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, 1999
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, OH 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 requirements 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 29, 2000 (excluding the total number of
Common Shares reported in Item 12 hereof), was $105,689,766.
Common Shares outstanding at March 29, 2000: 8,129,982
Documents incorporated by reference: Portions of the Registrant's definitive
Proxy Statement for its 1999 Annual Meeting of Shareholders (Part III).
Index to Exhibits is located on sequential page 16.
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PART I
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ITEM 1. BUSINESS.
GENERAL. The Davey Tree Expert Company, which was incorporated in 1909, and its
subsidiaries (the "Registrant") have two primary operating segments which
provide a variety of horticultural services to their respective customer groups.
Residential and Commercial services provides for the treatment, preservation,
maintenance, cultivation, planting and removal of trees, shrubs and other plant
life; its services also include the practices of landscaping, tree surgery, tree
feeding, and tree spraying, as well as the application of fertilizers,
herbicides and insecticides. Utility services is principally engaged in the
practice of line clearing for public utilities. The Registrant also provides
other services related to natural resource management solutions, including urban
and utility forestry research and development, natural resources consulting and
environmental planning.
COMPETITION AND CUSTOMERS. The Registrant's Residential and Commercial services
is one of the largest national tree care organizations, and competes with other
national and local firms with respect to its services. On a national level, the
competition is primarily in the context of landscape construction and
maintenance as well as residential and commercial lawn care. At a local and
regional level, its competition comes mainly from other companies which are
engaged primarily in tree care. With respect to Utility services, the
Registrant is the second largest organization in its industry, and competes
principally with one major national competitor, as well as several smaller
regional firms.
Principal methods of competition in both operating segments 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 all horticultural services
provided, and utilization of modern, well-maintained equipment. Pricing is not
always a critical factor in a customer's decision with respect to Residential
and Commercial services; however, pricing is generally the principal method of
competition for the Registrant's Utility services, 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 1999, the Registrant
had sales of approximately $51,000,000 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 customers
principally through direct mail programs and to a lesser extent through the
placement of advertisements in national magazines and trade journals, 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.
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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 customers. Also, the Registrant must continue to assure its
compliance with the Occupational Safety and Health Act. In keeping with these
requirements, expenditures in 1999 and 1998 were approximately $20,580,000 and
$34,009,000, 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 6,000, 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.
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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.
OPERATING BUILDING
LOCATION SEGMENT ACREAGE SQ. FT.
- -------- --------- ------- --------
Baltimore, Maryland Residential and Commercial 3.4 22,500
Bettendorf, Iowa Residential and Commercial .5 478
Cincinnati, Ohio Residential and Commercial 2.5 8.800
Chamblee, Georgia Residential and Commercial & Utility 1.9 6,200
Chantilly, Virginia Residential and Commercial 4.0 5,700
Charlotte, North Carolina Residential and Commercial & Utility 3.1 4,900
Cheektowaga, New York Other 6.9 2,800
Columbus, Ohio Residential and Commercial 8.0 15,925
Downsview, Ontario, Canada Residential and Commercial .5 3,675
East Dundee, Illinois Residential and Commercial & Utility 4.0 7,500
Edmonton, Alberta, Canada Utility .7 2,900
Gaithersburg, Maryland Residential and Commercial 2.1 7,200
Gibsonia, Pennsylvania Residential and Commercial 5.9 7,100
Hinsdale, Illinois Residential and Commercial 1.7 7,200
Houston, Texas Residential and Commercial 1.5 7,000
Indianapolis, Indiana Residential and Commercial 1.5 5,000
Jacksonville, Florida - Nursery Residential and Commercial 279.0 5,300
Kent, Ohio (multiple parcels) - Corporate Headquarters Other 101.4 111,608
Lachine, Quebec, Canada Residential and Commercial .5 2,300
Lancaster, New York Residential and Commercial 3.0 6,624
Lawrence, Pennsylvania Residential and Commercial 3.5 7,200
Livermore, California Utility 12.0 29,737
Mecklenburg County, North Carolina Utility 15.6 -0-
Nanaimo, British Columbia, Canada Other 1.0 4,742
Plymouth, Minnesota Residential and Commercial 2.7 11,750
Richmond, Virginia Residential and Commercial .7 2,586
Stow, Ohio Residential and Commercial 7.4 14,100
Toledo, Ohio Residential and Commercial .5 4,300
West Babylon, New York Residential and Commercial .9 14,100
West Carlton Twp., Ontario, Canada Residential and Commercial 3.1 4,000
Wheeling, Illinois Residential and Commercial 5.0 11,300
Winter Park, Florida Utility 1.0 5,850
Wooster, Ohio - Nursery Residential and Commercial 322.8 13,194
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.
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings, other than ordinary routine litigation
incidential 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of 1999 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) and their present positions and
ages are as follows:
NAME POSITION AGE
- ---- -------- ---
R. Douglas Cowan Chairman and Chief Executive Officer 59
Karl J. Warnke President and Chief Operating Officer 48
David E. Adante Executive Vice President, Chief Financial 48
Officer and Secretary-Treasurer
Howard D. Bowles Senior Vice President and General Manager, 56
Davey Tree Surgery Company
C. Kenneth Celmer Senior Vice President and General Manager, 53
Residential Services
Bradley L. Comport, CPA Corporate Controller 49
Dr. Roger C. Funk Vice President and General Manager, 55
The Davey Institute
Rosemary T. Nicholas Assistant Secretary 56
Marjorie L. Conner, Esquire Assistant Secretary 42
Gordon L. Ober Vice President - Personnel Recruiting and 50
Development
Richard A. Ramsey Vice President and General Manager, 50
Commercial Services
Wayne M. Parker Vice President - Eastern Operations, 44
Utility Services
Mr. Cowan was elected Chairman and Chief Executive Officer on March 11, 1999.
Previously he had served as Chairman, President and Chief Executive Officer
since May 1997. Prior to that time, he served as President and Chief Executive
Officer since before 1995.
Mr. Warnke was elected President and Chief Operating Officer on March 11, 1999.
Prior to that time, he served as Executive Vice President and General Manager -
Utility Services since before 1995.
Mr. Adante was elected Executive Vice President, Chief Financial Officer and
Secretary-Treasurer in May 1993.
Mr. Bowles was elected Senior Vice President and General Manager of Davey Tree
Surgery Company in January 2000. Prior to that time, he served as Vice
President and General Manager of Davey Tree Surgery Company since before 1995.
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Mr. Celmer was elected Senior Vice President and General Manager - Residential
and Commercial Services in January 2000. Prior to that time, he served as Vice
President and General Manager - Residential Services since January 1995.
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 1995.
Ms. Nicholas was elected Assistant Secretary in May 1982.
Ms. Conner was elected Assistant Secretary in May 1998. Prior to that time, she
served as Manager of Legal and Treasury Services since February 1995 and as
Assistant Controller since before 1995.
Mr. Ober was elected Vice President - Personnel Recruiting and Development in
February, 2000. Prior to that time, he served as Vice President - New Ventures
since before 1995.
Mr. Ramsey was elected Vice President and General Manager - Canadian Operations
in January 2000. Prior to that time, he served as Vice President and General
Manager - Commercial Services since January 1995.
Mr. Parker was elected Vice President - Eastern Utility Services in January
2000. Previously he had served as Vice President - Northern Operations, Utility
Services since before 1995.
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
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
At December 31, 1999, 1998 and 1997, the number of Common Shares issued were
10,728,440, 8,728,440, and 8,728,440 respectively. At those respective dates,
the number of shares in the treasury were 2,601,058, 4,736,785 and 4,429,205.
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, 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.
As of March 29, 2000, there were 2,125 recorded holders of the Registrant's
Common Shares. During the years ended December 31, 1999, December 31, 1998 and
December 31, 1997, the Registrant paid dividends of $.20, $.19, and $.17,
respectively, per share. Approximately one quarter of the total dividend
payment is made 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, EBIT (earnings before interest and taxes on income) to interest expense
and maximum consolidated funded debt to consolidated funded debt plus
consolidated net worth ratio, are maintained. (See Note 6 to the Financial
Statements on page F-16 of this Annual Report on Form 10-K.)
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ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED DECEMBER 31
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Operating Results:
Revenues $ 308,144 $ 313,887 $ 295,079 $ 266,934 $ 229,682
Earnings From Continuing
Operations $ 3,715 $ 10,597 $ 11,279 $ 8,759 $ 6,137
Earnings From Continuing
Operations Per Common Share $ .47 $ 1.29 $ 1.28 $ .96 $ .65
Earnings From Continuing
Operations Per Common Share-
Assuming Dilution $ .42 $ 1.15 $ 1.19 $ .93 $ .64
At Year End:
Total Assets $ 176,682 $ 149,086 $ 127,825 $ 111,386 $ 104,161
Total Long-Term Debt (Including
Capital Leases) $ 70,265 $ 42,893 $ 24,104 $ 19,640 $ 17,049
Cash Dividends Per Common Share $ .20 $ .19 $ .17 $ .148 $ .138
In 1995, the Registrant sold its interior plant care business. Operating
results for 1995 have accordingly been restated for this discontinued operation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities used $4,578,000 in cash during 1999, $32,771,000 more than
what had been provided in 1998. The items contributing to this significant
increased use of cash in 1999 were substantially reduced earnings, an inordinate
increase in accounts receivable, an increase in other assets, and a decrease in
accounts payable and accrued liabilities.
Several factors influenced the decline in earnings. First, Utility earnings
decreased almost solely as a result of a contract the Registrant had
renegotiated with a major western customer. This contract provided for an
extended term along with lower pricing. Second, Residential and Commercial
services earnings were significantly impacted by additional aged accounts
receivable (amounts in excess of a "typical" year) written off of approximately
$3,200,000. Please refer to the more detailed discussion regarding accounts
receivable which follows. Residential and Commercial services earnings, when
compared to last year, were also adversely affected due to the absence of storm
work that had been gained in Quebec and Maine in 1998. Consulting costs
incurred upon switching over to the Registrant's new enterprise-wide information
system of approximately $2,000,000 in excess of that originally anticipated,
also contributed to the overall reduced level of earnings. Please also refer to
the Registrant's more detailed discussion regarding its new system under
"Results of Operations."
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Accounts receivable increased $19,962,000, $12,368,000 more than the increase
experienced in 1998. Also, days outstanding have increased to 89.8 days from
63.7 days in the prior year. Several factors, all of which relate to
converting to the Registrant's new enterprise-wide information system in April
1999, have contributed to this increase. First, upon switching over to this
system, the Registrant temporarily postponed billing its Residential and
Commercial customers until approximately mid-May, and in some cases June, a
delay of about 40-60 days. This initial delay was attributable to errors in
converting data from the Registrant's legacy systems. Beyond this initial
delay, the Registrant also continued to experience a lag in billing to these
customers during its prime sales season. This lag in billing, the difference
between the date services had been performed versus the date an invoice was
actually prepared and sent to the customers, was attributable to the learning
curve associated with the new system. Despite this learning curve, revenues
were accrued and recognized as services were performed. The build-up in
accounts receivable was also significantly influenced as a result of billing
customers monthly from May through November, a function of system configuration
(in contrast with "as services were performed" under the Registrant's legacy
system); the system was reconfigured to bill all Residential customers weekly
from and after November. Finally, the level of accounts receivable was
exacerbated by an inability to generate accurate accounts receivable aging
reports until the latter part of 1999. In prior years these reports served as
an important tool to facilitate the Registrant's corporate and field management
efforts in monitoring the level of, and effecting collection on its accounts
receivable. As a consequence, as previously mentioned the Registrant charged
off as uncollectible approximately $3,200,000 in accounts receivable above and
beyond that which would have been experienced in prior years. While the
Registrant is not pleased with the level of accounts receivable at year end, it
has worked through substantially all of the issues previously mentioned, and is
further assured by the fact that, as of the end of February 2000, total accounts
receivable decreased to approximately $52,000,000, only $5,000,000 higher than
February 1999 levels. Accordingly, the Registrant is not concerned as to the
overall collectibility of accounts and will continue its efforts to reduce both
the level of accounts receivable and days outstanding. It also performs ongoing
credit evaluations of its customers' financial conditions for collection
purposes, and when determined necessary, it provides an allowance for doubtful
accounts.
Other assets increased $3,732,000, $3,673,000 more than in 1998. The increase
is attributable to increases in prepaid pension costs and refundable income
taxes.
Accounts payable and accrued liabilities declined by $2,949,000, $8,544,000
more than the increase experienced last year. The current year reduction is
due largely to lower administrative incentive accruals based upon the
Registrant's decreased earnings in 1999.
While insurance liabilities declined by $856,000, approximately the same amount
as last year, the Registrant believes it is important to note that the current
year reduction resulted primarily from a 175 basis point increase in the
discount rate applied to its workers compensation liabilities whereas in 1998
the reduction was due to accelerated claims payments made to the Registrant's
new excess insurer and claims administrator.
Investing activities used $18,707,000 in cash, $14,134,000 less than in 1999.
Last years level of cash expended for equipment was higher primarily due to
costs capitalized in conjunction with the development of the Registrant's
enterprise-wide information system. Also contributing to the decrease was
$4,657,000 of current year expenditures financed with capital leases.
Financing activities provided $22,084,000 in cash, $16,894,000 more than last
year. The increase is attributable to two factors. First, the Registrant's
net borrowings increased $10,206,000, necessitated by the higher level of
accounts receivable. Second, the Registrant's repurchase of common shares
declined by $6,641,000 from 1998. Last year the Registrant experienced a
relatively higher level of retirements and consequent repurchases of shares
from the Employee Stock Ownership Trust, along with redemptions from two
directors related to or in contemplation of their retirements from the Board.
9
At December 31, 1999, the Registrant's principal source of liquidity consisted
of $63,000 in cash and cash equivalents; short-term lines of credit and amounts
available to be borrowed from banks via notes payable totaling $4,600,000 of
which $500,000 was drawn and $700,000 was considered drawn to cover outstanding
letters of credit; and the revolving credit agreement and temporary line of
credit totaling $85,000,000, of which $56,600,000 was drawn and $11,400,000 was
considered drawn to cover outstanding letters of credit. Including the
outstanding term note agreement, at that date the Registrant's credit
facilities totaled $99,600,000. The Registrant and its banks have amended its
existing credit facility to among other things, extend the current availability
through April 30, 2000; the Registrant expects to complete a new credit
agreement with its banks prior to that date. As currently structured, the
proposed agreement would raise the total credit facilities of the Registrant to
$109,600,000. The Registrant believes its available credit will exceed credit
requirements, and that its liquidity is adequate.
LIQUIDITY MEASUREMENTS
As previously discussed, management uses these measurements primarily to gauge
the Registrant's ability to meet working capital requirements, fund capital
expenditures, and repurchase its common shares.
1999 1998 1997
---- ---- ----
Net cash provided by (used in)
operating activities $ (4,578) $ 28,193 $ 26,934
Net cash used in investing activities $ (18,707) $ (32,841) $ (26,314)
Net cash provided by (used in)
financing activities $ 22,084 $ 5,190 $ (525)
The Registrant also uses the following additional measures in its evaluation.
They are not an alternative to earnings determined in accordance with generally
accepted accounting principles (GAAP) as a measure of financial performance or
to GAAP cash flow as a measure of liquidity.
1999 1998 1997
---- ---- ----
Working capital $ 47,847 $ 28,172 $ 19,194
Current ratio 2.4:1 1.8:1 1.6:1
Cash flow from net earnings,
depreciation and amortization $ 24,127 $ 30,531 $ 28,654
Capital expenditures $ 20,580 $ 34,009 $ 27,003
Cash flow to capital expenditure ratio 1.2:1 .9:1 1.1:1
Cash flow as percentage of revenues 7.8% 9.7% 9.7%
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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.
1999 1998 1997
---- ---- ----
Equity to debt ratio .47:1 .62:1 .83:1
Debt as percentage of assets 68.1% 61.6% 54.7%
Equity as percentage of assets 31.9% 38.4% 45.3%
At the end of 1999, these measurements reflect a greater degree of leverage
when compared with 1998 due primarily to the additional borrowings
necessitated by the higher level of accounts receivable.
COMMON SHARE MEASUREMENTS
These measurements assist shareholders in assessing the Registrant's earnings
performance, dividend payout and equity position as related to their
shareholdings.
1999 1998 1997
---- ---- ----
Net earnings per share - assuming dilution $ .42 $ 1.15 $ 1.19
Dividends per share $ .20 $ .19 $ .17
Book value per share $ 6.94 $ 7.18 $ 6.73
Market valuation per share $ 13.00 $ 16.00 $ 13.03
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 1999. In 1999, they were increased by a total of $.01
per share, or 5.3% over 1998, compared to an increase in 1998 of $.02 per
share, or 11.8% over 1997. 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.
1999 1998 1997
---- ---- ----
Average assets employed $ 162,884 $ 138,456 $ 119,606
Asset turnover (revenues to average assets) 1.9 2.3 2.5
Return on average assets 2.3% 7.7% 9.4%
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RESULTS OF OPERATIONS
Revenues of $308,144,000 decreased $5,743,000 or 1.8% from 1999. As previously
mentioned, the Registrant believes that in the aggregate, approximately
$3,200,000 or 56% of this decline is attributable to "excess" or "additional"
amounts written off as sales allowances in the current year in contrast with
prior years, due to invoicing and collection issues resulting from the system
conversion. On an operating segment basis, the continued strength of
Residential and Commercial service revenues, which improved by $6,877,000 or
5.6%, was more than offset by an $11,114,000 or 6.0% decline in Utility service
revenues. The entire amount of excess amounts written off negatively impacted
Residential and Commercial services' revenues. As has been the case over the
last several years, Residential and Commercial services has benefited from a
continued emphasis on sales coupled with a good economy. The reduction in
Utility service revenues resulted primarily from three factors. First, at the
beginning of 1999, the Registrant completed negotiations with a major western
customer to extend the term of its contract with somewhat lower pricing.
Second, also in early 1999, it experienced a reduction in crews on a contract
with an eastern U.S. customer. Finally, it lost in the ordinary course of
competitive bidding, a relatively small contract in the Midwest.
Operating costs of $210,628,000 were $293,000 lower than in 1998, but increased
1.1% as a percentage of revenues to 68.3%. The percentage increase resulted
from a higher level of field costs associated with the Registrant's conversion
to its new enterprise-wide information system, resulting in reduced
productivity.
Selling costs of $45,403,000 were $5,802,000 higher than last year, and at 14.7%
were 2.1% higher as a percentage of revenues. The increase is attributable to
increased expenditures for salaries, commissions, and branch office expenses
associated with higher Residential and Commercial service revenues as well as
for branch office costs incurred related to converting to the Registrant's new
information system.
General and administrative costs of $21,742,000 declined $1,022,000 from 1998,
primarily the result of an increase in net periodic pension income realized on
the Registrant's defined benefit pension plans, along with lower travel and
education costs in comparison to 1998, a function of the system project. These
factors were somewhat offset by costs incurred for consultants required to
provide post implementation system modifications to the Registrant's new
enterprise-wide information system, as well as costs incurred for the increase
in additional temporary and full-time personnel retained upon "going live" with
the new system to perform data entry.
The Registrant acquired and commenced implementation of this new system in
January 1998, completing the blueprint, configuration, data conversion, and
testing phases through April 3, 1999. On April 4, 1999, the Registrant
commenced live operation of the new system and discontinued use of the legacy
system. The ultimate cost of this new system was approximately $18,000,000. Of
this total, $3,000,000 had been expensed in 1998 and as of December 31, 1999,
$11,000,000 had been capitalized. The remaining $4,000,000 was expensed during
1999. The amounts expensed in 1999 were higher than the amount originally
anticipated, and resulted from required modifications identified after
commencement of going live with the new system.
The Registrant completed its assessment of the year 2000 readiness of its non-IT
systems, those systems with embedded technology. The Registrant has also
completed its assessment of the year 2000 readiness of external entities with
which it interfaces. Material relationships include, but are not limited to,
those with existing utility customers in which electronic billing is required as
well as vendors such as the Registrant's principal bank which provides such
services as lockbox processing, treasury management services, and benefit plan
admnistration.
We have not experienced any adverse impact on our operations because of Year
2000 factors, including any inability or difficulty of our suppliers or
customers to operate in the Year 2000. We do not anticipate any adverse impact
on our 2000 financial results due to Year 2000 issues.
12
Depreciation and amortization of $20,412,000 increased $478,000 or .3% as a
percentage of revenues. The increase is attributable to a relatively higher
level of capital expenditures for equipment, particularly in the preceding two
years, primarily to support Utility and Residential and Commercial services. It
is also due to commencement of depreciation on the Registrant's new enterprise-
wide information system.
Interest expense of $4,947,000 was $1,556,000 higher than last year, and as a
percentage of revenues it increased .5%. The increase has resulted from a
higher level of borrowings necessitated mainly by the delays in billing the
Registrant's Residential and Commercial customers and the attendant increase in
accounts receivable.
Other income of $1,138,000 for 1999 increased $573,000 over 1998 due primarily
to the sale in June 1999 of the Registrant's Troy, Michigan property.
The Registrant's earnings before income taxes of $6,150,000 decreased
$11,691,000 from 1998 and as a percentage of revenues they declined 3.7% to
2.0%. The tax provisions for 1999, 1998 and 1997 resulted in effective tax
rates of 39.6%, 40.6%, and 41.4% respectively (see Note 10 of the Financial
Statements on page F-21 on this Annual Report on Form 10-K).
The Registrant's net earnings of $3,715,000 decreased $6,882,000 or 64.9%
compared to 1998, and as a percentage of revenues they declined 2.2%.
13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Registrant's interest expense is most sensitive to changes in the general
level of U.S. interest rates; in this regard, changes in these rates affect the
interest paid on its debt. To partially mitigate the impact of fluctuations in
interest rates, the Registrant has entered into interest rate exchange
agreements (swaps) on its term note agreement.
The following table provides information about the Registrant's financial
instruments and swaps that are sensitive to changes in interest rates. For debt
obligations, the table presents principal cash flows and related
weighted-average interest rates by expected maturity dates. For the interest
rate swap related to the Registrant's term note, the table presents notional
amounts and actual pay, receive rates by contractual maturity dates. For
presentation purposes, it has been assumed that the December 31,1999 balance
under the Registrant's revolving credit agreement will remain outstanding for
the years shown.
INTEREST RATE SENSITIVITY
PRINCIPAL (NOTIONAL) AMOUNT BY EFFECTED MATURITY
AVERAGE INTEREST (SWAP) RATE
FAIR
VALUE
2000 2001 2002 2003 2004 THEREAFTER TOTAL 12-31-99
---- ---- ---- ---- ---- ---------- ----- --------
Long-term debt, including
current portion:
Fixed rate $ 638 $ 502 $ 40 $ 44 $ 38 $ 114 $ 1,376 $ 1,371
Average interest rate 7.0% 4.5% 10.8% 10.8% 9.1% 10.0%
Variable rate:
a) Term note $ 1,500 $ 2,000 $ 2,000 $ 2,000 $ 2,000 $ 500 $ 10,000 $ 10,000
Average interest rate LIBOR LIBOR LIBOR LIBOR LIBOR LIBOR
plus plus plus plus plus plus
(1.00% to (1.00% to (1.00% to (1.00% to (1.00% to (1.00% to
1.50%) 1.50%) 1.50%) 1.50%) 1.50%) 1.50%)
b) Subordinated notes $ 508 $ 389 $ 389 $ 388 - - $ 1,674 $ 1,674
Average interest rate 5-year 5-year 5-year 5-year
U.S. U.S. U.S. U.S.
Treasury Treasury Treasury Treasury
c) Revolving credit
agreement, assuming
renewal upon maturity
i. Prime borrowings - - - - - $ 11,600 $ 11,600 $ 11,600
Average interest rate prime prime prime prime prime prime
ii.Libor borrowings - - - - - $ 45,000 $ 45,000 $ 45,000
Average interest rate LIBOR LIBOR LIBOR LIBOR LIBOR LIBOR
plus plus plus plus plus plus
(1.25% (1.25% (1.25% (1.25% (1.25% (1.25%
to 1.4%) to 1.4%) to 1.4%) to 1.4%) to 1.4%) to 1.4%)
Interest rate derivative
financial instruments
related to term note:
Interest rate swap:
Pay fixed $ 1,500 $ 2,000 $ 2,000 $ 2,000 $ 2,000 $ 500 $ 10,000 $ 177
Average pay rate 6.09% plus 6.09% plus 6.09% plus 6.09% plus 6.09% plus 6.09% plus
(1.00% to (1.00% to (1.00% to (1.00% to (1.00% to (1.00% to
1.50%) 1.50%) 1.50%) 1.50%) 1.50%) 1.50%)
Average receive rate LIBOR LIBOR LIBOR LIBOR LIBOR LIBOR
The Registrant's Canadian operations subject the Company to currency rate
exposure related to its foreign denominated debt, intercompany debt and cash and
cash equivalents. The Registrant periodically borrows against its Canadian lines
of credit, on which there were no amounts outstanding at December 31,1999. All
other foreign denominated financial instruments are not material.
14
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-2 through F-23 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 1999 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 1999 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 1999 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 1999 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 16 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
15
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned thereunto duly authorized.
THE DAVEY TREE EXPERT COMPANY
By: /s/ R. Douglas Cowan
------------------------
R.D. Cowan, Chairman and
Chief Executive Officer
March 31, 2000
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 31, 2000.
/s/ R. Douglas Cowan /s/ Douglas K. Hall
- ------------------------------------ ------------------------------------
R. DOUGLAS COWAN, Director; DOUGLAS K. HALL, Director
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ R. Cary Blair /s/ James H. Miller
- ------------------------------------ ------------------------------------
R. CARY BLAIR, Director JAMES H. MILLER, Director
/s/ Richard E. Dunn /s/ Thomas G. Murdough, Jr.
- ------------------------------------ ------------------------------------
RICHARD E. DUNN, Director THOMAS G. MURDOUGH, JR., Director
/s/ Russell R. Gifford /s/ Karl J. Warnke
- ------------------------------------ ------------------------------------
RUSSELL R. GIFFORD, Director KARL J. WARNKE, President and
Chief Operating Officer
/s/ William D. Ginn /s/ David E. Adante
- ------------------------------------ ------------------------------------
WILLIAM D. GINN, Director DAVID E. ADANTE, Executive Vice
President, Chief Financial Officer and
Secretary-Treasurer
(Principal Financial Officer)
/s/ Richard S. Gray /s/ Bradley L. Comport
- ------------------------------------ ------------------------------------
RICHARD S. GRAY, Director BRADLEY L. COMPORT, Corporate Controller
(Principal Financial Officer)
16
INDEX OF EXHIBITS
[ITEM 14(A) (3)]
LOCATION
EXHIBIT NO. DESCRIPTION SEQUENTIAL PAGE
- ----------- ----------- ---------------------
(2) Plan of acquisition, Not Applicable.
reorganization, arrangement,
liquidation or succession
(3)(i) 1991 Amended Articles of Incorporated by
Incorporation 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 Incorporated by
Regulations of The Davey Tree reference to Exhibit
Expert Company 3(ii) to the
Registrant's Annual
Report on Form 10-K
for the year ended
December 31, 1996.
(4) Instruments defining the The Company is a
rights of security holders, party to certain
including indentures 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 6 of Notes
to Consolidated
Financial Statements
on page F-16 of this
Annual Report on
Form 10-K.
(9) Voting Trust Agreement Not Applicable.
(10)(a) 1987 Incentive Stock Option Incorporated by
Plan reference to Exhibit
(10)(a) to the
Registrant's Annual
Report on Form 10-K
for the year ended
December 31, 1997.
(10)(b) 1994 Omnibus Stock Plan Incorporated by
reference to Exhibit
(10)(c) to the
Registrant's Annual
Report on Form 10-Q
for the quarter
ended July 3, 1999.
(11) Statement regarding Not Applicable.
computation of per share
earnings
(12) Statement regarding Not Applicable.
computation of ratios
(13) Annual Report to security Not Applicable.
holders, Form 10-Q or
quarterly report to security
holders
(16) Letter regarding change in Not Applicable.
certifying accountant
(18) Letter regarding change in Not Applicable.
accounting principles
17
LOCATION
EXHIBIT NO. DESCRIPTION SEQUENTIAL PAGE
- ----------- ----------- ---------------------
(21) Subsidiaries of the Registrant 18
(22) Published report regarding Incorporated by
matters submitted to vote of reference to Part
security holders II, Item 4 to the
Registrant's Form 10-
Q for the quarter
ended June 28, 1997.
(23) Consent of independent 19
auditors 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 20
The documents listed as Exhibits 10(a) and 10(b) constitute management contracts
or compensatory plans or arrangements.