FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number 1-14089
LANDCARE USA, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 76-0562801
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
THREE RIVERWAY, SUITE 630
HOUSTON, TEXAS 77056
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 965-0336
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Number of shares of common stock outstanding at August 13, 1998: 16,186,413
LANDCARE USA, INC.
INDEX TO FORM 10-Q
For the Quarter Ended June 30, 1998
Part I - Financial Information
Item 1 - Financial Statements
General Information.................................... 3
Historical Consolidated Balance Sheets - Unaudited
LandCARE USA, Inc. as of June 30, 1998 and
December 31, 1997.............................. 5
Unaudited Statements of Operations - LandCARE USA, Inc.
Historical Consolidated for the Three Months
and Six Months ended June 30, 1998 and 1997
and Pro Forma Combined for the Three Months
and Six Months ended June 30, 1998 and 1997.... 6
Unaudited Consolidated Statement of Changes in
Stockholders' Equity - LandCARE USA, Inc.
for the six month period ended June 30,
1998........................................... 8
Unaudited Historical Consolidated Statements of Cash
Flows - LandCARE USA, Inc. for the Six
Months ended June 30, 1998 and 1997............ 9
Notes to the Consolidated and Combined Financial
Statements............................................. 10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 16
Part II - Other Information
Item 1 - Legal Proceedings................................. 22
Item 2 - Recent Sales of Unregistered Securities.......... 22
Item 6 - Exhibits and Reports on Form 8-K................. 22
Signature................................................... 23
2
LANDCARE USA, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL INFORMATION
LandCARE USA, Inc., a Delaware corporation, ("LandCARE" or the
"Company"), was founded in 1997 to be a national provider of comprehensive
landscape and tree services to the commercial and institutional markets
and to pursue the consolidation of the highly fragmented landscape and
tree service industry. On June 9, 1998, LandCARE completed its initial
public offering (the "IPO") of 5,000,000 shares of its common stock, par
value $.01 per share (the "Common Stock"). Simultaneous with the
completion of the IPO, LandCARE acquired: Trees, Inc. ("Trees"), Four
Seasons Landscape and Maintenance, Inc. ("Four Seasons"), Southern Tree &
Landscape Co., Inc. ("Southern Tree"), D.R. Church Landscape Co., Inc.
("Church"), Ground Control Landscaping, Inc. ("Ground Control"), Arteka
Corporation ("Arteka"), and Desert Care Landscaping, Inc. ("Desert Care"),
(collectively referred to herein as the "Founding Companies") for $19.9
million in cash and 5,162,645 shares of Common Stock (the "Mergers"). In
connection with the IPO, the Company granted the underwriters an option to
acquire up to 750,000 additional shares of Common Stock at $8.00 per share
to cover over-allotments. On June 29, 1998, the underwriters exercised
such over-allotment option in part, electing to acquire 659,900 shares of
Common Stock. The Company intends to continue to acquire additional
companies, through merger or purchase, to expand its national operations.
Prior to the acquisition of the Founding Companies, LandCARE had not
conducted any revenue generating activities of its own. For the period
from inception through June 9, 1998, all of LandCARE'S activity was
related to the completion of the IPO and the Mergers. LandCARE's
expenditures from the date of inception through the completion of the IPO
were advanced by Notre Capital Ventures II, L.L.C. ("Notre"). In exchange,
Notre received 1,565,158 shares of LandCARE'S Common Stock, of which
1,296,408 shares were exchanged for 1,296,408 shares of LandCARE'S
Restricted Voting Common Stock.
Operating results for interim periods are not necessarily indicative
of the results for a full year. The financial statements included herein
should be read in conjunction with the Unaudited Pro Forma Combined
Financial Statements of the Company and the related notes thereto, the
Financial Statements of the Company and the related notes thereto, the
Financial Statements of LandCARE, Trees, Four Seasons, Southern Tree,
Church, Ground Control, Arteka, and Desert Care and related notes thereto,
and management's discussion and analysis of financial condition and
results of operations related thereto, all of which are included in the
Company's Registration Statement on Form S-1 (No. 333-48215), as amended
(the "Registration Statement"), filed with the United States Securities
and Exchange Commission in connection with the IPO.
For financial statement purposes, Trees, one of the Founding
Companies, has been identified as the accounting acquirer. Accordingly,
the historical financial information included herein represents the
information of Trees prior to the IPO and the Mergers and the consolidated
results of the Company subsequent to the IPO and the Mergers. The Mergers
were accounted for using the purchase method of accounting. The
allocations of the purchase price to the assets acquired and the
liabilities assumed from the Founding Companies have been initially
assigned and recorded based on preliminary estimates of fair value and may
be revised as additional information concerning the valuation of such
assets and liabilities becomes available.
3
The combined pro forma financial information for the three- and six-month
periods ended June 30, 1998 and 1997 includes the results of LandCARE combined
with the Founding Companies as if the Mergers had occurred at the beginning of
the periods. The pro forma financial information includes the effects of (i) the
IPO, (ii) the Mergers, (iii) certain reductions in salaries and benefits to the
former owners of the Founding Companies to which they agreed prospectively, (iv)
certain reductions in lease expense paid to the former owners of the Founding
Companies to which they agreed prospectively, (v) elimination of non-recurring,
non-cash compensation charges related to shares of Common Stock issued to
management, (vi) amortization of goodwill resulting from the Mergers, (vii)
decreases in interest expense resulting from the repayment of substantially all
the Founding Companies' outstanding debt, and (viii) adjustments to the
provisions for federal and state income taxes.
4
LANDCARE USA, INC.
HISTORICAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................... $ 1,231 $ 2,899
Accounts receivable, net ..................... 23,218 6,893
Inventories .................................. 2,788 --
Deferred tax assets .......................... -- 743
Other current assets ......................... 1,644 465
------- -------
Total current assets ...................... 28,881 11,000
PROPERTY AND EQUIPMENT, net ..................... 20,590 9,020
GOODWILL, net ................................... 49,417 --
OTHER ASSETS .................................... 712 339
------- -------
Total assets .............................. $99,600 $20,359
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ........ $12,902 $ 5,527
Payable to related party ..................... -- 2,424
Current maturities of long-term debt ......... 25 335
Deferred tax liability ....................... 1,043 --
Other current liabilities .................... 237 193
------- -------
Total current liabilities ................. 14,207 8,479
LONG-TERM DEBT, net ............................. 170 484
OTHER LONG-TERM LIABILITIES ..................... 584 515
DEFERRED TAX LIABILITY .......................... 2,795 1,813
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000
shares authorized; none issued and
outstanding ................................ -- --
Common stock, $.01 par value, 100,000,000
shares authorized; 13,381,943 and 1,863,137
shares issued and outstanding, at June 30,
1998 and December 31, 1997, respectively ... 134 19
Additional paid-in capital ................... 79,937 689
Retained earnings ............................ 1,773 8,360
------- -------
Total stockholders' equity ................ 81,844 9,068
------- -------
Total liabilities and stockholders' equity $99,600 $20,359
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
LANDCARE USA, INC.
UNAUDITED HISTORICAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
Three Months Ended Six Months Ended
June 30 June 30
----------------------- ---------------------
1998 1997 1998 1997
----------- ---------- ---------- ---------
REVENUES ............................... $ 23,164 $ 11,918 $ 37,004 $ 23,239
COST OF SERVICES ....................... 18,504 10,257 30,862 20,159
-------- -------- -------- --------
Gross profit ........................... 4,660 1,661 6,142 3,080
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ............................... 2,820 780 3,538 1,944
-------- -------- -------- --------
Income from operations ................. 1,840 881 2,604 1,136
OTHER INCOME (EXPENSE):
Interest expense ....................... (121) (67) (185) (138)
Other income, net ...................... 74 584 100 635
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES ............. 1,793 1,398 2,519 1,633
INCOME TAX PROVISION ................... 803 536 1,080 626
-------- -------- -------- --------
NET INCOME ............................. $ 990 $ 862 $ 1,439 $ 1,007
======== ======== ======== ========
NET INCOME PER SHARE:
BASIC .................................. $ 0.19 $ 0.46 $ 0.41 $ 0.54
DILUTED ................................ $ 0.19 $ 0.46 $ 0.41 $ 0.54
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC .................................. 5,100 1,863 3,490 1,863
DILUTED ................................ 5,112 1,863 3,503 1,863
The accompanying notes are an integral part of these consolidated financial
statements.
6
LANDCARE USA, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
-------- ------- -------- -------
REVENUES ........................... $ 38,288 $30,595 $ 64,928 $54,127
COST OF SERVICES ................... $ 29,658 $24,382 $ 51,688 $43,360
-------- ------- -------- -------
Gross profit ....................... $ 8,630 $ 6,213 $ 13,240 $10,767
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ........................... 5,206 3,638 9,021 7,213
-------- ------- -------- -------
Income from operations ............. 3,424 2,575 4,219 3,554
OTHER INCOME (EXPENSE):
Interest expense ................... (3) -- (3) --
Other income, net .................. 104 722 160 787
-------- ------- -------- -------
INCOME BEFORE INCOME TAXES ......... 3,525 3,297 4,376 4,341
INCOME TAX PROVISION ............... 1,586 1,483 1,967 1,953
-------- ------- -------- -------
NET INCOME ......................... $ 1,939 $ 1,814 $ 2,409 $ 2,388
======== ======= ======== =======
NET INCOME PER SHARE:
BASIC .............................. $ 0.15 $ 0.14 $ 0.19 $ 0.19
DILUTED ............................ $ 0.15 $ 0.14 $ 0.19 $ 0.19
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC .............................. 12,737 12,737 12,729 12,729
DILUTED ............................ 12,749 12,737 12,742 12,729
The accompanying notes are an integral part of these combined financial
statements.
7
LANDCARE USA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK Additional Total
------------ Paid-In Retained Stockholders'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- -------- ------
BALANCE, December 31, 1997 ...... 1,863,137 $ 19 $ 689 $ 8,360 $ 9,068
Issuance of shares to
Notre ........................ 1,565,158 16 11,253 -- 11,269
Issuance of management,
consultant and director
shares ....................... 994,240 10 7,149 -- 7,159
Acquisition of Founding
Companies and LandCARE ....... 3,299,508 33 23,721 -- 23,754
IPO, net of offering costs ... 5,659,900 56 37,125 -- 37,181
Distribution to
stockholders ................. -- -- -- (8,026) (8,026)
Net income ................... -- -- -- 1,439 1,439
---------- ------- ------- -------- --------
BALANCE, June 30, 1998 .......... 13,381,943 $ 134 $79,937 $ 1,773 $ 81,844
========== ======= ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
8
LANDCARE USA, INC.
UNAUDITED HISTORICAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended
June 30
--------------------
1998 1997
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $ 1,439 $ 1,007
Adjustments to reconcile net income to net
cash provided by operating activities --
Depreciation and amortization ................... 1,452 555
Gain on sale of equipment ....................... -- (88)
Deferred income tax provision ................... 993 --
Changes in assets and liabilities --
Accounts receivable, net ..................... (1,332) (1,054)
Other current assets ......................... (361) (28)
Other assets and other liabilities ........... (394) (53)
Accounts payable and accrued expenses ........ (2,568) (1,096)
-------- -------
Net cash used in operating activities ..... (771) (757)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment ...... -- 91
Purchases of property and equipment ................ (3,501) (369)
Cash paid for Founding Companies, net of
cash acquired ...................................... (11,795) --
-------- -------
Net cash used in investing activities ..... (15,296) (278)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issuance costs ................................ (275) --
Payments on long-term debt ......................... (16,636) (153)
Proceeds from issuance of Common Stock, net of
offering Costs ..................................... 39,336 --
Distribution to stockholders ....................... (8,026) --
-------- -------
Net cash provided by (used in)
financing activities ...................... 14,399 (153)
-------- -------
NET DECREASE IN CASH .................................. (1,668) (1,188)
CASH, beginning of period ............................. 2,899 4,369
-------- -------
CASH, end of period ................................... 1,231 3,181
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for --
Interest ........................................ $ 35 $ 33
Income taxes .................................... $ 580 $ 62
The accompanying notes are an integral part of these consolidated financial
statements.
9
LANDCARE USA, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
LandCARE USA, Inc., a Delaware corporation, ("LandCARE" or the
"Company"), was founded in 1997 to be a national provider of comprehensive
landscape and tree services to the commercial and institutional markets
and to pursue the consolidation of the highly fragmented landscape and
tree service industry. On June 9, 1998, LandCARE completed its initial
public offering (the "IPO") of 5,000,000 shares of its common stock, par
value $.01 per share (the "Common Stock"). Simultaneous with the
completion of the IPO, LandCARE acquired: Trees, Inc. ("Trees"), Four
Seasons Landscape and Maintenance, Inc. ("Four Seasons"), Southern Tree &
Landscape Co., Inc. ("Southern Tree"), D.R. Church Landscape Co., Inc.
("Church"), Ground Control Landscaping, Inc. ("Ground Control"), Arteka
Corporation ("Arteka"), and Desert Care Landscaping, Inc. ("Desert Care"),
(collectively referred to herein as the "Founding Companies") for $19.9
million in cash and 5,162,645 shares of Common Stock (the "Mergers"). In
connection with the IPO, the Company granted the underwriters an option to
acquire an additional 750,000 shares of Common Stock at $8.00 per share to
cover over-allotments. On June 29, 1998, the underwriters exercised such
over-allotment option in part, electing to acquire 659,900 shares of
Common Stock. The Company intends to continue to acquire additional
companies, through merger or purchase, to expand its national operations.
BASIS OF PRESENTATION
HISTORICAL STATEMENTS OF OPERATIONS. For financial statement
purposes, Trees, one of the Founding Companies, has been identified as the
accounting acquirer. Accordingly, the historical financial information
included herein represents the information of Trees prior to the IPO and
the Mergers and the consolidated results of the Company subsequent to the
IPO and the Mergers. The Mergers were accounted for using the purchase
method of accounting. The allocations of the purchase price to the assets
acquired and the liabilities assumed from the Founding Companies have been
initially assigned and recorded based on preliminary estimates of fair
value and may be revised as additional information concerning the
valuation of such assets and liabilities becomes available.
PRO FORMA STATEMENTS OF OPERATIONS. The pro forma financial
information for the three- and six- month periods ended June 30, 1998 and
1997 includes the results of LandCARE combined with the Founding Companies
as if the Mergers had occurred at the beginning of the period. The pro
forma financial information includes the effects of (i) the IPO, (ii) the
Mergers, (iii) certain reductions in salaries and benefits to the former
owners of the Founding Companies to which they agreed prospectively, (iv)
certain reductions in lease expense paid to the former owners of the
Founding Companies to which they agreed prospectively, (v) elimination of
non-recurring, non-cash compensation charges related to shares of Common
Stock issued to management, (vi) amortization of goodwill resulting from
the Mergers, (vii) decreases in interest expense resulting from the
repayment of substantially all of the Founding Companies' outstanding
debt, and (viii) adjustments to the provisions for federal and state
income taxes. The pro forma financial information may not be comparable to
and may not be indicative of the Company's post-acquisition results of
operations because the Founding Companies were not under common control or
management.
10
The pro forma adjustments are based on estimates, available
information and certain assumptions which may be revised as additional
information becomes available. The pro forma combined statements of
operations do not purport to represent what the Company's consolidated
results of operations would actually have been if such transactions had in
fact occurred on those dates and are not necessarily representative of the
Company's results of operations for any future period. Since the Founding
Companies were not under common control or management, historical
consolidated results may not be comparable to, or indicative of, future
performance.
INTERIM FINANCIAL INFORMATION. The accompanying unaudited interim
financial statements are prepared pursuant to the rules and regulations
for reporting on Form 10-Q. Accordingly, certain information and footnotes
required by generally accepted accounting principles for complete
financial statements are not included herein. The Company believes all
adjustments necessary for a fair presentation of these interim statements
have been included and are of a normal and recurring nature. The interim
statements should be read in conjunction with the financial statements and
related notes thereto included in the Company's Registration Statement on
Form S-1 (No. 333-48215), as amended, filed with the United States
Securities and Exchange Commission in connection with the IPO.
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.
RECLASSIFICATIONS. Certain reclassifications have been made to
the prior period amounts to conform to current period presentations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There were no significant changes in the accounting policies of the
Company during the periods presented. For a description of these policies,
refer to Note 4 of Notes to Financial Statements of LandCARE and Note 2 of
Notes to Financial Statements of Trees included in the Company's
Registration Statement.
3. CREDIT FACILITY
Effective June 9, 1998, the Company entered into a credit agreement
with The First National Bank of Chicago NBD (the "Credit Facility"). The
Credit Facility provided the Company with a revolving line of credit of up
to $50 million, which may be used for general corporate purposes,
including the repayment or refinancing of indebtedness of the Founding
Companies and financing future acquisitions, capital expenditures and
working capital. On July 28, 1998, the Credit Facility was amended to
increase the Credit Facility to $55 million and to add Bankers Trust
Company and NationsBank, N.A. as co-lenders under the facility. The Credit
Facility is secured by the stock of the Founding Companies. Advances under
the Credit Facility bear interest at the bank's designated prime lending
rate. At the Company's option, the loans may bear interest based on the
Eurodollar rate plus a margin ranging from 57.5 to 120 basis points,
depending on the ratio of the Company's total debt to its earnings before
interest, taxes, depreciation and amortization for the previous four
quarters. Commitment fees of 17.5 to 30 basis points per annum are payable
on the total facility, based on the same ratios. The Credit Facility
contains a provision for standby letters of credit up to $5 million. The
Credit Facility prohibits the payment of dividends by the Company,
restricts the Company's incurring or assuming other indebtedness and
requires the
11
Company to comply with certain financial covenants, including a minimum
net worth, leverage ratio and minimum fixed charge coverage ratio. The
Credit Facility will terminate and all amounts outstanding thereunder, if
any, will be due and payable on May 31, 2001. As of June 30, 1998, the
Company had no amounts outstanding under the Credit Facility.
4. CAPITAL STOCK
On June 9, 1998, the Company completed the IPO, which involved the
sale by the Company of 5,000,000 shares of Common Stock at a price to the
public of $8.00 per share. In connection with the IPO, the Company granted
the underwriters an option to acquire up to 750,000 additional shares of
Common Stock at $8.00 per share to cover over-allotments. On June 29,
1998, the underwriters exercised such over-allotment option in part,
electing to acquire 659,900 shares of Common Stock. The net proceeds to
the Company from the IPO (after deducting underwriting discounts,
commissions and IPO expenses) were approximately $37.2 million. Of this
amount, $19.9 million was used to pay the cash portion of the purchase
price relating to the Mergers of the Founding Companies and the remainder
was used to repay approximately $16.6 million of outstanding indebtedness
of the Founding Companies.
As a result of the Merger, the Company's historical capital
structure as of December 31, 1997, has been restated to give effect to the
exchange of Trees' then outstanding shares for 1,863,137 shares of LandCARE
Common Stock. In conjunction with the IPO and the Mergers, the Company
issued (i) 1,565,158 shares of Common Stock to Notre; (ii) 994,240
shares of Common Stock to management, consultants and directors of
LandCARE; and (iii) 3,299,508 shares of Common Stock (excluding 1,863,137
shares issued to Trees) to owners of the Founding Companies as a
result of the Mergers.
On July 14, 1998, the Company's registration statement registering
5,000,000 additional shares of Common Stock to be issued from time-to-time
in connection with future acquisitions was declared effective by the
Securities and Exchange Commission.
5. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "'Earnings
Per Share," which established new standards for computing and presenting
earnings per share. The provisions of the statement are effective for
fiscal years ending after December 15, 1997, and accordingly have been
adopted in the accompanying financial statements.
The historical periods ended June 30, 1997 represent the results of
operations of Trees and the shares of common stock presented to calculate
earnings per share for these periods are those issued to Trees in the
Mergers. The computation of historical net income per share for the three-
and six-month periods ended June 30, 1998 and pro forma net income per
share for the three- and six-month periods ended June 30, 1997 and 1998 is
based on the weighted average of Common Stock outstanding as of June 30,
1998 which includes shares as follows:
Issued in consideration for acquisition of
Founding Companies............................... 5,162,645
Sold pursuant to the IPO and the over-allotment.. 5,659,900
Issued to Notre ................................ 1,565,158
Issued to management and directors............... 994,240
---------
13,381,943
==========
12
Basic and diluted historical net income per share is computed based on the
following information:
Three Months Ended, Six Months Ended,
June 30, June 30,
--------------------- ------------------
(in thousands, except per share amounts)
1998 1997 1998 1997
--------- ---------- ------- ---------
Net income ........................... $ 990 $ 862 $1,439 $1,007
BASIC:
Basic weighted average shares ........ 5,100 1,863 3,490 1,863
DILUTED:
Basic weighted average shares ........ 5,100 1,863 3,490 1,863
Dilutive securities:
Options ......................... 12 -- 13 --
------ ------ ------ ------
Diluted weighted average shares ...... 5,112 1,863 3,503 1,863
====== ====== ====== ======
NET INCOME PER SHARE:
Basic .......................... $ 0.19 $ 0.46 0.41 $ 0.54
====== ====== ====== ======
Diluted ........................ $ 0.19 $ 0.46 0.41 $ 0.54
====== ====== ====== ======
Basic and diluted pro forma net income per share is computed based on the
following information:
Three Months Ended, Six Months Ended,
June 30, June 30,
--------------------- -----------------
(in thousands, except per share amounts)
1998 1997 1998 1997
--------- ---------- -------- -------
Net income ........................... $1,939 $1,814 $2,409 $2,388
BASIC:
Basic weighted average shares ........ 12,737 12,737 12,729 12,729
DILUTED:
Basic weighted average shares ........ 12,737 12,737 12,729 12,729
Dilutive securities:
Options ......................... 12 -- 13 --
------ ------ ------ ------
Diluted weighted average shares ...... 12,749 12,737 12,742 12,729
====== ====== ====== ======
NET INCOME PER SHARE:
Basic .......................... $ 0.15 $ 0.14 0.19 $ 0.19
====== ====== ====== ======
Diluted ........................ $ 0.15 $ 0.14 0.19 $ 0.19
====== ====== ====== ======
13
6. INCOME TAXES
The Company intends to file a consolidated federal income tax return
which includes the operations of the Founding Companies for periods
subsequent to the acquisition date. The Founding Companies will each file
a "short period" federal income tax return through the date of the
Mergers.
The provision for income taxes included in the Unaudited Historical
Consolidated Statements of Operations for the three- and six-month periods
ended June 30, 1998 and the Unaudited Pro Forma Combined Statements of
Operations for the three- and six-month periods ended June 30, 1998,
assumes the application of statutory federal and state income tax rates
and the non-deductibility of goodwill amortization. Interim period income
tax provisions are based upon estimates of annual effective tax rates, and
events may occur which will cause such rates to vary.
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that have
arisen in the ordinary course of business. While it is not possible to
predict the outcome of such proceedings with certainty, Management's
assessment is that none of these matters are anticipated to have a
material adverse effect on the financial position, liquidity or results of
operations of the Company.
8. RECENT PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," which 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 Option No. 25
must make pro forma disclosures of net income and earnings per share as if
the fair value method of accounting prescribed in SFAS No. 123 had been
applied. The Company will measure compensation expense attributable to
stock options based on the method prescribed in APB Opinion No. 25 and
will provide the required pro forma disclosure of net income and earnings
per share, if applicable, in notes to future consolidated annual financial
statements.
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.
9. SUBSEQUENT EVENTS
Subsequent to June 30, 1998, the Company acquired six landscape
maintenance and installation companies with annualized revenues totaling
approximately $60 million. The acquired companies were: Clean Cut, Inc.,
Horticultural Landscapes, Inc., Continental Landscape Management, Inc.
Landscape West, Inc., Gator & Gator Landscaping Company and Landscape
Resources, Inc. Two of such acquisitions will be accounted for utilizing
the "pooling-of-interests" method of accounting with the remaining four
acquisitions being accounted for under the "purchase" method of
accounting. The aggregate consideration paid by the Company to acquire
these companies was approximately $12.1 million in cash
14
and 2,804,470 shares of Common Stock (excluding assumed indebtedness of
approximately $10.9 million). The cash portion of the consideration was
provided by borrowings under the Company's Credit Facility.
On July 14, 1998, the Company's registration statement registering
5,000,000 additional shares of Common Stock to be issued from time-to-time
in connection with future acquisitions was declared effective by the
Securities and Exchange Commission.
15
LANDCARE USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Unaudited
Pro Forma Combined Financial Statements of the Company and related notes
thereto, the individual financial statements of LandCARE and the seven Founding
Companies and related notes thereto and management's discussion and analysis of
financial condition and results of operations related thereto which are included
in the Company's Registration Statement. This discussion contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements are based on the Company's current plans and
expectations and involve risks and uncertainties that could cause actual future
activities and results of operations to be materially different from those set
forth in the forward-looking statements. Important factors that could cause
actual results to differ include, among others, risks associated with
acquisitions, volatility of stock price, changes in government regulations,
competition, integration of operations and growth of newly acquired businesses
and other risks detailed in the Company's reports filed with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
On June 9, 1998, the Company acquired the Founding Companies in connection
with its initial public offering. For financial statement presentation, however,
Trees has been identified as the "accounting acquirer." Accordingly, the
historical financial information included herein represents the information of
Trees prior to the IPO and the Mergers and the consolidated results of the
Company subsequent to the IPO and the Mergers. In addition, the Historical
Consolidated Statements of Operations for the three- and six-month periods ended
June 30, 1998 reflect income taxes provided at the statutory federal and state
income tax rates prior to non-deductible goodwill amortization.
The pro forma combined financial information for the three- and six-months
ended June 30, 1998 and 1997 includes the results of LandCARE combined with the
Founding Companies as if the Mergers had occurred at the beginning of each
respective three-month and six-month period. The pro forma financial information
includes the effects of (i) the IPO; (ii) the Mergers; (iii) certain reductions
in salaries and benefits to the former owners of the Founding Companies to which
they agreed prospectively; (iv) certain reductions in lease expense paid to the
former owners of the Founding Companies to which they agreed prospectively; (v)
elimination of non-recurring, non-cash compensation charges related to pre-IPO
issuance of shares of Common Stock to management; (vi) amortization of goodwill
resulting from the Mergers; (vii) the repayment of substantially all of the
outstanding debt at the Founding Companies, including the corresponding
decreases in interest expense; and (viii) adjustments to the provisions for
federal and state income taxes. The pro forma financial information may not be
comparable to and may not be indicative of the Company's post-acquisition
results of operations because the Founding Companies were not under common
control or management.
Interim results may also be materially affected by the timing and magnitude
of acquisitions, assimilation costs, gain or loss of a material customer and
variations in the services provided. Accordingly, the Company's operating
results for any three-month or six-month period are not necessarily indicative
of the results that may be achieved for any subsequent three-month or six-month
period or for a full fiscal year.
16
PRO FORMA COMBINED RESULTS FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1998 AND
1997
The following table sets forth certain selected pro forma combined financial
data and such data as a percentage of pro forma combined revenues for the
periods indicated:
PRO FORMA COMBINED
THREE MONTH PERIOD ENDED
JUNE 30
---------------------------------------
1998 1997
------------------ -------------------
(dollars in thousands)
Revenues ......................... $38,288 100.0% $30,595 100.0%
Cost of services ................. 29,658 77.5 24,382 79.7
------ ------ ------ ------
Gross profit ................ 8,630 22.5 6,213 20.3
Selling, general and
administrative expenses .......... 3,941 10.3 3,324 10.9
Corporate overhead ............... 975 2.5 -- --
Goodwill
amortization ..................... 290 0.8 314 1.0
------ ------ ------ ------
Income from operations ........... 3424 8.9 2,575 8.4
Interest and other income,
net .............................. 101 0.3 722 2.4
====== ====== ====== ======
Income before income
taxes ............................ $3,525 9.2% $3,297 10.8%
====== ====== ====== ======
REVENUES. The Company's pro forma combined revenues increased by $7.7
million, or 25.1%, to $38.3 million for the three months ended June 30, 1998
from $30.6 million for the corresponding period of 1997 due primarily to an
increase of $4.1 million in pro forma combined maintenance revenues for utility
line clearing at Trees. This increase in Trees' maintenance revenues was
attributable to the addition of two new contracts during 1998 and the expansion
of several other contracts by utility customers. The Company's pro forma
combined landscape maintenance revenues increased by $1.2 million, principally
due to: (i) the acquisition by Arteka of two companies during December 1997
whose operations are exclusively maintenance; and (ii) the addition of new
landscape maintenance contracts at Four Seasons and Southern Tree. The Company's
pro forma combined landscape installation revenues increased by $2.4 million
between the periods, which increase was primarily attributable to early startup
of installation projects during 1998 at Church and Arteka.
GROSS PROFITS. The Company's pro forma combined gross profit increased by
$2.4 million, or 38.9%, to $8.6 million for the three months ended June 30, 1998
from $6.2 million for the corresponding period of 1997. As a percentage of pro
forma combined revenues, pro forma combined gross profit increased to 22.5% for
the three months ended June 30, 1998 from 20.3% for the corresponding period of
1997. The margin increase was primarily due to (i) budget increases on several
utility line clearing contracts at Trees resulting in higher overtime billings;
(ii) an increase in maintenance contracts at Four Seasons' two newest branches,
which were opened during late 1996 and early 1997; (iii) the inclusion of
several high margin installation jobs at Church; and (iv) lower material costs
at Ground Control.
SELLING GENERAL AND ADMINISTRATIVE EXPENSES. Pro forma combined selling,
general and administrative expenses increased by $0.6 million to $3.9 million
for the three months ended June 30, 1998 from $3.3 million for the corresponding
period of 1997. The increase in pro forma combined selling, general and
administrative expenses was primarily attributable to the inclusion of
additional sales personnel at Southern Tree and an increase at Arteka related to
the two acquisitions completed during December 1997. As a percentage of pro
forma combined revenues, pro forma combined selling, general and administrative
expenses decreased to 10.3% for the three months ended June 30, 1998 from 10.9%
for the corresponding period of 1997.
CORPORATE OVERHEAD. Corporate overhead increased to $1.0 million for the
three months ended June 30, 1998 compared with zero for the corresponding period
of 1997. The increase in corporate overhead was attributable to the
establishment of the LandCARE corporate office and an increase in professional
fees associated with being a
17
public company. As a percentage of pro forma combined revenues, corporate
overhead totaled 2.5% for the three months ended June 30, 1998.
INTEREST AND OTHER INCOME, NET. Pro forma combined interest and other
income, net, decreased by $0.6 million, or 86%, to $0.1 million for the three
months ended June 30, 1998 from $0.7 million for the corresponding period of
1997 due primarily to a $0.5 million insurance settlement received at Trees
during 1997.
PRO FORMA COMBINED RESULTS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND
1997
The following table sets forth certain selected pro forma financial data as
a percentage of pro forma revenues for the periods indicated:
PRO FORMA
SIX MONTH PERIOD ENDED
JUNE 30
-------------------------------------
1998 1997
------------------ ------------------
(dollars in thousands)
Revenues .......................... $64,928 100.0% $54,127 100.0%
Cost of services .................. 51,688 79.6 43,360 80.1
------ ------ ------ ------
Gross profit ................. 13,240 20.4 10,767 19.9
Selling, general and
administrative expenses ........... 7,327 11.3 6,584 12.2
Corporate overhead ................ 1,081 1.7 -- --
Goodwill
amortization ...................... 613 0.9 629 1.2
------ ------ ------ ------
Income from operations ............ 4,219 6.5 3,554 6.5
Interest and other income,
net ............................... 157 0.2 787 1.5
====== ====== ====== ======
Income before income
taxes ............................. $4,376 6.7% $4,341 8.0%
====== ====== ====== ======
REVENUES. The Company's pro forma combined revenues increased by $10.8
million, or 20.0%, to $64.9 million for the six months ended June 30, 1998 from
$54.1 million for the corresponding period of 1997, primarily due to an increase
of $6.5 million in pro forma combined maintenance revenues for utility line
clearing at Trees. The increase in line clearing revenues was attributable to
the addition of several new contracts and budget increases by utility customers
on several other contracts. This increase was partially offset by the loss of a
line clearing contract in a competitive bidding process. The Company's pro forma
combined landscape maintenance revenues increased by $2.0 million due primarily
to: (i) the addition of new maintenance contracts at Four Seasons and Southern
Tree; (ii) an increase in commercial tree services at Four Seasons; and (iii)
the acquisition by Arteka of two landscape maintenance companies during December
1997. The Company's pro forma combined landscape installation revenues increased
by $2.0 million due primarily to the inclusion of several large installation
jobs at Church and the earlier startup of installation work in the Midwest by
Church and Arteka due to mild winter conditions during 1998.
GROSS PROFIT. The Company's pro forma combined gross profit increased by
$2.4 million, or 23.0%, to $13.2 million for the six months ended June 30, 1998
from $10.8 million for the corresponding period of 1997. As a percentage of pro
forma combined revenues, pro forma combined gross profit increased to 20.4% for
the six months ended June 30, 1998 from 19.9% for the same period of 1997. Gross
margin improvements were realized at Trees, Four Seasons and Church due
primarily to: (i) budget increases on several line clearing contracts at Trees
resulting in higher overtime billings; (ii) the addition of new maintenance
contracts at Four Seasons' two newest branches; and (iii) the inclusion of
higher margin installation jobs at Church. The gross margin at Desert Care
decreased between the corresponding periods primarily because of weather related
inefficiencies experienced during the first quarter of 1998.
18
SELLING GENERAL AND ADMINISTRATIVE EXPENSES. Pro forma combined selling,
general and administrative expenses increased by $0.7 million, or 11.3%, to $7.3
million for the six months ended June 30, 1998 from $6.6 million for the
corresponding period of 1997. As a percentage of pro forma combined revenues,
pro forma combined selling, general and administrative expenses decreased to
11.3% for the six months ended June 30, 1998 from 12.2% for the corresponding
period of 1997. The increase in pro forma combined selling, general and
administrative expenses was primarily due to the addition of sales and
administrative personnel at Church and Southern Tree and an increase at Arteka
related to the two acquisitions completed during December 1997.
CORPORATE OVERHEAD. Corporate overhead increased to $1.1 million for the six
months ended June 30, 1998 from zero for the corresponding period of 1997. The
increase in corporate overhead was attributable to the establishment of the
LandCARE corporate office and an increase in professional fees associated with
being a public company. As a percentage of pro forma combined revenue, corporate
overhead totaled 1.7% for the six months ended June 30, 1998.
INTEREST AND OTHER INCOME, NET. Interest and other income, net, decreased by
$0.6 million, or 80.1%, to $0.2 million for the six months ended June 30, 1998
from $0.8 million for the corresponding period of 1997, and this decrease was
primarily attributable to the receipt of a $0.5 million insurance settlement at
Trees during 1997.
HISTORICAL RESULTS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30,
1998 AND 1997
The following discussion includes the historical operations of Trees prior
to the IPO and the Mergers, which were consummated on June 9, 1998, and the
consolidated operations of the Company for the period subsequent to the IPO and
the Mergers. The following table sets forth certain selected historical
financial data and such data as a percentage of historical revenues for the
periods indicated:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------------- ------------------------------------------
1998 % 1997 % 1998 % 1997 %
------- ----- ------ ----- -------- ----- ------ -----
(DOLLARS IN THOUSANDS)
Revenues ............... 23,164 100.0% 11,918 100.0% $ 37,004 100.0% 23,239 100.0%
Cost of services ....... 18,504 79.9 10,257 86.1 30,862 83.4 20,159 86.7
------ ----- ------ ----- -------- ----- ------ -----
Gross profit ......... 4,660 20.1 1,661 13.9 6,142 16.6 3,080 13.3
Selling, general and
administrative ......... 1,742 7.5 780 6.5 2,460 6.7 1,944 8.4
Corporate overhead ..... 975 4.2 -- -- 975 2.6 -- --
Goodwill amortization .. 103 0.5 -- -- 103 0.3 -- --
------ ----- ------ ----- -------- ----- ------ -----
Income from
operations ............. 1,840 7.9 881 7.4 2,604 7.0 1,136 4.9
Interest and other
income ................. (47) (0.2) 517 4.3 (85) (0.2) 497 2.1
====== ===== ====== ===== ======== ===== ====== =====
Income before income
taxes .................. 1,793 7.7% 1,398 11.7% 2,519 6.8 % 1,633 7.0 %
====== ===== ====== ===== ======== ===== ====== =====
REVENUES. Historical revenues increased to $23.2 million and $37.0 million
for the three- and six-months ended June 30, 1998, respectively, from $11.9
million and $23.2 million for the three-month and six-month periods ended June
30, 1997, respectively, primarily due to the acquisition of the Founding
Companies. Excluding the acquisition of the Founding Companies, revenues
increased between the corresponding periods due to the addition of new utility
line clearing contracts and the expansion of several other contracts by utility
customers.
GROSS PROFIT. Gross profit increased to $4.7 million and $6.1 million for
the three- and six-month periods ended June 30, 1998, respectively, from $1.7
million and $3.1 million for the three- and six-months ended June 30, 1997,
respectively, primarily due to the acquisition of the Founding Companies.
Excluding the acquisition of the Founding Companies, gross profit increased due
to the inclusion of overtime on two utility line clearing contracts. As a
percentage of revenues, gross profit increased to 20.1% and 16.6% for the
three-month and six-month periods ended June 30, 1998, respectively, from 13.9%
and 13.3% for the three and six months ended June 30, 1997, respectively.
SELLING GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $1.7 million and $2.5 million for the
three-month and six-month periods ended June 30, 1998, respectively, from
19
$0.8 million and $1.9 million for the three-month and six-month periods ended
June 30, 1997, respectively, primarily due to the acquisition of the Founding
Companies.
CORPORATE OVERHEAD. Corporate overhead totaled $1.0 million for each of the
three-month and six-month periods ended June 30, 1998. Corporate overhead is
comprised of LandCARE corporate salaries and professional fees associated with
being a public company. As a percentage of revenue, corporate overhead totaled
4.2% and 2.6% for the three-month and six-month periods ended June 30, 1998,
respectively.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income
(expense), net, decreased to an expense of $0.1 million for each of the
three-month and six-month periods ended June 30, 1998, respectively, from income
of $0.5 million for each of the three-month and six-month periods ended June 30,
1997, primarily due to the inclusion of a $0.5 million insurance settlement
received by Trees during 1997.
LIQUIDITY AND CAPITAL RESOURCES.
On June 4, 1998, the Company sold 5,000,000 shares of its Common Stock to
the public at $8.00 per share in an underwritten IPO. The net proceeds (after
deducting underwriters' commissions and IPO expenses) were $34.4 million. In
connection with the IPO, the Company had granted the underwriters an option to
acquire an additional 750,000 shares at $8.00 per share. On June 29, 1998, the
underwriters exercised this option on 659,900 shares, from which proceeds to the
Company totaled $4.9 million after deducting underwriting commissions. Of the
IPO proceeds, $19.9 million was used to pay the cash portion of the purchase
price of the Founding Companies and $16.6 million was used to repay
substantially all of the outstanding debt at the Founding Companies.
As of June 30, 1998, the Company had working capital of $14.7 million and no
outstanding long-term debt. Net cash used in operating activities totaled $0.8
million for the six months ended June 30, 1998. Net cash used in investing was
$15.3 million for the six months ended June 30, 1998, of which $11.8 million
represents the cash paid for the Founding Companies (excluding Trees) net of
cash acquired. Net cash provided by financing activities was $14.4 million for
the six months ended June 30, 1998 and was comprised of $39.3 million of net
proceeds from the IPO (before accrued offering costs), offset by $16.6 million
of debt repayments at the Founding Companies subsequent to the IPO and $8.0
million of distributions to Trees' stockholders representing the cash paid for
Trees in the Merger.
Effective June 9, 1998, the Company entered into a credit agreement with The
First National Bank of Chicago NBD (the "Credit Facility"). The Credit Facility
provided the Company with a revolving line of credit of up to $50 million, which
may be used for general corporate purposes, including the repayment or
refinancing of indebtedness of the Founding Companies and financing future
acquisitions, capital expenditures and working capital. On July 28, 1998, the
Credit Facility was amended to increase the Credit Facility to $55 million and
to add Bankers Trust Company and NationsBank, N.A. as co-lenders under the
facility. The Credit Facility is secured by the stock of the Founding Companies.
Advances under the Credit Facility bear interest at the bank's designated prime
lending rate. At the Company's option, the loans may bear interest based on the
Eurodollar rate plus a margin ranging from 57.5 to 120 basis points, depending
on the ratio of the Company's total debt to its earnings before interest, taxes,
depreciation and amortization for the previous four quarters. Commitment fees of
17.5 to 30 basis points per annum are payable on the total facility, based on
the same ratios. The Credit Facility contains a provision for standby letters of
credit up to $5 million. The Credit Facility prohibits the payment of dividends
by the Company, restricts the Company's incurring or assuming other indebtedness
and requires the Company to comply with certain financial covenants, including a
minimum net worth, leverage ratio and minimum fixed charge coverage ratio. The
Credit Facility will terminate and all amounts outstanding thereunder, if any,
will be due and payable on May 31, 2001. As of June 30, 1998, the Company had no
amounts outstanding under the Credit Facility. As of August 13, 1998, the
Company had outstanding borrowings of $20.9 million on the Credit Facility
primarily related to the acquisitions completed during August 1998. (see Note 9
under "Notes to Consolidated and Combined Financial Statements" included
elsewhere herein)
20
The Company intends to aggressively pursue acquisition opportunities. The
Company's acquisition program may require significant additional capital. The
Company intends to seek additional capital as necessary to fund such
acquisitions through one or more funding sources that may include borrowings
under the Credit Facility or offerings of debt and/or equity securities of the
Company. Cash provided by operating activities may also be used to fund a
portion of future acquisitions. Although management believes that the Company
will be able to obtain sufficient capital to fund acquisitions, there can be no
assurances that such capital will be available to the Company at the time it is
required or on terms acceptable to the Company.
On July 14, 1998, the Company's registration statement registering 5,000,000
additional shares of Common Stock to be issued from time to time in connection
with future acquisitions was declared effective by the Securities and Exchange
Commission.
The Company currently operates in a decentralized information systems
environment and uses a variety of software, computer systems and related
technologies for internal management, accounting and reporting purposes and for
revenue-generating activities. With respect to the Year 2000 issue, management
recently undertook a study to determine the potential impact of Year 2000 on its
computer related systems (operating, accounting, reporting and administrative)
and to what extent its current computer systems will meet internal needs and the
needs of customers and suppliers. The Company has not yet developed an estimate
of the potential cost of any system upgrades which might be required or the
impact on the Company's results of operations and financial position. In
addition, the Company is currently assessing the impact of the Year 2000 issue
related to its customers and supplier to determine what impact non-compliance
would have on the Company's results of operations and financial position.
SEASONALITY AND CYCLICALITY. The Company has experienced and expects to
continue to experience variability in revenue and net income as a result of the
seasonal nature of the Company's business. Generally, the Company's revenues
from installation projects are concentrated during the warmer months of April to
October. Revenues from maintenance contracts remain relatively constant
throughout the year, except in colder climates, where landscape maintenance
contracts typically do not generate revenues in the winter unless snow removal
is contracted for by the customer. As a result, the gross margin from landscape
maintenance contracts can vary seasonally because the Company recognizes
revenues from the monthly payments from its landscape maintenance services in
full when they are due, rather than in proportion to the work performed. The
Company generally reports higher profit margins from landscape maintenance
services during winter months and significantly lower profit margins during peak
service periods in late spring and summer. The Company has not performed an
analysis to estimate the impact of accounting for revenue in proportion to the
work performed as compared with accounting for revenue from the monthly payments
from its landscape maintenance services in full when they are due; however, the
Company believes that combined gross margins would not have been or expect to be
materially different than historical actual gross margins. Most line clearing
contracts are not affected by seasonality. Line clearing contracts typically
have a lower profit margin than landscape maintenance and installation services.
Historically, the Founding Companies' maintenance services have not been
cyclical and have not been significantly affected by changes in economic
conditions. However, the Founding Companies landscape services operations have
experienced significant fluctuations based on weather, economic conditions, the
commercial real estate market and other factors beyond the control of the
Company. The Founding Companies collectively have a geographically broad
customer mix which may tend to mitigate regional seasonal and cyclical trends.
There can be no assurance, however, that period-to-period differences will not
occur in the future or that pronounced cyclical or seasonal patterns will not
emerge.
21
LANDCARE USA, INC.
PART II - - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings that have arisen in the
ordinary course of business. The Company does not believe that any of these
proceedings will have a material adverse effect on the financial position or
results of operations of the Company.
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities by
the Company during the three months ended June 30, 1997, that were not
registered under the Securities Act of 1933, as amended (the "Securities Act").
On June 9, 1998, the Company issued 5,162,645 shares (including 1,863,137
shares issued to Trees) of its $0.01 par value Common Stock to the stockholders
of the Founding Companies as part of the consideration for the Mergers. These
shares of Common Stock were issued without registration under the Securities Act
in reliance on the exemption provided by Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1- Amended and Restated Certificate of Incorporation of LandCARE USA,
Inc., as amended. (Filed as Exhibit 3.1 to the Registration
Statement on Form S-1 filed on June 4, 1998, and is incorporated
herein by reference (File No. 333-48215)).
3.2- Bylaws of LandCARE USA, Inc., as amended. (Filed as Exhibit 3.2 to
the Registration Statement on Form S-1 filed on June 4, 1998, and is
incorporated herein by reference (File No. 333-48215)).
4.1- Form of Certificate Evidencing Ownership of Common Stock of
LandCARE USA, Inc. (Filed as Exhibit 4.1 to the Registration
Statement on Form S-1 filed on June 4, 1998, and is incorporated
herein by reference (File No. 333-48215)).
10.1- Credit Agreement dated as of June 9, 1998, among LandCARE USA, Inc.
and The First National Bank of Chicago, as Agent (filed herewith).
27.1- Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K
None
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who has signed this report on behalf of
the Registrant and as the principal financial officer of the Registrant.
LANDCARE USA, INC.
Date: August 14, 1998 By: PETER C. FORBES
Peter C. Forbes
Senior Vice President and Chief Financial
Officer (Principal Accounting Officer)
23