F-1
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[ITEMS 14(A)(1) AND (2)]
PAGE
----
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997:
Consolidated Balance Sheets F-3
Consolidated Statements of Net Earnings F-5
Consolidated Statements of Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-9
F-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, 1999, 1998 and 1997,
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 auditing standards generally accepted
in the United States of America. 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, 1999, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE AND TOUCHE LLP
Cleveland, Ohio
March 23, 2000
F-3
THE DAVEY TREE EXPERT COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 63 $ 1,264 $ 722
Accounts receivable 71,452 51,490 43,896
Operating supplies 2,848 2,644 2,662
Prepaid expenses and other assets 2,494 2,940 2,724
Refundable income taxes 2,375 1,248
Deferred income taxes 2,014 1,842 2,032
---------- ---------- ---------
Total current assets 81,246 61,428 52,036
PROPERTY AND EQUIPMENT:
Land and land improvements 6,495 6,325 6,283
Buildings and leasehold improvements 18,480 18,269 16,142
Equipment 201,997 187,084 166,902
---------- ---------- ---------
226,972 211,678 189,327
Less accumulated depreciation 142,964 132,245 123,053
---------- ---------- ---------
Net property and equipment 84,008 79,433 66,274
OTHER ASSETS AND INTANGIBLES 11,428 8,225 9,515
TOTAL ASSETS $ 176,682 $ 149,086 $ 127,825
========== ========== =========
See notes to consolidated financial statements.
F-4
DECEMBER 31
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 14,287 $ 15,191 $ 10,187
Accrued liabilities 9,815 11,413 10,822
Insurance liabilities 4,755 5,797 6,738
Income taxes payable 1,647
Notes payable, bank 500 300
Current maturities of long-term debt 3,746 855 3,148
Current obligations under capital leases 296
---------- ---------- ----------
Total current liabilities 33,399 33,256 32,842
LONG-TERM DEBT 65,904 42,893 24,104
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES 4,361
DEFERRED INCOME TAXES 4,731 3,588 1,381
INSURANCE LIABILITIES 11,155 10,969 10,913
OTHER LIABILITIES 712 1,112 698
---------- ---------- ----------
TOTAL LIABILITIES 120,262 91,818 69,938
SHAREHOLDERS' EQUITY:
Preferred shares
Common shares 10,728 8,728 8,728
Additional paid-in capital 3,136 5,893 4,625
Accumulated other comprehensive
income (loss) (543) (745) (535)
Retained earnings 76,455 94,547 85,510
---------- ---------- ----------
89,776 108,423 98,328
LESS:
Treasury shares, at cost 33,356 51,155 40,441
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 56,420 57,268 57,887
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 176,682 $ 149,086 $ 127,825
========== ========== ==========
See notes to consolidated financial statements.
F-5
THE DAVEY TREE EXPERT COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUES $ 308,144 100.0% $ 313,887 100.0% $ 295,079 100.0%
COSTS AND EXPENSES:
Operating 210,628 68.3 210,921 67.2 197,726 67.0
Selling 45,403 14.7 39,601 12.6 37,832 12.8
General and administrative 21,742 7.1 22,764 7.2 20,297 6.9
Depreciation and amortization 20,412 6.7 19,934 6.4 17,375 5.9
---------- ----- ---------- ----- ---------- -----
298,185 96.8 293,220 93.4 273,230 92.6
---------- ----- ---------- ----- ----------
EARNINGS FROM OPERATIONS 9,959 3.2 20,667 6.6 21,849 7.4
INTEREST EXPENSE 4,947 1.6 3,391 1.1 2,703 .9
OTHER INCOME - NET (1,138) (.4) (565) (.2) (105)
---------- ----- ---------- ----- ---------- -----
EARNINGS BEFORE INCOME TAXES 6,150 2.0 17,841 5.7 19,251 6.5
INCOME TAXES 2,435 0.8 7,244 2.3 7,972 2.7
---------- ------ ---------- ----- ---------- -----
NET EARNINGS $ 3,715 1.2% $ 10,597 3.4% $ 11,279 3.8%
========== ===== ========== ===== ========== =====
EARNINGS PER COMMON SHARE $ 0.47 $ 1.29 $ 1.28
========== ========== ==========
EARNINGS PER COMMON SHARE
ASSUMING DILUTION $ 0.42 $ 1.15 $ 1.19
========== ========== ==========
See notes to consolidated financial statements.
F-6
THE DAVEY TREE EXPERT COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
ADDITIONAL
COMMON PAID-IN
SHARES CAPITAL
--------- ----------
BALANCE, JANUARY 1, 1997 $ 8,728 $ 3,876
Comprehensive income:
Net earnings
Other comprehensive income, net of tax
Foreign currency translation adjustments
Comprehensive income
Receipts from subscriptions receivable
Shares purchased
Shares sold to employees 695
Options exercised 54
Dividends
--------- ---------
BALANCE, DECEMBER 31, 1997 8,728 4,625
Comprehensive income:
Net earnings
Other comprehensive income, net of tax
Foreign currency translation adjustments
Comprehensive income
Shares purchased
Shares sold to employees 1,115
Options exercised 153
Dividends
--------- ---------
BALANCE, DECEMBER 31, 1998 8,728 5,893
Comprehensive income:
Net earnings
Other comprehensive income, net of tax
Foreign currency translation adjustments
Comprehensive income
Stock dividend and share retirement 2,000 (3,982)
Shares purchased
Shares sold to employees 1,033
Options exercised 192
Dividends
--------- ---------
BALANCE, DECEMBER 31, 1999 $ 10,728 $ 3,136
========= =========
See notes to consolidated financial statements.
F-7
ACCUMULATED SUBSCRIP-
OTHER COMPRE- TIONS
HENSIVE RECEIVABLE COMPRE-
INCOME RETAINED TREASURY FROM HENSIVE
(LOSS) EARNINGS SHARES EMPLOYEES INCOME TOTAL
------------ -------- -------- ---------- ------- -----
$ (401) $ 75,725 $ (35,451) $ (7) $ 52,470
11,279 $ 11,279
(134) (134)
--------
$ 11,145 11,145
========
7 7
(5,918) (5,918)
737 1,432
191 245
(1,494) (1,494)
-------- -------- --------- -------- --------
(535) 85,510 (40,441) 0 57,887
10,597 $ 10,597
(210) (210)
--------
$ 10,387 10,387
========
(12,150) (12,150)
773 1,888
663 816
(1,560) (1,560)
-------- -------- --------- -------- --------
(745) 94,547 (51,155) 0 57,268
3,715 $ 3,715
202 202
--------
$ 3,917 3,917
========
(19,759) 21,741
(5,509) (5,509)
(407) 626
1,974 2,166
(2,048) (2,048)
-------- -------- --------- -------- --------
$ (543) $ 76,455 $ (33,356) $ 0 $ 56,420
======== ======== ========= ======== ========
See notes to consolidated financial statements.
F-8
THE DAVEY TREE EXPERT COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,715 $ 10,597 $ 11,279
Adjustments to reconcile net earnings to
net cash (used in) provided by operating
activities:
Depreciation 20,019 19,563 17,000
Amortization 393 371 375
Deferred income taxes 971 2,397 (817)
Gain on sale of assets (1,487) (587) (325)
Other (290) 28 (1)
-------- -------- --------
23,321 32,369 27,511
Change in operating assets and
liabilities:
Accounts receivable (19,962) (7,594) (4,091)
Other assets (3,732) (59) (2,876)
Accounts payable and accrued
liabilities (2,949) 5,595 2,606
Insurance liabilities (856) (885) 2,539
Other liabilities (400) (1,233) 1,245
-------- -------- --------
Net cash (used in) provided by operating
activities (4,578) 28,193 26,934
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment 2,730 1,880 1,138
Acquisitions (857) (712) (449)
Capital expenditures:
Land and buildings (2,574) (2,617) (285)
Equipment (18,006) (31,392) (26,718)
-------- -------- --------
Net cash used in investing activities (18,707) (32,841) (26,314)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under notes
payable, bank 500 (300) 225
Principal payments of long-term debt (1,071) (5,547) (2,778)
Proceeds from issuance of long-term debt 26,973 22,043 7,756
Sales of treasury shares 2,792 2,704 1,677
Receipts from stock subscriptions 7
Dividends paid, $.20 in 1999; $.19 in 1998;
$.17 in 1997 (1,601) (1,560) (1,494)
Repurchase of common shares (5,509) (12,150) (5,918)
-------- -------- --------
Net cash provided by (used in) financing
activities 22,084 5,190 (525)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,201) 542 95
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,264 722 627
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 63 $ 1,264 $ 722
======== ======== ========
See notes to consolidated financial statements.
F-9
THE DAVEY TREE EXPERT COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 and contingencies disclosed 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; 1999
was a 52-week year ended January 1, 2000; 1998 was a 52-week year ended
January 2, 1999 and 1997 was a 53-week year ended January 3, 1998. 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 an allowance of $348,000 at December 31, 1999 and $314,000
at December 31, 1998 and 1997.
INTANGIBLE ASSETS
Intangible assets represent goodwill, employment contracts, and customer
lists resulting from business acquisitions and are being amortized on a
straight-line basis over their estimated useful lives ranging from 3-15
years. The net book value of intangible assets (net of accumulated
amortization of $2,711,000, $2,318,000, and $1,947,000 at December 31, 1999,
1998, and 1997, respectively) was $2,790,000, $2,631,000, and $2,550,000 at
December 31, 1999, 1998, and 1997, respectively.
F-10
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PROPERTY AND EQUIPMENT
The Company records property and equipment at cost. In January 1998, the
Company commenced development of its new enterprise-wide information system.
This project included the re-design of certain key business processes, and
replaced the Company's legacy systems on April 4, 1999. Costs have been
expensed or capitalized depending on whether they were incurred in the
preliminary project stage, application development stage, or the post
implementation stage. Reengineering, training, and other costs such as data
conversion have been expensed as incurred. 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.
IMPAIRMENT
The Company periodically assesses recoverability of the carrying amount of
its property and equipment, goodwill, and other intangible assets
principally by evaluating the utilization of those assets as well as the
profitability associated with their related revenues. In the event these
assessments indicate their carrying amounts may not be recoverable,
estimates will be made of the applicable assets future undiscounted cash
flows to determine if recognition of an impairment loss is necessary.
STOCK SPLIT
On May 19, 1999 the Company's Board of Directors declared a 2-for-1 stock
split in the form of a 100% stock dividend on outstanding shares only, to
shareholders of record as of June 1, 1999. To effect the stock split, they
authorized the retirement of 1,981,894 common shares held in treasury. Per
common share amounts have been restated for all periods presented to give
retroactive effect to the stock split, and common shares issued, treasury
shares and retained earnings have been adjusted to reflect the share
retirement. Common share disclosures have also been restated, where
appropriate, to reflect the 2-for-1 stock split.
EARNINGS PER SHARE
The following table sets forth the computation of earnings per common
share and earnings per common share - assuming dilution:
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Numerator:
Net earnings $ 3,715 $ 10,597 $ 11,279
Denominator:
For earnings per common share
weighted average shares
outstanding 7,971,810 8,244,366 8,785,938
Effect of dilutive securities
employee and director stock
options 899,742 983,646 665,674
--------- --------- ---------
Denominator for earnings per share-
assuming dilution 8,871,552 9,228,012 9,451,612
========= ========= =========
Earnings per common share $ .47 $ 1.29 $ 1.28
========= ========= =========
Earnings per common share -
assuming dilution $ .42 $ 1.15 $ 1.19
========= ========= ==========
F-11
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." As permitted by SFAS No. 137, the
Company expects to adopt this statement in 2001. The statement requires that
all derivatives, such as interest rate exchange agreements (swaps), be
recognized on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. Derivatives determined
to be hedges will be adjusted to fair value through either income or other
comprehensive income, depending on the nature of the hedge. The Company has
not yet determined what effect SFAS No. 133 will have on the earnings and
financial position of the Company.
RECLASSIFICATIONS
Reclassifications have been made to the prior-year financial statements to
conform to the current year presentation.
2. OPERATING SEGMENTS
The Company has 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 tree surgery, tree feeding, tree
spraying and landscaping, 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 "Other" segment category
includes the Company's services related to natural resource management and
consulting, forestry research and development, and environmental planning.
The Company's primary focus in evaluating segment performance is on
operating earnings. The accounting policies of the operating segments are the
same as those described in Note 1, except that only straight-line
depreciation is allocated. Corporate expenses are substantially allocated
among the operating segments. Identifiable assets are those directly used or
generated by each segment, and include accounts receivable, inventory, and
property and equipment. Unallocated assets consist principally of corporate
facilities, enterprise-wide information systems, cash and cash equivalents,
deferred taxes, prepaid expenses, and other assets and intangibles.
Detail to Operating Segments is as follows:
RESIDENTIAL
& COMMERCIAL
UTILITY SERVICES OTHER TOTAL
------- ---------- ----- -----
(DOLLARS IN THOUSANDS)
1999
Revenues $ 173,654 $ 129,174 $ 5,316 $ 308,144
Earnings from operations 7,076 6,370 195 13,641
Depreciation 10,595 6,273 300 17,168
Segment assets 65,233 64,125 3,582 132,940
Capital expenditures 13,712 7,312 200 21,224
F-12
2. OPERATING SEGMENTS (CONTINUED)
RESIDENTIAL
& COMMERCIAL
UTILITY SERVICES OTHER TOTAL
------- ---------- ----- -----
(DOLLARS IN THOUSANDS)
1998
Revenues $ 184,768 $ 122,297 $ 6,822 $ 313,887
Earnings from operations 12,849 10,838 159 23,846
Depreciation 11,213 5,928 162 17,303
Segment assets 66,720 40,785 2,247 109,752
Capital expenditures 16,442 8,303 99 24,844
1997
Revenues $ 167,798 $ 113,977 $ 13,304 $ 295,079
Earnings from operations 9,556 10,325 2,569 22,450
Depreciation 9,918 5,214 73 15,205
Segment assets 59,291 33,730 1,223 94,244
Capital expenditures 14,460 6,894 65 21,419
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
EARNINGS
Operating earnings for reportable segments $ 13,446 $ 23,687 $ 19,881
Operating earnings for other 195 159 2,569
Unallocated amounts:
Other corporate expense (3,682) (3,179) (601)
Interest expense (4,947) (3,391) (2,703)
Other income - net 1,138 565 105
--------- --------- ---------
Earnings before tax $ 6,150 $ 17,841 $ 19,251
========= ========= =========
DEPRECIATION
Depreciation for reportable segments $ 16,868 $ 17,141 $ 15,132
Depreciation for other 300 162 73
Unallocated depreciation 2,851 2,260 1,795
-------- --------- ---------
Total $ 20,019 $ 19,563 $ 17,000
======== ========= =========
ASSETS
Assets for reportable segments $129,358 $ 107,505 $ 93,021
Assets for other 3,582 2,247 1,223
Unallocated assets 43,742 39,334 33,581
-------- --------- ---------
Total $176,682 $ 149,086 $ 127,825
========= ========= =========
CAPITAL EXPENDITURES
Expenditures for reportable segments $ 21,024 $ 24,745 $ 21,354
Expenditures for other 200 99 65
Unallocated expenditures 4,013 9,165 5,584
--------- --------- ---------
Total $ 25,237 $ 34,009 $ 27,003
========= ========= =========
F-13
2. OPERATING SEGMENTS (CONTINUED)
The Company's geographic information is as follows:
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
REVENUES
United States $ 293,541 $ 297,705 $ 280,284
Canada 14,603 16,182 14,795
--------- --------- ---------
Total $ 308,144 $ 313,887 $ 295,079
========= ========= =========
PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION
United States $ 80,291 $ 76,489 $ 63,336
Canada 3,717 2,944 2,938
--------- --------- ---------
Total $ 84,008 $ 79,433 $ 66,274
========= ========= =========
CUSTOMER CONCENTRATION
Utility services represented approximately 50%, 59% and 63% of the
outstanding accounts receivable at December 31, 1999, 1998, and 1997,
respectively. The Company had revenues from one utility customer under
multiple year contracts aggregating approximately $51,000,000 in 1999,
$55,000,000 in 1998, and $67,000,000 in 1997. The Company had revenues from a
second utility customer under multiple year contracts of approximately
$9,000,000 in 1999, $18,000,000 in 1998, and $22,000,000 in 1997. The Company
performs ongoing credit evaluations of its customers' financial conditions
and generally requires no collateral.
3. 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 are 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 6.25% at December 31, 1999, 4.50% at
December 31, 1998, and 5.75% at December 31, 1997, totaled $15,910,000,
$16,766,000 and $17,651,000 at December 31, 1999, December 31, 1998, and
December 31, 1997, respectively. The change in the discount rate reduced
insurance costs by approximately $1,336,000 in 1999, and increased insurance
costs by $306,000 in 1998 and $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, 1999, 1998, and 1997, the
gross value of those liabilities was approximately $19,015,000, $18,867,000
and $20,765,000, respectively.
F-14
4. 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. The
number of common shares issued was 10,728,440 at December 31, 1999 and
8,728,440 (pre-split) at December 31, 1998 and December 31, 1997. The number
of shares in the treasury were 2,601,058, 4,736,785 (pre-split), and
4,429,205 (pre-split) at December 31, 1999, 1998 and 1997, 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 1999, these
purchases totaled 343,312 shares for $5,509,000 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
894 shares for $20,000. It also sold 78,236 shares to the Company's 401(k)
plan for $1,254,000 and issued 28,134 shares to participant accounts to
satisfy its liability for the 1998 employer match in the amount of $450,000.
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, 4,000 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 1,600,000 during the ten-year term of the plan.
Shares available for grant at December 31, 1999 were 531,627, which were
based on the number available upon ratification of the plan less: the options
granted presented below; the director options granted; and 864,386 shares
purchased since 1994 under the stock purchase plan.
A summary of the status of the Company's director options as of December
31, 1999, 1998, and 1997, and changes during the years ending on those dates
is presented below:
1999 1998 1997
----------------------- ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------------ ------------------------ ------------------------
Outstanding at beginning of year 56,000 $ 9.07 60,000 $ 7.86 48,000 $ 7.03
Granted 4,000 16.00 12,000 13.03 20,000 9.40
Exercised (16,000) 7.68 (16,000) 7.51 (8,000) 6.76
Forfeited
------ ------ ------
Outstanding at end of year 44,000 $ 10.20 56,000 $ 9.07 60,000 $ 7.86
====== ====== ======
15
4. COMMON AND PREFERRED SHARES (CONTINUED)
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, 1999, 1998, and 1997, and changes
during the years ending on those dates is presented below:
1999 1998 1997
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- -------------- --------- --------------
Outstanding at beginning of year 1,772,430 $ 6.55 1,895,700 $ 6.51 1,931,200 $ 6.49
Granted
Exercised (414,273) 4.93 (119,670) 5.81 (35,500) 5.41
Forfeited (6,813) 4.70 (3,600) 7.90
--------- --------- ---------
Outstanding at end of year 1,351,344 7.05 1,772,430 6.55 1,895,700 6.51
========= ========= =========
Options exercisable at year end 1,139,344 1,454,430 1,471,700
========= ========= =========
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
Options Outstanding
----------------------------------------
Exercise Number Outstanding Remaining Number Exercisable
Price at 12/31/99 Contractual Life at 12/31/99
-------- ------------------ ---------------- ------------------
$5.95 40,800 3.0 years 40,800
6.22 408,560 2.3 408,560
6.92 388,000 4.0 388,000
7.90 513,984 .9 301,984
--------- ---------
1,351,344 1,139,344
========= =========
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 market value of the shares.
Purchases under the plan have been as follows:
1999 1998 1997
---- ---- ----
Number of employees participating 1,025 907 817
Annual shares purchased 103,038 102,688 124,216
Average price paid $13.63 $11.65 $8.32
Cumulative shares purchased 3,174,290 3,071,252 2,968,564
F-15
4. COMMON AND PREFERRED SHARES (CONTINUED)
The Company applies 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 $405,000 and $.05 in 1999,
$360,000 and $.04 in 1998 and $330,000 and $.04 in 1997.
In calculating the pro forma impact on earnings, the following assumptions
were used for the grants in 1996: initial annual dividends of $.16 per share
with annual increases of $.01 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 1999,
1998, and 1997 include $275,000, $230,000 and $200,000, respectively,
attributable to compensation cost for shares acquired under the employee
stock purchase plan.
5. ACCRUED LIABILITIES
Accrued liabilities consisted of:
DECEMBER 31
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
Compensation $ 5,035 $ 6,666 $ 5,648
Medical claims 1,280 1,420 1,948
Vacation 2,184 1,927 1,848
Taxes, other than taxes on income 618 779 657
Other 698 621 721
------- ------- -------
$ 9,815 $11,413 $10,822
======= ======= =======
6. NOTES PAYABLE, BANK AND LONG-TERM DEBT
NOTES PAYABLE, BANK
The Company had a bank operating loan which was repayable on demand and
charged interest at the bank's prime rate. Additionally, the Company has
unused short-term lines of credit with three banks totaling $3,852,000,
generally at the banks' prime rate, which was 8.50% at December 31, 1999.
F-17
6. NOTES PAYABLE, BANK AND LONG-TERM DEBT (CONTINUED)
LONG-TERM DEBT
DECEMBER 31
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
Revolving credit agreement:
Prime rate borrowings $ 11,600 $ 2,900 $ 2,800
London Interbank Offered Rate
(LIBOR) borrowings 45,000 28,000 18,000
Term note agreement 10,000 10,000 4,800
--------- --------- ---------
66,600 40,900 25,600
Subordinated notes - stock redemption 1,674 2,181 357
Term loans and other 1,376 667 1,295
--------- --------- ---------
69,650 43,748 27,252
Less current maturities 3,746 855 3,148
--------- --------- ---------
$ 65,904 $ 42,893 $ 24,104
========= ========= =========
The total annual installments required to be paid on long-term debt are
as follows: 2000, $3,746,000; 2001, $2,890,000; 2002, $57,427,000; 2003,
$2,432,000; 2004, $2,038,000; and thereafter $1,117,000.
REVOLVING CREDIT AGREEMENT
In 1999, the Company renegotiated and amended its Revolving Credit
Agreement (Revolver) with two banks, which permits borrowings, as defined,
up to $70,000,000 through March 31, 2000, and $55,000,000 thereafter. It
provides the Company an option of borrowing funds at either the prime (8.5%
at December 31, 1999) interest rate or rates based on LIBOR (5.24% at
December 31, 1999) plus a margin adjustment ranging from .9% to 1.4%. The
Revolver also includes a commitment fee of between .15% and .25% on the
average daily unborrowed commitment. A minimum of $5,000,000 in borrowings
may be converted, at the Company's option, to four-year loans. The
agreement has an expiration date of April 30, 2002.
In 1999, the Company also renegotiated and amended its temporary line of
credit in the amount of $15,000,000 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
May 31, 2000.
Under the most restrictive covenants of the Revolver and the Term Note
Agreement below, the Company is obligated to maintain a minimum shareholders'
equity, as defined, of $45,000,000 plus 30% of annual consolidated earnings
for 1998 and each year thereafter; a maximum ratio of consolidated funded
debt to consolidated funded debt plus consolidated shareholders' equity of
.58 to 1, and .5 to 1 in 1999 - 2000, and 2001 - 2002, respectively; and a
fixed charge coverage ratio of not less than 2.25 to 1.0.
The Company was not in compliance with the fixed charge coverage ratio
covenant as of December 31, 1999. The banks effectively waived the non-
compliance with this covenant through an amendment to the existing agreement,
by substituting in its place, a covenant based on the ratio of EBIT (earnings
before interest and taxes on income) to interest expense as of December 31,
1999. The ratio of EBIT to interest expense may not be less than 2.00 to
1.00 at that date through September 29, 2000; 2.25 to 1.00 on September 30,
2000 through December 30, 2000; 2.75 to 1.00 on December 31, 2000 through
March 30, 2001; and 3.00 to 1.00 on March 30, 2001 and thereafter. The
amendment also provides for an extension of the $70,000,000 of availability
under the Revolver through April 30, 2000; a new revolving credit agreement
is expected to be completed prior to that date.
F-18
6. NOTES PAYABLE, BANK AND LONG-TERM DEBT (CONTINUED)
TERM NOTE AGREEMENT
Commencing June 30, 2000, the Term Note Agreement provides for twenty
consecutive quarterly principal installments of $500,000, plus interest at
either LIBOR plus a margin adjustment ranging from 1.00% to 1.50%, or prime.
The average adjusted LIBOR rate during 1999 was 6.46%; adjusted LIBOR was
6.54%, 6.19%, and 7.09% at December 31, 1999, 1998 and 1997, respectively.
SUBORDINATED NOTES
In 1998 and 1995, the Company redeemed shares of its common stock from
shareholders for cash and five-year subordinated promissory notes. Effective
January 1, 1998, these notes bear interest based on the five-year U.S.
Treasury rate in effect at January 1 of each year (4.53% in 1999); prior to
1998, they bore interest at a rate equal to the average of the prime rate and
the prevailing local bank basic savings rate. There were 115,430 shares
redeemed in 1998 for cash of $1,157,710 and notes of $1,943,091. In 1995,
there were 31,574 shares redeemed for cash of $174,147 and notes of $595,627.
TERM LOANS AND OTHER
The weighted-average interest on the term loans approximates 8.53% 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 $4,912,000,
$3,353,000, and $2,806,000 in 1999, 1998, and 1997, respectively.
7. FINANCIAL INSTRUMENTS
The Company uses 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. Concurrent with the Company's May 14, 1998
renegotiation of the term note, it terminated the swaps outstanding on the
prior term note, and entered into a new swap. At December 31, 1999, 1998, and
1997, the outstanding swaps had a total notional amount of $10,000,000,
$10,000,000, and $4,800,000, respectively. These swaps effectively changed
the interest rate exposure through May 14, 1998 to a fixed 7.22%, and
thereafter to a fixed 6.09% plus the applicable LIBOR margin which was 1.40%
at December 31, 1999.
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 $82,000, $35,000, and $9,000 in 1999, 1998 and 1997
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.
F-19
7. FINANCIAL INSTRUMENTS (Continued)
The fair value of the swaps is the quoted amount that the Company would
receive or pay to terminate the swap agreements as provided by the bank,
taking into account current interest rates. Had these agreements been
terminated as of December 31 each year, the Company would have received
$177,000, paid $335,000 and paid $3,000 in 1999, 1998, and 1997,
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.
8. 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 (ESOP), in conjunction with the related
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.
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. All nonbargaining employees of
the parent company and its domestic subsidiaries who attained age 21 and
completed one year of service are eligible to participate. The Company's cost
of this plan for 1999, 1998, and 1997, consisting principally of the accruals
for the employer match, was $489,000, $520,000 and $493,000, respectively.
9. 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, provided a non-contributory benefit 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.
F-20
9. PENSION PLANS (CONTINUED)
EXPENSE RECOGNITION
Pension expense (income) was calculated as follows:
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
Service cost - increase in benefit
obligations earned $ 699 $ 754 $ 626
Interest cost on projected benefit obligation 887 905 849
Expected return on plan assets (2,644) (2,106) (1,894)
Amortization of prior service cost (34) (34) (34)
Amortization of initial net asset (72) (72) (72)
Recognized gains (950) (240) (141)
-------- ------- --------
Net pension income $(2,114) $ (793) $ (666)
======= ======= =======
FUNDED STATUS
The funded status of pension plans at December 31 was as follows:
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
Plan assets at fair market value $ 38,569 $ 32,725 $ 25,561
Projected benefit obligation (12,778) (13,595) (12,502)
--------- --------- ---------
Excess of assets over projected
benefit obligation 25,791 19,130 13,059
Unrecognized initial asset (858) (938) (1,010)
Unrecognized gain (17,785) (13,125) (7,741)
Unrecognized prior service cost (596) (629) (663)
--------- --------- ---------
Prepaid benefit cost recognized
as other assets in balance sheets
$ 6,552 $ 4,438 $ 3,645
========= ========= =========
RECONCILIATIONS
The projected benefit obligation is reconciled as follows:
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
Balance, beginning of year $ 13,595 $ 12,502 $ 12,091
Service cost 699 754 626
Interest cost 887 905 849
Participant contributions 13
Settlements (131)
Actuarial (gain) loss (1,217) 607 104
Benefits paid (1,055) (1,173) (1,181)
--------- --------- ---------
Balance, end of year $ 12,778 $ 13,595 $ 12,502
========= ========= =========
F-21
9. PENSION PLANS (CONTINUED)
The fair value of plan assets are reconciled as follows:
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
Balance, beginning of year $ 32,725 $ 25,561 $ 21,488
Actual return on plan assets 7,030 8,337 5,241
Participant contributions 13
Settlements (131)
Benefits paid (1,055) (1,173) (1,181)
--------- --------- ---------
Balance, end of year $ 38,569 $ 32,725 $ 25,561
========= ========= =========
On a weighted-average basis the following assumptions were used in
accounting for the plans:
1999 1998 1997
---- ---- ----
Discount rate used to determine
Projected benefit obligation 7.50% 6.75% 7.00%
Expected return on plan assets 8.25% 8.25% 8.25%
Rate of compensation increase 5.00% 5.00% 5.00%
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 1999, 1998 and 1997 totaled $194,000, $396,000,
and $380,000, respectively.
10. 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:
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
CURRENT
Assets:
Compensated absences $ 433 $ 377 $ 341
Insurance 1,455 1,311 1,447
Other - net 126 154 244
------- ------- -------
Net current 2,014 1,842 2,032
------- ------- -------
NON-CURRENT
Assets:
Insurance 4,096 3,872 3,825
Other - net 162 286 462
Liabilities:
Accelerated depreciation for tax purposes (6,746) (6,222) (4,421)
Pensions (2,243) (1,524) (1,247)
------- ------- -------
Net noncurrent (4,731) (3,588) (1,381)
------- ------- -------
Net deferred tax asset (liability) $(2,717) $(1,746) $ 651
======= ======= =======
F-22
10. INCOME TAXES (CONTINUED)
8 Significant components of income tax expense include:
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
Current tax expense (benefit):
U.S. Federal $ 1,085 $ 3,014 $ 6,839
Canadian (21) 333 309
State and local 400 1,500 1,641
------- ------- -------
1,464 4,847 8,789
------- ------- -------
Deferred tax expense (benefit):
U.S. Federal 932 1,975 (682)
Canadian (43) 73 46
State and local 82 349 (181)
------- ------- -------
971 2,397 (817)
------- ------- -------
$ 2,435 $ 7,244 $ 7,972
======= ======= =======
The differences between the U.S. Federal statutory tax rate and the
effective tax rate are as follows:
1999 1998 1997
---- ---- ----
U.S. Federal statutory tax rate 34.0% 34.6% 34.9%
State and local income taxes 4.3 5.5 5.5
Canadian income taxes .2 .7 .7
Miscellaneous 1.1 (.2) .3
----- ----- -----
Effective tax rate 39.6% 40.6% 41.4%
===== ===== =====
Earnings (loss) before income taxes by country are as follows:
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
U.S. $ 6,364 $ 17,006 $ 18,604
Canadian (214) 835 647
-------- -------- --------
$ 6,150 $ 17,841 $ 19,251
======== ======== ========
The Company made cash payments for income taxes of $2,591,000, $7,742,000,
$7,360,000 in 1999, 1998, and 1997, respectively.
F-23
11. LEASES
On December 30, 1999, the Company entered into agreements to lease
equipment under capital leases in the amount of $4,657,000. These amounts
have been included in property and equipment. No amortization was recorded
in 1999.
As of December 31, 1999, minimum lease obligations under capital leases are
as follows:
YEAR ENDING DECEMBER 31 TOTAL
----------------------- ------
(DOLLARS IN THOUSANDS)
2000 $ 572
2001 744
2002 744
2003 744
2004 744
Thereafter 2,505
----------
Total minimum capital lease payments 6,053
Amounts representing interest at 6.81% 1,396
----------
Present value of net minimum lease payments 4,657
Less current portion 296
----------
Long-term obligations at December 31, 1999 $ 4,361
==========
The Company also 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 $2,000,000, $1,899,000,
and $1,723,000 for 1999, 1998 and 1997, respectively. As of December 31,
1999, future minimum rental payments, including taxes and other operating
costs, for all operating leases having noncancelable lease terms in excess of
one year, totaled $5,390,000, and are expendable as follows: 2000,
$1,795,000; 2001, $1,441,000; 2002, $1,033,000; 2003, $643,000 and
2004, $478,000.
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, 1999, the Company was contingently liable to its principal
banks in the amount of $12,093,000 for outstanding letters of credit for
insurance coverage.
13. ACQUISITIONS
In 1999, 1998, and 1997, the Company completed acquisitions of
organizations providing Residential and Commercial services for a total
purchase price of $857,000, $712,000 and $449,000, 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.
********