<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number: 0-11917
THE DAVEY TREE EXPERT COMPANY
(Exact name of Registrant as specified in its charter)
Ohio 34-0176110
(State of Incorporation) (IRS Employer Identification No.)
1500 North Mantua Street
P. O. Box 5193
Kent, Ohio 44240-5193
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 673-9511
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $1 par value
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, and
(2) has been subject to such filing requirement for the past 90 days.
Yes X No
-- --
The disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate "market value" (See Item 5 hereof) of voting stock held by
non-affiliates of the Registrant at March 17, 1997 (excluding the total number
of Common Shares reported in Item 12 hereof), was $82,192,256.
Common Shares outstanding at March 17, 1997: 4,516,058.
Documents incorporated by reference: Portions of the Registrant's definitive
Proxy Statement for its 1997 Annual Meeting of Shareholders (Part III).
Index to Exhibits is located on sequential page 14.
<PAGE> 2
PART I
------
ITEM 1. BUSINESS.
GENERAL. The Davey Tree Expert Company, which was incorporated in 1909,
and its subsidiaries (the "Registrant") are in the business of providing
horticultural services to a variety of residential, commercial, corporate,
institutional and governmental customers. Horticultural services include the
treatment, preservation, maintenance, cultivation, planting and removal of
trees, shrubs and other plant life and also include the practices of
landscaping, tree surgery, tree feeding, tree spraying, line clearing for public
utilities, and related consultation and inventory services. Horticultural
services also involve the application of scientifically formulated fertilizers,
herbicides and insecticides with hydraulic spray equipment on residential and
commercial lawns.
COMPETITION AND CUSTOMERS. The Registrant is one of the largest
national organizations in the private horticultural services industry. The
Registrant competes with other national and local firms with respect to its
services, although the Registrant believes that no other firm, whether national
or local, offers the range of services that it offers.
Competition in private horticultural services is generally localized
but very active and widespread. The principal methods of competition are
advertising, customer service, image, performance and reputation. The
Registrant's program to meet its competition stresses the necessity for its
employees to have and project to the customers a thorough knowledge of
horticulture and utilization of modern, well-maintained equipment. Pricing is
not always a critical factor in a customer's decision. Pricing is, however, the
principal method of competition in providing horticultural services to utility
customers, although in most instances consideration is given to reputation and
past production performance.
The Registrant provides a wide range of horticultural services to
private companies, public utilities, local, state and federal agencies, and a
variety of industrial, commercial and residential customers. During 1996, the
Registrant had sales of approximately $55,000,000 (21% of total sales) to
Pacific Gas & Electric Company.
REGULATION AND ENVIRONMENT. The Registrant's facilities and operations,
in common with those of the industry generally, are subject to governmental
regulations designed to protect the environment. This is particularly important
with respect to the Registrant's services regarding insect and disease control,
because these services involve to a considerable degree the blending and
application of spray materials, which require formal licensing in most areas.
The constant changes in environmental conditions, environmental awareness,
technology and social attitudes make it necessary for the Registrant to maintain
a high degree of awareness of the impact such changes have on the market for its
services. The Registrant believes that it is in substantial compliance with
existing federal, state and local laws regulating the use of materials in its
spraying operations as well as the other aspects of its business that are
subject to any such regulation.
MARKETING. The Registrant solicits business from residential and
commercial customers principally through direct mail programs and to a lesser
extent through the placement of advertisements in national magazines and trade
journals and in local newspapers and "yellow pages" telephone directories.
Business from utility customers is obtained principally through negotiated
contracts and competitive bidding. All sales and services are carried out
through personnel who are direct employees. The Registrant does not generally
use agents and does not franchise its name or business.
2
<PAGE> 3
SEASONALITY. The Registrant's business is seasonal, primarily due to
fluctuations in horticultural services provided to residential and commercial
customers and to a lesser extent by budget constraints imposed on its utility
customers. Because of this seasonality, the Registrant has historically incurred
losses in the first quarter, while sales and earnings are generally highest in
the second and third quarters of the calendar year. Consequently, this has
created heavy demands for additional working capital at various times throughout
the year. The Registrant borrows primarily against bank commitments in the form
of a revolving credit agreement with two banks to provide the necessary funds.
OTHER FACTORS. Rapid changes in equipment technology require a constant
updating of equipment and processes to ensure competitive services to the
Registrant's clients. Also, the Registrant must continue to assure its
compliance with the Occupational Safety and Health Act. In keeping with these
requirements, and to equip the Registrant for continued growth, capital
expenditures in 1996 and 1995 were approximately $18,121,000 and $13,297,000,
respectively.
The Registrant owns several trademarks including "Davey", "Davey and
design", "Arbor Green", "Davey Tree and design", "Davey Expert Co. and design"
and "Davey and design (Canada)". Through substantial advertising and use, the
Registrant is of the opinion that these trademarks have become of value in the
identification and acceptance of its products and services.
EMPLOYEES. The Registrant employs between 5,200 and 5,800, depending
upon the season, and considers its employee relations to be good.
FOREIGN AND DOMESTIC OPERATIONS. The Registrant and its Canadian
subsidiaries sell the Registrant's service to customers in the United States and
Canada.
The Registrant does not consider its foreign operations to be material
and considers the risks attendant to its business with foreign customers, other
than currency exchange risks, to be not materially different from those
attendant to business with its domestic customers.
3
<PAGE> 4
ITEM 2. PROPERTIES.
The following table lists certain information with respect to major
properties owned by the Registrant and used in connection with its operations.
<TABLE>
<CAPTION>
LOCATION ACREAGE BUILDING SQ. FT.
- -------- ------- ----------------
<S> <C> <C>
Cincinnati, Ohio 2.5 8,800
Livermore, California 12.0 29,737
Winter Park, Florida 1.0 5,850
Chamblee, Georgia 1.9 6,200
East Dundee, Illinois 4.0 7,500
Indianapolis, Indiana 1.5 5,000
Troy, Michigan 2.0 7,200
Cheektowaga, New York 6.9 2,800
Bayport, New York 2.0 7,000
Charlotte, North Carolina 3.1 4,900
Kent, Ohio (multiple parcels)-Corporate Headquarters 105.0 111,608
Toledo, Ohio .5 4,300
Wooster, Ohio-Nursery 322.8 13,194
Columbus, Ohio 8.0 15,925
West Babylon, New York .9 14,100
Chantilly, Virginia 4.0 5,700
Downsview, Ontario, Canada .5 3,675
Baltimore, Maryland 3.4 22,500
Lancaster, New York 3.0 6,624
Bettendorf, Iowa .5 478
Richmond, Virginia .7 2,586
Mecklenburg County, North Carolina 15.6 -0-
Stow, Ohio 7.4 14,100
West Carlton Twp., Ontario, Canada 3.1 4,000
Nanaimo, British Columbia, Canada 1.0 4,742
Edmonton, Alberta, Canada .7 2,900
Houston, Texas 1.5 7,800
Plymouth, Minnesota 2.7 11,750
Gaithersburg, Maryland 2.1 7,200
Lachine, Quebec, Canada .5 2,300
Gibsonia, Pennsylvania 5.9 7,100
Lawrence, Pennsylvania 3.5 7,200
Jacksonville, Florida-Nursery 279.0 5,300
</TABLE>
The Registrant also rents approximately 60 other premises for office,
warehouse and storage use. The Registrant believes that all of these properties
have been adequately maintained and are suitable and adequate for its business
as presently conducted.
4
<PAGE> 5
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings, other than ordinary routine litigation
incidental to the business, to which the Registrant or any of its subsidiaries
is a party or of which any of their property is the subject. This routine
litigation is not material to the Registrant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of 1996 to a vote of
security holders, through the solicitation of proxies or otherwise.
Executive Officers of the Registrant (included pursuant to Instruction
3 to paragraph (b) of Item 401 of Regulation S-K). The executive officers of the
Registrant and their present positions and ages are as follows:
NAME POSITION AGE
- ---- -------- ---
R. Douglas Cowan President and Chief Executive Officer 56
David E. Adante Executive Vice President, Chief 45
Financial Officer and Secretary-Treasurer
Karl J. Warnke Executive Vice President and 45
General Manager, Utility Services
Howard D. Bowles Vice President and General Manager, 53
Davey Tree Surgery Company
C. Kenneth Celmer Vice President and General Manager, 50
Residential Services
Bradley L. Comport, CPA Corporate Controller 45
Dr. Roger C. Funk Vice President and General Manager, 52
The Davey Institute
Rosemary T. Nicholas Assistant Secretary 53
Gordon L. Ober Vice President - New Ventures 47
Richard A. Ramsey Vice President and General Manager, 47
Commercial Services
Wayne M. Parker Vice President - Northern Operations, 41
Utility Services
Mr. Cowan was elected President and Chief Executive Officer in May 1988
and prior to that time served as President and Chief Operating Officer.
5
<PAGE> 6
Mr. Adante was elected Executive Vice President, Chief Financial Officer
and Secretary-Treasurer in May 1993. He served as Vice President, Chief
Financial Officer and Secretary-Treasurer from July 1992 to June 1993. Prior to
that time, he served as Vice President, Chief Financial Officer and Secretary
since before 1992.
Mr. Warnke was elected Executive Vice President and General
Manager-Utility Services in May 1993. Prior to that time, he served as Vice
President and General Manager-Utility Services since before 1992.
Mr. Bowles was elected Vice President and General Manager of Davey Tree
Surgery Company in January 1992. From that date and since before 1992, he served
as Vice President and Co-General Manager.
Mr. Celmer was elected Vice President and General Manager - Residential
Services in January, 1995. He served as Vice President-Eastern Operations,
Residential and Commercial Services from January 1992 to January 1995. Prior to
that time, he served as Vice President-Operations, Residential and Commercial
Services since before 1992.
Mr. Comport was elected Corporate Controller in May 1990.
Dr. Funk was elected Vice President and General Manager - The Davey
Institute in May, 1996. Prior to that time he served as Vice President - Human
and Technical Resources since before 1992.
Ms. Nicholas was elected Assistant Secretary in May 1982.
Mr. Ober was elected Vice President-New Ventures in March 1986.
Mr. Ramsey was elected Vice President and General Manager-Commercial
Services in January, 1995. He served as Vice President-Western Operations,
Residential and Commercial Services from January 1992 to January 1995. Prior to
that time, he served as Vice President and Co-General Manager of Davey Tree
Surgery Company since before 1992.
Mr. Parker was elected Vice President - Northern Operations, Utility
Services in May, 1994. Prior to that time and since before 1992, he served in
several positions in utility operations.
Officers of the Registrant serve for a term of office from the date of
their election to the next organizational meeting of the Board of Directors and
until their respective successors are elected.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
At December 31, 1996, 1995, and 1994 the number of Common Shares issued
were 8,728,440 for each date. At those respective dates, the number of shares in
the treasury were 4,209,623, 4,104,976 and 3,842,434.
The Registrant's Common Shares are not listed or traded on an established
public trading market and market prices are, therefore, not available.
Semi-annually, for purposes of the Registrant's Employee Stock Ownership Trust
("ESOT"), the fair market value of the Registrant's Common Shares, based upon
the Registrant's performance and financial condition, is determined by an
independent stock valuation firm.
6
<PAGE> 7
The Registrants' board of directors declared a 2 for 1 stock split in the
form of a stock dividend on September 27, 1996. (See Note 1 to the Financial
Statements on page F-9 of this Annual Report on Form 10-K.)
As of March 17, 1997, there were 1,668 recorded holders of the
Registrant's Common Shares. During the years ended December 31, 1996, December
31, 1995 and December 31, 1994, the Registrant paid dividends of $.295, $.275,
and $.26, respectively, per share. Approximately one quarter of the total
dividend paid is paid in each of the four quarters. The Registrant's agreements
with its lenders allow for the payment of cash dividends provided that the terms
and conditions of the agreements, particularly those dealing with its
shareholders equity, fixed charge coverage ratio and maximum consolidated funded
debt to consolidated funded debt plus consolidated net worth ratio, are
maintained. (See Note 5 to the Financial Statements on page F-13 of this Annual
Report on Form 10-K.)
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating Results:
Revenues $266,934 $229,682 $209,683 $218,521 $206,054
Earnings from Continuing
Operations $ 8,759 $ 6,137 $ 4,189 $ 6,107 $ 5,345
Earnings from Continuing
Operations Per Common Share $ 1.86 $ 1.27 $ .84 $ 1.17 $ 1.00
At Year End:
Total Assets $111,386 $104,161 $ 98,486 $ 99,780 $ 92,722
Total Long-Term Debt $ 19,640 $ 17,049 $ 21,124 $ 26,778 $ 27,113
Cash Dividends Per Common Share $ .295 $ .275 $ .26 $ .24 $ .22
</TABLE>
In 1995 the Registrant sold its interior plant care business. Operating
results for all years presented have accordingly been restated for this
discontinued operation. (See Note 13 to the Financial Statements on page F-19 of
this Annual Report on Form 10-K.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Despite record net earnings in 1996, operating activities provided
$17,104,000, a $4,088,000 decrease when compared to the $21,192,000 generated in
1995. The decrease was principally the result of an increase in other assets, a
lower increase in accounts payable and accrued liabilities, and a reduction of
other liabilities, offset by an increase in insurance liabilities.
7
<PAGE> 8
Net earnings of $8,759,000 increased $2,386,000 or 37.4% when compared
to the $6,373,000 earned in 1995. This improvement was mainly due to higher
operating earnings in most of the Registrant's service lines, particularly its
Residential and Consulting services. Residential services benefited generally
from favorable economic conditions in 1996, and specifically from a continued
emphasis on sales, as well as productivity gains. The Registrant's Consulting
and Utility services benefited from additional work with a major Western U.S.
customer; although some of this work had been completed in 1996, the
Registrant's Consulting services have now been retained to continue through most
of 1997. Revenues and earnings also were enhanced from additional work obtained
as a result of the storm damage caused by Hurricane Fran in September.
In that the increase in accounts receivable of $5,183,000 was
comparable to the increase experienced in 1995, it did not affect the net change
in cash provided by operating activities. Nonetheless, it did adversely impact
cash flows provided by operating activities in 1996. The increase resulted
primarily from the additional work performed for its major Western U.S.
customer, some renegotiated and new utility contracts, and amounts due related
to the Registrant's new Commercial services. The current year increase also
caused consolidated days outstanding to rise 5.9 days to 59.7 days. Based upon
certain collections realized subsequent to year end, the Registrant believes
this increase in days outstanding to be temporary. The Registrant also performs
ongoing credit evaluations of its customers' financial condition for collection
purposes, and when determined necessary, it provides an allowance for doubtful
accounts.
Other assets used $966,000 in cash, a $1,013,000 change when compared
to the $47,000 provided last year. The change was primarily due to an increase
in operating supplies necessary to support the Registrant's expanded Utility and
Residential services, as well as an increase in its prepaid pension expense.
Even though accounts payable increased commensurate with the increase
in revenues, on a combined basis accounts payable and accrued liabilities
increased only $637,000, $4,475,000 less than the increase experienced in 1995.
This change was primarily attributable to a slight reduction in the current
portion of the Registrant's self-insurance liabilities, compared to an increase
of $3,448,000 in 1995. The change in the current year should be evaluated in
conjunction with the $2,627,000 increase in long-term insurance liabilities. In
the aggregate, all self-insurance liabilities increased only $1,941,000 compared
to a $4,778,000 increase in 1995. Both the reduction of the current portion and
the significantly lower total increase are a function of continued favorable
claims experience along with further stabilization in the level of estimated
ultimate costs resulting from a relatively mature self-insurance program. The
most significant estimates made by the Registrant that affect the amounts
reported in the financial statements and accompanying notes are those relating
to its insurance liabilities. (See Note 2 on page F-10 of this Annual Report on
Form 10-K.)
Other liabilities used $2,868,000 in cash, an increase of $5,013,000
when compared to the $2,145,000 provided during 1995. This change resulted
primarily from an acceleration of estimated income tax payments in the current
year, the result of substantially higher earnings.
Investing activities used $17,263,000 in 1996, an increase of
$5,769,000 when compared to the $11,494,000 used in 1995. The increase was
attributable to higher capital expenditures in the current year, coupled with
proceeds received in 1995 related to the sale of certain Interiorcare assets
(See Note 13 to the Financial Statements on page F-19 of this Annual Report on
Form 10-K). The Registrant believes its capital expenditures and 1997 capital
budget of approximately $17,800,000 are consistent with its plan to expand
services, maintain equipment on existing operations, and provide for appropriate
branch office facilities.
8
<PAGE> 9
In 1996, financing activities used $684,000, a decrease of $8,517,000
when compared to the $9,201,000 used in the prior year. The decrease was due
mostly to higher net borrowings under the Registrant's revolving credit
agreement necessitated by the increase in accounts receivable and capital
expenditures. Also, the Registrant's current year repurchase of its common
shares declined substantially when compared to last year, primarily due to a
significant repurchase in 1995 of shares held by a former vice president.
At December 31, 1996, the Registrant's principal source of liquidity
consisted of $627,000 in cash and cash equivalents; short-term lines of credit
and amounts available to be borrowed from banks via notes payable totaling
$3,817,000, of which $875,000 had been used at the end of the year; and a
revolving credit agreement in the amount of $35,000,000, of which $14,100,000
had been drawn and $7,277,000 was considered drawn to cover outstanding standby
letters of credit. Including the outstanding balance on the term note agreement
of $7,200,000, the Registrant's credit facilities now total $46,000,000. The
Registrant believes its available credit will exceed credit requirements, and
that its liquidity is adequate.
LIQUIDITY MEASUREMENTS
Management uses these measurements to gauge the Registrant's ability to
meet current working capital requirements and the extent by which capital
expenditures are funded by internally generated "cash flow".
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Working Capital $19,283 $12,493 $12,583
Current Ratio 1.7:1 1.4:1 1.5:1
Cash Flow from Net Earnings,
Depreciation & Amortization $23,449 $19,574 $17,302
Capital Expenditures $18,121 $13,297 $ 8,598
Cash Flow to Capital
Expenditures Ratio 1.3:1 1.5:1 2.0:1
Cash Flow as % of Revenues 8.8% 8.5% 8.3%
</TABLE>
LEVERAGE MEASUREMENTS
These ratios measure the extent to which the Registrant has been
financed by debt, or, put another way, the proportion of the total assets
employed in the business that have been provided by creditors as compared to
shareholders. Debt is defined as total liabilities.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Equity to Debt Ratio .89:1 .81:1 .83:1
Debt as % of Assets 52.9% 55.3% 54.8%
Equity as % of Assets 47.1% 44.7% 45.2%
</TABLE>
At the end of 1996, these measurements improved over the prior two
years primarily due to higher net earnings and further maturation of insurance
liabilities.
9
<PAGE> 10
COMMON SHARE MEASUREMENTS
These measurements assist shareholders in assessing the Registrant's
earnings performance, dividend payout and equity position as related to their
shareholdings.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net earnings per share $1.86 $1.32 $.81
Dividends per Share $.295 $.275 $.26
Book Value per Share $11.61 $10.07 $9.12
ESOT Market Valuation per Share $18.20 $13.56 $12.19
</TABLE>
Earnings per share measurements are shown as if all outstanding stock
options had been exercised at December 31 of the years presented. Dividends were
again increased in 1996. In 1996, they were increased by a total of $.02 per
share, or 7.3% over 1995, compared to an increase in 1995 of $.015 per share or
5.8% over 1994. It is the Registrant's objective to provide a fair return on
investment to its shareholders through improved dividends as long as the
Registrant can financially justify this policy. The fact that dividends have
increased each year since 1979 reflects that objective.
ASSET UTILIZATION MEASUREMENTS
Management uses these measurements to evaluate its efficiency in
employing assets to generate revenues and returns.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Average Assets Employed
(in 000's) $107,774 $101,324 $99,133
Asset Turnover (Revenues
to Average Assets) 2.5 2.3 2.1
Return on Average Assets 8.1% 6.2% 4.1%
</TABLE>
RESULTS OF OPERATIONS
Revenues of $266,934,000 for the year increased $37,252,000 or 16.2%
when compared to the $229,682,000 generated in 1995. This compares with an
increase in revenues of 9.5% in 1995 and a decrease of 4.0% in 1994. The current
year improvement was primarily due to increased revenues realized by the
Registrant's Residential and Commercial services, Western Utility operations and
Consulting services. As previously noted, Residential and Commercial services
continue to be favorably influenced by generally good economic conditions and
heightened sales efforts. The increase in Western Utility and Consulting
revenues was mainly due to the additional work obtained with the Registrant's
major Western U.S. customer. The 1996 revenues of $55,000,000 earned by the
Registrant with this customer represent a significant concentration (See Note 10
to the Financial Statements on page F-18 of this Annual Report on Form 10-K).
The Registrant believes that a slight favorable trend in revenues will continue
in 1997, despite the highly competitive nature of the utility market taken as a
whole.
10
<PAGE> 11
Operating costs of $183,427,000 increased $24,117,000 over 1995 but as
a percentage of revenues they decreased .7% to 68.7%. The percentage reduction
was mainly due to lower operating costs associated primarily with higher
Residential and Consulting service revenues. These services, when compared to
other services, positively influence operating costs in that they are generally
higher priced services with inherently higher gross margins and attendant lower
operating costs. In particular, Consulting services are far less capital
intensive and any increase in these revenues relative to the Registrant's other
services will benefit its cost structure. Even though the Registrant will
continue to emphasize these services, it anticipates that in 1997 these costs as
a percentage of revenues will approximate 1996 levels.
Selling costs for 1996 increased $4,946,000 to $33,575,000 when
compared to the $28,629,000 experienced last year, and as a percentage of
revenues they increased .1% to 12.6%. These costs were affected primarily by
higher commissions associated with improved Residential services revenue and
operating earnings.
Although general and administrative expense of $18,216,000 was
$2,327,000 higher than in 1995, as a percentage of revenues these costs declined
.1% to 6.8%. The dollar increase resulted primarily from professional services
related to the Registrant's upgrade of its information service technologies and
administrative costs associated with its expansion of Commercial and Consulting
services.
Depreciation and amortization increased $1,489,000 to $14,690,000, but
declined .2% to 5.5% as a percentage of revenues. The lower percentage was
primarily attributable to relatively lower capital expenditures in the prior two
years, coupled with higher, less capital intensive Consulting service revenues
in 1996. In 1997, the Registrant anticipates that depreciation expense will
approximate $14,800,000.
Interest Expense of $2,457,000 was $268,000 lower than last year, and
as a percentage of revenues declined .3% to .9%. The reduction was mainly due to
an approximate 60 basis point reduction in rates on the Registrant's bank debt.
As a result of the above factors, earnings before income taxes
increased $4,730,000 to $14,841,000 or 5.6% as a percentage of revenues. The tax
provisions for 1996, 1995 and 1994 resulted in effective tax rates of 41.0%,
39.3% and 40.3%, respectively. (See Note 9 of the Financial Statements on page
F-18 on this annual report on Form 10-K).
The Registrant's net earnings of $8,759,000 increased $2,386,000 or
37.4% compared to 1995 and as a percentage of revenues they improved .5% to
3.3%.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The independent auditors' report, the audited consolidated financial
statements, and the notes to the audited consolidated financial statements
required by this Item 8 appear on pages F-1 through F-19 of this Annual Report
on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
11
<PAGE> 12
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Reference is made to Part I of this Report for information as to
executive officers of the Registrant.
The information regarding directors of the Registrant appearing under
the heading "Election of Directors" in the Registrant's definitive Proxy
Statement for its 1997 Annual Meeting of Shareholders is hereby incorporated by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information regarding compensation of the Registrant's executive
officers appearing under the heading "Remuneration of Executive Officers" in the
Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information regarding the security ownership of certain beneficial
owners and management appearing under the heading "Ownership of Common Shares"
in the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information regarding certain relationships and related transactions
appearing under the headings "Election of Directors" and "Indebtedness of
Management" in the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders is hereby incorporated by reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) and (a) (2) Financial Statements and Schedules. See the Index to
Financial Statements and Financial Statement Schedules on page F-1 of this
Annual Report on Form 10-K.
(a) (3) Exhibits. See the Index to Exhibits on sequentially numbered page
14 of this Annual Report on Form 10-K.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
last quarter of the period covered by this Annual Report on Form 10-K.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned thereunto duly authorized.
THE DAVEY TREE EXPERT COMPANY
By: /s/ R. D. COWAN
---------------------------------
R. D. Cowan, President and
Chief Executive Officer
March 17, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report Form 10-K has been signed below by the following persons on behalf
of the Registrant and in the capacities indicated on March 17, 1997.
/s/ J. W. JOY /S/ JAMES H. MILLER
- ------------------------------------- ------------------------------
J. W. JOY, Director and JAMES H. MILLER, Director
Chairman of the Board
/s/ THOMAS G. MURDOUGH, JR.
/s/ R. DOUGLAS COWAN ------------------------------
- ------------------------------------- THOMAS G. MURDOUGH, JR., Director
R. DOUGLAS COWAN, Director;
President and Chief Executive Officer
(Principal Executive and Operating /s/ DAVID E. ADANTE
Officer) -------------------------------
DAVID E. ADANTE,
/s/ R. CARY BLAIR Executive Vice President, Chief
- ------------------------------------- Financial Officer and
R. CARY BLAIR, Director Secretary-Treasurer
(Principal Financial Officer)
/s/ RICHARD E. DUNN
- -------------------------------------
RICHARD E. DUNN, Director /s/ BRADLEY L. COMPORT
-------------------------------
BRADLEY L. COMPORT, Corporate
Controller (Principal Accounting
/s/ WILLIAM D. GINN Officer)
- -------------------------------------
WILLIAM D. GINN, Director
/s/ RICHARD S. GRAY
- -------------------------------------
RICHARD S. GRAY, Director
/s/ EUGENE W. HAUPT
- -------------------------------------
EUGENE W. HAUPT, Director
13
<PAGE> 14
INDEX OF EXHIBITS
[ITEM 14(a) (3)]
<TABLE>
<CAPTION>
LOCATION
EXHIBIT NO. DESCRIPTION SEQUENTIAL PAGE
- ----------- ----------- ---------------
<S> <C> <C>
(2) Plan of acquisition, reorganization,
arrangement, liquidation or succession. Not Applicable.
(3)(i) 1991 Amended Articles of Incorporation 16-19
(3)(ii) 1987 Amended and Restated Regulations
of The Davey Tree Expert Company. 20-31
(4) Instruments defining the rights of The Company is a party to
security holders, including indentures certain instruments, copies of which
will be furnished to the Securities
and Exchange Commission upon
request, defining the rights of
holders of long-term debt identified
in Note 5 of Notes to Consolidated
Financial Statements on page F-13 of
this Annual Report on Form 10-K.
(9) Voting Trust Agreement Not Applicable.
(10)(a) 1985 Incentive Stock Option Plan Incorporated by reference to Exhibit
10 (a) to the Registrant's Annual
Report on Form 10-K for the year
ended December 31, 1992.
(10)(b) 1987 Incentive Stock Option Plan Incorporated by reference to Exhibit
10 (b) to the Registrant's Annual
Report on Form 10-K for the year
ended December 31, 1992.
(10)(c) 1994 Omnibus Stock Plan Incorporated by reference to Exhibit
10 (c) to the Registrant's Form 10-Q
for the quarter ended July 2, 1994.
(11) Statement re computation of per share Not Applicable.
earnings
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
LOCATION
EXHIBIT NO. DESCRIPTION SEQUENTIAL PAGE
- ----------- ----------- ---------------
<S> <C> <C>
(12) Statement re computation of ratios Not Applicable.
(13) Annual Report to security holders, Not Applicable.
Form 10-Q or quarterly report to
security holders
(16) Letter re change in certifying Not Applicable.
accountant
(18) Letter re change in accounting
principals Not Applicable.
(21) Subsidiaries of the Registrant 32
(22) Published report regarding matters Incorporated by reference to
submitted to vote of security holders Part II, Item 4 to the Registrant's
Form 10-Q for the quarter ended June
29, 1996.
(23) Consent of independent auditors 33
to incorporation of their report
in Registrant's Statements on
Form S-8 (File Nos. 2-73052,
2-77353, 33-5755, 33-21072, and
33-59347) and Form S-2
(File No. 33-30970)
(24) Power of Attorney Not Applicable.
(27) Financial Data Schedule 34
</TABLE>
The documents listed as Exhibits 10(a), 10(b), and 10(c) constitute management
contracts or compensatory plans or arrangements.
15
<PAGE> 1
EXHIBIT 3(i)
------------
1991 AMENDED ARTICLES OF INCORPORATION
OF
THE DAVEY TREE EXPERT COMPANY
FIRST. The name of the Company is THE DAVEY TREE
EXPERT COMPANY.
SECOND. The place in the State of Ohio where the
principal office of the Company is located is the City of Kent, in Portage
County.
THIRD. The purposes for which the Company is formed
are:
(a) To engage in all phases of the tree and lawn care
business, including without limitation, the care, treatment, preservation,
propagation, cultivation, planting, removal and sale of trees, plants, shrubs
and vines, the practice of landscape architecture, the trimming of trees and
other forms of line clearing, including right-of-way clearance for power and
telephone companies or others, the publication of books, pamphlets, periodicals
and other literature for free distribution or sale, the manufacturing, jobbing,
buying and selling at wholesale or retail of any and all tools, materials,
supplies, implements or equipment, the practice of forestry, the logging,
sawing, milling, processing and marketing of forest products, the development of
recreation areas and facilities and the acquisition, operation and sales of
farms, manufacturing establishments and other enterprises;
(b) To manufacture, to purchase, lease or otherwise
acquire, to hold and use, to sell, lease or otherwise dispose of and to deal in
or with personal property of any description and any interest therein;
(c) To purchase, lease or otherwise acquire, to
invest in, hold, use and encumber, to sell, lease, exchange, transfer or
otherwise dispose of and to construct, develop, improve, equip, maintain and
operate structures and real property of any description and any interest
therein;
(d) To borrow money, to issue, sell and pledge its
notes, bonds and other evidence of indebtedness, to secure any of its
obligations by mortgage, pledge or deed of trust of all or any of its property
and to guarantee and secure obligations of any person, firm or corporation, all
to the extent necessary, useful or conducive to carrying out any of the other
purposes of the Company;
(e) To invest its funds in any shares or other
securities of another corporation, business or undertaking of a government,
governmental authority or governmental subdivision; and
(f) To do whatever is deemed necessary, useful or
conducive to carrying out any of the purposes of the Company and to engage in
any lawful activity for which corporations may be formed under the Ohio General
Corporation Law.
16
<PAGE> 2
FOURTH. The authorized number of shares of the
Company is 16,000,000, consisting of 4,000,000 Preferred Shares, without par
value (the "Preferred Shares"), and 12,000,000 Common Shares with par value of
$1 each (the "Common Shares").
DIVISION A. Express Terms of Preferred Shares.
The Preferred Shares shall be issuable only to
holders of Common Shares of the Company as a class, unless the holders of Common
Shares as a class waive such right of issuance, and the Directors, without any
further action by the shareholders, may, at any time and from time to time,
adopt an amendment or amendments to the Articles of Incorporation of the Company
in respect of any Preferred Shares which constitute unissued or treasury shares
at the time of such adoption, for the purpose of dividing any or all of such
Preferred Shares into such series as the Directors shall determine, each of
which series shall bear such distinguishing designation as the Directors shall
determine and within the limitations prescribed by the provisions of the Ohio
General Corporation Law, fix the express terms of any such series of Preferred
Shares, which may include statements specifying:
(a) Dividend rights, which may be cumulative or
non-cumulative, at a specified rate, amount or proportion, with or without
further participation rights, and in preference to, junior to, or on a parity in
whole or in part with dividend rights of shares of any other class or series;
(b) Liquidation rights, preferences, and price;
(c) Redemption rights and price or prices, if any;
(d) Sinking fund requirements, if any, which may
require the Company to provide a sinking fund out of earnings or otherwise for
the purchase or redemption of such shares or for dividends thereon;
(e) Conversion rights, if any, and the conversion
rate or rates or price or prices and the adjustments thereof, if any, and all
other terms and conditions upon which conversions may be made; and
(f) Restrictions on the issuance of shares of any
class or series of the Company.
DIVISION B. Express Terms of Common Shares.
The Common Shares shall be subject to the express
terms of the Preferred Shares and any series thereof. Each Common Share shall be
equal to every other common share. The holders of Common Shares shall be
entitled to one vote for each share held by them upon all matters presented to
the shareholders.
FIFTH. The Company, by action of its directors and
without action by its shareholders, may purchase its own shares in accordance
with the provisions of the Ohio General Corporation Law. Such purchases may be
made either in the open market or at public or
17
<PAGE> 3
private sale, in such manner and amounts, from such holder or holders of
outstanding shares of the Company and at such prices as the directors may from
time to time determine.
SIXTH. When a shareholder, or a shareholder's estate
upon the death of a shareholder, proposes to sell, give or otherwise transfer
Common Shares, whether voluntarily or involuntarily, other than (i) transfers to
a current Employee (as defined), (ii) transfers by a current or former Employee
to members of his or her Immediate Family (as defined), and (iii) transfers by a
deceased current or former Employee to members of his or her Immediate Family,
the Company and the ESOT (as defined) shall have the right, at their option, to
purchase all (but not less than all) of the Common Shares held by the
shareholder on the terms and conditions set forth in this article SIXTH.
(a) For purposes of this Article SIXTH, the following
definitions apply:
(i) "Employee" means an hourly or salaried employee
of the Company or of any subsidiary of the Company. For this purpose, a
"subsidiary" is another corporation of which the Company owns, directly or
indirectly through another subsidiary, more than 50% of the voting power.
(ii) "ESOT" means the trust for the Company's
Employee Stock Ownership Plan, or any replacement or substitute for that Plan,
as amended from time to time.
(iii) Member of an Employee's "Immediate Family"
means the Employee's spouse, children (including any adopted children and step
children), and any trust established for the benefit of one or more of them.
(b) The purchase price per share shall be the most
recent available valuation of the Common Shares conducted for the ESOT, provided
that these valuations continue to be made at least once a year. If these
valuations are no longer made or are made less frequently than once a year, the
purchase price per Common Share shall be the fair market value per Common Share
determined using another method established from time to time by the Company's
Board of Directors.
(c) In the event of the death of a shareholder and
the proposed transfer of the shareholder's Common Shares to anyone other than an
Employee or a member of an Employee's Immediate Family, the right of the Company
and the ESOT to purchase the Common Shares may be exercised by written notice to
the representatives of the shareholder's estate. The notice of exercise may be
delivered at any time on or before the 30th day after the Company receives
written notice of (i) the shareholder's death and (ii) the identity and address
of the representatives of the shareholder's estate. Upon delivery of the notice
of exercise on or before the 30th day and tender of the purchase price for the
Common Shares by the Company, all rights of the representatives in respect of
the Common Shares shall cease, and the representatives shall deliver to the
Company any certificate or certificates representing the Common Shares. If the
Company and the ESOT fail to deliver the notice of exercise on or before the
30th day, the representatives of the shareholder's estate and heirs can take and
hold the Common Shares, subject to the restrictions set forth in this Article
SIXTH.
18
<PAGE> 4
(d) In the event of a proposed sale, gift, or other
transfer of Common Shares to anyone other than an Employee of the Company or a
member of an Employee's Immediate Family, the right of the Company and the ESOT
to purchase the Common Shares may be exercised at any time within 30 days after
the certificate or certificates representing the Common Shares have been
surrendered to the Company or its transfer agent for transfer. Upon delivery of
the notice of exercise within the 30-day period and tender of the purchase price
for the Common Shares by the Company, all rights of the former shareholder in
respect of the Common Shares shall cease, and the Company may retain the
certificate or certificates representing the Common Shares. If the Company and
the ESOT fail to deliver the notice of exercise within the 30-day period, the
shareholder may proceed with the proposed transfer, and the recipient can take
and hold the Common Shares, subject to the restrictions set forth in this
Article SIXTH.
(e) Whenever both the Company and the ESOT desire to
purchase Common Shares under this Article SIXTH, the Company shall have the
first right to purchase the Common Shares, and the ESOT shall have the right to
purchase any Common Shares not purchased by the Company.
(f) All Common Shares shall bear a legend referring
to the restrictions on transfer set forth in this Article SIXTH.
SEVENTH. These 1991 Amended Articles of Incorporation
supersede the existing 1987 Amended Articles of Incorporation of the Company and
all amendments thereto.
19
<PAGE> 1
EXHIBIT 3(ii)
-------------
THE DAVEY TREE EXPERT COMPANY
1987 AMENDED AND RESTATED REGULATIONS
ADOPTED: MAY 19, 1987
ARTICLE I
SHAREHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of
Shareholders of the Company for the election of directors, the consideration of
reports to be laid before such meeting, and the transaction of such other
business as may properly be brought before such meeting shall be held, at the
principal office of the Company in the City of Kent, in Portage County, or at
such other place either within or without the State of Ohio as may be designated
by the Board of Directors, by the Chairman of the Board, or by the President and
specified in the notice of such meeting, at two o'clock p.m. on the third
Tuesday of May in each year, if not a legal holiday, and, if a legal holiday,
then on the next succeeding business day, or such other date or time as may be
designated by the Board of Directors, by the Chairman of the Board of Directors,
or by the President and specified in the notice of the meeting.
SECTION 2. SPECIAL MEETINGS. Special meetings of the
shareholders of the Company may be held on any business day, when called by the
Chairman of the Board, by the Vice Chairman of the Board, by the President, by
an Executive Vice President, by a Senior Vice President, by a Vice President, or
by the Board of Directors acting at a meeting, or by a majority of the
directors acting without a meeting, or by the persons who hold twenty-five
percent of all the shares outstanding and entitled to vote thereat. Upon request
in writing delivered either in person or by registered mail to the President or
the Secretary by any persons entitled to call a meeting of shareholders, such
officer shall forthwith cause to be given to the shareholders entitled thereto
notice of a meeting to be held on a date not less than seven or more than sixty
days after the receipt of such request, as such officer may fix. If such notice
is not given within thirty days after the delivery or mailing of such request,
the person calling the meeting may fix the time of the meeting and give notice
thereof in the manner provided by law or as provided in these Regulations, or
cause such notice to be given by any designated representative. Each special
meeting shall be called to convene between nine o'clock a.m. and four o'clock
p.m., shall be held at the principal office of the Company, unless the same is
called by the directors, acting with or without a meeting, in which case such
meeting may be held at any place either within or without the State of Ohio
designated by the Board of Directors and specified in the notice of such
meeting.
SECTION 3. NOTICE OF MEETINGS. Not less than seven or
more than sixty days before the date fixed for a meeting of shareholders,
written notice stating the time, place and purposes of such meeting shall be
given by or at the direction of the Secretary, or Assistant Secretary, or any
other person or persons required or permitted by these Regulations to give
such notice. The notice shall be given by personal delivery or by mail to each
shareholder
20
<PAGE> 2
entitled to notice of the meeting who is of record as of the day
next preceding the day on which notice is given or, if a record date therefore
is duly fixed, of record as of said date; if mailed, the notice shall be
addressed to the shareholders at their respective addresses as they appear on
the records of the Company. Notice of the time, place, and purposes of any
meeting of shareholders may be waived in writing, either before or after the
holding of such meeting, by any shareholder, which writing shall be filed with
or entered upon the records of the meeting. The attendance of any shareholder at
any such meeting without protesting, prior to or at the commencement of the
meeting, the lack of proper notice shall be deemed to be a waiver by him or
notice of such meeting.
SECTION 4. QUORUM; ADJOURNMENT. Except as may be
otherwise provided by law or by the Articles of Incorporation, at any meeting of
the shareholders the holders of shares entitling them to exercise a majority of
the voting power of the Company present in person or by proxy shall constitute a
quorum for such meeting; provided, however, that no action required by law, by
the Articles, or by these Regulations to be authorized or taken by a designated
proportion of the shares of any particular class or of each class of the Company
may be authorized or taken by a less proportion; and provided, further, that the
holders of a majority of the voting shares represented thereat, whether or not a
quorum is present, may adjourn such meeting from time to time; if any meeting is
adjourned, notice of such adjournment need not be given if the time and place to
which such meeting is adjourned are fixed and announced at such meeting.
SECTION 5. PROXIES. Persons entitled to vote shares
or to act with respect to shares may vote or act in person or by proxy. The
person appointed as proxy need not be a shareholder. Unless the writing
appointing a proxy otherwise provides, the presence at a meeting of the person
having appointed a proxy shall not operate to revoke the appointment. Notice to
the Company, in writing or in open meeting, of the revocation of the appointment
of a proxy shall not affect any vote or act previously taken or authorized.
SECTION 6. APPROVAL AND RATIFICATION OF ACTS OF
OFFICERS AND BOARD OF DIRECTORS. Except as otherwise provided by the Articles of
Incorporation or by law, any contract, act, or transaction, prospective or past,
of the Company, or of the Board of Directors, or of the officers may be approved
or ratified by the affirmative vote at a meeting of the shareholders, or by the
written consent, with or without a meeting, of the holders of record of shares
entitling them to exercise a majority of the voting power of the Company, and
such approval or ratification shall be as valid and binding as though
affirmatively voted for or consented to by every shareholder of the Company.
ARTICLE 11
BOARD OF DIRECTORS
SECTION 1. NUMBER AND CLASSIFICATION. The Board of
Directors will be divided into three classes consisting of not less than three
directors each. The number of directors may be fixed or changed by the
shareholders at any meeting of shareholders called to elect directors at which a
quorum is present, by the vote of the holders of a majority of
21
<PAGE> 3
the shares represented at the meeting and entitled to vote on the proposal. The
terms in office of the directors in each of the classes will expire in
consecutive years. At each annual election of directors, directors will be
elected to the class whose term in office expires in that year and will hold
office for a term of three years and until their respective successors are
elected. In case of any increase in the number of directors of any class, the
additional director or directors elected to that class will hold office for the
remainder of the term in office of that class.
SECTION 2. RESIGNATION; REMOVAL; VACANCIES. Any
director may resign at any time by oral statement made at a meeting of the Board
of Directors or in a writing delivered to the secretary; the resignation will
take effect immediately or at such other time as the director may specify. No
director may be removed prior to the expiration of his term except for gross
negligence or willful misconduct in the performance of his duties as a director.
No reduction in the number of directors of any class, and no modification or
elimination of the classification of the Board of Directors, will of itself have
the effect of shortening the term of nay incumbent director. In the event of any
vacancy or vacancies in the Board of Directors, however caused, the directors
then in office, though less than a majority of the authorized number of
directors, may, by the vote of a majority of their number, fill each vacancy for
the remainder of the term in office of the director whose resignation, removal,
or death resulted in the vacancy.
SECTION 3. NOMINATION OF CANDIDATES FOR ELECTION AS
DIRECTORS. At a meeting of shareholders at which directors are to be elected,
only persons nominated as candidates will be eligible for election as directors.
Candidates may be nominated either by the Board of Directors or by any
shareholder entitled to vote at the meeting. Nominations by the Board of
Directors may be made at a meeting or in an action without a meeting, not less
than 30 days prior to the meeting at which the directors are to be elected. Each
candidate nominated by the board will, at the request of the secretary, provide
the company with all of the information about himself required, under rules of
The Securities and Exchange Commission, to be included in the company's proxy
statement for the meeting. Any shareholder who proposes to nominate one or more
candidates for election as director must, not less than 30 days prior to the
meeting at which the directors are to be elected, notify the secretary of his
intention to make the nomination and provide the company with all of the
information about each of the candidates as would be required, under the rules
of The Securities and Exchange Commission, to be included in a proxy statement
soliciting proxies for the election of the candidate, including (i) his name,
age, and business and residence addresses, (ii) his principal occupations or
employment during the last five years, (iii) the number of shares of the company
beneficially owned by him, and (iv) transactions between him and the Company. In
the event that a candidate validly nominated by the Board or by a shareholder
thereafter becomes unable or unwilling to stand for election as a director, the
Board or the shareholder who nominated the candidate, as the case may be, may
nominate a substitute candidate. If the Chairman or other officer presiding at
the meeting determines that one or more candidates were not nominated in
accordance with these procedures, he may rule the nomination of these candidates
to be out-of-order and void.
22
<PAGE> 4
SECTION 4. ORGANIZATION MEETING. Immediately after
each annual meeting of the shareholders, the newly elected directors shall hold
an organization meeting for the purpose of electing officers and transacting any
other business. Notice of such meeting need not be given.
SECTION 5. REGULAR MEETINGS. Regular meetings of the
Board of Directors may be held at such times and places within or without the
State of Ohio as may be provided for in bylaws or resolutions adopted by the
Board of Directors and upon such notice, if any, as shall be so provided.
SECTION 6. SPECIAL MEETINGS. Special meetings of the
Board of Directors may be held at any time within or without the State of Ohio
upon call by the Chairman of the Board, the Vice Chairman of the Board, the
President, an Executive Vice President, Senior Vice President, or a Vice
President or any two directors. Written notice of the time and place of each
such meeting shall be given to each director either by personal delivery or by
mail, telegram, or cablegram at least two days before the meeting, which notice
need not specify the purposes of the meeting; provided, however, that attendance
of any director at any such meeting without protesting, prior to or at the
commencement of the meeting, the lack of proper notice shall be deemed to be a
waiver by him of notice of such meeting and such notice may be waived in
writing, either before or after the holding of such meeting, by any director,
which writing shall be filed with or entered upon the records of the meeting.
Unless otherwise indicated in the notice thereof, any business may be transacted
at any organization, regular, or special meeting.
SECTION 7. QUORUM; ADJOURNMENT. A quorum of the Board
of Directors shall consist of a majority of the directors then in office;
provided, that a majority of the directors present at a meeting duly held,
whether or not a quorum is present, may adjourn such meeting from time to time,
if any meeting is adjourned, notice of such adjournment need not be given if the
time and place to which such meeting is adjourned are fixed and announced at
such meeting. At each meeting of the Board of Directors at which a quorum is
present, all questions and business shall be determined by a majority vote of
those present except as in these Regulations otherwise expressly provided.
SECTION 8. ACTION WITHOUT A MEETING. Any action which
may be authorized or taken at a meeting of the Board of Directors may be
authorized or taken without a meeting in a writing or writings signed by all of
the directors, which writing or writings shall be filed with or entered upon the
records of the Company.
SECTION 9. COMMITTEES. The Board of Directors may at
any time appoint from its members an Executive, Finance, or other committee or
committees, consisting of such number of members, not less than three, as the
Board of Directors may deem advisable, together with such alternates as the
Board of Directors may deem advisable, to take the place of any absent member or
members at any meeting of such committee. Each such member and each such
alternate shall hold office during the pleasure of the Board of Directors. Any
such committee shall act only in the intervals between meetings of the Board of
Directors and shall have such authority to fill vacancies in the Board of
Directors or in any
23
<PAGE> 5
committee of the Board of Directors. Subject to the aforesaid exceptions, any
person dealing with the Company shall be entitled to rely upon any act or
authorization of an act by any such committee, to the same extent as an act or
authorization of the Board of Directors. Each committee shall keep full and
complete records of all meetings and actions, which shall be open to inspection
by the directors. Unless otherwise ordered by the Board of Directors, any such
committee may prescribe its own rules for calling and holding meetings, and for
its own method of procedure, and may act at a meeting by a majority of its
members or without a meeting by a writing or writings signed by all of its
members.
SECTION 10. DIRECTORS ADVISORY COMMITTEE. The Board
of Directors may establish a Directors Advisory Committee and appoint to such
Committee such number of persons as the Board of Directors may deem advisable.
No member of the Board of Directors shall serve on the Directors Advisory
Committee, but the Board of Directors may appoint to such Committee any former
directors or officers of the Company and such other persons as it may deem
advisable. Each member of the Directors Advisory Committee shall be appointed
for a term of three years, and no member of the Directors Advisory Committee
shall serve for more than two such three-year terms. The Directors Advisory
Committee shall exercise an advisory function with respect to only such matters
as the Board of Directors may specifically submit to such Committee, provided,
however, that the Directors Advisory Committee shall in no event have any
authority whatsoever with respect to the operations or management of the Company
or to authorize, require, or approve any expenditure, payment, or donation of
any funds of the Company.
ARTICLE III
OFFICERS
SECTION 1. ELECTION AND DESIGNATION OF OFFICERS. The
Board of Directors shall elect a President, a Secretary, a Treasurer, and, in
its discretion, may elect a Chairman of the Board, one or more Executive Vice
Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, one
or more Assistant Secretaries, one or more Assistant Treasurers, and such other
officers as the Board of Directors may deem necessary. The Chairman of the
Board, the Vice Chairman of the Board, and the President shall be directors, but
no one of the other officers need be a director. Any two or more of such offices
may be held by the same person, but no officer shall execute, acknowledge, or
verify any instrument in more than one capacity, if such instrument is required
to be executed, acknowledged, or verified by two or more officers.
SECTION 2. TERM OF OFFICE; VACANCIES. The officers of
the Company shall hold office until the next organization meeting of the Board
of Directors and until their successors are elected, except in case of
resignation, removal from office, or death. The Board of Directors may remove
any officer at any time with or without cause by a majority vote of the
directors then in office. Any vacancy in any office may be filled by the Board
of Directors.
24
<PAGE> 6
SECTION 3. CHAIRMAN OF THE BOARD. The Chairman of the
Board shall preside at all meetings of the Board of Directors and shall have
such authority and shall perform such other duties as may be determined by the
Board of Directors.
SECTION 4. PRESIDENT. The President shall preside at
all meetings of the shareholders and shall preside at all meetings of the Board
of Directors, except for meetings of the Board of Directors at which the
Chairman of the Board, if any, presides in accordance with the preceding
Section. Subject to directions of the Board of Directors, the President shall
have general executive supervision over the property, business, and affairs of
the Company. He may execute all authorized deeds, mortgages, bonds, contracts,
and other authority and shall perform such other duties as may be determined by
the Board of Directors.
SECTION 5. VICE CHAIRMAN OF THE BOARD. The Vice
Chairman of the Board shall exercise all of the authority of, and perform all of
the duties, of the Chairman in case of the absence or inability of the Chairman
to act an shall have such other authority and perform such other duties as may
be determined by the Board of Directors.
SECTION 6. EXECUTIVE VICE PRESIDENTS. The Executive
Vice Presidents shall, respectively, have such authority and perform such duties
as may be determined by the Board of Directors.
SECTION 7. SENIOR VICE PRESIDENTS. The Senior Vice
Presidents shall, respectively, have such authority and perform such duties as
may be determined by the Board of Directors.
SECTION 8. VICE PRESIDENTS. The Vice Presidents
shall, respectively, have such authority and perform such duties as may be
determined by the Board of Directors.
SECTION 9. SECRETARY. The Secretary shall keep the
minutes of the shareholders and of the Board of Directors. He shall keep such
books as may be required by the Board of Directors, shall give notices of
shareholders meetings and of Board meetings required by law, or by these
Regulations, or otherwise, and shall have such authority an shall perform such
other duties as may be determined by the Board of Directors.
SECTION 10. TREASURER. The Treasurer shall receive
and have in charge all money, bills, notes, bonds, stocks in other corporations,
and similar property belonging to the Company, and shall do with the same as may
be ordered by the Board of Directors. He shall keep accurate financial accounts
and hold the same open for the inspection and examination of the directors and
shall have such authority and shall perform such other duties as may be
determined by the Board of Directors.
SECTION 11. OTHER OFFICERS. The Assistant Secretaries
and Assistant Treasurers, if any, and any other officers whom the Board of
Directors may elect shall, respectively, have such authority and perform such
other duties as may be determined by the Board of Directors.
25
<PAGE> 7
SECTION 12. DELEGATION OF AUTHORITY AND DUTIES. The
Board of Directors is authorized to delegate the authority and duties of any
officer to any other officer and generally to control the action of the officers
and to require the performance of duties in addition to those mentioned herein.
ARTICLE IV
COMPENSATION
SECTION 1. DIRECTORS AND MEMBERS OF COMMITTEES.
Members of the Board of Directors and members of any committee of the Board of
Directors shall, as such, receive such compensation, which may be either a fixed
sum for attendance at each meeting of the Board of Directors, or at each meeting
of the committee, or stated compensation payable at intervals, or shall
otherwise be compensated as may be determined by or pursuant to authority
conferred by the Board of Directors or any committee of the Board of Directors,
which compensation may be in different amounts for various members of the Board
of Directors or any committee. No member of the Board of Directors and no member
of any committee of the Board of Directors shall be disqualified from being
counted in the determination of a quorum or from acting at any meeting of the
Board of Directors or of a committee of the Board of Directors by reason of the
fact that matters affecting his own compensation as a director, member of a
committee of the Board of Directors, officer, or employee are to be determined.
SECTION 2. OFFICERS AND EMPLOYEES. The compensation
of officers and employees of the Company, or the method of fixing such
compensation, shall be determined by or pursuant to authority conferred by the
Board of Directors or any committee of the Board of Directors. Such compensation
may include pension, disability, and death benefits, and may be by way of fixed
salary, or on the basis of earnings of the Company, or any combination thereof,
or otherwise, as may be determined or authorized from time to time by the Board
of Directors or any committee of the Board of Directors.
ARTICLE V
INDEMNIFICATION
SECTION 1. THIRD PARTY ACTIONS. The Company shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative (other than an action or suit
by or in the right of the Company), by reason of the fact that he is or was a
director, officer, employee, or agent of the Company, or is or was serving at
the request of the Company as a director, trustee, officer, employee, or agent
of another corporation, partnership, joint venture, trust, or other enterprise,
against expenses (including attorneys' fees), judgments, fines, and amounts paid
in settlement actually and reasonably incurred by him in connection with the
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the Company
26
<PAGE> 8
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. The termination of any action, suit, or
proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself create a presumption that the
person did not act in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the Company or that, with respect
to any criminal action or proceeding, he had reasonable cause to believe that
his conduct was unlawful.
SECTION 2. DERIVATIVE ACTIONS. Other than in
connection with an action or suit in which the liability of a director under
Section 1701.95 of the Ohio Revised Code is the only liability asserted, the
Company shall indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending, or completed action or suit by or in
the right of the Company to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee, or agent to the Company,
or is or was serving at the request of the Company as a director, trustee,
officer, employee, or agent of another corporation, partnership, joint venture,
trust, or other enterprise, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of the action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, except that:
(a) no indemnification of a director shall be made if
its is proved by clear and convincing evidence in a court of competent
jurisdiction that his action or failure to act involved an act or
omission undertaken with deliberate intent to cause injury to the
Company or undertaken with reckless disregard for the best interests of
the Company; and
(b) no indemnification of an officer, employee, or
agent, regardless of his status as a director, shall be made in respect
of any claim, issue, or matter as to which he is adjudged to be liable
for negligence or misconduct in the performance of his duty to the
Company;
unless and only to the extent that the Court of Common Pleas or the court in
which the action or suit was brought determines upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
he is fairly and reasonably entitled to indemnity for such expenses as the Court
of Common Pleas or the other court shall deem proper.
SECTION 3. RIGHTS AFTER SUCCESSFUL DEFENSE. To the
extent that a director, trustee, officer, employee, or agent has been successful
on the merits or otherwise in defense of any action, suit, or proceeding
referred to in Section 1 or Section 2, or in defense of any claim, issue, or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the action,
suit or proceeding.
SECTION 4. OTHER DETERMINATIONS OF RIGHTS. Except in
a situation governed by Section 3, any indemnification under Section 1 or
Section 2 (unless ordered by a court) shall be made by the Company only as
authorized in the specific case upon a
27
<PAGE> 9
determination that indemnification of the director, trustee, officer, employee,
or agent is proper in the circumstances because he has met the applicable
standard or conduct set forth in Section 1 or Section 2. The determination shall
be made (a) by a majority vote, at a meeting of directors, of those directors
who constitute a quorum and who also were not and are not parties to or
threatened with any such action, suit, or proceeding or (b) if such a quorum is
not obtainable (or even if obtainable) and a majority of disinterested directors
so directs, in a written opinion by independent legal counsel (compensated by
the Company) or (c) by the affirmative vote in person or by proxy of the holders
of record of a majority of the shares held by persons who were not and are not
parties to or threatened with any such action, suit, or proceeding and entitled
to vote in the election of directors, without regard to voting power which may
thereafter exist upon a default, failure, or other contingency or (d) by the
Court of Common Pleas or the court in which such action, suit, or proceeding was
brought.
SECTION 5. ADVANCES OF EXPENSES. Unless at the time
of a director's act or omission that is the subject of an action, suit, or
proceeding referred to in Section 1 or Section 2 hereof, the only liability
asserted against a director in the action, suit, or proceeding referred to in
Section 1 or Section 2 hereof is pursuant to Section 1701.95 of the Revised
Code:
(a) expenses, including attorney's fees, incurred by
a director in defending the action, suit, or proceeding shall be paid
by the company as they are incurred, in advance of the final
disposition of the action, suit, or proceeding upon receipt or an
undertaking by or on behalf of the director in which he agrees both:
(i) to repay the amount if it is proved by clear and convincing
evidence in a court of competent jurisdiction that his action or
failure to act involved an act or omission undertaken with deliberate
intent to cause injury to the company or undertaken with reckless
disregard for the best interests of the company and (ii) to reasonably
cooperate with the company concerning the action, suit, or proceeding.
(b) expenses (including attorney's fees), incurred by
a director, officer, employee, or agent in defending any action, suit
or proceeding referred to in Section 1 or Section 2 of this Article V
may be paid by the Company, as they are incurred, in advance of final
disposition of the action, suit, or proceeding, as authorized by the
Board of Directors in the specific case, upon receipt of an undertaking
by or on behalf of the director, officer, employee, or agent to repay
the amount if it is ultimately determined that he is not entitled to be
indemnified by the Company.
SECTION 6. PURCHASE OF INSURANCE. The Company may
purchase and maintain insurance or furnish similar protection, including but not
limited to trust funds, letters of credit, or self-insurance, on behalf of or
for any person who is or was a director, officer, employee, or agent of the
Company, or is or was serving at the request of the Company as a director,
trustee, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against any liability asserted against him
and incurred by him in any capacity, or arising out of his status as such,
whether or not the Company would have the
28
<PAGE> 10
power to indemnify him against liability under the provisions of this Article or
of the Ohio General Corporation Law. Insurance may be purchased from or
maintained with a person in which the Company has a financial interest.
SECTION 7. MERGERS. In the case of a merger into this
Company of a constituent corporation which, if its separate existence had
continued, would have been required to indemnify directors, trustees, officers,
employees, or agents in specified situations, any person who served as a
director, officer, employee or agent of the constituent corporation, or served
at the request of the constituent corporation as a director, trustee, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise, shall be entitled to indemnification by this Company (as the
surviving corporation) to the same extent he would have been entitled to
indemnification by the constituent corporation if its separate existence had
continued.
SECTION 8. NON-EXCLUSIVITY; HEIRS. Indemnification
authorized by this Article shall not be exclusive of , and shall be in addition
to, any other rights granted to those seeking indemnification as a matter of law
or under the Articles, these Regulations, any agreement, a vote of shareholders
or disinterested directors, any insurance purchased by the Company, any action
by the directors to take into account amendments to the Ohio General Corporation
Law that expand the authority of the Company to indemnify a director, officer,
employee, or agent of the Company, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding an office,
and shall continue as to a person who has ceased to be a director, trustee,
officer, employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of such a person.
ARTICLE VI
RECORD DATE
For any lawful purpose, including, without
limitation, the determination of the shareholders who are entitled to receive
notice of or to vote at a meeting of shareholders, the Board of Directors may
fix a record date in accordance with the provisions of the Ohio General
Corporation Law. The record date for the purpose of the determination of the
shareholders who are entitled to receive notice of or to vote at a meeting of
shareholders shall continue to be the record date for all adjournments of such
meeting, unless the Board of Directors or the persons who shall have fixed the
original record date shall, subject to the limitations set forth in the Ohio
General Corporation Law, fix another date, and, in case a new record date is so
fixed, notice thereof and of the date to which the meeting shall have been
adjourned shall be given to shareholders of record as of such date in accordance
with the same requirements as those applying to a meeting newly called. The
Board of Directors may close the share transfer books against transfers of
shares during the whole or any part of the period provided for in this Article,
including the date of the meeting of shareholders and the period ending with the
date, if any, to which adjourned. If no record date is fixed therefore, the
record for determining the shareholders who are entitled to receive notice of or
to vote at a meeting of shareholders shall be the date next preceding the day on
which notice is given, or the date next preceding the day on which the meeting
is held, as the case may be.
29
<PAGE> 11
ARTICLE VII
CERTIFICATES FOR SHARES
SECTION 1. FORM OF CERTIFICATES AND SIGNATURES. Each
holder of shares shall be entitled to one or more certificates, signed by the
Chairman of the Board, the Vice Chairman of the Board, the President, an
Executive Vice President, Senior Vice President, or a Vice President and by the
Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer of
the Company, which shall certify the number of class of shares held by him in
the Company, but no certificate for shares shall be executed or delivered until
such shares are fully paid. When such a certificate is countersigned by an
incorporated transfer agent or registrar, the signature of any of said officers
of the Company may be facsimile, engraved, stamped, or printed. Although any
officer of the Company whose manual or facsimile signature is affixed to such a
certificate ceases to be such officer before the certificate is delivered, such
certificate nevertheless shall be effective in all respects when delivered.
SECTION 2. TRANSFER OF SHARES. Shares of the Company
shall be transferable upon the books of the Company by the holders thereof, in
person, or by a duly authorized attorney, upon surrender and cancellation of
certificates for a like number of shares of the same class or series, with duly
executed assignment and power of transfer endorsed thereon or attached thereto,
and with such proof of the authenticity of the signatures to such assignment and
power of transfer as the Company or its agents may reasonably require.
SECTION 3. LOST, STOLEN, OR DESTROYED CERTIFICATES.
The Company may issue a new certificate for shares in place of any certificate
theretofore issued by it and alleged to have been lost, stolen, or destroyed,
and the Board of Directors may, in its discretion, require the owner, or his
legal representatives, to give the Company a bond containing such terms as the
Board of Directors may require to protect the Company or any person injured by
the execution and delivery of a new certificate.
SECTION 4. TRANSFER AGENT AND REGISTRAR. The Board of
Directors may appoint, or revoke the appointment of, transfer agents and
registrars and may require all certificates for shares to bear the signature of
such transfer agents and registrars, or any of them.
ARTICLE VIII
CORPORATE SEAL
The corporate seal of this Company shall be circular
in form and shall contain the name of the Company. Failure to affix the
corporate seal to any instrument executed on behalf of the Company shall not
affect the validity of such instrument.
30
<PAGE> 12
ARTICLE IX
AMENDMENTS
The Regulations of the Company may be amended, or new
Regulations may be adopted, by the shareholders at a meeting held for such
purpose, by affirmative vote of the holders of shares entitling them to exercise
a majority of the voting power on such proposal or, without a meeting, by the
written consent of the holders of shares entitling them to exercise two-thirds
of the voting power on such proposal. If the Regulations are amended or new
Regulations are adopted without a meeting of the shareholders, the Secretary of
the Company shall mail a copy of the amendment or the new Regulations to each
shareholder who would have been entitled to vote thereon and did not participate
in the adoption thereof.
31
<PAGE> 1
EXHIBIT 13
----------
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[ITEMS 14(a)(1) AND (2)]
DESCRIPTION PAGE
- ----------- ----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Net Earnings for the years ended F-5
December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the years ended F-6
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended F-8
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements for the years ended F-9
December 31, 1996, 1995 and 1994
F-1
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
The Davey Tree Expert Company
We have audited the accompanying consolidated balance sheets of The Davey Tree
Expert Company and subsidiary companies as of December 31, 1996, 1995, and 1994,
and the related consolidated statements of net earnings, shareholders' equity,
and cash flows for the years 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 upon 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, such consolidated financial statements present fairly, in all
material respects, the financial position of The Davey Tree Expert Company and
subsidiary companies as of December 31, 1996, 1995, and 1994, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/Deloitte & Touche LLP
Cleveland, Ohio
February 14, 1997
F-2
<PAGE> 3
THE DAVEY TREE EXPERT COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995 1994
(DOLLARS IN THOUSANDS)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 627 $ 1,470 $ 973
Accounts receivable 39,805 34,622 29,313
Operating supplies 2,477 2,136 2,568
Prepaid expenses and other assets 2,023 1,791 1,840
Deferred income taxes 1,786 2,697 1,898
--------- -------- ---------
Total current assets 46,718 42,716 36,592
PROPERTY AND EQUIPMENT:
Land and land improvements 6,178 6,446 6,376
Buildings and leasehold improvements 16,682 15,956 15,806
Equipment 148,204 139,711 132,708
--------- -------- ---------
171,064 162,113 154,890
Less accumulated depreciation 113,980 107,977 100,466
--------- -------- ---------
Net property and equipment 57,084 54,136 54,424
OTHER ASSETS AND INTANGIBLES 7,584 7,309 7,470
--------- -------- ---------
TOTAL ASSETS $ 111,386 $104,161 $ 98,486
========= ======== =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 4
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,564 $ 9,918 $ 9,160
Accrued liabilities 12,944 13,953 9,599
Income taxes payable 218 3,171 1,307
Notes payable, bank 75 400 99
Current maturities of long-term debt 2,634 2,781 3,844
--------- -------- ---------
Total current liabilities 27,435 30,223 24,009
LONG-TERM DEBT 19,640 17,049 21,124
DEFERRED INCOME TAXES 1,952 3,182 3,256
INSURANCE LIABILITIES 9,007 6,380 5,050
OTHER LIABILITIES 882 797 516
--------- -------- ---------
TOTAL LIABILITIES 58,916 57,631 53,955
SHAREHOLDERS' EQUITY:
Preferred shares
Common shares 8,728 8,728 8,728
Additional paid-in capital 3,876 3,472 3,167
Retained earnings 75,324 67,922 62,851
--------- -------- ---------
87,928 80,122 74,746
LESS:
Treasury shares, at cost 35,451 33,198 29,416
Subscriptions receivable from employees 7 297 606
Future contributions to ESOT 97 193
--------- -------- ---------
TOTAL SHAREHOLDERS' EQUITY 52,470 46,530 44,531
--------- -------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 111,386 $104,161 $ 98,486
========= ======== =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 5
THE DAVEY TREE EXPERT COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 266,934 100.0% $ 229,682 100.0% $ 209,683 100.0%
COSTS AND EXPENSES:
Operating 183,427 68.7 159,310 69.4 146,617 69.9
Selling 33,575 12.6 28,629 12.5 26,080 12.4
General and administrative 18,216 6.8 15,889 6.9 14,345 6.9
Depreciation and amortization 14,690 5.5 13,201 5.7 13,263 6.3
----------- -------- ----------- ------- ----------- --------
249,908 93.6 217,029 94.5 200,305 95.5
----------- -------- ----------- ------- ----------- --------
EARNINGS FROM OPERATIONS 17,026 6.4 12,653 5.5 9,378 4.5
INTEREST EXPENSE 2,457 .9 2,725 1.2 2,641 1.3
OTHER INCOME - NET (272) (.1) (183) (.1) (278) (.1)
----------- -------- ------------ ------- ------------ --------
EARNINGS BEFORE INCOME TAXES 14,841 5.6 10,111 4.4 7,015 3.3
INCOME TAXES 6,082 2.3 3,974 1.7 2,826 1.3
----------- -------- ----------- ------- ----------- --------
EARNINGS FROM
CONTINUING OPERATIONS 8,759 3.3 6,137 2.7 4,189 2.0
DISCONTINUED OPERATION -
NET EARNINGS (LOSS) 236 .1 (150) (.1)
----------- -------- ----------- ------- ----------- --------
NET EARNINGS $ 8,759 3.3% $ 6,373 2.8% $ 4,039 1.9%
=========== ======== =========== ======= =========== ========
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING
INCLUDING COMMON
STOCK EQUIVALENTS 4,714,607 4,813,538 4,977,090
=========== =========== ===========
NET EARNINGS PER COMMON
SHARE FROM CONTINUING
OPERATIONS $ 1.86 $ 1.27 $ .84
=========== =========== ===========
NET EARNINGS PER
COMMON SHARE $ 1.86 $ 1.32 $ .81
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 6
THE DAVEY TREE EXPERT COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN
SHARES CAPITAL
<S> <C> <C>
BALANCE, JANUARY 1, 1994 $ 8,728 $ 2,822
---------- -----------
Receipts from subscriptions receivable
Shares purchased
Shares sold to employees 408
Options exercised (63)
Contributions to ESOT
Net earnings
Dividends, $.26 per share
Net adjustment for foreign currency translation
---------- -----------
BALANCE, DECEMBER 31, 1994 8,728 3,167
Receipts from subscriptions receivable
Shares purchased
Shares sold to employees 281
Options exercised 24
Contributions to ESOT
Net earnings
Dividends, $.275 per share
Net adjustment for foreign currency translation
---------- -----------
BALANCE, DECEMBER 31, 1995 8,728 3,472
Receipts from subscriptions receivable
Shares purchased
Shares sold to employees 373
Options exercised 31
Contributions to ESOT
Net earnings
Dividends, $.295 per share
Net adjustment for foreign currency translation
---------- -----------
BALANCE, DECEMBER 31, 1996 $ 8,728 $ 3,876
========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 7
<TABLE>
<CAPTION>
SUBSCRIP-
TIONS RECEIV- CONTRIBU-
RETAINED TREASURY ABLE FROM TIONS
EARNINGS SHARES EMPLOYEES TO ESOT TOTAL
<S> <C> <C> <C> <C>
$60,263 $(26,491) $(975) $(289) $44,058
369 369
(4,409) (4,409)
832 1,240
652 589
96 96
4,039 4,039
(1,290) (1,290)
(161) (161)
------- -------- ----- ----- -------
62,851 (29,416) (606) (193) 44,531
309 309
(4,853) (4,853)
953 1,234
118 142
96 96
6,373 6,373
(1,292) (1,292)
(10) (10)
-------- -------- ----- ----- --------
67,922 (33,198) (297) (97) 46,530
290 290
(3,045) (3,045)
716 1,089
76 107
97 97
8,759 8,759
(1,341) (1,341)
(16) (16)
-------- -------- ----- ----- --------
$75,324 $(35,451) $ (7) $ $52,470
======= ========= ====== ===== =======
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 8
THE DAVEY TREE EXPERT COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996 1995 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FROM OPERATING ACTIVITIES:
Net earnings $ 8,759 $ 6,373 $ 4,039
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 14,338 12,827 12,963
Amortization 352 374 300
Deferred income taxes (319) (873) (563)
Other (273) (834) (431)
--------- --------- ---------
22,857 17,867 16,308
Change in operating assets and liabilities:
Accounts receivable (5,183) (5,309) (1,025)
Other assets (966) 47 (729)
Accounts payable and accrued liabilities 637 5,112 (331)
Insurance liabilities 2,627 1,330 1,839
Other liabilities (2,868) 2,145 143
--------- --------- --------
Net cash provided by operating activities 17,104 21,192 16,205
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment 1,678 898 945
Acquisitions (820) (395) (1,755)
Proceeds from sale of business 1,300
Capital expenditures:
Land and buildings (727) (504) (423)
Equipment (17,394) (12,793) (8,175)
--------- ---------- ---------
Net cash used in investing activities (17,263) (11,494) (9,408)
--------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
ESOT payment of debt guaranteed by Company 97 96 96
Net borrowings (payments) under notes payable, bank (325) 301 19
Principal payments of long-term debt (2,704) (7,162) (3,876)
Proceeds from issuance of long-term debt 5,148 2,024 416
Sales of treasury shares 1,196 1,376 1,829
Receipts from stock subscriptions 290 309 369
Dividends paid (1,341) (1,292) (1,290)
Repurchase of common shares (3,045) (4,853) (4,409)
--------- ---------- ---------
Net cash used in financing activities (684) (9,201) (6,846)
--------- ---------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (843) 497 (49)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,470 973 1,022
-------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 627 $ 1,470 $ 973
======== ========= ========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 9
THE DAVEY TREE EXPERT COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of The Davey
Tree Expert Company and its majority owned subsidiary companies. All
significant intercompany accounts and transactions have been eliminated
in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to December 31;
1996, 1995, and 1994 were fiscal years comprised of 52 weeks ended
December 28, 1996, December 30, 1995, and December 31, 1994,
respectively. For presentation purposes, all years were presumed to have
ended on December 31.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided, either on a
time and materials basis, price per unit completed, or an agreed upon fee
for services performed.
EARNINGS PER SHARE
The earnings per common share from continuing operations and the
earnings per common share were calculated by using the weighted average
number of common shares outstanding, including common stock equivalents.
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
Carrying amounts approximate fair value due to the short maturity of
these instruments. Cash equivalents are highly liquid investments with
maturities of three months or less when purchased. Due to the short
maturities, the carrying amount of the investments approximates fair
value.
ACCOUNTS RECEIVABLE
The Company had allowances of $314,000 and $330,000 in 1996 and 1995,
respectively; no allowance was considered necessary in 1994.
INTANGIBLE ASSETS
Intangible assets represent goodwill, employment contracts, client
lists and similar assets resulting from business acquisitions and are
being amortized on a straight-line basis over their estimated useful
lives ranging from 3 to 20 years.
PROPERTY AND EQUIPMENT
The Company records property and equipment at cost. Generally, land
improvements, leasehold improvements and buildings are depreciated by the
straight-line method while the declining balance method is used for
equipment. The estimated useful lives used in computing depreciation are:
land improvements, 5-20 years; buildings and leasehold improvements, 5-40
years; equipment, 3-10 years.
STOCK SPLIT
The Company's board of directors declared a 2 for 1 stock split on
September 27, 1996. The additional shares as a result of the split were
distributed on October 10, 1996 to shareholders of record as of October
1, 1996. Common shares issued, treasury shares, and per common share
amounts have been restated for all periods presented to give retroactive
effect to the stock split.
F-9
<PAGE> 10
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Reclassifications have been made to the prior-year financial statements
to conform to the current year presentation.
2. INSURANCE LIABILITIES
In managing its casualty liability exposures for workers compensation,
auto liability, and general liability, the Company is substantially
self-insured. It generally retains the first $300,000 in loss per
occurrence and carries excess insurance above that amount. With respect
to workers compensation, the Company's risk of exposure to loss per
occurrence may be less than $300,000 depending on the nature of the claim
and the statutes in effect by state.
Insurance liabilities are determined using actuarial methods and
assumptions to estimate ultimate costs. They include a large number of
claims for which the ultimate costs will develop over a period of several
years. Accordingly, the estimates can change as claims mature; they can
also be affected by changes in the number of new claims incurred and
claim severity. For these reasons, it is possible that these estimates
can change materially in the near term. Changes in estimates of claim
costs resulting from new information received will be recognized in
income in the period in which the estimates are changed. Expenses that
are unallocable to specific claims are recognized as period costs.
At December 31, 1996, 1995, and 1994, the present value of these
liabilities, which are discounted at 6 1/4% at December 31, 1996 and
5 1/2% at December 31, 1995 and 1994, were $15,112,000, $13,171,000 and
$8,393,000, respectively. The increases in 1996 and 1995 resulted from an
additional year's exposure to self-insured claims as well as their
continued maturation. The change in the discount rate reduced insurance
costs by approximately $200,000 in 1996. The discounted insurance
liabilities are classified as current and noncurrent liabilities based on
the timing of future estimated cash payments. At December 31, 1996, 1995,
and 1994, the gross value of those liabilities was approximately
$18,740,000, $16,911,000 and $10,487,000, respectively.
3. COMMON AND PREFERRED SHARES
The Company has authorized a class of 4,000,000 preferred shares, no
par value, of which none were issued.
The number of common shares authorized is 12,000,000, par value $1.00.
At December 31, 1996, 1995 and 1994, the number of common shares issued
was 8,728,440 and the number of shares in the treasury were 4,209,623,
4,104,976, and 3,842,434, respectively.
The Company's stock is not listed or traded on an active stock market
and market prices are, therefore, not available. Semi-annually, an
independent stock valuation firm determines the fair market value based
upon the Company's performance and financial condition.
Since 1979, the Company has provided a ready market for all
shareholders through its direct purchase of their common shares. During
1996, these purchases totaled 201,850 shares for $3,045,000 in cash; the
Company also had direct sales, to directors and employees, excluding
those shares sold through either the exercise of options or the employee
stock purchase plan below, of 6,997 shares for $90,000. Uniform
restrictions apply to the transfer of the Company's common shares. These
restrictions generally give the Company or the trust of the Company's
Employee Stock Ownership Plan the right to purchase the common shares
whenever a shareholder proposes to transfer the shares to anyone, other
than transfers to a current employee of the Company or transfers by a
current or former employee to members of their immediate family.
F-10
<PAGE> 11
3. COMMON AND PREFERRED SHARES (CONTINUED)
STOCK-BASED COMPENSATION PLANS
The 1994 Omnibus Stock Plan consolidates into a single plan provisions
for the grant of stock options and other stock based incentives and
maintenance of the employee stock purchase plan. Other than director
options, the grant of awards is at the discretion of the compensation
committee of the board of directors. The aggregate number of common
shares available for grant and the maximum number of shares granted
annually are based on formulas defined in the plan. Each non-employee
director elected or appointed, and re-elected or re-appointed, will
receive a director option that gives the right to purchase, for six
years, 2,000 common shares at the fair market value per share at date of
grant. The maximum number of shares that may be issued upon exercise of
stock options, other than director options and nonqualified stock
options, is 800,000 during the ten year term of the plan.
Shares available for grant at December 31, 1996 were 22,871, which were
based on the number available upon ratification of the plan less: the
options granted presented below; the director options granted; and shares
purchased in 1996, 1995, and 1994 under the stock purchase plan. On May
22, 1996, the non-employee directors were granted options to purchase
2,000 common shares at $13.56 per share, expiring in 2002; on May 17,
1995, they were granted options to purchase 6,000 common shares at $12.19
per share, expiring in 2001; on May 18, 1994, they were granted options
to purchase 20,000 common shares at $14.82 per share, expiring in 2000.
On August 21, 1996, 2,000 director options were exercised at $14.82 per
share.
The Company has an employee stock purchase plan that provides the
opportunity for all full-time employees with one year of service to
purchase shares through payroll deductions. The purchase price for the
shares offered under the plan is 85% of the fair value of the shares.
Purchases under the plan have been as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Number of employees participating 787 772 907
Annual shares purchased 80,006 90,798 96,418
Average price paid $12.44 $10.49 $11.43
Cumulative shares purchased 1,422,174 1,342,168 1,251,370
</TABLE>
Prior to adoption of the 1994 Omnibus Stock Plan, the Company had two
qualified stock option plans available for officers and management
employees; the final grant of awards under either of the two plans was
December 10, 1993. The Company has applied APB Opinion 25 and related
interpretations in accounting for awards granted under the three plans.
Accordingly, no compensation cost has been recognized for either the
fixed options granted under these plans or the employee stock purchase
plan. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation" (the standard), the Company's
net earnings and net earnings per common share would have been reduced by
$201,000 and $.04 respectively in 1996, and by $180,000 and $.03
respectively in 1995. In calculating the pro forma impact on earnings,
the following assumptions were used for the grants in 1996: initial
annual dividends of $.31 per share with annual increases of $.02 per
share; a risk free interest rate of 6.25%; an expected life of 5 years;
and an estimated forfeiture rate of 8%. The 1996 options vest at the rate
of 20% annually. The pro forma amounts for 1996 and 1995 include $190,000
and $180,000, respectively, attributable to compensation cost for shares
acquired under the employee stock purchase plan.
F-11
<PAGE> 12
3. COMMON AND PREFERRED SHARES (CONTINUED)
A summary of the status of the Company's three stock option plans as of
December 31, 1996, 1995, and 1994, and changes during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------- ------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 708,800 $11.88 763,670 $11.88 852,070 $11.34
Granted 265,000 15.80
Exercised (8,200) 10.56 (16,670) 9.40 (85,400) 6.55
Forfeited -0- (38,200) 12.90 (3,000) 10.41
-------- --------- ---------
Outstanding at end of year 965,600 12.97 708,800 11.88 763,670 11.88
======== ========= =========
Options exercisable at year end 646,600 492,800 276,270
Weighted average fair value of
options granted during the year $2.65
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------
EXERCISE NUMBER OUTSTANDING REMAINING NUMBER EXERCISABLE
PRICE AT 12/31/96 CONTRACTUAL LIFE AT 12/31/96
-------- ------------------ ---------------- ------------------
<S> <C> <C> <C>
$ 9.40 219,200 3.0 years 219,200
11.89 30,000 6.0 30,000
12.44 235,400 5.3 235,400
13.83 216,000 7.0 162,000
15.80 265,000 9.9 -0-
------- -------
965,600 646,600
======= =======
</TABLE>
STOCK SUBSCRIPTION OFFERING
In 1989, the Company made a stock subscription offering to employees
and directors whereby they could subscribe to purchase stock for $7.93
per share. Employees could purchase the Company's common shares by making
a 10% cash down payment and financing the remainder of the balance with
seven-year promissory notes payable to the Company through monthly
payroll deductions or annual installments commencing in September, 1989.
The notes called for interest at a rate of 8% per annum and have been
reflected as subscriptions receivable in shareholders' equity. A total of
141 participants subscribed for 457,752 common shares of the Company.
4. ACCRUED LIABILITIES
Accrued liabilities consisted of:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Compensation $ 4,009 $ 3,521 $ 3,101
Vacation 1,620 1,658 1,419
Insurance liabilities 6,105 6,791 3,343
Taxes, other than taxes on income 600 607 721
Other 610 1,376 1,015
-------- -------- --------
$ 12,944 $ 13,953 $ 9,599
======== ======== ========
</TABLE>
F-12
<PAGE> 13
5. NOTES PAYABLE, BANK AND LONG-TERM DEBT
NOTES PAYABLE, BANK
The Company has a bank operating loan which is repayable on demand and
charges interest at the bank's prime rate. Additionally, the Company has
unused short-term lines of credit with three banks totaling $2,942,000,
generally at the banks' prime rate, which was 8.25% at December 31, 1996.
LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revolving credit agreement:
Prime rate borrowings $ 3,100 $ 2,900 $ 2,700
London Interbank Offered Rate (LIBOR)
borrowings 11,000 6,000
Term note agreement 7,200 9,600 12,000
Notes payable 8,000
--------- --------- ---------
21,300 18,500 22,700
Long-term debt of ESOT 97 193
Subordinated notes - stock redemption 515 673 212
Term loans and other 459 560 1,863
--------- --------- ---------
22,274 19,830 24,968
Less current maturities 2,634 2,781 3,844
--------- --------- ---------
$ 19,640 $ 17,049 $ 21,124
========= ========= =========
</TABLE>
The total annual installments required to be paid on long-term debt in
years 1997 to 2001 are as follows: 1997, $2,634,000; 1998, $2,548,000;
1999, $2,552,000; 2000, $155,000; 2001, $40,000. Excluded from these
installments are the revolving credit agreement and notes payable which
are classified as long-term debt since it is expected that these amounts
will be outstanding throughout the ensuing year.
REVOLVING CREDIT AGREEMENT
The Company has a Revolving Credit Agreement (Revolver) with two banks,
which permits borrowings, as defined, up to $35,000,000. It provides the
Company an option of borrowing funds at either the prime interest rate or
rates based on LIBOR, plus a commitment fee of 3/16 of 1% on the average
daily unborrowed commitment. Borrowings may be converted, at the
Company's option, to four-year loans. The agreement has an expiration
date of April 30, 1999, and provides for one year extensions beyond that
date annually.
Under the most restrictive covenants of the Revolver and the Term Note
Agreement ("Term Note") below, the Company is obligated to maintain a
minimum shareholders' equity, as defined, of $32,000,000 plus 25% of
annual consolidated earnings from December 31, 1994; a maximum ratio of
consolidated funded debt to consolidated funded debt plus consolidated
net worth of .45 to 1; and a fixed charge coverage ratio of not less than
2.25 to 1.0.
TERM NOTE AGREEMENT
In 1992 the Company borrowed $12,000,000 under the Term Note which
provides for twenty consecutive quarterly principal installments of
$600,000 commencing January 1, 1995 plus interest at either LIBOR plus
1-5/16% or prime plus 1/4%. The average adjusted LIBOR rate during 1996
was 5.61%; LIBOR was 6.96%, 5.63%, and 6.50% at December 31, 1996, 1995
and 1994, respectively.
F-13
<PAGE> 14
5. NOTES PAYABLE, BANK AND LONG-TERM DEBT (CONTINUED)
NOTES PAYABLE
Notes payable consisted of borrowings from banks for periods of up to
six months at rates based either on LIBOR or a money market option rate,
which were generally less than the U.S. prime rate. The Company's intent
was to refinance these obligations either through continued uninterrupted
renewal of the notes or borrowing under the Revolver.
LONG-TERM DEBT OF ESOT
Commencing March 31, 1992, the agreement provided for twenty equal
quarterly installments of $24,098 plus interest of 8.4% with the final
installment due December 31, 1996.
SUBORDINATED NOTES
In 1995, 1992, and 1990, the Company redeemed shares of its common
stock from shareholders for cash and five-year subordinated promissory
notes bearing interest at a rate equal to the average of the prime rate
and the prevailing local bank basic savings rate, which was 5.3% in 1996.
There were 31,574 shares redeemed in 1995 for cash of $174,147 and notes
of $595,627. In 1992, 16,800 shares were redeemed for cash of $223,830
and notes of $193,986. In 1990, 32,937 shares were redeemed for cash of
$179,730 and notes of $478,022.
TERM LOANS AND OTHER
The weighted average interest on the term loans approximates 10.13% and
the amounts outstanding are being repaid primarily in equal monthly
installments through 1999.
INTEREST ON DEBT
The Company made cash payments for interest on all debt of $2,475,000,
$2,732,000, and $2,487,000 in 1996, 1995, and 1994, respectively.
6. FINANCIAL INSTRUMENTS
The Company uses interest rate swap agreements (swaps) with its
principal bank to reduce the impact of changes in interest rates on its
borrowings under the Term Note. Management's authority to utilize these
agreements is restricted by the Board of Directors, and they are not used
for trading purposes. At December 31, 1996, 1995, and 1994, the
outstanding swaps had a total notional amount of $7,200,000, $9,600,000,
and $12,000,000, which effectively changes the interest rate exposure on
the Term Note to a fixed 7.22% over the same maturity period. On December
16, 1993, a "reverse" swap was entered into which effectively changed the
fixed interest rate on one-half of the Term Note to a variable rate for
two years.
Amounts receivable or payable under the swaps are settled by the
parties on a quarterly basis, and are accrued over the related periods of
the swaps. These amounts are included in the consolidated balance sheets
on a net basis as accrued liabilities and are treated either as an
increase or decrease in interest expense. Interest expense was increased
by $25,000, $80,000, and $216,000 in 1996, 1995 and 1994 respectively
from these agreements.
The fair value of the swaps is the quoted amount that the Company would
receive or pay to terminate the swap agreements as provided by the bank,
taking into account current interest rates. Had these agreements been
terminated as of December 31 each year, the Company would have received
$1,000, paid $50,000, and received $345,000 in 1996, 1995, and 1994
respectively.
The carrying value of the Company's long-term debt is considered to
approximate fair value based on borrowing rates currently available for
loans with similar terms and maturities.
F-14
<PAGE> 15
7. EMPLOYEE STOCK OWNERSHIP PLAN AND 401KSOP
On March 15, 1979, the Company consummated a plan which transferred
control of the Company to its employees. As a part of this plan, the
Company sold 2,880,000 common shares to the Company's new Employee Stock
Ownership Trust (ESOT) for $2,700,000.
The Employee Stock Ownership Plan, in conjunction with the related
trust (ESOT), provided for the grant to certain employees of certain
ownership rights in, but not possession of, the common shares held by the
trustee of the Trust. Annual allocations of shares have been made to
individual accounts established for the benefit of the participants.
The Employee Stock Ownership Plan included as participants, all
nonbargaining employees of the parent company and its domestic
subsidiaries who have attained age 21 and completed one year of service.
SOP 93-6 "Employers Accounting for Employee Stock Ownership Plans"
requires the employer to recognize compensation expense equal to the fair
value of the shares committed to be released; however, it allows an
employer with an ESOP holding shares purchased prior to December 31, 1992
to continue their existing accounting treatment. Accordingly, the Company
has elected to maintain its existing accounting treatment.
The number of shares released from collateral and available for
allocation to ESOP participants was determined by dividing the sum of the
current year loan principal and interest payments by the sum of the
current and future years' loan principal and interest payments. The
Company made annual cash contributions to the ESOP, net of dividends paid
on the shares held as collateral, sufficient to pay the principal and
interest on the ESOT debt; such contributions are reflected as an expense
of the Company. Dividends on allocated shares are credited to
participants' accounts and charged against retained earnings. ESOP shares
that have been released and committed to be released are considered
outstanding for purposes of computing earnings per share.
The contributions to the ESOT were:
<TABLE>
<CAPTION>
1996 1995 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Principal repayment $ 97 $ 96 $ 96
Interest 5 14 22
----------- ----------- -----------
Total cash contributions required 102 110 118
Less dividends paid on collateral shares 12 23 33
----------- ----------- -----------
ESOT expense $ 90 $ 87 $ 85
=========== =========== ===========
Annual release of shares from collateral 38,970 42,216 45,432
=========== =========== ===========
Cumulative release of shares from collateral 2,880,000 2,841,030 2,798,814
=========== =========== ===========
Number of shares remaining in collateral 0 38,970 81,186
=========== =========== ===========
</TABLE>
Effective January 1, 1997, the Company will commence operation of the
"Davey 401KSOP and Employee Stock Ownership Plan", which retains the
existing ESOP participant accounts and incorporates a deferred savings
plan (401(k) plan) feature. Participants in the new plan will be allowed
to make before-tax contributions, within Internal Revenue Service
established limits, through payroll deductions. The Company will match,
in either cash or Company stock, 50% of each participants before-tax
contribution, limited to the first 3% of the employees' compensation
deferred each year. Eligibility to participate will remain the same as
that provided under the Employee Stock Ownership Plan.
F-15
<PAGE> 16
8. PENSION PLANS
DESCRIPTION OF PLANS
Substantially all of the Company's employees are covered by two defined
benefit pension plans. One of these plans is for non-bargaining unit
employees and, through 1996, was non-contributory with respect to annual
compensation up to a defined level, with voluntary employee contributions
beyond the specified compensation levels. Concurrent with the
introduction of the Davey 401KSOP, benefits earned under this plan
through December 31, 1996 were locked-in through retirement, and as of
January 1, 1997, the plan was amended to become non-contributory. The
other plan is for bargaining unit employees not covered by union pension
plans, is non-contributory, and provides benefits at a fixed monthly
amount based upon length of service.
FUNDING POLICY
The Company's funding policy is to make the annual contributions
necessary to fund the plans within the range permitted by applicable
regulations. The plans' assets are invested by outside asset managers in
marketable debt and equity securities.
EXPENSE RECOGNITION
Pension expense (income) was calculated as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost - increase in benefit
obligations earned $ 368 $ 358 $ 504
Interest cost on projected benefit obligation 906 880 879
Return on plan assets (earnings) (3,290) (3,841) (1,354)
Deferral (amortization) of unrecognized
net assets 1,454 2,303 (105)
--------- --------- ---------
Net pension income $ (562) $ (300) $ (76)
========== ========= =========
</TABLE>
FUNDED STATUS
The funded status of pension plans at December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Plan assets at fair market value $ 21,488 $ 19,143 $ 16,382
Projected benefit obligation (12,091) (12,462) (11,051)
---------- --------- ---------
Excess of assets over projected
benefit obligation 9,397 6,681 5,331
Unrecognized initial asset (1,082) (1,154) (1,226)
Unrecognized gain (4,639) (3,172) (2,054)
Unrecognized prior service cost (697) 62 66
---------- --------- ---------
Prepaid pension expense recognized
as other assets in balance sheets $ 2,979 $ 2,417 $ 2,117
========= ========= =========
</TABLE>
The projected benefit obligation was determined using an assumed
discount rate of 7.25% in 1996 and 1995, and 8.25% in 1994. The assumed
long-term compensation rate increase was 5.0%. The assumed long-term rate
of return on plan assets was 9.0% in 1996 and 1995, and 7.5% in 1994.
F-16
<PAGE> 17
8. PENSION PLANS (CONTINUED)
The projected benefit obligation, which includes the effect of annual
compensation rate increases, is based on an accumulated benefit
obligation of $10,530,000, $10,367,000, and $9,411,000 at December 31,
1996, 1995 and 1994, respectively. It includes vested benefits of
$10,390,000, $10,115,000, and $9,231,000, respectively. The January 1,
1997 amendment to the Davey Tree Expert Company Employee Retirement Plan
reduced the projected benefit obligation and increased the prior service
cost incurred by $755,000 in 1996.
MULTIEMPLOYER PLANS
The Company also contributes to several multiemployer plans which
provide defined benefits to unionized workers who do not participate in
the Company sponsored bargaining unit plan. Amounts charged to pension
cost and contributed to the plans in 1996, 1995 and 1994 totaled
$395,000, $309,000, and $380,000, respectively.
9. INCOME TAXES
The approximate tax effect of each type of temporary difference that
gave rise to the Company's deferred tax assets (no valuation allowance
was considered necessary) and liabilities at December 31, was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CURRENT
Assets:
Non-deductible accruals for:
Compensated absences $ 294 $ 217 $ 269
Insurance 1,346 2,419 1,591
Other - net 146 61 38
--------- --------- ---------
Net current 1,786 2,697 1,898
--------- --------- ---------
NON-CURRENT
Assets:
Insurance 2,997 1,883 1,360
Liabilities:
Accelerated depreciation for tax purposes (4,300) (4,228) (4,005)
Pensions (1,016) (822) (720)
Other - net 367 (15) 109
--------- --------- ---------
Net noncurrent (1,952) (3,182) (3,256)
--------- --------- ---------
Net deferred tax liability $ (166) $ (485) $ (1,358)
========= ========= =========
</TABLE>
Significant components of income tax expense from continuing operations
includes:
<TABLE>
<CAPTION>
1996 1995 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Taxes currently payable:
U.S. Federal $ 5,057 $ 3,721 $ 2,852
Canadian 144 246 (54)
State and local 1,200 880 591
--------- --------- ---------
6,401 4,847 3,389
--------- --------- ---------
Deferred tax expense (benefit):
U.S. (341) (891) (560)
Canadian 22 18 (3)
--------- --------- ---------
(319) (873) (563)
--------- --------- ---------
$ 6,082 $ 3,974 $ 2,826
========= ========= =========
</TABLE>
F-17
<PAGE> 18
9. INCOME TAXES (CONTINUED)
The differences between the U.S. Federal statutory tax rate and the
effective tax rate are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
U.S. Federal statutory tax rate 34.3% 34.0% 34.0%
State and local income taxes 5.3 5.6 5.7
Canadian income taxes .5 1.1 (.1)
Miscellaneous .9 (1.4) .7
------- ------- --------
Effective tax rate 41.0% 39.3% 40.3%
======= ======= ========
</TABLE>
Earnings before income taxes by country are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. $ 14,555 $ 9,669 $ 7,157
Canadian 286 442 (142)
--------- --------- ---------
$ 14,841 $ 10,111 $ 7,015
========= ========= =========
</TABLE>
The Company made cash payments for income taxes of $9,354,000,
$3,324,000, and $3,638,000 in 1996, 1995 and 1994, respectively.
10. NATURE OF OPERATIONS AND CUSTOMER CONCENTRATION
The Company provides a broad line of horticultural services to
corporate, institutional and residential customers throughout most of the
United States and Canada. The Company's major service line, utility line
clearance, represented approximately 62% of the outstanding accounts
receivable at December 31, 1996, 1995 and 1994. The Company had revenues
from one utility customer under multiple year contracts aggregating
approximately $55,000,000 in 1996, $37,000,000 in 1995, and $27,000,000
in 1994. The Company had revenues from a second utility customer under
multiple year contracts of approximately $19,000,000 in 1996, $21,000,000
in 1995, and $24,000,000 in 1994. The Company performs ongoing credit
evaluations of its customers' financial conditions and generally requires
no collateral.
11. OPERATING LEASES
The Company primarily leases facilities which are used for district
office and warehouse operations. These leases extend for varying periods
of time up to four years and, in some cases, contain renewal options.
Total rental expense under such operating leases amounted to
approximately $1,693,000, $1,539,000, and $1,394,000 for 1996, 1995 and
1994, respectively. As of December 31, 1996, future minimum rental
payments, including taxes and other operating costs, for all operating
leases having noncancelable lease terms in excess of one year, totaled
$2,989,000, and are expendable as follows: 1997, $1,266,000; 1998,
$855,000; 1999, $494,000, 2000, $273,000 and 2001, $101,000.
F-18
<PAGE> 19
12. COMMITMENTS AND CONTINGENCIES
The Company is party to a number of lawsuits, threatened lawsuits and
other claims arising out of the normal course of business. Management is
of the opinion that liabilities which may result are adequately covered
by insurance, or to the extent not covered by insurance or accrued, would
not be material in relation to the financial statements.
At December 31, 1996, the Company was contingently liable to its
principal banks in the amount of $7,277,000 for outstanding letters of
credit for insurance coverage and guarantees of debt for one of its
subsidiaries.
13. DISCONTINUED OPERATION
On March 31, 1995 the Company sold substantially all of the operating
assets, excluding real estate, of its interior plant care business; in
December, 1996 it sold the real estate related to this business at an
amount approximating its carrying value.
Amounts related to the discontinued operation and recognized in the
financial statements are as follows:
<TABLE>
<CAPTION>
1995 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revenues $ 553 $ 2,986
========= =========
Loss from discontinued operation, net of
applicable income tax benefits of $116,000 and
$77,000 in 1995 and 1994, respectively. (168) (150)
Gain on sale of assets, less applicable income
taxes of $280,000 404
--------- ----------
Discontinued operation, net $ 236 $ (150)
========= ==========
</TABLE>
14. ACQUISITIONS
In 1996 and 1995, the Company completed acquisitions of organizations
providing horticultural services for a total purchase price of $820,000
and $2,150,000, respectively. They were accounted for as a purchase and
their results of operations, which were not material in either year, are
included in the accompanying financial statements from their respective
dates of acquisition. Goodwill and other intangibles recognized in
connection with these purchases are being amortized over 3 to 15 years.
********
F-19
<PAGE> 1
EXHIBIT 21
----------
SUBSIDIARIES OF THE REGISTRANT
The Registrant has three wholly-owned subsidiaries, Davey Tree Surgery
Company (incorporated in Ohio), Davey Tree Expert Co. of Canada, Limited
(incorporated in Canada) and B.D. Wilhelm Company (incorporated in Colorado),
each of which did business in 1996 under its corporate name.
32
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
2-73052, as amended, 2-77353, 33-5755, 33-21072 and 33-59347 on Forms S-8
relating to The Davey Tree Expert Company 1980 Employee Stock Option Plan, The
Davey Tree Expert Company 1982 Employee Stock Option Plan, The Davey Tree Expert
Company 1985 Incentive Stock Option Plan, The Davey Tree Expert Company 1987
Incentive Stock Option Plan and The Davey Tree Expert Company 1994 Omnibus Stock
Plan, and in Registration Statement No. 33-30970 on Form S-2 relating to The
Davey Tree Expert Company 1989 Stock Subscription Plan and in the related
prospectuses, of our report dated February 14, 1997, appearing in this Annual
Report on Form 10-K of The Davey Tree Expert Company for the year ended December
31, 1996.
/s/DELOITTE & TOUCHE LLP
Cleveland, Ohio
March 25, 1997
33
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 627
<SECURITIES> 0
<RECEIVABLES> 39,805
<ALLOWANCES> 314
<INVENTORY> 2,477
<CURRENT-ASSETS> 46,718
<PP&E> 171,064
<DEPRECIATION> 113,980
<TOTAL-ASSETS> 111,386
<CURRENT-LIABILITIES> 27,435
<BONDS> 0
<COMMON> 8,728
0
0
<OTHER-SE> 43,742
<TOTAL-LIABILITY-AND-EQUITY> 111,386
<SALES> 0
<TOTAL-REVENUES> 266,934
<CGS> 0
<TOTAL-COSTS> 249,908
<OTHER-EXPENSES> (272)
<LOSS-PROVISION> 314
<INTEREST-EXPENSE> 2,457
<INCOME-PRETAX> 14,841
<INCOME-TAX> 6,082
<INCOME-CONTINUING> 8,759
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,759
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.86
</TABLE>
