AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1998
REGISTRATION NO. 333-48215
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LANDCARE USA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
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
THREE RIVERWAY
SUITE 630
HOUSTON, TEXAS 77056
(800) 492-1101
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND AGENT FOR SERVICE)
------------------------
COPIES TO:
WILLIAM D. GUTERMUTH RICHARD C. TILGHMAN, JR.
BRACEWELL & PATTERSON, L.L.P. PIPER & MARBURY L.L.P.
SOUTH TOWER PENNZOIL PLACE 36 SOUTH CHARLES STREET
711 LOUISIANA STREET, SUITE 2900 BALTIMORE, MARYLAND 21201
HOUSTON, TEXAS 77002-2781 (410) 539-2530
(713) 221-1316
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable 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. [ ]
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. [ ]
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>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
MAY 6, 1998
5,000,000 SHARES
(LOGO)
LANDCARE USA, INC.
COMMON STOCK
------------------------
All of the 5,000,000 shares of Common Stock offered hereby are being
offered by LandCARE USA, Inc. (the "Company"). The Company was founded in 1997
and has conducted no operations to date. Prior to this offering, there has been
no public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price for the Common Stock will be between
$10.00 and $12.00 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. An
aggregate of $34.3 million of the proceeds of this offering will be used to pay
the cash portion of the purchase price for the Founding Companies (as herein
defined) and to repay debt of the Founding Companies borrowed from or guaranteed
by affiliates of the Company. See "Use of Proceeds." The Common Stock has been
approved for listing on The New York Stock Exchange under the symbol "GRW,"
subject to official notice of issuance.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 10 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.
================================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
- --------------------------------------------------------------------------------
Per Share.... $ $ $
- --------------------------------------------------------------------------------
Total(2)..... $ $ $
================================================================================
(1) Before deducting expenses of the offering payable by the Company, estimated
at $4,000,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
750,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public as shown above. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
----------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, and if delivered to and accepted by them, subject to the
right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about
, 1998.
BT ALEX. BROWN
NATIONSBANC MONTGOMERY SECURITIES LLC
SANDERS MORRIS MUNDY
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
[Map of United States Showing
Founding Company Locations]
LandCare USA was founded in 1997 to become a leading national provider of
comprehensive landscape and tree services to the commercial and institutional
markets through its geographic coverage, and quality and range of services
offered to a diverse customer base. LandCare USA has entered into agreements to
acquire seven founding companies, which have been in business an average of 25
years, had pro forma combined 1997 revenues of $116.2 million and served more
than 2,500 customers.
LANDCARE USA FOUNDING COMPANIES
<TABLE>
<CAPTION>
COMPANY LOCATION YEAR FOUNDED
<S> <C> <C>
Trees, Inc. Houston, Texas (Operations in 13 States) 1953
Four Seasons Landscape and
Maintenance, Inc. Foster City, California 1973
Southern Tree & Landscape Co., Inc. Charlotte, North Carolina 1977
D.R. Church Landscape Co., Inc. Lombard, Illinois 1963
Ground Control Landscaping, Inc. Orlando, Florida 1978
Arteka Corporation Eden Prairie, Minnesota 1973
Desert Care Landscaping, Inc. Phoenix, Arizona 1992
</TABLE>
THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS CONTAINING
FINANCIAL STATEMENTS AUDITED BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AND
WITH QUARTERLY REPORTS CONTAINING UNAUDITED SUMMARY FINANCIAL INFORMATION FOR
EACH OF THE FIRST THREE QUARTERS OF EACH FISCAL YEAR.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
[Photograph of bush]
SERVICES PROVIDED
AND CUSTOMERS SERVED
COMMERCIAL LANDSCAPE
MAINTENANCE AND INSTALLATION
The Company provides comprehensive landscape maintenance and installation
services to:
o regional and national property owners and managers
o real estate developers
o corporations
o universities
o governmental entities
Properties served by the Company include:
o office buildings
o multi-family residential complexes
o shopping centers
o corporate and university campuses
o parks
o resorts and hotels
o governmental facilities
UTILITY LINE CLEARING
AND TREE CARE
Line clearing services comprised approximately 40% of the Company's 1997 pro
forma combined revenues and was generated through contracts with 16 public
utilities in 13 states.
The Company also provides comprehensive tree care services which include regular
pruning and fertilizing to maintain the tree's health and appearance.
[Photograph of Trees, Inc.
cherry-picker truck]
[Photograph of office building
at which LandCare performs
landscape maintenance services]
<PAGE>
MARKET DYNAMICS
AND SERVICE MIX
[Photograph of LandCare sales agent]
MARKET FACTORS
o CONSOLIDATION OF REAL ESTATE OWNERSHIP
o INCREASED OUTSOURCING
o GROWING RECOGNITION OF ECONOMIC
VALUE OF LANDSCAPING
o MORE THAN 10,000 SMALL, OWNER OPERATED
LANDSCAPE AND TREE SERVICE COMPANIES.
[Photograph of LandCare employee
performing landscape maintenance]
MARKET SIZE
[PIE CHART]
$15 Billion
Commercial Landscape
$5 Billion Tree Care
The commerical and institutional segment of the landscape and tree service
industry generated approximately $20 billion in revenues in 1996.
SERVICE MIX
[PIE CHART]
75% Maintenance
25% Installation
Approximately 75% of the Company's pro forma combined revenues in 1997 were
attributable to maintenance services, including tree services.
Photographs presented depict typical landscape and tree services performed for
representative customers of the Company.
<PAGE>
PROSPECTUS SUMMARY
SIMULTANEOUSLY WITH AND AS A CONDITION TO THE CONSUMMATION OF THE OFFERING
MADE BY THIS PROSPECTUS (THE "OFFERING"), LANDCare USA, INC. WILL ACQUIRE, 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, (I) ALL
SHARE, PER SHARE AND FINANCIAL INFORMATION SET FORTH HEREIN (A) HAVE BEEN
ADJUSTED TO GIVE EFFECT TO THE MERGERS; (B) ASSUME AN INITIAL PUBLIC OFFERING
PRICE OF $11.00 PER SHARE, AND (C) ASSUME NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION; AND (II) 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.
THE COMPANY
LandCARE was founded in 1997 to become a leading national provider of
comprehensive landscape and tree services to the commercial and institutional
markets through its geographic coverage, and quality and range of services
offered to a diverse customer base. 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 this Offering, LandCARE will acquire
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 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
intends to implement 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 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
3
<PAGE>
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, Summit
Properties, Equity Residential Properties Trust, Camden Property Trust, Gables
Residential Trust, CB Commercial and Insignia Financial Group. Trees, Inc., one
of the Founding Companies, has line clearing contracts with large utilities,
including PacifiCorp, Houston Lighting & Power, Texas Utilities and Pacific Gas
& Electric.
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 intends to manage the
Founding Companies and 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, 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 believes there are
significant opportunities to achieve operating efficiencies and cost
savings through purchasing economics 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 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 branch networks 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 believes it can better attract and retain
supervisory and management level employees because it will offer (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.
4
<PAGE>
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.
ACQUISITION PROGRAM. In addition to emphasizing internal growth, the
Company intends to implement an aggressive acquisition program and 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 will focus both on entering new markets through significant
acquisitions, as well as expanding within existing markets through acquisitions
of smaller companies.
ACQUISITION OF THE FOUNDING COMPANIES
Simultaneously with and as a condition to the consummation of this
Offering, LandCARE will acquire the seven Founding Companies for an aggregate of
$27.2 million and 5,162,645 shares of Common Stock. The Founding Companies will
become wholly-owned subsidiaries of LandCARE, and the Company's operations will
be conducted through the Founding Companies and any subsequently acquired
businesses. Following the consummation of the Offering and the Mergers, the
Company's executive officers and directors, former stockholders of the Founding
Companies and entities affiliated with them will beneficially own approximately
58.8% of the outstanding shares of Common Stock (55.5% if the Underwriters'
over-allotment option is exercised in full).
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."
5
<PAGE>
THE OFFERING
Common Stock offered by the
Company............................ 5,000,000 shares
Common Stock to be outstanding after
the Offering....................... 12,722,043 shares(1)(2)
Use of proceeds...................... To pay the cash portion of the purchase
price for the Founding Companies, to
repay expenses incurred in connection
with the organization of LandCARE and
the Offering, to repay the existing debt
of the Founding Companies and for
working capital and future acquisitions.
See "Use of Proceeds."
NYSE symbol.......................... GRW
- ------------
(1) Includes (i) 5,162,645 shares of Common Stock to be issued in connection
with the Mergers, (ii) 5,000,000 shares of Common Stock offered hereby, and
(iii) 994,240 shares of Common Stock issued to management and directors of,
and consultants to, the Company, but excludes 100,000 shares of Common Stock
subject to an option granted at an exercise price of $6.00 per share and
1,377,819 shares of Common Stock subject to options to be granted in
connection with this Offering at an exercise price equal to the initial
public offering price. See "Management -- 1998 Long-Term Incentive Plan"
and "-- 1998 Non-Employee Directors' Stock Plan."
(2) Includes 268,750 shares of Common Stock and 1,296,408 shares of Restricted
Common Stock held by Notre Capital Ventures II, L.L.C. ("Notre"). Each
share of Restricted Common Stock is entitled to 0.3 of one vote on all
matters submitted to stockholders. Restricted Common Stock is convertible
into Common Stock under certain circumstances. See "Description of Capital
Stock -- Common Stock and Restricted Common Stock."
RECENT DEVELOPMENTS
During 1997 and 1998, members of the management team and certain
consultants were assembled by 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 Offering 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 has
recorded non-recurring, non-cash compensation charges of $7.9 million in the
fourth quarter of 1997 and $1.9 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 $0.4 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.
The aggregate consideration to be paid by LandCARE in the Mergers consists
of approximately $27.2 million in cash and 5,162,645 shares of Common Stock. The
consideration to be paid by LandCARE for each Founding Company was determined by
negotiations between LandCARE and representatives of each Founding Company and
was based primarily on the pro forma adjusted net income of each Founding
Company. Prior to 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 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 Offering. For a more detailed description of these
transactions, see "Certain Transactions -- Organization of the Company."
6
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LandCARE will acquire the Founding Companies simultaneously with and as a
condition to the consummation of this Offering. 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 this Offering 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.
<TABLE>
<CAPTION>
PRO FORMA COMBINED
-----------------------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
------------------ -------------------------
<S> <C> <C>
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).... 13,609 3,500
Goodwill amortization(4)........ 1,620 405
------------------ -----------
Operating income................ 9,028 706
Interest and other income
(expense), net(5)............. 871 54
------------------ -----------
Income before income taxes...... 9,899 760
Income tax provision(6)......... 4,612 351
------------------ -----------
Net income...................... $ 5,287 $ 409
================== ===========
Net income per share............ $ 0.43 $ 0.03
================== ===========
Shares used in computing pro
forma net income per
share(7)...................... 12,319,865 12,319,865
</TABLE>
MARCH 31, 1998
--------------------------------
PRO FORMA
COMBINED AS ADJUSTED(8)
---------- ---------------
BALANCE SHEET DATA(9)
Working capital (deficit)(11)... $(26,223)(10) $ 14,076
Total assets.................... 112,209 113,794
Long-term debt, including
current maturities(11)........ 11,359 --
Stockholders' equity(11)........ 50,618 97,768
- ------------
(1) Assumes that the Mergers and the Offering 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
will not be 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
prospectively (the "Compensation Differential") and $0.1 million for the
year ended December 31, 1997 in
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
7
<PAGE>
reductions in lease expense as a result of renegotiation of certain leases
(the "Rent Differential"). These data do not include the non-recurring
portion of the non-cash Compensation Charge of $7.9 million and $1.8
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 planned 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 to be 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, (iv) 25,000
shares (determined to be common stock equivalents for purposes of computing
earnings per share) of the 100,000 shares issuable upon the exercise of an
outstanding option, and (v) 4,572,822 of the 5,000,000 shares to be sold in
the Offering necessary to pay the cash portion of the Merger consideration,
pay expenses of this Offering and to repay the Founding Companies' existing
debt. Excludes options to purchase 1,377,819 shares of Common Stock to be
granted upon consummation of this Offering at the initial public offering
price.
(8) Adjusted for the sale of the 5,000,000 shares of Common Stock offered
hereby 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 $27.2 million payable, representing the cash portion of the
Merger consideration and borrowings related to the S Corporation
Distributions of $1.2 million, to be paid from a portion of the net
proceeds of this Offering.
(11) Arteka Nurseries, Inc. and Desert Care are S Corporations. Prior to 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 this Offering. Additionally, prior to the Mergers, Trees,
Four Seasons and Ground Control will distribute to their stockholders
certain real estate, equipment and vehicles and associated liabilities, and
Church will distribute 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.
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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)
<S> <C> <C> <C> <C> <C>
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 has conducted no operations and
generated no revenues to date. LandCARE has entered into definitive agreements
to acquire the Founding Companies simultaneously with, and as a condition to,
the closing of this Offering. The Founding Companies have been operating as
separate independent entities, 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 or to implement effectively 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
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. Upon completion of this
Offering, the Company will have $4.7 million of net proceeds from the offering
($12.4 million if the Underwriters' over-allotment option is exercised in full)
remaining for future acquisitions and working capital after payment of Merger
and Offering expenses, the cash portion of the purchase price for the Founding
Companies and repayment of Founding Company debt. If the Company's cash
resources after the Offering are insufficient
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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
received a commitment for a bank line of credit of $50.0 million for working
capital and acquisitions which is expected to be available upon consummation of
the Offering. However, there can be no assurance that the Company will be able
to obtain this line of credit or additional financing it will need for its
acquisition strategy on terms that the Company deems acceptable. 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 could 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."
MANAGEMENT OF GROWTH. The Company expects to expand its business
principally through the acquisition of other companies. Management expects to
expend significant time and effort in evaluating, completing and integrating
acquisitions and opening new branches. To manage its expansion, promptly after
this Offering the Company must establish accounting, financial reporting,
financial control and other operating systems and procedures. Thereafter,
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."
SIGNIFICANT 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
31.3% of the Company's 1997 pro forma combined revenues and operating income,
respectively, and 52.0% and 108.0% of the Company's first quarter 1998 pro forma
combined revenues and operating income, respectively. The Company will be
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
11
<PAGE>
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
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., recently 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
service 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. 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 -- 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
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<PAGE>
estate construction activity in the markets it serves. In addition, on
installation projects for which there is 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 -- Seasonality and Cyclically."
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. 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 Founding
Companies currently maintain workers' compensation insurance with deductibles of
as much as $350,000 per claim. 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 Founding Companies also maintain liability
insurance for bodily injury and property damage with deductibles of as much as
$350,000 per claim. 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 upon consummation of the Offering. 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
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<PAGE>
affect the Company's profitability and ability to bid jobs competitivity with
smaller, non-unionized 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 will be 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. Following the completion
of the Mergers and this Offering, the Company's executive officers and
directors, former stockholders of the Founding Companies and entities affiliated
with them will beneficially own approximately 58.8% of the outstanding shares of
Common Stock (55.5% if the Underwriters' over-allotment option is exercised in
full). These persons, if acting in concert, will be able to exercise control
over the Company's affairs, to elect the entire Board of Directors and to
control the outcome of any matter submitted to a vote of stockholders. See
"Principal Stockholders."
SUBSTANTIAL PROCEEDS OF OFFERING PAYABLE TO STOCKHOLDERS OF FOUNDING
COMPANIES. Of the net proceeds of this Offering, $27.2 million, or 57.7%, will
be paid as the cash portion of the purchase price for the Founding Companies.
Some of the recipients of these funds will become directors of the Company or
holders of more than 5% of the Common Stock. Additionally, Notre has advanced to
LandCARE funds to cover certain organization expenses and Offering costs and
will be reimbursed up to $3.0 million from the proceeds of this Offering. See
"Use of Proceeds" and "Certain Transactions."
NO PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE. Prior to this
Offering, there has been no public market for the Common Stock. Therefore, the
initial public offering price for the Common Stock will be determined by
negotiation between the Company and the Representatives of the Underwriters and
may bear no relationship to the price at which the Common Stock will trade after
the Offering. See "Underwriting" for the factors to be considered in
determining the initial public offering price. The Common Stock has been
approved for listing on The New York Stock Exchange ("NYSE") under the symbol
"GRW," subject to official notice of issuance. However, there can be no
assurance that an active trading market will develop subsequent to this Offering
or, if developed, that it will be sustained. After this Offering, 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 landscape 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. Upon consummation of the Mergers and this Offering, 12,722,043 shares of
Common Stock will be outstanding. The 5,000,000 shares sold in this Offering
(other than shares that may be purchased by affiliates of the Company) will be
freely tradable. The remaining outstanding shares may be resold publicly only
following their registration under the Securities Act of 1933, as amended (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
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<PAGE>
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 this
Offering. See "Shares Eligible for Future Sale." Upon consummation of this
Offering, the Company also will have outstanding options to purchase up to a
total of 1,477,819 shares of Common Stock. The Company intends to register all
the shares subject to these options under the Securities Act for public resale.
The Company intends to register 5,000,000 additional shares of Common Stock
under the Securities Act within 90 days after completion of its offering for
issuance in connection with future acquisitions. These shares generally will be
freely tradeable after their issuance by persons not affiliated with the Company
unless the Company contractually restricts their resale.
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" 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."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of Common Stock in this
Offering will experience immediate, substantial dilution in the pro forma net
tangible book value of their stock of $8.41 per share and may experience further
dilution in that value from issuances of Common Stock in connection with future
acquisitions. See "Dilution."
FORWARD-LOOKING STATEMENTS.__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.
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THE COMPANY
LandCARE was founded in 1997 to become a leading national provider of
comprehensive landscape and tree services to the commercial and institutional
markets, by offering clients a full range of landscape maintenance, landscape
installation and line clearing services. 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 leading 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 this Offering, LandCARE will acquire
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 will be acquired, see "Certain
Transactions -- Organization of the Company." The following is a description of
the Founding Companies:
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. Following the consummation of this
Offering, she will sign a five-year employment agreement with Trees to continue
her present position and will become 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 has been employed by Four Seasons for 10 years.
Following the consummation of this Offering, Mr. Marcus will sign a five-year
employment agreement with Four Seasons to continue his present position and will
become a Director of Corporate Development of the Company; Mr. Cranston will
sign a five-year employment agreement with the Company to serve as its Chief
Operating Officer and will become a director 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. Following consummation of this
Offering, Mr. Braswell will sign a five-year employment agreement with Southern
Tree to serve as a Vice President and will become 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
16
<PAGE>
installation services accounted for 49% and 51% of Church revenues,
respectively. Bruce A. Church, the President of Church, has been employed by
Church for over 20 years and has over 24 years of industry experience. Following
the consummation of this Offering, he will sign a five-year employment agreement
with Church to continue his present position and will become 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. Following the consummation of this Offering, he will sign a
five-year employment agreement with Ground Control to continue his present
position and will become 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 41% and 59% of Arteka's revenues, respectively. David K.
Luse, the founder of Arteka, has been employed by Arteka for 25 years. Following
the consummation of this Offering, Mr. Luse will sign a five-year employment
agreement with Arteka to serve as Vice-President, and will become 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. Following the consummation of this
Offering, he will sign a five-year employment agreement with Desert Care to
continue his present position and will become a director of the Company.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,000,000 shares of
Common Stock offered hereby, after deducting underwriting discounts and
commissions and estimated Offering and Merger expenses, are estimated to be
$47.2 million ($54.8 million if the Underwriters' over-allotment option is
exercised in full).
Of the net proceeds, $27.2 million will be used to pay the cash portion of
the purchase price for the Founding Companies, approximately $11.7 million of
which will be paid to persons who will become officers or directors of the
Company or will become holders of 5% or more of the Common Stock. See "Certain
Transactions -- Organization of the Company."
A portion of the remaining net proceeds from this Offering will be used to
repay all of the $15.2 million of indebtedness of the Founding Companies, of
which $6.1 million was personally guaranteed by stockholders of the Founding
Companies or entities controlled by those stockholders. The indebtedness to be
repaid includes revolving credit facilities and equipment and vehicle loans,
which mature at various dates through 2013. The revolving credit facilities bore
interest at rates ranging from 9.25% to 9.75% as of December 31, 1997. The
equipment and vehicle loans bore interest at rates from 4.9% to 21.0% as of
December 31, 1997. Borrowings under these revolving credit facilities were used
for working capital requirements. The Company will use the remaining net
proceeds of the Offering and borrowings under the credit facility described
below to fund the cash requirements of its acquisition program, for working
capital and for general corporate purposes.
The Company has received a commitment for a credit facility of $50.0
million, which is expected to be available upon the consummation of this
Offering. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- Combined Liquidity and Capital
Resources."
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 expects that its credit facility will include restrictions on the
ability of the Company to pay cash dividends without the consent of the lender.
Prior to the Mergers, certain of the Founding Companies will make S
Corporation Distributions of up to $1.4 million and certain Founding Companies
will make distributions of the Other Assets having a net book value of
approximately $0.7 million to their former stockholders. To fund the S
Corporation Distributions, the Founding Companies will borrow approximately $1.2
million from existing sources, which will be repaid from the net proceeds of the
Offering.
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, this Offering 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 12,722,043
shares issued and outstanding,
pro forma
as adjusted(2)................ 77 127
Additional paid-in capital........... 41,758 88,858
Retained earnings.................... 8,783 8,783
---------- -----------
Total stockholders' equity...... 50,618 97,768
---------- -----------
Total capitalization....... $ 61,977 $97,768
========== ===========
- ------------
(1) Does not include amounts outstanding under the Founding Companies' short
term lines of credit which totaled $3.9 million at March 31, 1998. These
short term lines of credit will be repaid with the net proceeds of this
Offering. 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 to be
granted upon consummation of this Offering with an exercise price equal to
the initial public offering price. See "Management -- 1998 Long-Term
Incentive Plan" and "-- 1998 Non-Employee Directors' Stock Plan."
19
<PAGE>
DILUTION
The deficit in pro forma net tangible book value of the Company at March
31, 1998 was approximately $14.2 million, or $1.84 per share of Common Stock.
The deficit in net tangible book value per share represents the amount of the
Company's stockholders' equity, less intangible assets, divided by the number of
shares of Common Stock issued and outstanding after giving effect to the
Mergers. Net tangible book value dilution per share represents the difference
between the amount per share paid by purchasers of shares of Common Stock in the
Offering and the pro forma net tangible book value per share of Common Stock
immediately after completion of the Offering. After giving effect to the sale of
5,000,000 shares of Common Stock by the Company in the Offering and the
application of the estimated net proceeds therefrom, the pro forma net tangible
book value of the Company as of March 31, 1998 would have been $33.0 million, or
$2.59 per share. This represents an immediate increase in pro forma net tangible
book value of $4.43 per share to stockholders as of March 31, 1998, and an
immediate dilution in pro forma net tangible book value of $8.41 per share to
purchasers of Common Stock in the Offering. The following table illustrates the
dilution per share:
Assumed initial public offering price
per share............................ $ 11.00
Pro forma deficit in net
tangible book value per share
before the Offering............ $ (1.84)
Increase in pro forma net
tangible book value per share
attributable to new
investors...................... 4.43
---------
Pro forma net tangible book value per
share after the Offering............. 2.59
---------
Dilution per share to new
investors............................ $ 8.41
=========
The following table sets forth, on a pro forma basis to give effect to the
Mergers as of March 31, 1998, the number of shares of Common Stock purchased
from the Company, the aggregate cash consideration paid and the average price
per share paid to the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED AVERAGE
------------------------- TOTAL PRICE
NUMBER PERCENT CONSIDERATION(1) PER SHARE
-------------- -------- ----------------- ----------
<S> <C> <C> <C> <C>
Existing stockholders................ 7,722,043 60.7% $ (14,188,000) $(1.84)
New investors........................ 5,000,000 39.3 55,000,000 $11.00
-------------- -------- -----------------
Total...................... 12,722,043 100.0% $ 40,812,000
============== ======== =================
</TABLE>
- ------------
(1) Total consideration paid by existing stockholders represents the pro forma
net tangible book value of the Company, after giving effect to the Mergers.
20
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LandCARE will acquire the Founding Companies simultaneously with and as a
condition to the consummation of this Offering. For financial statement
presentation purposes, Trees has been 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
this Offering 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)..... 13,609 3,500
Goodwill amortization(4)........ 1,620 405
------------ -------------
Operating income................ 9,028 706
Interest and other income
(expense), net(5).............. 871 54
------------ -------------
Income before income taxes...... 9,899 760
Income tax provision(6)......... 4,612 351
------------ -------------
Net income...................... $ 5,287 $ 409
============ =============
Net income per share............ $ 0.43 $ 0.03
============ =============
Shares used in computing pro
forma net income per
share(7)....................... 12,319,865 12,319,865
(FOOTNOTES ON FOLLOWING PAGE)
21
<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 Offering 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
will not be 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 $7.9
million and $1.8 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 planned 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 to be 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, (iv) 25,000
shares (determined to be Common Stock equivalents for purposes of computing
earnings per share) of the 100,000 shares issuable upon the exercise of an
outstanding option, and (v) 4,572,822 of the 5,000,000 shares to be sold in
the Offering necessary to pay the cash portion of the Merger consideration
expenses of this Offering and to repay the Founding Companies' existing
debt. Excludes options to purchase 1,377,819 shares of Common Stock to be
granted upon consummation of this Offering at the initial public offering
price.
22
<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.
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. LandCARE was founded in 1997 but has
conducted no operations and generated no revenues to date. Upon consummation of
this Offering, LandCARE will acquire 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 intends to implement 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 received a commitment for a credit facility of $50.0
million, which is expected to be available upon the consummation of this
Offering. This credit facility will be used for working capital and
acquisitions. In addition, the Company intends to repay, from the net proceeds
of the Offering, $15.2 million of the Founding Companies' debt, representing all
of their outstanding debt. Accordingly, the Interest Differential of $1.1
million for 1997 and $0.3 million for the three months 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 following the Mergers, 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 has recorded
non-recurring, non-cash compensation charges of $7.9 million and $1.9 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
23
<PAGE>
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
$0.4 million related to these options will be amortized over the five year
vesting period.
The Mergers will be accounted for using the purchase method of accounting.
Trees has been designated as the "accounting acquiror" in the Mergers.
Accordingly, the Company will record goodwill of $64.8 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 and consultants and a portion of the shares issued to
management. 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 $1.6 million per year. The amount of goodwill to be recorded
and the related amortization expense will depend on the actual Offering price.
See "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 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 amount of work performed tends to be lower, even in
warmer climates, during winter months or during periods of inclement weather.
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-
24
<PAGE>
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
new corporate management and the costs of being a publicly-traded company, (iv)
the Company will use 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 once LandCARE and the
Founding Companies begin 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
Selling, general and administrative
expenses........................... 13,706 14.1 16,911 16.4 16,390 14.1 4,130 17.5
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... 4,704 4.9 2,312 2.2 7,853 6.7 419 1.8
Interest and other income (expense),
net................................ (977) (1.1) (670) (0.6) (361) (0.3) (218) (.9)
--------- --------- --------- --------- --------- --------- --------- ---------
Income before
income taxes....................... $ 3,727 3.8% $ 1,642 1.6% $ 7,492 6.4% $ 201 0.9%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
THREE MONTHS ENDED
MARCH 31
--------------------
1998(2)
--------------------
Revenues............................. $ 26,649 100.0%
Cost of services..................... 22,043 82.7
--------- ---------
Gross profit......................... 4,606 17.3
Selling, general and administrative
expenses........................... 4,568 17.1
--------- ---------
Income from operations............... 38 0.2
Interest and other income (expense),
net................................ (304) (1.1)
--------- ---------
Income before
income taxes....................... $ (266) (0.9)%
========= =========
- ------------
(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 will not be acquired in Mergers.
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 during the fourth
quarter of 1997, which have extensive snow removal operations 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.
25
<PAGE>
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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.5 million, or 10.6%, from $4.1 million
for the three months ended March 31, 1997 to $4.6 million for the corresponding
period of 1998. This increase was primarily attributable to an increase of $0.4
million in owners compensation at Four Seasons.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other expense, net,
increased by $0.1 million, or 39.4%, from a net expense of $0.2 million for the
three months ended March 31, 1997 to a net expense of $0.3 million for the
corresponding period of 1998. This increase was primarily due to an increase in
interest expense at Ground Control and Arteka as a result of higher average
outstanding debt balances during the first quarter of 1998.
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 $11.3 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 $6.1 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general
and administrative expenses decreased by $0.5 million, or 3.1%, from $16.9
million in 1996 to $16.4 million in 1997. As a percentage of revenues, selling,
general and administrative expenses decreased from 16.4% in 1996 to 14.1% in
1997 due partially to a non-recurring 1996 accrual by Church to fully reserve
for a potentially uncollectable account receivable from one installation job
totaling approximately $0.9 million. Excluding this charge, selling, general and
administrative expenses decreased from 15.5% of revenues in 1996 to 14.1% in
1997, due to lower owners' compensation during 1997 at Trees and Church.
INTEREST AND OTHER INCOME (EXPENSE), NET. Combined interest and other
expense, net, decreased by $0.3 million, or 46.1%, from a net expense of $0.7
million in 1996 to a net expense of $0.4 million in 1997. This decrease was
primarily due to the receipt of a $0.5 million insurance settlement at Trees
during 1997.
26
<PAGE>
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 $5.2 million in landscape maintenance
revenues at the Founding Companies. Landscape installation revenues increased by
$3.6 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.
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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general
and administrative expenses increased by $3.2 million, or 23.4%, from $13.7
million in 1995 to $16.9 million in 1996. As a percentage of revenues, selling,
general and administrative expense increased from 14.1% in 1995 to 16.4% in
1996. This percentage increase was partially due to a non-recurring accrual
recorded by Church in 1996 to fully reserve for a potentially uncollectable
receivable from one installation job totaling $0.9 million. Excluding this
one-time charge, selling, general and administrative expenses increased from
14.1% in 1995 to 15.5% in 1996, due to increased owners' compensation at Trees
and Church.
INTEREST AND OTHER INCOME (EXPENSE), NET. Combined interest and other
expense, net, decreased by $0.3 million, or 31.4%, from a net expense of $1.0
million in 1995 to a net expense of $0.7 million in 1996. This decrease was
primarily due to a reduction in interest expense at Trees as a result of lower
average outstanding debt 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 pursue an aggressive acquisition program. The
Company expects to fund future acquisitions through the issuance of additional
Common Stock, borrowings under the proposed credit facility discussed below and
with cash flows from operations.
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,
27
<PAGE>
and (iii) restrictions on liens, guarantees, advances and dividends, and will be
subject to customary drawing conditions and the consummation of the Offering.
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>
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.
28
<PAGE>
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. 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.
29
<PAGE>
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>
THREE MONTHS ENDED
MARCH 31
--------------------
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.
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.
30
<PAGE>
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 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.
31
<PAGE>
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:
THREE MONTHS ENDED MARCH 31,
------------------------------------------
1997 1998
-------------------- --------------------
(DOLLARS IN THOUSANDS)
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%
========= ========= ========= =========
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.
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
32
<PAGE>
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>
THREE MONTHS ENDED
MARCH 31
--------------------
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)%
========= =========
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
33
<PAGE>
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 $1.5 million
and an increase of $0.1 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 $1.1
million of revenues. These increases were partially offset by a decrease in snow
removal revenue of $0.2 million in 1996.
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 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
34
<PAGE>
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:
THREE MONTHS ENDED MARCH 31
------------------------------------------
1997 1998
-------------------- --------------------
(dollars in thousands)
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%
========= ========= ========= =========
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.
35
<PAGE>
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.
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
36
<PAGE>
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.
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.
37
<PAGE>
DESERT CARE -- RESULTS OF OPERATIONS
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.
The following table sets forth the selected statement of operations data
and such results as a percentage of total revenue for the periods indicated:
THREE MONTHS ENDED MARCH 31
---------------------------------------
1997 1998
------------------- ------------------
(DOLLARS IN THOUSANDS)
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)%
======== ========= ======== ========
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.
38
<PAGE>
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.
39
<PAGE>
BUSINESS
LandCARE was founded in 1997 to become a leading national provider of
comprehensive landscape and tree services to the commercial and institutional
markets through its geographic coverage, and quality and range of services
offered to a diverse customer base. 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 this Offering, LandCARE will acquire
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 service needs to third party
providers in order to focus on their core competencies, reduce costs and obtain
higher-quality service. Landscape service 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
40
<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 market. 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 service because it requires 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.
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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 market is 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 intends to manage the
Founding Companies and 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, 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 will have 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 will provide support to local management in
marketing, recruiting, training and risk management.
ACHIEVE OPERATING EFFICIENCIES. The Company believes there are
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 believes 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 Company's combined expense for workers'
compensation, personal injury and property damage
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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 believes 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
because it will offer (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.
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.
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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
The Company 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. The
Company currently has no agreements to effect any acquisitions other than the
acquisition of the Founding Companies.
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 received a commitment for a
credit line of $50.0 million which is expected to be available
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upon consummation of the Offering, to be used for working capital and
acquisitions. Following completion of this Offering, the Company intends to
register up to 5,000,000 additional shares of Common Stock under the Securities
Act for its use in connection with future acquisitions. The Company believes
that it can structure some larger acquisitions as tax-free reorganizations by
using its Common Stock as consideration, which will be attractive to those
business owners with a low tax basis in their businesses.
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
software to assist in preparing design drawings and computer software to
estimate the amount of time,
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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, Summit Properties, Equity Residential Properties Trust, Camden
Property Trust, Bay Apartment Communities, Gables Residential Trust, CB
Commercial and Insignia Financial Group. 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. 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 will seek 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's executive and administrative offices are temporarily located
at Three Riverway, Suite 630, Houston, Texas in space provided by Notre. After
the consummation of this Offering, the Company will lease its principal
executive and administrative offices in 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. Upon completion of
the Offering, the Company intends to obtain and maintain 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 Founding Companies currently maintain workers'
compensation insurance, with deductibles in states where allowed, up to $350,000
per claim. 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 Founding Companies also maintain liability insurance for
bodily injury and property damage with deductibles up to
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$350,000 per claim. The Company is considering reducing the deductible limits on
its workers' compensation and liability coverage.
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 segment 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
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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 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 will have 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 will be purchased
at or prior to closing 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 will obtain an agreement
from the purchaser of the property to indemnify 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................... 39 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>
- ------------
* Election as a director of the Company effective as of the consummation of
this Offering.
Election as an officer effective as of the consummation of this Offering.
William F. Murdy has served as President, Chief Executive Officer and
Chairman of the Board of the Company since January 1998. 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. 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
51
<PAGE>
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.
Harold D. Cranston will become Senior Vice President, Chief Operating
Officer and a director of the Company upon consummation of this Offering. Mr.
Cranston has 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 will become Senior Vice President and Chief Development
Officer of the Company upon consummation of this Offering. 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.
Linda T. Benge will become a director of the Company upon consummation of
this Offering. She has been employed by Trees since 1981, has served as its
President and Chief Executive Officer since 1989 and will continue in that
capacity after consummation of this Offering.
Roger S. Braswell will become a director of the Company upon consummation
of this Offering. Mr. Braswell founded Southern Tree in 1977. He has served as
President of Southern Tree since that time and will serve as a Director of
Corporate Development of the Company and Vice President of Southern Tree after
consummation of this Offering. 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 will become a director of the Company upon consummation of
this Offering. He has been employed by Church since 1977, has served as its
President since 1987 and will continue in that capacity after consummation of
this Offering. Mr. Church is a past member of the Board of Directors of the
Associated Landscape Contractors of America ("ALCA").
David K. Luse will become a director of the Company upon consummation of
this Offering. Mr. Luse founded Arteka in 1973, has served as Chief Executive
Officer of Arteka since that time and will serve as a Director of Corporate
Development of the Company and Vice President of Arteka after consummation of
this Offering. 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 will become a director of the Company upon consummation of
this Offering. Mr. Meyer founded Desert Care in 1992. He has served as President
and Chief Executive Officer of Desert Care since 1992 and will continue in that
capacity after consummation of this Offering.
52
<PAGE>
Mark S. Yahn will become a director of the Company upon consummation of
this Offering. He founded Ground Control in 1978, has served as Chief Executive
Officer of Ground Control since 1978 and will continue in that capacity after
consummation of this Offering.
Ronald L. Stanfa 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 will become a director of the Company upon consummation of
this Offering. 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 will become a director of the Company upon consummation of
this Offering. 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 will become a director of the Company upon consummation
of this Offering. 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 will serve as President of Southern
Tree upon consummation of this Offering.
Stewart K. Hanson has been employed by Arteka since 1973, serving as Vice
President from 1984 to 1995, President since 1995 and will continue in that
capacity upon consummation of this Offering.
James R. Marcus founded Four Seasons in 1973. He has served as Chairman
since its inception and will continue in that capacity and as a Director of
Corporate Development of the Company upon consummation of this Offering.
Effective upon consummation of this Offering, the Board of Directors will
be 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 and an Executive Committee. Effective upon
consummation of this Offering, the members of the Audit Committee will be
Messrs. Norton, Stanfa and Ferreira, and the members of the Compensation
Committee will be Messrs. Ferreira, Johnson and Stanfa. The members of the
Executive Committee, the Acquisition Committee and the Nominating Committee will
be selected following the consummation of this Offering. The Executive Committee
will include at least one outside director, and the Nominating Committee will
include three members, two of whom will be directors from the Founding
Companies.
53
<PAGE>
DIRECTOR COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
will not receive additional compensation for serving as directors. Each director
who is not an employee of the Company or one of its subsidiaries will receive 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 Company's 1998 Non-Employee Directors' Stock
Plan, each non-employee director will automatically be 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, has conducted no operations, other
than those associated with this Offering, has generated no revenue to date and
will not pay any of its executive officers any compensation prior to the
consummation of this Offering. 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 will enter into
an employment agreement with the Company upon consummation of this Offering
providing for an annual base salary of $150,000. Each employment agreement will
be 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 will provide 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 will enter into an
employment agreement with his or her Founding Company upon consummation of this
Offering providing for an annual base salary of $150,000. Each employment
agreement will be 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
will provide 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
54
<PAGE>
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 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 will enter 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 closing
of this Offering, NQSOs to purchase a total of 570,000 shares of Common Stock
will be 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 this Offering, options to purchase 767,819 shares will be
granted to certain employees of the Founding Companies. Each of the options
granted at the closing of the Offering will have an exercise price equal to the
initial public offering price per share. All of the foregoing options will vest
at the rate of 20% per year, commencing on the first
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anniversary of this Offering, and will expire at the earlier of ten years from
the date of grant or 90 days following termination of employment.
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 this Offering 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 will 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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<PAGE>
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 $16,279. 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 has agreed to advance
whatever funds are necessary to effect the Mergers and this Offering, all of
which will be on a non-interest-bearing basis. 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
will be repaid from the net proceeds of this Offering.
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 will become
directors of the Company upon consummation of this Offering. 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 this
Offering, to Mr. Stanfa, a director of the Company, and to Messrs. Ferreira,
Johnson and Norton who will become directors of the Company upon the
consummation of this Offering.
Simultaneously with consummation of this Offering, LandCARE will acquire by
merger all of the issued and outstanding stock of the Founding Companies, at
which time each Founding Company will become a wholly-owned subsidiary of the
Company. The aggregate consideration to be paid by LandCARE in the Mergers
consists of $27.2 million in cash and 5,162,645 shares of Common Stock. In
addition, prior to the Mergers, certain of the Founding Companies will make the
S Corporation Distributions of up to $1.4 million and distribute certain real
estate and Other Assets having a net book value of $0.7 million.
The consummation of each Merger is subject to customary conditions. These
conditions include, among others, the continuing accuracy on the closing date of
the Mergers of the representations and warranties of the Founding Companies and
the principal stockholders thereof and of LandCARE, the performance by each of
them of all covenants included in the agreements relating to the Mergers and the
absence of a material adverse change in the results of operations, financial
condition or business of each Founding Company.
There can be no assurance that the conditions to closing of the Mergers
will be satisfied or waived or that the acquisition agreements will not be
terminated prior to consummation. If any of the Mergers is terminated for any
reason, the Company does not intend to consummate this Offering on the terms
described herein.
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The following table sets forth the consideration to be 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................................ $ 11,036 1,863,137
Four Seasons......................... 4,952 742,581
Southern Tree........................ 1,399 482,863
Church Landscape..................... 2,941 725,451
Ground Control....................... 2,640 360,000
Arteka............................... 2,625 646,684
Desert Care.......................... 1,618 341,929
--------- -------------
Total...................... $ 27,211 5,162,645
========= =============
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, will receive 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....................... $ 2,628 716,591
Harold D. Cranston................... 632 221,242
Roger S. Braswell(1)................. 1,114 405,081
Bruce A. Church...................... 1,013 419,363
Mark S. Yahn......................... 2,640 360,000
David K. Luse........................ 2,625 600,092
Jeff A. Meyer........................ 1,037 228,446
--------- -------------
Total...................... $ 11,689 2,950,815
========= =============
- ------------
(1) Consideration being paid to Southern Shade Tree, Inc., the holding company
of Southern Tree, of which Mr. Braswell is an 80% owner.
Pursuant to the agreements to be 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 this
Offering.
Certain of the Founding Companies have incurred indebtedness which has been
personally guaranteed by their stockholders or by entities controlled by their
stockholders. At March 31, 1998, the aggregate amount of indebtedness of these
Founding Companies that was subject to personal guarantees was approximately
$6.1 million. The Company intends to use the net proceeds of the Offering to
repay this indebtedness.
LEASES OF REAL PROPERTY BY FOUNDING COMPANIES
Following the Mergers, Arteka will lease the following facilities from
David K. Luse, who will become a Director of Corporate Development and a
director of the Company upon consummation of the Offering: (i) 15195 Martin
Drive, Eden Prairie, Minnesota, (ii) 1160 Engler Boulevard, Chaska, Minnesota,
(iii) 230 Highway 65 North, River Falls, Wisconsin and (iv) Lot A, Edenvale
Industrial Park, 8th Addition, Eden Prairie, Minnesota. The leases provide for
annual rents of $38,604, $6,000, $24,000 and $15,600, 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
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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 will have 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.
Following the Mergers, Church will lease (i) its facility at 951 North
Ridge Avenue, Lombard, Illinois from a trust of which Bruce A. Church, who will
become a director of the Company upon consummation of the Offering, 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 will have 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.
Following the Mergers, Desert Care will lease 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 will become a director of the Company upon consummation
of the Offering, 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
Care will pay for all utilities, taxes and insurance on each leased property.
Desert Care will have 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.
Following the Mergers, Four Seasons will lease (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 will
become a Director of Corporate Development of the Company upon consummation of
the Offering, (ii) its facility at 4991 Pacheco Boulevard, Martinez, California
from Harold D. Cranston, who will become Senior Vice President, Chief Operating
Officer and a director of the Company upon consummation of the Offering 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 will have 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.
Following the Mergers, Ground Control will lease its facility at 2169 North
Forsyth Road, Orlando, Florida from Mark S. Yahn, who will become a director of
the Company upon consummation of the Offering. 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 will have
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.
Following the Mergers, Southern Tree will lease 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 will become
a director of the Company upon consummation of the Offering, is a member. The
lease provides for annual rent of $66,000, and the rent will be adjusted each
year in accordance with the
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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 will have 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 will become a director of the Company upon
consummation of this Offering, 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. Following the consummation of the Offering,
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 will sell its facility at 800 Turney Street,
Houston, Texas to L.J.S. Investments, Inc. ("LJS"), a Texas corporation of
which Linda T. Benge, who will become a director of the Company upon
consummation of the Offering, is a principal shareholder. Trees will sell the
facility to LJS for nominal consideration on an "As is, where is" basis and
LJS, together with its three principal shareholders, will indemnify Trees for
any and all liability for environmental matters associated with the facility.
See "Business -- Regulation."
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 will become a Director of
Corporate Development and a director of the Company upon consummation of this
Offering.
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 will become a director of the Company and a
Director of Corporate Development upon consummation of this Offering. Arteka
also leases facilities from David Luse (a stockholder) for $84,000 per year,
pursuant to leases that expire on various dates through 2002. This loan will be
repaid at the closing of the Offering.
Desert Care buys trees from and sells trees to Sonoran Heights Nurseries,
L.C. a company of which Jeff A. Meyer, who will become a director of the Company
upon consummation of this Offering, 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 this
Offering, by (i) each person known to own beneficially more than 5% of the
outstanding shares of Common Stock; (ii) each Company director and person who
has consented to be named as a director ("named directors"); (iii) each
executive officer and person who has consented to be named as an executive
officer ("named executive officers"); and (iv) all executive officers, named
executive officers, directors and named 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 12.3%
Ronald L. Stanfa(1)..................... 1,575,158 12.3
Linda T. Benge.......................... 716,591 5.6
David K. Luse........................... 600,092 4.7
Bruce A. Church......................... 419,363 3.3
Roger S. Braswell....................... 405,081 3.2
Mark S. Yahn............................ 360,000 2.8
William F. Murdy(2)..................... 284,091 2.2
Jeff A. Meyer........................... 228,446 1.8
Harold D. Cranston...................... 221,242 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).................. 29,091 *
Patrick J. Norton(2)(3)................. 29,091 *
Clark A. Johnson(3)..................... 20,000 *
All executive officers, directors and
named directors as a
group (16 persons).................... 5,263,246 41.2%
- ------------
* Less than 1%.
(1) Includes 10,000 shares of Common Stock issuable 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 9,091 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"). Upon completion of the Mergers and this Offering, the
Company will have outstanding 12,722,043 shares of Common Stock, including
1,296,408 shares of Restricted Common Stock and no shares of Preferred Stock.
The following discussion is qualified in its entirety by reference to the
Restated Certificate of Incorporation of LandCARE, 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 three-tenths (0.3) 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 this Offering, the Board of Directors will be 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, and the shares of Common Stock to be issued
pursuant to this Offering and the Mergers will be upon payment therefor, 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
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outstanding shares of Restricted Common Stock have been previously converted
into shares of Common Stock.
The Common Stock has been approved for listing on the NYSE under the symbol
"GRW," subject to official notice of issuance. The Restricted Common Stock
will not be listed on any exchange.
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
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 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 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
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stock repurchases illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit.
Additionally, the 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 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 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.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Mergers and completion of this Offering, the
Company will have outstanding 12,722,043 shares of Common Stock. The 5,000,000
shares sold in this Offering (plus any additional shares sold upon exercise of
the Underwriters' over-allotment option) will be 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 127,200 shares upon completion of this Offering) 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 7,722,043 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 date of this Prospectus 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. See
"Underwriting." 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 closing of this Offering, subject to waiver at the sole
discretion of the Company during the second year after the Offering to provide
limited liquidity opportunities.
Within 90 days after the consummation of this Offering, the Company intends
to register up to 5,000,000 shares of its Common Stock under the Securities Act
for use by the Company in connection with future acquisitions. Upon such
registration, these shares will generally be freely tradeable after their
issuance. In some instances, however, the Company may contractually restrict the
sale of shares issued in connection with future acquisitions. 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 upon consummation of this Offering. See
"Management -- 1998 Long Term Incentive Plan" and "-- 1998 Non-Employee
Directors' Plan."
Prior to this Offering, there has been no public market for the Common
Stock, and 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.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their representatives,
BT Alex. Brown Incorporated, NationsBanc Montgomery Securities LLC and Sanders
Morris Mundy Inc. (together, the "Representatives"), have severally agreed to
purchase from the Company the following respective number of shares of Common
Stock at the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------- ---------
BT Alex. Brown Incorporated..........
NationsBanc Montgomery Securities
LLC................................
Sanders Morris Mundy Inc.............
---------
Total........................... 5,000,000
=========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby if
any of such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to certain other dealers. After commencement of the
initial public offering, the offering price and other selling terms may be
changed by the Representatives.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 750,000
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it in the above table bears to 5,000,000, and the Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 5,000,000 shares are being offered.
The Underwriting Agreement contains covenants of indemnity and contribution
between the Underwriters and the Company regarding certain liabilities,
including liabilities under the Securities Act.
To facilitate the Offering of the Common Stock, the Underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Specifically, the Underwriters may over-allot shares of the
Common Stock in connection with this Offering, thereby creating a short position
in the Underwriters' syndicate account. Additionally, to cover such
over-allotments or to stabilize the market price of the Common Stock, the
Underwriters may bid for, and purchase, shares of the Common Stock in the open
market. Any of these activities may maintain the market price of the Common
Stock at a level above that which might otherwise prevail in the open market.
The Underwriters are not required to engage in these activities, and, if
commenced, any such activities may be discontinued at any time. The
Representatives, on behalf of the Underwriters, also may reclaim selling
concessions allowed to an Underwriter or dealer, if the syndicate repurchases
shares distributed by that Underwriter or dealer.
66
<PAGE>
The Company has agreed that it will not sell or offer any shares of Common
Stock or options, rights or warrants to acquire any Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
BT Alex. Brown Incorporated, except for shares issued (i) in connection with
acquisitions, (ii) pursuant to the exercise of options granted under the Plans,
and (iii) upon conversion of shares of Restricted Common Stock. Further, the
Company's directors, officers and certain stockholders who beneficially own
7,722,043 shares in the aggregate have agreed not to directly or indirectly sell
or offer for sale or otherwise dispose of any Common Stock for a period of 180
days after the date of this Prospectus without the prior written consent of BT
Alex. Brown Incorporated.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Two principals of Sanders Morris Mundy Inc., one of the Representatives,
are also investors in Notre. In February 1998, two principals of, and an
investment fund affiliated with Sanders Morris Mundy Inc., each purchased notes
from Notre which are convertible into shares of Common Stock upon consummation
of the Offering. These principals have agreed that they will not sell or offer
any shares of Common Stock received upon conversion of the notes for a period of
two years after the date of conversion, subject to waiver at the sole discretion
of the Company during the second year after the Offering to provide limited
liquidity opportunities. The shares of Common Stock beneficially owned by these
principals and the investment fund represent less than 1% of the Common Stock to
be outstanding after this Offering.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock has
been determined by negotiations between the Company and the Representatives.
Among the factors considered in such negotiations were prevailing market
conditions, the results of operations of the Founding Companies in recent
periods, the market capitalization and stages of development of other companies
which the Company and the Representatives believed to be comparable to the
Company, estimates of the business potential of the Company, the present state
of the Company's development and other factors deemed relevant by the Company
and the Representatives.
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. Certain legal matters related to this Offering
will be passed on for the Underwriters by Piper & Marbury L.L.P., Baltimore,
Maryland.
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.
67
<PAGE>
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.
68
<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) will occur simultaneously with the closing of
LandCARE'S initial public offering (the Offering) and will be 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 Offering 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 Offering 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.
------- ------- -------- ------ ------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
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 9,833
Retained earnings (deficit)....... 8,809 1,257 244 2,372 1,078 550 573 (9,833)
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
======= ======= ======== ====== ======= ====== ====== ========
PRO FORMA POST MERGER
TOTAL ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------- ----------- --------- ------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......... $ 4,138 $ (183) $ 3,955 $ 4,714 $ 8,669
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 1,585 27,546
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............................. -- 64,806 64,806 -- 64,806
------- ----------- --------- ------------ -----------
Total assets.................. $49,803 $62,406 $112,209 $ 1,585 $ 113,794
======= =========== ========= ============ ===========
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.................... -- 27,211 27,211 (27,211) --
Other current liabilities......... 217 -- 217 -- 217
------- ----------- --------- ------------ -----------
Total current liabilities..... 24,502 27,682 52,184 (38,714) 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 27,413 61,591 (45,565) 16,026
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock...................... 756 (679) 77 50 127
Additional paid-in capital........ 9,898 31,860 41,758 47,100 88,858
Retained earnings (deficit)....... 5,050 3,733 8,783 -- 8,783
Treasury stock, at cost........... (79) 79 -- -- --
------- ----------- --------- ------------ -----------
Total stockholders' equity.... 15,625 34,993 50,618 47,150 97,768
------- ----------- --------- ------------ -----------
Total liabilities and
stockholders' equity......... $49,803 $62,406 $112,209 $ 1,585 $ 113,794
======= =========== ========= ============ ===========
</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
======= ======== ========= ======== ======= ======= =======
LANDCARE PRO FORMA
USA, INC. TOTAL ADJUSTMENTS PRO FORMA
--------- --------- ------------ -----------
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............................ 7,954 24,344 (9,115) 15,229
--------- --------- ------------ -----------
Income (loss) from operations....... (7,954) (101) 9,129 9,028
OTHER INCOME (EXPENSE):
Interest expense.................... -- (1,232) 1,232 --
Other income (expense), net......... -- 871 -- 871
--------- --------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES.... (7,954) (462) 10,361 9,899
INCOME TAX PROVISION (BENEFIT)....... -- 2,444 2,168 4,612
--------- --------- ------------ -----------
NET INCOME (LOSS).................... $(7,954) $ (2,906) $ 8,193 $ 5,287
========= ========= ============ ===========
NET INCOME PER SHARE............................................................ $ 0.43
===========
SHARES USED IN COMPUTING PRO FORMA NET INCOME PER SHARE(1)......................12,319,865
===========
NET INCOME PER SHARE.................
</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,
(iv) 25,000 shares (determined to be common stock equivalents for purposes
of computing earnings per share) of the 100,000 shares issuable upon the
exercise of outstanding options, and (v) 4,572,822 of the 5,000,000 shares
sold in the Offering necessary to pay the cash portion of the Merger
consideration, expenses of this Offering 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 427,178 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)
======= ======== ========= ======== ======= ======= =======
LANDCARE PRO FORMA
USA, INC. TOTAL ADJUSTMENTS PRO FORMA
--------- --------- ------------ ----------
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............................ 1,879 6,447 (2,542) 3,905
--------- --------- ------------ ----------
Income (loss) from operations....... (1,879) (1,841) 2,547 706
OTHER INCOME (EXPENSE):
Interest expense.................... -- (358) 358 --
Other income (expense), net......... -- 54 -- 54
--------- --------- ------------ ----------
INCOME (LOSS) BEFORE INCOME TAXES.... (1,879) (2,145) 2,905 760
INCOME TAX PROVISION (BENEFIT)....... -- (69) 420 351
--------- --------- ------------ ----------
NET INCOME (LOSS).................... $(1,879) $ (2,076) $ 2,485 $ 409
========= ========= ============ ==========
NET INCOME PER SHARE........................................................... $ 0.03
==========
SHARES USED IN COMPUTING PRO FORMA NET INCOME PER SHARE(1)..................... 12,319,865
==========
</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, (iv) 25,000 shares (determined to be common stock equivalents
for purposes of computing earnings per share) of the 100,000 shares
issuable upon the exercise of outstanding options, and (v) 4,572,822 of the
5,000,000 shares sold in the Offering necessary to pay the cash portion of
the Merger consideration, expenses of this Offering 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 427,178 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 Offering,
LandCARE will acquire 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 to be 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 estimated purchase price for accounting
purposes, the value of the shares has been determined using an estimated fair
value of $9.90 per share, which represents a discount of ten percent from the
assumed initial public offering price due to restrictions on the sale and
transferability of the shares issued. The estimated purchase price for the
acquisitions is based upon preliminary estimates and is subject to certain
purchase price adjustments at and following closing. Adjustments to the purchase
price will be based upon the actual initial public offering price.
COMMON STOCK
----------------------
VALUE OF
CASH SHARES SHARES
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Trees................................ $ 11,036 1,863,137 $ 18,445
Four Seasons......................... 4,952 742,581 7,352
Southern Tree........................ 1,399 482,863 4,780
Church............................... 2,941 725,451 7,182
Ground Control....................... 2,640 360,000 3,564
Arteka............................... 2,625 646,684 6,402
Desert Care.......................... 1,618 341,929 3,385
--------- --------- ---------
Total........................... $ 27,211 5,162,645 $ 51,110
========= ========= =========
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 will not be 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 $78.3 million, including $29.5 million (Cash of $11.0 million and
shares with an aggregate value of $18.5 million determined using an estimated
fair value of $9.90 per share) attributed to Trees as accounting acquiror. The
entry includes the liability of $27.2 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 $45.3 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 $19.5
million, determined using an estimated fair value of $9.90 per share, has been
recorded attributable to the 1,969,398 shares of Common Stock issued to Notre
Capital Ventures II, L.L.C. and certain management of and consultants to
LandCARE.
(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):
ACQUIRED
TOTAL LESS: LESS: FOUNDING
COMBINED TREES LANDCARE COMPANIES
-------- ------- --------- ----------
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
======== ======= ========= ==========
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 5,000,000 shares of
Common Stock, net of estimated offering costs of $7.9 million (based on an
assumed initial public offering price of $11.00 per share). Offering costs
primarily consist of underwriting discounts and commissions, accounting fees,
legal fees and printing expenses.
(f) Records the cash portion of the consideration to be 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............................. -- -- 64,806 -- 64,806
--------- --------- --------- --------- ------------
Total assets................ (172) (2,199) 64,806 (29) 62,406
========= ========= ========= ========= ============
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....................... -- -- 27,211 -- 27,211
--------- --------- --------- --------- ------------
Total current liabilities... -- (40) 27,211 511 27,682
Long-term debt, net of current
maturities......................... 1,188 (1,479) -- -- (291)
Deferred tax liability............... -- -- -- 22 22
--------- --------- --------- --------- ------------
Total liabilities........... 1,188 (1,519) 27,211 533 27,413
Stockholders' equity:
Common stock..................... -- -- (679) -- (679)
Additional paid-in capital....... -- -- 31,860 -- 31,860
Retained earnings................ (1,360) (680) 6,335 (562) 3,733
Treasury stock, at cost.......... -- -- 79 -- 79
--------- --------- --------- --------- ------------
Total stockholders'
equity.................... (1,360) (680) 37,595 (562) 34,993
--------- --------- --------- --------- ------------
Total liabilities and
stockholders' equity...... $ (172) $ (2,199) $ 64,806 $ (29) $ 62,406
========= ========= ========= ========= ============
</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............ $ 47,165 $ (42,451) $ 4,714
Other current assets................. (3,129) -- (3,129)
--------- --------- -------------
Total current assets........ 44,036 (42,451) 1,585
Total assets................ 44,036 (42,451) 1,585
========= ========= =============
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....................... -- (27,211) (27,211)
--------- --------- -------------
Total current liabilities... (3,114) (35,600) (38,714)
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) (42,451) (45,565)
Stockholders' equity:
Common stock..................... 50 -- 50
Additional paid-in capital....... 47,100 -- 47,100
--------- --------- -------------
Total stockholders'
equity...................... 47,150 -- 47,150
--------- --------- -------------
Total liabilities and
stockholders' equity........ $ 44,036 $ (42,451) $ 1,585
========= ========= =============
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
YEAR ENDED DECEMBER 31, 1997
(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 $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 $7.9 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 planned repayment of existing debt in connection with the Mergers.
(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) (10,519) 1,620 -- (101) -- (9,115)
--------- --------- --------- --------- --------- --------- --------- -----------
Income (loss) from operations........ 43 86 10,519 (1,620) -- 101 -- 9,129
Other income (expense)
Interest expense, net............ -- 89 -- -- 1,143 -- -- 1,232
Other income (expense), net...... -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- -----------
Income (loss) before income taxes.... 43 175 10,519 (1,620) 1,143 101 -- 10,361
Provision (benefit) for income
taxes.............................. -- -- -- -- -- -- 2,168 2,168
--------- --------- --------- --------- --------- --------- --------- -----------
Net income (loss).................... $ 43 $ 175 $ 10,519 $ (1,620) $ 1,143 $ 101 $ (2,168) $ 8,193
========= ========= ========= ========= ========= ========= ========= ===========
</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 $1.9 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 planned repayment of existing debt in connection with the Mergers.
(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>
PRO FORMA
(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) (2,912) 405 -- 6 -- (2,542)
--------- --------- --------- --------- --------- --------- --------- -----------
Income (loss) from operations........ 9 37 2,912 (405) -- (6) -- 2,547
Other income (expense)
Interest expense, net............ -- 33 -- -- 325 -- -- 358
Other income (expense), net...... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- -----------
Income (loss) before income taxes.... 9 70 2,912 (405) 325 (6) -- 2,905
Provision (benefit) for income
taxes.............................. -- -- -- -- -- -- 420 420
--------- --------- --------- --------- --------- --------- --------- -----------
Net income (loss).................... $ 9 $ 70 $ 2,912 $ (405) $ 325 $ (6) $ (420) $ 2,485
========= ========= ========= ========= ========= ========= ========= ===========
</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...... 7,954 9,833
Retained deficit................ (7,954) (9,833)
------------ -----------
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)
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 9, 1997) THREE MONTHS ENDED
TO DECEMBER 31, 1997 MARCH 31, 1998
-------------------- ------------------
(UNAUDITED)
REVENUES.......................... $-- $--
COMPENSATION EXPENSE RELATING TO
ISSUANCE OF COMMON STOCK TO
MANAGEMENT AND CONSULTANTS...... 7,954 1,879
-------------------- ------------------
LOSS BEFORE INCOME TAXES.......... (7,954) (1,879)
INCOME TAX BENEFIT................ -- --
-------------------- ------------------
NET LOSS.......................... $ (7,954) $ (1,879)
==================== ==================
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 7,954 -- 7,962
Net loss........................ -- -- -- (7,954) (7,954)
--------- ------- ----------- --------- --------------
BALANCE, December 31, 1997........... 2,369,398 24 7,954 (7,954) 24
Issuance of management,
consultant and director shares
(unaudited)................... 190,000 2 1,879 -- 1,881
Net loss (unaudited)............ -- -- -- (1,879) (1,879)
--------- ------- ----------- --------- --------------
BALANCE, March 31, 1998
(unaudited)........................ 2,559,398 $ 26 $ 9,833 $ (9,833) $ 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)
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 9,
1997)
TO DECEMBER 31, THREE MONTHS ENDED
1997 MARCH 31, 1998
---------------- -------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................... $ (7,954) $(1,879)
Adjustments to reconcile net loss
to net cash provided by operating
activities --
Compensation expense related
to issuance of common stock
to management and
consultants................ 7,954 1,879
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
================ ===================
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 $7.9 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 $1.9 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 .30 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 $0.4 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, 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.
F-39
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 monthly over the term of the contract.
Revenues from landscape maintenance contracts are recognized based on agreed
upon monthly contract payments.
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
========= ========= =========
F-42
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from an amount computed at the
statutory rate as follows (in thousands):
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
========= ========= =========
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
=========
F-43
<PAGE>
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Total rent expense under all operating leases, including operating leases
with related parties, was $215,460, $251,778 and $301,480 for the years ended
December 31, 1995, 1996 and 1997, respectively.
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a standard range of insurance coverage, including
business auto liability, general liability, workers' compensation, commercial
property and an umbrella policy. The Company has not incurred significant claims
or losses on any of these insurance policies.
From May 1, 1996, through April 30, 1997, the Company was self-insured for
medical claims up to $35,000 per year per covered individual with a maximum
payout of approximately $250,000. Claims in excess of this amount were covered
by a stop loss policy. The Company has recorded reserves for its portion of
self-insured claims based on estimated claims.
EMPLOYEE 401(k) RETIREMENT PLAN
The Company offers its employees a 401(k) profit-sharing plan (the Plan)
which covers all employees at least 21 years of age who have completed at least
one year of service subsequent to employment. The Plan allows for employee
contributions through salary reductions up to the statutory limits. Employer
matching contributions are made at 20 percent of the employee's contribution and
were $19,000, $20,000 and $23,000 for the years ended December 31, 1995, 1996
and 1997, respectively.
STOCK AWARD INCENTIVE PROGRAM
In May 1997, the Company instituted a stock award incentive program that
authorizes the shareholders of the Company to grant up to 135 shares to
participants at the shareholders' discretion. The shares are not distributed
except in the event of a change in control. If a change in control occurs,
participants become fully vested immediately prior to the change and shares of
common stock are issued. If a change in control does not occur, the shares earn
cash value over a five-year vesting period from the date of grant. The cash
value earned as of December 31, 1997 was de minimus. As of March 31, 1998, the
Company has recorded compensation expense of approximately $200,000 to recognize
the effect of the pending Merger.
9. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In March 1998, the Company and its shareholders entered into a definitive
agreement with a wholly owned subsidiary of LandCARE, providing for the merger
of the Company with the subsidiary of LandCARE. Equipment of approximately
$34,000, which is included in the balance sheet at December 31, 1997, 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)
THREE MONTHS ENDED
MARCH 31
YEAR ENDED --------------------
DECEMBER 31, 1997 1997 1998
----------------- --------- ---------
(UNAUDITED)
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
================= ========= =========
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 monthly over the term of the contract.
Revenues from maintenance contracts are recognized based on agreed upon monthly
contract payments. 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 reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-51
<PAGE>
SOUTHERN TREE & LANDSCAPE CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 for the year ended 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 one to
two years and payments to the Company are remitted monthly over the term of the
contract. 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 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 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-63
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED 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 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
========= =========
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,
F-64
<PAGE>
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 monthly over
the term of the contract. 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 one to three years and payments to the Group are remitted monthly over
the term of the contract. Revenues from landscape maintenance contracts are
recognized based on agreed upon monthly contract payments. 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.
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.
F-88
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-89
<PAGE>
ARTEKA CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 monthly over the term of the
contract. 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.
F-100
<PAGE>
DESERT CARE LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 financial and descriptive
information about its reportable operating segments. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company will adopt SFAS No. 131 in the year ended December 31, 1998.
F-101
<PAGE>
DESERT CARE LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
===
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.
F-102
<PAGE>
DESERT CARE LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
============
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
F-103
<PAGE>
DESERT CARE LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-104
<PAGE>
DESERT CARE LANDSCAPING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
LANDCARE PROVIDES
COMPREHENSIVE
LANDSCAPE AND TREE
SERVICES TO THE
COMMERCIAL AND
INSTITUTIONAL MARKETS.
[Photograph of office building at which LandCARE
performs maintenance services]
[Photograph of office building at which LandCARE
performs landscape maintenance services]
o Ownership of commercial real estate throughout the United States has
become increasingly consolidated and owners are seeking providers with
the capacity to service all of their properties in a particular region.
o Commercial property owners and managers, as well as governmental entities
and institutions such as universities and hospitals, are increasingly
outsourcing their landscape and tree service needs.
Photographs presented depict typical landscape services performed for
representative customers of the Company.
<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......................... 10
The Company.......................... 16
Use of Proceeds...................... 18
Dividend Policy...................... 18
Capitalization....................... 19
Dilution............................. 20
Selected Financial Data.............. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 23
Business............................. 40
Management........................... 51
Certain Transactions................. 57
Principal Stockholders............... 61
Description of Capital Stock......... 62
Shares Eligible for Future Sale...... 65
Underwriting......................... 66
Legal Matters........................ 67
Experts.............................. 67
Additional Information............... 68
Index to Financial Statements........ F-1
UNTIL , 1998 (25 DAYS AFTER THE DATE HEREOF), ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
5,000,000 Shares
[LOGO]
LANDCARE USA, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
BT ALEX. BROWN
NATIONSBANC MONTGOMERY
SECURITIES LLC
SANDERS MORRIS MUNDY
, 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. All amounts are estimates
except for the fees payable to the SEC.
AMOUNT TO
BE PAID
----------
SEC registration fee................. $ 20,355
Printing expenses.................... $ 400,000
Legal fees and expenses.............. $ 875,000
Accounting fees and expenses......... $2,000,000
Blue Sky fees and expenses........... $ 10,000
Transfer Agent's and Registrar's
fees............................... $ 4,000
Miscellaneous........................ $ 690,645
----------
TOTAL........................... $4,000,000
==========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Certificate of Incorporation, as amended, and Bylaws
incorporate substantially the provisions of the Delaware General Corporation Law
("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 Certificate of
Incorporation, as amended, 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 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 intends to enter 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.
II-1
<PAGE>
The Company intends to purchase liability insurance policies covering
directors and officers in certain circumstances.
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.
Simultaneously with the consummation of the Offering, the Company will
issue 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>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
+1.1 -- Form of Underwriting Agreement
*3.1 -- Amended and Restated Certificate of Incorporation of LandCARE USA, Inc., as amended
*3.2 -- Bylaws of LandCARE, Inc., as amended
+4.1 -- Form of certificate evidencing ownership of Common Stock of LandCARE USA, Inc.
+5.1 -- Opinion of Bracewell & Patterson, L.L.P.
*10.1 -- LandCARE USA, Inc. 1998 Long-Term Incentive Plan
*10.2 -- LandCARE USA, Inc. 1998 Non-Employee Directors' Stock Plan
*10.3 -- Agreement and Plan of Organization dated as of March 17, 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, 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, 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, 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, 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, 1997, 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, 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 William F. Murdy
+10.13 -- Form of Employment Agreement between LandCARE USA, Inc. and Peter C. Forbes
+10.14 -- Form of Employment Agreement between LandCARE USA, Inc. and William L. Fiedler
+10.15 -- Form of Employment Agreement between LandCARE USA, Inc. and Kenneth V. Garcia
+10.16 -- Form of Employment Agreement between LandCARE USA, Inc. and Harold D. Cranston
+10.19 -- Form of Founders' Employment Agreement
*10.20 -- Form of Agreement Among Certain Stockholders
*10.21 -- Form of Indemnity Agreement with Notre Capital Ventures II, L.L.C.
*10.22 -- Form of Management Indemnity Agreement
*10.23 -- Form of Management Employment Agreement
*21.1 -- List of subsidiaries of LandCARE USA, Inc.
*23.1 -- Consent of Arthur Andersen LLP
+23.3 -- Consent of Bracewell & Patterson, L.L.P. (included in Exhibit 5.1)
*23.4 -- Consent of Linda T. Benge to be named as a director
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------------------ ------------------------------------------------------------------------------------------
*23.5 -- Consent of Roger S. Braswell to be named as a director
<C> <S>
*23.6 -- Consent of Bruce A. Church to be named as a director
*23.7 -- Consent of Harold D. Cranston to be named as a director
*23.8 -- Consent of Fred M. Ferreira to be named as a director
*23.9 -- Consent of Peter C. Forbes to be named as a director
*23.10 -- Consent of Clark A. Johnson to be named as a director
*23.11 -- Consent of David K. Luse to be named as a director
*23.12 -- Consent of Jeff A. Meyer to be named as a director
*23.13 -- Consent of William F. Murdy to be named as a director
*23.14 -- Consent of Patrick J. Norton to be named as a director
*23.15 -- Consent of Ronald L. Stanfa to be named as a director
*23.16 -- Consent of Mark S. Yahn to be named as a director
*24.1 -- Power of Attorney (included on signature page to this Registration Agreement)
*27 -- Financial Data Schedule
- ------------
</TABLE>
* Previously filed
+ Filed herewith
(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 to provide to the
underwriter at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(c) The undersigned registrant hereby undertakes that: (i) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective; (ii) for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<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 MAY 5, 1998.
LANDCARE USA, INC.
By: /s/ WILLIAM F. MURDY
WILLIAM F. MURDY
CHIEF EXECUTIVE OFFICER
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 MAY 5, 1998.
NAME TITLE DATE
- ----------------------------------------------------------------- ------------
/s/WILLIAM F. MURDY* Chairman of the Board; Chief May 5, 1998
WILLIAM F. MURDY Executive Officer and President
/s/PETER C. FORBES* Senior Vice President; Chief May 5, 1998
PETER C. FORBES Financial Officer and Director
(Chief Accounting Officer)
/s/RONALD L. STANFA* Director May 5, 1998
RONALD L. STANFA
*By: WILLIAM L. FIEDLER
WILLIAM L. FIEDLER
ATTORNEY-IN-FACT
II-5
EXHIBIT 1.1
5,000,000 SHARES
LANDCARE USA, INC.
Common Stock
UNDERWRITING AGREEMENT
, 1998
BT ALEX. BROWN INCORPORATED
NATIONSBANC MONTGOMERY SECURITIES LLC
SANDERS MORRIS MUNDY INC.
As Representatives of the Several Underwriters
c/o BT Alex. Brown Incorporated
One South Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
LandCARE USA, Inc., a Delaware corporation (the "Company"), proposes to
sell to the several underwriters (the "Underwriters") named in Schedule I hereto
for whom you are acting as representatives ("the Representatives") an aggregate
of 5,000,000 shares of the Company's Common Stock, par value $.01 per share (the
"Firm Shares"). The respective amounts of the Firm Shares to be so purchased by
the several Underwriters are set forth opposite their names in Schedule I
hereto. The Company also proposes to sell at the Underwriters' option an
aggregate of up to 750,000 additional shares of the Company's Common Stock (the
"Option Shares") as set forth below.
As the Representatives, you have advised the Company that you are
authorized to enter into this Agreement on behalf of the several Underwriters
and that the several Underwriters are willing, acting severally and not jointly,
to purchase the numbers of Firm Shares set forth opposite their respective names
in Schedule I, plus their pro rata portion of the Option Shares if you elect to
exercise the over-allotment option in whole or in part for the accounts of the
several
-1-
<PAGE>
Underwriters. The Firm Shares and the Option Shares (to the extent the
aforementioned option is exercised) are herein collectively called the "Shares."
Simultaneously with the closing with respect to the purchase of the Firm
Shares by the Underwriters, the Company will cause each of the Founding
Companies (as hereinafter defined) to be merged with a subsidiary of the Company
(collectively, the "Founding Company Mergers"), the consideration for which will
be a combination of cash and shares of the Company's Common Stock as described
in the Registration Statement (as hereinafter defined).
-2-
<PAGE>
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Underwriters as
follows:
(a) A registration statement on Form S-1 (Reg. No. 333- ) with
respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the Rules and Regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder
and has been filed with the Commission. Copies of such registration
statement, including any amendments thereto, the preliminary prospectuses
(meeting the requirements of the Rules and Regulations) contained therein
and the exhibits, financial statements and schedules, as finally amended
and revised, have heretofore been delivered by the Company to you. Such
registration statement, together with any registration statement filed by
the Company pursuant to Rule 462(b) under the Act, herein referred to as
the "Registration Statement," which shall be deemed to include all
information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, has become effective under the Act and
no post-effective amendment to the Registration Statement has been filed
as of the date of this Agreement. "Prospectus" means (a) the form of
prospectus first filed with the Commission pursuant to Rule 424(b) or (b)
the last preliminary prospectus included in the Registration Statement
filed prior to the time it becomes effective or filed pursuant to Rule
424(a) under the Act that is delivered by the Company to the Underwriters
for delivery to purchasers of the Shares, together with the term sheet or
abbreviated term sheet filed with the Commission pursuant to Rule
424(b)(7) under the Act. Each preliminary prospectus included in the
Registration Statement prior to the time it becomes effective is herein
referred to as a "Preliminary Prospectus."
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct
its business as described in
<PAGE>
the Registration Statement. Each of Trees, Inc., Four Seasons Landscape
and Maintenance, Inc., Southern Tree & Landscape Co., Inc., D.R. Church
Landscape Co., Inc., Arteka Corporation, Ground Control Landscaping, Inc.,
and Desert Care Landscaping, Inc. (collectively the "Founding Companies")
has been duly organized and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, with
corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement. As of the date
hereof, the Company has no subsidiaries except those listed in Item 16 to
the Registration Statement. The Company and each of the Founding Companies
are duly qualified to transact business in all jurisdictions in which the
conduct of their respective businesses requires such qualification, except
where the failure to so qualify would not have a materially adverse effect
on the business and operations of the Company and the Founding Companies
taken as a whole. The outstanding shares of capital stock of each of the
Founding Companies have been duly authorized and validly issued, are fully
paid and non-assessable. As of the Closing Date (as hereinafter defined),
after giving effect to the Founding Company Mergers, all of the
outstanding shares of capital stock of each of the Founding Companies will
be owned by the Company free and clear of all liens, encumbrances and
equities and claims; and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into shares of capital stock or ownership interests in any of
the Founding Companies will be outstanding.
(c) The outstanding shares of Common Stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable;
the Shares to be issued and sold by the Company have been duly authorized
and when issued and paid for as contemplated herein will be validly
issued, fully paid and non-assessable; and no preemptive rights of
stockholders exist with respect to any of the Shares or the issue and sale
thereof. Neither the filing of the Registration Statement nor the offering
or sale of the Shares as contemplated by this Agreement gives rise to any
rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock. Upon
completion of the Founding Company Mergers in the manner described in the
Registration Statement, the shares of Common Stock of the Company to
-4-
<PAGE>
be issued in such mergers will be duly authorized, validly issued and
fully paid and non-assessable.
(d) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. All of the Shares conform to the
description thereof contained in the Registration Statement. The form of
certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation.
(e) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Shares
nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto
will contain, all statements which are required to be stated therein by,
and will conform to the requirements of the Act and the Rules and
Regulations. The Registration Statement and any amendment thereto do not
contain, and will not contain, any untrue statement of a material fact and
do not omit, and will not omit, to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
The Prospectus and any amendments and supplements thereto do not contain,
and will not contain, any untrue statement of a material fact and do not
omit, and will not omit, to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that the Company makes
no representations or warranties as to information contained in or omitted
from the Registration Statement or the Prospectus, or any such amendment
or supplement, in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of any Underwriter
through the Representatives, specifically for use in the preparation
thereof.
(f) All of the financial statements of the Company and the separate
financial statements of the Founding Companies, in each case together with
related notes and schedules, as set forth in the Registration Statement,
present fairly in all material respects the financial position and the
results of operations and cash flows of the Company and of each of the
Founding Companies, respectively, at the indicated dates and for the
indicated periods. Such financial statements and related schedules have
been prepared in accordance with generally accepted principles of
accounting, consistently applied
-5-
<PAGE>
throughout the periods involved, except as disclosed therein, and all
adjustments necessary for a fair presentation of results for such periods
have been made. The summary historical and pro forma financial and
statistical data included in the Registration Statement present fairly the
information shown therein and such data have been compiled on a basis
consistent with the financial statements presented therein and the books
and records of the Company and the Founding Companies, as applicable. The
pro forma combined financial statements of the Company and the Founding
Companies (including the supplemental pro forma information shown
therein), together with the related notes, as set forth in the
Registration Statement, present fairly the information shown therein, have
been prepared in accordance with the Commission's rules and guidelines
with respect to pro forma financial statements and have been properly
compiled on the pro forma bases described therein, and in the opinion of
the Company, the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions or circumstances referred to therein.
(g) Arthur Andersen LLP and Harper & Pearson Company, PC, who have
certified certain of the financial statements filed with the Commission as
part of the Registration Statement, are independent public accountants as
required by the Act and the Rules and Regulations.
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company or any of the
Founding Companies before any court or administrative agency or otherwise,
which if determined adversely to the Company or such Founding Company is
reasonably likely to result in any material adverse change in the
earnings, business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and the
Founding Companies, taken as a whole, or to prevent the consummation of
the transactions contemplated hereby except as set forth in the
Registration Statement.
(i) Each of the Company and the Founding Companies has good and
marketable title to all of its properties and assets reflected in its
financial statements (or as described in the Registration Statement)
hereinabove described, subject to no lien,
-6-
<PAGE>
mortgage, pledge, charge or encumbrance of any kind except those reflected
in such financial statements (or as described in the Registration
Statement) or which are not material in amount. Each of the Company and
the Founding Companies occupies its leased properties under valid and
binding leases conforming in all material respects to the description
thereof set forth in the Registration Statement.
(j) Each of the Company and the Founding Companies has filed all
Federal, state, local and foreign income tax returns which have been
required to be filed and have paid all taxes indicated by said returns and
all assessments received by it or any of them to the extent that such
taxes have become due and are not being contested in good faith. All tax
liabilities have been adequately provided for in the financial statements
of the Company and the Founding Companies, as applicable.
(k) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there
has not been any material adverse change or any development involving a
prospective material adverse change in or affecting the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise), or prospects of the Company and the Founding
Companies, taken as a whole, whether or not occurring in the ordinary
course of business, and there has not been any material transaction
entered into or any material transaction that is probable of being entered
into by the Company or the Founding Companies, other than transactions in
the ordinary course of business and changes and transactions described in
the Registration Statement, as it may be amended or supplemented. Neither
the Company nor any of the Founding Companies has any material contingent
obligations which are not disclosed in the Company's or such Founding
Company's financial statements, as applicable, included in the
Registration Statement.
(l) Neither the Company nor any of the Founding Companies is, or
with the giving of notice or lapse of time or both, will be, in violation
of or in default under its Charter or By-Laws or under any agreement,
lease, contract, indenture or other instrument or obligation to which it
is a party or by which it, or any of its properties, is bound and which
default is of material significance in respect of the condition (financial
-7-
<PAGE>
or otherwise) of the Company and the Founding Companies, taken as a whole,
or the business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and the
Founding Companies, taken as a whole. The execution and delivery of this
Agreement and the consummation of the transactions herein contemplated and
the fulfillment of the terms hereof will not conflict with or result in a
material breach of any of the terms or provisions of, or constitute a
material default under, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company or any of the Founding
Companies is a party, or of the Charter or By-Laws of the Company or any
of the Founding Companies or any order, rule or regulation applicable to
the Company or any of the Founding Companies of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction.
(m) Each material approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory,
administrative or other governmental body necessary in connection with the
execution and delivery by the Company of this Agreement and the
consummation of the transactions herein contemplated (except such
additional steps as may be required by the Commission or the National
Association of Securities Dealers, Inc. (the "NASD")) has been obtained or
made and is in full force and effect.
(n) The Company and each of the Founding Companies hold all material
licenses, certificates and permits from governmental authorities which are
necessary to the conduct of their businesses; and neither the Company nor
any of the Founding Companies has infringed any patents, patent rights,
trade names, trademarks or copyrights, which infringement is material to
the business of the Company or such Founding Company. The Company knows of
no material infringement by others of patents, patent rights, trade names,
trademarks or copyrights owned by or licensed to the Company or any of the
Founding Companies.
(o) Neither the Company, nor to the Company's best knowledge, any of
its affiliates or any of the Founding Companies or any of their
affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or
-8-
<PAGE>
manipulation of the price of the shares of Common Stock to facilitate the
sale or resale of the Shares.
(p) Neither the Company nor any of the Founding Companies is an
"investment company" within the meaning of such term under the Investment
Company Act of 1940, as amended (the "1940 Act") and the rules and
regulations of the Commission thereunder.
(q) The Company and each of the Founding Companies maintain a system
of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(r) The Company and each of the Founding Companies carry, or are
covered by, insurance in such amounts and covering such risks as is
adequate for the conduct of their respective businesses and the value of
their respective properties and as is customary for companies engaged in
similar industries.
(s) The Company and each of the Founding Companies are in compliance
in all material respects with all presently applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA"); no
"reportable event" (as defined in ERISA) has occurred with respect to any
"pension plan" (as defined in ERISA) for which the Company or any of the
Founding Companies would have any liability; neither the Company nor any
of the Founding Companies has incurred nor expects to incur liability
under (i) Title IV of ERISA with respect to termination of, or withdrawal
from, any "pension plan," or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code");
-9-
<PAGE>
and each "pension plan" for which the Company or any of the Founding
Companies would have any liability that is intended to be qualified under
Section 401(a) of the Code is so qualified in all material respects and
nothing has occurred, whether by action or by failure to act, which would
cause the loss of such qualification.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the
Company agrees to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of $ per share, the
number of Firm Shares set forth opposite the name of each Underwriter in
Schedule I hereof, subject to adjustments in accordance with Section 9
hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made
in same day funds by wire transfer to the Company against delivery of
certificates therefor to the Representatives for the several accounts of
the Underwriters. Such payment and delivery are to be made at the offices
of BT Alex. Brown Incorporated, One South Street, Baltimore, Maryland, at
10:00 A.M., Baltimore time, on the third business day after the date of
this Agreement or at such other time and date not later than three
business days thereafter as you and the Company shall agree upon, such
time and date being herein referred to as the "Closing Date." (As used
herein, "business day" means a day on which the New York Stock Exchange is
open for trading and on which banks in New York are open for business and
are not permitted by law or executive order to be closed.) The
certificates for the Firm Shares will be delivered in such denominations
and in such registrations as the Representatives request in writing not
later than the third full business day prior to the Closing Date, and will
be made available for inspection by the Representatives at least one
business day prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth,
the Company hereby grants an option to the several Underwriters to
purchase the Option Shares at the price per
-10-
<PAGE>
share as set forth in the first paragraph of this Section 2. The option
granted hereby may be exercised in whole or in part but only once and at
any time upon written notice given within 30 days after the date of this
Agreement, by you, as Representatives of the several Underwriters, to the
Company setting forth the number of Option Shares as to which the several
Underwriters are exercising the option, the names and denominations in
which the Option Shares are to be registered and the time and date at
which such certificates are to be delivered. The time and date at which
certificates for Option Shares are to be delivered shall be determined by
the Representatives but shall not be earlier than three nor later than 10
full business days after the exercise of such option, nor in any event
prior to the Closing Date (such time and date being herein referred to as
the "Option Closing Date"). If the date of exercise of the option is three
or more days before the Closing Date, the notice of exercise shall set the
Closing Date as the Option Closing Date. The number of Option Shares to be
purchased by each Underwriter shall be in the same proportion to the total
number of Option Shares being purchased as the number of Firm Shares being
purchased by such Underwriter bears to 5,000,000, adjusted by you in such
manner as to avoid fractional shares. The option with respect to the
Option Shares granted hereunder may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters. You,
as Representatives of the several Underwriters, may cancel such option at
any time prior to its expiration by giving written notice of such
cancellation to the Company. To the extent, if any, that the option is
exercised, payment for the Option Shares shall be made on the Option
Closing Date in same day funds by wire transfer to the Company against
delivery of certificates therefor at the offices of BT Alex. Brown
Incorporated, One South Street, Baltimore, Maryland.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the Underwriters are to make a public offering of
the Firm Shares as soon as the Representatives deem it advisable to do so
following execution of this Agreement. The Firm Shares are to be initially
offered to the public at the public offering price set forth on the cover of the
Prospectus. The Representatives may from time to time thereafter change the
public offering price and other selling terms. To the extent, if at all, that
any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters
will offer them to the public on the foregoing terms.
-11-
<PAGE>
It is further understood that you will act in accordance with a Master
Agreement Among Underwriters.
4. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the Underwriters that:
(a) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule
430A of the Rules and Regulations is followed, to prepare and timely file
with the Commission under Rule 424(b) of the Rules and Regulations a
Prospectus in a form approved by the Representatives containing
information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Rules and
Regulations and (B) not file any amendment to the Registration Statement
or supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not
in compliance with the Rules and Regulations.
(b) The Company will advise the Representatives promptly (A) when
the Registration Statement or any post-effective amendment thereto shall
have become effective, (B) of receipt of any comments from the Commission,
(C) of any request of the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information and (D) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of
the Prospectus or of the institution of any proceedings for that purpose.
The Company will use its best efforts to prevent the issuance of any such
stop order preventing or suspending the use of the Prospectus and to
obtain as soon as possible the lifting thereof, if issued.
-12-
<PAGE>
(c) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representatives may reasonably have designated
in writing and will make such applications, file such documents, and
furnish such information as may be reasonably required for that purpose,
provided the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction where it is not now so qualified or required to file such a
consent. The Company will, from time to time, prepare and file such
statements, reports, and other documents, as are or may be required to
continue such qualifications in effect for so long a period as the
Representatives may reasonably request for distribution of the Shares.
(d) The Company will deliver to, or upon the order of, the
Representatives , from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period
when delivery of a Prospectus is required under the Act, as many copies of
the Prospectus in final form, or as thereafter amended or supplemented, as
the Representatives may reasonably request. The Company will deliver to
the Representatives at or before the Closing Date, three signed, xeroxed
copies of the Registration Statement and all amendments thereto including
all exhibits filed therewith, and will deliver to the Representatives such
number of copies of the Registration Statement (including such number of
copies of the exhibits filed therewith that may reasonably be requested)
and of all amendments thereto, as the Representatives may reasonably
request.
(e) The Company will comply with the Act and the Rules and
Regulations and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission
thereunder, so as to permit the completion of the distribution of the
Shares as contemplated in this Agreement and the Prospectus. If during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, any event shall occur as a result of which, in the
judgment of the Company or in the reasonable opinion of the Underwriters,
it becomes necessary to amend or supplement the Prospectus in order to
make the statements therein, in the light of the circumstances existing at
the time the Prospectus is delivered to a purchaser, not
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misleading, or, if it is necessary at any time to amend or supplement the
Prospectus to comply with any law, the Company promptly will prepare and
file with the Commission an appropriate amendment to the Registration
Statement or supplement to the Prospectus so that the Prospectus as so
amended or supplemented will not, in the light of the circumstances when
it is so delivered, be misleading, or so that the Prospectus will comply
with the law.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earnings statement (which need not be audited) in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earnings statement
shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of
the Rules and Regulations and will advise you in writing when such
statement has been so made available.
(g) The Company will, for a period of five (5) years from the
Closing Date, deliver to the Representatives copies of annual reports and
copies of all other documents, reports and information furnished by the
Company to its stockholders or filed with any securities exchange pursuant
to the requirements of such exchange or with the Commission pursuant to
the Act or the Exchange Act. The Company will deliver to the
Representatives similar reports with respect to significant subsidiaries,
as that term is defined in the Rules and Regulations, which are not
consolidated in the Company's financial statements.
(h) No offering, sale, short sale or other disposition of any shares
of Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivative of
Common Stock (or agreement for such) will be made for a period of 180 days
after the date of the Prospectus, directly or indirectly, by the Company
otherwise than hereunder or with the prior written consent of BT Alex.
Brown Incorporated, except that the Company may, without such consent,
issue shares (i) upon exercise of options granted under its stock option
plans, (ii) in connection with acquisitions or (iii) upon conversion of
shares of Restricted Common Stock.
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(i) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on the New York Stock Exchange.
(j) The Company has caused each executive officer, director and
certain stockholders of the Company to furnish to you, on or prior to the
date of this Agreement, a letter or letters, in form and substance
satisfactory to the Underwriters, pursuant to which each such person has
agreed not to offer, sell, sell short or otherwise dispose of any shares
of Common Stock of the Company owned by such person (or as to which such
person has the right to direct the disposition of) or request the
registration for the offer or sale of any of the foregoing for a period of
180 days after the date of the Prospectus, directly or indirectly, except
with the prior written consent of BT Alex. Brown Incorporated ("Lockup
Agreements").
(k) The Company will: (i) use its best efforts to satisfy all
conditions to the consummation of the Founding Company Mergers as set
forth in the agreements with respect thereto, (ii) use its best efforts to
cause each other party to such agreements to satisfy all conditions to the
consummation of the Founding Company Mergers and (iii) promptly notify the
Underwriters of the occurrence of any event which may result in the
non-consummation of any of the Founding Company Mergers on the Closing
Date.
(l) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of
the proceeds therefrom as may be required in accordance with Rule 463
under the Act.
(m) The Company shall not invest, or otherwise use, the proceeds
received by the Company from its sale of the Shares in such a manner as
would require the Company or any of the Founding Companies to register as
an investment company under the 1940 Act.
(n) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for
the Common Stock.
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(o) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any securities of the Company.
5. COSTS AND EXPENSES.
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement and in
connection with the Founding Company Mergers, including, without limiting the
generality of the foregoing, the following: accounting fees of the Company; the
fees and disbursements of counsel for the Company; the cost of printing and
delivering to, or as requested by, the Underwriters copies of the Registration
Statement, Preliminary Prospectuses, the Prospectus and this Agreement; the
filing fees of the Commission; the filing fees and expenses (including
disbursements but excluding legal fees of counsel to the Underwriters) incident
to securing any required review by the NASD of the terms of the sale of the
Shares; transfer agent and registrar fees and expenses; and the Listing Fee of
the New York Stock Exchange. The Company shall not, however, be required to pay
for any of the Underwriters' expenses (other than those related to qualification
under NASD regulations) except that, if this Agreement shall not be consummated
because the conditions in Section 6 hereof are not satisfied, or because this
Agreement is terminated by the Representatives pursuant to Section 11 hereof, or
by reason of any failure, refusal or inability on the part of the Company to
perform any undertaking or satisfy any condition of this Agreement or to comply
with any of the terms hereof on its part to be performed, unless such failure to
satisfy said condition or to comply with said terms be due to the default or
omission of any Underwriter, then the Company shall reimburse the several
Underwriters for reasonable out-of-pocket expenses, including fees and
disbursements of counsel, reasonably incurred in connection with investigating,
marketing and proposing to market the Shares or in contemplation of performing
their obligations hereunder; but the Company shall not in any event be liable to
any of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
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The several obligations of the Underwriters to purchase the Firm Shares on
the Closing Date and the Option Shares, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company contained
herein, and to the performance by the Company of their covenants and obligations
hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by Rule 424
and Rule 430A of the Rules and Regulations shall have been made, and any request
of the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing Date or
the Option Closing Date, as the case may be, which would prevent the issuance of
the Shares.
(b) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Bracewell &
Patterson L.L.P., counsel for the Company, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriters (and stating
that it may be relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Delaware, with corporate power and authority to own or
lease its properties and conduct its business as described in the
Registration Statement; each of the Founding Companies has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation, with
corporate power and authority to own or lease its properties and
conduct its business; the
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Company and each of the Founding Companies are duly qualified to
transact business in each of the jurisdictions set forth on a
schedule to such opinion; and, upon consummation of the Founding
Company Mergers, the outstanding shares of capital stock of each of
the Founding Companies will have been duly authorized and validly
issued and will be fully paid and non-assessable and will be owned
by the Company; and, to the best of such counsel's knowledge, the
outstanding shares of capital stock of each of the Founding
Companies will be owned by the Company, free and clear of all liens,
encumbrances and equities and claims, and no options, warrants or
other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into any shares of
capital stock of or other ownership interests in any of the Founding
Companies will be outstanding.
(ii) The Company has authorized capital stock as set forth
under the caption "Capitalization" in the Prospectus; the authorized
shares of the Company's Preferred Stock and Common Stock have been
duly authorized; the outstanding shares of the Company's Common
Stock have been duly authorized and validly issued and are fully
paid and non-assessable; all of the Shares conform to the
description thereof contained in the Prospectus; the certificates
for the Shares, assuming they are in the form filed with the
Commission, are in due and proper form; the Firm Shares and Option
Shares, if any, to be sold by the Company pursuant to this Agreement
and the shares of Common Stock of the Company to be issued in
connection with the Founding Company Mergers have been duly
authorized and will be validly issued, fully paid and non-assessable
when issued and paid for as contemplated by this Agreement; and no
preemptive rights of stockholders exist under statute or under
agreements known to such counsel with respect to any of the Shares
or the shares to be issued in the Founding Company Mergers or the
issue or sale thereof.
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no
outstanding securities of the Company convertible or exchangeable
into or evidencing the right to purchase or subscribe for any shares
of capital stock of the Company and there are no outstanding or
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authorized options, warrants or rights of any character obligating
the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right
to purchase or subscribe for any shares of such stock; and except as
described in the Prospectus, to the knowledge of such counsel, no
holder of any securities of the Company or any other person has the
right, contractual or otherwise, which has not been satisfied or
effectively waived, to cause the Company to sell or otherwise issue
to them, or to permit them to underwrite the sale of, any of the
Shares or the right to have any shares of Common Stock or other
securities of the Company included in the Registration Statement or
the right, as a result of the filing of the Registration Statement,
to require registration under the Act of any shares of Common Stock
or other securities of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the best of the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending
or threatened under the Act.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material
respects with the requirements of the Act and the applicable rules
and regulations thereunder (except that such counsel need express no
opinion as to the financial statements, notes thereto and related
schedules and other financial and statistical information included
therein or any information furnished by the Underwriters for use
therein).
(vi) The statements under the captions "Business-Regulation
and Environmental Matters," "Business-Risk Management, Insurance and
Litigation," "Management-Executive Compensation; Employment
Agreements; Covenants-not-to-Compete," "Management-1998 Long-Term
Incentive Plan," "Management-1998 Non-Employee Directors' Stock
Plan,", "Certain Transactions," "Description of Capital Stock" and
"Shares Eligible for Future Sale" in the Prospectus, insofar as such
statements constitute a summary of documents referred to therein or
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matters of law, are accurate summaries and fairly present in all
material respects the information called for with respect to such
documents and matters.
(vii) Each of the Agreements and Plan or Reorganization with
respect to the Founding Company Mergers (which have been filed with
the Commission as exhibits to the Registration Statement) have been
duly authorized, executed and delivered by the Company and
constitutes the valid binding obligation of the Company; the
Certificates or Articles of Merger referred to in such Agreements
and Plans of Reorganization, assuming the due filing thereof with
the appropriate regulatory authorities, will cause the statutory
merger of each of the Founding Companies with the respective
subsidiaries of the Company that are parties thereto.
(viii) Such counsel does not know of any contracts or
documents required to be filed as exhibits to the Registration
Statement or described in the Registration Statement or the
Prospectus which are not so filed or described as required, and the
descriptions of such contracts and documents required to be
described in the Registration Statement or the Prospectus are
correct in all material respects.
(ix) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the
Founding Companies except as set forth in the Prospectus.
(x) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will
not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Charter or By-Laws
of the Company, or, in any respect material to the Company and the
Founding Companies, taken as a whole, any agreement or instrument
known to such counsel to which the Company or any of the Founding
Companies is a party or by which the Company or any of the Founding
Companies may be bound.
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(xi) This Agreement has been duly authorized, executed and
delivered by the Company.
(xii) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the
execution and delivery of this Agreement and the consummation of the
transactions herein contemplated (other than as may be required by
the NASD), except such as have been obtained or made, specifying the
same.
(xiii) The Company is not, and will not become, as a result of
the consummation of the transactions contemplated by this Agreement,
and application of the net proceeds therefrom as described in the
Prospectus, required to register as an investment company under the
1940 Act.
In rendering such opinion, Bracewell & Patterson L.L.P. may provide
that its opinion is limited to matters governed by the laws of Texas and
the General Corporation law of the State of Delaware, and the Federal
securities laws of the United States and may rely on counsel (such counsel
having been deemed acceptable by the Representatives) to one or more of
the Founding Companies with respect to matters related to the Founding
Companies, provided that, in lieu of such reliance, Bracewell & Patterson
L.L.P. may provide separate opinions of such counsel so long as such
opinions are addressed to the Underwriters, and further provided, that, in
each case, Bracewell & Patterson L.L.P. shall state that they believe that
they and the Underwriters are justified in relying on such other counsel.
In addition to the matters set forth above, the opinion of Bracewell &
Patterson L.L.P. shall also include a statement of belief to the effect
that nothing has come to the attention of such counsel which leads them to
believe that (i) the Registration Statement, at the time it became
effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the
Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, and (ii) the Prospectus, or any supplement thereto, on the
date it was filed pursuant to the Rules and Regulations and as of the
Closing Date
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or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact necessary
in order to make the statements, in the light of the circumstances under
which they are made, not misleading (except that such counsel need express
no view as to financial statements, schedules or other financial and
statistical information therein). With respect to such statement of
belief, Bracewell & Patterson L.L.P. may state that their belief is based
upon the procedures set forth therein, but is without independent check
and verification.
(c) The Representatives shall have received from Piper & Marbury
L.L.P., counsel for the Underwriters, an opinion dated the Closing Date or
the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (ii), (iii), (iv), and (xi) of Paragraph (b) of
this Section 6, and that the Company is a duly organized and validly
existing corporation under the laws of the State of Delaware. In rendering
such opinion, Piper & Marbury L.L.P. may rely as to the matters relating
to the laws of the States other than Maryland and Delaware on the opinions
of counsel referred to in Paragraph (b) of this Section 6. In addition to
the matters set forth above, such opinion shall also include a statement
to the effect that nothing has come to the attention of such counsel which
leads them to believe that (i) the Registration Statement, or any
amendment thereto, as of the time it became effective under the Act (but
after giving effect to any modifications incorporated therein pursuant to
Rule 430A under the Act) and as of the Closing Date or the Option Closing
Date, as the case may be, contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant
to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact, necessary in order to
make the statements, in the light of the circumstances under which they
are made, not misleading (except that such counsel need express no view as
to financial statements, schedules and statistical information therein).
With respect to such statement, Piper & Marbury L.L.P. may state that
their belief is based upon the procedures set forth therein, but is
without independent check and verification.
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(d) The Representatives shall have received, on the date hereof, the
Closing Date and the Option Closing Date, as the case may be, letters
dated the date hereof, the Closing Date or the Option Closing Date, as the
case may be, in form and substance satisfactory to the Underwriters, of
Arthur Andersen LLP and Harper & Pearson Company, PC confirming that they
are independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and stating that, in
their opinion, the financial statements and schedules of the Company and
the Founding Companies examined by them and included in the Registration
Statement comply in form in all material respects with the applicable
accounting requirements of the Act and the related published Rules and
Regulations; and containing such other statements and information as is
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to such financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus.
(e) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or certificates
of the Company and signed by the Chief Executive Officer and the Chief
Financial Officer of the Company to the effect that, as of the Closing
Date or the Option Closing Date, as the case may be, each of them
severally represents as follows:
(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for such
purpose have been taken or are, to his knowledge, contemplated by
the Commission;
(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct in all material
respects as of the Closing Date or the Option Closing Date, as the
case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
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(iv) He or she has carefully examined the Registration
Statement and the Prospectus and, in his or her opinion, as of the
effective date of the Registration Statement, the statements
contained in the Registration Statement were true and correct in all
material respects, and such Registration Statement and Prospectus
did not omit to state a material fact required to be stated therein
or necessary in order to make the statements therein not misleading,
and since the effective date of the Registration Statement, no event
has occurred which should have been set forth in a supplement to or
an amendment of the Prospectus which has not been so set forth in
such supplement or amendment; and
(v) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not
been any material adverse change or any development involving a
prospective material adverse change in or affecting the condition,
financial or otherwise, of the Company or any of the Founding
Companies or the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects
of the Company or any of the Founding Companies, whether or not
arising in the ordinary course of business, except as set forth in,
or contemplated by, the Prospectus or as described in such
certificate.
(f) The Company shall have furnished to the Representatives such
further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters
as the Representatives may reasonably have requested.
(g) The Firm Shares and Option Shares, if any, shall have been
approved for designation upon notice of issuance on the New York Stock
Exchange.
(h) The Lockup Agreements described in Section 4(j) shall be in full
force and effect.
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(i) Each of the Founding Company Mergers shall have been completed
upon the terms set forth in the Prospectus simultaneously with the closing
of the purchase of the Firm Shares by the Underwriters.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to Piper & Marbury L.L.P.,
counsel for the Underwriters, in their reasonable judgment.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
The obligations of the Company to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that: (a) at the Closing Date or the Option Closing
Date, as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened, and (b) each of the Founding Company Mergers
shall have been completed upon the terms set forth in the Prospectus
simultaneously with the closing of the purchase of the Firm Shares by the
Underwriters.
8. INDEMNIFICATION.
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(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of the Act, against any losses, claims, damages or liabilities
to which such Underwriter or any such controlling person may become
subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement,
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto, or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading; and will reimburse each Underwriter and
each such controlling person upon demand for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in
connection with investigating or defending any such loss, claim, damage or
liability, action or proceeding or in responding to a subpoena or
governmental inquiry related to the offering of the Shares, whether or not
such Underwriter or controlling person is a party to any action or
proceeding; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue
statement, or omission or alleged omission made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or such amendment
or supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Representatives specifically
for use in the preparation thereof. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who
has signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of the Act against any losses,
claims, damages or liabilities to which the Company or any such director,
officer, or controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto or (ii)
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the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances under which they were
made; and will reimburse any legal or other expenses reasonably incurred
by the Company or any such director, officer, or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding; provided, however, that each Underwriter
will be liable in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission has been made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or such amendment or supplement, in reliance
upon and in conformity with written information furnished to the Company
by or through the Representatives specifically for use in the preparation
thereof. This indemnity agreement will be in addition to any liability
which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to this Section 8, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a) or (b) shall be available to
any party who shall fail to give notice as provided in this Section 8(c)
if the party to whom notice was not given was unaware of the proceeding to
which such notice would have related and was materially prejudiced by the
failure to give such notice, but the failure to give such notice shall not
relieve the indemnifying party or parties from any liability which it or
they may have to the indemnified party for contribution or otherwise than
on account of the provisions of Section 8(a) or (b). In case any such
proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the
extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party and shall pay as incurred the fees
and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel at its own expense. Notwithstanding the foregoing, the
indemnifying party shall pay as incurred (or within 30 days of
presentation) the fees and expenses of
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the counsel retained by the indemnified party in the event (i) the
indemnifying party and the indemnified party shall have mutually agreed to
the retention of such counsel, (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying
party and the indemnified party and representation of both parties by the
same counsel would be inappropriate due to actual or potential differing
interests between them or (iii) the indemnifying party shall have failed
to assume the defense and employ counsel acceptable to the indemnified
party within a reasonable period of time after notice of commencement of
the action. It is understood that the indemnifying party shall not, in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant
to Section 8(a) and by the Company in the case of parties indemnified
pursuant to Section 8(b). The indemnifying party shall not be liable for
any settlement of any proceeding effected without its written consent but
if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified
party from and against any loss or liability by reason of such settlement
or judgment. In addition, the indemnifying party will not, without the
prior written consent of the indemnified party, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim,
action or proceeding of which indemnification may be sought hereunder
(whether or not any indemnified party is an actual or potential party to
such claim, action or proceeding) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from
all liability arising out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above (other than by reason of the exceptions provided
in such paragraphs) in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) in
such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other
from the offering of the Shares. If, however, the allocation provided by
the
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<PAGE>
immediately preceding sentence is not permitted by applicable law then
each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company on
the one hand and the Underwriters on the other in connection with the
statements, omissions or breaches of representations and warranties which
resulted in such losses, claims, damages or liabilities, (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one
hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bears to the total underwriting
discounts and commissions received by the Underwriters, in each case as
set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied
by the Company on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined
by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to above in this
Section 8(d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) referred to above in this Section 8(d)
shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this
subsection (d), (i) no Underwriter shall be required to contribute any
amount in excess of the underwriting discounts and commissions applicable
to the Shares purchased by such Underwriter and (ii) no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Underwriters' obligations in
this Section
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<PAGE>
8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process
issuing from such court may be served upon him, her or it by any other
contributing party and consents to the service of such process and agrees
that any other contributing party may join him, her or it as an additional
defendant in any such proceeding in which such other contributing party is
a party.
(f) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified
party as such losses, claims, damages, liabilities or expenses are
incurred. The indemnity and contribution agreements contained in this
Section 8 and the representations and warranties of the Company set forth
in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter, the Company, its
directors or officers or any persons controlling the Company, (ii)
acceptance of any Shares and payment therefor hereunder and (iii) any
termination of this Agreement. A successor to any Underwriter, or to the
Company, its directors or officers, or any person controlling the Company,
shall be entitled to the benefits of the indemnity, contribution and
reimbursement agreements contained in this Section 8.
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<PAGE>
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may be, any
Underwriter shall fail to purchase and pay for any portion of the Shares which
such Underwriter has agreed to purchase and pay for on such date (otherwise than
by reason of any default on the part of the Company), you, as Representative of
the Underwriters, shall use your reasonable efforts to procure within 36 hours
thereafter one or more of the other Underwriters, or any others, to purchase
from the Company such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter failed to purchase. If during such 36 hours you, as such
Representatives shall not have procured such other underwriters, or any others,
to purchase the Firm Shares or Option Shares, as the case may be, agreed to be
purchased by the defaulting Underwriter or Underwriters, then (a) if the
aggregate number of shares with respect to which such default shall occur does
not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered
hereby, the other Underwriters shall be obligated, severally, in proportion to
the respective numbers of Firm Shares or Option Shares, as the case may be,
which they are obligated to purchase hereunder, to purchase the Firm Shares or
Option Shares, as the case may be, which such defaulting Underwriter or
Underwriters failed to purchase or (b) if the aggregate number of shares of Firm
Shares or Option Shares, as the case may be, with respect to which such default
shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be,
covered hereby, the Company or you, as the Representatives of the Underwriters
will have the right, by written notice given within the next 36-hour period to
the parties to this Agreement, to terminate this Agreement without liability on
your part or of the Company except to the extent provided in Section 8 hereof.
In the event of a default by any Underwriter, as set forth in this Section 9,
the Closing Date or Option Closing Date, as the case may be, may be postponed
for such period, not exceeding seven (7) days, as you, as the Representative of
the Underwriters may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. NOTICES.
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<PAGE>
All communications hereunder shall be in writing and, except as otherwise
provided herein, will be mailed, delivered, telecopied or telegraphed and
confirmed as follows: if to the Underwriters, to BT Alex. Brown Incorporated,
One South Street, Baltimore, Maryland 21202, Attention: Jay S. Eastman,
Principal, with a copy to BT Alex. Brown Incorporated, One South Street,
Baltimore, Maryland 21202 Attention: General Counsel; and if to the Company; to
LandCare USA, Inc., Three Riverway, Suite 630, Houston, Texas 77056, Attention:
William F. Murdy, Chief Executive Officer, with copies to Bracewell & Patterson
L.L.P., South Tower Pennzoil Place, 711 Louisiana Street, Suite 2900, Houston,
Texas 77002-2718, Attention: William D. Gutermuth, Esq. and William L. Fiedler
III, Esq., General Counsel, LandCare USA, Inc., Three Riverway, Suite 630,
Houston, Texas 77056.
11. TERMINATION.
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following
has occurred: (i) since the respective dates as of which information is
given in the Registration Statement and the Prospectus, any material
adverse change or any development involving a prospective material adverse
change in or affecting the condition, financial or otherwise, of the
Company and the Founding Companies taken as a whole or the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the Founding
Companies taken as a whole, whether or not arising in the ordinary course
of business, (ii) any outbreak or escalation of hostilities or declaration
of war or national emergency or other national or international calamity
or crisis or change in economic or political conditions if the effect of
such outbreak, escalation, declaration, emergency, calamity, crisis or
change on the financial markets of the United States would, in your
reasonable judgment, make it
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<PAGE>
impracticable to market the Shares or to enforce contracts for the sale of
the Shares, (iii) suspension of trading in securities generally on the New
York Stock Exchange or the American Stock Exchange or limitation on prices
(other than limitations on hours or numbers of days of trading) for
securities on either such Exchange, (iv) the enactment, publication,
decree or other promulgation of any statute, regulation, rule or order of
any court or other governmental authority which in your opinion materially
and adversely affects or may materially and adversely affect the business
or operations of the Company, (v) declaration of a banking moratorium by
United States or New York State authorities, (vi) the suspension of
trading of the Company's Common Stock by the Commission on the New York
Stock Exchange or (vii) the taking of any action by any governmental body
or agency in respect of its monetary or fiscal affairs which in your
reasonable opinion has a material adverse effect on the securities markets
in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), legends required by Item 502(d)
of Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.
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<PAGE>
14. MISCELLANEOUS.
The reimbursement, indemnity and contribution agreements contained in this
Agreement and the representations and warranties of the Company set forth in
this Agreement shall remain operative and in full force and effect, regardless
of (i) any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder and (iii) any termination of this Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Delaware.
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<PAGE>
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the
Underwriters in accordance with its terms.
Very truly yours,
LANDCARE USA, INC.
By: _________________________________________
William F. Murdy,
Chief Executive Officer
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
BT ALEX. BROWN INCORPORATED
NATIONSBANC MONTGOMERY SECURITIES LLC
SANDERS MORRIS MUNDY INC.
As Representatives of the several
Underwriters listed on Schedule I
By: BT Alex. Brown Incorporated
By ________________________
Authorized Officer
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<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
NUMBER OF FIRM SHARES
UNDERWRITER TO BE PURCHASED
BT Alex. Brown Incorporated.............................
NationsBanc Montgomery Securities LLC...................
Sanders Morris Mundy Inc................................
Total............................................. 5,000,000
=========
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EXHIBIT 4.1
TEMPORARY CERTIFICATE -- EXCHANGEABLE FOR DEFINITIVE ENGRAVED CERTIFICATE WHEN
READY FOR DELIVERY
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
COMMON STOCK COMMON STOCK
NUMBER SHARES
T
CUSIP
LANDCARE USA, INC.
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF RESTRICTED COMMON STOCK OF
LandCare USA, Inc. (hereinafter called the "Corporation"), transferable on
the books of the Corporation by the holder hereof in person or by duly
authorized attorney on surrender of this certificate properly endorsed. This
certificate and the shares represented hereby are issued and shall be subject
to all the provisions of the Certificate of Incorporation of the Corporation,
as now or hereafter amended, copies of which are on file at the office of the
Transfer Agent, to all of which the
holder hereof by acceptance of this certificate assents. This certificate is
not valid unless countersigned and registered by the Transfer Agent and
Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
DATED:
SECRETARY
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
NEW YORK, N.Y.
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
LandCare USA, Inc.
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof, and the qualifications, limitations and restrictions of such
preferences and/or rights. Such statement may be obtained by a request in
writing to the office of the Transfer Agent.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
TOD -- transfer on death direction in the event of
owner's death, to person named on face
UNIF GIFT MIN ACT-- __________ Custodian __________
(Cust) (Minor)
under Uniform Gifts to Minors
Act ________________________
(State)
UNIF TRAN MIN ACT-- ____________ as Custodian for _____________
(Cust) (Minor)
under Uniform Transfers to Minors
Act _____________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Shares
- -----------------------------------------------------------------------
of the capital stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
Attorney
- -----------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _______________
X ___________________________
X ___________________________
NOTICE:
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
By ___________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
EXHIBIT 5.1
May 5, 1998
LandCare USA, Inc.
Three Riverway
Suite 630
Houston, Texas 77056
Gentlemen:
We have acted as counsel to LandCare USA, Inc., a Delaware corporation (the
"Company"), in connection with the preparation of its Registration Statement on
Form S-1 (Registration No. 333-48215) (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 5,750,000 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 of
officers of the Company as to certain 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 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.
<PAGE>
LandCare USA, Inc.
May 5, 1998
Page 2
2. The issuance of the Common Stock has been duly authorized, and when
issued and delivered by the Company against payment therefor as described in the
Registration Statement, such shares will be validly issued, fully paid and
nonassessable.
The foregoing opinion is based on and is limited to the laws of the State of
Delaware and the relevant law of the United States of America, and we render no
opinion with respect to the law of any other jurisdiction.
We hereby consent to the filing of this opinion with the Securities and Exchange
Commission as Exhibit 5.1 to the Registration Statement 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 regulations issued thereunder.
Very truly yours,
Bracewell & Patterson, L.L.P.
EXHIBIT 10.12
MANAGEMENT
EMPLOYMENT AGREEMENT
This Management Employment Agreement (this "AGREEMENT") by and among
LandCare USA Management Co., L.P., a Delaware limited partnership ("EMPLOYER"),
and William F. Murdy ("EMPLOYEE") is hereby entered into and effective as of the
__ day of ____________, 1998 (the "EFFECTIVE DATE"), which date is the date of
the consummation of the initial public offering of the common stock of LandCare
USA, Inc., a Delaware corporation (the "COMPANY").
R E C I T A L S
A. The Company is engaged primarily in the landscaping services industry.
B. Employer is engaged primarily in the business of providing management
services to the Company;
C. Employer desires to employ Employee hereunder in a confidential
relationship wherein Employee, in the course of his employment, will become
familiar with and aware of information as to the Company's customers, specific
manner of doing business, processes, techniques and trade secrets and future
plans with respect thereto, all of which have been and will be established and
maintained at great expense to the Company, which information is a trade secret
and constitutes the valuable good will of the Company; and
D. The Company is intended to be a third-party beneficiary of this
Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, it is hereby agreed as follows:
A G R E E M E N T S
1. EMPLOYMENT AND DUTIES.
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<PAGE>
(a) Employer hereby employs Employee to serve as President and Chief
Executive Officer of the Company. As such, Employee shall have responsibilities,
duties and authority customarily accorded to and expected of an officer holding
such position directly with the Company. Employee hereby accepts this employment
upon the terms and conditions herein contained and agrees to devote his full
time, attention and efforts to promote and further the business of Employer.
(b) Employee shall faithfully adhere to, execute and fulfill all policies
established by Employer from time to time.
2. COMPENSATION. For all services rendered by Employee, Employer shall
compensate Employee as follows:
(a) BASE SALARY; PERFORMANCE BONUS; COMPANY STOCK OPTIONS. Effective as of
the Effective Date, the base salary payable to Employee shall be $150,000 per
year, payable on a regular basis in accordance with Employer's standard payroll
procedures but not less frequently than monthly. On at least an annual basis,
Employer will review Employee's performance and may, in its sole discretion, (i)
make increases to such base salary; (ii) pay a performance bonus; or (iii)
recommend Employee for the grant of Company stock options.
(b) EMPLOYEE PERQUISITES, BENEFITS AND OTHER COMPENSATION. Employee shall
be entitled to receive additional benefits and compensation from Employer in
such form and to such extent as specified below:
(i) Coverage, subject to contributions required of executives of the
Company generally, for Employee and his dependent family members under
health, hospitalization, disability, dental, life and other insurance
plans that Employer may have in effect from time to time. Benefits
provided to Employee under this clause (i) shall be equal to such benefits
provided to other Employer employees of the same level.
(ii) Reimbursement for all business travel and other out-of-pocket
expenses reasonably incurred by Employee in the performance of services
pursuant to this Agreement.
-2-
<PAGE>
All reimbursable expenses shall be appropriately documented in reasonable
detail by Employee upon submission of any request for reimbursement, and
in a format and manner consistent with Employer's expense reporting
policy.
(iii) Employer shall provide Employee with other employee
perquisites as may be available to or deemed appropriate for Employee by
Employer and participation in all other Company-wide employee benefits as
are available from time to time.
3. NONCOMPETITION AGREEMENT.
(a) Employee shall not, during the term of his employment hereunder, be
engaged in any other business activity pursued for gain, profit or other
pecuniary advantage if such activity interferes with Employee's duties and
responsibilities hereunder. The foregoing limitations shall not be construed as
prohibiting Employee from making personal investments in such form or manner as
will neither require his services in the operation or affairs of the companies
or enterprises in which such investments are made nor violate the terms of this
paragraph 3. Employee will not, during the period of his employment by or with
Employer, and for a period of two (2) years immediately following the
termination of his employment under this Agreement, except as provided below,
directly or indirectly, for himself or on behalf of or in conjunction with any
other person, persons, company, partnership, corporation or business of whatever
nature:
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor, or as a sales
representative, in any business in direct competition with Employer or the
Company within 100 miles of where the Company or any of its subsidiaries
conduct business, including any territory serviced by the Company or any
of such subsidiaries (the "TERRITORY");
(ii) call upon any person who is, at that time, an employee of
Employer or the Company (including the respective subsidiaries thereof) in
a sales or managerial capacity for the purpose or with the intent of
enticing such employee away from or out of the employ of Employer or the
Company (including the respective subsidiaries thereof);
-3-
<PAGE>
(iii) call upon any person or entity which is, at that time, or
which has been, within one (1) year prior to that time, a customer of the
Company (including the respective subsidiaries thereof) for the purpose of
soliciting or selling products or services in direct competition with the
Company; or
(iv) call upon any prospective acquisition candidate, on Employee's
own behalf or on behalf of any competitor, which candidate was, to
Employee's actual knowledge after due inquiry, either called upon by
Employer or the Company (including the respective subsidiaries thereof) or
for which Employer or the Company made an acquisition analysis for the
purpose of acquiring such entity or all or substantially all of such
entity's assets.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit Employee from acquiring as a passive investment not more than two
percent (2%) of the capital stock of a competing business the stock of which is
traded on a national securities exchange or on an over-the -counter or similar
market.
(b) Because of the difficulty of measuring economic losses to Employer or
the Company as a result of a breach of the foregoing covenant, and because of
the immediate and irreparable damage that could be caused to Employer or the
Company for which they would have no other adequate remedy, Employee agrees that
the foregoing covenant may be enforced by Employer or the Company in the event
of breach or threatened breach by Employee, by injunctions, restraining orders
and other appropriate equitable relief.
(c) It is agreed by the parties that the foregoing covenants in this
paragraph 3 impose a reasonable restraint on Employee in light of the activities
and business of the Company (including the Company's subsidiaries) on the date
of the execution of this Agreement and the current plans of the Company
(including the Company's subsidiaries); but it is also the intent of the Company
and Employee that such covenants be construed and enforced in accordance with
the changing activities, business and locations of the Company (including the
Company's subsidiaries) throughout the term of this covenant, whether before or
after the date of termination of the employment of Employee. For example, if,
during the term of this Agreement, the Company (including the Company's
subsidiaries) engages in new and different activities, enters a new business or
establishes new
-4-
<PAGE>
locations for its current activities or business in addition to or other than
the activities or business enumerated under the Recitals above or the locations
currently established therefor, then Employee will be precluded from soliciting
the customers or Employees of such new activities or business or from such new
location and from directly competing with such new business within 100 miles of
its then-established operating location(s) through the term of this covenant.
It is further agreed by the parties hereto that, in the event that
Employee shall cease to be employed hereunder, and shall enter into a business
or pursue other activities not in competition with the Company (including the
Company's subsidiaries), or similar activities or business in locations the
operation of which, under such circumstances, does not violate clause (i) of
paragraph 3(a), Employee shall not be chargeable with a violation of this
paragraph 3 if the Company (including the Company's subsidiaries) shall
thereafter enter the same, similar or a competitive (i) business, (ii) course of
activities or (iii) location, as applicable.
(d) The covenants in this paragraph 3 are severable and separate, and the
unenforceability of any specific covenant shall not affect the provisions of any
other covenant. Moreover, in the event any court of competent jurisdiction shall
determine that the scope, time or territorial restrictions set forth herein are
unreasonable, then it is the intention of the parties that such restrictions be
enforced to the fullest extent which the court deems reasonable, and this
Agreement shall thereby be reformed.
(e) All of the covenants in this paragraph 3 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against Employer or the
Company, whether predicated on this Agreement or otherwise, shall not constitute
a defense to the enforcement by Employer or the Company of such covenants. It is
specifically agreed that the period of two (2) years following termination of
employment stated at the beginning of this paragraph 3, during which the
agreements and covenants of Employee made in this paragraph 3 shall be
effective, shall be computed by excluding from such computation any time during
which Employee is in violation of any provision of this paragraph 3.
4. PLACE OF PERFORMANCE; RELOCATION RIGHTS.
-5-
<PAGE>
(a) Employee understands that he may be requested by Employer or the
Company to relocate from his present residence to another geographic location in
order to more efficiently carry out his duties and responsibilities under this
Agreement or as part of a promotion or other increase in duties and
responsibilities. In such event, if Employee agrees to relocate, Employer or the
Company will pay all relocation costs to move Employee, his immediate family and
their personal property and effects. Such costs may include, by way of example,
but are not limited to, pre-move visits to search for a new residence,
investigate schools or for other purposes; temporary lodging and living costs
prior to moving into a new permanent residence; duplicate home carrying costs;
all closing costs on the sale of Employee's present residence and on the
purchase of a comparable residence in the new location; and added income taxes
that Employee may incur if any relocation costs are not deductible for tax
purposes. The general intent of the foregoing is that Employee shall not
personally bear any out-of-pocket cost as a result of the relocation, with an
understanding that Employee will use his best efforts to incur only those costs
which are reasonable and necessary to effect a smooth, efficient and orderly
relocation with minimal disruption to the business affairs of Employer or the
Company and the personal life of Employee and his family.
(b) Notwithstanding the above, if Employee is requested by Employer to
relocate and Employee refuses, such refusal shall not constitute "CAUSE" for
termination of this Agreement under the terms of paragraph 5(a)(iii).
5. TERM; TERMINATION; RIGHTS ON TERMINATION.
(a) TERM. The term of this Agreement shall begin on the date hereof and
continue for three (3) years (the "INITIAL TERM") unless terminated sooner as
herein provided, and shall continue thereafter on a year-to-year basis on the
same terms and conditions contained herein in effect as of the time of renewal
(the "TERM"). This Agreement and Employee's employment may be terminated in any
one of the followings ways:
(i) TERMINATION AS A RESULT OF THE EMPLOYEE'S DEATH. The death of
Employee shall immediately terminate this Agreement with no severance
compensation due to Employee's estate.
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(ii) TERMINATION ON ACCOUNT OF DISABILITY. If, as a result of
incapacity due to physical or mental illness or injury, Employee shall
have been absent from his full-time duties hereunder for four (4)
consecutive months, then thirty (30) days after receiving written notice
(which notice may occur before or after the end of such four (4) month
period, but which shall not be effective earlier than the last day of such
four (4) month period), Employer may terminate Employee's employment
hereunder provided Employee is unable to resume his full-time duties with
or without reasonable accommodation at the conclusion of such notice
period. Also, Employee may terminate his employment hereunder if his
health should become impaired to an extent that makes the continued
performance of his duties hereunder hazardous to his physical or mental
health or his life, provided that Employee shall have furnished Employer
with a written statement from a qualified doctor to such effect and
provided, further, that, at Employer's request made within thirty (30)
days of the date of such written statement, Employee shall submit to an
examination by a doctor selected by Employer who is reasonably acceptable
to Employee or Employee's doctor and such doctor shall have concurred in
the conclusion of Employee's doctor. In the event this Agreement is
terminated as a result of Employee's disability, Employee shall receive
from Employer, in a lump-sum payment due within ten (10) days of the
effective date of termination, the base salary at the rate then in effect
for whatever time period is remaining under the Initial Term of this
Agreement or for one (1) year, whichever amount is greater; provided,
however, that any such payments shall be reduced by the amount of any
disability insurance payments payable to the Employee as a result of such
disability.
(iii) TERMINATION BY THE COMPANY FOR CAUSE. Employer may terminate
this Agreement immediately for "CAUSE," which shall be: (1) Employee's
willful and material breach of this Agreement (which breach cannot be
cured or, if capable of being cured, is not cured within ten (10) days
after receipt of written notice to cure); (2) Employee's gross negligence
in the performance or intentional nonperformance of any of Employee's
material duties and responsibilities hereunder; (3) Employee's willful
dishonesty, fraud or misconduct with respect to the business or affairs of
Employer or the Company which materially and adversely affects the
operations or reputation of Employer or the Company; (4) Employee's
conviction of a felony crime; or (5) Employee's confirmed positive illegal
drug test result. In the event of a termination for Cause, as enumerated
above, Employee shall have no right
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to any severance compensation.
(iv) TERMINATION WITHOUT CAUSE. At any time after the commencement
of employment, either Employee or Employer may, voluntarily or without
Cause, respectively, terminate this Agreement and Employee's employment,
effective thirty (30) days after written notice is provided to the other.
Should Employee be terminated by Employer without Cause during the Initial
Term, Employee shall receive from Employer, in a lump-sum payment due on
the effective date of termination, the base salary at the rate then in
effect for whatever time period is remaining under the Initial Term of
this Agreement or for one (1) year, whichever amount is greater. Should
Employee be terminated by Employer without Cause after the Initial Term,
Employee shall receive from Employer, in a lump-sum payment due on the
effective date of termination, the base salary at the rate then in effect
equivalent to one (1) year of salary. Further, any termination without
Cause by Employer shall operate to shorten the period set forth in
paragraph 3(a) and during which the terms of paragraph 3 apply to one (1)
year from the date of termination of employment. Except as provided in
paragraph 12 below, if Employee resigns or otherwise terminates this
Agreement, the provisions of paragraph 3 hereof shall apply, except that
Employee shall receive no severance compensation. If Employee is
terminated by the Company without Cause, or if the Employee terminates his
employment for Good Reason pursuant to paragraph 12(c) below, then the
Company shall make the insurance premium payments contemplated by COBRA
for a period of twelve (12) months immediately following such termination.
(b) CHANGE IN CONTROL OF THE COMPANY. In the event of a Change in Control
of the Company (as defined below) during the Term, paragraph 12 below shall
apply.
(c) EFFECT OF TERMINATION. Upon termination of this Agreement for any
reason provided above, Employee shall be entitled to receive all compensation
earned and all benefits and reimbursements due through the effective date of
termination. Additional compensation subsequent to termination, if any, will be
due and payable to Employee only to the extent and in the manner expressly
provided herein. All other rights and obligations of Employer and Employee under
this Agreement shall cease as of the effective date of termination, except that
Employer's obligations under paragraph 9 herein and Employee's obligations under
paragraphs 3, 6, 7, 8 and 10 herein shall
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survive such termination in accordance with their terms.
(d) BREACH BY COMPANY. If termination of Employee's employment arises out
of Employer's failure to pay Employee on a timely basis the amounts to which he
is entitled under this Agreement or as a result of any other breach of this
Agreement by Employer, as determined by a court of competent jurisdiction or
pursuant to the provisions of paragraph 16 below, Employer shall pay all amounts
and damages to which Employee may be entitled as a result of such breach,
including interest thereon and all reasonable legal fees and expenses and other
costs incurred by Employee to enforce his rights hereunder. Further, none of the
provisions of paragraph 3 shall apply in the event this Agreement is terminated
as a result of a breach by Employer.
6. RETURN OF COMPANY PROPERTY. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Employee by or on behalf of the Company or its
representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company and be subject at all
times to its discretion and control. Likewise, all correspondence, reports,
records, charts, advertising materials and other similar data pertaining to the
business, activities or future plans of the Company which is collected by
Employee shall be delivered promptly to the Company without request by it upon
termination of Employee's employment.
7. INVENTIONS. Employee shall disclose promptly to the Company any and all
significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by Employee,
solely or jointly with another, during the period of employment or within one
(1) year thereafter, and which are directly related to the business or
activities of the Company and which Employee conceives as a result of his
employment hereunder. Employee hereby assigns and agrees to assign all his
interests therein to the Company or its nominee. Whenever requested to do so by
the Company, Employee shall execute any and all applications, assignments or
other instruments that the Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
8. TRADE SECRETS. Employee agrees that he will not, during or after the
Term of this
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Agreement, disclose the specific terms of the Company's relationships or
agreements with their respective significant vendors or customers or any other
significant and material trade secret of the Company, whether in existence or
proposed, to any person, firm, partnership, corporation or business for any
reason or purpose whatsoever, except and only to the extent required by law or
legal process following notice to the Company.
9. INDEMNIFICATION. In the event Employee is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by Employer
against Employee), by reason of the fact that he is or was performing services
under this Agreement, then Employer shall indemnify Employee against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, as actually and reasonably incurred by Employee in connection
therewith, to the maximum extent permitted by applicable law. The advancement of
expenses shall be mandatory to the extent permitted by applicable law. In the
event that both Employee and Employer are made a party to the same third-party
action, complaint, suit or proceeding, Employer agrees to engage counsel, and
Employee agrees to use the same counsel, provided that if counsel selected by
Employer shall have a conflict of interest that prevents such counsel from
representing Employee, Employee may engage separate counsel and Employer shall
pay all reasonable attorneys' fees of such separate counsel. Employer shall not
be required to pay the fees of more than one law firm except as described in the
preceding sentence, and shall not be required to pay the fees of more than two
law firms under any circumstances. Further, while Employee is expected at all
times to use his best efforts to faithfully discharge his duties under this
Agreement, Employee cannot be held liable to Employer for errors or omissions
made in good faith where Employee has not exhibited gross, willful and wanton
negligence or misconduct or performed criminal or fraudulent acts.
10. NO PRIOR AGREEMENTS. Employee hereby represents and warrants to
Employer and the Company that the execution of this Agreement by Employee and
his employment by Employer and the performance of his duties hereunder will not
violate or be a breach of any agreement with a former employer, client or any
other person or entity. Further, Employee agrees to indemnify Employer and the
Company for any claim, including, but not limited to, attorneys' fees and
expenses of investigation, by any such third party that such third party may now
have or may hereafter come to have against Employer or the Company based upon or
arising out of any noncompetition
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agreement, invention or secrecy agreement between Employee and such third party
which was in existence as of the date of this Agreement.
11. ASSIGNMENT; BINDING EFFECT. Employee understands that he has been
selected for employment by Employer and/or the Company on the basis of his
personal qualifications, experience and skills. Employee agrees, therefore, he
cannot assign all or any portion of his performance under this Agreement.
Subject to the preceding two (2) sentences and the express provisions of
paragraph 12 below, this Agreement shall be binding upon, inure to the benefit
of and be enforceable by the parties hereto and their respective heirs, legal
representatives, successors and assigns.
12. CHANGE IN CONTROL.
(a) Unless Employee elects to terminate this Agreement pursuant to
paragraph 12(c) below, Employee understands and acknowledges that Employer
and/or the Company may be merged or consolidated with or into another entity and
that such entity shall automatically succeed to the rights and obligations of
Employer and/or the Company hereunder or that the Company may undergo another
type of Change in Control. In the event such a merger or consolidation or other
Change in Control is initiated during the Term of this Agreement, then the
provisions of this paragraph 12 shall be applicable.
(b) In the event of a pending Change in Control wherein the Company and
Employee have not received written notice at least five (5) business days prior
to the anticipated closing date of the transaction giving rise to the 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 as of the closing to
assume and agree to perform Employer's obligations under this Agreement in the
same manner and to the same extent that Employer is hereby required to perform,
then the Employee may elect to terminate his employment and shall be entitled to
receive in a lump-sum payment the amount equal to three (3) times his annual
base salary then in effect, and the noncompetition provisions of paragraph 3
shall apply for a period of one (1) year immediately following the effective
date of termination.
(c) In any Change in Control situation, if Employee is terminated by
Employer without
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Cause at any time during the twelve (12) months immediately following the
closing of the transaction giving rise to the Change in Control, or Employee
terminates this Agreement for Good Reason (as defined below) at any time during
the twelve (12) months immediately following the closing of the transaction
giving rise to the Change in Control, Employee shall be entitled to receive in a
lump-sum payment, due on the effective date of termination, the amount equal to
three (3) times the greater of (i) his annual base salary then in effect or (ii)
his annual base salary in effect immediately prior to the closing of the
transaction giving rise to the Change in Control, and the noncompetition
provisions of paragraph 3 shall apply for a period of one (1) year immediately
following the effective date of termination. For purposes of this Agreement,
Employee shall have "GOOD REASON" to terminate this Agreement and his employment
hereunder if, without Employee's consent, (x) Employee is demoted by means of a
reduction in authority, responsibilities, duties or title to a position of
materially less stature or importance within the Company than as described in
paragraph 1 hereof or (y) the Employer breaches this Agreement in any material
respect and fails to cure such breach within ten (10) days after Employee
delivers written notice and a written description of such breach to the
Employer, which notice shall specifically refer to this section of this
Agreement.
(d) For purposes of applying paragraph 5 under the circumstances described
in (b) above, the effective date of termination will be the closing date of the
transaction giving rise to the Change in Control and all compensation,
reimbursements and lump-sum payments due Employee must be paid in full by
Employer at or prior to such closing. Further, Employer shall ensure that
Employee will be given sufficient time and opportunity to elect whether to
exercise all or any of his vested options to purchase the Company's Common
Stock, including any options with accelerated vesting under the provisions of
the Company's 1998 Long-Term Incentive Plan (or other applicable plan then in
effect), such that he may convert the options to shares of the Company's Common
Stock at or prior to the closing of the transaction giving rise to the Change in
Control, if he so desires.
(e) A "CHANGE IN CONTROL" shall be deemed to have occurred if:
(i) any person, other than the Company or an employee benefit plan
of the Company, and other than Notre Capital Ventures II, L.L.C. or any
entity controlled by it, acquires directly or indirectly the Beneficial
Ownership (as defined in Section 13(d) of the
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Securities Exchange Act of 1934, as amended) of any voting security of the
Company and immediately after such acquisition such Person is, directly or
indirectly, the Beneficial Owner of voting securities representing fifty
percent (50%) or more of the total voting power of all of the
then-outstanding voting securities of the Company;
(ii) the following individuals no longer constitute a majority of
the members of the Board of Directors of the Company: (A) the individuals
who, as of the closing date of the Company's initial public offering,
constitute the Board of Directors of the Company (the "ORIGINAL
DIRECTORS"); (B) the individuals who thereafter are elected to the Board
of Directors of the Company and whose election, or nomination for
election, to the Board of Directors of the Company was approved by a vote
of at least two-thirds (2/3) of the Original Directors then still in
office (such directors becoming "ADDITIONAL ORIGINAL DIRECTORS"
immediately following their election); and (C) the individuals who are
elected to the Board of Directors of the Company and whose election, or
nomination for election, to the Board of Directors of the Company was
approved by a vote of at least two-thirds (2/3) of the Original Directors
and Additional Original Directors then still in office (such directors
also becoming " ADDITIONAL ORIGINAL DIRECTORS" immediately following their
election);
(iii) the stockholders of the Company shall approve a merger,
consolidation, recapitalization, or reorganization of the Company, a
reverse stock split of outstanding voting securities, or consummation of
any such transaction if stockholder approval is not obtained, other than
any such transaction which would result in at least seventy-five percent
(75%) of the total voting power represented by the voting securities of
the surviving entity outstanding immediately after such transaction being
Beneficially Owned by at least seventy-five percent (75%) of the holders
of outstanding voting securities of the Company immediately prior to the
transaction, with the voting power of each such continuing holder relative
to other such continuing holders not substantially altered in the
transaction; or
(iv) the stockholders of the Company shall approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or a substantial portion of the
Company's assets (i.e., fifty percent (50%) or more of the total assets of
the Company).
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(f) Employee must be notified in writing by Employer or the Company at any
time that either Employer or the Company anticipates that a Change in Control
may take place.
(g) If it shall be determined that any payment or distribution by
Employer, the Company or any other person to or for the benefit of the Employee
(a "PAYMENT") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "EXCISE TAX"), as a result of the
termination of employment of the Employee in the event of a Change in Control,
then Employer, the Company or the successor to the Company shall pay an
additional payment (a "GROSS-UP PAYMENT") in an amount such that after payment
by the Employee of all taxes, including, without limitation, any income taxes
and Excise Tax imposed on the Gross-Up Payment, the Employee retains an amount
of the Gross-Up Payment equal to the Excise Tax imposed on the Payments. Such
amount will be due and payable by Employer, the Company or the successor to the
Company within ten (10) days after the Employee delivers written request for
reimbursement accompanied by a copy of the Employee's tax return(s) or other tax
filings showing the excise tax actually incurred by the Employee.
13. COMPLETE AGREEMENT. This Agreement sets forth the entire agreement of
the parties hereto relating to the subject matter hereof and supersedes any
other employment agreements or understandings, written or oral, between or among
Employer, the Company and Employee. This Agreement is not a promise of future
employment. Employee has no oral representations, understandings or agreements
with Employer or the Company or any of its officers, directors or
representatives covering the same subject matter as this Agreement. This
Agreement is the final, complete and exclusive statement and expression of the
agreement between Employer and Employee and of all the terms of this Agreement,
and it cannot be varied, contradicted or supplemented by evidence of any prior
or contemporaneous oral or written agreements. This written Agreement may not be
later modified except by a further writing signed by a duly authorized officer
of Employer and Employee, and no term of this Agreement may be waived except in
writing signed by the party waiving the benefit of such term.
14. NOTICE. Whenever any notice is required hereunder, it shall be given
in writing addressed as follows:
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To Employer: LandCare USA Management Co., L.P.
Three Riverway, Suite 630
Houston, Texas 77056
Attention: Law Department
To: Company: LandCare USA, Inc.
Three Riverway, Suite 630
Houston, Texas 77056
Attention: Law Department
To Employee: William F. Murdy
_____________________________________
_____________________________________
Notice shall be deemed given and effective on the earlier of three (3) days
after the deposit in the U.S. mail of a writing addressed as above and sent
first class mail, certified, return receipt requested, or when actually received
by means of hand delivery, delivery by Federal Express or other courier service,
or by facsimile transmission. Either party may change the address for notice by
notifying the other party of such change in accordance with this paragraph 14.
15. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of this
Agreement or of any part hereof.
16. ARBITRATION. With the exception of paragraphs 3 and 7, any unresolved
dispute or controversy arising under or in connection with this Agreement shall
be settled exclusively by arbitration, conducted before a panel of three (3)
arbitrators in Houston, Texas, in accordance with the National Rules for the
Resolution of Employment Disputes of the American Arbitration Association
("AAA") then in effect, provided that Employee shall comply with Employer's
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grievance procedures in an effort to resolve such dispute or controversy before
resorting to arbitration, and provided further that the parties may agree to use
arbitrators other than those provided by the AAA. The arbitrators shall not have
the authority to add to, detract from, or modify any provision hereof nor to
award punitive damages to any injured party. The arbitrators shall have the
authority to order back-pay, severance compensation, vesting of options (or cash
compensation in lieu of vesting of options), reimbursement of costs, including
those incurred to enforce this Agreement, and interest thereon in the event the
arbitrators determine that Employee was terminated without disability or Cause,
as defined in paragraphs 5(a)(ii) and 5(a)(iii), respectively, or that Employer
has breached this Agreement in any material respect. A decision by a majority of
the arbitration panel shall be final and binding. Judgment may be entered on the
arbitrators' award in any court having jurisdiction. The direct expense of any
arbitration proceeding shall be borne by Employer.
17. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of Texas.
18. COUNTERPARTS. This Agreement may be executed simultaneously in two (2)
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
19. THIRD-PARTY BENEFICIARY. The Company is intended to be a third-party
beneficiary under this Agreement, and shall be entitled to enforce the
provisions hereof benefiting the Company.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
LANDCARE USA MANAGEMENT CO., L.P.
BY: LUSA GP, INC.
By: _______________________________________
William L. Fiedler
Senior Vice President and General Counsel
LANDCARE USA, INC.
By: _______________________________________
William L. Fiedler
Senior Vice President and General Counsel
EMPLOYEE:
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_______________________________________
William F. Murdy
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EXHIBIT 10.13
MANAGEMENT
EMPLOYMENT AGREEMENT
This Management Employment Agreement (this "AGREEMENT") by and among
LandCare USA Management Co., L.P., a Delaware limited partnership ("EMPLOYER"),
and Peter C. Forbes ("EMPLOYEE") is hereby entered into and effective as of the
__ day of ____________, 1998 (the "EFFECTIVE DATE"), which date is the date of
the consummation of the initial public offering of the common stock of LandCare
USA, Inc., a Delaware corporation (the "COMPANY").
R E C I T A L S
A. The Company is engaged primarily in the landscaping services industry.
B. Employer is engaged primarily in the business of providing management
services to the Company;
C. Employer desires to employ Employee hereunder in a confidential
relationship wherein Employee, in the course of his employment, will become
familiar with and aware of information as to the Company's customers, specific
manner of doing business, processes, techniques and trade secrets and future
plans with respect thereto, all of which have been and will be established and
maintained at great expense to the Company, which information is a trade secret
and constitutes the valuable good will of the Company; and
D. The Company is intended to be a third-party beneficiary of this
Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, it is hereby agreed as follows:
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A G R E E M E N T S
1. EMPLOYMENT AND DUTIES.
(a) Employer hereby employs Employee to serve as Senior Vice President and
Chief Financial Officer of the Company. As such, Employee shall have
responsibilities, duties and authority customarily accorded to and expected of
an officer holding such position directly with the Company. Employee hereby
accepts this employment upon the terms and conditions herein contained and
agrees to devote his full time, attention and efforts to promote and further the
business of Employer.
(b) Employee shall faithfully adhere to, execute and fulfill all policies
established by Employer from time to time.
2. COMPENSATION. For all services rendered by Employee, Employer shall
compensate Employee as follows:
(a) BASE SALARY; PERFORMANCE BONUS; COMPANY STOCK OPTIONS. Effective as of
the Effective Date, the base salary payable to Employee shall be $150,000 per
year, payable on a regular basis in accordance with Employer's standard payroll
procedures but not less frequently than monthly. On at least an annual basis,
Employer will review Employee's performance and may, in its sole discretion, (i)
make increases to such base salary; (ii) pay a performance bonus; or (iii)
recommend Employee for the grant of Company stock options.
(b) EMPLOYEE PERQUISITES, BENEFITS AND OTHER COMPENSATION. Employee shall
be entitled to receive additional benefits and compensation from Employer in
such form and to such extent as specified below:
(i) Coverage, subject to contributions required of executives of the
Company
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generally, for Employee and his dependent family members under health,
hospitalization, disability, dental, life and other insurance plans that
Employer may have in effect from time to time. Benefits provided to
Employee under this clause (i) shall be equal to such benefits provided to
other Employer employees of the same level.
(ii) Reimbursement for all business travel and other out-of-pocket
expenses reasonably incurred by Employee in the performance of services
pursuant to this Agreement. All reimbursable expenses shall be
appropriately documented in reasonable detail by Employee upon submission
of any request for reimbursement, and in a format and manner consistent
with Employer's expense reporting policy.
(iii) Employer shall provide Employee with other employee
perquisites as may be available to or deemed appropriate for Employee by
Employer and participation in all other Company-wide employee benefits as
are available from time to time.
3. NONCOMPETITION AGREEMENT.
(a) Employee shall not, during the term of his employment hereunder, be
engaged in any other business activity pursued for gain, profit or other
pecuniary advantage if such activity interferes with Employee's duties and
responsibilities hereunder. The foregoing limitations shall not be construed as
prohibiting Employee from making personal investments in such form or manner as
will neither require his services in the operation or affairs of the companies
or enterprises in which such investments are made nor violate the terms of this
paragraph 3. Employee will not, during the period of his employment by or with
Employer, and for a period of two (2) years immediately following the
termination of his employment under this Agreement, except as provided below,
directly or indirectly, for himself or on behalf of or in conjunction with any
other person, persons, company, partnership, corporation or business of whatever
nature:
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or
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in a managerial capacity, whether as an employee, independent contractor,
consultant or advisor, or as a sales representative, in any business in
direct competition with Employer or the Company within 100 miles of where
the Company or any of its subsidiaries conduct business, including any
territory serviced by the Company or any of such subsidiaries (the
"TERRITORY");
(ii) call upon any person who is, at that time, an employee of
Employer or the Company (including the respective subsidiaries thereof) in
a sales or managerial capacity for the purpose or with the intent of
enticing such employee away from or out of the employ of Employer or the
Company (including the respective subsidiaries thereof);
(iii) call upon any person or entity which is, at that time, or
which has been, within one (1) year prior to that time, a customer of the
Company (including the respective subsidiaries thereof) for the purpose of
soliciting or selling products or services in direct competition with the
Company; or
(iv) call upon any prospective acquisition candidate, on Employee's
own behalf or on behalf of any competitor, which candidate was, to
Employee's actual knowledge after due inquiry, either called upon by
Employer or the Company (including the respective subsidiaries thereof) or
for which Employer or the Company made an acquisition analysis for the
purpose of acquiring such entity or all or substantially all of such
entity's assets.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit Employee from acquiring as a passive investment not more than two
percent (2%) of the capital stock of a competing business the stock of which is
traded on a national securities exchange or on an over-the -counter or similar
market.
(b) Because of the difficulty of measuring economic losses to Employer or
the Company as a result of a breach of the foregoing covenant, and because of
the immediate and irreparable
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damage that could be caused to Employer or the Company for which they would have
no other adequate remedy, Employee agrees that the foregoing covenant may be
enforced by Employer or the Company in the event of breach or threatened breach
by Employee, by injunctions, restraining orders and other appropriate equitable
relief.
(c) It is agreed by the parties that the foregoing covenants in this
paragraph 3 impose a reasonable restraint on Employee in light of the activities
and business of the Company (including the Company's subsidiaries) on the date
of the execution of this Agreement and the current plans of the Company
(including the Company's subsidiaries); but it is also the intent of the Company
and Employee that such covenants be construed and enforced in accordance with
the changing activities, business and locations of the Company (including the
Company's subsidiaries) throughout the term of this covenant, whether before or
after the date of termination of the employment of Employee. For example, if,
during the term of this Agreement, the Company (including the Company's
subsidiaries) engages in new and different activities, enters a new business or
establishes new locations for its current activities or business in addition to
or other than the activities or business enumerated under the Recitals above or
the locations currently established therefor, then Employee will be precluded
from soliciting the customers or Employees of such new activities or business or
from such new location and from directly competing with such new business within
100 miles of its then-established operating location(s) through the term of this
covenant.
It is further agreed by the parties hereto that, in the event that
Employee shall cease to be employed hereunder, and shall enter into a business
or pursue other activities not in competition with the Company (including the
Company's subsidiaries), or similar activities or business in locations the
operation of which, under such circumstances, does not violate clause (i) of
paragraph 3(a), Employee shall not be chargeable with a violation of this
paragraph 3 if the Company (including the Company's subsidiaries) shall
thereafter enter the same, similar or a competitive (i) business, (ii) course of
activities or (iii) location, as applicable.
(d) The covenants in this paragraph 3 are severable and separate, and the
unenforceability
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of any specific covenant shall not affect the provisions of any other covenant.
Moreover, in the event any court of competent jurisdiction shall determine that
the scope, time or territorial restrictions set forth herein are unreasonable,
then it is the intention of the parties that such restrictions be enforced to
the fullest extent which the court deems reasonable, and this Agreement shall
thereby be reformed.
(e) All of the covenants in this paragraph 3 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against Employer or the
Company, whether predicated on this Agreement or otherwise, shall not constitute
a defense to the enforcement by Employer or the Company of such covenants. It is
specifically agreed that the period of two (2) years following termination of
employment stated at the beginning of this paragraph 3, during which the
agreements and covenants of Employee made in this paragraph 3 shall be
effective, shall be computed by excluding from such computation any time during
which Employee is in violation of any provision of this paragraph 3.
4. PLACE OF PERFORMANCE; RELOCATION RIGHTS.
(a) Employee understands that he may be requested by Employer or the
Company to relocate from his present residence to another geographic location in
order to more efficiently carry out his duties and responsibilities under this
Agreement or as part of a promotion or other increase in duties and
responsibilities. In such event, if Employee agrees to relocate, Employer or the
Company will pay all relocation costs to move Employee, his immediate family and
their personal property and effects. Such costs may include, by way of example,
but are not limited to, pre-move visits to search for a new residence,
investigate schools or for other purposes; temporary lodging and living costs
prior to moving into a new permanent residence; duplicate home carrying costs;
all closing costs on the sale of Employee's present residence and on the
purchase of a comparable residence in the new location; and added income taxes
that Employee may incur if any relocation costs are not deductible for tax
purposes. The general intent of the foregoing is that Employee shall not
personally bear any out-of-pocket cost as a result of the relocation, with an
understanding that
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Employee will use his best efforts to incur only those costs which are
reasonable and necessary to effect a smooth, efficient and orderly relocation
with minimal disruption to the business affairs of Employer or the Company and
the personal life of Employee and his family.
(b) Notwithstanding the above, if Employee is requested by Employer to
relocate and Employee refuses, such refusal shall not constitute "CAUSE" for
termination of this Agreement under the terms of paragraph 5(a)(iii).
5. TERM; TERMINATION; RIGHTS ON TERMINATION.
(a) TERM. The term of this Agreement shall begin on the date hereof and
continue for three (3) years (the "INITIAL TERM") unless terminated sooner as
herein provided, and shall continue thereafter on a year-to-year basis on the
same terms and conditions contained herein in effect as of the time of renewal
(the "TERM"). This Agreement and Employee's employment may be terminated in any
one of the followings ways:
(i) TERMINATION AS A RESULT OF THE EMPLOYEE'S DEATH. The death of
Employee shall immediately terminate this Agreement with no severance
compensation due to Employee's estate.
(ii) TERMINATION ON ACCOUNT OF DISABILITY. If, as a result of
incapacity due to physical or mental illness or injury, Employee shall
have been absent from his full-time duties hereunder for four (4)
consecutive months, then thirty (30) days after receiving written notice
(which notice may occur before or after the end of such four (4) month
period, but which shall not be effective earlier than the last day of such
four (4) month period), Employer may terminate Employee's employment
hereunder provided Employee is unable to resume his full-time duties with
or without reasonable accommodation at the conclusion of such notice
period. Also, Employee may terminate his employment hereunder if his
health should become impaired to an extent that makes the continued
performance of his
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<PAGE>
duties hereunder hazardous to his physical or mental health or his life,
provided that Employee shall have furnished Employer with a written
statement from a qualified doctor to such effect and provided, further,
that, at Employer's request made within thirty (30) days of the date of
such written statement, Employee shall submit to an examination by a
doctor selected by Employer who is reasonably acceptable to Employee or
Employee's doctor and such doctor shall have concurred in the conclusion
of Employee's doctor. In the event this Agreement is terminated as a
result of Employee's disability, Employee shall receive from Employer, in
a lump-sum payment due within ten (10) days of the effective date of
termination, the base salary at the rate then in effect for whatever time
period is remaining under the Initial Term of this Agreement or for one
(1) year, whichever amount is greater; provided, however, that any such
payments shall be reduced by the amount of any disability insurance
payments payable to the Employee as a result of such disability.
(iii) TERMINATION BY THE COMPANY FOR CAUSE. Employer may terminate
this Agreement immediately for "CAUSE," which shall be: (1) Employee's
willful and material breach of this Agreement (which breach cannot be
cured or, if capable of being cured, is not cured within ten (10) days
after receipt of written notice to cure); (2) Employee's gross negligence
in the performance or intentional nonperformance of any of Employee's
material duties and responsibilities hereunder; (3) Employee's willful
dishonesty, fraud or misconduct with respect to the business or affairs of
Employer or the Company which materially and adversely affects the
operations or reputation of Employer or the Company; (4) Employee's
conviction of a felony crime; or (5) Employee's confirmed positive illegal
drug test result. In the event of a termination for Cause, as enumerated
above, Employee shall have no right to any severance compensation.
(iv) TERMINATION WITHOUT CAUSE. At any time after the commencement
of employment, either Employee or Employer may, voluntarily or without
Cause, respectively, terminate this Agreement and Employee's employment,
effective thirty (30) days after written notice is provided to the other.
Should Employee be terminated by Employer without Cause during the Initial
Term, Employee shall receive from Employer, in a lump-sum payment due on
the effective date of termination, the base salary at the rate then in
effect for whatever time period is remaining under the Initial Term of
this Agreement or for one (1) year, whichever amount is greater. Should
Employee be terminated by Employer without
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Cause after the Initial Term, Employee shall receive from Employer, in a
lump-sum payment due on the effective date of termination, the base salary
at the rate then in effect equivalent to one (1) year of salary. Further,
any termination without Cause by Employer shall operate to shorten the
period set forth in paragraph 3(a) and during which the terms of paragraph
3 apply to one (1) year from the date of termination of employment. Except
as provided in paragraph 12 below, if Employee resigns or otherwise
terminates this Agreement, the provisions of paragraph 3 hereof shall
apply, except that Employee shall receive no severance compensation. If
Employee is terminated by the Company without Cause, or if the Employee
terminates his employment for Good Reason pursuant to paragraph 12(c)
below, then the Company shall make the insurance premium payments
contemplated by COBRA for a period of twelve (12) months immediately
following such termination.
(b) CHANGE IN CONTROL OF THE COMPANY. In the event of a Change in Control
of the Company (as defined below) during the Term, paragraph 12 below shall
apply.
(c) EFFECT OF TERMINATION. Upon termination of this Agreement for any
reason provided above, Employee shall be entitled to receive all compensation
earned and all benefits and reimbursements due through the effective date of
termination. Additional compensation subsequent to termination, if any, will be
due and payable to Employee only to the extent and in the manner expressly
provided herein. All other rights and obligations of Employer and Employee under
this Agreement shall cease as of the effective date of termination, except that
Employer's obligations under paragraph 9 herein and Employee's obligations under
paragraphs 3, 6, 7, 8 and 10 herein shall survive such termination in accordance
with their terms.
(d) BREACH BY COMPANY. If termination of Employee's employment arises out
of
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Employer's failure to pay Employee on a timely basis the amounts to which he is
entitled under this Agreement or as a result of any other breach of this
Agreement by Employer, as determined by a court of competent jurisdiction or
pursuant to the provisions of paragraph 16 below, Employer shall pay all amounts
and damages to which Employee may be entitled as a result of such breach,
including interest thereon and all reasonable legal fees and expenses and other
costs incurred by Employee to enforce his rights hereunder. Further, none of the
provisions of paragraph 3 shall apply in the event this Agreement is terminated
as a result of a breach by Employer.
6. RETURN OF COMPANY PROPERTY. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Employee by or on behalf of the Company or its
representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company and be subject at all
times to its discretion and control. Likewise, all correspondence, reports,
records, charts, advertising materials and other similar data pertaining to the
business, activities or future plans of the Company which is collected by
Employee shall be delivered promptly to the Company without request by it upon
termination of Employee's employment.
7. INVENTIONS. Employee shall disclose promptly to the Company any and all
significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by Employee,
solely or jointly with another, during the period of employment or within one
(1) year thereafter, and which are directly related to the business or
activities of the Company and which Employee conceives as a result of his
employment hereunder. Employee hereby assigns and agrees to assign all his
interests therein to the Company or its nominee. Whenever requested to do so by
the Company, Employee shall execute any and all applications, assignments or
other instruments that the Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
8. TRADE SECRETS. Employee agrees that he will not, during or after the
Term of this
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Agreement, disclose the specific terms of the Company's relationships or
agreements with their respective significant vendors or customers or any other
significant and material trade secret of the Company, whether in existence or
proposed, to any person, firm, partnership, corporation or business for any
reason or purpose whatsoever, except and only to the extent required by law or
legal process following notice to the Company.
9. INDEMNIFICATION. In the event Employee is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by Employer
against Employee), by reason of the fact that he is or was performing services
under this Agreement, then Employer shall indemnify Employee against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, as actually and reasonably incurred by Employee in connection
therewith, to the maximum extent permitted by applicable law. The advancement of
expenses shall be mandatory to the extent permitted by applicable law. In the
event that both Employee and Employer are made a party to the same third-party
action, complaint, suit or proceeding, Employer agrees to engage counsel, and
Employee agrees to use the same counsel, provided that if counsel selected by
Employer shall have a conflict of interest that prevents such counsel from
representing Employee, Employee may engage separate counsel and Employer shall
pay all reasonable attorneys' fees of such separate counsel. Employer shall not
be required to pay the fees of more than one law firm except as described in the
preceding sentence, and shall not be required to pay the fees of more than two
law firms under any circumstances. Further, while Employee is expected at all
times to use his best efforts to faithfully discharge his duties under this
Agreement, Employee cannot be held liable to Employer for errors or omissions
made in good faith where Employee has not exhibited gross, willful and wanton
negligence or misconduct or performed criminal or fraudulent acts.
10. NO PRIOR AGREEMENTS. Employee hereby represents and warrants to
Employer and the Company that the execution of this Agreement by Employee and
his employment by Employer and the performance of his duties hereunder will not
violate or be a breach of any agreement with a former employer, client or any
other person or entity. Further, Employee agrees to indemnify
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Employer and the Company for any claim, including, but not limited to,
attorneys' fees and expenses of investigation, by any such third party that such
third party may now have or may hereafter come to have against Employer or the
Company based upon or arising out of any noncompetition agreement, invention or
secrecy agreement between Employee and such third party which was in existence
as of the date of this Agreement.
11. ASSIGNMENT; BINDING EFFECT. Employee understands that he has been
selected for employment by Employer and/or the Company on the basis of his
personal qualifications, experience and skills. Employee agrees, therefore, he
cannot assign all or any portion of his performance under this Agreement.
Subject to the preceding two (2) sentences and the express provisions of
paragraph 12 below, this Agreement shall be binding upon, inure to the benefit
of and be enforceable by the parties hereto and their respective heirs, legal
representatives, successors and assigns.
12. CHANGE IN CONTROL.
(a) Unless Employee elects to terminate this Agreement pursuant to
paragraph 12(c) below, Employee understands and acknowledges that Employer
and/or the Company may be merged or consolidated with or into another entity and
that such entity shall automatically succeed to the rights and obligations of
Employer and/or the Company hereunder or that the Company may undergo another
type of Change in Control. In the event such a merger or consolidation or other
Change in Control is initiated during the Term of this Agreement, then the
provisions of this paragraph 12 shall be applicable.
(b) In the event of a pending Change in Control wherein the Company and
Employee have not received written notice at least five (5) business days prior
to the anticipated closing date of the transaction giving rise to the 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 as of the closing to
assume and agree to perform Employer's obligations under this Agreement in the
same manner and to the same extent that Employer is hereby required to perform,
then the Employee may elect to
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terminate his employment and shall be entitled to receive in a lump-sum payment
the amount equal to three (3) times his annual base salary then in effect, and
the noncompetition provisions of paragraph 3 shall apply for a period of one (1)
year immediately following the effective date of termination.
(c) In any Change in Control situation, if Employee is terminated by
Employer without Cause at any time during the twelve (12) months immediately
following the closing of the transaction giving rise to the Change in Control,
or Employee terminates this Agreement for Good Reason (as defined below) at any
time during the twelve (12) months immediately following the closing of the
transaction giving rise to the Change in Control, Employee shall be entitled to
receive in a lump-sum payment, due on the effective date of termination, the
amount equal to three (3) times the greater of (i) his annual base salary then
in effect or (ii) his annual base salary in effect immediately prior to the
closing of the transaction giving rise to the Change in Control, and the
noncompetition provisions of paragraph 3 shall apply for a period of one (1)
year immediately following the effective date of termination. For purposes of
this Agreement, Employee shall have "GOOD REASON" to terminate this Agreement
and his employment hereunder if, without Employee's consent, (x) Employee is
demoted by means of a reduction in authority, responsibilities, duties or title
to a position of materially less stature or importance within the Company than
as described in paragraph 1 hereof or (y) the Employer breaches this Agreement
in any material respect and fails to cure such breach within ten (10) days after
Employee delivers written notice and a written description of such breach to the
Employer, which notice shall specifically refer to this section of this
Agreement.
(d) For purposes of applying paragraph 5 under the circumstances described
in (b) above, the effective date of termination will be the closing date of the
transaction giving rise to the Change in Control and all compensation,
reimbursements and lump-sum payments due Employee must be paid in full by
Employer at or prior to such closing. Further, Employer shall ensure that
Employee will be given sufficient time and opportunity to elect whether to
exercise all or any of his vested options to purchase the Company's Common
Stock, including any options with accelerated vesting
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<PAGE>
under the provisions of the Company's 1998 Long-Term Incentive Plan (or other
applicable plan then in effect), such that he may convert the options to shares
of the Company's Common Stock at or prior to the closing of the transaction
giving rise to the Change in Control, if he so desires.
(e) A "CHANGE IN CONTROL" shall be deemed to have occurred if:
(i) any person, other than the Company or an employee benefit plan
of the Company, and other than Notre Capital Ventures II, L.L.C. or any
entity controlled by it, acquires directly or indirectly the Beneficial
Ownership (as defined in Section 13(d) of the Securities Exchange Act of
1934, as amended) of any voting security of the Company and immediately
after such acquisition such Person is, directly or indirectly, the
Beneficial Owner of voting securities representing fifty percent (50%) or
more of the total voting power of all of the then-outstanding voting
securities of the Company;
(ii) the following individuals no longer constitute a majority of
the members of the Board of Directors of the Company: (A) the individuals
who, as of the closing date of the Company's initial public offering,
constitute the Board of Directors of the Company (the "ORIGINAL
DIRECTORS"); (B) the individuals who thereafter are elected to the Board
of Directors of the Company and whose election, or nomination for
election, to the Board of Directors of the Company was approved by a vote
of at least two-thirds (2/3) of the Original Directors then still in
office (such directors becoming "ADDITIONAL ORIGINAL DIRECTORS"
immediately following their election); and (C) the individuals who are
elected to the Board of Directors of the Company and whose election, or
nomination for election, to the Board of Directors of the Company was
approved by a vote of at least two-thirds (2/3) of the Original Directors
and Additional Original Directors then still in office (such directors
also becoming " ADDITIONAL ORIGINAL DIRECTORS" immediately following their
election);
(iii) the stockholders of the Company shall approve a merger,
consolidation, recapitalization, or reorganization of the Company, a
reverse stock split of outstanding voting
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<PAGE>
securities, or consummation of any such transaction if stockholder
approval is not obtained, other than any such transaction which would
result in at least seventy-five percent (75%) of the total voting power
represented by the voting securities of the surviving entity outstanding
immediately after such transaction being Beneficially Owned by at least
seventy-five percent (75%) of the holders of outstanding voting securities
of the Company immediately prior to the transaction, with the voting power
of each such continuing holder relative to other such continuing holders
not substantially altered in the transaction; or
(iv) the stockholders of the Company shall approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or a substantial portion of the
Company's assets (i.e., fifty percent (50%) or more of the total assets of
the Company).
(f) Employee must be notified in writing by Employer or the Company at any
time that either Employer or the Company anticipates that a Change in Control
may take place.
(g) If it shall be determined that any payment or distribution by
Employer, the Company or any other person to or for the benefit of the Employee
(a "PAYMENT") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "EXCISE TAX"), as a result of the
termination of employment of the Employee in the event of a Change in Control,
then Employer, the Company or the successor to the Company shall pay an
additional payment (a "GROSS-UP PAYMENT") in an amount such that after payment
by the Employee of all taxes, including, without limitation, any income taxes
and Excise Tax imposed on the Gross-Up Payment, the Employee retains an amount
of the Gross-Up Payment equal to the Excise Tax imposed on the Payments. Such
amount will be due and payable by Employer, the Company or the successor to the
Company within ten (10) days after the Employee delivers written request for
reimbursement accompanied by a copy of the Employee's tax return(s) or other tax
filings showing the excise tax actually incurred by the Employee.
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<PAGE>
13. COMPLETE AGREEMENT. This Agreement sets forth the entire agreement of
the parties hereto relating to the subject matter hereof and supersedes any
other employment agreements or understandings, written or oral, between or among
Employer, the Company and Employee. This Agreement is not a promise of future
employment. Employee has no oral representations, understandings or agreements
with Employer or the Company or any of its officers, directors or
representatives covering the same subject matter as this Agreement. This
Agreement is the final, complete and exclusive statement and expression of the
agreement between Employer and Employee and of all the terms of this Agreement,
and it cannot be varied, contradicted or supplemented by evidence of any prior
or contemporaneous oral or written agreements. This written Agreement may not be
later modified except by a further writing signed by a duly authorized officer
of Employer and Employee, and no term of this Agreement may be waived except in
writing signed by the party waiving the benefit of such term.
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<PAGE>
14. NOTICE. Whenever any notice is required hereunder, it shall be given
in writing addressed as follows:
To Employer: LandCare USA Management Co., L.P.
Three Riverway, Suite 630
Houston, Texas 77056
Attention: Law Department
To: Company: LandCare USA, Inc.
Three Riverway, Suite 630
Houston, Texas 77056
Attention: Law Department
To Employee: Peter C. Forbes
__________________________________
__________________________________
Notice shall be deemed given and effective on the earlier of three (3) days
after the deposit in the U.S. mail of a writing addressed as above and sent
first class mail, certified, return receipt requested, or when actually received
by means of hand delivery, delivery by Federal Express or other courier service,
or by facsimile transmission. Either party may change the address for notice by
notifying the other party of such change in accordance with this paragraph 14.
15. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of this
Agreement or of any part
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hereof.
16. ARBITRATION. With the exception of paragraphs 3 and 7, any unresolved
dispute or controversy arising under or in connection with this Agreement shall
be settled exclusively by arbitration, conducted before a panel of three (3)
arbitrators in Houston, Texas, in accordance with the National Rules for the
Resolution of Employment Disputes of the American Arbitration Association
("AAA") then in effect, provided that Employee shall comply with Employer's
grievance procedures in an effort to resolve such dispute or controversy before
resorting to arbitration, and provided further that the parties may agree to use
arbitrators other than those provided by the AAA. The arbitrators shall not have
the authority to add to, detract from, or modify any provision hereof nor to
award punitive damages to any injured party. The arbitrators shall have the
authority to order back-pay, severance compensation, vesting of options (or cash
compensation in lieu of vesting of options), reimbursement of costs, including
those incurred to enforce this Agreement, and interest thereon in the event the
arbitrators determine that Employee was terminated without disability or Cause,
as defined in paragraphs 5(a)(ii) and 5(a)(iii), respectively, or that Employer
has breached this Agreement in any material respect. A decision by a majority of
the arbitration panel shall be final and binding. Judgment may be entered on the
arbitrators' award in any court having jurisdiction. The direct expense of any
arbitration proceeding shall be borne by Employer.
17. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of Texas.
18. COUNTERPARTS. This Agreement may be executed simultaneously in two (2)
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
19. THIRD-PARTY BENEFICIARY. The Company is intended to be a third-party
beneficiary under this Agreement, and shall be entitled to enforce the
provisions hereof benefiting the Company.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
LANDCARE USA MANAGEMENT CO., L.P.
BY: LUSA GP, INC.
By:_______________________________
William F. Murdy
President and Chief Executive Officer
LANDCARE USA, INC.
By:_______________________________
William F. Murdy
President and Chief Executive Officer
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EMPLOYEE:
___________________________________
Peter C. Forbes
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EXHIBIT 10.14
MANAGEMENT
EMPLOYMENT AGREEMENT
This Management Employment Agreement (this "AGREEMENT") by and among
LandCare USA Management Co., L.P., a Delaware limited partnership ("EMPLOYER"),
and William L. Fiedler ("EMPLOYEE") is hereby entered into and effective as of
the __ day of ____________, 1998 (the "EFFECTIVE DATE"), which date is the date
of the consummation of the initial public offering of the common stock of
LandCare USA, Inc., a Delaware corporation (the "COMPANY").
R E C I T A L S
A. The Company is engaged primarily in the landscaping services industry.
B. Employer is engaged primarily in the business of providing management
services to the Company;
C. Employer desires to employ Employee hereunder in a confidential
relationship wherein Employee, in the course of his employment, will become
familiar with and aware of information as to the Company's customers, specific
manner of doing business, processes, techniques and trade secrets and future
plans with respect thereto, all of which have been and will be established and
maintained at great expense to the Company, which information is a trade secret
and constitutes the valuable good will of the Company; and
D. The Company is intended to be a third-party beneficiary of this
Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, it is hereby agreed as follows:
A G R E E M E N T S
1. EMPLOYMENT AND DUTIES.
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(a) Employer hereby employs Employee to serve as Senior Vice President,
General Counsel and Secretary of the Company. As such, Employee shall have
responsibilities, duties and authority customarily accorded to and expected of
an officer holding such position directly with the Company. Employee hereby
accepts this employment upon the terms and conditions herein contained and
agrees to devote his full time, attention and efforts to promote and further the
business of Employer.
(b) Employee shall faithfully adhere to, execute and fulfill all policies
established by Employer from time to time.
2. COMPENSATION. For all services rendered by Employee, Employer shall
compensate Employee as follows:
(a) BASE SALARY; PERFORMANCE BONUS; COMPANY STOCK OPTIONS. Effective as of
the Effective Date, the base salary payable to Employee shall be $150,000 per
year, payable on a regular basis in accordance with Employer's standard payroll
procedures but not less frequently than monthly. On at least an annual basis,
Employer will review Employee's performance and may, in its sole discretion, (i)
make increases to such base salary; (ii) pay a performance bonus; or (iii)
recommend Employee for the grant of Company stock options.
(b) EMPLOYEE PERQUISITES, BENEFITS AND OTHER COMPENSATION. Employee shall
be entitled to receive additional benefits and compensation from Employer in
such form and to such extent as specified below:
(i) Coverage, subject to contributions required of executives of the
Company generally, for Employee and his dependent family members under
health, hospitalization, disability, dental, life and other insurance
plans that Employer may have in effect from time to time. Benefits
provided to Employee under this clause (i) shall be equal to such benefits
provided to other Employer employees of the same level.
(ii) Reimbursement for all business travel and other out-of-pocket
expenses
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reasonably incurred by Employee in the performance of services pursuant to
this Agreement. All reimbursable expenses shall be appropriately
documented in reasonable detail by Employee upon submission of any request
for reimbursement, and in a format and manner consistent with Employer's
expense reporting policy.
(iii) Employer shall provide Employee with other employee
perquisites as may be available to or deemed appropriate for Employee by
Employer and participation in all other Company-wide employee benefits as
are available from time to time.
3. NONCOMPETITION AGREEMENT.
(a) Employee shall not, during the term of his employment hereunder, be
engaged in any other business activity pursued for gain, profit or other
pecuniary advantage if such activity interferes with Employee's duties and
responsibilities hereunder. The foregoing limitations shall not be construed as
prohibiting Employee from making personal investments in such form or manner as
will neither require his services in the operation or affairs of the companies
or enterprises in which such investments are made nor violate the terms of this
paragraph 3. Employee will not, during the period of his employment by or with
Employer, and for a period of two (2) years immediately following the
termination of his employment under this Agreement, except as provided below,
directly or indirectly, for himself or on behalf of or in conjunction with any
other person, persons, company, partnership, corporation or business of whatever
nature:
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor, or as a sales
representative, in any business in direct competition with Employer or the
Company within 100 miles of where the Company or any of its subsidiaries
conduct business, including any territory serviced by the Company or any
of such subsidiaries (the "TERRITORY");
(ii) call upon any person who is, at that time, an employee of
Employer or the Company (including the respective subsidiaries thereof) in
a sales or managerial capacity for the purpose or with the intent of
enticing such employee away from or out of the employ of
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Employer or the Company (including the respective subsidiaries thereof);
(iii) call upon any person or entity which is, at that time, or
which has been, within one (1) year prior to that time, a customer of the
Company (including the respective subsidiaries thereof) for the purpose of
soliciting or selling products or services in direct competition with the
Company; or
(iv) call upon any prospective acquisition candidate, on Employee's
own behalf or on behalf of any competitor, which candidate was, to
Employee's actual knowledge after due inquiry, either called upon by
Employer or the Company (including the respective subsidiaries thereof) or
for which Employer or the Company made an acquisition analysis for the
purpose of acquiring such entity or all or substantially all of such
entity's assets.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit Employee from acquiring as a passive investment not more than two
percent (2%) of the capital stock of a competing business the stock of which is
traded on a national securities exchange or on an over-the -counter or similar
market.
(b) Because of the difficulty of measuring economic losses to Employer or
the Company as a result of a breach of the foregoing covenant, and because of
the immediate and irreparable damage that could be caused to Employer or the
Company for which they would have no other adequate remedy, Employee agrees that
the foregoing covenant may be enforced by Employer or the Company in the event
of breach or threatened breach by Employee, by injunctions, restraining orders
and other appropriate equitable relief.
(c) It is agreed by the parties that the foregoing covenants in this
paragraph 3 impose a reasonable restraint on Employee in light of the activities
and business of the Company (including the Company's subsidiaries) on the date
of the execution of this Agreement and the current plans of the Company
(including the Company's subsidiaries); but it is also the intent of the Company
and Employee that such covenants be construed and enforced in accordance with
the changing activities, business and locations of the Company (including the
Company's subsidiaries) throughout the term of this covenant, whether before or
after the date of termination of the employment of Employee.
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For example, if, during the term of this Agreement, the Company (including the
Company's subsidiaries) engages in new and different activities, enters a new
business or establishes new locations for its current activities or business in
addition to or other than the activities or business enumerated under the
Recitals above or the locations currently established therefor, then Employee
will be precluded from soliciting the customers or Employees of such new
activities or business or from such new location and from directly competing
with such new business within 100 miles of its then-established operating
location(s) through the term of this covenant.
It is further agreed by the parties hereto that, in the event that
Employee shall cease to be employed hereunder, and shall enter into a business
or pursue other activities not in competition with the Company (including the
Company's subsidiaries), or similar activities or business in locations the
operation of which, under such circumstances, does not violate clause (i) of
paragraph 3(a), Employee shall not be chargeable with a violation of this
paragraph 3 if the Company (including the Company's subsidiaries) shall
thereafter enter the same, similar or a competitive (i) business, (ii) course of
activities or (iii) location, as applicable.
(d) The covenants in this paragraph 3 are severable and separate, and the
unenforceability of any specific covenant shall not affect the provisions of any
other covenant. Moreover, in the event any court of competent jurisdiction shall
determine that the scope, time or territorial restrictions set forth herein are
unreasonable, then it is the intention of the parties that such restrictions be
enforced to the fullest extent which the court deems reasonable, and this
Agreement shall thereby be reformed.
(e) All of the covenants in this paragraph 3 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against Employer or the
Company, whether predicated on this Agreement or otherwise, shall not constitute
a defense to the enforcement by Employer or the Company of such covenants. It is
specifically agreed that the period of two (2) years following termination of
employment stated at the beginning of this paragraph 3, during which the
agreements and covenants of Employee made in this paragraph 3 shall be
effective, shall be computed by excluding from such computation any time during
which Employee is in violation of any provision of this paragraph 3.
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4. PLACE OF PERFORMANCE; RELOCATION RIGHTS.
(a) Employee understands that he may be requested by Employer or the
Company to relocate from his present residence to another geographic location in
order to more efficiently carry out his duties and responsibilities under this
Agreement or as part of a promotion or other increase in duties and
responsibilities. In such event, if Employee agrees to relocate, Employer or the
Company will pay all relocation costs to move Employee, his immediate family and
their personal property and effects. Such costs may include, by way of example,
but are not limited to, pre-move visits to search for a new residence,
investigate schools or for other purposes; temporary lodging and living costs
prior to moving into a new permanent residence; duplicate home carrying costs;
all closing costs on the sale of Employee's present residence and on the
purchase of a comparable residence in the new location; and added income taxes
that Employee may incur if any relocation costs are not deductible for tax
purposes. The general intent of the foregoing is that Employee shall not
personally bear any out-of-pocket cost as a result of the relocation, with an
understanding that Employee will use his best efforts to incur only those costs
which are reasonable and necessary to effect a smooth, efficient and orderly
relocation with minimal disruption to the business affairs of Employer or the
Company and the personal life of Employee and his family.
(b) Notwithstanding the above, if Employee is requested by Employer to
relocate and Employee refuses, such refusal shall not constitute "CAUSE" for
termination of this Agreement under the terms of paragraph 5(a)(iii).
5. TERM; TERMINATION; RIGHTS ON TERMINATION.
(a) TERM. The term of this Agreement shall begin on the date hereof and
continue for three (3) years (the "INITIAL TERM") unless terminated sooner as
herein provided, and shall continue thereafter on a year-to-year basis on the
same terms and conditions contained herein in effect as of the time of renewal
(the "TERM"). This Agreement and Employee's employment may be terminated in any
one of the followings ways:
(i) TERMINATION AS A RESULT OF THE EMPLOYEE'S DEATH. The death of
Employee shall immediately terminate this Agreement with no severance
compensation due to
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Employee's estate.
(ii) TERMINATION ON ACCOUNT OF DISABILITY. If, as a result of
incapacity due to physical or mental illness or injury, Employee shall
have been absent from his full-time duties hereunder for four (4)
consecutive months, then thirty (30) days after receiving written notice
(which notice may occur before or after the end of such four (4) month
period, but which shall not be effective earlier than the last day of such
four (4) month period), Employer may terminate Employee's employment
hereunder provided Employee is unable to resume his full-time duties with
or without reasonable accommodation at the conclusion of such notice
period. Also, Employee may terminate his employment hereunder if his
health should become impaired to an extent that makes the continued
performance of his duties hereunder hazardous to his physical or mental
health or his life, provided that Employee shall have furnished Employer
with a written statement from a qualified doctor to such effect and
provided, further, that, at Employer's request made within thirty (30)
days of the date of such written statement, Employee shall submit to an
examination by a doctor selected by Employer who is reasonably acceptable
to Employee or Employee's doctor and such doctor shall have concurred in
the conclusion of Employee's doctor. In the event this Agreement is
terminated as a result of Employee's disability, Employee shall receive
from Employer, in a lump-sum payment due within ten (10) days of the
effective date of termination, the base salary at the rate then in effect
for whatever time period is remaining under the Initial Term of this
Agreement or for one (1) year, whichever amount is greater; provided,
however, that any such payments shall be reduced by the amount of any
disability insurance payments payable to the Employee as a result of such
disability.
(iii) TERMINATION BY THE COMPANY FOR CAUSE. Employer may terminate
this Agreement immediately for "CAUSE," which shall be: (1) Employee's
willful and material breach of this Agreement (which breach cannot be
cured or, if capable of being cured, is not cured within ten (10) days
after receipt of written notice to cure); (2) Employee's gross negligence
in the performance or intentional nonperformance of any of Employee's
material duties and responsibilities hereunder; (3) Employee's willful
dishonesty, fraud or misconduct with respect to the business or affairs of
Employer or the Company which materially and adversely affects the
operations or reputation of Employer or the Company; (4) Employee's
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conviction of a felony crime; or (5) Employee's confirmed positive illegal
drug test result. In the event of a termination for Cause, as enumerated
above, Employee shall have no right to any severance compensation.
(iv) TERMINATION WITHOUT CAUSE. At any time after the commencement
of employment, either Employee or Employer may, voluntarily or without
Cause, respectively, terminate this Agreement and Employee's employment,
effective thirty (30) days after written notice is provided to the other.
Should Employee be terminated by Employer without Cause during the Initial
Term, Employee shall receive from Employer, in a lump-sum payment due on
the effective date of termination, the base salary at the rate then in
effect for whatever time period is remaining under the Initial Term of
this Agreement or for one (1) year, whichever amount is greater. Should
Employee be terminated by Employer without Cause after the Initial Term,
Employee shall receive from Employer, in a lump-sum payment due on the
effective date of termination, the base salary at the rate then in effect
equivalent to one (1) year of salary. Further, any termination without
Cause by Employer shall operate to shorten the period set forth in
paragraph 3(a) and during which the terms of paragraph 3 apply to one (1)
year from the date of termination of employment. Except as provided in
paragraph 12 below, if Employee resigns or otherwise terminates this
Agreement, the provisions of paragraph 3 hereof shall apply, except that
Employee shall receive no severance compensation. If Employee is
terminated by the Company without Cause, or if the Employee terminates his
employment for Good Reason pursuant to paragraph 12(c) below, then the
Company shall make the insurance premium payments contemplated by COBRA
for a period of twelve (12) months immediately following such termination.
(b) CHANGE IN CONTROL OF THE COMPANY. In the event of a Change in Control
of the Company (as defined below) during the Term, paragraph 12 below shall
apply.
(c) EFFECT OF TERMINATION. Upon termination of this Agreement for any
reason provided above, Employee shall be entitled to receive all compensation
earned and all benefits and reimbursements due through the effective date of
termination. Additional compensation subsequent to termination, if any, will be
due and payable to Employee only to the extent and in the manner expressly
provided herein. All other rights and obligations of Employer and Employee under
this
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Agreement shall cease as of the effective date of termination, except that
Employer's obligations under paragraph 9 herein and Employee's obligations under
paragraphs 3, 6, 7, 8 and 10 herein shall survive such termination in accordance
with their terms.
(d) BREACH BY COMPANY. If termination of Employee's employment arises out
of Employer's failure to pay Employee on a timely basis the amounts to which he
is entitled under this Agreement or as a result of any other breach of this
Agreement by Employer, as determined by a court of competent jurisdiction or
pursuant to the provisions of paragraph 16 below, Employer shall pay all amounts
and damages to which Employee may be entitled as a result of such breach,
including interest thereon and all reasonable legal fees and expenses and other
costs incurred by Employee to enforce his rights hereunder. Further, none of the
provisions of paragraph 3 shall apply in the event this Agreement is terminated
as a result of a breach by Employer.
6. RETURN OF COMPANY PROPERTY. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Employee by or on behalf of the Company or its
representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company and be subject at all
times to its discretion and control. Likewise, all correspondence, reports,
records, charts, advertising materials and other similar data pertaining to the
business, activities or future plans of the Company which is collected by
Employee shall be delivered promptly to the Company without request by it upon
termination of Employee's employment.
7. INVENTIONS. Employee shall disclose promptly to the Company any and all
significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by Employee,
solely or jointly with another, during the period of employment or within one
(1) year thereafter, and which are directly related to the business or
activities of the Company and which Employee conceives as a result of his
employment hereunder. Employee hereby assigns and agrees to assign all his
interests therein to the Company or its nominee. Whenever requested to do so by
the Company, Employee shall execute any and all applications, assignments or
other instruments that the Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
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<PAGE>
8. TRADE SECRETS. Employee agrees that he will not, during or after the
Term of this Agreement, disclose the specific terms of the Company's
relationships or agreements with their respective significant vendors or
customers or any other significant and material trade secret of the Company,
whether in existence or proposed, to any person, firm, partnership, corporation
or business for any reason or purpose whatsoever, except and only to the extent
required by law or legal process following notice to the Company.
9. INDEMNIFICATION. In the event Employee is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by Employer
against Employee), by reason of the fact that he is or was performing services
under this Agreement, then Employer shall indemnify Employee against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, as actually and reasonably incurred by Employee in connection
therewith, to the maximum extent permitted by applicable law. The advancement of
expenses shall be mandatory to the extent permitted by applicable law. In the
event that both Employee and Employer are made a party to the same third-party
action, complaint, suit or proceeding, Employer agrees to engage counsel, and
Employee agrees to use the same counsel, provided that if counsel selected by
Employer shall have a conflict of interest that prevents such counsel from
representing Employee, Employee may engage separate counsel and Employer shall
pay all reasonable attorneys' fees of such separate counsel. Employer shall not
be required to pay the fees of more than one law firm except as described in the
preceding sentence, and shall not be required to pay the fees of more than two
law firms under any circumstances. Further, while Employee is expected at all
times to use his best efforts to faithfully discharge his duties under this
Agreement, Employee cannot be held liable to Employer for errors or omissions
made in good faith where Employee has not exhibited gross, willful and wanton
negligence or misconduct or performed criminal or fraudulent acts.
10. NO PRIOR AGREEMENTS. Employee hereby represents and warrants to
Employer and the Company that the execution of this Agreement by Employee and
his employment by Employer and the performance of his duties hereunder will not
violate or be a breach of any agreement with a former employer, client or any
other person or entity. Further, Employee agrees to indemnify Employer and the
Company for any claim, including, but not limited to, attorneys' fees and
expenses of investigation, by any such third party that such third party may now
have or may hereafter come
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to have against Employer or the Company based upon or arising out of any
noncompetition agreement, invention or secrecy agreement between Employee and
such third party which was in existence as of the date of this Agreement.
11. ASSIGNMENT; BINDING EFFECT. Employee understands that he has been
selected for employment by Employer and/or the Company on the basis of his
personal qualifications, experience and skills. Employee agrees, therefore, he
cannot assign all or any portion of his performance under this Agreement.
Subject to the preceding two (2) sentences and the express provisions of
paragraph 12 below, this Agreement shall be binding upon, inure to the benefit
of and be enforceable by the parties hereto and their respective heirs, legal
representatives, successors and assigns.
12. CHANGE IN CONTROL.
(a) Unless Employee elects to terminate this Agreement pursuant to
paragraph 12(c) below, Employee understands and acknowledges that Employer
and/or the Company may be merged or consolidated with or into another entity and
that such entity shall automatically succeed to the rights and obligations of
Employer and/or the Company hereunder or that the Company may undergo another
type of Change in Control. In the event such a merger or consolidation or other
Change in Control is initiated during the Term of this Agreement, then the
provisions of this paragraph 12 shall be applicable.
(b) In the event of a pending Change in Control wherein the Company and
Employee have not received written notice at least five (5) business days prior
to the anticipated closing date of the transaction giving rise to the 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 as of the closing to
assume and agree to perform Employer's obligations under this Agreement in the
same manner and to the same extent that Employer is hereby required to perform,
then the Employee may elect to terminate his employment and shall be entitled to
receive in a lump-sum payment the amount equal to three (3) times his annual
base salary then in effect, and the noncompetition provisions of paragraph 3
shall apply for a period of one (1) year immediately following the effective
date of termination.
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(c) In any Change in Control situation, if Employee is terminated by
Employer without Cause at any time during the twelve (12) months immediately
following the closing of the transaction giving rise to the Change in Control,
or Employee terminates this Agreement for Good Reason (as defined below) at any
time during the twelve (12) months immediately following the closing of the
transaction giving rise to the Change in Control, Employee shall be entitled to
receive in a lump-sum payment, due on the effective date of termination, the
amount equal to three (3) times the greater of (i) his annual base salary then
in effect or (ii) his annual base salary in effect immediately prior to the
closing of the transaction giving rise to the Change in Control, and the
noncompetition provisions of paragraph 3 shall apply for a period of one (1)
year immediately following the effective date of termination. For purposes of
this Agreement, Employee shall have "GOOD REASON" to terminate this Agreement
and his employment hereunder if, without Employee's consent, (x) Employee is
demoted by means of a reduction in authority, responsibilities, duties or title
to a position of materially less stature or importance within the Company than
as described in paragraph 1 hereof or (y) the Employer breaches this Agreement
in any material respect and fails to cure such breach within ten (10) days after
Employee delivers written notice and a written description of such breach to the
Employer, which notice shall specifically refer to this section of this
Agreement.
(d) For purposes of applying paragraph 5 under the circumstances described
in (b) above, the effective date of termination will be the closing date of the
transaction giving rise to the Change in Control and all compensation,
reimbursements and lump-sum payments due Employee must be paid in full by
Employer at or prior to such closing. Further, Employer shall ensure that
Employee will be given sufficient time and opportunity to elect whether to
exercise all or any of his vested options to purchase the Company's Common
Stock, including any options with accelerated vesting under the provisions of
the Company's 1998 Long-Term Incentive Plan (or other applicable plan then in
effect), such that he may convert the options to shares of the Company's Common
Stock at or prior to the closing of the transaction giving rise to the Change in
Control, if he so desires.
(e) A "CHANGE IN CONTROL" shall be deemed to have occurred if:
(i) any person, other than the Company or an employee benefit plan
of the Company, and other than Notre Capital Ventures II, L.L.C. or any
entity controlled by it,
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acquires directly or indirectly the Beneficial Ownership (as defined in
Section 13(d) of the Securities Exchange Act of 1934, as amended) of any
voting security of the Company and immediately after such acquisition such
Person is, directly or indirectly, the Beneficial Owner of voting
securities representing fifty percent (50%) or more of the total voting
power of all of the then-outstanding voting securities of the Company;
(ii) the following individuals no longer constitute a majority of
the members of the Board of Directors of the Company: (A) the individuals
who, as of the closing date of the Company's initial public offering,
constitute the Board of Directors of the Company (the "ORIGINAL
DIRECTORS"); (B) the individuals who thereafter are elected to the Board
of Directors of the Company and whose election, or nomination for
election, to the Board of Directors of the Company was approved by a vote
of at least two-thirds (2/3) of the Original Directors then still in
office (such directors becoming "ADDITIONAL ORIGINAL DIRECTORS"
immediately following their election); and (C) the individuals who are
elected to the Board of Directors of the Company and whose election, or
nomination for election, to the Board of Directors of the Company was
approved by a vote of at least two-thirds (2/3) of the Original Directors
and Additional Original Directors then still in office (such directors
also becoming " ADDITIONAL ORIGINAL DIRECTORS" immediately following their
election);
(iii) the stockholders of the Company shall approve a merger,
consolidation, recapitalization, or reorganization of the Company, a
reverse stock split of outstanding voting securities, or consummation of
any such transaction if stockholder approval is not obtained, other than
any such transaction which would result in at least seventy-five percent
(75%) of the total voting power represented by the voting securities of
the surviving entity outstanding immediately after such transaction being
Beneficially Owned by at least seventy-five percent (75%) of the holders
of outstanding voting securities of the Company immediately prior to the
transaction, with the voting power of each such continuing holder relative
to other such continuing holders not substantially altered in the
transaction; or
(iv) the stockholders of the Company shall approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or a substantial portion of the
Company's assets (i.e., fifty percent (50%) or more of the total
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assets of the Company).
(f) Employee must be notified in writing by Employer or the Company at any
time that either Employer or the Company anticipates that a Change in Control
may take place.
(g) If it shall be determined that any payment or distribution by
Employer, the Company or any other person to or for the benefit of the Employee
(a "PAYMENT") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "EXCISE TAX"), as a result of the
termination of employment of the Employee in the event of a Change in Control,
then Employer, the Company or the successor to the Company shall pay an
additional payment (a "GROSS-UP PAYMENT") in an amount such that after payment
by the Employee of all taxes, including, without limitation, any income taxes
and Excise Tax imposed on the Gross-Up Payment, the Employee retains an amount
of the Gross-Up Payment equal to the Excise Tax imposed on the Payments. Such
amount will be due and payable by Employer, the Company or the successor to the
Company within ten (10) days after the Employee delivers written request for
reimbursement accompanied by a copy of the Employee's tax return(s) or other tax
filings showing the excise tax actually incurred by the Employee.
13. COMPLETE AGREEMENT. This Agreement sets forth the entire agreement of
the parties hereto relating to the subject matter hereof and supersedes any
other employment agreements or understandings, written or oral, between or among
Employer, the Company and Employee. This Agreement is not a promise of future
employment. Employee has no oral representations, understandings or agreements
with Employer or the Company or any of its officers, directors or
representatives covering the same subject matter as this Agreement. This
Agreement is the final, complete and exclusive statement and expression of the
agreement between Employer and Employee and of all the terms of this Agreement,
and it cannot be varied, contradicted or supplemented by evidence of any prior
or contemporaneous oral or written agreements. This written Agreement may not be
later modified except by a further writing signed by a duly authorized officer
of Employer and Employee, and no term of this Agreement may be waived except in
writing signed by the party waiving the benefit of such term.
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14. NOTICE. Whenever any notice is required hereunder, it shall be given
in writing addressed as follows:
To Employer: LandCare USA Management Co., L.P.
Three Riverway, Suite 630
Houston, Texas 77056
Attention: Law Department
To: Company: LandCare USA, Inc.
Three Riverway, Suite 630
Houston, Texas 77056
Attention: Law Department
To Employee: William L. Fiedler
_______________________________
_______________________________
Notice shall be deemed given and effective on the earlier of three (3) days
after the deposit in the U.S. mail of a writing addressed as above and sent
first class mail, certified, return receipt requested, or when actually received
by means of hand delivery, delivery by Federal Express or other courier service,
or by facsimile transmission. Either party may change the address for notice by
notifying the other party of such change in accordance with this paragraph 14.
15. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of this
Agreement or of any part hereof.
16. ARBITRATION. With the exception of paragraphs 3 and 7, any unresolved
dispute or
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controversy arising under or in connection with this Agreement shall be settled
exclusively by arbitration, conducted before a panel of three (3) arbitrators in
Houston, Texas, in accordance with the National Rules for the Resolution of
Employment Disputes of the American Arbitration Association ("AAA") then in
effect, provided that Employee shall comply with Employer's grievance procedures
in an effort to resolve such dispute or controversy before resorting to
arbitration, and provided further that the parties may agree to use arbitrators
other than those provided by the AAA. The arbitrators shall not have the
authority to add to, detract from, or modify any provision hereof nor to award
punitive damages to any injured party. The arbitrators shall have the authority
to order back-pay, severance compensation, vesting of options (or cash
compensation in lieu of vesting of options), reimbursement of costs, including
those incurred to enforce this Agreement, and interest thereon in the event the
arbitrators determine that Employee was terminated without disability or Cause,
as defined in paragraphs 5(a)(ii) and 5(a)(iii), respectively, or that Employer
has breached this Agreement in any material respect. A decision by a majority of
the arbitration panel shall be final and binding. Judgment may be entered on the
arbitrators' award in any court having jurisdiction. The direct expense of any
arbitration proceeding shall be borne by Employer.
17. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of Texas.
18. COUNTERPARTS. This Agreement may be executed simultaneously in two (2)
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
19. THIRD-PARTY BENEFICIARY. The Company is intended to be a third-party
beneficiary under this Agreement, and shall be entitled to enforce the
provisions hereof benefiting the Company.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
LANDCARE USA MANAGEMENT CO., L.P.
BY: LUSA GP, INC.
By:______________________________________
William F. Murdy
President and Chief Executive Officer
LANDCARE USA, INC.
By:______________________________________
William F. Murdy
President and Chief Executive Officer
EMPLOYEE:
_________________________________________
William L. Fiedler
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EXHIBIT 10.15
MANAGEMENT
EMPLOYMENT AGREEMENT
This Management Employment Agreement (this "AGREEMENT") by and among
LandCare USA Management Co., L.P., a Delaware limited partnership ("EMPLOYER"),
and Kenneth V. Garcia ("EMPLOYEE") is hereby entered into and effective as of
the __ day of ____________, 1998 (the "EFFECTIVE DATE"), which date is the date
of the consummation of the initial public offering of the common stock of
LandCare USA, Inc., a Delaware corporation (the "COMPANY").
R E C I T A L S
A. The Company is engaged primarily in the landscaping services industry.
B. Employer is engaged primarily in the business of providing management
services to the Company;
C. Employer desires to employ Employee hereunder in a confidential
relationship wherein Employee, in the course of his employment, will become
familiar with and aware of information as to the Company's customers, specific
manner of doing business, processes, techniques and trade secrets and future
plans with respect thereto, all of which have been and will be established and
maintained at great expense to the Company, which information is a trade secret
and constitutes the valuable good will of the Company; and
D. The Company is intended to be a third-party beneficiary of this
Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, it is hereby agreed as follows:
A G R E E M E N T S
1. EMPLOYMENT AND DUTIES.
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(a) Employer hereby employs Employee to serve as Senior Vice President and
Chief Development Officer of the Company. As such, Employee shall have
responsibilities, duties and authority customarily accorded to and expected of
an officer holding such position directly with the Company. Employee hereby
accepts this employment upon the terms and conditions herein contained and
agrees to devote his full time, attention and efforts to promote and further the
business of Employer.
(b) Employee shall faithfully adhere to, execute and fulfill all policies
established by Employer from time to time.
2. COMPENSATION. For all services rendered by Employee, Employer shall
compensate Employee as follows:
(a) BASE SALARY; PERFORMANCE BONUS; COMPANY STOCK OPTIONS. Effective as of
the Effective Date, the base salary payable to Employee shall be $150,000 per
year, payable on a regular basis in accordance with Employer's standard payroll
procedures but not less frequently than monthly. On at least an annual basis,
Employer will review Employee's performance and may, in its sole discretion, (i)
make increases to such base salary; (ii) pay a performance bonus; or (iii)
recommend Employee for the grant of Company stock options.
(b) EMPLOYEE PERQUISITES, BENEFITS AND OTHER COMPENSATION. Employee shall
be entitled to receive additional benefits and compensation from Employer in
such form and to such extent as specified below:
(i) Coverage, subject to contributions required of executives of the
Company generally, for Employee and his dependent family members under
health, hospitalization, disability, dental, life and other insurance
plans that Employer may have in effect from time to time. Benefits
provided to Employee under this clause (i) shall be equal to such benefits
provided to other Employer employees of the same level.
(ii) Reimbursement for all business travel and other out-of-pocket
expenses
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reasonably incurred by Employee in the performance of services pursuant to
this Agreement. All reimbursable expenses shall be appropriately
documented in reasonable detail by Employee upon submission of any request
for reimbursement, and in a format and manner consistent with Employer's
expense reporting policy.
(iii) Employer shall provide Employee with other employee
perquisites as may be available to or deemed appropriate for Employee by
Employer and participation in all other Company-wide employee benefits as
are available from time to time.
3. NONCOMPETITION AGREEMENT.
(a) Employee shall not, during the term of his employment hereunder, be
engaged in any other business activity pursued for gain, profit or other
pecuniary advantage if such activity interferes with Employee's duties and
responsibilities hereunder. The foregoing limitations shall not be construed as
prohibiting Employee from making personal investments in such form or manner as
will neither require his services in the operation or affairs of the companies
or enterprises in which such investments are made nor violate the terms of this
paragraph 3. Employee will not, during the period of his employment by or with
Employer, and for a period of two (2) years immediately following the
termination of his employment under this Agreement, except as provided below,
directly or indirectly, for himself or on behalf of or in conjunction with any
other person, persons, company, partnership, corporation or business of whatever
nature:
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor, or as a sales
representative, in any business in direct competition with Employer or the
Company within 100 miles of where the Company or any of its subsidiaries
conduct business, including any territory serviced by the Company or any
of such subsidiaries (the "TERRITORY");
(ii) call upon any person who is, at that time, an employee of
Employer or the Company (including the respective subsidiaries thereof) in
a sales or managerial capacity for the purpose or with the intent of
enticing such employee away from or out of the employ of
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Employer or the Company (including the respective subsidiaries thereof);
(iii) call upon any person or entity which is, at that time, or
which has been, within one (1) year prior to that time, a customer of the
Company (including the respective subsidiaries thereof) for the purpose of
soliciting or selling products or services in direct competition with the
Company; or
(iv) call upon any prospective acquisition candidate, on Employee's
own behalf or on behalf of any competitor, which candidate was, to
Employee's actual knowledge after due inquiry, either called upon by
Employer or the Company (including the respective subsidiaries thereof) or
for which Employer or the Company made an acquisition analysis for the
purpose of acquiring such entity or all or substantially all of such
entity's assets.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit Employee from acquiring as a passive investment not more than two
percent (2%) of the capital stock of a competing business the stock of which is
traded on a national securities exchange or on an over-the -counter or similar
market.
(b) Because of the difficulty of measuring economic losses to Employer or
the Company as a result of a breach of the foregoing covenant, and because of
the immediate and irreparable damage that could be caused to Employer or the
Company for which they would have no other adequate remedy, Employee agrees that
the foregoing covenant may be enforced by Employer or the Company in the event
of breach or threatened breach by Employee, by injunctions, restraining orders
and other appropriate equitable relief.
(c) It is agreed by the parties that the foregoing covenants in this
paragraph 3 impose a reasonable restraint on Employee in light of the activities
and business of the Company (including the Company's subsidiaries) on the date
of the execution of this Agreement and the current plans of the Company
(including the Company's subsidiaries); but it is also the intent of the Company
and Employee that such covenants be construed and enforced in accordance with
the changing activities, business and locations of the Company (including the
Company's subsidiaries) throughout the term of this covenant, whether before or
after the date of termination of the employment of Employee.
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For example, if, during the term of this Agreement, the Company (including the
Company's subsidiaries) engages in new and different activities, enters a new
business or establishes new locations for its current activities or business in
addition to or other than the activities or business enumerated under the
Recitals above or the locations currently established therefor, then Employee
will be precluded from soliciting the customers or Employees of such new
activities or business or from such new location and from directly competing
with such new business within 100 miles of its then-established operating
location(s) through the term of this covenant.
It is further agreed by the parties hereto that, in the event that
Employee shall cease to be employed hereunder, and shall enter into a business
or pursue other activities not in competition with the Company (including the
Company's subsidiaries), or similar activities or business in locations the
operation of which, under such circumstances, does not violate clause (i) of
paragraph 3(a), Employee shall not be chargeable with a violation of this
paragraph 3 if the Company (including the Company's subsidiaries) shall
thereafter enter the same, similar or a competitive (i) business, (ii) course of
activities or (iii) location, as applicable.
(d) The covenants in this paragraph 3 are severable and separate, and the
unenforceability of any specific covenant shall not affect the provisions of any
other covenant. Moreover, in the event any court of competent jurisdiction shall
determine that the scope, time or territorial restrictions set forth herein are
unreasonable, then it is the intention of the parties that such restrictions be
enforced to the fullest extent which the court deems reasonable, and this
Agreement shall thereby be reformed.
(e) All of the covenants in this paragraph 3 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against Employer or the
Company, whether predicated on this Agreement or otherwise, shall not constitute
a defense to the enforcement by Employer or the Company of such covenants. It is
specifically agreed that the period of two (2) years following termination of
employment stated at the beginning of this paragraph 3, during which the
agreements and covenants of Employee made in this paragraph 3 shall be
effective, shall be computed by excluding from such computation any time during
which Employee is in violation of any provision of this paragraph 3.
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4. PLACE OF PERFORMANCE; RELOCATION RIGHTS.
(a) Employee understands that he may be requested by Employer or the
Company to relocate from his present residence to another geographic location in
order to more efficiently carry out his duties and responsibilities under this
Agreement or as part of a promotion or other increase in duties and
responsibilities. In such event, if Employee agrees to relocate, Employer or the
Company will pay all relocation costs to move Employee, his immediate family and
their personal property and effects. Such costs may include, by way of example,
but are not limited to, pre-move visits to search for a new residence,
investigate schools or for other purposes; temporary lodging and living costs
prior to moving into a new permanent residence; duplicate home carrying costs;
all closing costs on the sale of Employee's present residence and on the
purchase of a comparable residence in the new location; and added income taxes
that Employee may incur if any relocation costs are not deductible for tax
purposes. The general intent of the foregoing is that Employee shall not
personally bear any out-of-pocket cost as a result of the relocation, with an
understanding that Employee will use his best efforts to incur only those costs
which are reasonable and necessary to effect a smooth, efficient and orderly
relocation with minimal disruption to the business affairs of Employer or the
Company and the personal life of Employee and his family.
(b) Notwithstanding the above, if Employee is requested by Employer to
relocate and Employee refuses, such refusal shall not constitute "CAUSE" for
termination of this Agreement under the terms of paragraph 5(a)(iii).
5. TERM; TERMINATION; RIGHTS ON TERMINATION.
(a) TERM. The term of this Agreement shall begin on the date hereof and
continue for three (3) years (the "INITIAL TERM") unless terminated sooner as
herein provided, and shall continue thereafter on a year-to-year basis on the
same terms and conditions contained herein in effect as of the time of renewal
(the "TERM"). This Agreement and Employee's employment may be terminated in any
one of the followings ways:
(i) TERMINATION AS A RESULT OF THE EMPLOYEE'S DEATH. The death of
Employee shall immediately terminate this Agreement with no severance
compensation due to
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Employee's estate.
(ii) TERMINATION ON ACCOUNT OF DISABILITY. If, as a result of
incapacity due to physical or mental illness or injury, Employee shall
have been absent from his full-time duties hereunder for four (4)
consecutive months, then thirty (30) days after receiving written notice
(which notice may occur before or after the end of such four (4) month
period, but which shall not be effective earlier than the last day of such
four (4) month period), Employer may terminate Employee's employment
hereunder provided Employee is unable to resume his full-time duties with
or without reasonable accommodation at the conclusion of such notice
period. Also, Employee may terminate his employment hereunder if his
health should become impaired to an extent that makes the continued
performance of his duties hereunder hazardous to his physical or mental
health or his life, provided that Employee shall have furnished Employer
with a written statement from a qualified doctor to such effect and
provided, further, that, at Employer's request made within thirty (30)
days of the date of such written statement, Employee shall submit to an
examination by a doctor selected by Employer who is reasonably acceptable
to Employee or Employee's doctor and such doctor shall have concurred in
the conclusion of Employee's doctor. In the event this Agreement is
terminated as a result of Employee's disability, Employee shall receive
from Employer, in a lump-sum payment due within ten (10) days of the
effective date of termination, the base salary at the rate then in effect
for whatever time period is remaining under the Initial Term of this
Agreement or for one (1) year, whichever amount is greater; provided,
however, that any such payments shall be reduced by the amount of any
disability insurance payments payable to the Employee as a result of such
disability.
(iii) TERMINATION BY THE COMPANY FOR CAUSE. Employer may terminate
this Agreement immediately for "CAUSE," which shall be: (1) Employee's
willful and material breach of this Agreement (which breach cannot be
cured or, if capable of being cured, is not cured within ten (10) days
after receipt of written notice to cure); (2) Employee's gross negligence
in the performance or intentional nonperformance of any of Employee's
material duties and responsibilities hereunder; (3) Employee's willful
dishonesty, fraud or misconduct with respect to the business or affairs of
Employer or the Company which materially and adversely affects the
operations or reputation of Employer or the Company; (4) Employee's
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conviction of a felony crime; or (5) Employee's confirmed positive illegal
drug test result. In the event of a termination for Cause, as enumerated
above, Employee shall have no right to any severance compensation.
(iv) TERMINATION WITHOUT CAUSE. At any time after the commencement
of employment, either Employee or Employer may, voluntarily or without
Cause, respectively, terminate this Agreement and Employee's employment,
effective thirty (30) days after written notice is provided to the other.
Should Employee be terminated by Employer without Cause during the Initial
Term, Employee shall receive from Employer, in a lump-sum payment due on
the effective date of termination, the base salary at the rate then in
effect for whatever time period is remaining under the Initial Term of
this Agreement or for one (1) year, whichever amount is greater. Should
Employee be terminated by Employer without Cause after the Initial Term,
Employee shall receive from Employer, in a lump-sum payment due on the
effective date of termination, the base salary at the rate then in effect
equivalent to one (1) year of salary. Further, any termination without
Cause by Employer shall operate to shorten the period set forth in
paragraph 3(a) and during which the terms of paragraph 3 apply to one (1)
year from the date of termination of employment. Except as provided in
paragraph 12 below, if Employee resigns or otherwise terminates this
Agreement, the provisions of paragraph 3 hereof shall apply, except that
Employee shall receive no severance compensation. If Employee is
terminated by the Company without Cause, or if the Employee terminates his
employment for Good Reason pursuant to paragraph 12(c) below, then the
Company shall make the insurance premium payments contemplated by COBRA
for a period of twelve (12) months immediately following such termination.
(b) CHANGE IN CONTROL OF THE COMPANY. In the event of a Change in Control
of the Company (as defined below) during the Term, paragraph 12 below shall
apply.
(c) EFFECT OF TERMINATION. Upon termination of this Agreement for any
reason provided above, Employee shall be entitled to receive all compensation
earned and all benefits and reimbursements due through the effective date of
termination. Additional compensation subsequent to termination, if any, will be
due and payable to Employee only to the extent and in the manner expressly
provided herein. All other rights and obligations of Employer and Employee under
this
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Agreement shall cease as of the effective date of termination, except that
Employer's obligations under paragraph 9 herein and Employee's obligations under
paragraphs 3, 6, 7, 8 and 10 herein shall survive such termination in accordance
with their terms.
(d) BREACH BY COMPANY. If termination of Employee's employment arises out
of Employer's failure to pay Employee on a timely basis the amounts to which he
is entitled under this Agreement or as a result of any other breach of this
Agreement by Employer, as determined by a court of competent jurisdiction or
pursuant to the provisions of paragraph 16 below, Employer shall pay all amounts
and damages to which Employee may be entitled as a result of such breach,
including interest thereon and all reasonable legal fees and expenses and other
costs incurred by Employee to enforce his rights hereunder. Further, none of the
provisions of paragraph 3 shall apply in the event this Agreement is terminated
as a result of a breach by Employer.
6. RETURN OF COMPANY PROPERTY. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Employee by or on behalf of the Company or its
representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company and be subject at all
times to its discretion and control. Likewise, all correspondence, reports,
records, charts, advertising materials and other similar data pertaining to the
business, activities or future plans of the Company which is collected by
Employee shall be delivered promptly to the Company without request by it upon
termination of Employee's employment.
7. INVENTIONS. Employee shall disclose promptly to the Company any and all
significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by Employee,
solely or jointly with another, during the period of employment or within one
(1) year thereafter, and which are directly related to the business or
activities of the Company and which Employee conceives as a result of his
employment hereunder. Employee hereby assigns and agrees to assign all his
interests therein to the Company or its nominee. Whenever requested to do so by
the Company, Employee shall execute any and all applications, assignments or
other instruments that the Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
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8. TRADE SECRETS. Employee agrees that he will not, during or after the
Term of this Agreement, disclose the specific terms of the Company's
relationships or agreements with their respective significant vendors or
customers or any other significant and material trade secret of the Company,
whether in existence or proposed, to any person, firm, partnership, corporation
or business for any reason or purpose whatsoever, except and only to the extent
required by law or legal process following notice to the Company.
9. INDEMNIFICATION. In the event Employee is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by Employer
against Employee), by reason of the fact that he is or was performing services
under this Agreement, then Employer shall indemnify Employee against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, as actually and reasonably incurred by Employee in connection
therewith, to the maximum extent permitted by applicable law. The advancement of
expenses shall be mandatory to the extent permitted by applicable law. In the
event that both Employee and Employer are made a party to the same third-party
action, complaint, suit or proceeding, Employer agrees to engage counsel, and
Employee agrees to use the same counsel, provided that if counsel selected by
Employer shall have a conflict of interest that prevents such counsel from
representing Employee, Employee may engage separate counsel and Employer shall
pay all reasonable attorneys' fees of such separate counsel. Employer shall not
be required to pay the fees of more than one law firm except as described in the
preceding sentence, and shall not be required to pay the fees of more than two
law firms under any circumstances. Further, while Employee is expected at all
times to use his best efforts to faithfully discharge his duties under this
Agreement, Employee cannot be held liable to Employer for errors or omissions
made in good faith where Employee has not exhibited gross, willful and wanton
negligence or misconduct or performed criminal or fraudulent acts.
10. NO PRIOR AGREEMENTS. Employee hereby represents and warrants to
Employer and the Company that the execution of this Agreement by Employee and
his employment by Employer and the performance of his duties hereunder will not
violate or be a breach of any agreement with a former employer, client or any
other person or entity. Further, Employee agrees to indemnify Employer and the
Company for any claim, including, but not limited to, attorneys' fees and
expenses of investigation, by any such third party that such third party may now
have or may hereafter come
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to have against Employer or the Company based upon or arising out of any
noncompetition agreement, invention or secrecy agreement between Employee and
such third party which was in existence as of the date of this Agreement.
11. ASSIGNMENT; BINDING EFFECT. Employee understands that he has been
selected for employment by Employer and/or the Company on the basis of his
personal qualifications, experience and skills. Employee agrees, therefore, he
cannot assign all or any portion of his performance under this Agreement.
Subject to the preceding two (2) sentences and the express provisions of
paragraph 12 below, this Agreement shall be binding upon, inure to the benefit
of and be enforceable by the parties hereto and their respective heirs, legal
representatives, successors and assigns.
12. CHANGE IN CONTROL.
(a) Unless Employee elects to terminate this Agreement pursuant to
paragraph 12(c) below, Employee understands and acknowledges that Employer
and/or the Company may be merged or consolidated with or into another entity and
that such entity shall automatically succeed to the rights and obligations of
Employer and/or the Company hereunder or that the Company may undergo another
type of Change in Control. In the event such a merger or consolidation or other
Change in Control is initiated during the Term of this Agreement, then the
provisions of this paragraph 12 shall be applicable.
(b) In the event of a pending Change in Control wherein the Company and
Employee have not received written notice at least five (5) business days prior
to the anticipated closing date of the transaction giving rise to the 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 as of the closing to
assume and agree to perform Employer's obligations under this Agreement in the
same manner and to the same extent that Employer is hereby required to perform,
then the Employee may elect to terminate his employment and shall be entitled to
receive in a lump-sum payment the amount equal to three (3) times his annual
base salary then in effect, and the noncompetition provisions of paragraph 3
shall apply for a period of one (1) year immediately following the effective
date of termination.
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(c) In any Change in Control situation, if Employee is terminated by
Employer without Cause at any time during the twelve (12) months immediately
following the closing of the transaction giving rise to the Change in Control,
or Employee terminates this Agreement for Good Reason (as defined below) at any
time during the twelve (12) months immediately following the closing of the
transaction giving rise to the Change in Control, Employee shall be entitled to
receive in a lump-sum payment, due on the effective date of termination, the
amount equal to three (3) times the greater of (i) his annual base salary then
in effect or (ii) his annual base salary in effect immediately prior to the
closing of the transaction giving rise to the Change in Control, and the
noncompetition provisions of paragraph 3 shall apply for a period of one (1)
year immediately following the effective date of termination. For purposes of
this Agreement, Employee shall have "GOOD REASON" to terminate this Agreement
and his employment hereunder if, without Employee's consent, (x) Employee is
demoted by means of a reduction in authority, responsibilities, duties or title
to a position of materially less stature or importance within the Company than
as described in paragraph 1 hereof or (y) the Employer breaches this Agreement
in any material respect and fails to cure such breach within ten (10) days after
Employee delivers written notice and a written description of such breach to the
Employer, which notice shall specifically refer to this section of this
Agreement.
(d) For purposes of applying paragraph 5 under the circumstances described
in (b) above, the effective date of termination will be the closing date of the
transaction giving rise to the Change in Control and all compensation,
reimbursements and lump-sum payments due Employee must be paid in full by
Employer at or prior to such closing. Further, Employer shall ensure that
Employee will be given sufficient time and opportunity to elect whether to
exercise all or any of his vested options to purchase the Company's Common
Stock, including any options with accelerated vesting under the provisions of
the Company's 1998 Long-Term Incentive Plan (or other applicable plan then in
effect), such that he may convert the options to shares of the Company's Common
Stock at or prior to the closing of the transaction giving rise to the Change in
Control, if he so desires.
(e) A "CHANGE IN CONTROL" shall be deemed to have occurred if:
(i) any person, other than the Company or an employee benefit plan
of the Company, and other than Notre Capital Ventures II, L.L.C. or any
entity controlled by it,
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acquires directly or indirectly the Beneficial Ownership (as defined in
Section 13(d) of the Securities Exchange Act of 1934, as amended) of any
voting security of the Company and immediately after such acquisition such
Person is, directly or indirectly, the Beneficial Owner of voting
securities representing fifty percent (50%) or more of the total voting
power of all of the then-outstanding voting securities of the Company;
(ii) the following individuals no longer constitute a majority of
the members of the Board of Directors of the Company: (A) the individuals
who, as of the closing date of the Company's initial public offering,
constitute the Board of Directors of the Company (the "ORIGINAL
DIRECTORS"); (B) the individuals who thereafter are elected to the Board
of Directors of the Company and whose election, or nomination for
election, to the Board of Directors of the Company was approved by a vote
of at least two-thirds (2/3) of the Original Directors then still in
office (such directors becoming "ADDITIONAL ORIGINAL DIRECTORS"
immediately following their election); and (C) the individuals who are
elected to the Board of Directors of the Company and whose election, or
nomination for election, to the Board of Directors of the Company was
approved by a vote of at least two-thirds (2/3) of the Original Directors
and Additional Original Directors then still in office (such directors
also becoming " ADDITIONAL ORIGINAL DIRECTORS" immediately following their
election);
(iii) the stockholders of the Company shall approve a merger,
consolidation, recapitalization, or reorganization of the Company, a
reverse stock split of outstanding voting securities, or consummation of
any such transaction if stockholder approval is not obtained, other than
any such transaction which would result in at least seventy-five percent
(75%) of the total voting power represented by the voting securities of
the surviving entity outstanding immediately after such transaction being
Beneficially Owned by at least seventy-five percent (75%) of the holders
of outstanding voting securities of the Company immediately prior to the
transaction, with the voting power of each such continuing holder relative
to other such continuing holders not substantially altered in the
transaction; or
(iv) the stockholders of the Company shall approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or a substantial portion of the
Company's assets (i.e., fifty percent (50%) or more of the total
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assets of the Company).
(f) Employee must be notified in writing by Employer or the Company at any
time that either Employer or the Company anticipates that a Change in Control
may take place.
(g) If it shall be determined that any payment or distribution by
Employer, the Company or any other person to or for the benefit of the Employee
(a "PAYMENT") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "EXCISE TAX"), as a result of the
termination of employment of the Employee in the event of a Change in Control,
then Employer, the Company or the successor to the Company shall pay an
additional payment (a "GROSS-UP PAYMENT") in an amount such that after payment
by the Employee of all taxes, including, without limitation, any income taxes
and Excise Tax imposed on the Gross-Up Payment, the Employee retains an amount
of the Gross-Up Payment equal to the Excise Tax imposed on the Payments. Such
amount will be due and payable by Employer, the Company or the successor to the
Company within ten (10) days after the Employee delivers written request for
reimbursement accompanied by a copy of the Employee's tax return(s) or other tax
filings showing the excise tax actually incurred by the Employee.
13. COMPLETE AGREEMENT. This Agreement sets forth the entire agreement of
the parties hereto relating to the subject matter hereof and supersedes any
other employment agreements or understandings, written or oral, between or among
Employer, the Company and Employee. This Agreement is not a promise of future
employment. Employee has no oral representations, understandings or agreements
with Employer or the Company or any of its officers, directors or
representatives covering the same subject matter as this Agreement. This
Agreement is the final, complete and exclusive statement and expression of the
agreement between Employer and Employee and of all the terms of this Agreement,
and it cannot be varied, contradicted or supplemented by evidence of any prior
or contemporaneous oral or written agreements. This written Agreement may not be
later modified except by a further writing signed by a duly authorized officer
of Employer and Employee, and no term of this Agreement may be waived except in
writing signed by the party waiving the benefit of such term.
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14. NOTICE. Whenever any notice is required hereunder, it shall be given
in writing addressed as follows:
To Employer: LandCare USA Management Co., L.P.
Three Riverway, Suite 630
Houston, Texas 77056
Attention: Law Department
To: Company: LandCare USA, Inc.
Three Riverway, Suite 630
Houston, Texas 77056
Attention: Law Department
To Employee: Kenneth V. Garcia
_____________________________
_____________________________
Notice shall be deemed given and effective on the earlier of three (3) days
after the deposit in the U.S. mail of a writing addressed as above and sent
first class mail, certified, return receipt requested, or when actually received
by means of hand delivery, delivery by Federal Express or other courier service,
or by facsimile transmission. Either party may change the address for notice by
notifying the other party of such change in accordance with this paragraph 14.
15. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of this
Agreement or of any part hereof.
16. ARBITRATION. With the exception of paragraphs 3 and 7, any unresolved
dispute or
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controversy arising under or in connection with this Agreement shall be settled
exclusively by arbitration, conducted before a panel of three (3) arbitrators in
Houston, Texas, in accordance with the National Rules for the Resolution of
Employment Disputes of the American Arbitration Association ("AAA") then in
effect, provided that Employee shall comply with Employer's grievance procedures
in an effort to resolve such dispute or controversy before resorting to
arbitration, and provided further that the parties may agree to use arbitrators
other than those provided by the AAA. The arbitrators shall not have the
authority to add to, detract from, or modify any provision hereof nor to award
punitive damages to any injured party. The arbitrators shall have the authority
to order back-pay, severance compensation, vesting of options (or cash
compensation in lieu of vesting of options), reimbursement of costs, including
those incurred to enforce this Agreement, and interest thereon in the event the
arbitrators determine that Employee was terminated without disability or Cause,
as defined in paragraphs 5(a)(ii) and 5(a)(iii), respectively, or that Employer
has breached this Agreement in any material respect. A decision by a majority of
the arbitration panel shall be final and binding. Judgment may be entered on the
arbitrators' award in any court having jurisdiction. The direct expense of any
arbitration proceeding shall be borne by Employer.
17. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of Texas.
18. COUNTERPARTS. This Agreement may be executed simultaneously in two (2)
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
19. THIRD-PARTY BENEFICIARY. The Company is intended to be a third-party
beneficiary under this Agreement, and shall be entitled to enforce the
provisions hereof benefiting the Company.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
LANDCARE USA MANAGEMENT CO., L.P.
BY: LUSA GP, INC.
By:______________________________________
William F. Murdy
President and Chief Executive Officer
LANDCARE USA, INC.
By: _______________________________________
William F. Murdy
President and Chief Executive Officer
EMPLOYEE:
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__________________________________
Kenneth V. Garcia
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EXHIBIT 10.16
FOUNDER'S MANAGEMENT EMPLOYMENT AGREEMENT
This Management Employment Agreement (this "Agreement") is by and between
LandCare USA Management Co., L.P., a Delaware limited partnership ("Employer"),
and Harold D. Cranston ("Executive"), and is dated May ___, 1998, but shall
become effective only on the date of the consummation of the initial public
offering of the common stock of LandCare USA, Inc. (the "Effective Date").
R E C I T A L S
A. As of the Effective Date, LandCare USA, Inc., a Delaware corporation
("LandCare USA"), will be engaged primarily in the business of providing
landscaping services, including design, installation, construction and
maintenance, and related services businesses (collectively, the "Business").
B. Employer is engaged primarily in the business of providing management
services to LandCare USA.
C. Employer desires to employ Executive in a confidential relationship
pursuant to which Executive has become and will continue to become familiar with
and aware of information as to LandCare USA's customers, specific manner of
doing business (including the processes, techniques and trade secrets utilized
by LandCare USA), and future plans with respect thereto, all of which have been
and will be established and maintained at significant expense to LandCare USA.
This information includes trade secrets and constitutes a valuable asset of
LandCare USA.
D. LandCare USA is intended to be a third-party beneficiary of this
Agreement.
E. The parties hereto desire to agree to the various matters described
herein and to memorialize their agreements as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, it is hereby agreed as follows:
A G R E E M E N T
1. EMPLOYMENT AND DUTIES.
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(a) Employer hereby employs Executive to serve as Senior Vice President
and Chief Operating Officer of LandCare USA. As such, Executive shall have
responsibilities, duties and authority reasonably accorded to and expected of an
officer holding such position with LandCare USA. Executive hereby accepts this
employment upon the terms and conditions herein contained and agrees to devote
substantially all of his business time, attention and efforts to promote and
further the business of Employer and LandCare USA. Executive shall not, during
the term of his employment hereunder, be engaged in any other business activity
pursued for gain, profit or other pecuniary advantage if such activity
interferes in any material respect with Executive's duties and responsibilities
hereunder. The foregoing limitations shall not be construed as prohibiting
Executive from making passive personal investments in such form or manner as
will neither require his services in the operation or affairs of the companies
or enterprises in which such investments are made nor violate the terms of
paragraph 3 hereof.
(b) Executive shall faithfully adhere to, execute and fulfill all lawful
policies established by Employer from time to time.
2. COMPENSATION. For all services rendered by Executive, Employer shall
compensate Executive as follows:
(a) BASE SALARY. Commencing on the Effective Date or, at the option of
Employer, the first day of the month during which the Effective Date occurs or
the first day of the month immediately following the date on which the Effective
Date occurs, the base salary payable to Executive shall be $ 150,000.00 per
year, payable on a regular basis in accordance with Employer's standard payroll
procedures but not less frequently than monthly. On at least an annual basis,
Employer will review Executive's performance and may make increases, but not
decreases, to such base salary if, in its discretion, any such increase is
warranted.
(b) EXECUTIVE PERQUISITES, BENEFITS AND OTHER COMPENSATION. Executive
shall be entitled to receive additional benefits and compensation from Employer
in such form and to such extent as specified below:
(i) Coverage, subject to contributions required of employees of
Employer generally, for Executive and his dependent family members under
health, hospitalization, disability, dental, life and other insurance
plans that Employer may have in effect from time to time for the benefit
of its executives.
(ii) Reimbursement for all business travel and other out-of-pocket
expenses reasonably incurred by Executive in the performance of his
services pursuant to this Agreement. All reimbursable expenses shall be
appropriately documented in reasonable
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detail by Executive upon submission of any request for reimbursement, and
in a format and manner consistent with Employer's expense reporting
policy.
(iii) Employer shall provide Executive with such other executive
perquisites as may be deemed appropriate for Executive by Employer, and
Executive shall be entitled to participate in all other employee benefits
as are available from time to time to all employees of LandCare USA and
its affiliates.
3. NON-COMPETITION AGREEMENT.
(a) Executive shall not, during the period of his employment by or with
Employer, and for a period of two (2) years immediately following the
termination of his employment under this Agreement, for any reason whatsoever,
except as provided herein, directly or indirectly, for himself or on behalf of
or in conjunction with any other person, company, partnership, corporation or
business of whatever nature:
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor, or as a sales
representative, in any business in direct competition with Employer or
LandCare USA or any of their respective subsidiaries, within 100 miles of
where Employer or any of LandCare USA's subsidiaries has a physical
location (the "Territory");
(ii) call upon any person who is, at that time, an employee of
Employer or LandCare USA (including the respective subsidiaries thereof)
in a sales or managerial capacity for the purpose or with the intent of
enticing such employee away from or out of the employ of Employer or
LandCare USA (including the respective subsidiaries thereof);
(iii) call upon any person or entity which is, at that time, or
which has been, within one (1) year prior to that time, a customer of
Employer or LandCare USA (including the respective subsidiaries thereof)
for the purpose of soliciting or selling products or services in direct
competition with Employer or LandCare USA;
(iv) call upon any prospective acquisition candidate, on Executive's
own behalf or on behalf of any competitor, which candidate was, to
Executive's actual knowledge, either called upon by Employer or LandCare
USA (including the respective subsidiaries thereof) or for which Employer
or LandCare USA made an acquisition analysis, for the purpose of acquiring
such entity or all or substantially all of such entity's assets.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit Executive from (i) participating in the activities as and to the extent
described on Schedule 13.1 to the Agreement and Plan of Organization dated as of
March 17, 1998 to which LandCare USA and
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Executive are parties, or (ii) acquiring as a passive investment not more than
two percent (2%) of the capital stock of a competing business the stock of which
is traded on a national securities exchange or on an over-the-counter or similar
market.
(b) Because of the difficulty of measuring economic losses to Employer and
LandCare USA as a result of a breach of the foregoing covenant, and because of
the immediate and irreparable damage that could be caused to Employer and
LandCare USA for which they would have no other adequate remedy, Executive
agrees that the foregoing covenant may be enforced by LandCare USA or Employer
in the event of breach or threatened breach by Executive, by injunctions,
restraining orders and other appropriate equitable relief.
(c) It is agreed by the parties that the foregoing covenants in this
paragraph 3 impose a reasonable restraint on Executive in light of the
activities and business of Employer or LandCare USA, as the case may be
(including LandCare USA's subsidiaries) on the Effective Date of this Agreement
and the current plans of LandCare USA (including LandCare USA's subsidiaries);
but it is also the intent of Employer and Executive that such covenants be
construed and enforced in accordance with the changing activities, business and
locations of Employer and LandCare USA, as the case may be (including LandCare
USA's subsidiaries) throughout the term of these covenants, whether before or
after the date of termination of the employment of Executive. For example, if,
during the term of these covenants, Employer or LandCare USA, as the case may be
(including LandCare USA's subsidiaries) engage in new and different activities
related to the Business, enter a new business related to the Business or
establish new locations for their current activities or businesses in addition
to or other than the activities or businesses enumerated under the Recitals
above or the locations currently established therefor, then Executive will be
precluded from soliciting the customers or employees of such new activities or
businesses or from such new locations and from directly competing with such new
businesses within 100 miles of all then-established operating location(s)
through the term of these covenants.
It is further agreed by the parties hereto that, in the event that
Executive shall cease to be employed hereunder, and shall enter into a business
or pursue other activities not in competition with Employer or LandCare USA
(including LandCare USA's subsidiaries), or similar activities or business in
locations the operation of which, under such circumstances, does not violate
clause (i) of paragraph 3(a), Executive shall not be chargeable with a violation
of this paragraph 3 if Employer or LandCare USA (including LandCare USA's
subsidiaries) shall thereafter enter the same, similar or a competitive (i)
business, (ii) course of activities or (iii) location, as applicable.
(d) The covenants in this paragraph 3 are severable and separate, and the
unenforceability of any specific covenant shall not affect the provisions of any
other covenant. Moreover, in the event any court of competent jurisdiction shall
determine that the scope, time or territorial restrictions set forth herein are
unreasonable, then it is the intention of the parties that such
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restrictions be enforced to the fullest extent which the court deems reasonable,
and this Agreement shall thereby be reformed.
(e) All of the covenants in this paragraph 3 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Executive against Employer or
LandCare USA, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by LandCare USA or Employer of such
covenants. It is specifically agreed that the period of two (2) years following
termination of employment stated at the beginning of this paragraph 3, during
which the agreements and covenants of Executive made in this paragraph 3 shall
be effective, shall be computed by excluding from such computation any time
during which Executive is in violation of any provision of this paragraph 3.
4. TERM; TERMINATION; RIGHTS ON TERMINATION.
(a) The term of this Agreement shall begin on the Effective Date and
continue for five (5) years (the "Term"), unless terminated sooner as herein
provided, and shall continue thereafter on a year-to-year basis on the same
terms and conditions contained herein in effect as of the time of renewal. This
Agreement and Executive's employment may be terminated in any one of the
followings ways:
(i) TERMINATION AS A RESULT OF EMPLOYEE'S DEATH. The death of
Executive shall immediately terminate this Agreement with no severance
compensation due to Executive's estate.
(ii) TERMINATION ON ACCOUNT OF DISABILITY. If, as a result of
incapacity due to physical or mental illness or injury, Executive shall
have been absent from his full-time duties hereunder for six (6)
consecutive months, then thirty (30) days after receiving written notice
(which notice may occur before or after the end of such six (6) month
period, but which shall not be effective earlier than the last day of such
six (6) month period), Employer may terminate Executive's employment
hereunder provided Executive is unable to resume his full-time duties with
or without reasonable accommodation at the conclusion of such notice
period. Also, Executive may terminate his employment hereunder if his
health should become impaired to an extent that makes the continued
performance of his duties hereunder hazardous to his physical or mental
health or his life, provided that Executive shall have furnished Employer
with a written statement from a qualified doctor to such effect and
provided, further, that, at Employer's request made within thirty (30)
days of the date of such written statement, Executive shall submit to an
examination by a doctor selected by Employer who is reasonably acceptable
to Executive or Executive's doctor and such doctor shall have concurred in
the conclusion of Executive's doctor. In the event this Agreement is
terminated as a result of Executive's disability, Executive shall receive
from Employer, in a lump-sum payment due within thirty (30) days of the
effective date of termination, the base
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salary at the rate then in effect for whatever time period is remaining
under the Initial Term (as defined below) or for one (1) year, whichever
amount is greater; provided, however, that any such payments shall be
reduced by the amount of any disability insurance payments payable to
Executive as a result of such disability to the extent such disability
insurance is provided by Employer or LandCare USA or any of their
affiliates.
(iii) TERMINATION BY EMPLOYER FOR CAUSE. Employer may terminate this
Agreement immediately for "Cause", which shall be: (1) Executive's willful
and material breach of this Agreement, which breach either cannot be cured
or, if capable of being cured, is not cured within ten (10) days after
receipt of written notice of the need to cure; (2) Executive's gross
negligence in the performance or intentional nonperformance (continuing
for ten (10) days after receipt of written notice of need to cure) of any
of Executive's material duties and responsibilities hereunder; (3)
Executive's willful dishonesty, fraud or misconduct with respect to the
business or affairs of Employer or LandCare USA; (4) Executive's
conviction of a felony crime; or (5) Executive's confirmed positive
illegal drug test result. In the event of a termination for Cause,
Executive shall have no right to any severance compensation.
(iv) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. At any time after
commencement of employment, Employer may terminate Executive's employment
hereunder without Cause, and Executive may terminate his employment
hereunder for Good Reason (as defined below), in either case effective
thirty (30) days after written notice. If Executive is terminated by
Employer without Cause or if Executive terminates Executive's employment
hereunder for Good Reason during the first three (3) years of the Term
(the "Initial Term"), Executive shall receive from Employer, in a lump-sum
payment due on the effective date of termination, the base salary at the
rate then in effect for whatever time period is remaining under the
Initial Term of this Agreement or for one (1) year, whichever amount is
greater. If Executive is terminated by Employer without Cause or should
Executive terminate for Good Reason after the Initial Term, Executive
shall receive from Employer, in a lump-sum payment due on the effective
date of termination, one year's salary at the base salary rate then in
effect. Further, any termination without Cause by Employer or by the
Executive for Good Reason shall operate to shorten the period set forth in
paragraph 3(a) and during which the terms of paragraph 3 apply to one (1)
year from the date of termination of employment. If Executive resigns or
otherwise terminates his employment hereunder without Good Reason,
Executive shall receive no severence compensation, and the provisions of
paragraph 3 hereof shall apply. If Executive is terminated by Employer
without Cause or if Executive terminates his employment hereunder for Good
Reason, (1) Employer shall make the insurance premium payments
contemplated by COBRA for a period of 12 months after such termination,
and (2) Executive shall be entitled to receive a pro rated portion of any
annual bonus to which Executive would have been entitled for the year
during which the termination occurred had Executive not been terminated.
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(b) DEFINITION OF "GOOD REASON". Executive shall have "Good Reason" to
terminate this Agreement and his employment hereunder if, without Executive's
consent, (i) Executive is demoted by means of a reduction in authority,
responsibilities, duties or title to a position of materially less stature or
importance within LandCare USA than the position described in Section 1 hereof,
or (ii) Employer breaches this Agreement in any material respect and fails to
cure such breach within ten days after Executive delivers written notice and a
written description of such breach to Employer, which notice shall specifically
refer to this section of this Agreement.
(c) CHANGE IN CONTROL OF LANDCARE USA. In the event of a "Change in
Control of LandCare USA" (as defined below) during the Initial Term, paragraph
11 below shall apply.
(d) EFFECT OF TERMINATION. Upon termination of this Agreement for any
reason provided above, Executive shall be entitled to receive all compensation
earned and all benefits and reimbursements due through the effective date of
termination. Additional compensation subsequent to termination, if any, will be
due and payable to Executive only to the extent and in the manner expressly
provided herein. All other rights and obligations of Employer and Executive
under this Agreement shall cease as of the effective date of termination, except
that Employer's obligations under paragraph 8 herein and Executive's obligations
under paragraphs 3, 5, 6, 7 and 9 herein shall survive such termination in
accordance with their terms.
(e) BREACH BY EMPLOYER. If termination of Executive's employment arises
out of Employer's failure to pay Executive on a timely basis the amounts to
which Executive is entitled under this Agreement or as a result of any other
breach of this Agreement by Employer, as determined by a court of competent
jurisdiction or pursuant to the provisions of paragraph 15 below, Employer shall
pay all amounts and damages to which Executive may be entitled as a result of
such breach, including interest thereon and all reasonable legal fees and
expenses and other costs incurred by Executive to enforce his rights hereunder.
Further, none of the provisions of paragraph 3 shall apply in the event this
Agreement is terminated as a result of a breach by Employer.
5. RETURN OF EMPLOYER PROPERTY. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Executive by or on behalf of Employer, LandCare USA
or their representatives, vendors or customers which pertain to the business of
Employer or LandCare USA shall be and remain the property of Employer or
LandCare USA, as the case may be, and be subject at all times to their
discretion and control. Likewise, all correspondence, reports, records, charts,
advertising materials and other similar data pertaining to the business,
activities or future plans of Employer or LandCare USA which is collected by
Executive shall be delivered promptly to Employer without request by it upon
termination of Executive's employment.
6. INVENTIONS. Executive shall disclose promptly to Employer any and all
significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable
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or not, which are conceived or made by Executive, solely or jointly with
another, during the period of employment or within one (1) year thereafter, and
which are directly related to the business or activities of Employer or LandCare
USA and which Executive conceives as a result of his employment by Employer.
Executive hereby assigns and agrees to assign all his interests therein to
Employer or its nominee. Whenever requested to do so by Employer, Executive
shall execute any and all applications, assignments or other instruments that
Employer shall deem necessary to apply for and obtain Letters Patent of the
United States or any foreign country or to otherwise protect Employer's or
LandCare USA's interest therein.
7. TRADE SECRETS. Executive agrees that Executive will not, during or
after the Term of this Agreement with Employer, disclose the terms of Employer's
or LandCare USA's relationships or agreements with their respective vendors or
customers or any other significant or material trade secret of Employer or
LandCare USA, whether in existence or proposed, to any person, firm,
partnership, corporation or business for any reason or purpose whatsoever,
except and only to the extent required by law or legal process following notice
to Employer and LandCare USA.
8. INDEMNIFICATION. In the event Executive is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by Employer or
LandCare USA against Executive), by reason of the fact that Executive is or was
performing services under this Agreement, then Employer shall indemnify
Executive against all expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement, as actually and reasonably incurred by Executive in
connection therewith to the maximum extent permitted by applicable law. The
advancement of expenses shall be mandatory to the extent permitted by applicable
law. In the event that both Executive and Employer are made a party to the same
third-party action, complaint, suit or proceeding, Employer agrees to engage
counsel, and Executive agrees to use the same counsel, provided that if counsel
selected by Employer shall have a conflict of interest that prevents such
counsel from representing Executive, Executive may engage separate counsel and
Employer shall pay all reasonable attorneys' fees of such separate counsel.
Employer shall not be required to pay the fees of more than one law firm except
as described in the preceding sentence, and shall not be required to pay the
fees of more than two law firms under any circumstances. Executive cannot be
held liable to Employer or LandCare USA for errors or omissions made in good
faith or where Executive has not exhibited gross, willful, and wanton negligence
in connection with such conduct, error or omission.
9. NO PRIOR AGREEMENTS. Executive hereby represents and warrants to
Employer that the execution of this Agreement by Executive and his employment by
Employer and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client or any other person or
entity. Executive hereby indemnifies Employer against any and all liability,
expenses and other costs and amounts incurred by Employer, including, but not
limited to, attorneys' fees and expenses of investigation, as a result of any
claim by any third party that such third party may now have or may hereafter
come to have against Employer based upon or
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arising out of any non-competition agreement, invention or secrecy agreement
between Executive and such third party which was in existence as of the date of
this Agreement.
10. ASSIGNMENT; BINDING EFFECT. Executive understands that Employer has
selected Executive for employment by it on the basis of Executive's personal
qualifications, experience and skills. Executive agrees, therefore, that
Executive cannot assign all or any portion of Executive's performance under this
Agreement. Subject to the preceding two (2) sentences and the express provisions
of paragraph 12 below, this Agreement shall be binding upon, inure to the
benefit of and be enforceable by the parties hereto and their respective heirs,
legal representatives, successors and assigns.
11. CHANGE IN CONTROL.
(a) Executive understands and acknowledges that LandCare USA may be merged
or consolidated with or into another entity and that such entity shall
automatically succeed to the rights and obligations of LandCare USA hereunder or
that LandCare USA may undergo another type of Change in Control. In the event
such a merger or consolidation or other Change in Control is initiated prior to
the end of the Initial Term, then the provisions of this paragraph 11 shall be
applicable.
(b) In the event of a pending Change in Control wherein LandCare USA and
Executive have not received written notice at least five (5) business days prior
to the anticipated closing date of the transaction giving rise to the Change in
Control from the successor to all or a substantial portion of LandCare USA's
business and/or assets that such successor is willing as of the closing to
assume and agree to perform LandCare USA's and/or Employer's obligations under
this Agreement in the same manner and to the same extent that LandCare USA
and/or Employer is hereby required to perform, then Executive may elect to
terminate his employment and shall be entitled to receive in one lump sum on the
effective date of such termination, an amount equal to three times his annual
base salary then in effect, and the non-competition provisions of paragraph 3
shall apply for a period of one (1) year from the effective date of termination.
(c) In any Change in Control situation, if Executive is terminated by
Employer without Cause at any time during the twelve (12) months immediately
following the closing of the transaction giving rise to the Change in Control,
or Executive terminates for Good Reason at any time during the twelve (12)
months immediately following the closing of the transaction giving rise to the
Change in Control, Executive shall be entitled to receive in one lump sum on the
effective date of such termination an amount equal to three (3) times his annual
base salary then in effect, and the non-competition provisions of paragraph 3
shall apply for a period of one (1) year from the effective date of termination.
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(d) For purposes of applying paragraph 4 under the circumstances described
in (b) and (c) above, the effective date of termination will be the date of
termination and all compensation, reimbursements and lump-sum payments due
Executive must be paid in full by Employer. Further, Executive will be given
sufficient time and opportunity to elect whether to exercise all or any of
Executive's vested options to purchase LandCare USA common stock, such that
Executive may convert the options to shares of LandCare USA common stock at or
prior to the closing of the transaction giving rise to the Change in Control, if
Executive so desires.
(e) A "Change in Control" shall be deemed to have occurred if:
(i) any person, other than LandCare USA or an employee benefit plan
of LandCare USA, and other than Notre Capital Ventures II, L.L.C. or any
entity controlled by it, acquires directly or indirectly the beneficial
ownership (as defined in Section 13(d) of the Securities Exchange Act of
1934, as amended) of any voting security of LandCare USA and immediately
after such acquisition such person is, directly or indirectly, the
Beneficial Owner of voting securities representing 50% or more of the
total voting power of all of the then-outstanding voting securities of
LandCare USA;
(ii) the following individuals no longer constitute a majority of
the members of the Board of Directors of LandCare USA: (A) the individuals
who, as of the closing date of LandCare USA's initial public offering,
constitute the Board of Directors of LandCare USA (the "Original
Directors"); (B) the individuals who thereafter are elected to the Board
of Directors of LandCare USA and whose election, or nomination for
election, to the Board of Directors of LandCare USA was approved by a vote
of at least two-thirds (2/3) of the Original Directors then still in
office (such directors becoming "Additional Original Directors"
immediately following their election); and (C) the individuals who are
elected to the Board of Directors of LandCare USA and whose election, or
nomination for election, to the Board of Directors of LandCare USA was
approved by a vote of at least two-thirds (2/3) of the Original Directors
and Additional Original Directors then still in office (such directors
also becoming "Additional Original Directors" immediately following their
election);
(iii) the stockholders of LandCare USA shall approve a merger,
consolidation, recapitalization, or reorganization of LandCare USA, a
reverse stock split of outstanding voting securities, or consummation of
any such transaction if stockholder approval is not obtained, other than
any such transaction which would result in at least 75% of the total
voting power represented by the voting securities of the surviving entity
outstanding immediately after such transaction being Beneficially Owned by
at least 75% of the holders of outstanding voting securities of LandCare
USA immediately prior to the transaction, with the voting power of each
such continuing holder relative to other such continuing holders not
substantially altered in the transaction; or
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(iv) the stockholders of LandCare USA shall approve a plan of
complete liquidation of LandCare USA or an agreement for the sale or
disposition by LandCare USA of 50% or more of the total assets of LandCare
USA.
(f) If it shall be determined that any payment or distribution by
LandCare USA or Employer or any other person to or for the benefit of
Executive (a "Payment") would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Excise
Tax"), as a result of the termination of employment of Executive in the
event of a Change in Control, then Employer, LandCare USA or the successor
to LandCare USA shall pay an additional payment (a "Gross-Up Payment") in
an amount such that after payment by Executive of all taxes, including,
without limitation, any income taxes and Excise Tax imposed on the
Gross-Up Payment, Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed on the Payments. Such amount will be due
and payable by Employer, LandCare USA or the successor to LandCare USA
within ten (10) days after Executive delivers written request for
reimbursement accompanied by a copy of Executive's tax return(s) showing
the Excise Tax actually incurred by Executive.
12. COMPLETE AGREEMENT. This Agreement sets forth the entire
agreement of the parties hereto relating to the subject matter hereof and
supersedes any other employment agreements or understandings, written or
oral, between Employer and/or LandCare USA and Executive. This Agreement
is not a promise of future employment. Executive has no oral
representations, understandings or agreements with Employer and/or
LandCare USA or any of its officers, directors or representatives covering
the same subject matter as this Agreement. This written Agreement is the
final, complete and exclusive statement and expression of the agreement
between Employer and Executive and of all the terms of this Agreement, and
it cannot be varied, contradicted or supplemented by evidence of any prior
or contemporaneous oral or written agreements. This written Agreement may
not be later modified except by a further writing signed by a duly
authorized officer of Employer and Executive, and no term of this
Agreement may be waived except by writing signed by the party waiving the
benefit of such term.
13. NOTICE. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
To Employer: LandCare USA Management Co. L. P.
c/o LUSA GP, Inc.
Three Riverway, Suite 630
Houston, Texas 77056
Attention: Law Department
Telephone: 713/965-0331
Fax: 713/965-0579
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with a copy to: General Counsel
LandCare USA, Inc.
Three Riverway, Suite 630
Houston, Texas 77056
Telephone: 713/965-0331
Fax: 713/965-0579
To Executive: Harold D. Cranston
__________________
__________________
Notice shall be deemed given and effective on the earlier of three (3)
days after the deposit in the U.S. mail of a writing addressed as above
and sent first class mail, certified, return receipt requested, or when
actually received by means of hand delivery or delivery by Federal Express
or other courier service. Either party may change the address for notice
by notifying the other party of such change in accordance with this
paragraph 13.
14. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be
deemed valid and operative and, so far as is reasonable and possible,
effect shall be given to the intent manifested by the portion held invalid
or inoperative. The paragraph headings herein are for reference purposes
only and are not intended in any way to describe, interpret, define or
limit the extent or intent of the Agreement or of any part hereof.
15. ARBITRATION.With the exception of the provisions hereof
providing for enforcement by means of equitable remedies, any unresolved
dispute or controversy arising under or in connection with this Agreement
shall be settled exclusively by arbitration, conducted before a panel of
three (3) arbitrators in Houston, Texas, in accordance with the National
Rules for the Resolution of Employment Disputes of the American
Arbitration Association ("AAA") then in effect, provided that the parties
may agree to use arbitrators other than those provided by the AAA. The
arbitrators shall not have the authority to add to, detract from, or
modify any provision hereof nor to award punitive damages to any injured
party. A decision by a majority of the arbitration panel shall be final
and binding. Judgment may be entered on the arbitrators' award in any
court having jurisdiction. The direct expenses of any arbitration
proceeding shall be borne by Employer; however, each party shall be
responsible for payment of its counsel fees and related expenses. The
arbitrator shall, however, have the right and discretion to award counsel
fees and expenses (including reasonable travel expenses) to either party
as part of the arbitrator's final judgment.
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16. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of Texas.
17. COUNTERPARTS. This Agreement may be executed simultaneously in
two (2) or more counterparts, each of which shall be deemed an original
and all of which together shall constitute but one and the same
instrument.
18. THIRD-PARTY BENEFICIARY. LandCare USA is intended to be a
third-party beneficiary under this Agreement, and shall be entitled to
enforce the provisions hereof benefitting LandCare USA.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written, but effective as of the
Effective Date.
LANDCARE USA MANAGEMENT CO., L.P.
By: LUSA, GP, Inc.
By:________________________
William L. Fiedler
Vice President
EXECUTIVE
_________________________________
Harold D. Cranston
LANDCARE USA, INC.
By:______________________________
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EXHIBIT 10.19
FOUNDER'S EMPLOYMENT AGREEMENT
This Founder's Employment Agreement (this "Agreement") is by and between
[______________________], a [_____________] corporation (the "Company") which,
on the Effective Date (as defined below), will be a wholly-owned subsidiary of
LandCare USA, Inc., a Delaware corporation ("LandCare USA"), and
[_______________________] ("Executive"), and is dated [ ], but shall become
effective only on the date of the consummation of the initial public offering of
the common stock of LandCare USA (the "Effective Date").
R E C I T A L S
A. As of the Effective Date, the Company and the other subsidiaries of
LandCare USA are or will be engaged primarily in the business of providing
landscaping services, including design, installation, construction and
mainenance, and related services businesses (collectively, the "Business").
B. Executive is employed by the Company in a confidential relationship
pursuant to which Executive has become and will continue to become familiar with
and aware of information as to the Company's and LandCare USA's customers,
specific manner of doing business (including the processes, techniques and trade
secrets utilized by the Company and LandCare USA), and future plans with respect
thereto, all of which have been and will be established and maintained at
significant expense to the Company and LandCare USA. This information includes
trade secrets and constitutes a valuable asset of the Company and of LandCare
USA.
C. The parties hereto desire to agree to the various matters described
herein and to memorialize their agreements as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, it is hereby agreed as follows:
A G R E E M E N T
1. EMPLOYMENT AND DUTIES.
(a) The Company hereby employs Executive as [______________________] of
the Company. Executive shall have responsibilities, duties and authority
reasonably accorded to, expected of, and consistent with such position and will
report directly to the Board of Directors of
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the Company (the "Board") or its designee. Executive hereby accepts this
employment upon the terms and conditions herein contained and agrees to devote
substantially all of his business time, attention and efforts to promote and
further the business of the Company. Executive shall not, during the term of his
employment hereunder, be engaged in any other business activity pursued for
gain, profit or other pecuniary advantage if such activity interferes in any
material respect with Executive's duties and responsibilities hereunder. The
foregoing limitations shall not be construed as prohibiting Executive from
making passive personal investments in such form or manner as will neither
require his services in the operation or affairs of the companies or enterprises
in which such investments are made nor violate the terms of paragraph 3 hereof.
(b) Executive shall faithfully adhere to, execute and fulfill all lawful
policies established from time to time by the Company.
(c) Executive shall only be required to perform Executive's duties in, and
shall not be required to relocate from, the area in which the Company is
headquartered on the date of this Agreement unless otherwise agreed by
Executive.
2. COMPENSATION. For all services rendered by Executive, the Company shall
compensate Executive as follows:
(a) BASE SALARY. Commencing on the Effective Date or, at the option of the
Company, the first day of the month during which the Effective Date occurs or
the first day of the month immediately following the date on which the Effective
Date occurs, the base salary payable to Executive shall be $ _______ per year,
payable on a regular basis in accordance with the Company's standard payroll
procedures but not less frequently than monthly. On at least an annual basis,
the Board will review Executive's performance and may make increases, but not
decreases, to such base salary if, in its discretion, any such increase is
warranted.
(b) EXECUTIVE PERQUISITES, BENEFITS AND OTHER COMPENSATION. Executive
shall be entitled to receive additional benefits and compensation from the
Company in such form and to such extent as specified below:
(i) Coverage, subject to contributions required of executives of the
Company generally, for Executive and his dependent family members under health,
hospitalization, disability, dental, life and other insurance plans that the
Company may have in effect from time to time for the benefit of its executives;
provided, however, that the Company shall not modify the plans in effect on the
date hereof in a manner that would decrease the benefits afforded thereby to the
Executive in any material respect unless (a) the Executive consents to such
changes, or (b) such changes result in plans that provide benefits to the
Executive that are substantially similar to those afforded to similarly situated
executives employed by the other subsidiaries of LandCare.
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(ii) Reimbursement for all business travel and other out-of-pocket
expenses reasonably incurred by Executive in the performance of his services
pursuant to this Agreement. All reimbursable expenses shall be appropriately
documented in reasonable detail by Executive upon submission of any request for
reimbursement, and in a format and manner consistent with the Company's expense
reporting policy.
(iii) The Company shall provide Executive with such other executive
perquisites as may be deemed appropriate for Executive by the Board, and
Executive shall be entitled to participate in all other Company-wide employee
benefits as are available from time to time.
3. NON-COMPETITION AGREEMENT.
(a) Executive shall not, during the period of his employment by or with
the Company, and for a period of two (2) years immediately following the
termination of his employment under this Agreement, for any reason whatsoever,
except as provided herein, directly or indirectly, for himself or on behalf of
or in conjunction with any other person, company, partnership, corporation or
business of whatever nature:
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor, or as a sales
representative, in any business in direct competition with the Company or
LandCare USA or any of their respective subsidiaries, within 100 miles of
where the Company or any of LandCare USA's other subsidiaries has a
physical location (the "Territory");
(ii) call upon any person who is, at that time, an employee of the
Company or LandCare USA (including the respective subsidiaries thereof) in
a sales or managerial capacity for the purpose or with the intent of
enticing such employee away from or out of the employ of the Company or
LandCare USA (including the respective subsidiaries thereof);
(iii) call upon any person or entity which is, at that time, or
which has been, within one (1) year prior to that time, a customer of the
Company or LandCare USA (including the respective subsidiaries thereof)
for the purpose of soliciting or selling products or services in direct
competition with the Company or LandCare USA;
(iv) call upon any prospective acquisition candidate, on Executive's
own behalf or on behalf of any competitor, which candidate was, to
Executive's actual knowledge, either called upon by the Company or
LandCare USA (including the respective subsidiaries
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thereof) or for which the Company or LandCare USA made an acquisition analysis,
for the purpose of acquiring such entity or all or substantially all of such
entity's assets.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit Executive from (i) participating in the activities as and to the extent
described on Schedule 13.1 to the Agreement and Plan of Organization dated as of
March 17, 1998 to which the Company, LandCare and the Executive are parties, or
(ii) acquiring as a passive investment not more than two percent (2%) of the
capital stock of a competing business the stock of which is traded on a national
securities exchange or on an over-the-counter or similar market.
(b) Because of the difficulty of measuring economic losses to the Company
and LandCare USA as a result of a breach of the foregoing covenant, and because
of the immediate and irreparable damage that could be caused to the Company and
LandCare USA for which they would have no other adequate remedy, Executive
agrees that the foregoing covenant may be enforced by LandCare USA or the
Company in the event of breach or threatened breach by Executive, by
injunctions, restraining orders and other appropriate equitable relief.
(c) It is agreed by the parties that the foregoing covenants in this
paragraph 3 impose a reasonable restraint on Executive in light of the
activities and business of the Company or LandCare USA, as the case may be
(including LandCare USA's other subsidiaries) on the Effective Date of this
Agreement and the current plans of LandCare USA (including LandCare USA's other
subsidiaries); but it is also the intent of the Company and Executive that such
covenants be construed and enforced in accordance with the changing activities,
business and locations of the Company and LandCare USA, as the case may be
(including LandCare USA's other subsidiaries) throughout the term of these
covenants, whether before or after the date of termination of the employment of
Executive. For example, if, during the term of these covenants, the Company or
LandCare USA, as the case may be (including LandCare USA's other subsidiaries)
engage in new and different activities related to the Business, enter a new
business related to the Business or establish new locations for their current
activities or businesses in addition to or other than the activities or
businesses enumerated under the Recitals above or the locations currently
established therefor, then Executive will be precluded from soliciting the
customers or employees of such new activities or businesses or from such new
locations and from directly competing with such new businesses within 100 miles
of all then-established operating location(s) through the term of these
covenants.
It is further agreed by the parties hereto that, in the event that
Executive shall cease to be employed hereunder, and shall enter into a business
or pursue other activities not in competition with the Company or LandCare USA
(including LandCare USA's other subsidiaries), or similar activities or business
in locations the operation of which, under such circumstances, does not violate
clause (i) of paragraph 3(a), Executive shall not be chargeable with a violation
of this paragraph 3 if the Company or LandCare USA (including LandCare USA's
other subsidiaries) shall thereafter enter the same, similar or a competitive
(i) business, (ii) course of activities or (iii) location, as applicable.
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(d) The covenants in this paragraph 3 are severable and separate, and the
unenforceability of any specific covenant shall not affect the provisions of any
other covenant. Moreover, in the event any court of competent jurisdiction shall
determine that the scope, time or territorial restrictions set forth herein are
unreasonable, then it is the intention of the parties that such restrictions be
enforced to the fullest extent which the court deems reasonable, and this
Agreement shall thereby be reformed.
(e) All of the covenants in this paragraph 3 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Executive against the Company or
LandCare USA, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by LandCare USA or the Company of such
covenants. It is specifically agreed that the period of two (2) years following
termination of employment stated at the beginning of this paragraph 3, during
which the agreements and covenants of Executive made in this paragraph 3 shall
be effective, shall be computed by excluding from such computation any time
during which Executive is in violation of any provision of this paragraph 3.
4. TERM; TERMINATION; RIGHTS ON TERMINATION.
(a) The term of this Agreement shall begin on the Effective Date and
continue for five (5) years (the "Term"), unless terminated sooner as herein
provided, and shall continue thereafter on a year-to-year basis on the same
terms and conditions contained herein in effect as of the time of renewal. This
Agreement and Executive's employment may be terminated in any one of the
followings ways:
(i) TERMINATION AS A RESULT OF EMPLOYEE'S DEATH. The death of
Executive shall immediately terminate this Agreement with no severance
compensation due to Executive's estate.
(ii) TERMINATION ON ACCOUNT OF DISABILITY. If, as a result of
incapacity due to physical or mental illness or injury, Executive shall
have been absent from his full-time duties hereunder for six (6)
consecutive months, then thirty (30) days after receiving written notice
(which notice may occur before or after the end of such six (6) month
period, but which shall not be effective earlier than the last day of such
six (6) month period), the Company may terminate Executive's employment
hereunder provided Executive is unable to resume his full-time duties with
or without reasonable accommodation at the conclusion of such notice
period. Also, Executive may terminate his employment hereunder if his
health should become impaired to an extent that makes the continued
performance of his duties hereunder hazardous to his physical or mental
health or his life, provided that Executive shall have furnished the
Company with a written statement from a qualified doctor to such effect
and provided, further, that, at the Company's request made within thirty
(30) days of the date
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of such written statement, Executive shall submit to an examination by a
doctor selected by the Company who is reasonably acceptable to Executive
or Executive's doctor and such doctor shall have concurred in the
conclusion of Executive's doctor. In the event this Agreement is
terminated as a result of Executive's disability, Executive shall receive
from the Company, in a lump-sum payment due within thirty (30) days of the
effective date of termination, the base salary at the rate then in effect
for whatever time period is remaining under the Initial Term (as defined
below) or for one (1) year, whichever amount is greater; provided,
however, that any such payments shall be reduced by the amount of any
disability insurance payments payable to the Executive as a result of such
disability to the extent such disability insurance is provided by the
Company or LandCare USA or any of their affiliates.
(iii) TERMINATION BY THE COMPANY FOR CAUSE. The Company may
terminate this Agreement immediately for "Cause", which shall be: (1)
Executive's willful and material breach of this Agreement, which breach
either cannot be cured or, if capable of being cured, is not cured within
ten (10) days after receipt of written notice of the need to cure; (2)
Executive's gross negligence in the performance or intentional
nonperformance (continuing for ten (10) days after receipt of written
notice of need to cure) of any of Executive's material duties and
responsibilities hereunder; (3) Executive's willful dishonesty, fraud or
misconduct with respect to the business or affairs of the Company or
LandCare USA; (4) Executive's conviction of a felony crime; or (5)
Executive's confirmed positive illegal drug test result. In the event of a
termination for Cause, Executive shall have no right to any severance
compensation.
(iv) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. At any time after
commencement of employment, the Company may terminate Executive's
employment hereunder without Cause, and Executive may terminate his
employment hereunder for Good Reason (as defined below), in either case
effective thirty (30) days after written notice. If Executive is
terminated by the Company without Cause or if Executive terminates
Executive's employment hereunder for Good Reason during the first three
(3) years of the Term (the "Initial Term"), Executive shall receive from
the Company, in a lump-sum payment due on the effective date of
termination, the base salary at the rate then in effect for whatever time
period is remaining under the Initial Term of this Agreement or for one
(1) year, whichever amount is greater. If Executive is terminated by the
Company without Cause or should Executive terminate for Good Reason after
the Initial Term, Executive shall receive from the Company, in a lump-sum
payment due on the effective date of termination, one year's salary at the
base salary rate then in effect. Further, any termination without Cause by
the Company or by the Executive for Good Reason shall operate to shorten
the period set forth in paragraph 3(a) and during which the terms of
paragraph 3 apply to one (1) year from the date of termination of
employment. If Executive resigns or otherwise terminates his employment
hereunder without Good Reason, Executive shall receive no
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severence compensation, and the provisions of paragraph 3 hereof shall
apply. If Executive is terminated by the Company without Cause or if
Executive terminates his employment hereunder for Good Reason, (1) the
Company shall make the insurance premium payments contemplated by COBRA
for a period of 12 months after such termination, and (2) the Executive
shall be entitled to receive a pro rated portion of any annual bonus to
which the Executive would have been entitled for the year during which the
termination occurred had the Executive not been terminated.
(b) DEFINITION OF "GOOD REASON". Executive shall have "Good Reason" to
terminate this Agreement and his employment hereunder if, without Executive's
consent, (i) Executive is demoted by means of a reduction in authority,
responsibilities, duties or title to a position of materially less stature or
importance within the Company than the position described in Section 1 hereof,
or (ii) the Company breaches this Agreement in any material respect and fails to
cure such breach within ten days after Executive delivers written notice and a
written description of such breach to the Company, which notice shall
specifically refer to this section of this Agreement.
(c) CHANGE IN CONTROL OF LANDCARE USA. In the event of a "Change in
Control of LandCare USA" (as defined below) during the Initial Term, paragraph
11 below shall apply.
(d) EFFECT OF TERMINATION. Upon termination of this Agreement for any
reason provided above, Executive shall be entitled to receive all compensation
earned and all benefits and reimbursements due through the effective date of
termination. Additional compensation subsequent to termination, if any, will be
due and payable to Executive only to the extent and in the manner expressly
provided herein. All other rights and obligations of the Company and Executive
under this Agreement shall cease as of the effective date of termination, except
that the Company's obligations under paragraph 8 herein and Executive's
obligations under paragraphs 3, 5, 6, 7 and 9 herein shall survive such
termination in accordance with their terms.
(e) BREACH BY COMPANY. If termination of Executive's employment arises out
of the Company's failure to pay Executive on a timely basis the amounts to which
Executive is entitled under this Agreement or as a result of any other breach of
this Agreement by the Company, as determined by a court of competent
jurisdiction or pursuant to the provisions of paragraph 15 below, the Company
shall pay all amounts and damages to which Executive may be entitled as a result
of such breach, including interest thereon and all reasonable legal fees and
expenses and other costs incurred by Executive to enforce his rights hereunder.
Further, none of the provisions of paragraph 3 shall apply in the event this
Agreement is terminated as a result of a breach by the Company.
5. RETURN OF COMPANY PROPERTY. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Executive by or on behalf of the Company, LandCare
USA or their representatives, vendors or customers which pertain to the business
of the Company or LandCare USA shall be and remain the property of the
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Company or LandCare USA, as the case may be, and be subject at all times to
their discretion and control. Likewise, all correspondence, reports, records,
charts, advertising materials and other similar data pertaining to the business,
activities or future plans of the Company or LandCare USA which is collected by
Executive shall be delivered promptly to the Company without request by it upon
termination of Executive's employment.
6. INVENTIONS. Executive shall disclose promptly to the Company any and
all significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by
Executive, solely or jointly with another, during the period of employment or
within one (1) year thereafter, and which are directly related to the business
or activities of the Company and which Executive conceives as a result of his
employment by the Company. Executive hereby assigns and agrees to assign all his
interests therein to the Company or its nominee. Whenever requested to do so by
the Company, Executive shall execute any and all applications, assignments or
other instruments that the Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
7. TRADE SECRETS. Executive agrees that Executive will not, during or
after the Term of this Agreement with the Company, disclose the terms of the
Company's or LandCare USA's relationships or agreements with their respective
vendors or customers or any other significant or material trade secret of the
Company or LandCare USA, whether in existence or proposed, to any person, firm,
partnership, corporation or business for any reason or purpose whatsoever,
except and only to the extent required by law or legal process following notice
to the Company and LandCare USA.
8. INDEMNIFICATION. In the event Executive is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the Company
or LandCare USA against Executive), by reason of the fact that Executive is or
was performing services under this Agreement, then the Company shall indemnify
Executive against all expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement, as actually and reasonably incurred by Executive in
connection therewith to the maximum extent permitted by applicable law. The
advancement of expenses shall be mandatory to the extent permitted by applicable
law. In the event that both Executive and the Company are made a party to the
same third-party action, complaint, suit or proceeding, the Company agrees to
engage counsel, and Executive agrees to use the same counsel, provided that if
counsel selected by the Company shall have a conflict of interest that prevents
such counsel from representing Executive, Executive may engage separate counsel
and the Company shall pay all reasonable attorneys' fees of such separate
counsel. The Company shall not be required to pay the fees of more than one law
firm except as described in the preceding sentence, and shall not be required to
pay the fees of more than two law firms under any circumstances. Executive
cannot be held liable to the Company or
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LandCare USA for errors or omissions made in good faith or where Executive has
not exhibited gross, willful, and wanton negligence in connection with such
conduct, error or omission.
9. NO PRIOR AGREEMENTS. Executive hereby represents and warrants to the
Company that the execution of this Agreement by Executive and his employment by
the Company and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client or any other person or
entity. Executive hereby indemnifies the Company against any and all liability,
expenses and other costs and amounts incurred by the Company, including, but not
limited to, attorneys' fees and expenses of investigation, as a result of any
claim by any third party that such third party may now have or may hereafter
come to have against the Company based upon or arising out of any
non-competition agreement, invention or secrecy agreement between Executive and
such third party which was in existence as of the date of this Agreement.
10. ASSIGNMENT; BINDING EFFECT. Executive understands that the Company has
selected Executive for employment by it on the basis of Executive's personal
qualifications, experience and skills. Executive agrees, therefore, that
Executive cannot assign all or any portion of Executive's performance under this
Agreement. Subject to the preceding two (2) sentences and the express provisions
of paragraph 12 below, this Agreement shall be binding upon, inure to the
benefit of and be enforceable by the parties hereto and their respective heirs,
legal representatives, successors and assigns.
11. CHANGE IN CONTROL.
(a) Executive understands and acknowledges that LandCare USA and/or the
Company may be merged or consolidated with or into another entity and that such
entity shall automatically succeed to the rights and obligations of LandCare USA
and/or the Company hereunder or that the Company may undergo another type of
Change in Control. In the event such a merger or consolidation or other Change
in Control is initiated prior to the end of the Initial Term, then the
provisions of this paragraph 11 shall be applicable.
(b) In the event of a pending Change in Control wherein LandCare USA
and/or the Company and Executive have not received written notice at least five
(5) business days prior to the anticipated closing date of the transaction
giving rise to the Change in Control from the successor to all or a substantial
portion of LandCare USA's and/or the Company's business and/or assets that such
successor is willing as of the closing to assume and agree to perform LandCare
USA's and/or the Company's obligations under this Agreement in the same manner
and to the same extent that LandCare USA and/or the Company is hereby required
to perform, then Executive may elect to terminate his employment and shall be
entitled to receive in one lump sum on the effective date of such termination,
an amount equal to three times his annual base salary then in effect, and the
non-competition provisions of paragraph 3 shall apply for a period of one (1)
year from the effective date of termination.
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(c) In any Change in Control situation, if Executive is terminated by the
Company without Cause at any time during the twelve (12) months immediately
following the closing of the transaction giving rise to the Change in Control,
or Executive terminates for Good Reason at any time during the twelve (12)
months immediately following the closing of the transaction giving rise to the
Change in Control, Executive shall be entitled to receive in one lump sum on the
effective date of such termination an amount equal to three (3) times his annual
base salary then in effect, and the non-competition provisions of paragraph 3
shall apply for a period of one (1) year from the effective date of termination.
(d) For purposes of applying paragraph 4 under the circumstances described
in (b) and (c) above, the effective date of termination will be the closing date
of the transaction giving rise to the Change in Control and all compensation,
reimbursements and lump-sum payments due Executive must be paid in full by the
Company at or prior to such closing. Further, Executive will be given sufficient
time and opportunity to elect whether to exercise all or any of Executive's
vested options to purchase LandCare USA common stock, such that Executive may
convert the options to shares of LandCare USA common stock at or prior to the
closing of the transaction giving rise to the Change in Control, if Executive so
desires.
(e) A "Change in Control" shall be deemed to have occurred if:
(i) any person, other than LandCare USA or an employee benefit plan
of LandCare USA, acquires directly or indirectly the beneficial ownership
(as defined in Section 13(d) of the Securities Exchange Act of 1934, as
amended) of any voting security of the Company and immediately after such
acquisition such person is, directly or indirectly, the Beneficial Owner
of voting securities representing 50% or more of the total voting power of
all of the then-outstanding voting securities of the Company;
(ii) the following individuals no longer constitute a majority of
the members of the Board of Directors of LandCare USA: (A) the individuals
who, as of the closing date of LandCare USA's initial public offering,
constitute the Board of Directors of LandCare USA (the "Original
Directors"); (B) the individuals who thereafter are elected to the Board
of Directors of LandCare USA and whose election, or nomination for
election, to the Board of Directors of LandCare USA was approved by a vote
of at least two-thirds (2/3) of the Original Directors then still in
office (such directors becoming "Additional Original Directors"
immediately following their election); and (C) the individuals who are
elected to the Board of Directors of LandCare USA and whose election, or
nomination for election, to the Board of Directors of LandCare USA was
approved by a vote of at least two-thirds (2/3) of the Original Directors
and Additional Original Directors then still in office (such directors
also becoming "Additional Original Directors" immediately following their
election);
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(iii) the stockholders of LandCare USA shall approve a merger,
consolidation, recapitalization, or reorganization of LandCare USA, a
reverse stock split of outstanding voting securities, or consummation of
any such transaction if stockholder approval is not obtained, other than
any such transaction which would result in at least 75% of the total
voting power represented by the voting securities of the surviving entity
outstanding immediately after such transaction being Beneficially Owned by
at least 75% of the holders of outstanding voting securities of LandCare
USA immediately prior to the transaction, with the voting power of each
such continuing holder relative to other such continuing holders not
substantially altered in the transaction;
(iv) the stockholders of LandCare USA shall approve a plan of
complete liquidation of LandCare USA or an agreement for the sale or
disposition by LandCare USA of 50% or more of the total assets of LandCare
USA; or
(v) LandCare USA shall approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of 50%
or more of the total assets of the Company.
(f) If it shall be determined that any payment or distribution by LandCare
USA or the Company or any other person to or for the benefit of the Executive (a
"Payment") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Excise Tax"), as a result of the
termination of employment of the Executive in the event of a Change in Control,
then the Company, LandCare USA or the successor to LandCare USA shall pay an
additional payment (a "Gross-Up Payment") in an amount such that after payment
by the Executive of all taxes, including, without limitation, any income taxes
and Excise Tax imposed on the Gross-Up Payment, the Executive retains an amount
of the Gross-Up Payment equal to the Excise Tax imposed on the Payments. Such
amount will be due and payable by the Company, LandCare USA or the successor to
LandCare USA within ten (10) days after the Executive delivers written request
for reimbursement accompanied by a copy of the Executive's tax return(s) showing
the Excise Tax actually incurred by the Executive.
12. COMPLETE AGREEMENT. This Agreement sets forth the entire agreement of
the parties hereto relating to the subject matter hereof and supersedes any
other employment agreements or understandings, written or oral, between the
Company and Executive. This Agreement is not a promise of future employment.
Executive has no oral representations, understandings or agreements with the
Company or any of its officers, directors or representatives covering the same
subject matter as this Agreement. This written Agreement is the final, complete
and exclusive statement and expression of the agreement between the Company and
Executive and of all the terms of this Agreement, and it cannot be varied,
contradicted or supplemented by evidence of any prior or contemporaneous oral or
written
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agreements. This written Agreement may not be later modified except by a further
writing signed by a duly authorized officer of the Company and Executive, and no
term of this Agreement may be waived except by writing signed by the party
waiving the benefit of such term.
13. NOTICE. Whenever any notice is required hereunder, it shall be given
in writing addressed as follows:
To the Company: ________________________
________________________
________________________
________________________
with a copy to: General Counsel
LandCare USA, Inc.
Three Riverway, Suite 630
Houston, Texas 77056
Telephone: 713/965-0331
Fax: 713/965-0579
To Executive: ________________________
________________________
Notice shall be deemed given and effective on the earlier of three (3) days
after the deposit in the U.S. mail of a writing addressed as above and sent
first class mail, certified, return receipt requested, or when actually received
by means of hand delivery or delivery by Federal Express or other courier
service. Either party may change the address for notice by notifying the other
party of such change in accordance with this paragraph 13.
14. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of the
Agreement or of any part hereof.
15. ARBITRATION. With the exception of the provisions hereof providing for
enforcement by means of equitable remedies, any unresolved dispute or
controversy arising under or in connection with this Agreement shall be settled
exclusively by arbitration, conducted before a panel of three (3) arbitrators in
Houston, Texas, in accordance with the National Rules for the Resolution of
Employment Disputes of the American Arbitration Association ("AAA") then in
effect, provided that the parties may agree to use arbitrators other than those
provided by the AAA. The arbitrators
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shall not have the authority to add to, detract from, or modify any provision
hereof nor to award punitive damages to any injured party. A decision by a
majority of the arbitration panel shall be final and binding. Judgment may be
entered on the arbitrators' award in any court having jurisdiction. The direct
expenses of any arbitration proceeding shall be borne by the Company; however,
each party shall be responsible for payment of its counsel fees and related
expenses. The arbitrator shall, however, have the right and discretion to award
counsel fees and expenses (including reasonable travel expenses) to either party
as part of the arbitrator's final judgment.
16. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State in which the Company's headquarters are
located on the date hereof as shown in the Company's address for notices set
forth in Section 13 hereof.
17. COUNTERPARTS. This Agreement may be executed simultaneously in two (2)
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written, but effective as of the Effective Date.
[ ]
By: _____________________________
[ ]
President
EXECUTIVE
_________________________________
[Name]
-13-
<PAGE>
LANDCARE USA, INC.
By: _____________________________
-14-
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
May 6, 1998
