1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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 22, 1999 (excluding the total number of
Common Shares reported in Item 12 hereof), was $128,093,664.
Common Shares outstanding at March 22, 1999: 4,002,927
Documents incorporated by reference: Portions of the Registrant's definitive
Proxy Statement for its 1999 Annual Meeting of Shareholders (Part III).
Index to Exhibits is located on sequential page 16.
2
PART I
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ITEM 1. BUSINESS.
GENERAL. The Davey Tree Expert Company, which was incorporated in 1909,
and its subsidiaries (the "Registrant") have two primary operating segments
which provide a variety of horticultural services to their respective customer
groups. Residential services provides for the treatment, preservation,
maintenance, cultivation, planting and removal of trees, shrubs and other plant
life; its services also include the practices of landscaping, tree surgery, tree
feeding, and tree spraying, as well as the application of fertilizers,
herbicides and insecticides. Utility services is principally engaged in the
practice of line clearing for public utilities. The Registrant also provides
commercial services and other services related to natural resource management
solutions, including urban and utility forestry research and development,
natural resources consulting and environmental planning.
COMPETITION AND CUSTOMERS. The Registrant's Residential services is one of
the largest national tree care organizations, and competes with other national
and local firms with respect to its services. On a national level, the
competition is primarily in the context of landscape construction and
maintenance as well as residential and commercial lawn care. At a local and
regional level, its competition comes mainly from other companies which are
engaged primarily in tree care. With respect to Utility services, the
Registrant is the second largest organization in its industry, and competes
principally with one major national competitor, as well as several smaller
regional firms.
Principal methods of competition in both operating segments are
advertising, customer service, image, performance and reputation. The
Registrant's program to meet its competition stresses the necessity for its
employees to have and project to the customers a thorough knowledge of all
horticultural services provided, and utilization of modern, well-maintained
equipment. Pricing is not always a critical factor in a customer's decision
with respect to Residential services; however, pricing is generally the
principal method of competition for the Registrant's Utility services, although
in most instances consideration is given to reputation and past production
performance.
The Registrant provides a wide range of horticultural services to private
companies, public utilities, local, state and federal agencies, and a variety of
industrial, commercial and residential customers. During 1998, the Registrant
had sales of approximately $55,000,000 (18% 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 customers
principally through direct mail programs and to a lesser extent through the
placement of advertisements in national magazines and trade journals, local
newspapers and "yellow pages" telephone directories. Business from utility
customers is obtained principally through negotiated contracts and competitive
bidding. All sales and services are carried out through personnel
who are direct employees. The Registrant does not generally use agents and does
not franchise its name or business.
3
SEASONALITY. The Registrant's business is seasonal, primarily due to
fluctuations in horticultural services provided to residential customers and to
a lesser extent by budget constraints imposed on its utility customers. Because
of this seasonality, the Registrant has historically incurred losses in the
first quarter, while sales and earnings are generally highest in the second and
third quarters of the calendar year. Consequently, this has created heavy
demands for additional working capital at various times throughout the year.
The Registrant borrows primarily against bank commitments in the form of a
revolving credit agreement with two banks to provide the necessary funds.
OTHER FACTORS. Rapid changes in equipment technology require a constant
updating of equipment and processes to ensure competitive services to the
Registrant's customers. Also, the Registrant must continue to assure its
compliance with the Occupational Safety and Health Act. In keeping with these
requirements, and to equip the Registrant for continued growth, capital
expenditures in 1998 and 1997 were approximately $34,009,000 and $27,003,000,
respectively.
The Registrant owns several trademarks including "Davey", "Davey and
design", "Arbor Green", "Davey Tree and design", "Davey Expert Co. and design"
and "Davey and design (Canada)". Through substantial advertising and use, the
Registrant is of the opinion that these trademarks have become of value in the
identification and acceptance of its products and services.
EMPLOYEES. The Registrant employs between 5,000 and 6,000, depending upon
the season, and considers its employee relations to be good.
FOREIGN AND DOMESTIC OPERATIONS. The Registrant sells its services to
customers in the United States and Canada.
The Registrant does not consider its foreign operations to be material and
considers the risks attendant to its business with foreign customers, other than
currency exchange risks, to be not materially different from those attendant to
business with its domestic customers.
4
ITEM 2. PROPERTIES.
The following table lists certain information with respect to major
properties owned by the Registrant and used in connection with its operations.
OPERATING BUILDING
LOCATION SEGMENT ACREAGE SQ. FT.
- -------- --------- ------- --------
Baltimore, Maryland Residential 3.4 22,500
Bettendorf, Iowa Residential .5 478
Cincinnati, Ohio Residential 2.5 8,800
Chamblee, Georgia Residential & Utility 1.9 6,200
Chantilly, Virginia Residential 4.0 5,700
Charlotte, North Carolina Residential & Utility 3.1 4,900
Cheektowaga, New York Other 6.9 2,800
Columbus, Ohio Residential 8.0 15,925
Downsview, Ontario, Canada Residential .5 3,675
East Dundee, Illinois Residential & Utility 4.0 7,500
Edmonton, Alberta, Canada Utility .7 2,900
Gaithersburg, Maryland Residential 2.1 7,200
Gibsonia, Pennsylvania Residential 5.9 7,100
Hinsdale, Illinois Residential 1.7 7,200
Houston, Texas Residential 1.5 7,000
Indianapolis, Indiana Residential 1.5 5,000
Jacksonville, Florida - Nursery Residential 279.0 5,300
Kent, Ohio (multiple parcels) - Corporate Headquarters Other 101.4 111,608
Lachine, Quebec, Canada Residential .5 2,300
Lancaster, New York Residential 3.0 6,624
Lawrence, Pennsylvania Residential 3.5 7,200
Livermore, California Utility 12.0 29,737
Mecklenburg County, North Carolina Utility 15.6 -0-
Nanaimo, British Columbia, Canada Other 1.0 4,742
Plymouth, Minnesota Residential 2.7 11,750
Richmond, Virginia Residential .7 2,586
Stow, Ohio Residential 7.4 14,100
Toledo, Ohio Residential .5 4,300
Troy, Michigan Residential 2.0 7,200
West Babylon, New York Residential .9 14,100
West Carlton Twp., Ontario, Canada Residential 3.1 4,000
Wheeling, Illinois Residential 5.0 11,300
Winter Park, Florida Utility 1.0 5,850
Wooster, Ohio - Nursery Residential 322.8 13,194
The Registrant also rents approximately 70 other premises for office and
warehouse use. The Registrant believes that all of these properties have been
adequately maintained and are suitable and adequate for its business as
presently conducted.
5
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings, other than ordinary routine litigation
incidental to the business, to which the Registrant or any of its subsidiaries
is a party or of which any of their property is the subject. This routine
litigation is not material to the Registrant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of 1998 to a vote of
security holders, through the solicitation of proxies or otherwise.
Executive Officers of the Registrant (included pursuant to Instruction 3 to
paragraph (b) of Item 401 of Regulation S-K) and their present positions and
ages are as follows:
NAME POSITION AGE
- ---- -------- ---
R. Douglas Cowan Chairman and Chief Executive Officer 58
Karl J. Warnke President and Chief Operating Officer 47
David E. Adante Executive Vice President, Chief 47
Financial Officer and Secretary-Treasurer
Howard D. Bowles Vice President and General Manager, 55
Davey Tree Surgery Company
C. Kenneth Celmer Vice President and General Manager, 52
Residential Services
Bradley L. Comport, CPA Corporate Controller 47
Dr. Roger C. Funk Vice President and General Manager, 54
The Davey Institute
Rosemary T. Nicholas Assistant Secretary 55
Marjorie L. Conner, Esquire Assistant Secretary 41
Gordon L. Ober Vice President - New Ventures 49
Richard A. Ramsey Vice President and General Manager, 49
Commercial Services
Wayne M. Parker Vice President - Northern Operations, 43
Utility Services
Mr. Cowan was elected Chairman and Chief Executive Officer on March 11, 1999.
Previously he had served as Chairman, President and Chief Executive Officer
since May 1997. Prior to that time, he served as President and Chief Executive
Officer since before 1994.
Mr. Warnke was elected President and Chief Operating Officer on March 11,
1999. Prior to that time, he served as Executive Vice President and General
Manager - Utility Services since before 1994.
6
Mr. Adante was elected Executive Vice President, Chief Financial Officer and
Secretary - Treasurer in May 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 1994.
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 1994.
Ms. Nicholas was elected Assistant Secretary in May 1982.
Ms. Conner was elected Assistant Secretary in May 1998. Prior to that time
she served as Manager of Legal and Treasury Services since February 1995 and as
Assistant Controller since before 1994.
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 1994.
Mr. Parker was elected Vice President - Northern Operations, Utility
Services in May 1994. Prior to that time and since before 1994, 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, 1998, 1997, and 1996 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 4,736,785, 4,429,205 and 4,209,623.
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.
7
As of March 22, 1999, there were 1,920 recorded holders of the Registrant's
Common Shares. During the years ended December 31, 1998, December 31, 1997 and
December 31, 1996, the Registrant paid dividends of $.38, $.34, and $.295,
respectively, per share. Approximately one quarter of the total dividend
payment is made in each of the four quarters. The Registrant's agreements with
its lenders allow for the payment of cash dividends provided that the terms and
conditions of the agreements, particularly those dealing with its shareholders'
equity, fixed charge coverage ratio and maximum consolidated funded debt to
consolidated funded debt plus consolidated net worth ratio, are maintained.
(See Note 6 to the Financial Statements on page F-16 of this Annual Report on
Form 10-K.)
ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED DECEMBER 31
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands, except per share data)
Operating Results:
Revenues $ 313,887 $ 295,079 $ 266,934 $ 229,682 $ 209,683
Earnings from Continuing
Operations $ 10,597 $ 11,279 $ 8,759 $ 6,137 $ 4,189
Earnings from Continuing
Operations Per Common Share $ 2.57 $ 2.57 $ 1.92 $ 1.29 $ .85
Earnings from Continuing
Operations Per Common Share -
Assuming Dilution $ 2.30 $ 2.39 $ 1.86 $ 1.27 $ .84
At Year End:
Total Assets $ 149,086 $ 127,825 $ 111,386 $ 104,161 $ 98,486
Total Long-Term Debt $ 42,893 $ 24,104 $ 19,640 $ 17,049 $ 21,124
Cash Dividends Per Common Share $ .38 $ .34 $ .295 $ .275 $ .26
In 1995 the Registrant sold its interior plant care business. Operating
results for 1995 and 1994 have accordingly been restated for this
discontinued operation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided $28,193,000 in cash, an increase of $1,259,000
when compared to the $26,934,000 provided in 1997. This increase occurred
despite a decline in net earnings for the year, and is attributable to a higher
level of depreciation, an increase in the Registrant's net deferred tax
liability, a lower increase in other assets, and increases in accounts payable
and accrued liabilities. These increases were partially offset by an increase
in accounts receivable and reductions in insurance and other liabilities.
8
Net earnings of $10,597,000 declined $682,000 or 6.0% when compared to the
$11,279,000 earned in 1997, and the decline occurred even though the
Registrant's two primary operating segments, Utility and Residential, realized
increased operating earnings. Utility services improvement was driven largely
by additional work obtained in its western and southern operations; the former
continues to be primarily a function of the more stringent utility line
clearance standards promulgated by the state of California, while the latter is
mainly the result of new contracts obtained in the ordinary course of business,
as well as a heightened focus on operating efficiencies and consequent cost
reductions. Notwithstanding these improvements, the overall decline in net
earnings resulted from two factors. First, the Registrant completed a
significant consulting service contract in 1997. Second, it incurred expense in
the current year of approximately $3,000,000 related to its implementation of a
new enterprise-wide information system, a process which commenced in January
1998.
Depreciation increased $2,563,000, the result of higher levels of capital
expenditures in the current and immediately preceding two years.
The Registrant's deferred tax expense of $2,397,000 represents a net
increase of $3,214,000 from last year's deferred tax benefit of $817,000, and is
principally the result of a higher level of accelerated depreciation for tax
purposes in the current year.
Other assets increased only $59,000, $2,817,000 less than the increase
experienced in 1997. Last year's increase resulted from an escrow deposit on
real property to be used as a branch office facility in the Registrant's
Residential services; the transaction was completed in 1998.
Accounts payable and accrued liabilities increased $5,595,000 in 1998, or
$2,989,000 more than the increase experienced last year. The increase is mainly
due to a higher level of accounts payable associated with consulting services
performed in conjunction with the Registrant's development of its enterprise-
wide information system, as well as higher compensation related accruals
associated with its increased levels of revenue and operating earnings in its
primary operating segments.
Accounts receivable increased $7,594,000 to $51,490,000, $3,503,000 more
than the increase in 1998. Days outstanding increased 1.2 days to 63.7 days
from 62.5 days in 1997. Substantially all of the increase in the level of
accounts receivable and days outstanding has been realized in the Registrant's
Residential services. The Registrant is not concerned as to the overall
collectibility of accounts and continues its efforts to reduce both the level of
accounts receivable and days outstanding. It also performs ongoing credit
evaluations of its customers' financial condition for collection purposes, and
when determined necessary, it provides an allowance for doubtful accounts.
Insurance liabilities declined by $885,000, a net change of $3,424,000 when
compared to the 1997 increase of $2,539,000. This reduction is a function of
relatively stable levels of estimated ultimate costs resulting from a generally
mature self-insurance program, coupled with an acceleration in claims payments.
As has been experienced throughout 1998, this acceleration in claims payments is
due to an anticipated "catching up" in processing by the Registrant's excess
insurer and claims administrator; these payments had generally lagged during the
transition to this insurer since September 1996. 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 3 on page F-13 of this Annual Report on Form 10-K).
The Registrant's other liabilities decreased $1,233,000, a net change of
$2,478,000 when compared to the increase of $1,245,000 in 1997. Most of the
change can be attributed to the Registrant's payment of its 1997 income tax
liability in the current year.
Investing activities used $32,841,000 in cash, an increase of $6,527,000
over last year. The increase is mainly attributable to costs capitalized in
conjunction with the development of the Registrant's new enterprise-wide
information system.
9
Financing activities provided $5,190,000 in cash, a $5,715,000 increase when
compared to the $525,000 used in 1997. Proceeds from issuance of long-term
debt, net of principal repayments, totaled $16,496,000, $11,518,000 more than
last year. The additional long-term borrowings were necessitated by the higher
level of capital expenditures previously discussed, as well as by the repurchase
of $12,150,000 of its common shares, an increase of $6,232,000. The current
year increase in shares repurchased was due to a combination of several factors.
First, there was favorable movement in the independent valuation of the
Registrant's common shares, which resulted in a higher level of transactions
generally. Second, the Registrant experienced a relatively higher level of
retirements and consequent repurchases of shares from the Employee Stock
Ownership Trust. Finally, a portion of these purchases were attributable to
redemptions from two directors related to or in contemplation of their
retirements from the Board.
At December 31, 1998, the Registrant's principal source of liquidity
consisted of $1,264,000 in cash and cash equivalents; short term lines of credit
and amounts available to be borrowed from banks via notes payable totaling
$4,600,000, of which $710,000 was considered drawn to cover outstanding letters
of credit; and the revolving credit agreement and temporary line of credit
totaling $70,000,000, of which $30,900,000 was drawn and $9,715,000 was
considered drawn to cover outstanding letters of credit. Including the
outstanding term note agreement, at that date the Registrant's credit facilities
totaled $84,600,000. The Registrant believes its available credit will exceed
credit requirements, and that its liquidity is adequate.
LIQUIDITY MEASUREMENTS
As previously discussed, management uses these measurements primarily to
gauge the Registrant's ability to meet working capital requirements, fund
capital expenditures, and repurchase its common shares.
1998 1997 1996
---- ---- ----
Net cash provided by operating activities $ 28,193 $ 26,934 $ 17,104
Net cash used in investing activities $(32,841) $ (26,314) $(17,263)
Net cash provided by (used in)
financing activities $ 5,190 $ (525) $ (684)
The Registrant also uses the following additional measures in its evaluation.
They are not an alternative to earnings determined in accordance with generally
accepted accounting principles (GAAP) as a measure of financial performance or
to GAAP cash flow as a measure of liquidity.
1998 1997 1996
---- ---- ----
Working capital $ 28,172 $ 19,194 $ 19,283
Current ratio 1.8:1 1.6:1 1.7:1
Cash flow from net earnings,
depreciation and amortization $ 30,531 $ 28,654 $ 23,449
Capital expenditures $ 34,009 $ 27,003 $ 18,121
Cash flow to capital expenditures ratio .9:1 1.1:1 1.3:1
Cash flow as percentage of revenues 9.7% 9.7% 8.8%
10
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.
1998 1997 1996
---- ---- ----
Equity to debt ratio .62:1 .83:1 .89:1
Debt as percentage of assets 61.6% 54.7% 52.9%
Equity as percentage of assets 38.4% 45.3% 47.1%
At the end of 1998, these measurements reflect a greater degree of leverage
when compared with 1997 due primarily to the additional borrowings incurred to
fund the significantly higher level of capital expenditures and common share
repurchases.
COMMON SHARE MEASUREMENTS
These measurements assist shareholders in assessing the Registrant's earnings
performance, dividend payout and equity position as related to their
shareholdings.
1998 1997 1996
---- ---- ----
Net earnings per share-assuming dilution $ 2.30 $ 2.39 $ 1.86
Dividends per share $ .38 $ .34 $ .295
Book value per share $ 14.35 $ 13.46 $ 11.61
Market valuation per share $ 32.00 $ 26.05 $ 18.20
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 1998. In 1998, they were increased by a total of $.04
per share, or 11.8% over 1997, compared to an increase in 1997 of $.045 per
share, or 15.3% over 1996. 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.
1998 1997 1996
---- ---- ----
Average assets employed $ 138,456 $ 119,606 $ 107,774
Asset turnover (revenues to average assets) 2.3 2.5 2.5
Return on average assets 7.7% 9.4% 8.1%
11
MARKET RISK
The Registrant's interest expense is most sensitive to changes in the general
level of U.S. interest rates; in this regard, changes in these rates affect the
interest paid on its debt. To partially mitigate the impact of fluctuations in
interest rates, the Registrant has entered into interest rate exchange
agreements (swaps) on its term note agreement.
The following table provides information about the Registrant's financial
instruments and swaps that are sensitive to changes in interest rates. For debt
obligations, the table presents principal cash flows and related weighted-
average interest rates by expected maturity dates. For the interest rate swap
related to the Registrant's term note, the table presents notional amounts and
actual pay, receive rates by contractual maturity dates. For presentation
purposes, it has been assumed that the December 31, 1998 balance under the
Registrant's revolving credit agreement will remain outstanding for the years
shown.
INTEREST RATE SENSITIVITY
PRINCIPAL (NOTIONAL) AMOUNT BY EFFECTED MATURITY
AVERAGE INTEREST (SWAP) RATE
FAIR
VALUE
1999 2000 2001 2002 2003 THEREAFTER TOTAL 12-31-98
---- ---- ---- ---- ---- ---------- ----- --------
(DOLLARS IN THOUSANDS)
Long-term debt, including
current portion
Fixed rate $ 347 $ 36 $ 40 $ 40 $ 44 $ 160 $ 667 $ 680
Average interest rate 9.5% 10.4% 10.4% 10.3% 10.2% 10.0%
Variable rate:
a) Term note - $ 1,500 $ 2,000 $ 2,000 $ 2,000 $ 2,500 $10,000 $10,000
Average interest rate LIBOR LIBOR LIBOR LIBOR LIBOR LIBOR
plus plus plus plus plus plus
(1.00% to (1.00% to (1.00% to (1.00% to (1.00% to (1.00% to
1.50%) 1.50%) 1.50%) 1.50%) 1.50%) 1.50%)
b) Subordinated notes $ 508 $ 508 $ 389 $ 388 $ 388 - $ 2,181 $ 2,181
Average interest rate 5-year 5-year 5-year 5-year 5-year
U.S. U.S. U.S. U.S. U.S.
Treasury Treasury Treasury Treasury Treasury
c) Revolving credit agreement, assuming renewal upon maturity
i. Prime borrowings - - - - - $ 2,900 $ 2,900 $ 2,900
Average interest rate prime prime prime prime prime prime
ii.Libor borrowings - - - - - $ 28,000 $28,000 $28,000
Average interest rate LIBOR LIBOR LIBOR LIBOR LIBOR LIBOR
plus plus plus plus plus plus
(.9% to (.9% to (.9% to (.9% to (.9% to (.9% to
1.4%) 1.4%) 1.4%) 1.4%) 1.4%) 1.4%)
Interest rate derivative financial
instruments related to term note:
Interest rate swap:
Pay fixed $ 1,500 $ 2,000 $ 2,000 $ 2,000 $ 2,500 $10,000 $ (335)
Average pay rate 6.09% plus 6.09% plus 6.09% plus 6.09% plus 6.09% plus
(1.00% to (1.00% to (1.00% to (1.00% to (1.00% to
1.50%) 1.50%) 1.50%) 1.50%) 1.50%)
Average receive rate LIBOR LIBOR LIBOR LIBOR LIBOR
The Registrant's Canadian operations subject the Company to currency rate
exposure related to its foreign denominated debt, intercompany debt and cash and
cash equivalents. The Registrant periodically borrows against its Canadian
lines of credit, on which there were no amounts outstanding at December 31,
1998. All other foreign denominated financial instruments are not material.
12
RESULTS OF OPERATIONS
Revenues of $313,887,000 for the year increased $18,808,000 or 6.4% when
compared to the $295,079,000 realized in 1997. This compares with increases of
10.5% and 16.2% in 1997 and 1996, respectively. The current year increase was
attributable to revenue growth in Utility and Residential services. As
previously mentioned, the increase in Utility services revenue was derived
principally from additional work obtained in its western and southern
operations, while Residential services continues to benefit from good economic
conditions and a focused sales effort. The 1998 revenues of $55,000,000 earned
by the Registrant with its major U.S. customer represent a significant
concentration (See Note 2 to the Financial Statements on page F-11 of this
Annual Report on Form 10-K). The Registrant expects that its 1999 revenues will
increase slightly less as a percent than in 1998.
Operating costs of $210,921,000 increased $13,195,000 over 1997, and as a
percentage of revenues they increased .2% to 67.2%. The percentage increase was
primarily influenced by higher operating costs associated with a relatively
higher increase in Utility services revenues compared to that of Residential
services, as well as a significantly lower level of Consulting service revenues.
Utility services, in contrast with Residential and Consulting services,
adversely affect operating costs in that they are generally lower priced
services with inherently lower gross margins and attendant higher operating
costs. The Registrant anticipates that as a percentage of revenues, 1999
operating costs will approximate 1998 levels.
Selling costs for 1998 increased $1,769,000 to $39,601,000, but as a
percentage of revenues they declined .2% to 12.6%. The dollar increase
continues to result from higher commissions and branch office expenses
associated with higher Residential service revenues; the decline as a percentage
of revenues is primarily due to a lower level of travel and other sales costs
related to the Registrant's Consulting services, the result of completing a
major contract in 1997.
General and administrative expense of $22,764,000 was $2,467,000 higher than
in 1997, and as a percentage of revenues these costs increased .3% to 7.2%. The
increases are due to costs associated with the Registrant's implementation of an
enterprise-wide information system.
In 1997, the Registrant completed development of its information technology
plan for the purpose of replacing its existing legacy systems with this new
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. The software vendor has also represented
that this new system is year 2000 compliant. In January 1998, the Registrant
acquired and commenced implementation of this new information system. The
Registrant estimates implementation will be completed by June of 1999.
Consistent with the implementation schedule, the blueprint phase of the project
had been completed as of July 4, 1998. Configuration, data conversion, testing,
and going live will follow over the remaining term of the implementation
schedule. The Registrant's current estimate for the ultimate cost of this new
system is approximately $13,500,000. Of this total, $3,000,000 has been
expensed in 1998 and $8,800,000, consisting of hardware, software license fees,
consulting and internal personnel costs related to design and configuration, has
been capitalized. The Registrant expects that depreciation of these costs will
commence in 1999, as system modules are ready to be placed in service.
The Registrant has not fully addressed the year 2000 readiness of its non-IT
systems, those systems with embedded technology, but recognizes the need to do
so over the next two quarters. The exception to this is that concurrent
with implementation of the new enterprise-wide application, the Registrant, with
assistance from outside consultants, obtained competitive proposals from several
major vendors to provide it with telecommunication services throughout North
America. One critical element that the Registrant evaluated in these proposals
was the year 2000 readiness of each vendor. The telecommunication services
provider selection process was completed in 1998. The Registrant has also
upgraded its corporate headquarters phone software at a cost of $60,000.
13
The Registrant continues to assess the year 2000 readiness of external
entities with which it interfaces. Material relationships include, but are not
limited to, those with existing utility customers in which electronic billing is
required as well as vendors such as the Registrant's principal bank which will
provide or already provides such services as lockbox processing, treasury
management services, and benefit plan administration. It is anticipated that
the assessment of year 2000 issues with material third party relationships will
be completed over the term of the enterprise-wide system implementation
schedule.
The Registrant currently is uncertain with respect to its most reasonably
likely worst case year 2000 scenario, but believes that most issues will have
been identified prior to going live with its enterprise-wide information system.
Given this uncertainty, the Registrant also has no contingency plans, but will,
to the extent considered necessary under the circumstances, develop such plans
as issues are identified.
The preceding comments regarding the year 2000 are forward looking
statements and, as such, represent the Registrant's best faith estimates of
costs that will be incurred. There can be no assurance that these estimates are
accurate.
Depreciation and amortization of $19,934,000 increased $2,559,000 or .5% as
a percentage of revenues. The dollar and percentage increases continue to
result from a relatively higher level of capital expenditures for equipment
primarily to support Utility and Residential services.
Interest expense of $3,391,000 was $688,000 higher than in 1997, and as a
percentage of revenues it increased .2% from .9 to 1.1%. The increase was due
to the substantially higher debt levels in 1998.
Earnings before income taxes declined $1,410,000 to $17,841,000, and as a
percentage of revenues they decreased .8% to 5.7%. The tax provisions for 1998,
1997, and 1996 resulted in effective tax rates of 40.6%, 41.4%, and 41.0%,
respectively. (See Note 10 of the Financial Statements on page F-21 on this
Annual Report on Form 10-K.)
The Registrant's net earnings of $10,597,000 decreased $682,000 or 6.0%
compared to 1997, and as a percentage of revenues they declined .4% to 3.4%.
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-22 of this Annual Report
on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Reference is made to Part I of this Report for information as to executive
officers of the Registrant.
The information regarding directors of the Registrant appearing under the
heading "Election of Directors" in the Registrant's definitive Proxy Statement
for its 1999 Annual Meeting of Shareholders is hereby incorporated by reference.
14
ITEM 11. EXECUTIVE COMPENSATION.
The information regarding compensation of the Registrant's executive
officers appearing under the heading "Remuneration of Executive Officers" in the
Registrant's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information regarding the security ownership of certain beneficial
owners and management appearing under the heading "Ownership of Common Shares"
in the Registrant's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information regarding certain relationships and related transactions
appearing under the headings "Election of Directors" and "Indebtedness of
Management" in the Registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders is hereby incorporated by reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) and (a) (2) Financial Statements and Schedules. See the Index to
Financial Statements and Financial Statement Schedules on page F-1 of this
Annual Report on Form 10-K.
(a) (3) Exhibits. See the Index to Exhibits on sequentially numbered page
16 of this Annual Report on Form 10-K.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the period covered by this Annual Report on Form 10-K.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned thereunto duly authorized.
THE DAVEY TREE EXPERT COMPANY
By: /s/ R. Douglas Cowan
-----------------------------------
R. D. Cowan, Chairman and
Chief Executive Officer
March 25, 1999
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 25, 1999.
/s/ R. Douglas Cowan /s/ Douglas K. Hall
- ---------------------------- ----------------------------
R. DOUGLAS COWAN, Director; DOUGLAS K. HALL, Director
Chairman and Chief
Executive Officer
(Principal Executive Officer)
/s/ 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)
16
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
Security holders, including indentures party 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 6 of Notes
to Consolidated
Financial Statements
on page F-16 of this
Annual Report on
Form 10-K.
(9) Voting Trust Agreement Not Applicable.
(10)(a) 1987 Incentive Stock Option Plan Incorporated by
reference to Exhibit
(10) (a) to the
Registrant's Annual
Report on Form 10-K
for the year ended
December 31, 1997.
(10)(b) 1994 Omnibus Stock Plan Incorporated by
reference to Exhibit
10 (c) to the
Registrant's 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
17
LOCATION
EXHIBIT NO. DESCRIPTION SEQUENTIAL PAGE
- ----------- ----------- ---------------
(18) Letter re change in accounting
principles Not Applicable.
(21) Subsidiaries of the Registrant 18
(22) Published report regarding matters Incorporated by
submitted to vote of security holders reference to Part II,
Item 4 to the
Registrant's Form
for the quarter ended
June 28, 1997.
(23) Consent of independent auditors 19
to incorporation of their report
in Registrant's Statements on
Form S-8 (File Nos. 2-73052,
2-77353, 33-5755, 33-21072, and
33-59347) and Form S-2
(File No. 33-30970)
(24) Power of Attorney Not Applicable.
(27) Financial Data Schedule 20
The documents listed as Exhibits 10(a) and 10(b) constitute management contracts
or compensatory plans or arrangements.