1
EXHIBIT 13
----------
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[ITEMS 14(a)(1) AND (2)]
DESCRIPTION PAGE
- ----------- ----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Net Earnings for the years ended F-5
December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the years ended F-6
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended F-8
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements for the years ended F-9
December 31, 1997, 1996 and 1995
F-1
2
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
The Davey Tree Expert Company
Kent, Ohio
We have audited the accompanying consolidated balance sheets of The Davey Tree
Expert Company and subsidiary companies as of December 31, 1997, 1996, and 1995,
and the related consolidated statements of net earnings, shareholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Davey Tree Expert Company and
subsidiary companies as of December 31, 1997, 1996, and 1995, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Cleveland, Ohio
February 13, 1998
F-2
3
THE DAVEY TREE EXPERT COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31
1997 1996 1995
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 722 $ 627 $ 1,470
Accounts receivable 43,896 39,805 34,622
Operating supplies 2,662 2,477 2,136
Prepaid expenses and other assets 2,724 2,023 1,791
Deferred income taxes 2,032 1,786 2,697
--------- --------- ---------
Total current assets 52,036 46,718 42,716
PROPERTY AND EQUIPMENT:
Land and land improvements 6,283 6,178 6,446
Buildings and leasehold improvements 16,142 16,682 15,956
Equipment 166,902 148,204 139,711
--------- --------- ---------
189,327 171,064 162,113
Less accumulated depreciation 123,053 113,980 107,977
--------- --------- ---------
Net property and equipment 66,274 57,084 54,136
OTHER ASSETS AND INTANGIBLES 9,515 7,584 7,309
--------- --------- ---------
TOTAL ASSETS $ 127,825 $ 111,386 $ 104,161
========= ========= =========
See notes to consolidated financial statements.
F-3
4
DECEMBER 31
1997 1996 1995
(DOLLARS IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,187 $ 10,174 $ 8,488
Accrued liabilities 10,822 8,229 8,592
Insurance liabilities 6,738 6,105 6,791
Income taxes payable 1,647 218 3,171
Notes payable, bank 300 75 400
Current maturities of long-term debt 3,148 2,634 2,781
-------- --------- --------
Total current liabilities 32,842 27,435 30,223
LONG-TERM DEBT 24,104 19,640 17,049
DEFERRED INCOME TAXES 1,381 1,952 3,182
INSURANCE LIABILITIES 10,913 9,007 6,380
OTHER LIABILITIES 698 882 797
-------- --------- --------
TOTAL LIABILITIES 69,938 58,916 57,631
SHAREHOLDERS' EQUITY:
Preferred shares
Common shares 8,728 8,728 8,728
Additional paid-in capital 4,625 3,876 3,472
Retained earnings 84,975 75,324 67,922
-------- --------- --------
98,328 87,928 80,122
LESS:
Treasury shares, at cost 40,441 35,451 33,198
Subscriptions receivable from employees 7 297
Future contributions to ESOT 97
-------- --------- --------
TOTAL SHAREHOLDERS' EQUITY 57,887 52,470 46,530
-------- --------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $127,825 $ 111,386 $104,161
======== ========= ========
See notes to consolidated financial statements.
F-4
5
THE DAVEY TREE EXPERT COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
- --------------------------------------------------------------------------------
DECEMBER 31
1997 1996 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUES $ 295,079 100.0% $ 266,934 100.0% $ 229,682 100.0%
COSTS AND EXPENSES:
Operating 197,726 67.0 183,427 68.7 159,310 69.4
Selling 37,832 12.8 33,575 12.6 28,629 12.5
General and administrative 20,297 6.9 18,216 6.8 15,889 6.9
Depreciation and amortization 17,375 5.9 14,690 5.5 13,201 5.7
--------- ------ --------- ------ --------- -----
273,230 92.6 249,908 93.6 217,029 94.5
--------- ------ --------- ------ --------- -----
EARNINGS FROM OPERATIONS 21,849 7.4 17,026 6.4 12,653 5.5
INTEREST EXPENSE 2,703 .9 2,457 .9 2,725 1.2
OTHER INCOME - NET (105) (272) (.1) (183) (.1)
--------- ------ --------- ------ --------- -----
EARNINGS BEFORE INCOME TAXES 19,251 6.5 14,841 5.6 10,111 4.4
INCOME TAXES 7,972 2.7 6,082 2.3 3,974 1.7
--------- ------ --------- ------ --------- -----
EARNINGS FROM
CONTINUING OPERATIONS 11,279 3.8 8,759 3.3 6,137 2.7
DISCONTINUED OPERATION -
NET EARNINGS 236 .1
--------- ------ --------- ------ --------- -----
NET EARNINGS $ 11,279 3.8% $ 8,759 3.3% $ 6,373 2.8%
========= ====== ========= ====== ========= =====
EARNINGS PER COMMON SHARE:
FROM CONTINUING OPERATIONS $ 2.57 $ 1.92 $ 1.29
========= ========= =========
NET EARNINGS $ 2.57 $ 1.92 $ 1.34
========= ========= =========
EARNINGS PER COMMON SHARE - ASSUMING DILUTION:
FROM CONTINUING OPERATIONS $ 2.39 $ 1.86 $ 1.27
========= ========= =========
NET EARNINGS $ 2.39 $ 1.86 $ 1.32
========= ========= =========
See notes to consolidated financial statements.
F-5
6
THE DAVEY TREE EXPERT COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
Additional
Common Paid-In
Shares Capital
BALANCE, JANUARY 1, 1995 $ 8,728 $ 3,167
Receipts from subscriptions receivable
Shares purchased
Shares sold to employees 281
Options exercised 24
Contributions to ESOT
Net earnings
Dividends, $.275 per share
Net adjustment for foreign currency translation
---------- ----------
BALANCE, DECEMBER 31, 1995 8,728 3,472
Receipts from subscriptions receivable
Shares purchased
Shares sold to employees 373
Options exercised 31
Contributions to ESOT
Net earnings
Dividends, $.295 per share
Net adjustment for foreign currency translation
---------- ----------
BALANCE, DECEMBER 31, 1996 8,728 3,876
Receipts from subscriptions receivable
Shares purchased
Shares sold to employees 695
Options exercised 54
Net earnings
Dividends, $.34 per share
Net adjustment for foreign currency translation
---------- ----------
BALANCE, DECEMBER 31, 1997 $ 8,728 $ 4,625
========== ==========
See notes to consolidated financial statements.
F-6
7
SUBSCRIP-
TIONS RECEIV- CONTRIBU-
RETAINED TREASURY ABLE FROM TIONS
EARNINGS SHARES EMPLOYEES TO ESOT TOTAL
$ 62,851 $ (29,416) $ (606) $ (193) $ 44,531
309 309
(4,853) (4,853)
953 1,234
118 142
96 96
6,373 6,373
(1,292) (1,292)
(10) (10)
---------- ---------- ---------- ---------- ----------
67,922 (33,198) (297) (97) 46,530
290 290
(3,045) (3,045)
716 1,089
76 107
97 97
8,759 8,759
(1,341) (1,341)
(16) (16)
---------- ---------- ---------- ---------- ----------
75,324 (35,451) (7) 0 52,470
7 7
(5,918) (5,918)
737 1,432
191 245
11,279 11,279
(1,494) (1,494)
(134) (134)
---------- ---------- --------- ---------- ----------
$ 84,975 $ (40,441) $ 0 $ 0 $ 57,887
========== ========== ========= ========== ==========
See notes to consolidated financial statements.
F-7
8
THE DAVEY TREE EXPERT COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
1997 1996 1995
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 11,279 $ 8,759 $ 6,373
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 17,000 14,338 12,827
Amortization 375 352 374
Deferred income taxes (817) (319) (873)
Other (326) (273) (834)
-------- ------- --------
27,511 22,857 17,867
Change in operating assets and liabilities:
Accounts receivable (4,091) (5,183) (5,309)
Other assets (2,876) (966) 47
Accounts payable and accrued liabilities 2,606 1,323 1,664
Insurance liabilities 2,539 1,941 4,778
Other liabilities 1,245 (2,868) 2,145
-------- -------- --------
Net cash provided by operating activities 26,934 17,104 21,192
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment 1,138 1,678 898
Acquisitions (449) (820) (395)
Proceeds from sale of business 1,300
Capital expenditures:
Land and buildings (285) (727) (504)
Equipment (26,718) (17,394) (12,793)
-------- -------- --------
Net cash used in investing activities (26,314) (17,263) (11,494)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under notes
payable, bank 225 (325) 301
Principal payments of long-term debt (2,778) (2,704) (7,162)
Proceeds from issuance of long-term debt 7,756 5,148 2,024
Sales of treasury shares 1,677 1,196 1,376
Receipts from stock subscriptions 7 290 309
ESOT payment of debt guaranteed by Company 97 96
Dividends paid (1,494) (1,341) (1,292)
Repurchase of common shares (5,918) (3,045) (4,853)
-------- ------- --------
Net cash used in financing activities (525) (684) (9,201)
-------- ------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 95 (843) 497
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 627 1,470 973
-------- ------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 722 $ 627 $ 1,470
======== ======= ========
See notes to consolidated financial statements.
F-8
9
THE DAVEY TREE EXPERT COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31,1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company provides a broad line of horticultural services to corporate,
institutional and residential customers throughout most of the United States
and Canada.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of The Davey
Tree Expert Company and its subsidiary companies. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to December 31; 1997
was a 53 week year ended January 3, 1998. In 1996 and 1995, the fiscal
years were each comprised of 52 weeks ended December 28, 1996, and December
30, 1995, respectively. For presentation purposes, all years were presumed
to have ended on December 31.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided, either on a time
and materials basis, price per unit completed, or an agreed upon fee for
services performed.
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
Carrying amounts approximate fair value due to the short maturity of these
instruments. Cash equivalents are highly liquid investments with maturities
of three months or less when purchased. Due to the short maturities, the
carrying amount of the investments approximates fair value.
ACCOUNTS RECEIVABLE
The Company had allowances of $314,000 at December 31, 1997 and 1996, and
$330,000 at December 31, 1995.
INTANGIBLE ASSETS
Intangible assets represent goodwill, employment contracts, client lists
and similar assets resulting from business acquisitions and are being
amortized on a straight-line basis over their estimated useful lives ranging
from 3 to 20 years.
PROPERTY AND EQUIPMENT
The Company records property and equipment at cost. Generally, land
improvements, leasehold improvements and buildings are depreciated by the
straight-line method while the declining balance method is used for
equipment. The estimated useful lives used in computing depreciation are:
land improvements, 5-20 years; buildings and leasehold improvements, 5-40
years; equipment, 3-10 years.
F-9
10
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Standards (SFAS) No. 128, "Earnings Per Share." This standard
replaces the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike the Company's previously
reported primary earnings per share, basic earnings per share excludes the
dilutive effects of options; diluted earnings per share includes their
effect. All earnings per share amounts for all periods have been presented,
and where appropriate, restated to conform to the new standard.
The following table sets forth the computation of earnings per common share
and earnings per common share - assuming dilution:
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Numerator:
Earnings from continuing operations $ 11,279 $ 8,759 $ 6,137
Discontinued operations - net earnings 236
---------- ---------- ----------
Net earnings $ 11,279 $ 8,759 $ 6,373
========== ========== ==========
Denominator:
For earnings per common share
weighted average shares outstanding 4,392,969 4,550,677 4,750,024
Effect of dilutive securities
employee and director stock options 332,837 163,930 63,514
---------- ---------- ----------
Denominator for earnings per share -
assuming dilution 4,725,806 4,714,607 4,813,538
========== ========== ==========
Earnings per common share:
From continuing operations $ 2.57 $ 1.92 $ 1.29
Discontinued operations - net earnings .05
---------- ---------- ----------
Net earnings $ 2.57 $ 1.92 $ 1.34
========== ========== ==========
Earnings per common share - assuming dilution:
From continuing operations $ 2.39 $ 1.86 $ 1.27
Discontinued operations - net earnings .05
---------- ---------- ----------
Net earnings $ 2.39 $ 1.86 $ 1.32
========== ========== ==========
Antidilutive shares not included in earnings per
common share - assuming dilution 0 20,402 31,746
========== ========== ==========
STOCK SPLIT
The Company's board of directors declared a 2 for 1 stock split on
September 27, 1996. The additional shares as a result of the split were
distributed on October 10, 1996 to shareholders of record as of October 1,
1996. Common shares issued, treasury shares, and per common share amounts
have been restated for all periods presented to give retroactive effect to
the stock split.
F-10
11
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements, but does not address either issues of recognition or
measurement. It is effective for the Company in 1998. The only item that
will impact the Company's display of comprehensive income will be net
adjustments for foreign currency translation, which have previously been
reported within the statement of shareholders' equity.
In 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." It becomes effective in 1998 and
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements of the
enterprise and in condensed financial statements of interim periods issued
to shareholders, as well as other information regarding products and
services, geographic information, and major customers. The Company has not
yet completed its analysis of SFAS No. 131 and accordingly has yet to
determine the effect, if any, it will have on future financial statement
disclosures.
RECLASSIFICATIONS
Reclassifications have been made to the prior-year financial statements to
conform to the current year presentation.
2. INSURANCE LIABILITIES
In managing its casualty liability exposures for workers compensation, auto
liability, and general liability, the Company is substantially self-insured.
It generally retains the first $300,000 in loss per occurrence and carries
excess insurance above that amount. With respect to workers compensation,
the Company's risk of exposure to loss per occurrence may be less than
$300,000 depending on the nature of the claim and the statutes in effect by
state.
Insurance liabilities are determined using actuarial methods and
assumptions to estimate ultimate costs. They include a large number of
claims for which the ultimate costs will develop over a period of several
years. Accordingly, the estimates can change as claims mature; they can
also be affected by changes in the number of new claims incurred and claim
severity. For these reasons, it is possible that these estimates can change
materially in the near term. Changes in estimates of claim costs resulting
from new information received will be recognized in income in the period in
which the estimates are changed. Expenses that are unallocable to specific
claims are recognized as period costs.
These liabilities, including the present value of workers compensation
liabilities which are discounted at 5 3/4% at December 31, 1997, 6 1/4% at
December 31, 1996, and 5 1/2% at December 31, 1995, totaled $17,651,000,
$15,112,000 and $13,171,000 at December 31, 1997, December 31, 1996, and
December 31, 1995, respectively. The increases in 1997 and 1996 resulted
from an additional year's exposure to self-insured claims as well as their
continued maturation. The change in the discount rate increased insurance
costs by approximately $213,000 in 1997. Insurance liabilities are
classified as current and noncurrent liabilities based on the timing of
future estimated cash payments. At December 31, 1997, 1996, and 1995, the
gross value of those liabilities was approximately $20,765,000, $18,740,000
and $16,911,000, respectively.
F-11
12
3. COMMON AND PREFERRED SHARES
The Company has authorized a class of 4,000,000 preferred shares, no par
value, of which none were issued.
The number of common shares authorized is 12,000,000, par value $1.00. At
December 31, 1997, 1996 and 1995, the number of common shares issued was
8,728,440 and the number of shares in the treasury were 4,429,205,
4,209,623, and 4,104,976, respectively.
The Company's stock is not listed or traded on an active stock market and
market prices are, therefore, not available. Semi-annually, an independent
stock valuation firm determines the fair market value based upon the
Company's performance and financial condition.
Since 1979, the Company has provided a ready market for all shareholders
through its direct purchase of their common shares. During 1997, these
purchases totaled 324,124 shares for $5,918,000 in cash; the Company also
had direct sales, to directors and employees, excluding those shares sold
through either the exercise of options or the employee stock purchase plan
below, of 12,264 shares for $220,000. It also sold 8,420 shares to the
Company's 401 (k) plan for $169,000. Uniform restrictions apply to the
transfer of the Company's common shares. These restrictions generally give
the Company or the trust of the Company's Employee Stock Ownership Plan the
right to purchase the common shares whenever a shareholder proposes to
transfer the shares to anyone, other than transfers to a current employee of
the Company or transfers by a current or former employee to members of their
immediate family.
STOCK-BASED COMPENSATION PLANS
The 1994 Omnibus Stock Plan consolidated into a single plan provisions for
the grant of stock options and other stock based incentives and maintenance
of the employee stock purchase plan. Other than director options, the grant
of awards is at the discretion of the compensation committee of the board of
directors. The aggregate number of common shares available for grant and
the maximum number of shares granted annually are based on formulas defined
in the plan. Each non-employee director elected or appointed, and re-
elected or re-appointed, will receive a director option that gives the right
to purchase, for six years, 2,000 common shares at the fair market value per
share at date of grant. The director options are exercisable six months
from the date of grant. The maximum number of shares that may be issued
upon exercise of stock options, other than director options and nonqualified
stock options, is 800,000 during the ten year term of the plan.
Shares available for grant at December 31, 1997 were 176,704, which were
based on the number available upon ratification of the plan less: the
options granted presented below; the director options granted; and 329,330
shares purchased since 1994 under the stock purchase plan.
A summary of the status of the Company's director options as of December
31, 1997, 1996, and 1995, and changes during the years ending on those dates
is presented below:
1997 1996 1995
---------------------------- --------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
Outstanding at beginning of year 24,000 $14.06 24,000 $14.16 20,000 $14.82
Granted 10,000 18.79 2,000 13.56 6,000 12.19
Exercised (4,000) 13.51 (2,000) 14.82
Forfeited (2,000) 14.82
------ ------ ----- -----
Outstanding at end of year 30,000 15.71 24,000 14.06 24,000 14.16
====== ====== ======
The Company has an employee stock purchase plan that provides the
opportunity for all full-time employees with one year of service to purchase
shares through payroll deductions. The purchase price for the shares
offered under the plan is 85% of the fair value of the shares.
F-12
13
3. COMMON AND PREFERRED SHARES (CONTINUED)
Purchases under the plan have been as follows:
1997 1996 1995
---- ---- ----
Number of employees participating 817 787 772
Annual shares purchased 62,108 80,006 90,798
Average price paid $16.63 $12.44 $10.49
Cumulative shares purchased 1,484,282 1,422,174 1,342,168
Prior to adoption of the 1994 Omnibus Stock Plan, the Company had two
qualified stock option plans available for officers and management
employees; the final grant of awards under those plans was December 10,
1993.
A summary of the status of the Company's stock option plans, excluding
director options, as of December 31, 1997, 1996, and 1995, and changes
during the years ending on those dates is presented below:
1997 1996 1995
--------------------------- --------------------------- -------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
Outstanding at beginning of year 965,600 $12.97 708,800 $11.88 763,670 $11.88
Granted 265,000 15.80
Exercised (17,750) 10.82 (8,200) 10.56 (16,670) 9.40
Forfeited (38,200) 12.90
------- ------- -------
Outstanding at end of year 947,850 13.01 965,600 12.97 708,800 11.88
======= ======= ========
Options exercisable at year end 735,850 646,600 492,800
Weighted average fair value of
options granted during the year - $ 2.65 -
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
OPTIONS OUTSTANDING
-------------------------------------
EXERCISE NUMBER OUTSTANDING REMAINING NUMBER EXERCISABLE
PRICE AT 12/31/97 CONTRACTUAL LIFE AT 12/31/97
-------- ------------------ ---------------- ------------------
$ 9.40 210,500 2.0 years 210,500
11.89 25,850 5.0 25,850
12.44 230,500 4.3 230,500
13.83 216,000 6.0 216,000
15.80 265,000 8.9 53,000
------- -------
947,850 735,850
======= =======
The Company continues to apply the intrinsic-value method under APB Opinion
25 and related interpretations in accounting for awards granted under the
three plans. Using this method, compensation is measured as the difference
between the option exercise price and the market value of the stock at the
date of grant. Accordingly, no compensation cost has been recognized for
either the fixed options granted under these plans or the employee stock
purchase plan. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's net earnings
and earnings per common share - assuming dilution would have been reduced by
$330,000 and $.07 in 1997, $201,000 and $.04 in 1996 and $180,000 and $.04
in 1995.
F-13
14
3. COMMON AND PREFERRED SHARES (CONTINUED)
In calculating the pro forma impact on earnings, the following assumptions
were used for the grants in 1996: initial annual dividends of $.31 per
share with annual increases of $.02 per share; a risk free interest rate of
6.25%; an expected life of 5 years; and an estimated forfeiture rate of 8%.
The 1996 options vest at the rate of 20% annually. The pro forma amounts
for 1997, 1996, and 1995 include $200,000, $190,000 and $180,000,
respectively, attributable to compensation cost for shares acquired under
the employee stock purchase plan.
STOCK SUBSCRIPTION OFFERING
In 1989, the Company made a stock subscription offering to employees and
directors whereby they could subscribe to purchase stock for $7.93 per
share. Employees could purchase the Company's common shares by making a 10%
cash down payment and financing the remainder of the balance with seven-year
promissory notes payable to the Company through monthly payroll deductions
or annual installments commencing in September, 1989. The notes called for
interest at a rate of 8% per annum and have been reflected as subscriptions
receivable in shareholders' equity. A total of 141 participants subscribed
for 457,752 common shares of the Company.
4. ACCRUED LIABILITIES
Accrued liabilities consisted of:
DECEMBER 31
1997 1996 1995
(DOLLARS IN THOUSANDS)
Compensation $ 5,648 $ 4,009 $ 3,521
Medical claims 1,948 1,390 1,430
Vacation 1,848 1,620 1,658
Taxes, other than taxes on income 657 600 607
Other 721 610 1,376
-------- -------- -------
$ 10,822 $ 8,229 $ 8,592
======== ========= =======
5. NOTES PAYABLE, BANK AND LONG-TERM DEBT
NOTES PAYABLE, BANK
The Company has a bank operating loan which is repayable on demand and
charges interest at the bank's prime rate. Additionally, the Company has
unused short-term lines of credit with three banks totaling $3,702,000,
generally at the banks' prime rate, which was 8.5 % at December 31, 1997.
F-14
15
5. NOTES PAYABLE, BANK AND LONG-TERM DEBT (CONTINUED)
LONG-TERM DEBT
DECEMBER 31
1997 1996 1995
(DOLLARS IN THOUSANDS)
Revolving credit agreement:
Prime rate borrowings $ 2,800 $ 3,100 $ 2,900
London Interbank Offered Rate (LIBOR)
borrowings 18,000 11,000 6,000
Term note agreement 4,800 7,200 9,600
------- ------- -------
25,600 21,300 18,500
Long-term debt of ESOT 97
Subordinated notes - stock redemption 357 515 673
Term loans and other 1,295 459 560
------- ------- -------
27,252 22,274 19,830
Less current maturities 3,148 2,634 2,781
------- ------- -------
$24,104 $19,640 $17,049
======= ======= =======
The total annual installments required to be paid on long-term debt are as
follows: 1998, $3,148,000; 1999, $2,867,000; 2000, $155,000; 2001, $40,000;
2002, $39,000; and thereafter $203,000. The revolving credit agreement is
classified as long-term debt and excluded from these installments since it
is expected that these amounts will be outstanding throughout the ensuing
year.
REVOLVING CREDIT AGREEMENT
The Company has a Revolving Credit Agreement (Revolver) with two banks,
which permits borrowings, as defined, up to $35,000,000. It provides the
Company an option of borrowing funds at either the prime (8.5% at December
31, 1997) interest rate or rates based on LIBOR (5.75% at December 31,
1997), plus a margin adjustment ranging from .7% to 1.0%. The Revolver also
includes a commitment fee of 3/16 of 1% on the average daily unborrowed
commitment. Borrowings may be converted, at the Company's option, to four-
year loans. The agreement has an expiration date of April 30, 2000, and
provides for one year extensions beyond that date annually.
On May 16, 1997, the Company obtained a temporary line of credit in the
amount of $5,000,000 with its principal bank which provided for borrowings
at either the prime interest rate, rates based on LIBOR, or a negotiated
fixed interest rate. The agreement has an expiration date of April 30,
1998.
Under the most restrictive covenants of the Revolver and the Term Note
Agreement ("Term Note") below, the Company is obligated to maintain a
minimum shareholders' equity, as defined, of $38,000,000 plus 30% of annual
consolidated earnings from December 31, 1996; a maximum ratio of
consolidated funded debt to consolidated funded debt plus consolidated net
worth of .45 to 1; and a fixed charge coverage ratio of not less than 2.25
to 1.0.
TERM NOTE AGREEMENT
In 1992 the Company borrowed $12,000,000 under the Term Note which provides
for twenty consecutive quarterly principal installments of $600,000
commencing January 1, 1995 plus interest at either LIBOR plus 1-5/16% or
prime plus 1/4%. The average adjusted LIBOR rate during 1997 was 7.06%;
adjusted LIBOR was 7.09 %, 6.96%, and 5.63% at December 31, 1997, 1996 and
1995, respectively.
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16
5. NOTES PAYABLE, BANK AND LONG-TERM DEBT (CONTINUED)
LONG-TERM DEBT OF ESOT
Commencing March 31, 1992, the agreement provided for twenty equal
quarterly installments of $24,098 plus interest of 8.4% with the final
installment due December 31, 1996.
SUBORDINATED NOTES
In 1995, 1992, and 1990, the Company redeemed shares of its common stock
from shareholders for cash and five-year subordinated promissory notes
bearing interest at a rate equal to the average of the prime rate and the
prevailing local bank basic savings rate, which was 5.3% in 1997. There
were 31,574 shares redeemed in 1995 for cash of $174,147 and notes of
$595,627. In 1992, 16,800 shares were redeemed for cash of $223,830 and
notes of $193,986. In 1990, 32,937 shares were redeemed for cash of
$179,730 and notes of $478,022.
TERM LOANS AND OTHER
The weighted average interest on the term loans approximates 8.78 % and
the amounts outstanding are being repaid primarily in equal monthly
installments through 2007.
INTEREST ON DEBT
The Company made cash payments for interest on all debt of $2,806,000,
$2,475,000, and $2,732,000 in 1997, 1996, and 1995, respectively.
6. FINANCIAL INSTRUMENTS
The Company has used interest rate exchange agreements (swaps) with its
principal bank to modify the interest rate characteristics on its borrowings
under the variable interest rate Term Note. Management's authority to
utilize these agreements is restricted by the Board of Directors, and they
are not used for trading purposes. At December 31, 1997, 1996, and 1995,
the outstanding swaps had a total notional amount of $4,800,000, $7,200,000,
and $9,600,000, which effectively changes the interest rate exposure on the
Term Note to a fixed 7.22% over the same maturity period. On December 16,
1993, a "reverse" swap was entered into which effectively changed the fixed
interest rate on one-half of the Term Note to a variable rate for two years.
The swaps are accounted for using the settlement method or the "matched
swap" method in which the quarterly net cash settlements of the agreements
are recognized in interest expense when they accrue. The accrual amounts
are included in the consolidated balance sheets as accrued liabilities.
Interest expense was increased by $9,000, $25,000, and $80,000 in 1997, 1996
and 1995 respectively from these agreements. An interest rate swap is
considered to be a matched swap if it is linked through designation with an
asset or liability provided that it has the opposite interest rate
characteristics of the asset or liability. Generally, if the asset or
liability that is linked to the swap matures, or is extinguished, or if the
swap no longer qualifies for settlement accounting the swap will be marked
to market through income. The term of the agreements is matched with the
maturity period of the Term Note. If the Company decided to terminate the
swap agreements any resulting gain or loss would be deferred and amortized
over the original life of the swap contracts or recognized with the
offsetting gain or loss of the hedged transaction.
The fair value of the swaps is the quoted amount that the Company would
receive or pay to terminate the swap agreements as provided by the bank,
taking into account current interest rates. Had these agreements been
terminated as of December 31 each year, the Company would have paid $3,000,
received $1,000 and paid $50,000 in 1997, 1996, and 1995, respectively.
The carrying value of the Company's long-term debt is considered to
approximate fair value based on borrowing rates currently available for
loans with similar terms and maturities.
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7. EMPLOYEE STOCK OWNERSHIP PLAN AND 401KSOP
On March 15, 1979, the Company consummated a plan which transferred control
of the Company to its employees. As a part of this plan, the Company sold
2,880,000 common shares to the Company's Employee Stock Ownership Trust
(ESOT) for $2,700,000.
The Employee Stock Ownership Plan, in conjunction with the related trust
(ESOT), provided for the grant to certain employees of certain ownership
rights in, but not possession of, the common shares held by the trustee of
the Trust. Annual allocations of shares have been made to individual
accounts established for the benefit of the participants.
The Employee Stock Ownership Plan included as participants, all
nonbargaining employees of the parent company and its domestic subsidiaries
who have attained age 21 and completed one year of service.
Statement of Position 93-6 "Employers Accounting for Employee Stock
Ownership Plans" requires the employer to recognize compensation expense
equal to the fair value of the shares committed to be released; however, it
allows an employer with an ESOP holding shares purchased prior to December
31, 1992 to continue their existing accounting treatment. Accordingly, the
Company has elected to maintain its existing accounting treatment.
The number of shares released from collateral and available for allocation
to ESOP participants was determined by dividing the sum of the current year
loan principal and interest payments by the sum of the current and future
years' loan principal and interest payments. The Company made annual cash
contributions to the ESOP, net of dividends paid on the shares held as
collateral, sufficient to pay the principal and interest on the ESOT debt;
such contributions are reflected as an expense of the Company. Dividends on
allocated shares are credited to participants' accounts and charged against
retained earnings. ESOP shares that have been released and committed to be
released are considered outstanding for purposes of computing earnings per
share.
The contributions to the ESOT were:
1996 1995
(DOLLARS IN THOUSANDS)
Principal repayment $ 97 $ 96
Interest 5 14
---------- ----------
Total cash contributions required 102 110
Less dividends paid on collateral shares 12 23
---------- ----------
ESOT expense $ 90 $ 87
========== ==========
Annual release of shares from collateral 38,970 42,216
========== ==========
Cumulative release of shares from collateral 2,880,000 2,841,030
========== ==========
Number of shares remaining in collateral 0 38,970
========== ==========
Effective January 1, 1997, the Company commenced operation of the "The
Davey 401KSOP and ESOP," which retained the existing ESOP participant
accounts and incorporated a deferred savings plan (401(k) plan) feature.
Participants in the plan are allowed to make before-tax contributions,
within Internal Revenue Service established limits, through payroll
deductions. The Company will match, in either cash or Company stock, 50% of
each participant's before-tax contribution, limited to the first 3% of the
employee's compensation deferred each year. Eligibility to participate is
the same as that provided under the Employee Stock Ownership Plan. The
Company's cost of this plan for 1997, consisting principally of the accrual
for the employer match, was $493,000.
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8. PENSION PLANS
DESCRIPTION OF PLANS
Substantially all of the Company's employees are covered by two defined
benefit pension plans. One of these plans is for non-bargaining unit
employees and, through 1996, was non-contributory with respect to annual
compensation up to a defined level, with voluntary employee contributions
beyond the specified compensation levels. Concurrent with the introduction
of the Davey 401KSOP, future benefits earned under this plan were modified,
and as of January 1, 1997, the plan was amended to become non-contributory.
The other plan is for bargaining unit employees not covered by union pension
plans, is non-contributory, and provides benefits at a fixed monthly amount
based upon length of service.
FUNDING POLICY
The Company's funding policy is to make the annual contributions necessary
to fund the plans within the range permitted by applicable regulations. The
plans' assets are invested by outside asset managers in marketable debt and
equity securities.
EXPENSE RECOGNITION
Pension expense (income) was calculated as follows:
1997 1996 1995
(DOLLARS IN THOUSANDS)
Service cost - increase in benefit
obligations earned $ 626 $ 368 $ 358
Interest cost on projected
benefit obligation 849 906 880
Return on plan assets (earnings) (5,072) (3,290) (3,841)
Deferral (amortization) of unrecognized
net assets 2,931 1,454 2,303
-------- -------- -------
Net pension income $ (666) $ (562) $ (300)
======== ======== =======
Funded Status
The funded status of pension plans at December 31 was as follows:
1997 1996 1995
(DOLLARS IN THOUSANDS)
Plan assets at fair market value $25,561 $21,488 $19,143
Projected benefit obligation (12,502) (12,091) (12,462)
------- ------- -------
Excess of assets over projected
benefit obligation 13,059 9,397 6,681
Unrecognized initial asset (1,010) (1,082) (1,154)
Unrecognized gain (7,741) (4,639) (3,172)
Unrecognized prior service cost (663) (697) 62
------- ------- -------
Prepaid pension expense recognized
as other assets in balance sheets $ 3,645 $ 2,979 $ 2,417
======= ======== =======
The projected benefit obligation was determined using an assumed discount
rate of 7.00% in 1997 and 7.25% in 1996 and 1995. The assumed long-term
compensation rate increase was 5.0%. The assumed long-term rate of return
on plan assets was 8.25% in 1997 and 9.0% in 1996 and 1995.
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8. PENSION PLANS (CONTINUED)
The projected benefit obligation, which includes the effect of annual
compensation rate increases, is based on an accumulated benefit obligation
of $11,342,000, $10,530,000, and $10,367,000 at December 31, 1997, 1996 and
1995, respectively. It includes vested benefits of $11,220,000,
$10,390,000, and $10,115,000, respectively. The January 1, 1997 amendment
to the Davey Tree Expert Company Employee Retirement Plan reduced the
projected benefit obligation and prior service cost incurred by $755,000 at
December 31, 1996.
MULTIEMPLOYER PLANS
The Company also contributes to several multiemployer plans which provide
defined benefits to unionized workers who do not participate in the Company
sponsored bargaining unit plan. Amounts charged to pension cost and
contributed to the plans in 1997, 1996 and 1995 totaled $380,000, $395,000,
and $309,000, respectively.
9. INCOME TAXES
The approximate tax effect of each type of temporary difference that gave
rise to the Company's deferred tax assets (no valuation allowance was
considered necessary) and liabilities at December 31, was as follows:
1997 1996 1995
(DOLLARS IN THOUSANDS)
CURRENT
Assets:
Compensated absences $ 341 $ 294 $ 217
Insurance 1,447 1,346 2,419
Other - net 244 146 61
-------- -------- -------
Net current 2,032 1,786 2,697
-------- -------- -------
NON-CURRENT
Assets:
Insurance 3,825 3,100 1,986
Liabilities:
Accelerated depreciation
for tax purposes (4,421) (4,300) (4,228)
Pensions (1,247) (1,016) (822)
Other - net 462 264 (118)
-------- -------- -------
Net noncurrent (1,381) (1,952) (3,182)
-------- -------- -------
Net deferred tax asset (liability) $ 651 $ (166) $ (485)
======== ======== =======
Significant components of income tax expense from continuing operations include:
1997 1996 1995
(DOLLARS IN THOUSANDS)
Taxes currently payable:
U.S. Federal $ 6,839 $ 5,057 $ 3,721
Canadian 309 144 246
State and local 1,641 1,200 880
-------- -------- -------
8,789 6,401 4,847
-------- -------- -------
Deferred tax expense (benefit):
U.S. Federal (682) (269) (704)
Canadian 46 22 18
State and local (181) (72) (187)
-------- -------- -------
(817) (319) (873)
-------- -------- -------
$ 7,972 $ 6,082 $ 3,974
======== ======== =======
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9. INCOME TAXES (CONTINUED)
The differences between the U.S. Federal statutory tax rate and the
effective tax rate are as follows:
1997 1996 1995
U.S. Federal statutory tax rate 34.9% 34.3% 34.0%
State and local income taxes 5.5 5.3 5.6
Canadian income taxes .7 .5 1.1
Miscellaneous .3 .9 (1.4)
----- ------ ------
Effective tax rate 41.4% 41.0% 39.3%
===== ====== ======
Earnings before income taxes by country are as follows:
1997 1996 1995
(DOLLARS IN THOUSANDS)
U.S. $ 18,604 $ 14,555 $ 9,669
Canadian 647 286 442
-------- -------- -------
$ 19,251 $ 14,841 $10,111
======== ======== =======
The Company made cash payments for income taxes of $7,360,000, $9,354,000,
and $3,324,000 in 1997, 1996 and 1995, respectively.
10. CUSTOMER CONCENTRATION
The Company's major service line, utility line clearance, represented
approximately 62% of the outstanding accounts receivable at December 31,
1997, 1996 and 1995. The Company had revenues from one utility customer
under multiple year contracts aggregating approximately $67,000,000 in 1997,
$55,000,000 in 1996, and $37,000,000 in 1995. The Company had revenues from
a second utility customer under multiple year contracts of approximately
$22,000,000 in 1997, $19,000,000 in 1996, and $21,000,000 in 1995. The
Company performs ongoing credit evaluations of its customers' financial
conditions and generally requires no collateral.
11. OPERATING LEASES
The Company primarily leases facilities which are used for district office
and warehouse operations. These leases extend for varying periods of time
up to four years and, in some cases, contain renewal options. Total rental
expense under such operating leases amounted to approximately $1,723,000,
$1,693,000, and $1,539,000 for 1997, 1996 and 1995, respectively. As of
December 31, 1997, future minimum rental payments, including taxes and other
operating costs, for all operating leases having noncancelable lease terms
in excess of one year, totaled $3,275,000, and are expendable as follows:
1998, $1,280,000; 1999, $867,000; 2000, $586,000, 2001, $361,000 and 2002,
$181,000.
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12. COMMITMENTS AND CONTINGENCIES
The Company is party to a number of lawsuits, threatened lawsuits and
other claims arising out of the normal course of business. Management is of
the opinion that liabilities which may result are adequately covered by
insurance, or to the extent not covered by insurance or accrued, would not
be material in relation to the financial position, results of operations or
liquidity of the Company.
At December 31, 1997, the Company was contingently liable to its principal
banks in the amount of $7,515,000 for outstanding letters of credit for
insurance coverage and guarantees of debt for one of its subsidiaries.
13. DISCONTINUED OPERATION
On March 31, 1995 the Company sold substantially all of the operating
assets, excluding real estate, of its interior plant care business; in
December 1996 it sold the real estate related to this business at an amount
approximating its carrying value.
Amounts related to the discontinued operation and recognized in the
financial statements are as follows:
1995
(DOLLARS IN THOUSANDS)
Revenues $ 553
========
Loss from discontinued operation, net of
applicable income tax benefits of $116,000 (168)
Gain on sale of assets, less applicable income
taxes of $280,000 404
--------
Discontinued operation, net $ 236
========
14. ACQUISITIONS
In 1997, 1996, and 1995, the Company completed acquisitions of
organizations providing horticultural services for a total purchase price of
$449,000, $820,000 and $2,150,000, respectively. They were accounted for as
purchases and their results of operations, which were not material in any of
the years presented, are included in the accompanying financial statements
from their respective dates of acquisition. Goodwill and other intangibles
recognized in connection with these purchases are being amortized over 3 to
15 years.
*******
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