<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, 1997
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 23, 1998 (excluding the total number of
Common Shares reported in Item 12 hereof), was $111,765,962.
Common Shares outstanding at March 23, 1998: 4,290,440.
Documents incorporated by reference: Portions of the Registrant's definitive
Proxy Statement for its 1998 Annual Meeting of Shareholders (Part III).
Index to Exhibits is located on sequential page 14.
1
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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, and line clearing for
public utilities. Horticultural services also involve the application of
scientifically formulated fertilizers, herbicides and insecticides with
hydraulic spray equipment on residential and commercial lawns. The Registrant
also provides a full range of natural resource management solutions, including
urban and utility forestry research and development, natural resources
consulting, and environmental planning.
COMPETITION AND CUSTOMERS. The Registrant is one of the largest national
organizations in the 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 1997, the Registrant
had sales of approximately $67,000,000 (23% 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 1997 and 1996 were approximately $27,003,000 and $18,121,000,
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 5,000 and 5,900, depending upon
the season, and considers its employee relations to be good.
FOREIGN AND DOMESTIC OPERATIONS. The Registrant sells its services 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
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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>
<CAPTI0N>
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 7,000
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 70 other premises for office and
warehouse 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 1997 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:
<TABLE>
<CAPTION>
NAME POSITION AGE
- ---- -------- ---
<S> <C> <C>
R. Douglas Cowan Chairman, President and 57
Chief Executive Officer
David E. Adante Executive Vice President, Chief 46
Financial Officer and Secretary-Treasurer
Karl J. Warnke Executive Vice President and 46
General Manager, Utility Services
Howard D. Bowles Vice President and General Manager, 54
Davey Tree Surgery Company
C. Kenneth Celmer Vice President and General Manager, 51
Residential Services
Bradley L. Comport, CPA Corporate Controller 46
Dr. Roger C. Funk Vice President and General Manager, 53
The Davey Institute
Rosemary T. Nicholas Assistant Secretary 54
Gordon L. Ober Vice President - New Ventures 48
Richard A. Ramsey Vice President and General Manager, 48
Commercial Services
Wayne M. Parker Vice President - Northern Operations, 42
Utility Services
</TABLE>
Mr. Cowan was elected Chairman, President and Chief Executive Officer in
May 1997. Prior to that time, he served as President and Chief Executive Officer
since before 1993.
Mr. Adante was elected Executive Vice President, Chief Financial Officer
and Secretary - Treasurer in May 1993. Prior to that time, he served as Vice
President, Chief Financial Officer and Secretary - Treasurer since before 1993.
5
<PAGE> 6
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 1993.
Mr. Bowles was elected Vice President and General Manager of Davey Tree
Surgery Company in January 1992.
Mr. Celmer was elected Vice President and General Manager - Residential
Services in January 1995. Prior to that time, he served as Vice President -
Eastern Operations, Residential and Commercial Services since before 1993.
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 1993.
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. Prior to that time, he served as Vice President -
Western Operations, Residential and Commercial Services since before 1993.
Mr. Parker was elected Vice President - Northern Operations, Utility
Services in May 1994. Prior to that time and since before 1993, 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, 1997, 1996, and 1995 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 4,429,205, 4,209,623 and 4,104,976.
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 401KSOP and ESOP, 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.
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 23, 1998, there were 1,757 recorded holders of the Registrant's
Common Shares. During the years ended December 31, 1997, December 31, 1996 and
December 31, 1995, the Registrant paid dividends of $.34, $.295, and $.275,
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-14 of this Annual Report on
Form 10-K.)
6
<PAGE> 7
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating Results:
Revenues $ 295,079 $ 266,934 $ 229,682 $ 209,683 $ 218,521
Earnings from Continuing
Operations $ 11,279 $ 8,759 $ 6,137 $ 4,189 $ 6,107
Earnings from Continuing
Operations Per
Common Share $ 2.57 $ 1.92 $ 1.29 $ .85 $ 1.22
Earnings from Continuing
Operations Per Common
Share-Assuming Dilution $ 2.39 $ 1.86 $ 1.27 $ .84 $ 1.17
At Year End:
Total Assets $ 127,825 $ 111,386 $ 104,161 $ 98,486 $ 99,780
Total Long-Term Debt $ 24,104 $ 19,640 $ 17,049 $ 21,124 $ 26,778
Cash Dividends Per
Common Share $ .34 $ .295 $ .275 $ .26 $ .24
</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-21
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
Operating activities provided $26,934,000 in cash, an increase of
$9,830,000 when compared to the $17,104,000 provided in 1996. The increase was
primarily attributable to higher net earnings and depreciation. The increase
was also due to a lower increase in accounts receivable, as well as in accounts
payable and accrued liabilities, insurance liabilities, and other liabilities.
These increases were partially offset by an increase in other assets.
Record net earnings of $11,279,000 increased $2,520,000 or 28.8% when
compared to the $8,759,000 earned in 1996. All of the Registrant's services
contributed to the increase through higher operating earnings, particularly
utility and commercial services. Utility services continued to be positively
influenced by additional work performed by the Registrant's western utility
operations. To a large extent this additional work has resulted from more
stringent utility line clearance standards promulgated by the state of
California. Given the continuance of these standards, the Registrant expects
that, while the rate of increase in utility revenues and operating earnings will
not be as pronounced as in 1997, their levels will be maintained generally,
subject to contract renewals and new contracts obtained in the ordinary course
of business. Commercial services increased their revenues and operating
earnings significantly when compared to 1996, its inaugural year of operation;
its earnings as well as most of the Registrant's other services also benefited
from additional work obtained as a result of damage caused by a July storm in
southeast Michigan.
7
<PAGE> 8
Accounts receivable increased by $4,091,000 in 1997. Nevertheless, this
represents an improvement of $1,092,000 from the increase experienced in 1996
and a corresponding improvement to the increase in net cash provided by
operating activities. Despite this lower increase in accounts receivable, the
Registrant's days outstanding have increased 2.8 days to 62.5 days in the
aggregate. Even though an improvement of about 2.4 days was realized throughout
most of the Registrant's U.S. operations, it was more than offset by a
deterioration of days outstanding in the Registrant's western U.S. operations,
more specifically with its major U.S. customer. The days outstanding with
respect to this customer have fluctuated during the course of 1997. While the
Registrant is not concerned as to the collectibility of this account or the
overall collectibility of accounts, it considers the current level of accounts
receivable and days outstanding as clearly unacceptable, and will continue its
work to reduce both. 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.
Accounts payable and accrued liabilities provided $2,606,000 in cash,
$1,283,000 more than in 1996. The net increase was principally a function of
higher accruals associated with the Registrant's increased levels of revenue and
profitability.
Insurance liabilities increased $2,539,000, which was only $598,000 higher
than that experienced in 1996. The increase is primarily due to accruals
associated with the addition of the Registrant's auto and general liability
exposures to its self-insured program in late 1996. The Registrant continues to
benefit from generally favorable claims experience in its casualty liability
exposures, and from a further stabilization in the level of estimated ultimate
costs resulting from a relatively mature self-insurance program, particularly
with respect to workers compensation. 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-11 of this Annual Report on Form 10-K).
Other liabilities provided $1,245,000 in cash, an increase of $4,113,000
when compared to the $2,868,000 used during 1996. This increase resulted
primarily from an acceleration of estimated income tax payments in the prior
year.
Other assets used $2,876,000 in cash, an increase of $1,910,000 when
compared to the $966,000 used in 1996. The current year increase resulted
primarily from an escrow deposit on real property which will be used as a branch
office facility. The transaction to acquire the property will be completed in
1998.
Investing activities used $26,314,000 in 1997, an increase of $9,051,000
when compared to the $17,263,000 used in 1996. The increase was attributable to
higher capital expenditures necessitated by the growth in all services,
particularly the Registrant's western utility operations. The Registrant
believes its capital expenditures and 1998 capital budget of approximately
$26,000,000 are consistent with its plan to expand services, maintain equipment
on existing operations, and implement its new enterprise wide information
system, discussed in more detail under "Results of Operations."
Financing activities used $525,000 in 1997, $159,000 less than that used in
1996, and $8,676,000 less than in 1995. In 1995, the Registrant significantly
reduced its capital expenditures and net of borrowings repaid $5,138,000 in long
- -term debt. In 1997 and 1996 the Registrant increased its level of capital
expenditures which were partially funded by net borrowings of $4,978,000 and
$2,444,000 respectively. In 1997 and 1995 the Registrant repurchased $5,918,000
and $4,853,000 of its common shares, respectively, compared with only $3,045,000
in 1996. The increase in 1997 was mainly due to shares redeemed from a trust
that had been established by a former employee's family, while the higher 1995
level resulted from a significant repurchase of shares held by a former vice
president. In the current year, a relatively higher level of treasury share
sales partially offset the increase in share repurchases.
8
<PAGE> 9
At December 31, 1997, the Registrant's principal source of liquidity
consisted of $722,000 in cash and cash equivalents; short-term lines of credit
and amounts available to be borrowed from banks via notes payable totaling
$4,562,000, of which $860,000 had been used at the end of the year; and a
revolving credit agreement in the amount of $35,000,000, of which $20,800,000
had been drawn and $6,955,000 was considered drawn to cover outstanding standby
letters of credit; and an available $5,000,000 temporary line of credit.
Including the outstanding balance on the term note agreement of $4,800,000, the
Registrant's credit facilities now total $49,000,000. 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Working Capital $ 19,194 $ 19,283 $ 12,493
Current Ratio 1.6:1 1.7:1 1.4:1
Cash Flow from Net Earnings,
Depreciation & Amortization $ 28,654 $ 23,449 $ 19,574
Capital Expenditures $ 27,003 $ 18,121 $ 13,297
Cash Flow to Capital
Expenditures Ratio 1.1:1 1.3:1 1.5:1
Cash Flow as % of Revenues 9.7% 8.8% 8.5%
</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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Equity to Debt Ratio .83:1 .89:1 .81:1
Debt as % of Assets 54.7% 52.9% 55.3%
Equity as % of Assets 45.3% 47.1% 44.7%
</TABLE>
At the end of 1997, these measurements reflect a greater degree of leverage
when compared with 1996 due primarily to the additional borrowings incurred to
fund the significantly higher level of capital expenditures.
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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net earnings per share -
assuming dilution $ 2.39 $ 1.86 $ 1.32
Dividends per Share $ .34 $ .295 $ .275
Book Value per Share $ 13.46 $ 11.61 $ 10.07
Market Valuation per Share $ 26.05 $ 18.20 $ 13.56
</TABLE>
Net earnings per share - assuming dilution includes the dilutive effects of
employee and director stock options in each of the years presented. Dividends
were again increased in 1997. In 1997, they were increased by a total of $.045
per share, or 15.3% over 1996, compared to an increase in 1996 of $.02 per share
or 7.3% over 1995. 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Average Assets Employed
(in 000's) $ 119,606 $ 107,774 $ 101,324
Asset Turnover (Revenues to
Average Assets) 2.5 2.5 2.3
Return on Average Assets 9.4% 8.1% 6.2%
</TABLE>
RESULTS OF OPERATIONS
Revenues of $295,079,000 for the year increased $28,145,000 or 10.5% when
compared to the $266,934,000 generated in 1996. This compares with increases of
16.2% and 9.5% in 1996 and 1995, respectively. The current year improvement was
primarily due to increased revenues realized by the Registrant's Utility and
Consulting services in its western operations, as well as higher Residential and
Commercial service revenues. 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 resulted from
the additional work obtained with several western utility customers and the
Registrant's major U.S. customer. The 1997 revenues of $67,000,000 earned by
the Registrant with this customer represent a significant concentration (See
Note 10 to the Financial Statements on page F-20 of this Annual Report on Form
10-K). The Registrant anticipates that 1998 revenues will approximate those
earned in 1997.
10
<PAGE> 11
Operating costs of $197,726,000 increased $14,299,000 over 1996 but as a
percentage of revenues they declined 1.7% to 67.0%. The percentage improvement
was generally the result of a higher level of revenues across all services, but
was more specifically influenced by the lower operating costs associated with
higher Residential, Commercial 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 have benefited its cost structure. As previously
discussed, the Registrant anticipates that 1998 revenues will approximate those
earned in 1997. It also expects a reduction in Consulting service revenues,
primarily due to the substantial completion of a major contract during the third
quarter of 1997. For these reasons, the Registrant believes that as a
percentage of revenues operating costs in 1998 will approximate, or slightly
exceed, 1997 levels.
Selling costs for 1997 increased $4,257,000 to $37,832,000 when compared to
the $33,575,000 experienced last year, and as a percentage of revenues they
increased .2% to 12.8%. The dollar and percentage increases are primarily the
result of higher commissions and branch office expenses associated with higher
Residential and Commercial service revenues, as well as increased travel and
other sales costs related to the Registrant's Consulting services.
General and administrative expense of $20,297,000 was $2,081,000 higher
than in 1996, and as a percentage of revenues these costs increased .1% to 6.9%.
Ordinarily, these expenses should decline as a percentage of revenues as
revenues increase; however, in the current year the Registrant has incurred
expenditures to complete the development of its information technology plan for
the purpose of replacing its existing legacy systems with a new enterprise wide
information system. Of primary importance and in accord with the information
technology plan, the new system will significantly enhance the Registrant's
processes and its ability to support future growth. Equally important, the
software vendor has represented that this new system is year 2000 compliant.
Even so, the Registrant recognizes that it must also assess the year 2000
readiness of external entities with which it interfaces. In January, 1998, the
Registrant acquired and commenced implementation of this new information system.
The Registrant estimates that implementation will be completed over an eighteen
month period. The Registrant projects its ultimate cost, including third party
consulting fees, hardware, and other costs to be approximately $8,500,000;
however, the Registrant believes a significant portion will be capitalizable.
The Registrant anticipates that general and administrative expense, as a
percentage of revenues, will be higher than existing levels over the term of
this system implementation. This is anticipated because certain costs such as
data conversion, training, and business process reengineering must be expensed
as incurred. The Registrant does however believe that, over the long term,
these costs will decline by virtue of having acquired and implemented this
system.
Depreciation and amortization of $17,375,000 increased $2,685,000 or .4% as
a percentage of revenues. The dollar and percentage increases are the result of
relatively higher capital expenditures, in the last two years particularly, for
equipment to support Utility, Residential and Commercial services. In 1998, the
Registrant anticipates that depreciation expense will approximate $17,500,000.
Interest Expense of $2,703,000 was $246,000 higher than last year, but as a
percentage of revenues, it remained constant at .9%. The dollar increase was
mainly due to higher overall debt levels in 1997.
As a result of the above factors, earnings before income taxes increased
$4,410,000 to $19,251,000 or 6.5% as a percentage of revenues. The tax
provisions for 1997, 1996 and 1995 resulted in effective tax rates of 41.4%,
41.0% and 39.3%, respectively. (See Note 9 of the Financial Statements on page
F-19 on this annual report on Form 10-K).
The Registrant's net earnings of $11,279,000 increased $2,520,000 or 28.8%
compared to 1996 and as a percentage of revenues they improved .5% to 3.8%.
11
<PAGE> 12
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-21 of this Annual Report
on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
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 1998 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 1998 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 1998 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 1998 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: R. D. COWAN
-----------------------
R. D. Cowan, Chairman, President and
Chief Executive Officer
March 23, 1998
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 23, 1998.
/s/ R. DOUGLAS COWAN /s/ EUGENE W. HAUPT
- --------------------------- ----------------------------
R. DOUGLAS COWAN, Director; EUGENE W. HAUPT, Director
Chairman, President and Chief
Executive Officer (Principal Executive
and Operating Officer)
/s/ J. W. JOY
----------------------------
J. W. JOY, Director
/s/ R. CARY BLAIR
- ---------------------------
R. CARY BLAIR, Director
/s/ JAMES H. MILLER
----------------------------
JAMES H. MILLER, Director
/s/ RICHARD E. DUNN
- ---------------------------
RICHARD E. DUNN, Director
/s/ THOMAS G. MURDOUGH JR.
----------------------------
THOMAS G. MURDOUGH JR., Director
/s/ RUSSELL R. GIFFORD
- ---------------------------
RUSSELL R. GIFFORD, Director
/s/ DAVID E. ADANTE
----------------------------
DAVID E. ADANTE, Executive Vice
/s/ WILLIAM D. GINN President, Chief Financial Officer
- --------------------------- and Secretary - Treasurer
WILLIAM D. GINN, Director (Principal Financial Officer)
/s/ RICHARD S. GRAY /s/ BRADLEY L. COMPORT
- --------------------------- ----------------------------
RICHARD S. GRAY, Director BRADLEY L. COMPORT,
Corporate Controller
(Principal Accounting Officer)
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, Not Applicable.
arrangement, liquidation or
succession.
(3)(i) 1991 Amended Articles of Incorporation Incorporated by
reference to Exhibit
3(i) to the Registrant's
Annual Report on Form
10-K for the year ended
December 31, 1996.
(3)(ii) 1987 Amended and Restated Regulations Incorporated by
of The Davey Tree Expert Company reference to Exhibit
3 (ii) to the
Registrant's Annual
Report on Form 10-K for
the year ended December
31, 1996.
(4) Instruments defining the rights of The Company is a party
security holders, including indentures to 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-14
of this Annual Report on
Form 10-K.
(9) Voting Trust Agreement Not Applicable.
(10)(a) 1987 Incentive Stock Option Plan 16 - 19
(10)(b) 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
(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
principles Not Applicable.
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
LOCATION
EXHIBIT NO. DESCRIPTION SEQUENTIAL PAGE
- ----------- ---------- ---------------
<S> <C> <C>
(21) Subsidiaries of the Registrant 20
(22) Published report regarding matters Incorporated by
submitted to vote of security holders reference to Part II,
Item 4 to the
Registrant's Form 10-Q
for the quarter ended
June 28, 1997.
(23) Consent of independent auditors 21
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 22
</TABLE>
The documents listed as Exhibits 10(a) and 10(b) constitute management contracts
or compensatory plans or arrangements.
15
<PAGE> 1
EXHIBIT 10(a)
-------------
THE DAVEY TREE EXPERT COMPANY
1987 INCENTIVE STOCK OPTION PLAN
PLAN ADOPTED BY BOARD OF DIRECTORS ON APRIL 20, 1987
PLAN APPROVED BY SHAREHOLDERS ON MAY 19, 1987
1. PURPOSE. This 1987 Incentive Stock Option Plan (the "Plan") is
designed to promote the interest of the Company by enabling the Company, by
grant of options to purchase Common Shares of the Company, to retain and attract
key employees for the Company and its affiliates, and to provide additional
incentive to those employees through increased stock ownership in the Company.
Options granted under the Plan ("Options") shall be incentive stock options
within the meaning of Section 422A of the Internal Revenue Code of 1986, as
amended, as now in effect or as hereafter further amended (the "Code"). The term
"affiliates" where used in the Plan means subsidiary corporations as defined in
Section 425 of the Code.
2. ADMINISTRATION. The Plan shall be administered by the Compensation
Committee of the Board of Directors of the Company (the "Committee"). The
Committee shall have full power and authority to construe and interpret the
provisions and to supervise the administration of the Plan, and to grant Options
under the Plan. No Director who shall have been eligible within a period of one
year prior to his appointment to the Committee to participate in the Plan or any
other plan of the Company entitling participants therein to acquire shares,
stock appreciation rights, or options of the Company is entitled to serve on the
Committee. All decisions and designations made by the Committee pursuant to the
provisions of the Plan shall be made by a majority of its members.
3. EMPLOYEES WHO MAY PARTICIPATE IN THE PLAN. Employees to whom
options are granted shall be designated by the Committee. An Option may be
granted to any full-time salaried key employee of the Company or of an
affiliate, including any director or officer who is a key employee. An employee
may hold more than one Option. No employee may, however, be granted incentive
stock options under any and all stock option plans of the Company that become
exercisable for the first time by the employee during any calendar year for
shares that exceed an aggregate fair market value (determined on the date(s) of
grant) of $100,000.
4. SHARES SUBJECT TO THE PLAN. The aggregate number of Common Shares
that may be delivered upon the exercise of all Options granted under the Plan
may not exceed 100,000, subject, however, to adjustment as provided in Section
13. The Common Shares to be issued under the Plan shall be the Company's
authorized Common Shares and may be unissued shares or treasury shares as the
Committee, with the concurrence of the Board of Directors, may from time to time
determine. To the extent the Company shall reacquire Common Shares for such
purposes, shares may be reacquired at the time Options are exercised, or from
time to time in advance, whenever the Board of Directors may deem their purchase
advisable. If an option is surrendered or for any other reason ceases to be
exercisable in whole or in part, the Common Shares that are subject to the
Option, but as to which the option has not been exercised, shall again become
available for offering under the Plan, subject to the limitations contained in
the first sentence of this Section 4.
5. OPTION GRANTS. Options granted under this Plan shall be deemed to
be granted on the June 30 or December 31, whichever day occurs first,
immediately preceding approval by the Committee of the granting of such Options.
16
<PAGE> 2
6. OPTION PRICE. The Option price under each option shall be
determined by the Committee or by the Board of Directors. The option price shall
be not less than 100% of the fair market value of the Common Shares subject to
the option on the date the option is granted, except that, if the optionee owns,
at the time the Option is granted, shares possessing more than 10% of the total
combined voting power of all classes of stock of the Company or of an affiliate,
the Option price shall be not less than 110% of the fair market value of the
shares on the date the option is granted. For purposes of the Plan, "fair market
value" of-shares shall be, with respect to options deemed to be granted on
December 31, the fair market value established by the trustee of the Company's
Employee Stock Ownership Trust ("ESOP Trustee") on that December 31, and with
respect to options deemed to be granted on June 30, the fair market value
established by the ESOP Trustee on that June 30.
7. NOTICE OF GRANT OF OPTION. Promptly after the Committee grants any
Option to an employee, the Committee shall cause the employee to be notified of
the fact that the option has been granted and of the terms of the option.
8. EXERCISE OF OPTIONS. No Option granted under the Plan may be
exercised prior to the completion of one year of continuous employment with the
Company or an affiliate after the date of grant, unless an option is accelerated
as provided in Section 10(b), and under no circumstances later than the
expiration date of the option. An option may be exercised only while the
optionee is in the employ of the Company or an affiliate, except as otherwise
provided in Section 9 or as may be permitted pursuant to substitute Options
granted under Section 14. An option shall become exercisable at such time or
times, in whole or in part, on a cumulative or non-cumulative basis, as the
Committee may determine at the time the Option is granted. No fraction of a
share may be purchased upon exercise of an Option.
9. EXERCISE OF OPTIONS AFTER TERMINATION OF EMPLOYMENT. Subject to
the provision found in Section 8, that under no circumstances may an option be
exercised later than the expiration date of the Option, an Option may be
exercised after termination of the optionee's employment only in the following
situations:
(a) If the termination of employment is due to retirement under
the applicable retirement plan or policy of the Company or an affiliate,
the optionee shall have the right within the period of three months next
following the date of termination to purchase all or any part of the Common
Shares that he would have been entitled to purchase if he had exercised his
option on the date of termination.
(b) Upon the termination of employment of an optionee due to
permanent and total disability or the death of an optionee while in the
employ of the Company or a subsidiary or within the three-month period
referred to in paragraphs (a) and (c) of this Section 9, the optionee or
the optionee's estate, personal representative, or beneficiary shall have
the right to exercise the Option in whole or in part within one year after
the date of termination or the optionee's death.
(c) If the termination of employment is due to any reason other
than the optionee's retirement as specified in (a) above or the optionee's
permanent and total disability or death as specified in (b) above, the
optionee may, provided the Committee or the Board of Directors consents,
exercise the option in whole or in part within the period of three months
after the date of termination of employment.
10. TERMINATION OF OPTIONS.
(a) An Option granted under the Plan shall terminate, and the right
of the optionee (or his estate, personal representative, or beneficiary)
to-purchase shares upon exercise of the Option shall expire, on the date
determined by the Committee at the time the option is granted. No Option,
however, may have a life of more than ten years after the date on which it
is granted, and, in the case of an optionee who owns, at the time the
Option is granted, stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or a subsidiary, no
option may have a life of more than five years after the date on which it
is granted.
17
<PAGE> 3
(b) In the event of a proposed lease, sale, or other disposition of
all or substantially all of the assets of the Company to other
corporations, firms, or individuals or a proposed merger, consolidation,
combination (as defined in Section 1701.01(Q), Ohio Revised Code), or
majority share acquisition (as defined in Section 1701.01(R), Ohio Revised
Code) involving the Company and as a result of which the holders of shares
of the Company prior to the transaction would become, by reason of the
transaction, the holders of such number of shares of the surviving or
acquiring corporation as entitle them to exercise less than one-third of
the voting power of the surviving or acquiring corporation in the election
of directors, the Board of Directors of the Company may accelerate the date
on which any outstanding Option or any portion of an outstanding Option
becomes exercisable. If the Board of Directors so accelerates the date (i)
the Board of Directors shall give the optionee written notice of the
acceleration and the reasons therefor; (ii) the optionee may, not more than
ten days prior to the anticipated effective date of the proposed
transaction, exercise the Option to purchase any or all shares then subject
to the Option; (iii) any such exercise shall be conditioned upon the
consummation of the transaction and shall become effective immediately
prior to the consummation date, in which event the employee need not make
payment for the shares to be purchased upon exercise of the option until
five days after written notice by the Company to the employee that the
transaction has been consummated; (iv), if the proposed transaction is
consummated, each Option, to the extent not previously exercised prior to
the date specified in the foregoing notice, shall terminate on the
effective date of the consummation, and (v), if the proposed transaction is
abandoned, the shares then subject to the Option shall continue to be
available for purchase in accordance with the other provisions of the Plan,
and any acceleration of the date on which any outstanding Option, or part
thereof, becomes exercisable shall be deemed to have been rescinded. In
addition to the foregoing, the Committee may authorize the purchase by the
Company, from the optionee, of options previously granted to any person
who, at the time of any transaction described in the first sentence of this
paragraph (b) of Section 10, is a director or officer of the Company for a
price equal to the difference between the consideration per share payable
pursuant to the terms of the transaction and the option price.
(c) If, at the meeting of shareholders of the Company next
following the date on which the Board of Directors adopts the Plan, the
shareholders do not approve the Plan, any Option theretofore granted shall,
forthwith upon the final adjournment of the meeting of shareholders, become
null and void.
11. NOTICE OF EXERCISE; PAYMENT FOR COMMON SHARES. No
certificate for Common Shares purchased upon exercise of an option shall be
delivered until full payment of the purchase price for the Common Shares has
been made. An employee to whom an option has been granted shall have none of the
rights of a shareholder with respect to the Common Shares subject thereto until
the Option is exercised by delivery of written notice of exercise to the
Company. Following exercise of the Option, the employee shall have all of the
rights of a shareholder with respect to the Common Shares purchased upon the
exercise, except that he shall not have the right to vote the shares or to
receive dividends with respect thereto until payment therefor has been made in
full. Payment of the Option price must be made only in cash.
12. ASSIGNABILITY. Except as otherwise provided in Section
9(b), an Option granted under this Plan shall not be transferred and may be
exercised only by the employee to whom granted. Each employee to whom an Option
is granted, by accepting the Option, agrees with the Company that, in the event
the Company merges into, consolidates with, or sells or otherwise transfers all
or a substantial part of its assets to another corporation, he will consent to
the assumption of the Option, or accept a new incentive stock option in
substitution therefor, if the Committee or the Board of Directors requests him
to do so and the option is not otherwise terminated in accordance with the
provisions of Section 10(b).
13. ADJUSTMENTS UPON CHANGES IN SHARES. In the event of any
change in the Common Shares subject to the Plan or to any option granted under
the Plan by reason of a merger, consolidation, reorganization, recapitalization,
stock dividend, stock split-up, combination, or exchange of shares, or other
change in the corporate structure of the Company, the aggregate number of shares
as to which options may thereafter be granted under the Plan, the number of
shares subject to each outstanding option, and the option price with respect to
the shares shall be appropriately adjusted by the Board of Directors.
18
<PAGE> 4
14. SUBSTITUTE OPTIONS. The Board of Directors may grant
Options in substitution for, or upon the assumption of, options granted by
another corporation that is merged into, consolidated with, or all or a
substantial part of the assets or stock of which is acquired by the Company or a
subsidiary. Subject to the limit in Section 4 on the number of shares that may
be delivered upon the exercise of options granted under the Plan, the terms and
provisions of any options granted under this Section 14 may vary from the terms
and provisions otherwise specified in the Plan and may, instead, correspond to
the terms and provisions of the options granted by the other corporation.
15. PURCHASE FOR INVESTMENT. Each employee exercising an option
may be required by the Company, in its sole discretion, to give a representation
that he is acquiring the shares other than with a view to the distribution
thereof. The Company may release any investment representation obtained if it
subsequently determines that the representation is no longer required to insure
that a sale or other disposition of the shares would not involve a violation of
the provisions of the Securities Act of 1933, as amended, or of applicable state
blue sky laws.
16. COMPLIANCE WITH SECURITIES LAWS AND EXCHANGE REQUIREMENTS.
No certificate for shares shall be delivered upon exercise of an Option until
the Company shall have taken such action, if any, as is then required to comply
with the provisions of the Securities Act of 1933, as amended, the Securities
Exchange Act of 1934, as amended, the Ohio Securities Act, as amended, any
applicable state blue sky laws, and with the requirements of any exchange on
which the Common Shares may, at the time, be listed.
17. DURATION AND TERMINATION OF THE PLAN. The Plan shall remain
in effect until April 20, 1997, and shall then terminate, unless terminated at
an earlier date by action of the Board of Directors. Except as provided in
Section 19, termination of the Plan shall not affect Options granted prior
thereto.
18. AMENDMENT OF THE PLAN. The Board of Directors may alter or amend
the Plan from time to time prior to its termination, except that, without
shareholder approval, no amendment may increase the aggregate number of shares
with respect to which Options may be granted (other than in accordance with the
provisions of Section 13), reduce the option price at which options may be
exercised (other than in accordance with the provisions of Section 13), extend
the time within which options may be granted or exercised, or change the
requirements relating to eligibility or to administration of the Plan. Except
for adjustments made in accordance with the provisions of Section 13, the Board
of Directors may not, without the consent of the holder of the Option, alter or
impair any Option previously granted under the Plan.
19. SHAREHOLDER APPROVAL. Approval of the Plan must be obtained by
no later than June 30, 1987, by the affirmative vote of the holders of shares of
the Company entitling them to exercise at least a majority of the voting power
on the approval. options may be granted prior to approval of the Plan by
shareholders, but no option may be exercised until after the Plan has been
approved by shareholders.
19
EXHIBIT 21
----------
SUBSIDIARIES OF THE REGISTRANT
The Registrant has two wholly-owned subsidiaries, Davey Tree Surgery Company
(incorporated in Ohio), and the Davey Tree Expert Co. of Canada, Limited
(incorporated in Canada), each of which did business in 1997 under its
corporate name.
20
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
prospectus, of our report dated February 13, 1998 appearing in this Annual
Report on Form 10-K of The Davey Tree Expert Company for the year ended
December 31, 1997.
/s/DELOITTE & TOUCHE LLP
Cleveland, Ohio
March 23, 1998
21
<PAGE> 1
EXHIBIT 13
----------
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[ITEMS 14(a)(1) AND (2)]
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------- ----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Net Earnings for the years ended F-5
December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the years ended F-6
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended F-8
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements for the years ended F-9
December 31, 1997, 1996 and 1995
</TABLE>
F-1
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
The Davey Tree Expert Company
Kent, Ohio
We have audited the accompanying consolidated balance sheets of The Davey Tree
Expert Company and subsidiary companies as of December 31, 1997, 1996, and 1995,
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 on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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, 1997, 1996, and 1995, 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 13, 1998
F-2
<PAGE> 3
THE DAVEY TREE EXPERT COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995
(DOLLARS IN THOUSANDS)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 722 $ 627 $ 1,470
Accounts receivable 43,896 39,805 34,622
Operating supplies 2,662 2,477 2,136
Prepaid expenses and other assets 2,724 2,023 1,791
Deferred income taxes 2,032 1,786 2,697
--------- --------- ---------
Total current assets 52,036 46,718 42,716
PROPERTY AND EQUIPMENT:
Land and land improvements 6,283 6,178 6,446
Buildings and leasehold improvements 16,142 16,682 15,956
Equipment 166,902 148,204 139,711
--------- --------- ---------
189,327 171,064 162,113
Less accumulated depreciation 123,053 113,980 107,977
--------- --------- ---------
Net property and equipment 66,274 57,084 54,136
OTHER ASSETS AND INTANGIBLES 9,515 7,584 7,309
--------- --------- ---------
TOTAL ASSETS $ 127,825 $ 111,386 $ 104,161
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 4
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,187 $ 10,174 $ 8,488
Accrued liabilities 10,822 8,229 8,592
Insurance liabilities 6,738 6,105 6,791
Income taxes payable 1,647 218 3,171
Notes payable, bank 300 75 400
Current maturities of long-term debt 3,148 2,634 2,781
-------- --------- --------
Total current liabilities 32,842 27,435 30,223
LONG-TERM DEBT 24,104 19,640 17,049
DEFERRED INCOME TAXES 1,381 1,952 3,182
INSURANCE LIABILITIES 10,913 9,007 6,380
OTHER LIABILITIES 698 882 797
-------- --------- --------
TOTAL LIABILITIES 69,938 58,916 57,631
SHAREHOLDERS' EQUITY:
Preferred shares
Common shares 8,728 8,728 8,728
Additional paid-in capital 4,625 3,876 3,472
Retained earnings 84,975 75,324 67,922
-------- --------- --------
98,328 87,928 80,122
LESS:
Treasury shares, at cost 40,441 35,451 33,198
Subscriptions receivable from employees 7 297
Future contributions to ESOT 97
-------- --------- --------
TOTAL SHAREHOLDERS' EQUITY 57,887 52,470 46,530
-------- --------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $127,825 $ 111,386 $104,161
======== ========= ========
</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>
DECEMBER 31
1997 1996 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 295,079 100.0% $ 266,934 100.0% $ 229,682 100.0%
COSTS AND EXPENSES:
Operating 197,726 67.0 183,427 68.7 159,310 69.4
Selling 37,832 12.8 33,575 12.6 28,629 12.5
General and administrative 20,297 6.9 18,216 6.8 15,889 6.9
Depreciation and amortization 17,375 5.9 14,690 5.5 13,201 5.7
--------- ------ --------- ------ --------- -----
273,230 92.6 249,908 93.6 217,029 94.5
--------- ------ --------- ------ --------- -----
EARNINGS FROM OPERATIONS 21,849 7.4 17,026 6.4 12,653 5.5
INTEREST EXPENSE 2,703 .9 2,457 .9 2,725 1.2
OTHER INCOME - NET (105) (272) (.1) (183) (.1)
--------- ------ --------- ------ --------- -----
EARNINGS BEFORE INCOME TAXES 19,251 6.5 14,841 5.6 10,111 4.4
INCOME TAXES 7,972 2.7 6,082 2.3 3,974 1.7
--------- ------ --------- ------ --------- -----
EARNINGS FROM
CONTINUING OPERATIONS 11,279 3.8 8,759 3.3 6,137 2.7
DISCONTINUED OPERATION -
NET EARNINGS 236 .1
--------- ------ --------- ------ --------- -----
NET EARNINGS $ 11,279 3.8% $ 8,759 3.3% $ 6,373 2.8%
========= ====== ========= ====== ========= =====
EARNINGS PER COMMON SHARE:
FROM CONTINUING OPERATIONS $ 2.57 $ 1.92 $ 1.29
========= ========= =========
NET EARNINGS $ 2.57 $ 1.92 $ 1.34
========= ========= =========
EARNINGS PER COMMON SHARE - ASSUMING DILUTION:
FROM CONTINUING OPERATIONS $ 2.39 $ 1.86 $ 1.27
========= ========= =========
NET EARNINGS $ 2.39 $ 1.86 $ 1.32
========= ========= =========
</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, 1997, 1996 AND 1995
(Dollars in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Paid-In
Shares Capital
<S> <C> <C>
BALANCE, JANUARY 1, 1995 $ 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
Receipts from subscriptions receivable
Shares purchased
Shares sold to employees 695
Options exercised 54
Net earnings
Dividends, $.34 per share
Net adjustment for foreign currency translation
---------- ----------
BALANCE, DECEMBER 31, 1997 $ 8,728 $ 4,625
========== ==========
</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>
$ 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) 0 52,470
7 7
(5,918) (5,918)
737 1,432
191 245
11,279 11,279
(1,494) (1,494)
(134) (134)
---------- ---------- --------- ---------- ----------
$ 84,975 $ (40,441) $ 0 $ 0 $ 57,887
========== ========== ========= ========== ==========
</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
1997 1996 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 11,279 $ 8,759 $ 6,373
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 17,000 14,338 12,827
Amortization 375 352 374
Deferred income taxes (817) (319) (873)
Other (326) (273) (834)
-------- ------- --------
27,511 22,857 17,867
Change in operating assets and liabilities:
Accounts receivable (4,091) (5,183) (5,309)
Other assets (2,876) (966) 47
Accounts payable and accrued liabilities 2,606 1,323 1,664
Insurance liabilities 2,539 1,941 4,778
Other liabilities 1,245 (2,868) 2,145
-------- -------- --------
Net cash provided by operating activities 26,934 17,104 21,192
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment 1,138 1,678 898
Acquisitions (449) (820) (395)
Proceeds from sale of business 1,300
Capital expenditures:
Land and buildings (285) (727) (504)
Equipment (26,718) (17,394) (12,793)
-------- -------- --------
Net cash used in investing activities (26,314) (17,263) (11,494)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under notes
payable, bank 225 (325) 301
Principal payments of long-term debt (2,778) (2,704) (7,162)
Proceeds from issuance of long-term debt 7,756 5,148 2,024
Sales of treasury shares 1,677 1,196 1,376
Receipts from stock subscriptions 7 290 309
ESOT payment of debt guaranteed by Company 97 96
Dividends paid (1,494) (1,341) (1,292)
Repurchase of common shares (5,918) (3,045) (4,853)
-------- ------- --------
Net cash used in financing activities (525) (684) (9,201)
-------- ------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 95 (843) 497
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 627 1,470 973
-------- ------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 722 $ 627 $ 1,470
======== ======= ========
</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 31,1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company provides a broad line of horticultural services to corporate,
institutional and residential customers throughout most of the United States
and Canada.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of The Davey
Tree Expert Company and its 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; 1997
was a 53 week year ended January 3, 1998. In 1996 and 1995, the fiscal
years were each comprised of 52 weeks ended December 28, 1996, and December
30, 1995, 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.
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 at December 31, 1997 and 1996, and
$330,000 at December 31, 1995.
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.
F-9
<PAGE> 10
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Standards (SFAS) No. 128, "Earnings Per Share." This standard
replaces the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike the Company's previously
reported primary earnings per share, basic earnings per share excludes the
dilutive effects of options; diluted earnings per share includes their
effect. All earnings per share amounts for all periods have been presented,
and where appropriate, restated to conform to the new standard.
The following table sets forth the computation of earnings per common share
and earnings per common share - assuming dilution:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Numerator:
Earnings from continuing operations $ 11,279 $ 8,759 $ 6,137
Discontinued operations - net earnings 236
---------- ---------- ----------
Net earnings $ 11,279 $ 8,759 $ 6,373
========== ========== ==========
Denominator:
For earnings per common share
weighted average shares outstanding 4,392,969 4,550,677 4,750,024
Effect of dilutive securities
employee and director stock options 332,837 163,930 63,514
---------- ---------- ----------
Denominator for earnings per share -
assuming dilution 4,725,806 4,714,607 4,813,538
========== ========== ==========
Earnings per common share:
From continuing operations $ 2.57 $ 1.92 $ 1.29
Discontinued operations - net earnings .05
---------- ---------- ----------
Net earnings $ 2.57 $ 1.92 $ 1.34
========== ========== ==========
Earnings per common share - assuming dilution:
From continuing operations $ 2.39 $ 1.86 $ 1.27
Discontinued operations - net earnings .05
---------- ---------- ----------
Net earnings $ 2.39 $ 1.86 $ 1.32
========== ========== ==========
Antidilutive shares not included in earnings per
common share - assuming dilution 0 20,402 31,746
========== ========== ==========
</TABLE>
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-10
<PAGE> 11
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements, but does not address either issues of recognition or
measurement. It is effective for the Company in 1998. The only item that
will impact the Company's display of comprehensive income will be net
adjustments for foreign currency translation, which have previously been
reported within the statement of shareholders' equity.
In 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." It becomes effective in 1998 and
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements of the
enterprise and in condensed financial statements of interim periods issued
to shareholders, as well as other information regarding products and
services, geographic information, and major customers. The Company has not
yet completed its analysis of SFAS No. 131 and accordingly has yet to
determine the effect, if any, it will have on future financial statement
disclosures.
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.
These liabilities, including the present value of workers compensation
liabilities which are discounted at 5 3/4% at December 31, 1997, 6 1/4% at
December 31, 1996, and 5 1/2% at December 31, 1995, totaled $17,651,000,
$15,112,000 and $13,171,000 at December 31, 1997, December 31, 1996, and
December 31, 1995, respectively. The increases in 1997 and 1996 resulted
from an additional year's exposure to self-insured claims as well as their
continued maturation. The change in the discount rate increased insurance
costs by approximately $213,000 in 1997. Insurance liabilities are
classified as current and noncurrent liabilities based on the timing of
future estimated cash payments. At December 31, 1997, 1996, and 1995, the
gross value of those liabilities was approximately $20,765,000, $18,740,000
and $16,911,000, respectively.
F-11
<PAGE> 12
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, 1997, 1996 and 1995, the number of common shares issued was
8,728,440 and the number of shares in the treasury were 4,429,205,
4,209,623, and 4,104,976, 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 1997, these
purchases totaled 324,124 shares for $5,918,000 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 12,264 shares for $220,000. It also sold 8,420 shares to the
Company's 401 (k) plan for $169,000. 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.
STOCK-BASED COMPENSATION PLANS
The 1994 Omnibus Stock Plan consolidated 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 director options are exercisable six months
from the 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, 1997 were 176,704, which were
based on the number available upon ratification of the plan less: the
options granted presented below; the director options granted; and 329,330
shares purchased since 1994 under the stock purchase plan.
A summary of the status of the Company's director options as of December
31, 1997, 1996, and 1995, and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- --------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 24,000 $14.06 24,000 $14.16 20,000 $14.82
Granted 10,000 18.79 2,000 13.56 6,000 12.19
Exercised (4,000) 13.51 (2,000) 14.82
Forfeited (2,000) 14.82
------ ------ ----- -----
Outstanding at end of year 30,000 15.71 24,000 14.06 24,000 14.16
====== ====== ======
</TABLE>
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.
F-12
<PAGE> 13
3. COMMON AND PREFERRED SHARES (CONTINUED)
Purchases under the plan have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Number of employees participating 817 787 772
Annual shares purchased 62,108 80,006 90,798
Average price paid $16.63 $12.44 $10.49
Cumulative shares purchased 1,484,282 1,422,174 1,342,168
</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 those plans was December 10,
1993.
A summary of the status of the Company's stock option plans, excluding
director options, as of December 31, 1997, 1996, and 1995, and changes
during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- -------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 965,600 $12.97 708,800 $11.88 763,670 $11.88
Granted 265,000 15.80
Exercised (17,750) 10.82 (8,200) 10.56 (16,670) 9.40
Forfeited (38,200) 12.90
------- ------- -------
Outstanding at end of year 947,850 13.01 965,600 12.97 708,800 11.88
======= ======= ========
Options exercisable at year end 735,850 646,600 492,800
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, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------
EXERCISE NUMBER OUTSTANDING REMAINING NUMBER EXERCISABLE
PRICE AT 12/31/97 CONTRACTUAL LIFE AT 12/31/97
-------- ------------------ ---------------- ------------------
<S> <C> <C> <C>
$ 9.40 210,500 2.0 years 210,500
11.89 25,850 5.0 25,850
12.44 230,500 4.3 230,500
13.83 216,000 6.0 216,000
15.80 265,000 8.9 53,000
------- -------
947,850 735,850
======= =======
</TABLE>
The Company continues to apply the intrinsic-value method under APB Opinion
25 and related interpretations in accounting for awards granted under the
three plans. Using this method, compensation is measured as the difference
between the option exercise price and the market value of the stock at the
date of grant. 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 Company's net earnings
and earnings per common share - assuming dilution would have been reduced by
$330,000 and $.07 in 1997, $201,000 and $.04 in 1996 and $180,000 and $.04
in 1995.
F-13
<PAGE> 14
3. COMMON AND PREFERRED SHARES (CONTINUED)
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 1997, 1996, and 1995 include $200,000, $190,000 and $180,000,
respectively, attributable to compensation cost for shares acquired under
the employee stock purchase plan.
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
1997 1996 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Compensation $ 5,648 $ 4,009 $ 3,521
Medical claims 1,948 1,390 1,430
Vacation 1,848 1,620 1,658
Taxes, other than taxes on income 657 600 607
Other 721 610 1,376
-------- -------- -------
$ 10,822 $ 8,229 $ 8,592
======== ========= =======
</TABLE>
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 $3,702,000,
generally at the banks' prime rate, which was 8.5 % at December 31, 1997.
F-14
<PAGE> 15
5. NOTES PAYABLE, BANK AND LONG-TERM DEBT (CONTINUED)
LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revolving credit agreement:
Prime rate borrowings $ 2,800 $ 3,100 $ 2,900
London Interbank Offered Rate (LIBOR)
borrowings 18,000 11,000 6,000
Term note agreement 4,800 7,200 9,600
------- ------- -------
25,600 21,300 18,500
Long-term debt of ESOT 97
Subordinated notes - stock redemption 357 515 673
Term loans and other 1,295 459 560
------- ------- -------
27,252 22,274 19,830
Less current maturities 3,148 2,634 2,781
------- ------- -------
$24,104 $19,640 $17,049
======= ======= =======
</TABLE>
The total annual installments required to be paid on long-term debt are as
follows: 1998, $3,148,000; 1999, $2,867,000; 2000, $155,000; 2001, $40,000;
2002, $39,000; and thereafter $203,000. The revolving credit agreement is
classified as long-term debt and excluded from these installments 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 (8.5% at December
31, 1997) interest rate or rates based on LIBOR (5.75% at December 31,
1997), plus a margin adjustment ranging from .7% to 1.0%. The Revolver also
includes 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, 2000, and
provides for one year extensions beyond that date annually.
On May 16, 1997, the Company obtained a temporary line of credit in the
amount of $5,000,000 with its principal bank which provided for borrowings
at either the prime interest rate, rates based on LIBOR, or a negotiated
fixed interest rate. The agreement has an expiration date of April 30,
1998.
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 $38,000,000 plus 30% of annual
consolidated earnings from December 31, 1996; 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 1997 was 7.06%;
adjusted LIBOR was 7.09 %, 6.96%, and 5.63% at December 31, 1997, 1996 and
1995, respectively.
F-15
<PAGE> 16
5. NOTES PAYABLE, BANK AND LONG-TERM DEBT (CONTINUED)
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 1997. 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 8.78 % and
the amounts outstanding are being repaid primarily in equal monthly
installments through 2007.
INTEREST ON DEBT
The Company made cash payments for interest on all debt of $2,806,000,
$2,475,000, and $2,732,000 in 1997, 1996, and 1995, respectively.
6. FINANCIAL INSTRUMENTS
The Company has used interest rate exchange agreements (swaps) with its
principal bank to modify the interest rate characteristics on its borrowings
under the variable interest rate 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, 1997, 1996, and 1995,
the outstanding swaps had a total notional amount of $4,800,000, $7,200,000,
and $9,600,000, 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.
The swaps are accounted for using the settlement method or the "matched
swap" method in which the quarterly net cash settlements of the agreements
are recognized in interest expense when they accrue. The accrual amounts
are included in the consolidated balance sheets as accrued liabilities.
Interest expense was increased by $9,000, $25,000, and $80,000 in 1997, 1996
and 1995 respectively from these agreements. An interest rate swap is
considered to be a matched swap if it is linked through designation with an
asset or liability provided that it has the opposite interest rate
characteristics of the asset or liability. Generally, if the asset or
liability that is linked to the swap matures, or is extinguished, or if the
swap no longer qualifies for settlement accounting the swap will be marked
to market through income. The term of the agreements is matched with the
maturity period of the Term Note. If the Company decided to terminate the
swap agreements any resulting gain or loss would be deferred and amortized
over the original life of the swap contracts or recognized with the
offsetting gain or loss of the hedged transaction.
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 paid $3,000,
received $1,000 and paid $50,000 in 1997, 1996, and 1995, 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-16
<PAGE> 17
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 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.
Statement of Position 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
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Principal repayment $ 97 $ 96
Interest 5 14
---------- ----------
Total cash contributions required 102 110
Less dividends paid on collateral shares 12 23
---------- ----------
ESOT expense $ 90 $ 87
========== ==========
Annual release of shares from collateral 38,970 42,216
========== ==========
Cumulative release of shares from collateral 2,880,000 2,841,030
========== ==========
Number of shares remaining in collateral 0 38,970
========== ==========
</TABLE>
Effective January 1, 1997, the Company commenced operation of the "The
Davey 401KSOP and ESOP," which retained the existing ESOP participant
accounts and incorporated a deferred savings plan (401(k) plan) feature.
Participants in the plan are 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 participant's before-tax contribution, limited to the first 3% of the
employee's compensation deferred each year. Eligibility to participate is
the same as that provided under the Employee Stock Ownership Plan. The
Company's cost of this plan for 1997, consisting principally of the accrual
for the employer match, was $493,000.
F-17
<PAGE> 18
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, future benefits earned under this plan were modified,
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>
1997 1996 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost - increase in benefit
obligations earned $ 626 $ 368 $ 358
Interest cost on projected
benefit obligation 849 906 880
Return on plan assets (earnings) (5,072) (3,290) (3,841)
Deferral (amortization) of unrecognized
net assets 2,931 1,454 2,303
-------- -------- -------
Net pension income $ (666) $ (562) $ (300)
======== ======== =======
</TABLE>
Funded Status
The funded status of pension plans at December 31 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Plan assets at fair market value $25,561 $21,488 $19,143
Projected benefit obligation (12,502) (12,091) (12,462)
------- ------- -------
Excess of assets over projected
benefit obligation 13,059 9,397 6,681
Unrecognized initial asset (1,010) (1,082) (1,154)
Unrecognized gain (7,741) (4,639) (3,172)
Unrecognized prior service cost (663) (697) 62
------- ------- -------
Prepaid pension expense recognized
as other assets in balance sheets $ 3,645 $ 2,979 $ 2,417
======= ======== =======
</TABLE>
The projected benefit obligation was determined using an assumed discount
rate of 7.00% in 1997 and 7.25% in 1996 and 1995. The assumed long-term
compensation rate increase was 5.0%. The assumed long-term rate of return
on plan assets was 8.25% in 1997 and 9.0% in 1996 and 1995.
F-18
<PAGE> 19
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 $11,342,000, $10,530,000, and $10,367,000 at December 31, 1997, 1996 and
1995, respectively. It includes vested benefits of $11,220,000,
$10,390,000, and $10,115,000, respectively. The January 1, 1997 amendment
to the Davey Tree Expert Company Employee Retirement Plan reduced the
projected benefit obligation and prior service cost incurred by $755,000 at
December 31, 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 1997, 1996 and 1995 totaled $380,000, $395,000,
and $309,000, 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>
1997 1996 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CURRENT
Assets:
Compensated absences $ 341 $ 294 $ 217
Insurance 1,447 1,346 2,419
Other - net 244 146 61
-------- -------- -------
Net current 2,032 1,786 2,697
-------- -------- -------
NON-CURRENT
Assets:
Insurance 3,825 3,100 1,986
Liabilities:
Accelerated depreciation
for tax purposes (4,421) (4,300) (4,228)
Pensions (1,247) (1,016) (822)
Other - net 462 264 (118)
-------- -------- -------
Net noncurrent (1,381) (1,952) (3,182)
-------- -------- -------
Net deferred tax asset (liability) $ 651 $ (166) $ (485)
======== ======== =======
</TABLE>
Significant components of income tax expense from continuing operations include:
<TABLE>
<CAPTION>
1997 1996 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Taxes currently payable:
U.S. Federal $ 6,839 $ 5,057 $ 3,721
Canadian 309 144 246
State and local 1,641 1,200 880
-------- -------- -------
8,789 6,401 4,847
-------- -------- -------
Deferred tax expense (benefit):
U.S. Federal (682) (269) (704)
Canadian 46 22 18
State and local (181) (72) (187)
-------- -------- -------
(817) (319) (873)
-------- -------- -------
$ 7,972 $ 6,082 $ 3,974
======== ======== =======
</TABLE>
F-19
<PAGE> 20
9. INCOME TAXES (CONTINUED)
The differences between the U.S. Federal statutory tax rate and the
effective tax rate are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
U.S. Federal statutory tax rate 34.9% 34.3% 34.0%
State and local income taxes 5.5 5.3 5.6
Canadian income taxes .7 .5 1.1
Miscellaneous .3 .9 (1.4)
----- ------ ------
Effective tax rate 41.4% 41.0% 39.3%
===== ====== ======
</TABLE>
Earnings before income taxes by country are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. $ 18,604 $ 14,555 $ 9,669
Canadian 647 286 442
-------- -------- -------
$ 19,251 $ 14,841 $10,111
======== ======== =======
</TABLE>
The Company made cash payments for income taxes of $7,360,000, $9,354,000,
and $3,324,000 in 1997, 1996 and 1995, respectively.
10. CUSTOMER CONCENTRATION
The Company's major service line, utility line clearance, represented
approximately 62% of the outstanding accounts receivable at December 31,
1997, 1996 and 1995. The Company had revenues from one utility customer
under multiple year contracts aggregating approximately $67,000,000 in 1997,
$55,000,000 in 1996, and $37,000,000 in 1995. The Company had revenues from
a second utility customer under multiple year contracts of approximately
$22,000,000 in 1997, $19,000,000 in 1996, and $21,000,000 in 1995. 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 $1,723,000,
$1,693,000, and $1,539,000 for 1997, 1996 and 1995, respectively. As of
December 31, 1997, future minimum rental payments, including taxes and other
operating costs, for all operating leases having noncancelable lease terms
in excess of one year, totaled $3,275,000, and are expendable as follows:
1998, $1,280,000; 1999, $867,000; 2000, $586,000, 2001, $361,000 and 2002,
$181,000.
F-20
<PAGE> 21
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 position, results of operations or
liquidity of the Company.
At December 31, 1997, the Company was contingently liable to its principal
banks in the amount of $7,515,000 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
(DOLLARS IN THOUSANDS)
<S> <C>
Revenues $ 553
========
Loss from discontinued operation, net of
applicable income tax benefits of $116,000 (168)
Gain on sale of assets, less applicable income
taxes of $280,000 404
--------
Discontinued operation, net $ 236
========
</TABLE>
14. ACQUISITIONS
In 1997, 1996, and 1995, the Company completed acquisitions of
organizations providing horticultural services for a total purchase price of
$449,000, $820,000 and $2,150,000, respectively. They were accounted for as
purchases and their results of operations, which were not material in any of
the years presented, 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-21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 722
<SECURITIES> 0
<RECEIVABLES> 43,896
<ALLOWANCES> 314
<INVENTORY> 2,662
<CURRENT-ASSETS> 52,036
<PP&E> 189,327
<DEPRECIATION> 123,053
<TOTAL-ASSETS> 127,825
<CURRENT-LIABILITIES> 32,842
<BONDS> 0
0
0
<COMMON> 8,728
<OTHER-SE> 49,159
<TOTAL-LIABILITY-AND-EQUITY> 127,825
<SALES> 0
<TOTAL-REVENUES> 295,079
<CGS> 0
<TOTAL-COSTS> 273,230
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,703
<INCOME-PRETAX> 19,251
<INCOME-TAX> 7,972
<INCOME-CONTINUING> 11,279
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,279
<EPS-PRIMARY> 2.57<F1>
<EPS-DILUTED> 2.39
<FN>
<F1>Tag 40 Basic EPS
</FN>
</TABLE>
