
REVENUES. Revenues increased by $0.3 million, or 4.5%, from $7.1 million
in 1996 to $7.4 million in 1997 due to an increase in landscape installation
revenues of $0.4 million, partially offset by a $0.1 million decrease in
revenues from landscape maintenance and snow removal.
GROSS PROFIT. Gross profit increased by $0.1 million, or 7.1%, from $2.0
million in 1996 to $2.1 million in 1997. As a percentage of revenues, gross
profit increased from 28.3% in 1996 to 29.0% in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.4 million, or 24.0%, from $1.7 million
in 1996 to $2.1 million in 1997. This increase was attributable to a $0.4
million increase in owner's compensation paid during 1997. As a percentage of
revenues, selling, general and administrative expenses increased from 24.4% in
1996 to 29.0% in 1997 due to the increase in owners' compensation.
35
<PAGE>
ARTEKA'S LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, Arteka had a working capital deficit of $1.5 million,
compared to a working capital deficit of $0.8 million as of December 31, 1997.
The primary reason for the decrease in working capital between December 31, 1997
and March 31, 1998 was lower billings associated with landscape installation and
maintenance services during the winter months. Net cash used in operating
activities totaled $0.1 million and $0.8 million for the three months ended
March 31, 1997 and 1998, respectively. Net cash used in investing activities
totaled $0.0 million and $0.1 million for the three months ended March 31, 1997
and 1998, respectively. Net cash provided by financing activities totaled $0.1
million and $0.6 million for the three months ended March 31, 1997 and 1998,
respectively. During the first quarter of 1998, Arteka borrowed $1.0 million
under its line of credit to fund its working capital requirements.
As of December 31, 1997, Arteka had a working capital deficit of $0.8
million, compared to working capital of $0.5 million as of December 31, 1996.
The primary reason for the decline in working capital between 1996 and 1997 was
the issuance by Arteka of notes payable totaling $2.3 million issued in
connection with the acquisition of two landscape maintenance services companies
effective December 31, 1997. Arteka's principal capital requirements are to fund
its working capital and the purchase and improvement of facilities, vehicles and
equipment. Arteka has historically satisfied these requirements with cash flow
generated from operations, and to a lesser extent, with borrowings under its
credit facility and notes payable to equipment manufactures and distributors.
Net cash provided by operating activities for 1996 and 1997 was $0.4
million and $0.0 million, respectively. Net cash used in investing activities
totaled $0.3 million and $0.3 million for each of 1996 and 1997, respectively.
Cash used in investing activities was used for the purchase of property and
equipment. Net cash provided by (used in) financing activities totaled $(0.1)
million and $0.5 million for 1996 and 1997, respectively. Cash provided by
financing activities for 1997 included a note payable of $1.0 million from its
sole shareholder, which was used for working capital. In 1996 and 1997, Arteka
repaid outstanding long-term borrowings of $0.7 million and $0.6 million,
respectively.
Arteka has lines of credit which provide for borrowings up to $1.3 million.
Borrowings under the line of credit are secured by accounts receivable. As of
December 31, 1996 and 1997, there was a total of $0.4 million and $0.1 million
of borrowings outstanding under the lines of credit, respectively.
DESERT CARE -- RESULTS OF OPERATIONS
Desert Care was founded in 1992 and operates two branches in Phoenix,
Arizona. Desert Care provides commercial landscape installation and maintenance
services. Desert Care also provides native plant reclamation, which consists of
temporarily removing native plants, maintaining them during a construction
period and replacing them following construction.
The following table sets forth the selected statement of operations data
and such results as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
------------------------------------------
1997 1998
-------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues............................. $ 1,492 100.0% $ 1,297 100.0%
Cost of services..................... 1,179 79.0 1,200 92.5
--------- --------- --------- ---------
Gross profit......................... 313 21.0 97 7.5
Selling, general and administrative
expenses........................... 155 10.4 175 13.5
--------- --------- --------- ---------
Income from operations............... 158 10.6 (78) (6.0)
Interest and other income (expense),
net................................ (15) (1.0) (7) (0.6)
--------- --------- --------- ---------
Income (loss) before income taxes.... $ 143 9.6% $ (85) (6.6)%
========= ========= ========= =========
</TABLE>
36
<PAGE>
DESERT CARE'S RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1997
REVENUES. Revenues decreased by $0.2 million, or 13.1%, from $1.5 million
for the three months ended March 31, 1997 to $1.3 million for the corresponding
period of 1998 due to a decrease in landscape installation revenues of $0.2
million. This decrease in revenues was primarily due to the unusually high level
of rainfall experienced in the Phoenix area during the first quarter of 1998,
which delayed planned installation projects.
GROSS PROFIT. Gross profit decreased by $0.2 million, or 69.0%, from $0.3
million for the three months ended March 31, 1997 to $0.1 million for
corresponding period of 1998. As a percentage of revenues, gross profit
decreased from 21.0% for the three months ended March 31, 1997 to 7.5% for the
corresponding period of 1998, primarily due to inefficiencies caused by
inclement weather.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 12.9% between the three months ended March
31, 1997 and the corresponding period of 1998. As a percentage of revenues,
selling, general and administrative expenses increased from 10.4% for the three
months ended March 31, 1997 to 13.5% for the corresponding period of 1998 due to
lower revenues.
DESERT CARE'S LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, Desert Care had a working capital deficit of $0.1
million, compared to working capital of $0.7 million at December 31, 1997. This
working capital deficit was due to an increase in short-term borrowings used to
fund S Corporation shareholder distributions during the first quarter of 1998.
Net cash provided by operating activities totaled $0.2 million and $0.3 million
for the three months ended March 31, 1997 and 1998, respectively. Net cash used
in investing activities totaled $0.1 million for the three months ended March
31, 1998. Net cash used in financing activities totaled $0.2 million and $0.4
million for the three months ended March 31, 1997 and March 31, 1998,
respectively. During the three months ended March 31, 1998, Desert Care borrowed
$0.6 million under its line of credit to fund an S Corporation shareholder
distribution.
Desert Care's principal capital requirements are to fund its working
capital and the purchase and improvement of facilities, vehicles and equipment.
Historically, these requirements have been met by cash flow from operations and,
to a lesser extent, with borrowings under its lines of credit and notes payable
to equipment and vehicle manufacturers, distributors and finance companies.
Net cash provided by operating activities totaled $0.7 million for 1997.
Net cash used in investing activities was primarily attributable to vehicle and
equipment purchases and totaled $0.3 million for 1997. Net cash used in
financing activities totaled $0.3 million for 1997. During 1997, Desert Care
repaid $1.2 million of outstanding borrowings, borrowed $1.0 million to fund
vehicle and equipment purchases and working capital requirements and made an S
Corporation shareholder distribution of $0.1 million.
Desert Care has lines of credit which provide for borrowings up to $0.5
million. Borrowings under the lines of credit are secured by accounts receivable
and equipment and are guaranteed by Desert Care's shareholders. As of December
31, 1997, there were no borrowings outstanding under the lines of credit. During
January and February 1998, Desert Care borrowed $0.2 million under one of the
lines of credit to fund S Corporation shareholder distributions.
37
<PAGE>
BUSINESS
LandCARE was founded in 1997 to be a national provider of comprehensive
landscape and tree services to the commercial and institutional markets. The
Company 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." The Company 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 the Company include office
buildings, multi-family residential complexes, shopping centers, corporate and
university campuses, parks, hotels, resorts and governmental facilities.
Approximately 75% of the Company's pro forma combined revenues in 1997 were
attributable to maintenance services, which include line clearing for utility
customers, and 25% were attributable to installation services. Upon consummation
of the IPO, LandCARE acquired the seven Founding Companies, which have been in
business an average of 25 years. Pro forma combined revenues of the Founding
Companies were $116.2 million in 1997 and $26.6 million in the three months
ended March 31, 1998. Historical combined revenues increased at a compound
annual growth rate of approximately 10% from 1995 through 1997. In addition to
emphasizing internal growth, the Company intends to implement an aggressive
acquisition program.
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 1996. The Company estimates that approximately $15
billion of this amount represented landscape installation and maintenance 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 service 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 ("REITs") 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 seek landscape and tree
service firms with the capacity to service all of their properties in a
particular region. The Company believes, therefore, that a national or
multi-regional presence and greater scale will be a significant competitive
advantage in the commercial and institutional landscape segment. The Company
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, 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. Examples include 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. 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
38
<PAGE>
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
The Company provides maintenance and installation services to the
commercial and institutional markets. Maintenance services include landscape
maintenance and tree maintenance services. The Company's services are described
below:
LANDSCAPE MAINTENANCE. Landscape maintenance services accounted for
approximately 35% of the Company's 1997 pro forma combined revenues. The
Company'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. The Company also provides irrigation system maintenance
and repair. Irrigation systems are becoming more sophisticated and may have
remote monitoring capability, which permits the Company to determine remotely
whether the system is operating properly and expedite problem diagnosis and
correction. The Company 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
40% of the Company's 1997 pro forma combined revenues. Most landscape
maintenance companies do not provide tree services because they require
different skills and an investment in specialized equipment, although two of the
Founding Companies provides both landscape and tree services to its commercial
and institutional customers. The Company intends to provide both landscape and
tree services in more markets. The Company'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 Founding 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.
39
<PAGE>
LANDSCAPE INSTALLATION. Landscape installation accounted for approximately
25% of the Company's 1997 pro forma combined revenues. The Company'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, the Company 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, the Company 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, the Company's in-house
landscape architects may provide the design. The Company performs most
installation projects under firm price contracts and is paid on a staged basis
as the work is performed.
STRATEGY
The Company plans to achieve its goal of becoming 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. The Company believes that there are significant
opportunities to increase its profitability. The key elements of the Company's
operating strategy are:
FOCUS ON COMMERCIAL AND INSTITUTIONAL MARKETS. The Company believes
that the commercial and institutional markets are attractive because of (i)
the potential for preferred relationships with national and regional
property owners and managers, real estate developers, corporations, general
contractors and landscape architects, (ii) the diverse types of properties
served, such as office buildings, multi-family residential complexes,
shopping centers, corporate and university campuses, parks, hotels and
resorts, (iii) the opportunity to generate recurring revenue through
ongoing maintenance contracts and (iv) the recognition by building owners
and managers of the importance of landscaping in enhancing the value and
marketability of their properties. The Company also believes that the
commercial and institutional landscape services markets are more attractive
than the residential landscape services market because installation and
maintenance projects are larger and industry participants are larger and
more sophisticated.
OPERATE ON DECENTRALIZED BASIS. The Company manages the Founding
Companies and intends to manage the subsequently acquired companies on a
decentralized basis, with local management retaining responsibility for the
day-to-day operations, profitability and internal growth of the business.
Although the Company intends to maintain strong central operating and
financial controls over businesses it acquires, without which inconsistent
operating and financial practices could result, its decentralized operating
structure will allow it to capitalize on the considerable local and
regional market knowledge and customer relationships possessed by local
management. The Company's corporate management has responsibility for
corporate strategy and acquisitions, centralized vendor relationships to
take advantage of volume discounts, banking arrangements, insurance,
shareholder relations and employee benefit plans and also provides support
to local management in marketing, recruiting, training and risk management.
ACHIEVE OPERATING EFFICIENCIES. The Company expects there will be
significant opportunities to achieve operating efficiencies and cost
savings through purchasing economies and the adoption of "best practices"
operating programs. The Company intends to use its increased purchasing
power to gain volume discounts in areas such as materials, equipment, spare
parts and vehicle purchases, workers' compensation and other insurance
coverage. The Company expects that it can purchase green goods at a
discount by making opportunistic cash purchases. In 1997, the Company spent
approximately $5.9 million on a combined basis on new equipment, vehicles
and spare parts. In 1997, the
40
<PAGE>
Company's combined expense for workers' compensation, personal injury and
property damage insurance was approximately $5.0 million. The Company
believes that its operating efficiency also can be enhanced by implementing
"best practices," in areas such as management information systems,
recruiting and training programs, safety and risk management programs,
sales training and materials and human resource management, and can also be
enhanced by expanding its branch network to increase route density and
improve labor utilization.
ATTRACT AND RETAIN QUALITY LABOR AND SUPERVISORY PERSONNEL. Most
companies in the landscape and tree services industry experience high labor
turnover and difficulty in attracting sufficient numbers of supervisory
personnel. The Company expects that its substantial training programs and
commitment to workplace safety provide a competitive advantage in
attracting and retaining a qualified labor force. The Company believes it
can better attract and retain supervisory and management level employees,
the lack of which could adversely limit the Company's growth and scope of
operations, because it offers (i) an enhanced career path from working for
a multi-branch, public company, including the opportunity to gain increased
responsibility at a branch office, (ii) the opportunity to realize a more
stable income and (iii) improved health insurance, retirement, incentive
compensation and other benefits, which the Company expects it can offer at
little or no additional cost to the Company due to its ability to negotiate
with benefit providers on a higher-volume basis.
INTERNAL GROWTH. A principal component of the Company's strategy is to
continue its internal growth. The key elements of the Company's internal growth
strategy are:
BUILD MARKET DENSITY. The Company intends to develop its branch
network in each of the markets it serves. This will enable the Company to
serve more commercial and institutional properties efficiently, improve
labor utilization and attract employees who live near newly-established
branches. The Company also intends to make tuck-in acquisitions of smaller
companies to increase local route density and expand within markets served.
ESTABLISH REGIONAL AND NATIONAL MARKET COVERAGE. The Company intends
to provide comprehensive landscaping and tree services on a multi-regional
and ultimately a national basis. This will enable the Company to capitalize
on relationships with major regional and national property owners and
managers, such as real estate developers and REITs, as well as
corporations, utilities, universities and governmental entities. Many large
property owners and managers would prefer to deal with fewer vendors for
their landscape and tree service needs. The Company believes it can
establish preferred provider relationships with these regional and national
property owners and managers to serve all or a significant number of their
properties. The Company believes it will be well positioned to obtain
additional line clearing contracts as it extends its geographic coverage.
BECOME SINGLE SOURCE PROVIDER. The Company intends to provide its
customers with both landscape and tree services in order to become the
single source for its customers' landscape maintenance requirements. The
Company believes that becoming a single source provider will allow it to
take advantage of the trend toward vendor consolidation in the commercial
real estate market and the developing trend toward outsourcing by
institutions and state and local governments. Since most of the Founding
Companies have not historically provided both landscape and tree services,
the Company believes it will have a significant opportunity to capture
incremental revenue by marketing its full service capabilities to existing
customers. Where necessary, the Company will also provide or subcontract
for other exterior maintenance functions in order to become the single
source provider for its customers' overall landscape requirements.
DEVELOP ENHANCED SALES AND MARKETING PROGRAM. The Company intends to
establish a national account sales and marketing program, which will
emphasize the Company's full service capabilities. This program will target
large regional and national property owners and managers as well as large
corporations. The Company also intends to establish a regional and national
sales and marketing program targeted toward customers beginning to
outsource their landscape and tree service requirements, such as
institutions and state and local governments that operate properties such
as university campuses, hospitals, parks, municipal office buildings,
schools and golf courses. The Company expects
41
<PAGE>
that its sales force, which currently includes twenty full-time sales
and/or marketing personnel, will expand as the Company increases in size.
Although the Company believes that this strategy will prove
successful, no assurance can be given of continued internal growth among
the Founding Companies and subsequently acquired businesses. See "Risk
Factors -- Risks Related to Operating and Internal Growth Strategy."
ACQUISITIONS. The Company estimates that more than 1,000 companies, each
with annual revenues in excess of $2.0 million, provide landscape installation
or maintenance services to the commercial, institutional and municipal markets.
Most of these companies are small, owner-operated businesses that operate in a
limited geographic area. The Company believes that more than 100 companies, each
with revenues in excess of $2.0 million, provide tree services, a number of
which are regional or national companies with revenues in excess of $10 million,
primarily in the line clearing market. The key elements of the Company's
acquisition strategy are:
ENTER NEW GEOGRAPHIC MARKETS. The Company intends to expand into
geographic markets not currently served by the Founding Companies by
acquiring one or more leading local or regional companies that provide
landscaping and/or tree services. Acquisition targets will have the scale,
customer base, expertise and management necessary to be a core business
into which the Company can consolidate other acquisitions in that
geographic area. Special emphasis will be placed on diversifying the
Company's operations geographically to serve the needs of large regional
and national property owners and managers and to minimize the effect of
seasonality in the colder regions served by the Company. The Company will
also consider acquiring companies that service high-end residential
communities.
EXPAND WITHIN EXISTING MARKETS. Once the Company has entered a market
and established management in that market, it will seek to acquire other
well-established landscape and/or tree services businesses to expand its
market penetration and client list. The Company will also pursue
"tuck-in" acquisitions of smaller companies whose operations can be
integrated into existing Company operations to leverage the existing
infrastructure.
ACQUISITION PROGRAM
Although the Company expects to face competition for acquisition
candidates, it believes it will be regarded by acquisition candidates as an
attractive acquiror because of: (i) the Company'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) the Company's decentralized operating philosophy, (iii) the
potential for owners of the acquired businesses to participate in the Company's
planned growth while realizing liquidity, (iv) the Company's increased name
recognition and its access to financial resources as a public company 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. The Company believes that the few
acquisitions that have been made have typically resulted in the elimination of
the acquired company's separate identity. The Company believes that the sale of
well-established businesses to these acquirors is not an attractive alternative
for many owners, particularly those who do not wish to retire from the business.
Important 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
Founding Companies have substantial experience in the industry, are active in
industry trade associations and are personally acquainted with the owners of
numerous acquisition targets. Within the past several months, the Company has
contacted the owners of a number of acquisition candidates, several of whom have
expressed interest in having their businesses acquired by the Company.
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As consideration for future acquisitions, the Company intends to use
various combinations of its Common Stock, cash and notes. The consideration for
each future acquisition will vary on a case-by-case basis, with the major
factors in establishing the purchase price being historical operating results,
future prospects of the target and the ability of the target to complement the
services offered by the Company. The Company has obtained a bank credit line of
$50 million from First Chicago to be used for working capital and acquisitions.
OPERATIONS
LANDSCAPE MAINTENANCE. The Company'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 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, the Company provides one or more workers who work full time on-site.
The Company'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 Founding
Companies have specially trained maintenance technicians responsible for
maintaining and repairing irrigation systems. In regions with cold winters, the
Company provides ice and snow removal during winter months. The Company 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 the Company's
marketing efforts. Once the Company completes a landscape installation project,
it is often selected to perform regular, ongoing maintenance of the site. The
Company performs substantially all maintenance work under contracts. The
Company'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 15
people. A supervisor manages the project in the field and coordinates the work
of any subcontractors. In installing softscape portions of a landscape project,
the Company's work crew performs fine grading and flower and plant bed
preparation, followed by plantings specified by the design. In most instances,
the Company subcontracts the sodding work. The Company'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, the Company may subcontract the hardscape work. The Company 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 the Company'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. The Company
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, the Company can provide in-house design
capability, including registered landscape architects. The Company uses CAD
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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 upon.
TREE SERVICE.
LINE CLEARING. The Company conducts its line clearing operations through
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 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, the Company employs
a variety of specialized mowing, trimming and herbicide spraying equipment to
control vegetation along rights-of-way.
Line clearing services comprised approximately 40% of the Company's 1997
pro forma combined revenues. The Company currently has contracts with 16 public
utilities in 13 states, under which the Company keeps power lines free of
obstructions from overhanging trees, vegetation and limbs and branches damaged
by storms. The Company 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, the
Company 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, the
Company 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. The Company provides periodic pruning of trees,
typically annually, and field evaluations by the Company's tree specialists for
commercial and institutional customers. Based on these inspections, the Company
recommends, to the extent 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. The Company intends to offer
regularly scheduled tree care as part of its standard maintenance contract.
CUSTOMERS
The Company has a diverse customer base, with more than 2,500 customers,
none of whom accounted for more than 10% of 1997 combined revenues. The Company
performs landscape maintenance and installation services for a number of leading
regional and national property owners and managers, including Trammell Crow,
Marriott and CB Commercial, each which represented under 2% of the Company's
total revenues in 1997. Trees has line clearing contracts with several large
utilities, including PacifiCorp, Houston Lighting & Power and Texas Utilities,
which together accounted for 54% of Trees' total revenues in 1997 and
individually represented 8.7%, 7.8% and 6.8% of the Company's total revenues in
1997, respectively. Management at the Founding Companies has developed and
maintained relationships with key customers by emphasizing customer satisfaction
and high quality service.
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SALES AND MARKETING
The Company'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. The Company seeks to become a preferred vendor to these property
owners and managers and corporate customers. To facilitate this strategy, the
Company intends to hire experienced sales and marketing personnel for the
Company's national account sales and marketing program. The Company will also
attend national and regional conventions, including those sponsored by trade
associations such as the Building Owners and Managers Association ("BOMA") and
the Institute of Real Estate Managers ("IREM"). Members of these associations
include large and small property owners and managers. The Company also intends
to advertise in selected trade journals to increase the Company's name
recognition with potential customers.
The Company 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 the
Company intends to build upon those relationships. To pre-qualify for bid lists,
the Company's large account managers will market the Company's capacity to serve
the utility customer's line clearing and vegetation management needs as well as
its reputation for quality service.
The Company also intends to capitalize on the developing trend toward
outsourcing by institutions and state and local governments by marketing its
services to these entities. The Company intends to extend the current marketing
efforts of the Founding 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
The Company purchases its green goods primarily from local or regional
wholesale nurseries on an as-needed basis. From time to time, however, the
Company 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 the Company exist,
although there are occasional shortages of plants in a particular region. In
this event, the Company has been able to substitute similar plants acceptable to
the customer. Arteka maintains its own tree nursery for use primarily in its own
operations. The Company 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 the Company 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 the Company'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 the Company include sprinkler heads, clocks,
valves, control systems and PVC pipe. For its tree services business, the
Company purchases small and large trucks, including bucket trucks, as well as
chippers and chainsaws. Most of the equipment and vehicles used by the Company
are generally available from a number of manufacturers. The Company expects to
establish relationships with a number of manufacturers and to take advantage of
volume discounts and manufacturers' fleet purchase programs. The Company
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 December 31, 1997, the Company employed approximately 2,400 persons.
Of this number, 190 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 one other Founding Company contracts with union labor for
certain installation projects. The Company experiences high turnover rates among
its hourly workers, a significant portion of
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which are immigrants, and intense competition for qualified supervisory
personnel. The Company has not experienced any strikes or work stoppages and
believes its relationship with its employees is satisfactory.
RECRUITING, TRAINING AND SAFETY
The Company 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 programs.
Recruiting is also conducted by means of advertisements locally and in trade
magazines. The Company 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. The Company recruits its seasonal labor force through
word-of-mouth, as well as through employment agencies and local help wanted
advertisements.
The Company is committed to continuing the Founding Companies' focus and
emphasis on continual training and safety in the workplace. To ensure quality
service and workplace safety, the Company 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
Founding Companies also provide training programs in chemical application. The
Company intends to implement a "best practices" safety program throughout its
operations to ensure that employees comply with safety standards established by
the Company, its insurance carriers and federal, state and local laws and
regulations.
FACILITIES; VEHICLES AND MAINTENANCE
In addition to their principal operating offices, the Founding Companies
operate an aggregate of 24 branch offices. The location of the principal
operating offices of the Founding Companies is described under the caption "The
Company." 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 Company vehicles and
larger equipment. The Company also maintains auxillary facilities for vehicle
maintenance and storage of materials and equipment. With the exception of one
Company-owned site, all of the Company's facilities are leased, some from
related parties. See "Certain Transactions -- Leases of Real Property by
Founding Companies." The Company believes that its facilities are adequate for
its current needs.
As of December 31, 1997, the Company operated a fleet of approximately
1,300 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 the Company's current operations. The Company performs regular
maintenance of its own vehicles. The Company believes that it should be able to
purchase vehicles at lower prices due to its increased purchasing volume.
The Company temporarily leases its principal executive and administrative
offices at 5850 San Felipe, Suite 500, Houston, Texas and is currently in the
process of obtaining permanent office space for this purpose.
RISK MANAGEMENT, INSURANCE AND LITIGATION
The primary risks in the Company's operations are injured workers'
compensation, third-party property damage and bodily injury. The Company
currently maintains liability insurance for workers' compensation, third-party
property damage and bodily injury coverage which it considers sufficient to
insure against these risks, subject to self-insured amounts. The Company
currently maintains workers' compensation insurance which it considers
sufficient to insure against these risks. The Founding Companies also operate
large numbers of vehicles on public roads and, therefore, are subject to claims
for personnal injury or property damage. The Company also maintains liability
insurance for bodily injury and property damage on a fully insured basis with
minimal deductibles. The Company is considering reducing the deductible limits
on its workers' compensation and liability coverage.
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The Company 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. The Company is
not currently involved in any litigation, nor is the Company aware of any
threatened litigation, that it believes is likely to have a material adverse
effect on its financial condition or results of operations.
The Company generally offers one-year warranties on the landscape
installation work it performs, which includes warranties on the green goods that
it provides to customers. The Company has established reserves for warranty
claims which it considers adequate. Historically, warranty claims have been
insignificant, and the Company does not expect warranty claims will have a
material effect on its future business, results of operations or financial
condition.
COMPETITION
The landscape and tree services industry is highly competitive. The Company
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 the Company's landscape services competitors are small,
owner-operated companies operating in a limited geographic area. However, there
are a few large, private landscape service companies which operate in multiple
markets and have periodically acquired some small landscape companies. TruGreen-
ChemLawn, a division of ServiceMaster, recently acquired several commercial
landscape services companies, although it continues to focus primarily on
residential lawn spraying.
Competition in the line clearing market is characterized by a small number
of large companies, led by Asplundh. The Company believes Asplundh's share of
the line clearing market is significant. The Company 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, and the Company believes that
its status as a publicly-traded company will provide a competitive advantage.
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. The Company believes that its ability to offer tree services as part of
its maintenance contracts will provide a competitive advantage.
Some of the Company's private and public competitors and potential
competitors have greater name recognition and greater financial resources than
the Company with which to finance acquisition and development opportunities. The
Company cannot predict whether other large companies will enter the landscape
and tree services industry.
REGULATION AND ENVIRONMENTAL MATTERS
The Company 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 improved water management
techniques. Immigration laws require the Company to confirm the legal status of
its immigrant labor force. The INS periodically conducts random inspections of
the Company'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 mandates that all workers not come 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, currently requiring a
minimum distance of 18 inches between plant growth and electrical conductors.
Many states require licensing for the commercial application of chemical sprays,
a service which the Company performs
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primarily in connection with its line clearing operations. Such licenses are
usually conditioned upon a showing of technical competence and adequate bonding
and insurance. The United States Department of Agriculture ("USDA") 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 ("EPA") 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 the Company operates require
the Company 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 the Company 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. The Company's management
believes that the Company has all required licenses to conduct its operations
and its in substantial compliance with applicable regulatory requirements. The
Company'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 the Company operates will not change
significantly in the future. The Company's failure to comply with these laws and
regulations could subject it to substantial fines and the loss of its licenses.
Prior to the consummation of the Mergers, the Company completed evaluations
of the properties owned or leased by the Founding Companies 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. The Company has obtained an agreement from the purchaser of the
property indemnifying the Company from any loss arising from this property and
to assume all of the legal obligations and liabilities associated with the
property.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors, executive officers and key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- ----- ------------------------------------------------------------
<S> <C>
William F. Murdy..................... 56 Chairman of the Board, Chief Executive Officer
and President
Peter C. Forbes...................... 53 Senior Vice President, Chief Financial Officer and Director
Harold D. Cranston................... 50 Senior Vice President, Chief Operating Officer
and Director
William L. Fiedler................... 40 Senior Vice President, General Counsel and Secretary
Kenneth V. Garcia.................... 28 Senior Vice President and Chief Development Officer
Steven G. Ives....................... 36 Vice President and Controller
Linda T. Benge....................... 48 President of Trees, Director
Roger S. Braswell.................... 46 Vice President of Southern Tree, Director of Corporate
Development, Director
Bruce A. Church...................... 37 President of Church, Director
David K. Luse........................ 42 Vice President of Arteka, Director of Corporate Development,
Director
Mark S. Yahn......................... 41 President of Ground Control, Director
Jeff A. Meyer........................ 37 President of Desert Care, Director
Ronald L. Stanfa..................... 50 Director
Fred M. Ferreira..................... 56 Director
Clark A. Johnson..................... 66 Director
Patrick J. Norton.................... 47 Director
N. David Blakeley.................... 40 President of Southern Tree
Stewart K. Hanson.................... 43 President of Arteka
James R. Marcus...................... 53 Chairman of Four Seasons, Director of Corporate Development
</TABLE>
William F. Murdy has served as President, Chief Executive Officer and
Chairman of the Board of the Company since January 1998. He has been a Class I
director of the Company since the consummation of the IPO. From 1989 through
December 1997, Mr. Murdy was President and Chief Executive Officer of General
Investment and Development Company, a privately-held real estate operating
company. From 1981 to 1989, Mr. Murdy served as the Managing General Partner of
the Morgan Stanley Venture Capital Fund. From 1974 to 1981, Mr. Murdy served as
the Senior Vice President and Chief Operating Officer, among other positions, of
Pacific Resources, Inc., a publicly-traded company involved primarily in
petroleum refining and marketing. From 1964 to 1974, Mr. Murdy served in the
United States Army, achieving the rank of Major. Mr. Murdy holds an M.B.A. from
Harvard University and a B.S. from the United States Military Academy.
Peter C. Forbes has served as Chief Financial Officer and a director of the
Company since March 1998. He has been a Class III director of the Company since
the consummation of the IPO. From July 1996 to March 1998, Mr. Forbes was
President and Chief Executive Officer of SOCO Offshore, Inc. ("SOCO"), the
Gulf coast subsidiary of Snyder Oil Corporation, a publicly-traded oil and gas
exploration and production company, and from July 1995 to July 1996 was
Executive Vice President of SOCO. From 1994 to 1995, he was President and Chief
Executive Officer of SD Resources, Inc., the general partner of Sand Dollar
Resources L.P., a limited partnership with Enron Gas Services Corp., a
subsidiary of Enron Corp. From 1992 to 1993, Mr. Forbes was Vice President in
charge of the oil and gas property acquisition unit of Enron Gas Services Corp.
Mr. Forbes is a member of the Institute of Chartered Accountants of Scotland and
holds a B.A. from Edinburgh University, Scotland.
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<PAGE>
Harold D. Cranston has served as Senior Vice President, Chief Operating
Officer and a Class II director of the Company since the consummation of the
IPO. Prior to the IPO, Mr. Cranston had been President of Four Seasons and a
shareholder of that company since 1987. Prior to that, he was Vice President and
General Manager of the Consumer Products Business Division of Crown Zellerbach,
a forest products company. Mr. Cranston holds an M.B.A. and B.A. from Stanford
University.
William L. Fiedler has served as Senior Vice President, General Counsel and
Secretary of the Company since November 1997. From February 1994 through October
1997, Mr. Fiedler was Vice President, General Counsel and Secretary of Allwaste,
Inc., a publicly-traded industrial services company ("Allwaste"), and from
February 1990 to January 1994, was Senior Counsel of Allwaste. Prior to that,
Mr. Fiedler held the position of Chief Legal and Compliance Officer of Sentra
Securities Corporation, an NASD registered broker-dealer. Mr. Fiedler holds a
J.D. and B.B.A. from the University of San Diego.
Kenneth V. Garcia has served as a Senior Vice President and Chief
Development Officer of the Company since the consummation of the IPO. In June
1997, Mr. Garcia became a Vice President of Notre and has been involved in
planning and structuring the Company since its inception. Prior to that, Mr.
Garcia was an attorney at Bracewell & Patterson, L.L.P., where he focused
primarily on the consolidation of highly-fragmented industries. Mr. Garcia holds
a J.D. from The University of Texas School of Law and a B.S. from Cornell
University.
Steven G. Ives has served as Vice President and Controller of the Company
since January 1998. From January 1997 through its sale in October 1997, Mr. Ives
was Vice President, Finance for Convest Energy Corporation, an independent oil
and gas exploration company ("Convest"), and Vice President, Controller and
Chief Accounting Officer for Edisto Resources Corporation, the majority owner of
Convest. From June 1996 to January 1997, Mr. Ives was Vice President of EnCap
Investments L.C., a Houston-based investment banking firm. From June 1990 to May
1996, Mr. Ives served in various accounting capacities with Convest, including
Assistant Controller. Mr. Ives is a C.P.A. and holds a B.B.A. from Southwest
Texas State University.
Linda T. Benge has served as a Class III director of the Company since the
consummation of the IPO. She has been employed by Trees since 1981 and has
served as its President and Chief Executive Officer since 1989.
Roger S. Braswell has served as a Class II director of the Company since
the consummation of the IPO. Mr. Braswell founded Southern Tree in 1977. He
served as President of Southern Tree until the date of the IPO, is currently a
Vice President of Southern Tree and has been a Director of Corporate Development
of the Company since the consummation of the IPO. Mr. Braswell previously served
as President of the North Carolina Landscape Contractors Association and
currently serves on the Board of the Green Industry Exposition.
Bruce A. Church has served as a Class III director of the Company since the
consummation of the IPO. He has been employed by Church since 1977 and has
served as its President since 1987. Mr. Church is a past member of the Board of
Directors of the Associated Landscape Contractors of America ("ALCA").
David K. Luse has served as a Class I director of the Company since the
consummation of the IPO. Mr. Luse founded Arteka in 1973, served as Chief
Executive Officer of Arteka until the date of the IPO, is currently a Vice
President of Arteka and has been a Director of Corporate Development of the
Company since the consummation of the IPO. Mr. Luse currently serves on the
Board of Directors of ALCA and as the Chair of the Exterior Landscape Council of
ALCA and serves on the Board of the Green Industry Exposition.
Jeff A. Meyer has served as a Class II director of the Company since the
consummation of the IPO. Mr. Meyer founded Desert Care in 1992 and has served as
President and Chief Executive Officer of Desert Care since that time.
Mark S. Yahn has served as a Class I director of the Company since the
consummation of the IPO. He founded Ground Control in 1978 and has served as
Chief Executive Officer of Ground Control since that time.
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Ronald L. Stanfa is currently a Class III director and has been a director
of the Company since February 1998, serving as the director elected by the
holders of the Restricted Common Stock. Mr. Stanfa has served as a Managing
Director of Notre since July 1995. From June 1993 to July 1995, Mr. Stanfa was
an independent business consultant. Mr. Stanfa was a founder and served as a
director of Allwaste from 1986 through 1995. From October 1988 to June 1993, Mr.
Stanfa was Vice President -- Corporate Development of Allwaste.
Fred M. Ferreira has served as a Class III director of the Company since
the consummation of the IPO. Since January 1997, Mr. Ferreira has served as
Chairman of the Board, Chief Executive Officer and President of Comfort Systems
USA, Inc., a publicly-traded company that is a consolidator of commercial HVAC
companies. From 1995 through 1996, Mr. Ferreira was a private investor. He
served as Chief Operating Officer and a director of Allwaste from 1994 to 1995,
and was President of Allwaste Environmental Services, Inc., the largest division
of Allwaste, from 1991 to 1994.
Clark A. Johnson has served as a Class II director of the Company since the
consummation of the IPO. Since 1988, Mr. Johnson has served as Chairman of the
Board and Chief Executive Officer of Pier 1 Imports, Inc. ("Pier 1") and a
member of the Executive Committee of the Board of Pier 1. He has been a director
of Pier 1 since 1983. Mr. Johnson is also a director of Albertson's, Inc.,
InterTAN, Inc., Metro Media International Group, Anacomp, Inc. and Heritage
Media Corporation.
Patrick J. Norton has served as a Class I director of the Company since the
consummation of the IPO. Mr. Norton served as President and Chief Executive
Officer of Barefoot, Inc. ("Barefoot"), a publicly-traded company, until it
merged with ServiceMaster Co. in February 1997. At the time of the merger,
Barefoot was the second largest lawn care service company in the United States.
Mr. Norton was a senior officer of Barefoot beginning in 1979, becoming
President and Chief Executive Officer in 1983. From 1972 to 1979, he served as
an accountant with Arthur Andersen LLP in Cleveland, Ohio.
N. David Blakeley has been employed by Southern Tree since 1984, has served
as Chief Operating Officer since 1989 and has served as President of Southern
Tree since the IPO.
Stewart K. Hanson has been employed by Arteka since 1973, serving as Vice
President from 1984 to 1995 and President since 1995.
James R. Marcus founded Four Seasons in 1973. He has served as Chairman
since its inception and has been a Director of Corporate Development of the
Company since the consummation of the IPO.
The Board of Directors is divided into three classes of four, four and five
directors, respectively, with directors serving staggered three-year terms,
expiring at the annual meetings of stockholders in 1999, 2000 and 2001,
respectively. At each annual meeting of stockholders, one class of directors
will be elected for a full term of three years to succeed that class of
directors whose terms are expiring. The Company's Certificate of Incorporation
permits the holders of the Restricted Common Stock to elect one director. Mr.
Stanfa is the director elected by the holders of the Restricted Common Stock.
All officers serve at the discretion of the Board of Directors.
The Board of Directors has established an Audit Committee, a Compensation
Committee, a Nominating Committee, an Executive Committee and an Acquisition
Committee. The members of the Audit Committee are Messrs. Norton, Johnson and
Ferreira, and the members of the Compensation Committee are Messrs. Ferreira,
Johnson and Stanfa. The members of the Executive Committee are Messrs. Murdy,
Braswell, Cranston and Stanfa and Ms. Benge. The members of the Acquisition
Committee are Messrs. Stanfa, Church, Murdy and Yahn, and the members of the
Nominating Committee are Messrs. Murdy, Stanfa and Meyer.
DIRECTOR COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
do not receive additional compensation for serving as directors. Each director
who is not an employee of the Company or one of its subsidiaries receives a fee
of $2,000 for attendance at each Board of Directors' meeting and $1,000 for each
committee meeting (unless held on the same day as a Board of Directors'
meeting). In addition, under the
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Company's 1998 Non-Employee Directors' Stock Plan, each non-employee director is
automatically granted an option to acquire 10,000 shares of Common Stock upon
such person's initial election as a director, and an annual option to acquire
5,000 shares at each annual meeting of the Company's stockholders thereafter at
which such director is re-elected or remains as a director, unless such annual
meeting is held within three months of such person's initial election as a
director. Each non-employee director also may elect to receive shares of Common
Stock or credits representing "deferred shares" in lieu of cash directors'
fees. See "-- 1998 Non-Employee Directors' Stock Plan." Directors are also
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors or committees thereof.
EXECUTIVE COMPENSATION, EMPLOYMENT AGREEMENTS, COVENANTS NOT-TO-COMPETE
The Company was incorporated in 1997, and did not pay any of its executive
officers any compensation prior to the consummation of the IPO. The Company
anticipates that during 1998 its five most highly compensated executive officers
(other than those employed by a Founding Company) will be Messrs. Murdy, Forbes,
Cranston, Fiedler and Garcia.
Each of Messrs. Murdy, Forbes, Cranston, Fiedler and Garcia has entered
into an employment agreement with the Company providing for an annual base
salary of $150,000. Each employment agreement is for a term of three years (the
"Initial Term"), and, unless terminated or not renewed, the term will continue
thereafter on a year-to-year basis on the same terms and conditions existing at
the time of renewal. Each employment agreement provides that, in the event of
termination of employment by the Company without cause during the Initial Term,
the employee will be entitled to receive from the Company an amount equal to his
then-current salary for the remainder of the Initial Term or for one year,
whichever is greater. In the event of termination of employment by the Company
without cause subsequent to the Initial Term, the employee will be entitled to
receive from the Company an amount equal to his then-current salary for one
year. In either case, payment is due in a lump sum on the effective date of
termination. In the event of a change in control of the Company (as defined), if
the employee is not given notice at least five business days prior to such
change in control from the successor to all or a substantial portion of the
Company's business and/or assets that such successor is willing to assume and
perform the Company's obligations under the employment agreement, then the
employee may elect to terminate his employment and receive in a lump sum the
amount equal to three times his annual base salary then in effect. The
noncompetition provisions of the employment agreement would apply for one year
from the effective date of termination without such notice. For a defined period
following an event constituting change in control, if the Company terminates the
employee or if the employee elects to terminate his employment for Good Reason
(as defined), the employee will receive in a lump sum the amount equal to three
times his annual base salary then in effect. In such event, the noncompetition
provisions of the employment agreement would apply for one year from the
effective date of termination. Each employment agreement contains a covenant not
to compete with the Company for a period of two years immediately following
termination of employment or, in the case of termination by the Company without
cause, for a period of one year immediately following termination of employment.
Each of Messrs. Church, Meyer, Yahn and Ms. Benge has entered into an
employment agreement with his or her Founding Company providing for an annual
base salary of $150,000. Each employment agreement is for a term of five years,
and, unless terminated or not renewed, the term will continue thereafter on a
year-to-year basis on the same terms and conditions existing at the time of
renewal. Each employment agreement provides that, in the event of termination of
employment by the Founding Company without cause during the first three years of
the employment term (the "Initial Term"), the employee will be entitled to
receive from the Founding Company an amount equal to his or her then-current
salary for the remainder of the Initial Term or for one year, whichever is
greater. In the event of termination of employment by the Founding Company
without cause subsequent to the Initial Term, the employee will be entitled to
receive from the Founding Company an amount equal to his or her then-current
salary for one year. In either case, payment is due in a lump sum on the
effective date of termination. In the event of a change in control of the
Company (as defined) during the Initial Term, if the employee is not given
notice at least five business days prior to such change in control from the
successor to all or a substantial portion of
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<PAGE>
the Company's business and/or assets that such successor is willing to assume
and perform the Founding Company's obligations under the employment agreement,
then the employee may elect to terminate his or her employment and receive in a
lump sum the amount equal to three times his or her annual base salary then in
effect. The noncompetition provisions of the employment agreement would apply
for one year from the effective date of termination without such notice. For a
defined period following an event constituting a change in control, the employee
may elect to terminate his or her employment for Good Reason (as defined) and
receive in a lump sum the amount equal to three times his or her annual base
salary then in effect. In such event, the noncompetition provisions of the
employment agreement would apply for one year from the effective date of
termination. Each employment agreement contains a covenant not to compete with
the Company for a period of two years immediately following termination of
employment or, in the case of termination by the Founding Company without cause
or by the employee for Good Reason, for a period of one year immediately
following termination of employment.
At least one principal executive officer of each of the other Founding
Companies has entered into an employment agreement with his or her respective
Founding Company containing substantially the same provisions, including a
covenant not to compete, as those for Messrs. Church, Meyer, Yahn and Ms. Benge.
1998 LONG-TERM INCENTIVE PLAN
No stock options were granted to, exercised by or held by any executive
officer in 1997. In February 1998, the Board of Directors and the Company's
stockholders approved the Company's 1998 Long-Term Incentive Plan (the
"Plan"). The purpose of the Plan is to provide directors, officers, key
employees, consultants and other service providers with additional incentives by
increasing their ownership interests in the Company. Individual awards under the
Plan may take the form of one or more of: (i) either incentive stock options or
non-qualified stock options ("NQSOs"), (ii) stock appreciation rights; (iii)
restricted or deferred stock, (iv) dividend equivalents and (v) other awards not
otherwise provided for, the value of which is based in whole or in part upon the
value of the Common Stock.
The Compensation Committee will administer the Plan and select the
individuals who will receive awards and establish the terms and conditions of
those awards. The maximum number of shares of Common Stock that may be subject
to outstanding awards, determined immediately after the grant of any award, may
not exceed the greater of 2,000,000 shares or 15% of the aggregate number of
shares of Common Stock outstanding. Shares of Common Stock which are
attributable to awards which have expired, terminated or been canceled or
forfeited are available for issuance or use in connection with future awards.
The Plan will remain in effect until terminated by the Board of Directors.
The Plan may be amended by the Board of Directors without the consent of the
stockholders of the Company, except that any amendment, although effective when
made, will be subject to stockholder approval if required by any federal or
state law or regulation or by the rules of any stock exchange or automated
quotation system on which the Common Stock may then be listed or quoted.
Effective February 15, 1998, NQSOs to purchase 100,000 shares of Common
Stock at a price of $6.00 per share were granted to Mr. Cranston. At the
consummation of the IPO, NQSOs to purchase a total of 570,000 shares of Common
Stock were granted as follows: 200,000 shares to Mr. Murdy, 100,000 shares to
Mr. Forbes, 100,000 shares to Mr. Fiedler, 100,000 shares to Mr. Garcia, 50,000
shares to Mr. Ives and 20,000 shares to other employees. In addition, at the
consummation of the IPO, options to purchase 767,819 shares were granted to
certain employees of the Founding Companies. Each of the options granted at the
closing of the IPO have an exercise price equal to the IPO price of $8.00 per
share. All of the foregoing options vest at the rate of 20% per year, commencing
on the first anniversary of the IPO, and expire at the earlier of ten years from
the date of grant or 90 days following termination of employment.
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1998 NON-EMPLOYEE DIRECTORS' STOCK PLAN
The Company's 1998 Non-Employee Directors' Stock Plan (the "Directors'
Plan"), which was adopted by the Board of Directors and approved by the
Company's stockholders in February 1998, provides for (i) the automatic grant to
each non-employee director serving at the consummation of the IPO of an option
to purchase 10,000 shares, (ii) the automatic grant to each other non-employee
director of an option to purchase 10,000 shares upon such person's initial
election as a director, and (iii) an automatic annual grant to each non-employee
director of an option to purchase 5,000 shares at each annual meeting of
stockholders thereafter at which such director is re-elected or remains as a
director, unless such annual meeting is held within three months of such
person's initial election as a director. All options have an exercise price per
share equal to the fair market value of the Common Stock on the date of grant
and are immediately vested and expire on the earlier of ten years from the date
of grant or one year after termination of service as a director. The Directors'
Plan also permits non-employee directors to elect to receive, in lieu of cash,
directors' fees, shares or credits representing "deferred shares" at future
settlement dates, as selected by the director. The number of shares or deferred
shares received will equal the number of shares of Common Stock which, at the
date the fees would otherwise be payable, will have an aggregate fair market
value equal to the amount of such fees.
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CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
In connection with the formation of the Company, LandCARE issued to Notre a
total of 1,565,158 shares (as adjusted for a 78.2579-to-one stock dividend) of
Common Stock for an aggregate cash consideration of $15,869. Mr. Stanfa is a
Managing Director of Notre and a director of the Company. In March 1998, Notre
exchanged 1,296,408 shares of Common Stock for 1,296,408 shares of Restricted
Common Stock. See "Description of Capital Stock." Notre advanced the funds
necessary to effect the Mergers and the IPO. As of December 31, 1997 and March
31, 1998, Notre had incurred expenses on behalf of the Company in the aggregate
amount of $0.2 million and $3.1 million, respectively. All of Notre's advances
were repaid from the net proceeds of the IPO.
From November 1997 through March 1998, the Company issued a total of
670,000 shares of Common Stock (as adjusted for a 78.2579-to-one stock dividend)
at $.01 per share to various members of management, as follows: Mr.
Murdy -- 275,000 shares, Mr. Forbes -- 100,000 shares, Mr. Fiedler -- 110,000
shares, Mr. Garcia -- 110,000 shares, Mr. Ives -- 55,000 shares and 20,000
shares to other members of management. The Company also issued 324,240 shares of
Common Stock at $.01 per share to consultants to and directors of the Company,
including a total of 30,000 shares of Common Stock to persons who became
directors of the Company upon consummation of the IPO. The Company also granted
options to purchase 100,000 shares of Common Stock under the Plan to Mr.
Cranston at an exercise price of $6.00 per share, and 10,000 shares of Common
Stock under the Directors' Plan, effective upon the consummation of the IPO, to
each of Messrs. Stanfa, Ferreira, Johnson and Norton.
In connection with the IPO, LandCARE acquired by merger all of the issued
and outstanding stock of the Founding Companies, each of which is now a
wholly-owned subsidiary of the Company. The aggregate consideration paid by
LandCARE in the Mergers consisted of $19.7 million in cash and 5,162,645 shares
of Common Stock. In addition, in conjunction with the Mergers, certain of the
Founding Companies will make S Corporation Distributions of a total of up to
$1.4 million and have distributed certain real estate and Other Assets having a
net book value of $0.7 million.
The following table sets forth the consideration paid by LandCARE for each
of the Founding Companies. These amounts do not include S Corporation
Distributions of $0.8 million for Desert Care and $0.6 million for Arteka or the
distribution of other non-operating assets. (Dollars in thousands.)
SHARES OF
COMPANY CASH COMMON STOCK
- ------------------------------------- --------- -------------
Trees................................ $ 8,026 1,863,137
Four Seasons......................... 3,602 742,581
Southern Tree........................ 1,017 482,863
Church............................... 2,139 725,451
Ground Control....................... 1,920 360,000
Arteka............................... 1,800 646,684
Desert Care.......................... 1,160 341,929
--------- -------------
Total...................... $ 19,664 5,162,645
========= =============
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In connection with the Mergers, and as consideration for their interests in
the Founding Companies, certain officers, directors and holders of 5% or more of
the outstanding shares of the Company, together with trusts for which they act
as trustees, received cash and shares of Common Stock of the Company as follows.
These amounts do not include S Corporation Distributions of $0.8 million for
Desert Care and $0.6 million for Arteka or distributions of other non-operating
assets. (Dollars in thousands.)
SHARES OF
NAME CASH COMMON STOCK
- ------------------------------------- --------- -------------
Linda T. Benge....................... $ 1,911 716,591
Harold D. Cranston................... 459 221,242
Roger S. Braswell(1)................. 810 405,081
Bruce A. Church...................... 736 419,363
Mark S. Yahn......................... 1,920 360,000
David K. Luse........................ 1,800 600,092
Jeff A. Meyer........................ 743 228,446
--------- -------------
Total...................... $ 8,379 2,950,815
========= =============
- ------------
(1) Consideration paid to Southern Shade Tree, Inc., the holding company of
Southern Tree, of which Mr. Braswell is an 80% owner.
Pursuant to the agreements entered into in connection with the Mergers, the
stockholders of the Founding Companies have agreed not to compete with the
Company for five years, commencing on the date of consummation of the IPO.
LEASES OF REAL PROPERTY BY FOUNDING COMPANIES
Arteka leases the following facilities from David K. Luse, who is a
Director of Corporate Development and a director of the Company: (i) 15195
Martin Drive, Eden Prairie, Minnesota, (ii) 1160 Engler Boulevard, Chaska,
Minnesota and (iii) 230 Highway 65 North, River Falls, Wisconsin. The leases
provide for annual rents of $38,604, $6,000 and $24,000, respectively. The rent
will be adjusted each year in accordance with the Consumer Price Index
("CPI"), not to be increased by more than five percent of the rent for the
immediately preceding lease year. Each of the leases provides for an initial
term of five years, with three, five year renewal options. Arteka will pay for
all utilities, taxes and insurance on each leased property. Arteka has a right
of first refusal to purchase each leased property. In addition, Arteka subleases
its facility at Lot A, Edinvale Industrial Park, 8th Edition, Eden Prairie,
Minnesota from Mr. Luse. The Lease provides for monthly rent of $1,300 and will
expire on December 31, 1998. The Company believes that the economic terms of
these leases are no less favorable to the Company than those available from a
disinterested third party.
Church leases (i) its facility at 951 North Ridge Avenue, Lombard, Illinois
from a trust of which Bruce A. Church, who is a director of the Company is a
beneficiary, and (ii) its facility at 17950 West Route 173, Wadsworth, Illinois
from The Hunt Club, L.P., a partnership of which Mr. Church is a limited
partner. The leases provide for annual rents of $105,060 and $75,636,
respectively. The rent for each lease will be adjusted each year in accordance
with the CPI, not to be increased by more than five percent of the rent for the
immediately preceding lease year. Each of the leases provides for an initial
term of five years, with three, five year renewal options. Church will pay for
all utilities, taxes and insurance on each leased property. Church has a right
of first refusal to purchase each leased property. The Company believes that the
economic terms of these leases are no less favorable to the Company than those
available from a disinterested third party.
Desert Care leases its facilities at 6143 South 32nd Street, Phoenix,
Arizona and 4237 East Forest Pleasant Place, Phoenix, Arizona from Sonoram
Heights Nurseries, L.C., a limited liability company of which Jeff A. Meyer, who
is a director of the Company, is a member. The leases provide for annual rents
of $54,000 and $36,000, respectively. The rent for each lease will be adjusted
each year in accordance with the CPI, not to be increased by more than five
percent of the rent for the immediately preceding lease year. Each of the leases
provides for an initial term of five years, with three, five year renewal
options. Desert
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Care will pay for all utilities, taxes and insurance on each leased property.
Desert Care has a right of first refusal to purchase each leased property. The
Company believes that the economic terms of these leases are no less favorable
to the Company than those available from a disinterested third party.
Four Seasons leases (i) its facilities at 270 Sunol Street, San Jose,
California, 4095 Deeble Street, Sacramento, California and 23144 Clawiter Road,
Hayward, California from James R. Marcus, who is a Director of Corporate
Development of the Company, (ii) its facility at 4991 Pacheco Boulevard,
Martinez, California from Harold D. Cranston, who is Senior Vice President,
Chief Operating Officer and a director of the Company and another individual,
and (iii) its facility at 1064 Serpentine Lane, Pleasanton, California from Mr.
Cranston. The leases provide for a total annual rent of $54,000, $48,000,
$44,760, $38,400 and $66,060, respectively. The rent for each lease will be
adjusted each year in accordance with the CPI, not to be increased by more than
five percent of the rent for the immediately preceding lease year. Each of the
leases provides for an initial term of ten years, with two, five year renewal
options. Four Seasons will pay for all utilities, taxes and insurance on each
leased property. Four Seasons has a right of first refusal to purchase each
leased property. The Company believes that the economic terms of these leases
are no less favorable to the Company than those available from a disinterested
third party.
Ground Control leases its facility at 2169 North Forsyth Road, Orlando,
Florida from Mark S. Yahn, who is a director of the Company. The lease provides
for annual rent of $217,476, and the rent will be adjusted each year in
accordance with the CPI, not to be increased by more than five percent of the
rent for the immediately preceding lease year. The lease provides for an initial
term of ten years, with two, five year renewal options. Ground Control will pay
for all utilities, taxes and insurance on the leased property. Ground Control
has a right of first refusal to purchase the leased property. The Company
believes that the economic terms of the lease are no less favorable to the
Company than those available from a disinterested third party.
Southern Tree leases its facility at 2808 Highway 64 West, Apex, North
Carolina from Blakely-Braswell Land Company, L.L.C., a limited liability company
of which Roger S. Braswell, who is a director of the Company, is a member. The
lease provides for annual rent of $66,000, and the rent will be adjusted each
year in accordance with the CPI, not to be increased by more than five percent
of the rent for the immediately preceding lease year. The lease provides for an
initial term of five years, with three, five year renewal options. Southern Tree
will pay for all utilities, taxes and insurance on the leased property. Southern
Tree has a right of first refusal to purchase the leased property. The Company
believes that the economic terms of the lease are no less favorable to the
Company than those available from a disinterested third party.
The Company has adopted a policy that, whenever possible, it will not own
any real estate. Accordingly, in connection with future acquisitions, the
Company may require the distribution of real property owned by acquired
companies to its stockholders and the leaseback of such property at fair market
value.
OTHER TRANSACTIONS
Trees leases trucks and heavy equipment from LJS Investments, a company of
which Linda T. Benge, who is a director of the Company, is an owner. Lease
payments for 1997 were approximately $64,000. Trees purchases climbing supplies
from Universal Distributing Company, Inc., a company of which Ms. Benge is an
owner. Purchases for the years ended March 31, 1996, 1997 and 1998 were
approximately $420,000, $289,000 and $579,000, respectively. Any transactions
between Trees and LJS Investments or Universal Distributing Company, Inc. will
be on terms no less favorable than those available from a disinterested third
party.
Prior to the Mergers, Trees sold its facility at 800 Turney Street,
Houston, Texas to L.J.S. Investments, Inc. ("LJS"), a Texas corporation of
which Linda T. Benge, who is a director of the Company, is a principal
shareholder. Trees sold the facility to LJS for nominal consideration on an "As
is, where is" basis and LJS, together with its three principal shareholders,
agreed to indemnify Trees for any and all liability for environmental matters
associated with the facility. See "Business -- Regulation."
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Additionally, in November 1996, Ms. Benge borrowed $165,444 from Trees. The
loan was paid in full in December 1996.
During 1997, Southern Shade Tree Co., of which Roger S. Braswell is a
stockholder, sold assets worth $738,162 to Southern Tree in exchange for 1,900
shares of Southern Tree common stock. Mr. Braswell is a Director of Corporate
Development and a director of the Company.
In March 1998, all of the assets of Royal Oaks Nursery, Inc., a
wholly-owned subsidiary of Church, were distributed to an affiliate of Church,
also named Royal Oaks Nursery, Inc., ("Royal Oaks II"), for a purchase price
of $150,000 plus the assumption of liabilities. In addition, Royal Oaks II, of
which Bruce A. Church and family members are the sole stockholders, is a
supplier of plant materials to Church.
In December 1997, Arteka borrowed $1,000,000 from David and Juliann Luse,
who borrowed the money from First Minnesota City Bank, in order to fund the
purchase by Arteka of the stock of Southwest Lawn Maintenance, Inc. and other
corporate purposes. Mr. David Luse is a director of the Company and a Director
of Corporate Development. This loan was repaid at the closing of the IPO. Arteka
also leases facilities from David Luse (a stockholder) for $84,000 per year,
pursuant to leases that expire on various dates through 2002.
Desert Care buys trees from and sells trees to Sonoran Heights Nurseries,
L.C., a company of which Jeff A. Meyer, who is a director of the Company, is a
stockholder. For the year ended December 31, 1997, Desert Care purchased a total
of $73,000 of trees from Sonoran Heights Nurseries, L.C. and sold a total of
$10,000 of trees to Sonoran Heights Nurseries, L.C.
COMPANY POLICY
Any future transactions with directors, officers, employees or affiliates
of the Company are anticipated to be minimal and must be approved in advance by
a majority of disinterested members of the Board of Directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Common Stock, after giving effect to the Mergers and the IPO,
by (i) each person known to own beneficially more than 5% of the outstanding
shares of Common Stock; (ii) each Company director; (iii) each executive
officer; and (iv) all executive officers and directors as a group. All persons
listed have an address c/o the Company's principal executive offices and have
sole voting and investment power with respect to their shares unless otherwise
indicated.
SHARES BENEFICIALLY
OWNED AFTER OFFERING
----------------------
NUMBER PERCENT
--------- -------
Notre Capital Ventures II, L.L.C........ 1,565,158 11.7%
Ronald L. Stanfa(1)..................... 1,625,158 12.1
Linda T. Benge.......................... 727,841 5.4
David K. Luse........................... 612,592 4.6
Bruce A. Church......................... 419,363 3.1
Roger S. Braswell....................... 411,331 3.1
Mark S. Yahn............................ 360,000 2.7
William F. Murdy(2)..................... 312,500 2.3
Jeff A. Meyer........................... 232,612 1.7
Harold D. Cranston...................... 224,992 1.7
William L. Fiedler...................... 110,000 *
Kenneth V. Garcia....................... 110,000 *
Peter C. Forbes......................... 100,000 *
Steven G. Ives.......................... 55,000 *
Fred M. Ferreira(2)(3).................. 52,500 *
Patrick J. Norton(2)(3)................. 52,500 *
Clark A. Johnson(3)..................... 40,000 *
All executive officers and directors as
a group (16 persons).................. 5,446,389 40.1%
- ------------
* Less than 1%.
(1) Includes 50,000 shares of Common Stock owned by Mr. Stanfa, 10,000 shares of
Common Stock issuable to Mr. Stanfa upon the exercise of options granted
under the Directors' Plan and 1,565,158 shares of Common Stock issued to
Notre. Mr. Stanfa is a Managing Director of Notre.
(2) Includes 12,500 shares of Common Stock issuable on conversion of a
convertible note issued by Notre which is convertible into Common Stock of
the Company owned by Notre.
(3) Includes 10,000 shares of Common Stock issuable upon the exercise of options
granted under the Directors' Plan.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of one hundred seven
million (107,000,000) shares of capital stock, consisting of one hundred million
(100,000,000) shares of Common Stock, two million (2,000,000) shares of
Restricted Common Stock and five million (5,000,000) shares of Preferred Stock
("Preferred Stock"). The Company has outstanding 13,381,943 shares of Common
Stock, including 1,296,408 shares of Restricted Common Stock, and no shares of
Preferred Stock outstanding. The following discussion is qualified in its
entirety by reference to the Company's Restated Certificate of Incorporation,
which is included as an exhibit to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK AND RESTRICTED COMMON STOCK
The holders of Common Stock are each entitled to one vote for each share
held on all matters to which they are entitled to vote, including the election
of directors. The holders of Restricted Common Stock, voting together as a
single class, are entitled to elect one member of the Company's Board of
Directors and to one-tenth (0.1) of one vote for each share held 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. Upon
consummation of the IPO, the Board of Directors were classified into three
classes as nearly equal in number as possible, with the term of each class
expiring on a staggered basis. The classification of the Board of Directors may
make it more difficult to change the composition of the Board of Directors and
thereby may discourage or make more difficult an attempt by a person or group to
obtain control of the Company. Cumulative voting for the election of directors
is not permitted. Any director, or the entire Board of Directors, may be removed
at any time, with cause, by 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 for the election of directors, provided, however,
that only the holders of the Restricted Common Stock may remove the director
such holders are entitled to elect.
Subject to the rights of any then outstanding shares of Preferred Stock,
holders of Common Stock and Restricted Common Stock are entitled to participate
pro rata in such dividends as may be declared in the discretion of the Board of
Directors out of funds legally available therefor. Holders of Common Stock and
Restricted Common Stock are entitled to share ratably in the net assets of the
Company upon liquidation after payment or provision for all liabilities and any
preferential liquidation rights of any Preferred Stock then outstanding. Holders
of Common Stock and holders of Restricted Common Stock have no preemptive rights
to purchase shares of stock of the Company. Shares of Common Stock are not
subject to any redemption provisions and are not convertible into any other
securities of the Company. Shares of Restricted Common Stock are not subject to
any redemption provisions but are convertible into Common Stock, on the
occurrence of certain events. All outstanding shares of Common Stock and
Restricted Common Stock are fully paid and non-assessable.
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) in the event of
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.
The Common Stock is listed on the NYSE under the symbol "GRW."
60
<PAGE>
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series. Subject to the provisions of the Company's
Restated Certificate of Incorporation and limitations prescribed by law, the
Board of Directors is expressly authorized to adopt resolutions to issue the
shares, to fix the number of shares and to change the number of shares
constituting any series and to provide for or change the voting powers,
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any series of the
Preferred Stock, in each case without any further action or vote by the
stockholders. The Company has no current plans to issue any shares of Preferred
Stock.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock and Restricted Common Stock as to dividend
rights, liquidation preference or both, may have full or limited voting rights
and may be convertible into shares of Common Stock. Accordingly, the issuance of
shares of Preferred Stock may discourage bids for the Common Stock or may
otherwise adversely affect the market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to Section 203 of the Delaware General Corporation
Law ("DGCL") which, with certain exceptions, prohibits a Delaware corporation
from engaging in any of a broad range of business combinations with any
"interested stockholder" for a period of three years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, 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) upon 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 (a) by persons
who are directors and officers and (b) by employee 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 after such date, 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 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. An "interested stockholder" is
defined as any person that is (a) the owner of 15% or more of the outstanding
voting stock of the corporation or (b) an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
Pursuant to the Company's Restated Certificate of Incorporation and as
permitted by Delaware law, directors of the Company are not liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty,
except for liability in connection with a breach of duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for dividend payments or stock repurchases illegal under
Delaware law or any transaction in which a director has derived an improper
personal benefit.
Additionally, the Restated Certificate of Incorporation of the Company
provides that directors and officers of the Company shall be, and at the
discretion of the Board of Directors non-officer employees and agents may be,
indemnified by the Company to the fullest extent authorized by Delaware law, as
it now
61
<PAGE>
exists or may in the future be amended, against all expenses and liabilities
actually and reasonably incurred in connection with service for or on behalf of
the Company and further permits the advancing of expenses incurred in defense of
claims.
The Restated Certificate of Incorporation also provides that any action
required or permitted to be taken by the stockholders of the Company at an
annual or special meeting of stockholders must be effected at a duly called
meeting and may not be taken or effected by a written consent of stockholders in
lieu thereof. The Company's Bylaws provide that a special meeting of
stockholders may be called only by the Chief Executive Officer, by a majority of
the Board of Directors or by a majority of the Executive Committee of the Board
of Directors. The Bylaws provide that only those matters set forth in the notice
of the special meeting may be considered or acted upon at that special meeting.
To amend or repeal the Company's Bylaws, an amendment or repeal thereof must
first be approved by the Board of Directors or by the affirmative 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 Company's Bylaws establish an advance notice procedure with regard to
the nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors (the "Nomination
Procedure") and with regard to other matters to be brought by stockholders
before an annual meeting of stockholders of the Company (the "Business
Procedure"). The Nomination Procedure requires that a stockholder give prior
written notice, in proper form, of a planned nomination for the Board of
Directors to the Secretary of the Company. The requirements as to the form and
timing of that notice are specified in the Company's Bylaws. If the Chairman of
the Board of Directors determines that a person was not nominated in accordance
with the Nomination Procedure, such person will not be eligible for election as
a director. Under the Business Procedure, a stockholder seeking to have any
business conducted at an annual meeting must give prior written notice, in
proper form, to the Secretary of the Company. The requirements as to the form
and timing of that notice are specified in the Company's Bylaws. If the Chairman
of the Board of Directors determines that the other business was not properly
brought before such meeting in accordance with the Business Procedure, such
business will not be conducted at such meeting.
Although the Company's Bylaws do not give the Board of Directors any power
to approve or disapprove stockholder nominations for the election of directors
or of any other business desired by stockholders to be conducted at an annual or
any other meeting, the Company's Bylaws (i) may have the effect of precluding a
nomination for the election of directors or precluding the conduct of business
at a particular meeting if the proper procedures are not followed or (ii) may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
the Company, even if the conduct of such solicitation or such attempt might be
beneficial to the Company and its stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, 46 Wall Street, New York, New York 10005.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company has outstanding 13,381,943 shares of Common Stock. The
5,659,900 shares sold in the IPO are freely tradeable without restriction unless
acquired by affiliates of the Company. None of the remaining outstanding shares
of Common Stock or Restricted Common Stock have been registered under the
Securities Act, which means that they may be resold publicly only upon
registration under the Securities Act or in compliance with an exemption from
the registration requirements of the Securities Act, including the exemption
provided by Rule 144 thereunder.
In general, under Rule 144, if a period of at least one year has elapsed
between the later of the date on which restricted securities were acquired from
the Company or the date on which they were acquired from an affiliate, the
holder of such restricted securities (including an affiliate) is entitled to
sell a number of shares within any three-month period that does not exceed the
greater of (i) one percent of the then outstanding shares of the Common Stock
(approximately 133,819 shares as of the date of this Prospectus) or (ii) the
average weekly reported volume of trading of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements pertaining to the manner of such sales, notices of such
sales and the availability of current public information concerning the Company.
Affiliates may sell shares not constituting restricted securities in accordance
with the foregoing volume limitations and other requirements but without regard
to the one year holding period. Under Rule 144(k), if a period of at least two
years has elapsed between the later of the date on which restricted securities
were acquired from the Company and the date on which they were acquired from an
affiliate, a holder of such restricted securities who is not an affiliate at the
time of the sale and who has not been an affiliate for at least three months
prior to the sale is entitled to sell the shares immediately without regard to
the volume limitations and other conditions described above.
The Company and its officers, directors and certain stockholders who
beneficially own 8,032,043 shares in the aggregate have agreed not to sell or
otherwise dispose of any shares of Common Stock for a period of 180 days after
the IPO without the prior written consent of BT Alex. Brown Incorporated, except
that the Company may issue Common Stock in connection with acquisitions or in
connection with the Plan and the Directors' Plan (the "Plans") or upon
conversion of shares of the Restricted Common Stock. In addition, all of the
stockholders of the Founding Companies, certain other stockholders and the
Company's officers and directors have agreed that they will not sell any of
their shares for a period of two years after the IPO, subject to waiver at the
sole discretion of the Company during the second year after the IPO to provide
limited liquidity opportunities.
The Company is hereby registering 5,000,000 shares of its Common Stock
under the Securities Act for use by the Company in connection with future
acquisitions. After the effective date of such registration, these shares will
generally be freely tradeable unless acquired by persons who become affiliates
of the Company. In some instances, however, the sale of shares issued in
connection with future acquisitions may be contractually restricted.
Additionally, the Company intends to file a registration statement covering the
shares of Common Stock to be acquired upon exercise of 1,477,819 options granted
or to be granted under the Plan and the Directors' Plan. See
"Management -- 1998 Long Term Incentive Plan" and "-- 1998 Non-Employee
Directors' Plan."
No prediction can be made as to the effect, if any, that the sale of shares
or the availability of shares for sale will have on the market price for the
Common Stock prevailing from time to time. Nevertheless, sales, or the
availability for sale of, substantial amounts of the Common Stock in the public
market could adversely affect prevailing market prices and the future ability of
the Company to raise equity capital and complete any additional acquisitions for
Common Stock.
63
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed on for the
Company by Bracewell & Patterson, L.L.P., Houston, Texas. Certain members of
Bracewell & Patterson, L.L.P. are investors in Notre and own in the aggregate an
approximate 2% interest in Notre.
EXPERTS
The audited financial statements of LandCARE, Trees, Four Seasons, Southern
Tree, Church, Ground Control, Arteka and Desert Care included in this Prospectus
and elsewhere in the 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.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement (which term
shall encompass any and all amendments thereto) on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Common Stock offered hereby. This Prospectus, which
is part of the Registration Statement, does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain items of which are omitted in accordance with the rules and regulations
of the SEC. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is hereby made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. For further
information with respect to the Company, reference is hereby made to the
Registration Statement and such exhibits and schedules filed as a part thereof,
which may be inspected, without charge, at the Public Reference Section of the
SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the SEC located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. The SEC maintains a web
site that contains reports, proxy and information statements regarding
registrants that file electronically with the SEC. The address of this web site
is (http://www.sec.gov). Copies of all or any portion of the Registration
Statement may be obtained from the Public Reference Section of the SEC, upon
payment of the prescribed fees.
The Common Stock is listed on the New York Stock Exchange. Proxy
statements, reports and other information concerning the Company that are filed
under the Exchange Act can be inspected at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
Basis of Presentation........... F-3
Unaudited Pro Forma Combined
Balance Sheet as of March 31,
1998........................... F-4
Unaudited Pro Forma Combined
Statement of Operations for the
Year Ended December 31, 1997... F-5
Unaudited Pro Forma Combined
Statement of Operations for the
Three Months Ended March 31,
1998........................... F-6
Notes to Unaudited Pro Forma
Combined Financial
Statements..................... F-7
HISTORICAL FINANCIAL STATEMENTS
LANDCARE USA, INC.
Report of Independent Public
Accountants.................... F-13
Balance Sheet................... F-14
Statement of Operations......... F-15
Statement of Stockholders'
Equity......................... F-16
Statement of Cash Flows......... F-17
Notes to Financial Statements... F-18
TREES, INC.
Report of Independent Public
Accountants.................... F-22
Consolidated Balance Sheets..... F-23
Consolidated Statements of
Operations..................... F-24
Consolidated Statements of
Shareholders' Equity........... F-25
Consolidated Statements of Cash
Flows.......................... F-26
Notes to Consolidated Financial
Statements..................... F-27
FOUR SEASONS LANDSCAPE AND
MAINTENANCE, INC.
Report of Independent Public
Accountants.................... F-34
Balance Sheets.................. F-35
Statements of Operations........ F-36
Statements of Shareholders'
Equity......................... F-37
Statements of Cash Flows........ F-38
Notes to Financial Statements... F-39
SOUTHERN TREE & LANDSCAPE CO., INC.
Report of Independent Public
Accountants.................... F-45
Balance Sheet................... F-46
Statement of Operations......... F-47
Statement of Shareholders'
Equity......................... F-48
Statement of Cash Flows......... F-49
Notes to Financial Statements... F-50
D.R. CHURCH LANDSCAPE CO., INC.
Report of Independent Public
Accountants.................... F-57
Consolidated Balance Sheets..... F-58
Consolidated Statements of
Operations..................... F-59
Consolidated Statements of
Shareholders' Equity........... F-60
Consolidated Statements of Cash
Flows.......................... F-61
Notes to Consolidated Financial
Statements..................... F-62
F-1
<PAGE>
PAGE
-----
GROUND CONTROL LANDSCAPING, INC.
Report of Independent Public
Accountants.................... F-69
Balance Sheet................... F-70
Statement of Operations......... F-71
Statement of Stockholder's
Equity......................... F-72
Statement of Cash Flows......... F-73
Notes to Financial Statements... F-74
ARTEKA CORPORATION
Report of Independent Public
Accountants.................... F-81
Combined Balance Sheets......... F-82
Combined Statements of
Operations..................... F-83
Combined Statements of
Stockholder's Equity........... F-84
Combined Statements of Cash
Flows.......................... F-85
Notes to Combined Financial
Statements..................... F-86
DESERT CARE LANDSCAPING, INC.
Report of Independent Public
Accountants.................... F-95
Balance Sheet................... F-96
Statement of Operations......... F-97
Statement of Shareholders'
Equity......................... F-98
Statement of Cash Flows......... F-99
Notes to Financial Statements... F-100
F-2
<PAGE>
LANDCARE USA, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to the mergers by LandCARE USA, Inc. (LandCARE or the Company), of substantially
all 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). (together, the Founding Companies).
LandCARE and the Founding Companies are hereinafter referred to as the Company.
These mergers (the Mergers) occurred simultaneously with the closing of
LandCARE'S initial public offering (the IPO) 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 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. The
unaudited pro forma combined financial statements also give effect to the
issuance of common stock in connection with the IPO and as partial consideration
for the acquisitions to the sellers of the Founding Companies. These pro forma
statements are based on the historical financial statements of the Founding
Companies included elsewhere in this Prospectus and the estimates and
assumptions set forth below and in the notes to the unaudited pro forma combined
financial statements.
The unaudited pro forma combined balance sheet gives effect to the Mergers
and the IPO as if they had occurred on March 31, 1998. The unaudited pro forma
combined statement of operations give effect to these transactions 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 Founding Companies have agreed
prospectively to reductions in salary, bonuses and benefits, these reductions
have been reflected in the unaudited pro forma combined statements of
operations. Additionally, reductions in lease expense pursuant to the
renegotiation of certain leases and reductions in interest expense as the result
of the planned repayment of the Founding Companies' existing lines of credit and
long-term debt have been reflected in the unaudited pro forma combined
statements of operations. With respect to other potential benefits, LandCARE has
not and cannot quantify these benefits until completion of the combination of
the Founding Companies. It is anticipated that these benefits 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 costs 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 unaudited pro forma combined financial data presented herein do
not purport to represent what the Company's financial position or results of
operations would have actually been had such events occurred at the beginning of
the periods presented, as assumed, or to project the Company's financial
position or results of operations for any future period or the future results of
the Founding Companies. The unaudited pro forma combined financial statements
should be read in conjunction with the historical financial statements and notes
thereto included elsewhere in this Prospectus. Also see "Risk Factors"
included elsewhere herein.
F-3
<PAGE>
LANDCARE USA, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET -- MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
LANDCARE
FOUR SOUTHERN GROUND DESERT USA,
TREES SEASONS TREE CHURCH CONTROL ARTEKA CARE INC.
------- ------- -------- ------ ------- ------ ------ --------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......... $ 2,626 $ 770 $ 9 $ 649 $ -- $ 73 $-- $ 11
Accounts receivable, net.......... 6,298 1.132 1,867 1,338 1,114 1,318 918 --
Related-party receivable.......... -- -- -- 25 -- -- -- --
Inventories....................... -- 148 704 209 42 1,034 -- --
Deferred tax asset................ 412 165 77 136 103 -- -- --
Other current assets.............. 702 256 426 -- 209 285 31 3,129
------- ------- -------- ------ ------- ------ ------ --------
Total current assets.......... 10,038 2,471 3,083 2,357 1,468 2,710 949 3,140
PROPERTY AND EQUIPMENT, net.......... 10,339 1,232 2,115 1,976 2,923 1,548 1,021 --
DEFERRED TAX ASSET................... -- -- -- 238 -- -- -- --
OTHER ASSETS, net.................... 345 36 -- 144 80 1,564 26 --
GOODWILL............................. -- -- -- -- -- -- -- --
------- ------- -------- ------ ------- ------ ------ --------
Total assets.................. $20,722 $3,739 $ 5,198 $4,715 $4,471 $5,822 $1,996 $ 3,140
======= ======= ======== ====== ======= ====== ====== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses........................ $ 6,279 $1,921 $ 1,489 $1,130 $1,029 $ 364 $ 494 $ 3,114
Lines of credit................... -- 75 1,858 -- 517 1,131 300 --
Current maturities of long-term
debt............................ 117 39 344 486 182 2,516 191 --
Current maturities of long-term payable to related party.. 225 -- 333 5 -- 108 -- --
Deferred tax liability............ -- -- -- -- -- 38 -- --
Payable to Founding Company
Stockholders.................... -- -- -- -- -- -- -- --
Other current liabilities......... -- 33 34 -- -- 94 56 --
------- ------- -------- ------ ------- ------ ------ --------
Total current liabilities..... 6,621 2,068 4,058 1,621 1,728 4,251 1,041 3,114
LONG-TERM DEBT, net of current
maturities.......................... 453 93 759 736 1,556 140 332 --
LONG-TERM PAYABLE TO RELATED PARTY,
net of current maturities........... 2,366 -- -- 15 -- 692 -- --
DEFERRED TAX LIABILITY............... 1,765 309 134 -- 147 179 -- --
------- ------- -------- ------ ------- ------ ------ --------
Total liabilities............. 11,205 2,470 4,951 2,372 3,431 5,262 1,373 3,114
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock...................... 710 1 3 6 -- 10 -- 26
Additional paid-in capital........ -- 11 -- -- 4 -- 50 7,148
Retained earnings (deficit)....... 8,809 1,257 244 2,372 1,078 550 573 (7,148)
Treasury stock, at cost........... (2) -- -- (35 ) (42 ) -- -- --
------- ------- -------- ------ ------- ------ ------ --------
Total stockholders' equity.... 9,517 1,269 247 2,343 1,040 560 623 26
------- ------- -------- ------ ------- ------ ------ --------
Total liabilities and
stockholders' equity......... $20,722 $3,739 $ 5,198 $4,715 $4,471 $5,822 $1,996 $ 3,140
======= ======= ======== ====== ======= ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA POST MERGER
TOTAL ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------- ----------- --------- ------------ -----------
ASSETS
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......... $ 4,138 $ (183) $ 3,955 $ 3,221 $ 7,176
Accounts receivable, net.......... 13,985 (43) 13,942 -- 13,942
Related-party receivable.......... 25 -- 25 -- 25
Inventories....................... 2,137 -- 2,137 -- 2,137
Deferred tax asset................ 893 (29) 864 -- 864
Other current assets.............. 5,038 -- 5,038 (3,129) 1,909
------- ----------- --------- ------------ -----------
Total current assets.......... 26,216 (255) 25,961 92 26,053
PROPERTY AND EQUIPMENT, net.......... 21,154 (2,145) 19,009 -- 19,009
DEFERRED TAX ASSET................... 238 -- 238 -- 238
OTHER ASSETS, net.................... 2,195 -- 2,195 -- 2,195
GOODWILL............................. -- 50,291 50,291 -- 50,291
------- ----------- --------- ------------ -----------
Total assets.................. $49,803 $47,891 $ 97,694 $ 92 $ 97,786
======= =========== ========= ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses........................ $15,820 $ (2) 15,818 (3,114) 12,704
Lines of credit................... 3,881 -- 3,881 (3,881) --
Current maturities of long-term
debt............................ 3,875 (38) 3,837 (3,837) --
Current maturities of long-term pa 671 -- 671 (671) --
Deferred tax liability............ 38 511 549 -- 549
Payable to Founding Company
Stockholders.................... -- 19,664 19,664 (19,664) --
Other current liabilities......... 217 -- 217 -- 217
------- ----------- --------- ------------ -----------
Total current liabilities..... 24,502 20,135 44,637 (31,167) 13,470
LONG-TERM DEBT, net of current
maturities.......................... 4,069 (291) 3,778 (3,778) --
LONG-TERM PAYABLE TO RELATED PARTY,
net of current maturities........... 3,073 -- 3,073 (3,073) --
DEFERRED TAX LIABILITY............... 2,534 22 2,556 -- 2,556
------- ----------- --------- ------------ -----------
Total liabilities............. 34,178 19,866 54,044 (38,018) 16,026
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock...................... 756 (679) 77 57 134
Additional paid-in capital........ 7,213 27,576 34,789 38,053 72,842
Retained earnings (deficit)....... 7,735 1,049 8,784 -- 8,784
Treasury stock, at cost........... (79) 79 -- -- --
------- ----------- --------- ------------ -----------
Total stockholders' equity.... 15,625 28,025 43,650 38,110 81,760
------- ----------- --------- ------------ -----------
Total liabilities and
stockholders' equity......... $49,803 $47,891 $ 97,694 $ 92 $ 97,786
======= =========== ========= ============ ===========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-4
<PAGE>
LANDCARE USA, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOUR SOUTHERN GROUND DESERT
TREES SEASONS TREES CHURCH CONTROL ARTEKA CARE
------- -------- --------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $50,085 $16,066 $14,176 $13,257 $8,979 $7,366 $6,481
COST OF SERVICES..................... 43,568 11,067 11,617 8,906 6,663 5,227 5,119
------- -------- --------- -------- ------- ------- -------
Gross profit........................ 6,517 4,999 2,559 4,351 2,316 2,139 1,362
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 3,688 3,754 1,766 2,864 1,510 2,136 672
------- -------- --------- -------- ------- ------- -------
Income (loss) from operations....... 2,829 1,245 793 1,487 806 3 690
OTHER INCOME (EXPENSE):
Interest expense.................... (272) (37 ) (429) (184 ) (151 ) (95 ) (64)
Other income (expense), net......... 744 (9 ) 26 97 (16 ) 16 13
------- -------- --------- -------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES.... 3,301 1,199 390 1,400 639 (76 ) 639
INCOME TAX PROVISION (BENEFIT)....... 1,266 476 158 547 248 (251 ) --
------- -------- --------- -------- ------- ------- -------
NET INCOME (LOSS).................... $ 2,035 $ 723 $ 232 $ 853 $ 391 $ 175 $ 639
======= ======== ========= ======== ======= ======= =======
NET INCOME PER SHARE.......................................................................................................
SHARES USED IN COMPUTING PRO FORMA NET INCOME PER SHARE(1).................................................................
</TABLE>
<TABLE>
<CAPTION>
LANDCARE PRO FORMA
USA, INC. TOTAL ADJUSTMENTS PRO FORMA
--------- --------- ------------ ----------
<S> <C> <C> <C> <C>
REVENUES............................. $ -- $ 116,410 $ (233) $ 116,177
COST OF SERVICES..................... -- 92,167 (247) 91,920
--------- --------- ------------ ----------
Gross profit........................ -- 24,243 14 24,257
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 5,782 22,172 (7,307) 14,865
--------- --------- ------------ ----------
Income (loss) from operations....... (5,782) 2,071 7,321 9,392
OTHER INCOME (EXPENSE):
Interest expense.................... -- (1,232) 1,232 --
Other income (expense), net......... -- 871 -- 871
--------- --------- ------------ ----------
INCOME (LOSS) BEFORE INCOME TAXES.... (5,782) 1,710 8,553 10,263
INCOME TAX PROVISION (BENEFIT)....... -- 2,444 2,168 4,612
--------- --------- ------------ ----------
NET INCOME (LOSS).................... $(5,782) $ (734) $ 6,385 $ 5,651
========= ========= ============ ==========
NET INCOME PER SHARE................. $ 0.44
==========
SHARES USED IN COMPUTING PRO FORMA NE 12,981,285
==========
</TABLE>
(1) Includes (i) 1,565,158 shares issued to Notre Capital Ventures II, L.L.C.
(ii) 994,240 shares issued to management, directors and consultants of
LandCARE, (iii) 5,162,645 shares issued to owners of the Founding Companies,
and (iv) 5,259,242 of the 5,659,900 shares sold in the IPO necessary to pay
the cash portion of the Merger Consideration, expenses of the IPO and
repayment of the Founding Companies' existing debt. Basic and diluted income
per share were the same for the year ended December 31, 1997. The 400,658
shares excluded reflect the net cash proceeds to LandCARE.
See accompanying notes to unaudited pro forma combined financial statements.
F-5
<PAGE>
LANDCARE USA, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOUR SOUTHERN GROUND DESERT
TREES SEASONS TREES CHURCH CONTROL ARTEKA CARE
------- -------- --------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $13,840 $ 3,830 $ 3,502 $ 963 $2,324 $ 893 $1,297
COST OF SERVICES..................... 12,359 2,547 2,675 787 1,857 618 1,200
------- -------- --------- -------- ------- ------- -------
Gross profit........................ 1,481 1,283 827 176 467 275 97
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 718 1,385 514 661 389 726 175
------- -------- --------- -------- ------- ------- -------
Income (loss) from operations....... 763 (102 ) 313 (485 ) 78 (451 ) (78)
OTHER INCOME (EXPENSE):
Interest expense.................... (63) (3 ) (95) (31 ) (49 ) (103 ) (14)
Other income (expense), net......... 26 5 -- 14 1 1 7
------- -------- --------- -------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES.... 726 (100 ) 218 (502 ) 30 (553 ) (85)
INCOME TAX PROVISION (BENEFIT)....... 278 (40 ) 88 (197 ) 12 (210 ) --
------- -------- --------- -------- ------- ------- -------
NET INCOME (LOSS).................... $ 448 $ (60 ) $ 130 $ (305 ) $ 18 $ (343 ) $ (85)
======= ======== ========= ======== ======= ======= =======
NET INCOME PER SHARE.......................................................................................................
SHARES USED IN COMPUTING PRO FORMA NET INCOME PER SHARE(1).................................................................
</TABLE>
<TABLE>
<CAPTION>
LANDCARE PRO FORMA
USA, INC. TOTAL ADJUSTMENTS PRO FORMA
--------- --------- ------------ ----------
<S> <C> <C> <C> <C>
REVENUES............................. $ -- $ 26,649 $ (10) $ 26,639
COST OF SERVICES..................... -- 22,043 (15) 22,028
--------- --------- ------------ ----------
Gross profit........................ -- 4,606 5 4,611
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 1,366 5,934 (2,120) 3,814
--------- --------- ------------ ----------
Income (loss) from operations....... (1,366) (1,328) 2,125 797
OTHER INCOME (EXPENSE):
Interest expense.................... -- (358) 358 --
Other income (expense), net......... -- 54 -- 54
--------- --------- ------------ ----------
INCOME (LOSS) BEFORE INCOME TAXES.... (1,366) (1,632) 2,483 851
INCOME TAX PROVISION (BENEFIT)....... -- (69) 452 383
--------- --------- ------------ ----------
NET INCOME (LOSS).................... $(1,366) $ (1,563) $ 2,031 $ 468
========= ========= ============ ==========
NET INCOME PER SHARE................. $ 0.04
==========
SHARES USED IN COMPUTING PRO FORMA NE 12,981,285
==========
</TABLE>
(1) Includes (i) 1,565,158 shares issued to Notre Capital Ventures II, L.L.C.
(ii) 994,240 shares issued to management, directors and consultants of
LandCARE, (iii) 5,162,645 shares issued to owners of the Founding Companies,
and (iv) 5,259,242 of the 5,659,900 shares sold in the IPO necessary to pay
the cash portion of the Merger consideration, expenses of the IPO and
repayment of the Founding Companies' existing debt. Basic and diluted income
per share were the same for the three months ended March 31, 1998. The
400,658 shares excluded reflect the net cash proceeds to LandCARE.
See accompanying notes to unaudited pro forma combined financial statements.
F-6
<PAGE>
LANDCARE USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL:
LandCARE USA, Inc. was formed to become a leading national provider of
landscape, lawncare, tree trimming, line clearing and other related services.
LandCARE USA, Inc. conducted no operations prior to the IPO and acquired the
Founding Companies simultaneously with the consummation of the IPO.
The historical financial statements represent the financial position and
results of operations of the Founding Companies and were derived from the
respective financial statements included elsewhere herein, with the exception of
Trees, Inc., whose results of operations were derived from the unaudited
financial statements for the year ended December 31, 1997. The periods included
in these financial statements for the individual Founding Companies are as of
and for the three months ended March 31, 1998 and for the year ended December
31, 1997. The historical financial statements included elsewhere herein have
been included in accordance with Securities and Exchange Commmission Rule 3-05.
2. ACQUISITION OF FOUNDING COMPANIES:
Concurrently with and as a condition to the closing of the IPO, LandCARE
acquired all of the outstanding capital stock of the Founding Companies. The
Mergers were accounted for using the purchase method of accounting with Trees
being treated as the accounting acquiror. The following table sets forth the
consideration paid (a) in cash and (b) in shares of the Company's Common Stock
to the stockholders of each of the Founding Companies. For purposes of computing
the purchase price for accounting purposes, the value of the shares was
determined using an estimated fair value of $7.20 per share, which represents a
discount of ten percent from the initial public offering price due to
restrictions on the sale and transferability of the shares issued.
COMMON STOCK
----------------------
VALUE OF
CASH SHARES SHARES
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Trees................................ $ 8,026 1,863,137 $ 13,415
Four Seasons......................... 3,602 742,581 5,347
Southern Tree........................ 1,017 482,863 3,477
Church............................... 2,139 725,451 5,223
Ground Control....................... 1,920 360,000 2,592
Arteka............................... 1,800 646,684 4,656
Desert Care.......................... 1,160 341,929 2,462
--------- --------- ---------
Total........................... $ 19,664 5,162,645 $ 37,172
========= ========= =========
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the borrowings assumed to be required to fund the S
Corporation Distributions totaling up to $1.4 million to shareholders of Arteka
Nurseries, Inc. and Desert Care.
(b) Records the distribution of certain real estate, equipment and
vehicles, and their related liabilities, to Trees, Four Seasons and Ground
Control in connection with the Mergers. In addition, reflects the reduction for
the nursery operations of Church which were not acquired in the Mergers.
F-7
<PAGE>
LANDCARE USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Records the purchase of the Founding Companies for a total purchase
price of $56.8 million, including $21.4 million (Cash of $8.0 million and shares
with an aggregate value of $13.4 million determined using an estimated fair
value of $7.20 per share) attributed to Trees as accounting acquiror. The entry
includes the liability of $19.7 million for the cash portion of the
consideration paid to the stockholders of the Founding Companies in connection
with the Mergers and the issuance of 5.2 million shares of Common Stock to the
Founding Companies resulting in the creation of $31.9 million of goodwill after
allocating the purchase price to the aggregate assets acquired and liabilities
assumed, excluding Trees, as shown below. In addition, goodwill of $18.4
million, determined using an estimated fair value of $7.20 per share, has been
recorded attributable to the 2,559,398 shares of Common Stock issued to Notre
Capital Ventures II, L.L.C., directors and management of and consultants to
LandCARE. Based on its initial assessment, management believes that the
historical carrying value of the Founding Companies' assets and liabilities will
approximate fair value and that there are no other identifiable intangible
assets to which any material purchase price can be allocated.
(IN THOUSANDS)
ASSETS
Cash and cash equivalents............... $ 1,318
Accounts receivable, net................ 7,644
Related - party receivable.............. 25
Inventories............................. 2,137
Deferred tax asset...................... 452
Other current assets.................... 1,207
--------------
Total current assets............... 12,783
Property and equipment, net............. 8,696
Deferred tax asset...................... 238
Other assets, net....................... 1,850
--------------
Total assets....................... $ 23,567
==============
LIABILITIES
Accounts payable and accrued expenses... $ 6,635
Lines of credit......................... 3,881
Current maturities of long-term debt.... 3,720
Current maturities of long-term payable
to related party...................... 446
Deferred tax liability.................. 518
Other current liabilities............... 217
--------------
Total current liabilities.......... 15,417
Long-term debt, net of current
maturities............................ 3,325
Long-term payable to related party, net
of current maturities................. 707
Deferred tax liability.................. 612
--------------
Total liabilities.................. $ 20,061
==============
Net book value..................... $ 3,506
==============
The following reconciles the combined historical net assets of the Founding
Companies to the net assets acquired (in thousands):
<TABLE>
<CAPTION>
ACQUIRED
TOTAL LESS: LESS: FOUNDING
COMBINED TREES LANDCARE COMPANIES
-------- ------- --------- ----------
<S> <C> <C> <C> <C>
Historical net assets................ $15,625 $(9,517) $ (26) $6,082
S Corporation Distributions.......... (1,360 ) -- -- (1,360)
Distribution of assets and
liabilities to Founding
Companies.......................... (680 ) 26 -- (654)
Tax adjustments...................... (562 ) -- -- (562)
-------- ------- --------- ----------
$13,023 $(9,491) $ (26) $3,506
======== ======= ========= ==========
</TABLE>
F-8
<PAGE>
LANDCARE USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(d) 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 Desert Care, an S
Corporation.
(e) Records the cash proceeds from the issuance of 5,659,900 shares of
Common Stock, net of estimated IPO costs of $7.2 million (based on an initial
public offering price of $8.00 per share). IPO costs primarily consist of
underwriting discounts and commissions, accounting fees, legal fees and printing
expenses.
(f) Records the cash portion of the consideration paid to the
stockholders of the Founding Companies in connection with the Mergers, the
payment of the S Corporation Distributions and the repayment of long-term debt.
The following tables summarize the unaudited pro forma combined balance
sheet adjustments:
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
--------- --------- --------- --------- ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............ $ (172) $ (11) $ -- $ -- $ (183)
Accounts receivable, net............. -- (43) -- -- (43)
Inventories.......................... -- -- -- -- --
Deferred tax assets.................. -- -- -- (29) (29)
Other current assets................. -- -- -- -- --
--------- --------- --------- --------- ------------
Total current assets........ (172) (54) -- (29) (255)
Property and equipment, net.......... -- (2,145) -- -- (2,145)
Other assets, net.................... -- -- -- -- --
Goodwill............................. -- -- 50,291 -- 50,291
--------- --------- --------- --------- ------------
Total assets................ (172) (2,199) 50,291 (29) 47,891
========= ========= ========= ========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
expenses........................... -- (2) -- -- (2)
Current maturities of long-term
debt............................... -- (38) -- -- (38)
Deferred tax liability............... -- -- -- 511 511
Payable to Founding Company
stockholders....................... -- -- 19,664 -- 19,664
--------- --------- --------- --------- ------------
Total current liabilities... -- (40) 19,664 511 20,135
Long-term debt, net of current
maturities......................... 1,188 (1,479) -- -- (291)
Deferred tax liability............... -- -- -- 22 22
--------- --------- --------- --------- ------------
Total liabilities........... 1,188 (1,519) 19,664 533 19,866
Stockholders' equity:
Common stock..................... -- -- (679) -- (679)
Additional paid-in capital....... -- -- 27,576 -- 27,576
Retained earnings................ (1,360) (680) 3,651 (562) 1,049
Treasury stock, at cost.......... -- -- 79 -- 79
--------- --------- --------- --------- ------------
Total stockholders'
equity.................... (1,360) (680) 30,627 (562) 28,025
--------- --------- --------- --------- ------------
Total liabilities and
stockholders' equity...... $ (172) $ (2,199) $ 50,291 $ (29) $ 47,891
========= ========= ========= ========= ============
</TABLE>
F-9
<PAGE>
LANDCARE USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
POST MERGER
(E) (F) ADJUSTMENTS
--------- --------- -------------
ASSETS
Cash and cash equivalents............ $ 38,125 $ (34,904) $ 3,221
Other current assets................. (3,129) -- (3,129)
--------- --------- -------------
Total current assets........ 34,996 (34,904) 92
Total assets................ 34,996 (34,904) 92
========= ========= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
expenses........................... (3,114) -- (3,114)
Line of Credit....................... -- (3,881) (3,881)
Current maturities of long-term
debt............................... -- (3,837) (3,837)
Current maturities of long-term
payable to related party........... -- (671) (671)
Payable to Founding Company
stockholders....................... -- (19,664) (19,664)
--------- --------- -------------
Total current liabilities... (3,114) (28,053) (31,167)
Long-term debt, net of current
maturities......................... -- (3,778) (3,778)
Long-term payable to related party
net of current maturities.......... -- (3,073) (3,073)
--------- --------- -------------
Total liabilities........... (3,114) (34,904) (38,018)
Stockholders' equity:
Common stock..................... 57 -- 57
Additional paid-in capital....... 38,053 -- 38,053
--------- --------- -------------
Total stockholders'
equity...................... 38,110 -- 38,110
--------- --------- -------------
Total liabilities and
stockholders' equity........ $ 34,996 $ (34,904) $ 92
========= ========= =============
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
YEAR ENDED DECEMBER 31, 1997
(a) Reflects the nursery operations of Church which were not acquired in
the Mergers.
(b) Reflects the reduction in operations for the distribution of certain
real estate, equipment and vehicles to Trees, Four Seasons and Ground Control
which were not acquired in the Mergers.
(c) Reflects the $2.6 million reduction in salaries, bonuses and benefits
to the owners of the Founding Companies to which they agreed in connection with
the mergers 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 a $12,500 charge for the
recurring portion of salary expenses of management.
(d) Reflects the amortization of goodwill to be recorded as a result of
the Mergers over a 40-year estimated life.
(e) Reflects the elimination of interest expense of $1.1 million due to
the repayment of all of the existing debt from the proceeds of the IPO.
(f) Reflects the reduction in certain related party rental and lease
expenses which has been agreed to prospectively.
(g) 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.
F-10
<PAGE>
LANDCARE USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the unaudited pro forma combined statements
of operations adjustments:
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) (F) (G) ADJUSTMENTS
--------- --------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ (233) $ -- $ -- $ -- $ -- $ -- $ -- $ (233)
Cost of services..................... (247) -- -- -- -- -- -- (247)
--------- --------- --------- --------- --------- --------- --------- -----------
Gross profit......................... 14 -- -- -- -- -- -- 14
Selling, general and
administrative..................... (29) (86) (8,348) 1,257 -- (101) -- (7,307)
--------- --------- --------- --------- --------- --------- --------- -----------
Income (loss) from operations........ 43 86 8,348 (1,257) -- 101 -- 7,321
Other income (expense)
Interest expense, net............ -- 89 -- -- 1,143 -- -- 1,232
Other income (expense), net...... -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- -----------
Income (loss) before income taxes.... 43 175 8,348 (1,257) 1,143 101 -- 8,553
Provision (benefit) for income
taxes.............................. -- -- -- -- -- -- 2,168 2,168
--------- --------- --------- --------- --------- --------- --------- -----------
Net income (loss).................... $ 43 $ 175 $ 8,348 $ (1,257) $ 1,143 $ 101 $ (2,168) $ 6,385
========= ========= ========= ========= ========= ========= ========= ===========
</TABLE>
5. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
THREE MONTHS ENDED MARCH 31, 1998
(a) Reflects the nursery operations of Church which will not be acquired
in the Mergers.
(b) Reflects the reduction in operations for the distribution of certain
real estate, equipment and vehicles to Trees, Four Seasons and Ground Control
which will not be acquired in the Mergers.
(c) Reflects the $1.1 million reduction in salaries, bonuses and benefits
to the owners of the Founding Companies to which they agree in connection with
the Mergers, 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 charge $0.1 million for
the recurring portion of salary expenses of management.
(d) Reflects the amortization of goodwill to be recorded as a result of
the Mergers over a 40-year estimated life.
(e) Reflects the elimination of interest expense of $0.3 million due to
the repayment of all of the existing debt from the proceeds of the IPO.
(f) Reflects the increase in certain related party rental and lease
expenses which has been agreed to prospectively.
(g) 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.
F-11
<PAGE>
LANDCARE USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the unaudited pro forma combined statements
of operations adjustments:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F) (G) ADJUSTMENTS
--------- --------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ (10) $ -- $ -- $ -- $ -- $ -- $ -- $ (10)
Cost of services..................... (15) -- -- -- -- -- -- (15)
--------- --------- --------- --------- --------- --------- --------- -----------
Gross profit......................... 5 -- -- -- -- -- -- 5
Selling, general and
administrative..................... (4) (37) (2,399) 314 -- 6 -- (2,120)
--------- --------- --------- --------- --------- --------- --------- -----------
Income (loss) from operations........ 9 37 2,399 (314) -- (6) -- 2,125
Other income (expense)
Interest expense, net............ -- 33 -- -- 325 -- -- 358
Other income (expense), net...... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- -----------
Income (loss) before income taxes.... 9 70 2,399 (314) 325 (6) -- 2,483
Provision (benefit) for income
taxes.............................. -- -- -- -- -- -- 452 452
--------- --------- --------- --------- --------- --------- --------- -----------
Net income (loss).................... $ 9 $ 70 $ 2,399 $ (314) $ 325 $ (6) $ (452) $ 2,031
========= ========= ========= ========= ========= ========= ========= ===========
</TABLE>
F-12
<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-13
<PAGE>
LANDCARE USA, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
ASSETS
CASH AND CASH EQUIVALENTS............ $ 9 $ 11
DEFERRED OFFERING COSTS.............. 218 3,129
------------ -----------
Total assets............... $ 227 $ 3,140
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
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,
50,000,000 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
============ ===========
The accompanying notes are an integral part of these financial statements.
F-14
<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-15
<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-16
<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............................ 9 2
CASH, beginning of period............... -- 9
---------------- -------------------
CASH, end of period..................... $ 9 $ 11
================ ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<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 Offering) and, subsequent to the Offering,
continue to acquire, through merger or purchase, similar companies to expand its
national operations.
LandCARE has not conducted any operations, and all activities to date have
related to the Offering 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 Offering. LandCARE has treated these
costs as deferred offering costs. LandCARE is dependent upon the Offering 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.
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.
F-18
<PAGE>
LANDCARE USA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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 Offering. 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
F-19
<PAGE>
LANDCARE USA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
options will vest at the rate of 20 percent per year, commencing on the first
anniversary of the Offering and will expire seven 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 Offering.
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 this
Offering. 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.
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 Offering. 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. An investment in shares of Common
Stock offered by this Prospectus involves a high
F-20
<PAGE>
LANDCARE USA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
degree of risk as discussed in Note 1. For a more thorough discussion of risk
factors, see "Risk Factors" included elsewhere in this Prospectus.
The Company has received a commitment for a credit facility of $50.0
million, which is expected to be available upon consummation of the Offering.
The credit facility will be used to fund acquisitions and working capital
requirements. It is anticipated that the credit facility will be subject to
various loan covenants including (i) maintenance of certain financial ratios,
(ii) restrictions on additional indebtedness, and (iii) restrictions on liens,
guarantees, advances and dividends, and will be subject to customary drawing
conditions and the consummation of the Offering.
F-21
<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 Trees, Inc.
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-22
<PAGE>
TREES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31
--------------------
1997 1998
--------- ---------
ASSETS
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
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
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
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
TREES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED MARCH 31
-------------------------------
1996 1997 1998
--------- --------- ---------
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
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<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-25
<PAGE>
TREES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MARCH 31
-------------------------------
1996 1997 1998
--------- --------- ---------
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
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<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.
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-27
<PAGE>
TREES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-28
<PAGE>
TREES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
ESTIMATED MARCH 31
USEFUL LIVES ----------------------
IN YEARS 1997 1998
------------ ---------- ----------
Land................................. -- $ 129 $ 129
Transportation equipment............. 5 20,730 22,129
Machinery and equipment.............. 5-10 4,311 5,672
Buildings and improvements........... 30 258 258
Office furniture and equipment....... 5 127 164
---------- ----------
Total...................... 25,555 28,352
Less -- Accumulated depreciation..... (17,160) (18,013)
---------- ----------
Property and equipment,
net..................... $ 8,395 $ 10,339
========== ==========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
MARCH 31
--------------------
1997 1998
--------- ---------
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
========= =========
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):
MARCH 31
--------------------
1997 1998
--------- ---------
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
========= =========
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
F-29
<PAGE>
TREES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
MARCH 31
--------------------
1997 1998
--------- ---------
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.................... $ 681 $ 570
Note payable to former shareholder
payable in monthly installments of
$35,335 including interest of 8.0%,
due 2006.............................. 2,798 2,591
--------- ---------
3,479 3,161
Less -- Current portion................. (319) (342)
--------- ---------
$ 3,160 $ 2,819
========= =========
The aggregate maturities of long-term debt at March 31, 1998, are as
follows (in thousands):
Year ending March 31 --
1999............................... 345
2000............................... 374
2001............................... 404
2002............................... 437
2003............................... 337
Thereafter......................... 1,264
---------
Total......................... $ 3,161
=========
6. INCOME TAXES:
The components of the provision for income taxes are as follows (in thousands):
YEAR ENDED MARCH 31
-------------------------------
1996 1997 1998
--------- --------- ---------
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
========= ========= =========
F-30
<PAGE>
TREES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from an amount computed at the
statutory rate as follows (in thousands):
YEAR ENDED MARCH 31
-------------------------------
1996 1997 1998
--------- --------- ---------
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
========= ========= =========
The significant items giving rise to the deferred tax assets and
liabilities are as follows (in thousands):
MARCH 31, MARCH 31,
1997 1998
--------- ------------
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)
========= ============
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.
F-31
<PAGE>
TREES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
Year ending March 31 --
1999............................ $ 1,413
2000............................ 1,278
2001............................ 1,273
2002............................ 1,257
2003............................ 1,184
Thereafter...................... 70
---------
$ 6,475
=========
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.
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.
F-32
<PAGE>
TREES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
will be 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.
F-33
<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-34
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31
-------------------- MARCH 31
1996 1997 1998
--------- --------- ------------
(UNAUDITED)
ASSETS
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
========= ========= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
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,
1215.5 shares issued and
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
========= ========= ============
The accompanying notes are an integral part of these financial statements.
F-35
<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-36
<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-37
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
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)............... $ (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...... (53) -- 277 (42) 373
CASH, beginning of period............ 173 120 120 120 397
--------- --------- --------- --------- ---------
CASH, 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-38
<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.
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
F-39
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-40
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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):
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------
IN YEARS 1996 1997
------------ --------- ---------
Transportation equipment................ 5 $ 1,700 $ 1,801
Machinery and equipment................. 5-10 608 724
Leasehold improvements.................. 5-10 216 230
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
========= =========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
DECEMBER 31
--------------------
1996 1997
--------- ---------
Accounts receivable, trade.............. $ 973 $ 1,569
Income tax refund....................... 41 --
Accounts receivable, other.............. 16 11
Allowance for doubtful accounts......... (93) (100)
--------- ---------
$ 937 $ 1,480
========= =========
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31
--------------------
1996 1997
--------- ---------
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
========= =========
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.
F-41
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31
--------------------
1996 1997
--------- ---------
Note payable to a financial institution
in monthly installments of $4,123
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
$9,436 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
========= =========
The aggregate maturities of long-term debt as of December 31, 1997, are as
follows (in thousands):
Year ending December 31 --
1998............................... $ 38
1999............................... 42
2000............................... 45
2001............................... 16
---------
$ 141
=========
6. INCOME TAXES:
The components of the provision for income taxes are as follows (in
thousands):
DECEMBER 31
-------------------------------
1995 1996 1997
--------- --------- ---------
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
========= ========= =========
The provision for income taxes differs from an amount computed at the
statutory rate as follows (in thousands):
DECEMBER 31
-------------------------------
1995 1996 1997
--------- --------- ---------
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
========= ========= =========
F-42
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The significant items giving rise to the deferred tax assets and
liabilities are as follows (in thousands):
DECEMBER 31
--------------------
1996 1997
--------- ---------
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)
========= =========
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):
Year ending December 31 --
1998............................ $ 273
1999............................ 206
2000............................ 143
2001............................ 70
2002............................ 12
---------
$ 704
=========
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.
F-43
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, will be
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 aproximately $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.
Concurrently with the Merger, the Company will enter into an agreement with
the shareholders to lease land used in the Company's operations for negotiated
amounts and terms.
F-44
<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-45
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 MARCH 31
1997 1998
------------ ------------
(UNAUDITED)
ASSETS
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
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
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
issued and outstanding............ 3 3
Retained earnings.................. 114 244
------------ ------------
Total shareholders' equity.... 117 247
------------ ------------
Total liabilities and
shareholders' equity....... $5,006 $5,198
============ ============
The accompanying notes are an integral part of these financial statements.
F-46
<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-47
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
RETAINED TOTAL
COMMON EARNINGS SHAREHOLDERS'
STOCK (DEFICIT) EQUITY (DEFICIT)
------ --------- -----------------
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
====== ========= =======
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS
ENDED
YEAR ENDED MARCH 31
DECEMBER 31 --------------------
1997 1997 1998
------------ --------- ---------
(UNAUDITED)
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
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
financing activities....... 667 144 (63)
------------ --------- ---------
NET INCREASE IN CASH................. 34 (15) (40)
CASH, beginning of year.............. 15 15 49
------------ --------- ---------
CASH, end of year.................... $ 49 $ -- $ 9
============ ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for --
Interest........................ $ 429 $ 101 $ 95
The accompanying notes are an integral part of these financial statements.
F-49
<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.
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-50
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., 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 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 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
F-51
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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):
ESTIMATED
USEFUL LIVES DECEMBER 31
IN YEARS 1997
------------- ------------
Machinery and equipment................. 5-10 $ 1,914
Transportation equipment................ 5 804
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
============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
DECEMBER 31
1997
------------
Accounts receivable, trade.............................. $ 1,854
Retainage............................................... 35
Allowance for doubtful accounts......................... (79)
------------
$ 1,810
============
Other current assets consist of the following (in thousands):
DECEMBER 31
1997
------------
Prepaid expenses........................................ $ 189
Advance to related party................................ 83
Other current assets.................................... 33
------------
$ 305
============
F-52
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
1997
------------
Accounts payable, trade................................. $ 1,319
Income tax payable...................................... 188
Warranty accrual........................................ 123
Accrued compensation and benefits....................... 64
Other accrued expenses.................................. 60
------------
$ 1,754
============
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.
LONG-TERM DEBT
Long-term debt as of December 31, 1997, consists of the following (in
thousands):
Notes payable to various financial
institutions in total monthly
installments of approximately
$20,329 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 $2,265 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
$19,608 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)
---------
$ 820
=========
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.
F-53
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt as of December 31, 1997, are as
follows (in thousands):
Year ending December 31-
1998............................ $ 346
1999............................ 244
2000............................ 226
2001............................ 194
2002............................ 156
---------
$ 1,166
=========
6. INCOME TAXES:
The components of the provision for income taxes as of December 31, 1997,
are as follows (in thousands):
Federal --
Current......................... $ 199
Deferred........................ (71)
---------
128
---------
State --
Current......................... 47
Deferred........................ (17)
---------
30
---------
Total provision............ $ 158
=========
The provision for income taxes as of December 31, 1997, differs from an
amount computed at the statutory rate as follows (in thousands):
Federal income tax at statutory
rates................................ $ 137
State income taxes................... 19
Nondeductible expenses............... 2
---------
$ 158
=========
The significant items giving rise to the deferred tax assets and
liabilities as of December 31, 1997, are as follows (in thousands):
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
=========
F-54
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
Future minimum lease payments for operating leases are as follows (in
thousands):
Year ending December 31 --
1998....................... 747
1999....................... 659
2000....................... 430
2001....................... 142
2002....................... 77
---------
$ 2,055
=========
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.
F-55
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 will enter into an agreement with
the shareholders to lease a building used in the Company's operations for
negotiated amounts and terms.
F-56
<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-57
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31
-------------------- MARCH 31
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
ASSETS
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
========= ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
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
========= ========= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-58
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
CONSOLIDATED 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............................. $ 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-59
<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-60
<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
statements.
F-61
<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 provices 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.
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-62
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED 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 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 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
F-63
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------
IN YEARS 1996 1997
------------ --------- ---------
Transportation equipment............. 5 $ 2,041 $ 2,677
Machinery and equipment.............. 3-10 3,020 3,248
Leasehold improvements............... 15-30 53 74
--------- ---------
Total...................... 5,114 5,999
Less -- Accumulated depreciation..... (3,632) (4,082)
--------- ---------
Property and equipment,
net........................ $ 1,482 $ 1,917
========= =========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
DECEMBER 31
--------------------
1996 1997
--------- ---------
Accounts receivable, trade........... $ 2,584 $ 3,404
Retainage............................ 234 308
Allowance for doubtful accounts...... (741) (741)
--------- ---------
$ 2,077 $ 2,971
========= =========
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31
--------------------
1996 1997
--------- ---------
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
========= =========
F-64
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
DECEMBER 31
--------------------
1996 1997
--------- ---------
Notes payable to financial
institutions in total monthly
installments of approximately
$19,000 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
$8,300 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 $656
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 $19,000 including
interest at 6.25%, with varying
maturities ranging from
1999-2002.......................... 175 607
Capital leases of equipment payable
in monthly installments of
approximately $5,000 including
interest at 6.25%, with varying
maturities ranging from 1998-
1999............................... 207 7
--------- ---------
871 1,252
Less- Current portion................ (282) (472)
--------- ---------
$ 589 $ 780
========= =========
The aggregate maturities of long-term debt and capital lease obligations as
of December 31, 1997, are as follows (in thousands):
Year ending December 31 --
1998............................ $ 472
1999............................ 371
2000............................ 286
2001............................ 123
---------
$ 1,252
=========
F-65
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows
(in thousands):
DECEMBER 31
-------------------------------
1995 1996 1997
--------- --------- ---------
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
========= ========= =========
The provision (benefit) for income taxes differs from an amount computed at
the statutory rate as follows (in thousands):
DECEMBER 31
-------------------------------
1995 1996 1997
--------- --------- ---------
Federal income tax at statutory rates... $ 290 $ (106) $ 482
State income taxes...................... 39 (14) 65
--------- --------- ---------
$ 329 $ (120) $ 547
========= ========= =========
The significant items giving rise to the deferred tax assets and
liabilities, are as follows (in thousands):
1996 1997
--------- ---------
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
========= =========
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.
F-66
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
Year ending December 31 --
1998............................ $ 249
1999............................ 166
2000............................ 116
2001............................ 92
---------
$ 623
=========
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-67
<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, will not be 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 will be 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 will enter into an agreement with
the shareholders to lease land, equipment and buildings used in the Company's
operations for negotiated amounts and terms.
F-68
<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-69
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 MARCH 31
1997 1998
------------ ------------
(UNAUDITED)
ASSETS
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
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
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 and
issued,
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
============ ============
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED
YEAR ENDED MARCH 31
DECEMBER 31 --------------------
1997 1997 1998
------------ --------- ---------
(UNAUDITED)
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
============ ========= =========
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
STATEMENT 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-72
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
YEAR ENDED MARCH 31
DECEMBER 31, --------------------
1997 1997 1998
------------ --------- ---------
(UNAUDITED)
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... 19 324 41
------------ --------- ---------
Net cash
provided by
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
financing
activities.... 120 (60) 53
------------ --------- ---------
NET 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 for --
Interest................... $ 152 $ 21 $ 49
Income taxes............... 135 85 130
The accompanying notes are an integral part of these financial statements.
F-73
<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.
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).
F-74
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
NOTES TO 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 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.
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-75
<PAGE>
GROUND CONTROL LANDSCAPING, 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 in the year ended December 31, 1998.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
ESTIMATED
USEFUL LIVES DECEMBER 31
IN YEARS 1997
------------ -------------
Land................................. -- $ 219
Buildings and improvements........... 30 1,910
Transportation equipment............. 5 1,204
Machinery and equipment.............. 3-10 292
Office furniture and equipment....... 5 188
-------------
Total...................... 3,813
Less -- Accumulated depreciation..... (958)
-------------
Property and equipment,
net..................... $ 2,855
=============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
DECEMBER 31
1997
------------
Accounts receivable, trade........... $ 881
Retainage............................ 99
Allowance for doubtful accounts...... (15)
------------
$ 965
============
Other current assets consist of the following (in thousands):
DECEMBER 31
1997
------------
Deposits on materials................ $ 82
Costs in excess of billings.......... 45
Other current assets................. 23
------------
$ 150
============
F-76
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31
1997
-----------
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
===========
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):
DECEMBER 31
1997
-----------
Notes payable to a financial
institution in monthly installments
of approximately $14,000 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 $12,600 including
interest at 9.5%, secured by
property due 2013.................. 1,330
Note payable to a bank in monthly
installments of approximately
$2,300 including interest at 8.5%,
secured by land and property due
2008............................... 188
-----------
1,768
Less -- Current portion.............. (180)
-----------
$ 1,588
===========
F-77
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt as of December 31, 1997, are as
follows (in thousands):
Year ending December 31 --
1998............................ $ 180
1999............................ 130
2000............................ 65
2001............................ 50
2002............................ 54
Thereafter...................... 1,289
---------
$ 1,768
=========
6. INCOME TAXES:
The components of the provision for income taxes as of December 31, 1997,
are as follows (in thousands):
Federal --
Current......................... $ 204
Deferred........................ 8
---------
212
---------
State --
Current......................... 35
Deferred........................ 1
---------
36
---------
Total provision............ $ 248
=========
The provision for income taxes as of December 31, 1997, differs from an
amount computed at the statutory rate as follows (in thousands):
Federal income tax at statutory
rates.............................. $ 223
State income taxes................... 23
Nondeductible expenses............... 5
Fuel tax credit...................... (3)
---------
$ 248
=========
F-78
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The significant items giving rise to the deferred tax assets and
liabilities as of December 31, 1997, are as follows (in thousands):
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)
=========
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.
Future minimum lease payments for operating leases are as follows (in
thousands):
Year ending December 31 --
1998............................ $ 135
1999............................ 128
2000............................ 89
2001............................ 34
2002............................ 4
---------
$ 390
=========
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
F-79
<PAGE>
GROUND CONTROL LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, will be distributed to the stockholders. In
addition, stockholders of the Company will assume 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.
Concurrently with the Merger, the Company will enter into an agreement with
the stockholders to lease land and buildings used in the Company's operations
for negotiated amounts and terms.
F-80
<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-81
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31
-------------------- MARCH 31
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
ASSETS
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
========= ========= ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
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
========= ========= ===========
The accompanying notes are an integral part of these combined financial
statements.
F-82
<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
statements.
F-83
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
TOTAL
COMMON RETAINED SHAREHOLDER'S
STOCK EARNINGS EQUITY
------ --------- --------------
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
====== ========= ==============
The accompanying notes are an integral part of these combined financial
statements.
F-84
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31 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-85
<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 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-86
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In conjunction with the acquisitions, liabilities were assumed as follows
(in thousands):
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
=========
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):
YEAR ENDED
DECEMBER 31,
1997
------------
(UNAUDITED)
Pro forma revenue.................... $9,249
Pro forma net income................. 432
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-87
<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):
DECEMBER 31
--------------------
1996 1997
--------- ---------
Growing stock........................ $ 933 $ 897
Parts and supplies................... 87 103
--------- ---------
$ 1,020 $ 1,000
========= =========
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-88
<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:
SHARES
AUTHORIZED ISSUED AND
SHARES OUTSTANDING PAR VALUE
---------- ----------- ---------
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
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-89
<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):
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------
IN YEAR 1996 1997
------------ --------- ---------
Machinery and equipment.............. 5-10 $ 1,356 $ 2,345
Office furniture and equipment....... 5 207 212
Leasehold improvements............... 5 122 122
--------- ---------
Total...................... 1,685 2,679
Less -- Accumulated depreciation..... (971) (1,140)
--------- ---------
Property and equipment,
net..................... $ 714 $ 1,539
========= =========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
DECEMBER 31
--------------------
1996 1997
--------- ---------
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
========= =========
Other assets consist of the following (in thousands):
DECEMBER 31
--------------------
1996 1997
--------- ---------
Goodwill............................. $ -- $ 1,472
Other................................ 30 82
--------- ---------
$ 30 $ 1,554
========= =========
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31
--------------------
1996 1997
--------- ---------
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
========= =========
F-90
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Other current liabilities consist of the following (in thousands):
DECEMBER 31
--------------------
1996 1997
--------- ---------
Customer deposits.................... $ 123 $ 3
Performance payment.................. -- 80
Other................................ -- 7
--------- ---------
$ 123 $ 90
========= =========
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):
DECEMBER 31
--------------------
1996 1997
--------- ---------
Note payable to a financial
institution in monthly installments
of $14,300 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
$10,000 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 $1,754 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 $16,416 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 $145,000 on January 9,
1998 and $435,000 on July 1, 1998
including interest of 10%.......... -- 580
--------- ---------
672 3,809
Less -- Current portion.............. (233) (2,597)
--------- ---------
$ 439 $ 1,212
========= =========
F-91
<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):
Year ending December 31 --
1998....................... $ 2,597
1999....................... 391
2000....................... 151
2001....................... 139
2002....................... 153
Thereafter................. 378
---------
$ 3,809
=========
6. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows
(in thousands):
DECEMBER 31
--------------------
1996 1997
--------- ---------
Federal --
Current............................ $ (1) $ 3
Deferred........................... 58 (248)
--------- ---------
57 (245)
--------- ---------
State --
Current............................ 14 (1)
Deferred........................... 4 (5)
--------- ---------
18 (6)
--------- ---------
Total provision............ $ 75 $ (251)
========= =========
The provision (benefit) for income taxes differs from an amount computed at
the statutory rate as follows (in thousands):
DECEMBER 31
--------------------
1996 1997
--------- ---------
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)
========= =========
F-92
<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):
1996 1997
--------- ---------
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)
========= =========
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):
Year ending December 31 --
1998............................ $ 146
1999............................ 108
2000............................ 108
2001............................ 84
2002............................ 84
---------
$ 530
=========
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-93
<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 will enter into an agreement with
the shareholder to lease land and buildings used in the Group's operations for
negotiated amounts and terms.
F-94
<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-95
<PAGE>
DESERT CARE LANDSCAPING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 MARCH 31
1997 1998
------------ ------------
(UNAUDITED)
ASSETS
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
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
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 issued and
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
============ ============
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE>
DESERT CARE LANDSCAPING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED
YEAR ENDED MARCH 31
DECEMBER 31 --------------------
1997 1997 1998
------------ --------- ---------
(UNAUDITED)
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)
============ ========= =========
The accompanying notes are an integral part of these financial statements.
F-97
<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-98
<PAGE>
DESERT CARE LANDSCAPING, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
YEAR ENDED MARCH 31
DECEMBER 31 --------------------
1997 1997 1998
------------ --------- ---------
(UNAUDITED)
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
(The accompanying notes are an integral part of these financial statements.)
F-99
<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'Scommon 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.
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
F-100
<PAGE>
DESERT CARE LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-101
<PAGE>
DESERT CARE LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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):
ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 1997
------------- ------------
Transportation equipment............. 5 $ 707
Machinery and equipment.............. 5-10 634
Leasehold improvements............... 10 15
Office furniture and equipment....... 5 96
------------
Total...................... 1,452
Less- Accumulated depreciation....... (445)
------------
Property and equipment,
net..................... $1,007
============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
DECEMBER 31,
1997
------------
Accounts receivable, trade...... $ 911
Retainage....................... 103
Accounts receivable, other...... 104
Allowance for doubtful
accounts....................... (32)
------------
$1,086
============
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
1997
------------
Accounts payable, trade......... $ 247
Accrued compensation and
benefits....................... 99
Warranty accrual................ 80
Other accrued expenses.......... 11
------------
$ 437
============
Other current liabilities consist of the following (in thousands):
DECEMBER 31,
1997
------------
Customer deposits............... $ 50
Other........................... 3
---
$ 53
===
F-102
<PAGE>
DESERT CARE LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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):
DECEMBER 31,
1997
------------
Notes payable to a financial
institution in total monthly
installments of $7,137 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
$3,257 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 $2,194 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 $2,625 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 $2,252 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 $2,126 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 $1,171 including
interest at 10.9% and 12.4%,
secured by various equipment, due
in 1998 through 2000............... 15
------------
565
Less -- Current portion.............. (186)
------------
$ 379
============
F-103
<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):
Year ending December 31 --
1998............................... $ 186
1999............................... 165
2000............................... 142
2001............................... 63
2002............................... 9
---------
$ 565
=========
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):
Year ending December 31 --
1998............................... $ 163
1999............................... 147
2000............................... 108
2001............................... 90
2002............................... 90
---------
$ 598
=========
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-104
<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 will enter into an agreement with
the shareholders to lease land, equipment and buildings used in the Company's
operations for negotiated amounts and terms.
F-105
<PAGE>
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................... 3
Risk Factors......................... 11
The Company.......................... 17
Dividend Policy...................... 18
Capitalization....................... 19
Selected Financial Data.............. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
Business............................. 38
Management........................... 49
Certain Transactions................. 55
Principal Stockholders............... 59
Description of Capital Stock......... 60
Shares Eligible for Future Sale...... 63
Legal Matters........................ 64
Experts.............................. 64
Additional Information............... 64
Index to Financial Statements........ F-1
5,000,000 Shares
[LOGO]
LANDCARE USA, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the securities being registered. In connection with future
acquisitions, additional printing, legal, accounting and miscellaneous expenses
are expected to be incurred with respect to the issuance and distribution of the
securities being registered hereby. All amounts are estimates except for the
fees payable to the SEC.
AMOUNT TO
BE PAID
----------
SEC registration fee................. $ 12,169
Printing expenses.................... $ 10,000
Legal fees and expenses.............. $ 20,000
Accounting fees and expenses......... $ 20,000
Miscellaneous........................ $ 12,831
----------
TOTAL........................... $ 75,000
==========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Restated Certificate of Incorporation and Bylaws, as amended,
incorporate substantially the provisions of the DGCL providing for
indemnification of directors and officers of the Company against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with any proceeding arising by reason of the fact that such person
is or was an officer or director of the Company or is or was serving at the
request of the Company as a director, officer or employee of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise.
As permitted by Section 102 of the DGCL, the Company's Restated Certificate
of Incorporation contains provisions eliminating a director's personal liability
for monetary damages to the Company and its stockholders arising from a breach
of a director's fiduciary duty except for liability (a) for any breach of the
director's duty of loyalty to the Company or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the DGCL, or (d) for any transaction
from which the director derived an improper personal benefit.
Section 145 of the DGCL provides generally that a person sued as a
director, officer, employee or agent of a corporation may be indemnified by the
corporation for reasonable expenses, including attorneys' fees, if in the case
of other than derivative suits such person has acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation (and, in the case of a criminal proceeding, had no
reasonable cause to believe that such person's conduct was unlawful). In the
case of a derivative suit, an officer, employee or agent of the corporation
which is not protected by the Restated Certificate of Incorporation may be
indemnified by the corporation for reasonable expenses, including attorneys'
fees, if such person has acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made in the case of a
derivative suit in respect of any claim as to which an officer, employee or
agent has been adjudged to be liable to the corporation unless that person is
fairly and reasonably entitled to indemnity for proper expenses. Indemnification
is mandatory in the case of a director or officer who is successful on the
merits in defense of a suit against such person.
The Company has entered into Indemnity Agreements with its directors and
certain key officers pursuant to which the Company generally is obligated to
indemnify its directors and such officers to the full extent permitted by the
DGCL as described above.
The Company has purchased liability insurance policies covering directors
and officers in certain circumstances.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On October 9, 1997, LandCARE issued and sold 20,000 shares of Common Stock
to Notre for a consideration of $1,000. This sale was exempt from registration
under Section 4(2) of the Securities Act, no public offering being involved.
On November 12, 1997, LandCARE issued and sold shares of Common Stock to
the following parties in the amounts and for the consideration indicated. These
sales were exempt from registration under Section 4(2) of the Securities Act, no
public offering being involved: William F. Murdy -- 3,194.56 shares for a
consideration of $2,500; William L. Fiedler -- 1,277.82 shares for a
consideration of $1,000; Kenneth V. Garcia -- 1,277.82 shares for a
consideration of $1,000; Fred M. Ferreira -- 127.78 shares for a consideration
of $100; Steven Ives -- 638.91 shares for a consideration of $500; Fieldstone
Partners, Inc. -- 1,111.70 shares for a consideration of $870; Infoscope
Partners, Inc. -- 1,022.26 shares for a consideration of $800; John T.
King -- 98.90 shares for a consideration of $77.40; Susan Yancey -- 63.89 shares
for a consideration of $50; Jennifer Davidson -- 31.94 shares for a
consideration of $25; Shellie LePori -- 319.45 shares for a consideration of
$250; Steven Blum -- 191.67 shares for a consideration of $150: Richard T.
Howell -- 255.56 shares for a consideration of $200; Jennifer Jackson -- 127.78
shares for a consideration of $100; Melinda Malek -- 12.77 shares for a
consideration of $10; Tina Rose -- 12.77 shares for a consideration of $10;
Michael Loy -- 191.67 shares for a consideration of $150; Michael
Pacini -- 127.78 shares for a consideration of $100; Kenneth Watler -- 63.89
shares for a consideration of $50.00; and Richard Owen -- 127.78 shares for a
consideration of $100.
On March 6, 1998, LandCARE issued and sold shares of Common Stock to the
following parties in the amounts and for the consideration indicated. These
sales were exempt from registration under Section 4(2) of the Securities Act, no
public offering being involved: Peter C. Forbes -- 1,277.82 shares of Common
Stock for a consideration of $1,000; William F. Murdy -- 319.45 shares for a
consideration of $250; William L. Fiedler -- 127.78 shares for a consideration
of $100; Kenneth V. Garcia -- 127.78 shares for a consideration of $100; Rohan
Crichton -- 255.56 shares for a consideration of $200; Steven Ives -- 63.89
shares for a consideration of $50.00; Clark A. Johnson -- 127.78 shares for a
consideration of $100; and Patrick J. Norton -- 127.78 shares for a
consideration of $100.
Effective March 15, 1998, LandCARE effected a 78.2579-to-1 stock split on
shares of Common Stock outstanding as of March 15, 1998.
Effective March 15, 1998, LandCARE issued and sold 1,296,408 shares of
Restricted Common Stock to Notre in exchange for 1,296,408 shares of Common
Stock. This sale was exempt from registration under Section 4(2) of the
Securities Act, no public offering being involved.
On June 9, 1998, the Company sold 5,162,645 shares of its Common Stock in
connection with the Mergers of the Founding Companies. Each of these
transactions was completed without registration under the Securities Act in
reliance upon the exemption provided by Section 4(2) of the Securities Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE TO THE EXHIBIT
INDICATED BELOW AND TO
THE FILING WITH THE
COMMISSION INDICATED
BELOW
------------------------
EXHIBIT EXHIBIT FILE
NUMBER DESCRIPTION OF EXHIBITS NUMBER NUMBER
- ------------------------ ------------------------------------------------------------- ------ --------------
<C> <S> <C> <C>
1.1 -- Form of Underwriting Agreement 1.1 333-48215
3.1 -- Amended and Restated Certificate of Incorporation of LandCARE 3.1 333-48215
USA, Inc., as amended
3.2 -- Bylaws of LandCARE USA, Inc., as amended 3.2 333-48215
4.1 -- Form of certificate evidencing ownership of Common Stock of 4.1 333-48215
LandCARE USA, Inc.
5.1 -- Opinion of Bracewell & Patterson, L.L.P. Filed herewith
10.1 -- LandCARE USA, Inc. 1998 Long-Term Incentive Plan 10.1 333-48215
10.2 -- LandCARE USA, Inc. 1998 Non-Employee Directors' Stock Plan 10.2 333-48215
10.3 -- Agreement and Plan of Organization dated as of March 17, 10.3 333-48215
1998, by and among LandCARE USA, Inc., Arteka Acquisition
Corp., Arteka Natural Acquisition Corp., Arteka Nurseries
Acquisition Corp., Arteka Corporation, Arteka Natural Green
Corporation, Arteka Nurseries, Inc. and the Stockholders
named therein
10.4 -- Agreement and Plan of Organization dated as of March 17, 10.4 333-48215
1998, by and among LandCARE USA, Inc., Desert Care
Acquisition Corp., Desert Care Landscaping, Inc, and the
Stockholders named therein
10.5 -- Agreement and Plan of Organization dated as of March 17, 10.5 333-48215
1998, by and among LandCARE USA, Inc., D. R. Church Landscape
Co., Inc. and the Stockholders named therein
10.6 -- Agreement and Plan of Organization dated as of March 17, 10.6 333-48215
1998, by and among LandCARE USA, Inc., Four Seasons
Acquisition Corp., Four Seasons Landscape and Maintenance,
Inc. and the Stockholders named therein
10.7 -- Agreement and Plan of Organization dated as of March 17, 10.7 333-48215
1998, by and among LandCARE USA, Inc., Ground Control
Acquisition Corp., Ground Control Landscaping, Inc. and the
Stockholders named therein
10.8 -- Agreement and Plan of Organization dated as of March 17, 10.8 333-48215
1998, by and among LandCARE USA, Inc., Southern Tree
Acquisition Corp., Southern Tree & Landscape Co., Inc. and
the Stockholders named therein
10.9 -- Agreement and Plan of Organization dated as of March 17, 10.9 333-48215
1998, by and among LandCARE USA, Inc., Trees Acquisition
Corp, Trees Inc. and the Stockholders named therein
10.12 -- Form of Employment Agreement between LandCARE USA, Inc. and 10.12 333-48215
William F. Murdy
10.13 -- Form of Employment Agreement between LandCARE USA, Inc. and 10.13 333-48215
Peter C. Forbes
10.14 -- Form of Employment Agreement between LandCARE USA, Inc. and 10.14 333-48215
William L. Fiedler
10.15 -- Form of Employment Agreement between LandCARE USA, Inc. and 10.15 333-48215
Kenneth V. Garcia
10.16 -- Form of Employment Agreement between LandCARE USA, Inc. and 10.16 333-48215
Harold D. Cranston
10.19 -- Form of Founders' Employment Agreement 10.19 333-48215
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE TO THE EXHIBIT
INDICATED BELOW AND TO
THE FILING WITH THE
COMMISSION INDICATED
BELOW
------------------------
EXHIBIT EXHIBIT FILE
NUMBER DESCRIPTION OF EXHIBITS NUMBER NUMBER
- ------------------------ ------------------------------------------------------------- ------ --------------
<C> <S> <C> <C>
10.20 -- Form of Agreement Among Certain Stockholders 10.20 333-48215
10.21 -- Form of Management Employment Agreement 10.23 333-48215
10.22 -- Commitment letter for $50 million credit facility between the 10.24 333-48215
Company and The First National Bank of Chicago, dated March
31, 1998
21.1 -- List of subsidiaries of LandCARE USA, Inc. 21.1 333-48215
23.1 -- Consent of Arthur Andersen LLP Filed herewith
23.2 -- Consent of Bracewell & Patterson, L.L.P. (included in Exhibit 23.3 333-48215
5.1)
23.3 -- Consent of LAWN AND LANDSCAPE to the Company's reference in 23.17 333-48215
the Prospectus to data appearing in the magazine
24.1 -- Power of Attorney (included on signature page to this Filed herewith
Registration Agreement)
</TABLE>
(b) Financial Statement Schedules
The following financial statement schedules are included herein.
Schedule I
All other schedules for which provision is made in the applicable
accounting regulation of the SEC are not required under the related
instructions, are inapplicable, or the information is included in the
consolidated financial statements, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the provisions described in Item 14, or otherwise,
the Company has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company 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
Company 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 and will be governed by the final adjudication
of such issue.
(b) 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; (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,
represents a fundamental change in the information set forth in the
Registration Statement. Notwithstanding, the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b), if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective Registration Statement; (iii) To include any material
information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change in the
Registration Statement.
II-4
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, 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 the time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, LANDCARE USA,
INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT THERETO TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY
OF HOUSTON, STATE OF TEXAS, ON JULY 2, 1998.
LANDCARE USA, INC.
By: /s/ WILLIAM F. MURDY
WILLIAM F. MURDY
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below on this Registration Statement
hereby constitutes and appoints William F. Murdy and William L. Fiedler, each
with full power to act without the other, his or her true and lawful
Attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities (until revoked in writing) to sign any and all amendments (including
post-effective amendments and amendments thereto) to this Registration
Statement, and to file the name, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said Attorney-in-fact and agent full power and authority to do and perform
each and every act and thing he or she might do or could do in person, hereby
ratifying and confirming all that said Attorney-in-fact and agent, or his
substitute, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE INDICATED CAPACITIES ON JULY 2, 1998.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
/s/WILLIAM F. MURDY Chairman of the Board; Chief July 2, 1998
WILLIAM F. MURDY Executive Officer and President
(Principal Executive Officer)
/s/PETER C. FORBES Senior Vice President; Chief July 2, 1998
PETER C. FORBES Financial Officer and Director
(Principal Financial Officer and
Principal Accounting Officer)
/s/RONALD L. STANFA Director July 2, 1998
RONALD L. STANFA
/s/LINDA T. BENGE Director July 2, 1998
LINDA T. BENGE
/s/ROGER S. BRASWELL Director July 2, 1998
ROGER S. BRASWELL
</TABLE>
II-6
<PAGE>
SIGNATURES (CONTINUED)
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
/s/BRUCE A. CHURCH Director July 2, 1998
BRUCE A. CHURCH
/s/DAVID K. LUSE Director July 2, 1998
DAVID K. LUSE
/s/MARK S. YAHN Director July 2, 1998
MARK S. YAHN
/s/JEFF A. MEYER Director July 2, 1998
JEFF A. MEYER
/s/FRED M. FERREIRA Director July 2, 1998
FRED M. FERREIRA
/s/CLARK A. JOHNSON Director July 2, 1998
CLARK A. JOHNSON
/s/PATRICK A. NORTON Director July 2, 1998
PATRICK A. NORTON
</TABLE>
II-7
EXHIBIT 5.1
July 2, 1998
LandCARE USA, Inc.
5850 San Felipe, Suite 500
Houston, Texas 77057
Gentlemen:
We have acted as counsel to LandCARE, Inc., a Delaware corporation (the
"Company"), in connection with the preparation of its Registration Statement
on Form S-1 (the "Registration Statement"), filed by the Company under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
offering and sale by the Company of up to 5,000,000 shares of its common stock,
par value $.01 per share (the "Common Stock").
We have examined originals or copies of (i) the Amended and Restated
Certificate of Incorporation of the Company; (ii) the Bylaws of the Company, as
amended; (iii) certain resolutions of the Board of Directors of the Company; and
(iv) such other documents and records as we have deemed necessary and relevant
for purposes hereof. We have relied upon certificates of public officials and
officers of the Company as to all matters of fact relating to this opinion and
have made such investigations of law as we have deemed necessary and relevant as
a basis hereof. We have not independently verified any factual matter relating
to this opinion.
We have assumed the genuineness of all signatures, the authenticity of all
documents, certificates and records submitted to us as copies, and the
conformity to original documents, certificates and records of all documents,
certificates and records submitted to us as copies.
Based upon the foregoing, and subject to the limitations and assumptions
set forth herein, and having due regard for such legal considerations as we deem
relevant, we are of the opinion that:
1. The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware.
2. The Common Stock is duly authorized, and when issued and delivered
by the Company against payment therefor as described in the Registration
Statement pursuant to Board authorization of the transactions contemplated
by the Registration Statement, such shares will be duly and validly issued,
fully paid and nonassessable.
The foregoing opinion is based on and is limited to the laws of the General
Corporation Law of the State of Delaware, and we render no opinion with respect
to any other law.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as Exhibit 5.1 to the Registration and to the reference to
this firm as having passed on the validity of the issuance of the Common Stock
under the caption "Legal Matters" in the prospectus contained in the
Registration Statement. By giving such consent, we do not admit that we are
included within the category of persons whose consent is required under Section
7 of the Securities Act or the rules and regualtions issued thereunder.
Very truly yours,
/s/ Bracewell & Patterson, L.L.P.
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and all references to our Firm included in this registration statement
on Form S-1 filed by LandCARE USA, Inc.
ARTHUR ANDERSEN LLP
Houston, Texas
July 2, 1998
