Stock-Based Compensation

The Davey Tree Expert Company 2004 Omnibus Stock Plan (the “Stock Plan”) was approved by our shareholders at our annual shareholders' meeting in May 2004. The Stock Plan is administered by the Compensation Committee of the Board of Directors, with the maximum number of common shares that may be granted to or purchased by all employees and directors under the Stock Plan being 10,000,000. In addition to the maintenance of the Employee Stock Purchase Plan, the Stock Plan provides for the grant of stock options, restricted stock, stock appreciation rights, stock purchase rights, stock equivalent units, cash awards, and other stock or performance-based incentives. These awards are payable in cash or common shares, or any combination thereof, as established by the Compensation Committee.

Stock-based compensation expense under all share-based payment plans -- our Employee Stock Purchase Plan, stock option plans, stock appreciation rights and performance-based restricted stock units -- included in the results of operations follows:



	Three Months Ended				Nine Months Ended
	September 29, 2012		October 1, 2011		September 29, 2012		October 1, 2011
Compensation expense, all share-based payment plans	$	285	$	282	$	1,210	$	986

Stock-based compensation consisted of the following:

Employee Stock Purchase Plan--Under the Employee Stock Purchase Plan, all full-time employees with one year of service are eligible to purchase, through payroll deduction, common shares. Employee purchases under the Employee Stock Purchase Plan are at 85% of the fair market value of the common shares--a 15% discount. We recognize compensation costs as payroll deductions are made. The 15% discount of total shares purchased under the plan resulted in compensation cost of $312 being recognized for the nine months ended September 29, 2012 and $302 for the nine months ended October 1, 2011.

Stock Option Plans--Stock options awarded before January 1, 2006 were granted at an exercise price equal to the fair market value of our common shares at the dates of grant. Stock options awarded on or after January 1, 2006 were required to be measured at fair value. At September 29, 2012, there were 615,401 stock options outstanding that were awarded after January 1, 2006. The stock options were awarded under a graded vesting schedule and have a term of ten years. Compensation costs for stock options are recognized over the requisite service period on the straight-line recognition method. Compensation cost recognized for stock options was $122 for the nine months ended September 29, 2012 and $229 for the nine months ended October 1, 2011.

Stock-Settled Stock Appreciation Rights--During the nine months ended September 29, 2012, the Compensation Committee of the Board of Directors awarded 105,000 Stock-Settled Stock Appreciation Rights (“SSARs”) to certain management employees and nonemployee directors, which vest ratably over five years. A stock-settled stock appreciation right is an award that allows the recipient to receive common stock equal to the appreciation in the fair market value of our common stock between the date the award was granted and the conversion date of the shares vested.


F.	Stock-Based Compensation (continued)

The following table summarizes our SSARs as of September 29, 2012.



Stock-Settled Stock Appreciation Rights	Number of Rights		Weighted- Average Award Date Value		Weighted- Average Remaining Contractual Life	Unrecognized Compensation Cost		Aggregate Intrinsic Value
Unvested, January 1, 2012	210,188		$	3.47
Granted	105,000		2.70
Forfeited	—		—
Vested	(57,371	)	3.43
Unvested, September 29, 2012	257,817		$	3.17	3.2 years	$	636	$	5,363

Employee SSARs	218,400		$	3.31	3.2 years	$	552	$	4,543
Nonemployee Director SSARs	39,417		$	2.34	3.7 years	$	84	$	820

Compensation costs for stock appreciation rights are determined using a fair-value method and amortized over the requisite service period. Compensation expense for stock appreciation rights was $217 for the nine months ended September 29, 2012 and $142 for the nine months ended October 1, 2011.

Performance-Based Restricted Stock Units--During the nine months ended September 29, 2012, the Compensation Committee of the Board of Directors awarded 23,058 Performance-Based Restricted Stock Units to certain management employees. The Compensation Committee made similar awards in prior periods. The awards vest over specified periods. The following table summarizes Performance-Based Restricted Stock Units as of September 29, 2012.



Performance-Based Restricted Stock Units	Number of Stock Units		Weighted- Average Grant Date Value		Weighted- Average Remaining Contractual Life	Unrecognized Compensation Cost		Aggregate Intrinsic Value
Unvested, January 1, 2012	113,908		$	15.15
Granted	23,058		19.41
Forfeited	—		—
Vested	(58,313	)	14.52

Unvested, September 29, 2012	78,653		$	16.87	2.9 years	$	711	$	1,636

The fair value of the restricted stock units for awards made prior to January 1, 2006 is based on the market price of our common shares on the date of award and is recognized as compensation cost on the straight-line recognition method over the vesting period. Compensation cost for awards made after December 31, 2005 is determined using a fair-value method and amortized over the requisite service period. Compensation expense on restricted stock awards totaled $559 for the nine months ended September 29, 2012 and $313 for the nine months ended October 1, 2011.


F.	Stock-Based Compensation (continued)

For stock-based awards issued on or after January 1, 2006, we estimated the fair value of each award on the date of grant using a binomial option-pricing model. The binomial model considers a range of assumptions related to volatility, risk-free interest rate and employee exercise behavior. Expected volatilities utilized in the binomial model are based on historical volatility of our stock prices and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The binomial model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock-based awards is derived from the output of the binomial model and represents the period of time that awards granted are expected to be outstanding.

The fair values of stock-based awards granted were estimated at the dates of grant with the following weighted-average assumption.



	Nine Months Ended
	September 29, 2012		October 1, 2011
Volatility rate	11.7	%	11.9	%
Risk-free interest rate	1.6	%	2.9	%
Expected dividend yield	1.5	%	1.5	%
Expected life of awards (years)	9.1		8.9

General Stock Option Information--The following table summarizes activity under the stock option plans for the nine months ended September 29, 2012.



Stock Options	Number of Options Outstanding		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Unrecognized Compensation Cost		Aggregate Intrinsic Value
Outstanding, January 1, 2012	1,110,785		$	10.62
Granted	—		—
Exercised	(121,385	)	8.02
Forfeited	—		—
Outstanding, September 29, 2012	989,400		$	10.94	3.6 years	$	10,826	$	9,753

Exercisable, September 29, 2012	818,400		$	9.82	2.7 years			$	8,985


F.	Stock-Based Compensation (continued)

“Intrinsic value” is defined as the amount by which the market price of a common share exceeds the exercise price of an option. Information regarding the stock options outstanding at September 29, 2012 is summarized below:



Stock Options Exercise Price			Number Outstanding	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable	Weighted- Average Exercise Price
Employee options:	$	6.75	373,999	1.2 years	$	6.75	373,999	$	6.75
	11.25		329,133	3.7 years	11.25		329,133	11.25
	16.00		132,200	7.1 years	16.00		49,200	16.00
	16.60		109,400	8.1 years	16.60		21,400	16.60
			944,732	3.7 years	$	10.75	773,732	$	9.52

Director options:	$12.95 to $16.40		44,668	1.4 years	14.95		44,668	14.95
			989,400	3.6 years	$	10.94	818,400	$	9.82

Common shares are issued from treasury upon the exercise of stock options, stock appreciation rights, restricted stock units or purchases under the Employee Stock Purchase Plan.