X	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2002
	OR
	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ______________ to ______________
	Commission file number 0-11917

Ohio	34-0176110
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
1500 North Mantua Street P.O. Box 5193
Kent, Ohio 44240 (Address of principal executive offices) (Zip code)
(330) 673-9511 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Shares, $1.00 par value

Segment	Number of Properties	How Held	Square Footage	Number of  States or Provinces
Residential and Commercial	20	Owned	167,457	11
Residential, Commercial and Utility	2	Owned	12,400	2
Utility	5	Owned	40,587	5
Canada	2	Owned	6,300	2

	Year Ended December 31,
Quarter	2002		2001
1	6.0		5.5
2	6.0		5.5
3	6.0		5.5
4	6.0		5.5
Total	24.0		22.0

 

 

We presently expect to pay comparable cash dividends in 2003.

 

Recent Sale of Unregistered Securities

 

None.

 

Equity Compensation Plan Information

 

For information on our securities authorized for issuance under equity compensation plans, see Item 12 of this report.

 

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Item 6.  Selected Financial Data.

 

	Fiscal Year Ended December 31,
	2002	2001	2000	1999	1998
	(In thousands, except ratio and per share data)
Operating Statement Data:
Revenues	$ 319,273	$ 321,284	$ 322,236	$ 308,144	$ 313,887
Costs and expenses:
Operating	211,549	212,783	226,441	210,628	210,921
Selling	50,865	50,564	49,978	45,403	39,601
General and administrative	22,800	22,567	23,015	21,742	22,764
Depreciation	19,370	19,054	20,722	20,019	19,563
Amortization of intangible assets	692	466	459	393	371
Income from operations	13,997	15,850	1,621	9,959	20,667
Interest expense	(3,121)	(4,993)	(6,217)	(4,947)	(3,391)
Gain on sale of assets	2,054	1,023	1,172	1,487	587
Other expense	(993)	(744)	(60)	(349)	(22)
Income (loss) before income taxes	11,937	11,136	(3,484)	6,150	17,841
Income taxes (benefit)	4,716	4,405	(1,080)	2,435	7,244
Net income (loss)	$     7,221	$     6,731	$    (2,404)	$     3,715	$   10,597
Net income (loss) per share--diluted	$         .85	$         .82	$        (.30)	$         .42	$       1.15
Shares used for computing per share      amounts--diluted (a)	8,508	8,231	7,929	8,872	9,228
Other Financial Data:
Depreciation and amortization	$   20,062	$   19,520	$    21,181	$   20,412	$   19,934
EBITDA (b)	35,120	35,649	23,914	31,509	41,166
Capital expenditures	16,127	11,692	17,476	20,580	34,009
Cash flow provided by (used in):
Operating activities	29,427	29,813	31,267	(3,835)	28,193
Investing activities	(16,670)	(10,356)	(14,209)	(18,707)	(32,841)
Financing activities	(12,572)	(19,108)	(17,058)	21,335	5,190
Dividends per share (a)	$         .24	$         .22	$         .22	$         .20	$         .19

 

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		As of December 31,
		2002	2001	2000	1999	1998
		(In thousands, except ratio and per share data)
Balance Sheet Data:
Working capital		$    15,422	$    16,255	$    35,386	$    46,714	$    27,562
Current ratio		1.33	1.39	2.09	2.62	1.81
Property and equipment, net		66,863	70,111	78,076	84,008	79,433
Total assets		161,156	155,473	159,382	176,682	149,086
Long-term debt		36,605	41,887	57,414	65,904	42,893
Other long-term liabilities		24,335	21,904	22,078	19,826	15,059
Shareholders' equity		54,135	50,250	47,392	56,420	57,268
Common shares (a):
Issued		10,728	10,728	10,728	10,728	10,728
In treasury		3,048	3,000	2,932	2,601	2,755
Net outstanding		7,680	7,728	7,796	8,127	7,973
Stock options (a):
Outstanding		868	1,205	1,342	1,395	1,828
Exercisable		868	1,205	1,236	1,183	1,510
ESOT valuation per share		$       12.80	$       12.00	$     11.00	$     13.00	$     16.00
(a)	On May 19, 1999, the Company's Board of Directors declared a 2-for-1 stock split in the form of a 100% stock dividend on outstanding shares, to shareholders of record as of June 1, 1999.  To effect the stock split, the Board of Directors authorized the retirement of 1,981,894 common shares held in treasury.  Common share disclosures have also been restated, where appropriate, to reflect the 2-for-1 stock split.
(b)	EBITDA (earnings before interest, taxes, depreciation and amortization) is provided because it is a measure commonly used to evaluate a company's ability to service its indebtedness. EBITDA is presented to enhance the understanding of the Company's operating results and is not intended to represent cash flows or results of operations in accordance with GAAP for the periods indicated.  EBITDA is not a measurement under GAAP and is not necessarily comparable with similarly titled measures of other companies.  Net cash flows from operating, investing and financing activities as determined using GAAP are also presented above.

 

 

 Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

                                                   (Amounts in thousands, except share data)

 

You should read the following discussion in conjunction with our consolidated financial statements for the three-year period ended December 31, 2002, and the notes thereto, included elsewhere in this annual report.

 

 

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GENERAL

 

We provide a wide range of horticultural services to residential, commercial, utility and institutional customers throughout the United States and Canada.

 

Our operating results are reported in two segments: Residential and Commercial Services and Utility Services for operations in the United States. Residential and Commercial Services provides for the treatment, preservation, maintenance, cultivation, planting and removal of trees, shrubs and other plant life; its services also include the practice of landscaping, tree surgery, tree feeding and tree spraying, as well as the application of fertilizer, herbicides and insecticides. Utility Services is principally engaged in the practice of line clearing for investor-owned and municipal utilities, including the clearing of tree growth from power lines, clearance of rights-of-way and chemical brush control.

 

We also have two nonreportable segments: Canadian operations, which provides a comprehensive range of Davey horticultural services, and Davey Resource Group, which provides services related to natural resource management and consulting, forestry research and development, and environmental planning.  In addition, the Davey Resource Group also maintains research, technical support and laboratory diagnostic facilities.

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.  

 

On an ongoing basis, we evaluate our estimates and assumptions, including those related to accounts receivable, specifically those receivables under contractual arrangements primarily arising from Utility Services customers; bad debts; and, self-insurance accruals.  We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

 

We believe the following are our "critical accounting policies"--those most important to the financial presentations and those that require the most difficult, subjective or complex judgments.

 

          Revenue Recognition--Revenues from residential and commercial services are recognized as the services are
          provided and amounts are determined to be collectible. Revenues from contractual arrangements, primarily with
          utility services customers, are recognized based on costs incurred to total estimated contract costs. Changes in
          estimates and assumptions related to total estimated contract costs may have a material effect on the amounts
          reported as receivables arising from contractual arrangements and the corresponding amounts of revenues and
          profit.

 

          Utility Services Customers--We generate a significant portion of revenues and corresponding accounts
          receivable from our utility services customers in the utility industry. One utility services customer approximated
          13% of revenues during 2002 and 16% during 2001 and 2000.  Adverse conditions in the utility industry or
          individual utility customer operations may affect the collectibility of our receivables or our ability to generate
          ongoing revenues.

 

 

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          Bad Debts--We evaluate the collectibility of our accounts receivables based on a combination of factors. In
          circumstances where we are aware of a specific customer's inability to meet its financial obligations to us (e.g.,
          bankruptcy filings), we record a specific allowance for doubtful accounts against amounts due to reduce the net
          recognized receivable to the amount we reasonably believe will be collected. For all other customers, we
          recognize allowances for doubtful accounts based on the length of time the receivables are past due. If
          circumstances change (e.g., unexpected material adverse changes in a major customer's ability to meet its financial
          obligation to us or higher than expected customer defaults), our estimates of the recoverability of amounts due us
          could be reduced by a material amount.

 

          Self-Insurance Accruals--We are generally self-insured for losses and liabilities related primarily to workers'
          compensation, vehicle liability and general liability claims. We use commercial insurance as a risk-reduction
          strategy to minimize catastrophic losses. We accrue ultimate losses based upon estimates of the aggregate liability
          for claims incurred using certain actuarial assumptions followed in the insurance industry and based on our specific
          experience.

 

          Our self-insurance accruals include claims for which the ultimate losses will develop over a period of years.
          Accordingly, our estimates of ultimate losses can change as claims mature. Our accruals also are affected by
          changes in the number of new claims incurred and claim severity. The methodology for estimating ultimate losses
          and the total cost of claims were determined by external consulting actuaries; the resulting accruals are continually
          reviewed by us, and any adjustments arising from changes in estimates are reflected in income currently.

 

          Our self-insurance accruals are based on estimates and, while we believe that the amounts accrued are adequate,
          the ultimate claims may be in excess of or less than the amounts provided.

 

RESULTS OF OPERATIONS

 

The following table sets forth our consolidated results of operations as a percentage of revenues.

 

 

	Year Ended December 31,
	2002		2001		2000
Revenues	100.0%		100.0%		100.0 %
Costs and expenses:
Operating	66.3		66.2		70.3
Selling	15.9		15.7		15.5
General and administrative	7.1		7.1		7.1
Depreciation	6.1		6.0		6.5
Amortization of intangible assets	.2		.1		.1
	95.6		95.1		99.5
Income from operations	4.4		4.9		0.5
Other income (expense):
Interest expense	(1.0)		(1.5)		(1.9)
Gain on sale of assets	.6		.3		.3
Other	(.3)		(.2)		(.0)
Income (loss) before income taxes	3.7		3.5		(1.1)
Income taxes (benefit)	1.4		1.4		(.3)
Net income (loss)	2.3%		2.1%		(.8)%

 

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Fiscal 2002 Compared to Fiscal 2001

 

Revenues--Revenues of $319,273 declined $2,011 over the $321,284 in 2001.  Utility Services declined $15,420 from 2001, the result of contract reductions and shutdowns (reduced work volume or cessation of work for certain Utility customers) both in our eastern and western operations.  Despite a slower economy, Residential and Commercial Services increased $9,966, or 6.8% due principally to the Asian Longhorned Beetle contracts in New York.  Increases in all other segments of $3,443 also served to offset the reduction in Utility Services.

 

Operating Expenses--Operating expenses of $211,549 declined $1,234 from the prior year, but increased  .1% as a percentage of revenues.  Utility Services experienced a decrease of $12,444 from the prior year, the result of contract reductions and shutdowns in our operations.  Residential and Commercial Services increased 10.7% from the prior year, the result of additional subcontractor costs associated with the Asian Longhorned Beetle contracts in New York.

 

Selling Expenses--Selling expenses increased $301 over 2001 and as a percentage of revenues increased .2% to 15.9%.  Increases in Residential and Commercial Services for field management wages, branch office expenses and marketing costs were partially offset by reductions in labor and supervision expense within Utility Services, the result of contract reductions and shutdowns.

 

General and Administrative Expenses--General and administrative expenses increased 1.0% to $22,800 from the $22,567 experienced in 2001, the result of higher employee incentive expense and a decrease in pension income.  We expect to incur pension expense in 2003 because of a decline in the value of pension plan assets.

 

Depreciation and Amortization Expense--Depreciation and amortization expense of $20,062 increased  $542 from the prior year and as a percentage of revenues increased to 6.3% from 6.1%.  The increase is the result of additional capital expenditures for equipment and acquisitions within Residential and Commercial Services.  Depreciation and amortization expense is expected to increase in 2003 as a result of acquisitions.

 

Interest Expense--Interest expense of $3,121 declined $1,872 from the $4,993 incurred in 2001. This decrease is the result of our continued focus on debt reduction and lower interest rates than those experienced in the prior year.

 

Gain on Sale of Assets--Gain on the sale of assets increased to $2,054, or a $1,031 increase from 2001.  The increase reflects a gain of $919 from the sale of a facility associated with our Residential and Commercial Services operations.

 

Income Taxes--Income tax expense for 2002 was $4,716.  The 2002 effective rate of 39.5%, includes a 4.6% effect of state income taxes.

 

Net Income--Net income of $7,221 exceeded 2001's net income by $490, or an increase of .2% as a percentage of revenues.

 

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Fiscal 2001 Compared to Fiscal 2000

 

Revenues--Revenues of $321,284 decreased .3% or $952 over 2000.  Residential and Commercial Services continued to grow, increasing 7.3% or $9,855.  This growth is reflective of a continued focus on sales. Utility Services declined 7.0%, or $11,119, when compared to 2000.  The decline in Utility Services revenues was the result of evaluations or renegotiations of contracts from the latter half of 2000, as well as shutdowns on certain contracts. Revenues from all other segments increased 1.2%, or $312.

 

Operating Expenses--Operating expenses of $212,783 declined $13,658 from the prior year, a 4.1% reduction as a percentage of revenues.  Utility Services decreased $17,487, or 18.7%, from 2000 due mainly to lower labor costs and reduced repair and equipment costs associated with the reduction in revenues.  The decrease in Utility Services was partially offset by an increase in Residential and Commercial Services of $4,302, primarily for labor and material costs associated with increased revenue.

 

Selling Expenses--Selling expense increased $586 over 2000.  Increases in Residential and Commercial Services of $1,615 for field management wages, district incentives, marketing and branch office costs were partially offset by a reduction in Utility Services field management wages, a result of certain contract shutdowns.

 

General and Administrative Expenses--General and administrative expense decreased $448 from the prior year.  This reduction, partially offset by increases in other expenses, was attributable to the consolidation of the Utility Services accounting-related functions from our Livermore, California, facility to our corporate headquarters in Kent, Ohio.  

 

Depreciation and Amortization Expense--Depreciation and amortization expense of $19,520 decreased $1,661 from the prior year and as a percentage of revenues declined to 6.1% from 6.6%.  The reduction was due to the lower level of capital expenditures during 2001 and 2000, primarily in Utility Services, coupled with lower depreciation expense arising from capital expenditures in earlier years.

 

Interest Expense--Interest expense declined $1,224, or .4% as a percentage of revenues from 2000.  This decrease was mainly due to a net decrease in revolving credit facility debt of $15,100 and substantially lower interest rates as compared to 2000.

 

Gain on Sale of Assets--Gain on the sale of assets declined to $1,023, or a $149 decrease from 2000.  The slight decline was attributable to less assets disposed of in 2001 compared to the preceding year, primarily within Utility Services.

 

Income Taxes--Income tax expense for 2001 was $4,405.  The 2001 effective rate of 39.6%, includes a 5.4% effect of state income taxes.

 

Net Income--Net income of $6,731 exceeded 2000's net loss by $9,135, or an increase of 2.9% as a percentage of revenues.

 

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Our principal financial requirements are for capital spending, working capital and business acquisitions.

 

Cash increased $185 during the year ended December 31, 2002. Uses of cash consisted of $16,670 used in investing activities and $12,572 used in financing activities. Net cash provided by operating activities of $29,427 offset these uses of cash.

 

Net Cash Provided by Operating Activities

 

Operating activities in 2002 provided cash of $29,427, $386 lower than the $29,813 provided in 2001.  The $386 net decline was due to increases in self-insurance accruals, prepaid insurance premiums and gain on the sale of property which were offset by lower increases in accounts payable, accrued expenses and accounts receivable.

 

Net income of $7,221 increased $490 when compared to the $6,731 in 2001. Reductions in operating expense and interest expense, as well as higher gains on the sale of fixed assets, served to offset the reductions in revenues experienced within Utility Services.

 

Overall, accounts receivable increased $689 in 2002 as compared to the increase of $4,475 experienced in 2001.  The "day-sales-outstanding" in accounts receivable decreased approximately 5.3 days from the prior year, the result of concentrated collection efforts within Residential and Commercial Services (calculated on receivable agings based on most recent sales and including noncurrent PG&E prepetition accounts receivable).  We continue to strive to collect accounts receivable dollars and reduce days-sales-outstanding.

 

On April 6, 2001, one of the Company's largest utility customers, Pacific Gas and Electric Company (PG&E) filed a voluntary bankruptcy petition under Chapter 11 of the U. S. Bankruptcy Code. Subsequent to the bankruptcy petition date, the Company continued to provide services under the terms of its contracts with PG&E. The Company continues to perform services for PG&E and receives payment for post-petition date services performed, as part of PG&E administrative expenses.

 

On September 20, 2001, PG&E filed a reorganization plan as part of its Chapter 11 bankruptcy proceeding that seeks to pay all of its creditors in full. Components of the plan will require the approval of the Federal Energy Regulatory Commission, the Securities and Exchange Commission and the Nuclear Energy Regulatory Commission, in addition to the bankruptcy court.  In addition to PG&E's reorganization plan, there is a competing alternative proposed plan of reorganization filed by the California Public Utilities Commission and the Official Committee of Unsecured Creditors ("CPUC/OCC plan").  The bankruptcy court began confirmation hearings in December 2002 to determine whether to confirm the PG&E plan, the CPUC/OCC plan or neither plan.  The bankruptcy court has scheduled trial dates through April 2003.  In determining whether to confirm either plan, the bankruptcy court will consider, among other factors, creditor preference and financial and legal feasibility. Various parties have filed objections to confirmation of either or both plans.  PG&E will not emerge from bankruptcy until a plan of reorganization has been confirmed by the bankruptcy court and the confirmed plan has been executed.  Management is unable to predict which plan, if any, the bankruptcy court will confirm. Management has monitored the situation closely and will continue to assess the collectibility of its receivables from PG&E.  In management's opinion, the prepetition receivables from PG&E are collectible.

 

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During 2002, the Company received interest payments of $836 from PG&E on the prepetition accounts receivable reducing the outstanding prepetition balance from $13,326 to $12,490.  Because of the inability to predict when payment will be received, the prepetition receivables are classified as noncurrent other assets.

 

Accounts payable and accrued expenses increased $3,588 in 2002, a decrease of $2,397 when compared to the increase of $5,985 experienced in 2001.  The increase is primarily attributable to an increase in employee compensation and commercial insurance liabilities.  These increases were partially offset by a decrease in income tax liabilities.

 

Self-insurance accruals increased $3,292 in 2002 or $494 more than the increase experienced in 2001.  The increase occurred in our workers compensation and vehicle liability classifications.  The increase is necessary to provide for future estimated claims payments.

 

Other assets increased $2,574 in 2002, a change of $3,387 over the $813 decrease in 2001.  The increase is the result of advance payments for insurance premiums related to our workers compensation, vehicle liability and general liability policies.

 

Net Cash Used in Investing Activities

 

Investing activities used $16,670 in cash, or $6,314 more than that used in 2001, the result of higher expenditures for equipment and business acquisitions.  The expenditures were offset by increases in proceeds from the sale of property and equipment.  We anticipate the level of capital expenditures in 2003 will exceed that of 2002.

 

Net Cash Used in Financing Activities

 

Financing activities used $12,572 in 2002, a decrease of $6,536 over the $19,108 used in 2001.  Net borrowings outstanding, from the revolving credit agreement, decreased by $6,900.  The continued decrease was consistent with our planned efforts to reduce debt levels.  Borrowings of notes payable decreased $1,109 and other debt and capital lease obligations decreased $1,074.  Purchases of common shares for treasury of $7,051 were offset by cash received from the sale of common shares of $4,237 and $1,379 of cash received on our common share subscription.  Dividends paid during 2002 totaled $2,054.

 

Revolving Credit Agreement--During November 2002, we entered into a new revolving credit agreement with a group of banks that permits borrowings, as defined, up to $90,000 with a letter of credit sublimit of $30,000 through November 2005. Borrowings outstanding bear interest, at the Company's option, at the agent bank's prime rate or LIBOR plus a margin adjustment ranging from 1.0% - 2.0%, based on a ratio of funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization).  A commitment fee ranging from .20% to .45% is required on the average daily unborrowed commitment.  The revolving credit agreement contains certain affirmative and negative covenants customary for this type of arrangement and includes financial covenant ratios, as defined, with respect to interest coverage, funded debt to EBITDA, and funded debt to capitalization.

 

Contractual Obligations Summary

 

The following is a summary of our long-term contractual obligations, as at December 31, 2002 to make future payments for the periods indicated.

 

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		Contractual Obligations Due--Year Ending December 31,
Description	Total	2003	2004	2005	2006	2007	Thereafter
Revolving credit agreement	$  34,400	$           -	$           -	$   34,400	$           -	$           -	$            -
Subordinated notes	389	389	-	-	-	-	-
Term loans	2,248	43	1,389	386	215	215	-
Capital lease obligations	3,748	650	657	807	616	1,018	-
Operating lease obligations	6,291	1,843	1,456	1,049	762	538	643
Self-insurance accruals	25,119	9,197	5,772	3,587	1,767	984	3,812
	$  72,195	$  12,122	$   9,274	$   40,229	$   3,360	$   2,755	$    4,455

 

The self-insurance accruals in the summary above reflect the total of the undiscounted amount accrued as at December 31, 2002, and amounts estimated to be due each year may differ from actual payments required to fund claims. Additional information regarding the long-term obligations summarized above is provided in the notes to our consolidated financial statements.

 

As at December 31, 2002, we were contingently liable to our principal banks in the amount of $27,524 for letters of credit outstanding primarily related to insurance coverage. Substantially all of these letters of credit, which expire within a year, are planned for renewal as necessary.

 

Also, as is common with our industry, we have performance obligations that are supported by surety bonds, which expire during 2003 through 2006.  We intend to renew the performance bonds where appropriate and as necessary.

 

Capital Resources

 

Cash generated from operations and our revolving credit facility are our primary sources of capital.

 

We satisfy seasonal working capital needs and other financing requirements with the revolving credit agreement and several other short-term lines of credit that approximated $3,399 as at December 31, 2002. We are continuously reviewing our existing sources of financing and evaluating alternatives.  At December 31, 2002, we had working capital of  $15,422 and approximately $28,076 of availability under our revolving credit agreement.

 

Our sources of capital presently allow us the financial flexibility to meet our capital spending plan and to complete business acquisitions.

 

Impact of Recently Issued Accounting Pronouncements

 

In December 2002, the FASB issued FAS 148, "Accounting for Stock-Based Compensation--Transition and Disclosures," which amends FAS 123 "Accounting for Stock-Based Compensation."  FAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require more prominent and more frequent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of FAS 148 are effective for fiscal years ending after December 15, 2002 and have been incorporated into our financial statements.

 

 

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MARKET RISK DISCLOSURES

 

In the normal course of business, we are exposed to market risk related to changes in interest rates and changes in foreign currency exchange rates.  We do not hold or issue derivative financial instruments for trading or speculative purposes.

 

Interest Rate Risk

 

We are exposed to market risk related to changes in interest rates on long-term debt obligations. The interest rates on substantially all of our long-term debt outstanding are variable.  We have interest rate protection from our interest rate swaps to limit exposure to interest rate volatility (Interest rate "swaps" are the exchange of interest rate payments based on fixed versus floating interest rates which reduce the risk of interest-rate changes on future interest expense--"hedging").

 

The following table provides information, as of December 31, 2002, about our debt obligations and interest rate swaps. For debt obligations, the table presents principal cash flows, weighted-average interest rates by expected maturity dates and fair values. For the interest rate swaps, the table presents the underlying face (notional) amount, weighted-average interest rate by contractual maturity dates and the fair value to settle the swaps at December 31, 2002. Weighted-average interest rates used for variable rate obligations are based on rates as derived from published spot rates, in effect as at December 31, 2002.

 

	December 31,							Fair Value    December 31,
	2003	2004	2005	2006	2007	Thereafter	Total	2002
Liabilities
Long-term debt
Fixed rate	$     43	$       38	$        36	$     40	$     40	$         -	$      197	$      196
Average interest rate	10.2%	10.1%	10.0%	10.0%	10.0%
Variable rate	$   389	$  1,351	$ 34,750	$   175	$   175	$         -	$ 36,840	$ 36,754
Average interest rate	3.9%	4.9%	6.0%	7.3%	7.7%
Interest rate derivative instruments
Interest rate swaps:
Pay fixed, notional amount	$ 10,000	$         -	$ 10,000	$     -	$     -	$         -	$ 20,000	$      364
Average pay rate	4.82%	4.39%	4.39%
Average receive rate	1.82%	2.89%	5.08%

 

Interest rates, as of December 31, 2002, on the fixed-rate debt ranged from 10.0% to 12.7% and interest rates on the variable-rate debt ranged from 3.8% to 7.7%.

 

The interest rate swaps have an underlying face (notional) amount of $10,000 each, which is used to calculate the cash flow to be exchanged and does not represent the exposure to credit loss. If we were to settle the swap agreement at December 31, 2002 (fair value), we would pay $364.

 

Foreign Currency Rate Risk

 

We are exposed to market risk related to foreign currency exchange rate risk resulting from our operations in Canada, where a comprehensive range of horticultural services are provided.

 

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Our financial results could be affected by factors such as changes in the foreign currency exchange rate or differing economic conditions in the Canadian markets as compared with the markets for our services in the United States. Our earnings are affected by translation exposures from currency fluctuations in the value of the U. S. dollar as compared to the Canadian dollar. Similarly, the Canadian dollar-denominated assets and liabilities may result in financial exposure as to the timing of transactions and the net asset / liability position of our Canadian operations.

 

For the year ended December 31, 2002, the result of a hypothetical 10% uniform change in the value of the U.S. dollar, as compared with the Canadian dollar, would not have a material effect on our results of operations or our financial position.  Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.

 

Impact of Inflation

 

The impact of inflation on the results of operations has not been significant in recent years.

 

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

 

The information set forth in "Market Risk Disclosures" under Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by reference.

 

Item 8.  Financial Statements and Supplementary Data.

 

Our consolidated financial statements are attached hereto and listed on page F-1 of this annual report.

 

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

 

PART III

 

Item 10.  Directors and Executive Officers of the Registrant.

 

Information about our executive officers is in the section "Executive Officers of the Registrant" at Part I, Item 4A of this report.

 

Information about our directors is in the section "Election of Directors" of our 2003 Proxy Statement, which is incorporated into this report by reference.

 

Item 11.  Executive Compensation.

 

Information about director compensation is in the section "Compensation of Directors" and information about executive compensation is in the section "Compensation of Executive Officers" of the 2003 Proxy Statement, which are incorporated into this report by reference.

 

Page 21

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Item 12.  Security Ownership of Certain Beneficial Owners and Management.

 

Information about ownership of our common shares by certain persons is in the section "Ownership of Common Shares" of the 2003 Proxy Statement, which is incorporated into this report by reference. Information about our securities authorized for issuance under equity compensation plans is in the section "Equity Compensation Plans" of the 2003 Proxy Statement, which is incorporated into this report by reference.

 

Item 13.  Certain Relationships and Related Transactions.

 

Information about certain transactions between the Company and their affiliates and certain other persons is in the sections "Election of Directors" of the 2003 Proxy Statement, which is incorporated into this report by reference.

 

Item 14.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Davey Tree Expert Company's management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of a date within 90 days of filing this Annual Report on Form 10-K (the "Evaluation Date").Based on that evaluation, management, including our CEO and CFO, concluded that the Company's disclosure controls and procedures were effective, as of the Evaluation Date, in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion.

 

Changes in Internal Controls

 

No significant changes were made to our internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date.

 

 

PART IV

 

Item 15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.

 

(a) (1) and (a) (2) Financial Statements and Schedules.

 

The response to this portion of Item 14 is set forth on page F-1 of this report.

 

(a) (3) Exhibits.

 

The exhibits to this Form 10-K are submitted as a separate section of this report.  See Exhibit Index.

 

(b) Reports on Form 8‑K.

 

No reports on Form 8-K have been filed during the fourth quarter 2002.

 

Page 22

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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 report to be signed on its behalf by the undersigned, thereunto duly authorized on March 26, 2003.
	THE DAVEY TREE EXPERT COMPANY
	By:     /s/ R. Douglas Cowan
	R. Douglas Cowan, Chairman and           Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 26, 2003.
/s/ R. Douglas Cowan	/s/ James H. Miller
R. Douglas Cowan, Director, Chairman and Chief Executive Officer (Principal Executive Officer)	James H. Miller, Director
	/s/ Karl J. Warnke
/s/ R. Cary Blair	Karl J. Warnke, Director, President and Chief Operating Officer
R. Cary Blair, Director
	/s/ David E. Adante
/s/ Dr. Carol A. Cartwright                                   Dr. Carol A. Cartwright, Director	David E. Adante, Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer)
/s/ Russell R. Gifford
Russell R. Gifford, Director	/s/ Nicholas R. Sucic
	Nicholas R. Sucic, Corporate Controller (Principal Accounting Officer)
/s/ Richard S. Gray
Richard S. Gray, Director
/s/ Douglas K. Hall
Douglas K. Hall, Director
/s/ Willard R. Holland
Willard R. Holland, Director

 

 

Page 23

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Certifications

Certification of Chief Executive Officer

 

 

 

Page 24

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Certification of Chief Financial Officer

 

I, David E. Adante, certify that:

 

 

 

Page 25

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The documents listed as Exhibits 10.1 and 10.2 constitute management contracts or compensatory plans or arrangements.

 

The Registrant is a 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.

 

 

Page 26

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ANNUAL REPORT OF FORM 10-K

 

ITEM 8, ITEM 15 (a)(1) AND (2)

 

LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

CERTAIN EXHIBITS

 

FINANCIAL STATEMENT SCHEDULES

 

YEAR ENDED DECEMBER 31, 2002

 

THE DAVEY TREE EXPERT COMPANY

 

KENT, OHIO

 

 

 

---

 

LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Form 10-K-item 15(a)(1) and (2)
The Davey Tree Expert Company
The following consolidated financial statements of The Davey Tree Expert Company are included in Item 8:
Audited Consolidated Financial Statements:
Report of Ernst & Young LLP, Independent Auditors	F-2
Report of Deloitte & Touche LLP, Independent Auditors	F-3
Consolidated Balance Sheets -- December 31, 2002 and 2001	F-4
Consolidated Statements of Operations -- Years ended December 31, 2002,           2001 and 2000	F-5
Statements of Consolidated Shareholders' Equity -- Years ended December 31, 2002,           2001 and 2000	F-6
Consolidated Statements of Cash Flows -- Years ended December 31, 2002, 2001           and 2000	F-7
Notes to Consolidated Financial Statements -- December 31, 2002	F-8
Financial Statement Schedules:
None
All schedules for which provision is made in the applicable accounting regulation of the           Securities and Exchange Commission are not required under the related instructions or           are inapplicable and therefore have been omitted.

 

 

 

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

 

To the Shareholders and the Board of Directors
The Davey Tree Expert Company

 

We have audited the accompanying consolidated balance sheets of The Davey Tree Expert Company as of December 31, 2002 and 2001 and the related consolidated statements of operations, shareholders' equity, and cash flows for the two years ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Davey Tree Expert Company at December 31, 2002 and 2001 and the consolidated results of its operations and its cash flows for the two years ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

                                                                               /s/ ERNST & YOUNG LLP

Akron, Ohio
February 21, 2003

 

 

 

F-2

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REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS

 

To the Shareholders and Board of Directors
The Davey Tree Expert Company

Kent, Ohio

 

We have audited the accompanying consolidated statements of operations, shareholders' equity, and cash flows of The Davey Tree Expert Company and its subsidiaries (the "Company") for the year ended December 31, 2000. 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 audit.

 

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, the results of operations and cash flows of the Company for the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

Cleveland, Ohio
March 7, 2001

 

 

F-3

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THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

 

	December 31,
	2002	2001
Assets
Current assets:
Cash and cash equivalents	$              591	$              406
Accounts receivable, net	49,197	47,672
Operating supplies	2,857	2,724
Prepaid expenses	4,768	3,478
Other current assets	4,090	3,407
Total current assets	61,503	57,687
Property and equipment:
Land and land improvements	6,569	6,436
Buildings and leasehold improvements	17,289	18,594
Equipment	205,180	200,488
	229,038	225,518
Less accumulated depreciation	162,175	155,407
	66,863	70,111
Other assets	25,230	25,147
Identified intangible assets and goodwill, net	7,560	2,528
	$       161,156	$       155,473
Liabilities and shareholders' equity
Current liabilities:
Short-term debt	$           1,242	$           1,541
Accounts payable	18,097	16,919
Accrued expenses	16,659	14,249
Self-insurance accruals	9,433	8,190
Current portion of capital lease obligations	650	533
Total current liabilities	46,081	41,432
Long-term debt	36,605	41,887
Capital lease obligations	3,098	3,600
Self-insurance accruals	13,493	11,444
Deferred income taxes	7,081	6,350
Other liabilities	663	510
	107,021	105,223
Common shareholders' equity:
Common shares, $1.00 par value, per share; 12,000           shares authorized; 10,728 shares issued and           outstanding as of December 31, 2002 and 2001	10,728	10,728
Additional paid-in capital	5,710	5,163
Common shares subscribed, unissued	9,817	-
Retained earnings	82,525	77,358
Accumulated other comprehensive income (loss)	(1,057)	(1,209)
	107,723	92,040
Less cost of Common shares held in treasury:
3,048 in 2002 and 3,000 in 2001	44,956	41,790
Common shares subscription receivable	8,632	-
	54,135	50,250
	$       161,156	$        155,473
See notes to consolidated financial statements.

 

F-4

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THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

 

	Year Ended December 31,
	2002	2001	2000
Revenues	$   319,273	$   321,284	$   322,236
Costs and expenses:
Operating	211,549	212,783	226,441
Selling	50,865	50,564	49,978
General and administrative	22,800	22,567	23,015
Depreciation	19,370	19,054	20,722
Amortization of intangible assets	692	466	459
	305,276	305,434	320,615
Income from operations	13,997	15,850	1,621
Other income (expense):
Interest expense	(3,121)	(4,993)	(6,217)
Gain on sale of assets	2,054	1,023	1,172
Other	(993)	(744)	(60)
Income (loss) before income taxes	11,937	11,136	(3,484)
Income taxes (benefit)	4,716	4,405	(1,080)
Net income (loss)	$       7,221	$       6,731	$     (2,404)
Net income (loss) per share:
Basic	$           .89	$           .87	$         (.30)
Diluted	$           .85	$           .82	$         (.30)
See notes to consolidated financial statements.

 

 

F-5

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THE DAVEY TREE EXPERT COMPANY
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)

	2002			2001			2000
	Shares	Amount		Shares	Amount		Shares	Amount
Common shares
At beginning and end of year	10,728	$  10,728		10,728	$  10,728		10,728	$  10,728
Additional paid-in capital
At beginning of year		5,163			4,308			3,136
Shares sold to employees		660			918			1,162
Options exercised		(190)			(63)			10
Subscription shares, issued		77			-			-
At end of year		5,710			5,163			4,308
Common shares subscribed, unissued
At beginning of year	-	-		-	-		-	-
Common shares, subscribed	836	10,032		-	-		-	-
Common shares, issued	(16)	(194)		-	-		-	-
Cancellations	(2)	(21)		-	-		-	-
At end of year	818	9,817		-	-		-	-
Retained earnings
At beginning of year		77,358			72,328			76,455
Net income (loss)		7,221			6,731			(2,404)
Dividends, $.22 per share		-			(1,701)			(1,723)
Dividends, $.24 per share		(2,054)			-			-
At end of year		82,525			77,358			72,328
Accumulated other comprehensive      income (loss), net of tax
At beginning of year		(1,209)			(745)			(543)
Foreign currency translation                adjustments		13			(99)			(202)
Derivatives:  Cumulative effect of                accounting change		-			(105)			-
Unrealized gain (loss) on interest                rate swaps		139			(260)			-
Other comprehensive income (loss)		152			(464)			(202)
At end of year		(1,057)			(1,209)			(745)
Common shares held in treasury
At beginning of year	3,000	(41,790)		2,932	(39,227)		2,601	(33,356)
Shares purchased	578	(7,051)		492	(5,541)		640	(8,205)
Shares sold to employees	(201)	1,588		(284)	2,021		(251)	1,960
Options exercised	(313)	2,179		(140)	957		(58)	374
Subscription shares, issued	(16)	118		-	-		-	-
At end of year	3,048	(44,956)		3,000	(41,790)		2,932	(39,227)
Common shares subscription receivable
At beginning of year	-	-		-	-		-	-
Shares subscribed	(836)	(10,032)		-	-		-	-
Payments	16	1,379		-	-		-	-
Cancellations	2	21		-	-		-	-
At end of year	(818)	(8,632)		-	-		-	-
Total Common Shareholders' Equity                                       at December 31	7,680	$   54,135		7,728	$    50,250		7,796	$    47,392
Total Comprehensive Income
Net income (loss)		$       7,221			$        6,731			$     (2,404)
Other comprehensive income (loss)		152			(464)			(202)
Total comprehensive income (loss)		$      7,373			$        6,267			$     (2,606)
See notes to consolidated financial statements.

 

 

F-6

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THE DAVEY TREE EXPERT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

	Year Ended December 31,
	2002	2001	2000
Operating activities
Net income (loss)	$     7,221	$     6,731	$    (2,404)
Adjustments to reconcile net income (loss) to net           cash provided by operating activities:
Depreciation	19,370	19,054	20,722
Amortization	692	466	459
Gain on sale of property	(2,054)	(1,023)	(1,172)
Deferred income taxes	408	(342)	568
Other	173	(194)	24
	25,810	24,692	18,197
Changes in operating assets and liabilities:
Accounts receivable	(689)	(4,475)	15,129
Accounts payable and accrued expenses	3,588	5,985	(24)
Self-insurance accruals	3,292	2,798	926
Other assets, net	(2,574)	813	(2,961)
	3,617	5,121	13,070
Net cash provided by operating activities	29,427	29,813	31,267
Investing activities
Capital expenditures
Equipment	(15,791)	(11,593)	(17,099)
Land and buildings	(336)	(99)	(377)
Proceeds from sales of property and equipment	3,745	1,419	3,719
Purchases of businesses	(4,288)	(83)	(452)
Net cash used in investing activities	(16,670)	(10,356)	(14,209)
Increase in cash before financing activities	12,757	19,457	17,058
Financing activities
Revolving credit facility payments, net	(6,900)	(15,100)	(10,200)
Borrowings (payments) of notes payable	(1,109)	288	326
Payments of long-term debt and capital leases	(1,074)	(887)	(762)
Purchase of Common shares for treasury	(7,051)	(5,541)	(8,205)
Sale of Common shares from treasury	4,237	3,833	3,506
Cash received on Common share subscriptions	1,379	-	-
Dividends	(2,054)	(1,701)	(1,723)
Net cash used in financing activities	(12,572)	(19,108)	(17,058)
Increase in cash and cash equivalents	185	349	-
Cash and cash equivalents, beginning of year	406	57	57
Cash and cash equivalents, end of year	$        591	$        406	$          57
See notes to consolidated financial statements.

 

 

F-7

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The Davey Tree Expert Company
Notes to Consolidated Financial Statements
December 31, 2002
(In thousands, except share data)

 

 

A.  The Company's Business

 

The Davey Tree Expert Company and its subsidiaries (the "Company") provides a wide range of horticultural services to residential, commercial, utility and institutional customers throughout the United States and Canada.

 

Residential and Commercial Services provides for the treatment, preservation, maintenance, cultivation, planting and removal of trees, shrubs and other plant life; its services also include the practice of landscaping, tree surgery, tree feeding, and tree spraying, as well as the application of fertilizer, herbicides and insecticides.

 

Utility Services is principally engaged in the practice of line clearing for public utilities, including the clearing of tree growth from power lines, clearance of rights-of-way and chemical brush control.

 

Resource Group provides services related to natural resource management and consulting, forestry research and development, and environmental planning and also maintains research, technical support and laboratory diagnostic facilities.

 

B.  Accounting Policies

 

Principles of Consolidation--The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

Accounting Estimates--The consolidated financial statements and notes prepared in accordance with accounting principles generally accepted in the United States include estimates and assumptions made by management that affect reported amounts.  Actual results could differ from those estimates.

 

Fiscal Year--The Company's fiscal year ends on the Saturday closest to December 31. The fiscal years reported are for the 52-week periods ended December 28, 2002, December 29, 2001 and December 30, 2000. For purposes of the consolidated financial statements, the year-end is referred to as December 31 for all years presented.

 

Cash Equivalents--Cash equivalents are highly liquid investments with maturities of three months or less when purchased.

 

Revenue Recognition--Revenues from residential and commercial services are recognized as the services are provided and amounts are determined to be collectible.  Revenues from contractual arrangements, primarily with utility services customers, are recognized based on costs incurred to total estimated contract costs.  During the performance of such contracts, estimated final contract prices and costs are periodically reviewed and revisions are made, as required, to the revenue recognized. On cost-plus-fee contracts, revenue is recognized to the extent of costs incurred plus a proportionate amount of fees earned, and on time-and-material contracts revenue is recognized to the extent of billable rates times hours worked, plus material and other reimbursable costs incurred. Revisions arise in the normal course of providing services to utility services customers and generally relate to changes in contract specifications and cost allowability. Such revisions are recorded when realization is probable and can be reliably estimated.

 

 

F-8

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The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

B.  Accounting Policies (continued)

 

Concentration of Credit Risk--Credit risk represents the accounting loss that would be recognized if the counterparties failed to perform as contracted. The principal financial instruments subject to credit risk follows:

 

          Cash and Cash Equivalents, and Derivative Financial Instruments: To limit its exposure, the Company transacts its
          business and maintains interest rate swaps with high credit quality financial institutions.

 

          Accounts Receivable: The Company's residential and commercial customers are located geographically
          throughout the United States and Canada and, as to commercial customers, within differing industries, thus
          minimizing credit risk.  The credit exposure of utility services customers is directly affected by conditions within
          the utility industries as well as the financial condition of individual customers. One utility services customer
          approximated 13% of revenues during 2002 and 16% during 2001 and 2000.  To reduce credit risk, the
          Company evaluates the credit of customers, but generally does not require advance payments or collateral.
          Exposure to losses on receivables is principally dependent on each customer's financial condition.

 

Property and Equipment--Property and equipment are stated at cost. Repair and maintenance costs are expensed as incurred. Depreciation is computed for financial reporting purposes by the straight-line method for land improvements, building and leasehold improvements and by the double-declining method for equipment, based on the estimated useful lives of the assets, as follows:

 

                         Land improvements  . . . . . . . . . . . . . .. . . 5 to 20 years
                         Buildings .. . . . . . . . . . . . . . . . . . . . . . . . .5 to 20 years

                         Equipment .. . . . . . . . . . . . . . . . . . . . . . .  3 to 10 years

                         Leasehold improvements . . . . . . . . . . . . .Shorter of lease term or estimated useful life;
                                                                                                        ranging from 5 to 20 years

 

The amortization of assets acquired under capital leases is included in depreciation expense.

 

Intangible Assets--Intangible assets with finite lives, primarily customer lists, noncompete agreements and trade names, are amortized by the straight-line method based on their estimated useful lives, ranging from one to ten years

 

Long-Lived Assets--The Company assesses potential impairment to its long-lived assets, other than goodwill, only when there is evidence that events or changes in circumstances have made recovery of the asset's carrying value unlikely and the carrying amount of the asset exceeds the estimated future undiscounted cash flow. In the event the assessment indicates that the carrying amounts may not be recoverable, an impairment loss would be recognized to reduce the asset's carrying amount to its estimated fair value based on the present value of the estimated future cash flows.

 

 

F-9

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The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

B.  Accounting Policies (continued)

 

Stock Compensation Arrangements--The Company accounts for stock compensation arrangements using the intrinsic value method in APB Opinion No. 25, "Accounting for Stock Issued to Employees."  Under the intrinsic value method, no compensation expense is recorded for stock options when granted, if the option prices are set at the market value of the underlying stock.

 

In accordance with the intrinsic value method, the Company has not recognized any expense related to stock options, as holders of stock options have historically had to pay an amount equal to the market value of the shares at the date of grant.

 

The alternative policy, in FAS No. 123, "Accounting for Stock-Based Compensation," the fair value method, is based on the fair value of the stock option awarded, determined by an option pricing model, net of any amount the holders must pay for the stock options when granted. If the Company had used the fair value method, the after-tax expense relating to the stock options would have been $13 in 2002, $357 in 2001 and $284 in 2000. In calculating the after-tax expense of the stock options, the following assumptions were used: initial annual dividend rate of 1.5% per share; a risk free interest rate of 6.25%; and, an expected life of five years. The following table presents the pro forma net income as if the fair value method had been applied to the stock options.

 

 

	Year Ended December 31,
	2002	2001	2000
Net income (loss) as reported	$        7,221	$       6,731	$     (2,404)
Deduct stock-based compensation,
determined under fair value	13	357	284
Pro forma net income, FAS 123 adjusted	$        7,208	$       6,374	$     (2,688)
Net income (loss) per share -- basic
As reported	$            .89	$          .87	$        (.30)
Pro forma, FAS 123 adjusted	.89	.82	(.34)
Net income (loss) per share -- diluted
As reported	$            .85	$           .82	$        (.30)
Pro forma, FAS 123 adjusted	.85	.77	(.34)

 

Derivative Financial Instruments--Derivative financial instruments such as interest rate swaps are used by the Company to reduce interest rate risks. The Company does not hold or issue derivative financial instruments for trading purposes.

 

Self-Insurance Accruals--The Company is generally self-insured for losses and liabilities related primarily to workers' compensation, vehicle liability and general liability claims. The Company uses commercial insurance as a risk-reduction strategy to minimize catastrophic losses. Ultimate losses are accrued based upon estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on Company-specific experience.

 

 

 

F-10

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The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

B.  Accounting Policies (continued)

 

The self-insurance accruals include claims for which the ultimate losses will develop over a period of years. Accordingly, the estimates of ultimate losses can change as claims mature. The accruals also are affected by changes in the number of new claims incurred and claim severity. The methods for estimating the ultimate losses and the total cost of claims were determined by external consulting actuaries; the resulting accruals are continually reviewed by management, and any adjustments arising from changes in estimates are reflected in income currently. The self-insurance accruals are based on estimates, and while management believes that the amounts accrued are adequate, the ultimate claims may be in excess of or less than the amounts provided.

 

Income Taxes--The Company computes taxes on income in accordance with the tax rules and regulations where the income is earned. The income tax rates imposed by these taxing authorities vary. Taxable income may differ from pretax income for financial reporting purposes. To the extent differences are due to revenue and expense items reported in one period for tax purposes and in another period for financial reporting purposes, provision for deferred taxes is made. Changes in tax rates and laws are reflected in income in the period when such changes are enacted. 

 

Net Income Per Share and Common Shares--Basic net income per share is determined by dividing the income available to common shareholders by the weighted-average number of common shares outstanding. Diluted net income per share is computed similar to basic net income per share except that the weighted-average number of shares is increased to include the effect of stock options that were granted and outstanding during the period.

 

Foreign Currency Translation--All assets and liabilities of the Company's Canadian operations are translated into United States dollars at year-end exchange rates while revenues and expenses are translated at weighted-average exchange rates in effect during the year.  Translation adjustments are recorded as accumulated other comprehensive income (loss) in shareholders' equity.

 

Comprehensive Income (Loss)--Comprehensive income (loss) includes net income and other comprehensive income or loss. Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income as these amounts are recorded directly as an adjustment to shareholders' equity, net of tax. The Company's other comprehensive income (loss) is composed of foreign currency translation adjustments and unrealized gains and losses from its interest rate swaps.

 

Fair Values--The carrying amount of cash and cash equivalents, receivables, accounts payable and debt approximates fair value.

 

New Accounting Standards Adopted--Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("FAS") No. 133,  "Accounting for Derivative Instruments and Hedging Activities," as amended by FAS 138.  FAS 133 requires that all derivatives, such as interest rate swap agreements, be recognized on the balance sheet at fair value. The Statement also requires that changes in the derivative instrument's fair value be recognized currently in the results of operations unless specific hedge accounting criteria are met. The cumulative effect of the accounting change, as of January 1, 2001, resulted in the reporting of a $105 decrease, net of tax, to accumulated other comprehensive income (loss).

 

 

F-11

---

 

The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

B.  Accounting Policies (continued)

 

Effective January 1, 2002, the Company adopted FAS 141, "Business Combinations," and FAS 142, "Goodwill and Other Intangible Assets." FAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets apart from goodwill. FAS 142 requires that purchased goodwill and certain indefinite-lived intangibles no longer be amortized, but instead be tested for impairment at least annually. There was no impairment of goodwill upon adoption of FAS 142. Supplemental comparative disclosure, as if the change had been retroactively applied, follows:

 

 

	Year Ended December 31,
	2002	2001	2000
Cease goodwill amortization	$              -	$          150	$        154
Net income (loss) as reported	$       7,221	$       6,731	$    (2,404)
Cease goodwill amortization, net of tax	-	105	110
Pro forma net income, FAS 142 adjusted	$       7,221	$       6,836	$    (2,294)
Net income (loss) per share - basic
As reported	$           .89	$           .87	$        (.30)
Pro forma net income, FAS 142 adjusted	.89	.88	(.29)
Net income (loss) per share - diluted
As reported	$           .85	$           .82	$        (.30)
Pro forma net income, FAS 142 adjusted	.85	.83	(.29)

 

Recently Issued Accounting Pronouncement--In December 2002, the FASB issued FAS 148, "Accounting for Stock-Based Compensation--Transition and Disclosures," which amends FAS 123 "Accounting for Stock-Based Compensation."  FAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require more prominent and more frequent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of FAS 148 are effective for fiscal years ending after December 15, 2002 and have been incorporated into these financial statements.

 

 

F-12

---

 

The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

C.  Accounts Receivable, Net

 

Accounts receivable, net, consisted of the following:

 

	December 31,
	2002	2001
Accounts receivable	$       57,376	$       59,102
Receivables under contractual arrangements	5,880	3,174
	63,256	62,276
Less prepetition accounts receivable from PG&E      classified as noncurrent other assets	12,490	13,326
	50,766	48,950
Less allowances for doubtful accounts	1,569	1,278
	$       49,197	$       47,672

 

Receivables under contractual arrangements consist of work-in-process in accordance with the terms of contracts, primarily utility services customers.

 

On April 6, 2001, one of the Company's largest utility customers, Pacific Gas and Electric Company (PG&E) filed a voluntary bankruptcy petition under Chapter 11 of the U. S. Bankruptcy Code. Subsequent to the bankruptcy petition date, the Company continued to provide services under the terms of its contracts with PG&E. The Company continues to perform services for PG&E and receives payment for post-petition date services performed, as part of PG&E administrative expenses.

 

On September 20, 2001, PG&E filed a reorganization plan as part of its Chapter 11 bankruptcy proceeding that seeks to pay all of its creditors in full. Components of the plan will require the approval of the Federal Energy Regulatory Commission, the Securities and Exchange Commission and the Nuclear Energy Regulatory Commission, in addition to the bankruptcy court.  In addition to PG&E's reorganization plan, there is a competing alternative proposed plan of reorganization filed by the California Public Utilities Commission and the Official Committee of Unsecured Creditors ("CPUC/OCC plan").  The bankruptcy court began confirmation hearings in December 2002 to determine whether to confirm the PG&E plan, the CPUC/OCC plan or neither plan.  The bankruptcy court has scheduled trial dates through April 2003.  In determining whether to confirm either plan, the bankruptcy court will consider, among other factors, creditor preference and financial and legal feasibility. Various parties have filed objections to confirmation of either or both plans.  PG&E will not emerge from bankruptcy until a plan of reorganization has been confirmed by the bankruptcy court and the confirmed plan has been executed.  Management is unable to predict which plan, if any, the bankruptcy court will confirm.

Management has monitored the situation closely and will continue to assess the collectibility of its receivables from PG&E.  In management's opinion, the prepetition receivables from PG&E are collectible.

 

During 2002, the Company received interest payments of $836 from PG&E on the prepetition accounts receivable reducing the outstanding prepetition balance to $12,490.  Because of the inability to predict when payment will be received, the prepetition receivables are classified as noncurrent other assets.

 

F-13

---

 

The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

D.  Supplemental Balance Sheet and Cash Flow Information

 

The following items comprise the amounts included in the balance sheets:

 

	December 31,
Other currents assets	2002	2001
Refundable income taxes	$             360	$                -
Deferred income taxes	3,730	3,407
Total	$          4,090	$         3,407
	December 31,
Other assets	2002	2001
Prepaid pension costs	$        11,324	$       10,922
Prepetition accounts receivable from PG&E	12,490	13,326
Deposits	1,416	899
Total	$        25,230	$       25,147
	December 31,
Identified intangibles and goodwill, net	2002	2001
Customer lists	$          5,381	$         2,950
Noncompete agreements	1,674	563
Tradenames	195	-
Goodwill	4,638	2,651
	11,888	6,164
Less accumulated amortization	4,328	3,636
Total	$          7,560	$        2,528
	December 31,
Accrued expenses	2002	2001
Employee compensation	$          6,526	$        5,845
Accrued vacation	2,491	2,491
Self-insured medical claims	1,029	919
Commercial insurance payable	3,444	1,475
Income taxes payable	-	1,416
Taxes, other than income	1,087	601
Other	2,082	1,502
Total	$        16,659	$      14,249

 

F-14

---

 

The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

D.  Supplemental Balance Sheet and Cash Flow Information (continued)

 

Supplemental cash flow information follows:

 

	Year Ended December 31,
	2002	2001	2000
Interest paid	$      3,046	$       5,330	$       5,957
Income taxes paid (refunds received), net	4,585	2,465	(1,742)
Noncash transactions:
Debt issued for purchase of business	2,860	-	-
Common share subscriptions	10,032	-	-
Detail of acquisitions:
Assets acquired:
Equipment	1,706	63	87
Intangibles	5,699	20	365
Liabilities assumed	(257)	-	-
Debt issued for purchase of business	(2,860)	-	-
Cash paid	$      4,288	$           83	$         452

 

E.  Pension Plans

 

Substantially all of the Company's domestic employees are covered by two noncontributory defined benefit pension plans.

 

The plan for nonbargaining employees provides a benefit based primarily on annual compensation up to a defined level and years of credited service. The other plan is for bargaining employees not covered by union pension plans and provides benefits at a fixed monthly amount based upon length of service. The Company's funding policy is to make the annual contributions necessary to fund the plans within the range permitted by applicable regulations.

 

Summarized information on the Company's defined benefit pension plans follows:

 

	December 31,
	2002	2001
Change in benefit obligation
Projected benefit obligation at beginning of year	$    15,419	$    13,411
Service cost	875	786
Interest cost	1,083	973
Amendments	-	574
Actuarial loss	1,461	933
Benefit payments	(1,622)	(1,258)
Projected benefit obligation at end of year	$    17,216	$    15,419

 

F-15

---

 

The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

E.  Pension Plans (continued)

 

	December 31,
	2002	2001
Change in plan assets
Fair value of plan assets at beginning of year	$      29,413	$      33,840
Actual return on plan assets	(4,978)	(3,169)
Benefit payments	(1,622)	(1,258)
Fair value of plan assets at end of year	$      22,813	$      29,413
	December 31,
	2002	2001
Funded status
Fair value of plan assets at end of year	$      22,813	$      29,413
Projected benefit obligation at end of year	17,216	15,419
Plan assets in excess of benefit obligation	5,597	13,994
Unrecognized loss (gain)	6,328	(2,404)
Unrecognized prior service cost	42	46
Unrecognized transition asset	(643)	(714)
Prepaid pension costs recognized in balance sheet	$       11,324	$      10,922

 

The assumptions used in developing the benefit obligations were as follows:

 

	December 31,
	2002	2001
Weighted-average assumptions
Discount rate used to determine projected           benefit obligation	6.75%	7.25%
Expected return on plan assets	8.00	8.00
Rate of increase in compensation	4.5	5.0

 

Net periodic benefit income associated with the defined benefit pension plans included the following components:

 

	Year Ended December 31,
	2002	2001	2000
Components of pension expense (income)
Service costs -- increase in benefit obligation earned	$        875	$        786	$         607
Interest cost on projected benefit obligation	1,083	973	924
Expected return on plan assets	(2,287)	(2,732)	(3,129)
Recognized net actuarial gains	(6)	(491)	(1,096)
Amortization of prior service cost	4	(34)	(34)
Amortization of transition asset	(72)	(72)	(72)
Net pension income of defined benefit pension plans	$       (403)	$    (1,570)	$    (2,800)

 

F-16

---

 

The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

E.  Pension Plans (continued)

 

In addition to the Company sponsored defined benefit plans, the Company contributes to several multiemployer plans. Total pension expense for multiemployer plans was $180 in 2002, $289 in 2001, and $183 in 2000.

 

F.  Short-Term and Long-Term Debt

 

Short-term debt consisted of the following:

 

	December 31,
	2002	2001
Notes payable	$         810	$      1,114
Current portion of long-term debt	432	427
	$      1,242	$      1,541

 

The note payable is due on June 5, 2003 with interest approximating 4.75%.

 

At December 31, 2002, the Company also had unused short-term lines of credit with several banks totaling  $3,399, generally at the banks' prime rate.

 

Long-term debt consisted of the following:

 

	December 31,
	2002	2001
Revolving credit agreement
Prime rate borrowings	$        400	$     1,300
LIBOR borrowings	34,000	40,000
	34,400	41,300
Subordinated notes, share redemptions	389	777
Term loans	2,248	237
	37,037	42,314
Less current portion	432	427
	$   36,605	$   41,887

 

Revolving Credit Agreement--During November 2002, the Company entered into a new revolving credit agreement with a group of banks that permits borrowings, as defined, up to $90,000 with a letter of credit sublimit of $30,000, through November 2005.  Borrowings outstanding bear interest, at the Company's option, at the agent bank's prime rate or LIBOR plus a margin adjustment ranging from 1.0% to 2.0%, based on a ratio of funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization).  A commitment fee ranging from .20% to .45% is required on the average daily unborrowed commitment.

 

The revolving credit agreement contains certain affirmative and negative convenants customary for this type of agreement and includes financial covenant ratios, as defined, with respect to interest coverage, funded debt to EBITDA, and funded debt to capitalization.

F-17

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The Davey Tree Expert Company

Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

F.  Short-Term and Long-Term Debt (continued)

 

Subordinated Notes-share redemption--In 1998, the Company redeemed common shares for cash and five-year subordinated promissory notes. These notes bear interest based on the five-year U.S. Treasury rate in effect at January 1 of each year (4.52% in 2002 and 4.99% in 2001).

 

Term Loans--The weighted-average interest on the term loans approximated 5.46% (10.37% at December 31, 2001).

 

Aggregate Maturities of Long-Term Debt--Aggregate maturities of long-term debt for the five years subsequent to December 31, 2002 were as follows: 2003--$432; 2004--$1,389; 2005--$34,786; 2006--$215 and 2007--$215.

 

Interest rate swaps--Under interest rate swap agreements, the Company has agreed to exchange, with a financial institution, at specific intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to agreed notional amounts.  Differentials to be paid or received under these agreements are accrued and recognized as adjustments to interest expense.  An interest rate swap effectively converts a portion of the Company's variable-rate revolving credit borrowings to a fixed rate, thus reducing the impact of interest-rate changes on future interest expense.  The Company has two interest rate swaps, each with an underlying notional amount of $10,000, one of which matures during November 2005 requiring interest to be paid at 4.39%, and the other maturing during March 2003 requiring interest to be paid at 6.53%.  The fair value of the swaps is the amount quoted by the financial institution that the Company would pay to terminate the agreement, a liability of $364 at December 31, 2002. 

 

G.  Self-Insurance Accruals

 

Components of the Company's self-insurance accruals for workers' compensation, vehicle liability and general liability follow:

 

	December 31,
	2002	2001
Workers' compensation	$       15,782	$      12,761
Present value discount	2,193	2,191
	13,589	10,570
Vehicle liability	5,176	4,325
General liability	4,161	4,739
Total	22,926	19,634
Less current portion	9,433	8,190
Noncurrent portion	$       13,493	$      11,444

 

F-18

---

 

 

The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

G.  Self-Insurance Accruals (continued)

 

The table below reconciles the changes in the self-insurance accruals for losses and related payments and sets forth the discount rate used for the workers compensation accrual.

 

	December 31,
	2002	2001
Balance, beginning of year	$     19,634	$     16,836
Provision for claims	19,227	20,212
Change in discount rate	99	91
Payment for claims	16,034	17,505
Balance, end of year	$     22,926	$     19,634
Workers compensation discount rate	4.50%	4.75%

 

H.  Lease Obligations

 

Assets acquired under capital leases and included in property and equipment consisted of the following:

 

	December 31,
	2002	2001
Equipment	$      5,125	$      4,947
Less accumulated amortization	2,103	1,507
	$      3,022	$      3,440

 

The Company also leases facilities under noncancelable operating leases, which are used for district office and warehouse operations. These leases extend for varying periods of time up to five years and, in some cases, contain renewal options. Minimum rental commitments under all capital and noncancelable operating leases, as of December 31, 2002 were as follows:

F-19

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The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

H.  Lease Obligations (continued)

 

	Lease Obligations
	Capital	Operating
Minimum lease obligations
Year ending December 31, 2003	$        881	$     1,843
2004	844	1,456
2005	942	1,049
2006	706	762
2007	1,038	538
2008 and after	-	643
Total minimum lease payments	4,411	$     6,291
Amounts representing interest	663
Present value of net minimum lease payments	3,748
Less current portion	650
Long-term capital lease obligations, December 31, 2002	$     3,098

 

Total rent expense under all operating leases was $2,567 in 2002, $2,437 in 2001 and $2,295 in 2000.

 

 

I.  Common Shares and Preferred Shares

 

The Company has authorized a class of 4,000,000 preferred shares, no par value, of which none were issued.

 

The number of common shares authorized is 12,000,000, par value $1.00. The number of common shares issued was 10,728,440 during each of the three years ended December 31, 2002. The number of shares in the treasury for each of the three years ended December 31, 2002 were as follows: 2002--3,048,073;  2001-- 2,999,526;  and, 2000-- 2,932,289.

 

The Company's stock is not listed or traded on an active stock market and market prices are, therefore, not available. Semiannually, 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 2002, purchases of common shares totaled 578,092 shares for $7,051 in cash; the Company also had direct sales, to directors and employees of 6,426 shares for $77, excluding those shares issued through either the exercise of options or the employee stock purchase plan. It also sold 47,581 shares from the Company's 401(k) plan for $583 and issued 41,208 shares to participant accounts to satisfy its liability for the 2001 employer match in the amount of $494.  The liability accrued at December 31, 2002 for the 2002 employer match was $586. There were also 105,609 shares purchased during 2002 under the employee stock purchase plan.

 

F-20

---

 

The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

I.  Common Shares and Preferred Shares (continued)

 

Stock Subscription Offering--During June 2002, the Company offered to eligible employees the right to subscribe to common shares at $12.00 per share in accordance with the provisions of The Davey Tree Expert Company 1994 Omnibus Stock Plan (the "plan").  The offering period ended August 1, 2002 and resulted in the subscription of 836,007 common shares ($10,032).

 

Under the plan, an employee purchasing common shares for an aggregate purchase price of less than $5 was required to pay cash.  Eligible employees purchasing $5 or more of the common shares had the option to finance their purchases through a down-payment of at least 10% of the total purchase price and a seven-year promissory note for the balance due with interest at 4.75%.   Payments on the promissory note are made either by payroll deductions or annual lump-sum payments of both principal and interest.

Common shares purchased under the plan are pledged as security for the payment of the promissory note and the common shares will not be issued until the promissory note is paid-in-full.  Dividends are paid on all unissued subscribed shares.

 

All employees (excluding directors, officers and certain operations management) that purchased $5 or more of common shares were granted a "right" to purchase one additional common share at a price of $12.00 per share for every two common shares purchased under the plan.  In connection with the offering, employees were granted rights to purchase 263,615 common shares.  Each right may be exercised at the rate of one-seventh per year and will expire seven years after the date that the right was granted.  Employees may not exercise a right should they cease to be employed by the Company.

 

 

J.  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.

 

The Employee Stock Ownership Plan (ESOP), in conjunction with the related ESOT, provided for the grant to certain employees of certain ownership rights in, but not possession of, the common shares held by the trustee of the Trust. Annual allocations of shares have been made to individual accounts established for the benefit of the participants.

 

Effective January 1, 1997, the Company commenced operation of the "The Davey 401KSOP and ESOP," which retained the existing ESOP participant accounts and incorporated a deferred savings plan (401(k) plan) feature. Participants in the plan are allowed to make before‑tax contributions, within Internal Revenue Service established limits, through payroll deductions. The Company will match, in either cash or Company stock, 50% of each participant's before-tax contribution, limited to the first 3% of the employee's compensation deferred each year. All nonbargaining domestic employees who attained age 21 and completed one year of service are eligible to participate. The Company's cost of this plan, consisting principally of the employer match, was $586 in 2002, $500 in 2001, and $466 in 2000.

 

F-21

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The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

K.  Employee Stock Purchase Plan and Stock Option Plans

 

Employee Stock Purchase Plan--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. Purchases under the plan, at 85% of the fair market value of the common shares, have been as follows:

 

	Year Ended December 31,
	2002	2001	2000
Number of employees participating	775	900	1,032
Shares purchased during the year	105,609	132,963	131,309
Weighted average per share purchase price paid	$     10.36	$       9.59	$     10.75
Cumulative shares purchased since 1982	3,544,171	3,438,562	3,305,599

 

 

Stock Option Plans--The 1994 Omnibus Stock Plan (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. Prior to adoption of the 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. The maximum number of shares that may be issued upon exercise of stock options, other than director options and nonqualified stock options, is 1,600,000 during the ten‑year term of the Stock Plan. Shares purchased since 1994 under the stock purchase plan were 1,234,267. Each nonemployee director elected or appointed, and reelected or reappointed, will receive a director option that gives the right to purchase, for six years, 4,000 common shares at the fair market value per share at date of grant. The director options are exercisable six months from the date of grant. The aggregate number of common shares available for grant and the maximum number of shares granted annually are based on formulas defined in the Stock Plan. The grant of awards, other than director options, is at the discretion of the compensation committee of the Board of Directors.  Shares available for grant at December 31, 2002 were 504,704.

 

F-22

---

 

The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

K.  Employee Stock Purchase Plan and Stock Option Plans (continued)

 

A summary of the Company's stock option activity, excluding director options, is presented below:

 

	2002		2001		2000
	Options	Weighted-Average   Exercise       Price	Options	Weighted-Average   Exercise       Price	Options	Weighted-Average   Exercise       Price
Outstanding, beginning of year	1,161,147	$     7.15	1,301,696	$     7.07	1,351,344	$     7.05
Granted	-	-	-	-	-	-
Exercised	(312,514)	6.36	(140,549)	6.36	(49,648)	6.54
Forfeited	(28,718)	6.14	-	-	-	-
Outstanding, end of year	819,915	7.49	1,161,147	7.15	1,301,696	7.07

 

 

The following table summarizes information about stock options outstanding and exercisable, excluding director options at December 31, 2002:

 

	Options Outstanding			Options Exercisable
Exercise    Price	Options	Weighted-  Average    Remaining  Contractual       Life	Weighted- Average   Exercise        Price	Options	Weighted- Average   Exercise        Price
$     6.92	340,045	1.0 years	$     6.92	340,045	$     6.92
7.90	479,870	3.9 years	7.90	479,870	7.90
	819,915			819,915

 

 

A summary of the status of the Company's director options is presented below:

 

	2002		2001		2000
	Options	Weighted-Average   Exercise       Price	Options	Weighted-Average   Exercise       Price	Options	Weighted-Average   Exercise       Price
Outstanding, beginning of year	44,000	$  12.16	40,000	$  11.60	44,000	$   10.20
Granted	8,000	12.00	12,000	11.00	8,000	13.00
Exercised	-	-	-	-	(8,000)	7.41
Forfeited	(4,000)	9.10	(8,000)	7.41	(4,000)	9.10
Outstanding and exercisable,      end of year	48,000	12.39	44,000	12.16	40,000	11.60

 

F-23

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The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

L.  Other Comprehensive Income (Loss)

 

The components of accumulated other comprehensive income (loss) follows:

 

	Year Ended December 31,
	2002	2001	2000
Comprehensive Income
Net Income (loss)	$    7,221	$    6,731	$   (2,404)
Other comprehensive income (loss)
Foreign currency translation adjustments	13	(99)	(202)
Derivative instrument:
Cumulative effect of accounting change	-	(170)	-
Change in fair value of interest rate swap	225	(419)	-
	225	(589)	-
Other comprehensive income (loss),                before income taxes	238	(688)	(202)
Income tax benefit (expense), related to                items of other comprehensive income	(86)	224	-
Other comprehensive income (loss)	152	(464)	(202)
Comprehensive income (loss)	$    7,373	$    6,267	$   (2,606)

 

 

	December 31,
	2002	2001	2000
Accumulated comprehensive income (loss)
Foreign currency translation adjustments	$     (831)	$     (844)	$     (745)
Fair value of interest rate swap	(226)	(365)	-
Accumulated comprehensive income (loss)	$  (1,057)	$  (1,209)	$     (745)

 

 

M.  Income Taxes

 

Income (loss) before income taxes were attributable to the following sources:

 

	Year Ended December 31,
	2002	2001	2000
United States	$  11,023	$  10,287	$  (3,011)
Canada	914	849	(473)
Total	$  11,937	$  11,136	$  (3,484)

 

F-24

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The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

M.  Income Taxes (continued)

 

Income taxes have been provided as follows:

 

	Year Ended December 31,
	2002	2001	2000
Currently payable:
Federal	$    3,143	$    3,180	$   (1,360)
State	826	900	(140)
Canadian	425	442	(148)
Total current	4,394	4,522	(1,648)
Deferred taxes	322	(117)	568
Total taxes on income	$    4,716	$    4,405	$   (1,080)

 

Deferred income taxes reflect the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

 

Significant components of the Company's current net deferred tax assets at December 31, were as follows:

 

	Year Ended December 31,
	2002	2001
Deferred tax assets:
Accrued compensated absences	$       491	$       504
Self-insurance accruals	2,812	2,417
Other	427	486
Net deferred income tax assets--current	$    3,730	$    3,407

 

Significant components of the Company's noncurrent net deferred tax assets and liabilities at December 31, were as follows:

 

	Year Ended December 31,
	2002	2001
Deferred tax assets:
Self-insurance accruals	$     4,349	$       3,836
Other	281	189
	4,630	4,025
Deferred tax liabilities:
Tax over financial reporting depreciation and amortization	7,884	6,662
Prepaid pension costs	3,827	3,713
	11,711	10,375
Net deferred income tax liability--noncurrent	$   (7,081)	$   (6,350)

 

F-25

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The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

M.  Income Taxes (continued)

 

A reconciliation of the expected statutory U.S. federal rate to the Company's actual effective income tax rate follows:

 

	Year Ended December 31,
	2002	2001	2000
Statutory U.S. federal tax rate	34.0 %	34.0 %	(34.0) %
State income taxes, net of federal benefit	4.6	5.4	(2.6)
Effect of Canadian income taxes	1.0	(.1)	(.4)
Meals disallowance	1.5	.9	5.0
Other	(1.6)	(.6)	1.0
Effective income tax rate	39.5 %	39.6 %	(31.0) %

 

 

N.  Net Income Per Share

 

Net income per share is computed as follows:

 

	Year Ended December 31,
	2002	2001	2000
Income available to common shareholders:
Net income (loss)	$       7,221	$       6,731	$     (2,404)
Weighted average shares:
Basic:
Outstanding	7,781,902	7,756,949	7,929,210
Partially-paid share subscriptions	342,915	-	-
Basic weighted average shares	8,124,817	7,756,949	7,929,210
Diluted:
Basic from above	8,124,817	7,756,949	7,929,210
Incremental shares from assumed:
Exercise of stock subscription rights	4,322	-	-
Exercise of stock options	379,047	473,740	-
Diluted weighted average shares	8,508,186	8,230,689	7,929,210
Net income (loss) per share:
Basic	$           .89	$           .87	$         (.30)
Diluted	$           .85	$           .82	$         (.30)

 

 

For the year ended December 31, 2000, there were 593,254 shares attributable to the exercise of stock options that were excluded from the calculation of diluted net loss per share because the effect was antidilutive.

 

F-26

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The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

O.  Operations by Segment and Geographic Information

 

The Company's operating results are reported in two segments: Residential and Commercial Services, and Utility Services, for operations in the United States. Residential and Commercial Services provides for the treatment, preservation, maintenance, cultivation, planting and removal of trees, shrubs and other plant life; its services also include the practice of landscaping, tree surgery, tree feeding, and tree spraying, as well as the application of fertilizer, herbicides and insecticides. Utility Services is principally engaged in the practice of line clearing for investor-owned and municipal utilities, including the clearing of tree growth from power lines, clearance of rights-of-way and chemical brush control.

 

The Company also has two nonreportable segments:  Canadian operations, which provides a comprehensive range of Davey horticultural services, and Davey Resource Group, which provides services related to natural resource management and consulting, forestry research and development, and environmental planning and also maintains research, technical support and laboratory diagnostic facilities. Canadian operations and Davey Resource Group are presented below as "All Other."

 

Measurement of Segment Profit and Loss and Segment Assets--The Company evaluates performance and allocates resources based primarily on operating income and also actively manages business unit operating assets.

 

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies except that (a) the Company computes and recognizes depreciation expense for its segments only by the straight-line method and (b) state income taxes are allocated to the segments. Corporate expenses are substantially allocated among the operating segments, but the nature of expenses allocated may differ from year-to-year. There are no intersegment revenues. Segment assets are those generated or directly used by each segment, and include accounts receivable, inventory, and property and equipment.

 

Information on reportable segments and reconciliation to the consolidated financial statements follows:

 

F-27

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The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

O.  Operations by Segment and Geographic Information (continued)

 

 

	Utility  Services	Residential  Commercial    Services	All         Other	Reconciling Adjustments		Consolidated
Fiscal Year 2002
Revenues	$ 132,875	$     155,689	$   30,709	$              -		$     319,273
Income (loss) from operations	1,898	12,901	2,032	(2,834)	(a)	13,997
Interest expense				3,121		3,121
Other income (expense), net				1,061		1,061
Income before income taxes						11,937
Depreciation and amortization	$     8,160	$         7,127	$     1,559	$      2,524	(b)	$       19,370
Capital expenditures	5,456	5,580	2,151	2,940		16,127
Segment assets, total	40,727	43,159	11,706	65,564	(c)	161,156
Fiscal Year 2001
Revenues	$ 148,295	$     145,723	$   27,266	$             -		$    321,284
Income (loss) from operations	3,535	14,331	1,155	(3,171)	(a)	15,850
Interest expense				4,993		4,993
Other income (expense), net				279		279
Income before income taxes						11,136
Depreciation and amortization	$     8,302	$         6,830	$     1,400	$     2,522	(b)	$      19,054
Capital expenditures	4,209	3,576	1,907	2,000		11,692
Segment assets, total	45,571	37,812	9,101	62,989	(c)	155,473
Fiscal Year 2000
Revenues	$ 159,414	$     135,868	$   26,954	$             -		$    322,236
Income (loss) from operations	(5,896)	11,134	1,112	(4,729)	(a)	1,621
Interest expense				6,217		6,217
Other income (expense), net				1,112		1,112
Income before income taxes						(3,484)
Depreciation and amortization	$     9,802	$       6,639	$     1,401	$      2,880	(b)	$      20,722
Capital expenditures	7,106	5,596	1,446	3,328		17,476
Segment assets, total	61,663	39,763	7,776	50,180	(c)	159,382

 

Reconciling adjustments from segment reporting to consolidated external financial reporting include unallocated corporate items:

 

     (a)  Reclassification of depreciation expense and allocation of corporate expenses.

     (b)  Reduction to straight-line depreciation expense from declining balance method and depreciation
            and amortization of corporate assets.

     (c)  Corporate assets include cash and cash equivalents, prepaid expenses, corporate facilities,
           enterprise-wide information systems, intangibles, and deferred and other nonoperating assets.

 

F-28

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The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

O.  Operations by Segment and Geographic Information (continued)

 

Geographic Information--The following presents revenues and long-lived assets by geographic territory:

 

	Year Ended December 31,
	2002	2001	2000
Revenues
United States	$   301,075	$   304,109	$   306,387
Canada	18,198	17,175	15,849
	$   319,273	$   321,284	$   322,236
	December 31,
		2002	2001
Long-lived assets, net
United States		$     69,309	$     68,512
Canada		5,114	4,127
		$     74,423	$     72,639

 

 

P.  Commitments and Contingencies

 

At December 31, 2002, the Company was contingently liable to its principal banks in the amount of $27,524 for letters of credit outstanding primarily related to insurance coverage.

 

In certain circumstances, the Company has performance obligations that are supported by surety bonds in connection with its contractual commitments.

 

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 reflected in the self-insurance accruals and would not be material in relation to the financial position or results of operations.

 

F-29

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The Davey Tree Expert Company
Notes to Consolidated Financial Statements--(Continued)
December 31, 2002
(In thousands, except share data)

 

 

Q.  Quarterly Results of Operations (Unaudited)

 

The following is a summary of the results of operations for each quarter of 2002 and 2001.

 

 

	Fiscal 2002, Three Months Ended
	Mar 30	Jun 29	Sep 28	Dec 28
Net sales	$   64,373	$    93,354	$    80,705	$    80,841
Gross profit	19,156	32,524	28,049	27,995
Income (loss) from operations	(2,801)	7,762	3,750	5,286
Net income (loss)	(2,170)	4,778	1,674	2,939
Earnings (loss) per share -- Basic	$       (.28)	$         .61	$         .20	$         .34
Earnings (loss) per share -- Diluted	$       (.28)	$         .58	$         .19	$         .33
ESOT Valuation per share	$     12.00	$     12.40	$     12.40	$     12.80
	Fiscal 2001, Three Months Ended
	Mar 31	Jun 30	Sep 29	Dec 29
Net sales	$   67,360	$   93,279	$   85,251	$   75,394
Gross profit	19,463	34,173	29,470	25,395
Income (loss) from operations	(2,519)	10,047	5,828	2,494
Net income (loss)	(2,382)	5,417	2,747	949
Earnings (loss) per share -- Basic	$       (.31)	$         .70	$         .35	$         .12
Earnings (loss) per share -- Diluted	$       (.31)	$         .66	$         .33	$         .12
ESOT Valuation per share	$     11.00	$     11.60	$     11.60	$     12.00

 

 

 

 

 

*  *  *  *  *

 

F-30

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