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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.
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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") 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.
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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 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.
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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.
<CAPTI0N>
LOCATION ACREAGE BUILDING SQ. FT.
- -------- ------- ----------------
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
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.
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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:
NAME POSITION AGE
- ---- -------- ---
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
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.
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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
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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.)
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ITEM 6. SELECTED FINANCIAL DATA.
Years Ended December 31
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands, except per share data)
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
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.
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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.
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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".
1997 1996 1995
---- ---- ----
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%
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.
1997 1996 1995
---- ---- ----
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%
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.
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COMMON SHARE MEASUREMENTS
These measurements assist shareholders in assessing the Registrant's
earnings performance, dividend payout and equity position as related to their
shareholdings.
1997 1996 1995
---- ---- ----
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
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.
1997 1996 1995
---- ---- ----
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%
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.
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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%.
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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
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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
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
14
INDEX OF EXHIBITS
[Item 14(a) (3)]
LOCATION
EXHIBIT NO. DESCRIPTION SEQUENTIAL PAGE
- ----------- ---------- ---------------
(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.
14
15
LOCATION
EXHIBIT NO. DESCRIPTION SEQUENTIAL PAGE
- ----------- ---------- ---------------
(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
The documents listed as Exhibits 10(a) and 10(b) constitute management contracts
or compensatory plans or arrangements.
15