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
and (iii) 230 Highway 65 North, River Falls, Wisconsin. The leases provide for
annual rents of $38,604, $6,000 and $24,000, respectively. The rent will be
adjusted each year in accordance with the Consumer Price Index ("CPI"), not to
be increased by more than five percent of the rent for the immediately preceding
lease year. Each of the leases provides for an initial term of five years, with
three, five year renewal options. Arteka will pay for all utilities, taxes and
insurance on each leased property. Arteka will have a right of first refusal to
purchase each leased property. In addition, Arteka will sublease its facility at
Lot A, Edinvale Industrial Park, 8th Edition, Eden Prairie, Minnesota from Mr.
Luse. The Lease provides for monthly rent of $1,300 and will expire on December
31, 1998. The Company believes that the economic
58
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 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
59
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 March 1998, all of the assets of Royal Oaks Nursery, Inc., a
wholly-owned subsidiary of Church, were distributed to an affiliate of Church,
also named Royal Oaks Nursery, Inc., ("Royal Oaks II"), for a purchase price
of $150,000 plus the assumption of liabilities. In addition, Royal Oaks II, of
which Bruce A. Church and family members are the sole stockholders, is a
supplier of plant materials to Church and will continue to conduct business with
Church after the IPO. 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.
60
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.
61
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
62
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
63
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.
64
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.
65
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
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.
In February 1998, two principals of, and two investment funds affiliated
with Sanders Morris Mundy Inc., purchased notes from Notre which are convertible
into an aggregate of 37,500 shares of Common Stock upon consummation of the
Offering, assuming an initial public offering price of $12.00 per share. One of
these principals also owns a non-voting membership interest in Notre, which
represents an indirect interest in 18,782 shares of the Company's Common Stock.
These principals and investment funds have agreed that they will not sell or
offer any of these shares of Common Stock for a period of two years after the
consummation of the Offering, 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 an aggregate of than 1% of the Common
Stock to be outstanding after this Offering and have been deemed to be
underwriting compensation by the National Association of Securities Dealers,
Inc.
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
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
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
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
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
LANDCARE USA, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET -- MARCH 31, 1998
(IN THOUSANDS)
LANDCARE
FOUR SOUTHERN GROUND DESERT USA,
TREES SEASONS TREE CHURCH CONTROL ARTEKA CARE INC.
------- ------- -------- ------ ------- ------ ------ --------
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
======= =========== ========= ============ ===========
See accompanying notes to unaudited pro forma combined financial statements.
F-4
LANDCARE USA, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
FOUR SOUTHERN GROUND DESERT
TREES SEASONS TREES CHURCH CONTROL ARTEKA CARE
------- -------- --------- -------- ------- ------- -------
REVENUES............................. $50,085 $16,066 $14,176 $13,257 $8,979 $7,366 $6,481
COST OF SERVICES..................... 43,568 11,067 11,617 8,906 6,663 5,227 5,119
------- -------- --------- -------- ------- ------- -------
Gross profit........................ 6,517 4,999 2,559 4,351 2,316 2,139 1,362
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 3,688 3,754 1,766 2,864 1,510 2,136 672
------- -------- --------- -------- ------- ------- -------
Income (loss) from operations....... 2,829 1,245 793 1,487 806 3 690
OTHER INCOME (EXPENSE):
Interest expense.................... (272) (37 ) (429) (184 ) (151 ) (95 ) (64)
Other income (expense), net......... 744 (9 ) 26 97 (16 ) 16 13
------- -------- --------- -------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES.... 3,301 1,199 390 1,400 639 (76 ) 639
INCOME TAX PROVISION (BENEFIT)....... 1,266 476 158 547 248 (251 ) --
------- -------- --------- -------- ------- ------- -------
NET INCOME (LOSS).................... $ 2,035 $ 723 $ 232 $ 853 $ 391 $ 175 $ 639
======= ======== ========= ======== ======= ======= =======
NET INCOME PER SHARE.................
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE(1)..............
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
==========
(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
LANDCARE USA, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
FOUR SOUTHERN GROUND DESERT
TREES SEASONS TREES CHURCH CONTROL ARTEKA CARE
------- -------- --------- -------- ------- ------- -------
REVENUES............................. $13,840 $ 3,830 $ 3,502 $ 963 $2,324 $ 893 $1,297
COST OF SERVICES..................... 12,359 2,547 2,675 787 1,857 618 1,200
------- -------- --------- -------- ------- ------- -------
Gross profit........................ 1,481 1,283 827 176 467 275 97
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 718 1,385 514 661 389 726 175
------- -------- --------- -------- ------- ------- -------
Income (loss) from operations....... 763 (102 ) 313 (485 ) 78 (451 ) (78)
OTHER INCOME (EXPENSE):
Interest expense.................... (63) (3 ) (95) (31 ) (49 ) (103 ) (14)
Other income (expense), net......... 26 5 -- 14 1 1 7
------- -------- --------- -------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES.... 726 (100 ) 218 (502 ) 30 (553 ) (85)
INCOME TAX PROVISION (BENEFIT)....... 278 (40 ) 88 (197 ) 12 (210 ) --
------- -------- --------- -------- ------- ------- -------
NET INCOME (LOSS).................... $ 448 $ (60 ) $ 130 $ (305 ) $ 18 $ (343 ) $ (85)
======= ======== ========= ======== ======= ======= =======
NET INCOME PER SHARE.......................................................................................................
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE(1)....................................................................................................
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 12,319,865
NET INCOME PER SHARE(1).............. ==========
(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
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.
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
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. Based on its initial assessment, management believes that the
historical carrying value of the Founding Companies' assets and liabilities will
approximate fair value and that there are no other identifiable intangible
assets to which any material purchase price can be allocated.
(IN THOUSANDS)
ASSETS
Cash and cash equivalents............... $ 1,318
Accounts receivable, net................ 7,644
Related - party receivable.............. 25
Inventories............................. 2,137
Deferred tax asset...................... 452
Other current assets.................... 1,207
--------------
Total current assets............... 12,783
Property and equipment, net............. 8,696
Deferred tax asset...................... 238
Other assets, net....................... 1,850
--------------
Total assets....................... $ 23,567
==============
LIABILITIES
Accounts payable and accrued expenses... $ 6,635
Lines of credit......................... 3,881
Current maturities of long-term debt.... 3,720
Current maturities of long-term payable
to related party...................... 446
Deferred tax liability.................. 518
Other current liabilities............... 217
--------------
Total current liabilities.......... 15,417
Long-term debt, net of current
maturities............................ 3,325
Long-term payable to related party, net
of current maturities................. 707
Deferred tax liability.................. 612
--------------
Total liabilities.................. $ 20,061
==============
Net book value..................... $ 3,506
==============
The following reconciles the combined historical net assets of the Founding
Companies to the net assets acquired (in thousands):
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
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:
PRO FORMA
(a) (b) (c) (d) ADJUSTMENTS
--------- --------- --------- --------- ------------
ASSETS
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
========= ========= ========= ========= ============
F-9
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 from the proceeds of the Offering.
(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
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:
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 from the proceeds of the Offering.
(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
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:
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
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
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
LANDCARE USA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------- ----------- --------- --------------
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
========= ======= =========== ========= ==============
The accompanying notes are an integral part of these financial statements.
F-16
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
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.
LandCAREintends 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'Sfuture 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
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
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
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
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
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
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
TREES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
TOTAL
COMMON RETAINED TREASURY SHAREHOLDERS'
STOCK EARNINGS STOCK EQUITY
------ -------- -------- --------------
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
====== ======== === ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
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
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
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
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):
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
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):
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
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):
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
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
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
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
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
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)
========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-36
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------- ----------- ---------- -------------
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
======= =========== ========== =============
The accompanying notes are an integral part of these financial statements.
F-37
FOUR SEASONS LANDSCAPE AND MAINTENANCE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
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 -- --
The accompanying notes are an integral part of these financial statements.
F-38
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
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
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):
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
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):
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):
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
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
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
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
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
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
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
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
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):
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
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
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
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
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
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
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
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
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)
========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-59
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
TOTAL
COMMON RETAINED TREASURY SHAREHOLDERS'
STOCK EARNINGS STOCK EQUITY
------ --------- -------- -------------
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
====== ========= ======== =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-60
D.R. CHURCH LANDSCAPE CO., INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
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
The accompanying notes are an integral part of these consolidated financial
statements.
F-61
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
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
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):
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
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):
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
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):
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
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
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
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
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
GROUND CONTROL LANDSCAPING, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
------ ---------- --------- -------- -------------
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
====== === ========= ======== =============
The accompanying notes are an integral part of these financial statements.
F-72
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
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
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
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):
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
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
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):
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
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):
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
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
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
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
ARTEKA CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED THREE MONTHS
DECEMBER 31 ENDED MARCH 31
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(UNAUDITED)
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)
========= ========= ========= =========
The accompanying notes are an integral part of these combined financial
statements.
F-83
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
ARTEKA CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31 MARCH 31
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(UNAUDITED)
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 --
The accompanying notes are an integral part of these combined financial
statements.
F-85
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
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
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):
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
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
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):
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
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):
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
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):
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
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
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
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
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
DESERT CARE LANDSCAPING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
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
====== === ========= =============
The accompanying notes are an integral part of these financial statements.
F-98
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
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
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
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):
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
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
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
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
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.
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
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
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, LandCAREissued 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
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------------------------ ------------------------------------------------------------------------------------------
*1.1 -- Form of Underwriting Agreement
*3.1 -- Amended and Restated Certificate of Incorporation of LandCAREUSA, 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
+10.24 -- Commitment letter for $50 million credit facility between the Company and The First
National Bank of Chicago, dated March 31, 1998
*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
II-3
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------------------------ ------------------------------------------------------------------------------------------
*23.5 -- Consent of Roger S. Braswell to be named as a director
*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
*23.17 -- Consent of LAWN AND LANDSCAPE to the Company's reference in the Prospectus to data
appearing in the magazine
*24.1 -- Power of Attorney (included on signature page to this Registration Agreement)
*27 -- Financial Data Schedule
* 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
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 28, 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 28, 1998.
NAME TITLE DATE
------------------------------------------------------------------------- --------------
/s/WILLIAM F. MURDY* Chairman of the Board; Chief May 28, 1998
WILLIAM F. MURDY Executive Officer and President
/s/PETER C. FORBES* Senior Vice President; Chief May 28, 1998
PETER C. FORBES Financial Officer and Director
(Chief Accounting Officer)
/s/RONALD L. STANFA* Director May 28, 1998
RONALD L. STANFA
* By: WILLIAM L. FIEDLER
WILLIAM L. FIEDLER
ATTORNEY-IN-FACT
II-5
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGES
------ ----------------------- -----
*1.1 -- Form of Underwriting Agreement
*3.1 -- Amended and Restated Certificate of
Incorporation of LandCAREUSA, 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
+10.24 -- Commitment letter for $50 million
credit facility between the Company
and The First National Bank of
Chicago, dated March 31, 1998
*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
*23.5 -- Consent of Roger S. Braswell to be
named as a director
INDEX TO EXHIBITS -- CONTINUED
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGES
------ ----------------------- -----
*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
*23.17 -- Consent of LAWN AND LANDSCAPE to the
Company's reference in the Prospectus
to data appearing in the magazine
*24.1 -- Power of Attorney (included on
signature page to this Registration
Agreement)
*27 -- Financial Data Schedule
------------
* Previously filed
+ Filed herewith
EXHIBIT 10.24
March 31, 1998
Mr. Peter C. Forbes
Chief Financial Officer
LandCare USA, Inc.
Three Riverway, Suite 630
Houston, Tx 77056
RE: COMMITMENT LETTER
Dear Peter:
LandCare USA, Inc., a Delaware corporation (the "Borrower"), has requested
a credit facility (the "Facility") in the aggregate principal amount of up to
$75,000,000 (the "Aggregate Commitment").
The First National Bank of Chicago is pleased to offer to act as
administrative agent (the "Agent") under the Facility and to commit to make
loans to the Borrower in the amount of the Aggregate Commitment on the terms and
subject to the conditions set forth herein and in the term sheet attached hereto
(the "Term Sheet").
The Agent intends, and reserves the right, to syndicate the Facility to a
group of lenders (collectively, including the Agent, the "Lenders") selected by
First Chicago Markets, Inc. ("FCCM"). FCCM will act as arranger (the "Arranger")
and will manage all aspects of the syndication including, without limitation,
the timing of all offers to potential lenders, the acceptance of commitments and
the amounts accepted. The Borrower agrees to participate actively in the
presentation of the information to prospective lenders.
The obligation of the Agent to make loans under the Facility is subject to
the following: (i) the preparation, execution and delivery of a credit agreement
("Credit Agreement") and other loan documents (collectively, together with the
Credit Agreement, the "Loan Documents") mutually acceptable to the Borrower and
the Lenders incorporating, without limitation, substantially the terms and
conditions outlined herein and in the Term Sheet; (ii) the Agent's determination
that there is no material adverse change in the business, condition (financial
or otherwise), operations, performance, properties, or prospects of the Borrower
or any of its material subsidiaries since December 31, 1997; and (iii) the
absence of any material adverse change prior to closing in primary and secondary
loan syndication markets or capital markets generally.
The Borrower hereby agrees to reimburse the Agent and the Arranger for all
out-of-pocket expenses (including the reasonable fees, time charges and expenses
of attorneys for the Agent and the Arranger, which attorneys may be employees of
the Agent or the Arranger) incurred in connection with the preparation,
negotiation, execution, syndication and enforcement of this commitment letter,
the fee letter of even date herewith between the Borrower, the Agent and the
Arranger (the "Fee Letter"), the Loan Documents and any other documentation
contemplated hereby or thereby.
The Borrower hereby further agrees to indemnify and hold harmless the
Agent, the Arranger, the Lenders and their respective officers, employees,
agents and directors (each an "indemnified party") against any and all losses,
claims, damages, costs, expenses (including the reasonable fees, time charges
and expenses of attorneys for the indemnified parties, which attorneys may be
employees of the indemnified parties) or liabilities of every kind whatsoever
(collectively, the "Indemnified Obligations") to which each of the indemnified
parties may become subject in connection in any way with the transaction which
is the subject of this commitment letter, including without limitation, expenses
incurred in connection with investigating or defending against any liability or
action (whether or not such indemnified party is a party thereto).
The Borrower's obligations under the immediately preceding two paragraphs
shall continue and are and shall remain absolute obligations of the Borrower,
unless and until superseded by the indemnity provisions of definitive Loan
Documents, whether or not Loan Documents are executed or any loan is made by the
Agent or any conditions of lending are met. The obligations of the Agent and the
Arranger under this
commitment letter shall be enforceable solely by the Borrower and may not be
relied upon by any other person.
This commitment letter, the Fee Letter and the Term Sheet are for the
Borrower's confidential use only and may not be disclosed by it to any person
other than its employees, attorneys and financial advisors (but not commercial
lenders), and then only in connection with the proposed transaction and on a
confidential basis, except where (in the Borrower's judgment) disclosure is
required by law or where the Agent or the Arranger consents to the proposed
disclosure, which consent shall not be unreasonably withheld. Officers,
directors, employees and agents of each of the Arranger and the Agent shall at
all times have the right to share information received from the Borrower and its
affiliates and their respective officers, directors, employees and agents.
Please indicate the Borrower's acceptance of the commitment herein
contained in the space indicated below and return a copy of this commitment
letter so executed to the Arranger. By its acceptance hereof, the Borrower
agrees to pay the Agent and the Arranger the fees described in the Fee Letter.
This commitment will expire at 5 p.m. (Chicago time) on Tuesday, April 7, 1998,
unless on or prior to such time the Arranger shall have received a copy of this
commitment letter executed by the Borrower, together with the fees due and
payable pursuant to the Fee Letter. Notwithstanding timely acceptance of this
commitment letter pursuant to the preceding sentence, the commitment herein
contained will automatically terminate unless definitive Loan Documents are
executed on or before June 30, 1998.
This commitment letter, the Fee Letter and the Term Sheet supersede any and
all prior versions hereof or thereof. This commitment letter may only be amended
by a writing signed by all parties hereto.
IF THE COMMITMENT LETTER, THE TERM SHEET, THE FEE LETTER OR ANY ACT,
OMISSION OR EVENT HEREUNDER OR THEREUNDER BECOMES THE SUBJECT OF A DISPUTE, THE
BORROWER, THE AGENT AND THE ARRANGER EACH HEREBY WAIVE TRIAL BY JURY. THIS
COMMITMENT LETTER SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF
ILLINOIS.
Sincerely,
THE FIRST NATIONAL BANK OF CHICAGO,
INDIVIDUALLY AND AS AGENT
By: __________________________________
Title: Authorized Agent
FIRST CHICAGO CAPITAL MARKETS, INC.,
AS ARRANGER
By: __________________________________
Title: Managing Director
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 28, 1998
EXHIBIT 23.17
CONSENT TO USE OF DATA FROM PUBLICATION
LAWN AND LANDSCAPE magazine hereby consents to the reference to data published
in LAWN AND LANDSCAPE in the Registration Statement on Form S-1 (Reg. No.
333-48215) filed by LandCare USA, Inc.
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