-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TfMP/bYtPLi7yIEvkpVtwAVVsH5TOX1qtAbGwp7//lJ6VFflhi1/dWRWFTG8SCuw C41zHp32pgd7jr8ED5v3eg== 0000950152-02-002601.txt : 20020415 0000950152-02-002601.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950152-02-002601 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAVEY TREE EXPERT CO CENTRAL INDEX KEY: 0000277638 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE SERVICES [0700] IRS NUMBER: 340176110 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11917 FILM NUMBER: 02594521 BUSINESS ADDRESS: STREET 1: 1500 N MANTUA ST STREET 2: P O BOX 5193 CITY: KENT STATE: OH ZIP: 44240-5193 BUSINESS PHONE: 3306739511 MAIL ADDRESS: STREET 1: 1500 NORTH MANTUA STREET STREET 2: P O BOX 5193 CITY: KENT STATE: OH ZIP: 44240-5193 10-K 1 form10k.txt DAVEY TREE EXPERT COMPANY Page 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 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 THE DAVEY TREE EXPERT COMPANY (Exact name of registrant as specified in its charter) Ohio 34-0176110 (State or other (I.R.S. Employer jurisdiction of Identification Number) incorporation or organization) 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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. There were 7,831,032 Common Shares outstanding as of March 21, 2002. The aggregate market value of the Common Shares held by nonaffiliates of the registrant as of March 21, 2002 was $70,425,096. For purposes of this calculation, it is assumed that the registrant's affiliates include the registrant's Board of Directors and its executive officers (latest available information). DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the 2002 Annual Meeting of Shareholders, to be held on May 21, 2002 are incorporated by reference into Part III (to be filed). NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations," "Item 7A - Quantitative and Qualitative Disclosures About Market Risk," and elsewhere. These statements relate to future events or our future financial performance. In some cases, forward-looking statements may be identified by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to differ materially from what is expressed or implied in these forward-looking statements. Some important factors that could cause actual results to differ materially from those in the forward-looking statements include: n Our business, other than tree services to utility customers, is highly seasonal, and weather dependent. n Significant customers, particularly utilities, may experience financial difficulties, resulting in payment delays or delinquencies. n Our failure to remain competitive could harm our business. n Because no public market exists for our common shares, the ability of shareholders to sell their common shares is limited. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform these statements to actual future results. THE DAVEY TREE EXPERT COMPANY FORM 10-K For the Fiscal Year Ended December 31, 2001 TABLE OF CONTENTS Page Note Regarding Forwarding-Looking Statements 2 PART I 4 Item 1: Business Item 2: Properties Item 3: Legal Proceedings Item 4: Submission of Matters to a Vote of Security Holders Item 4A: Executive Officers of the Registrant PART II 9 Item 5: Market for Registrant's Common Equity and Related Stockholder Matters Item 6: Selected Financial Data Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A: Quantitative and Qualitative Disclosures About Market Risk Item 8: Financial Statements and Supplementary Data Item 9: Changes In and Disagreements With Accountants on Accounting and Financial Disclosure PART III 20 Item 10: Directors and Executive Officers of the Registrant Item 11: Executive Compensation Item 12: Security Ownership of Certain Beneficial Owners and Management Item 13: Certain Relationships and Related Transactions PART IV 21 Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K SIGNATURES 22 PART I Item 1. Business. General The Davey Tree Expert Company, which was incorporated in 1909, and its subsidiaries ("we" or "us") have two primary operating segments which provide a variety of horticultural services to our customers throughout the United States and Canada. Our Residential and Commercial services segment provides for the treatment, preservation, maintenance, cultivation, planting and removal of trees, shrubs and other plant life; its services also include the practices of landscaping, tree surgery, tree feeding and tree spraying, as well as the application of fertilizers, herbicides and insecticides. Our Utility services segment 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. We also provide other services related to natural resource management and consulting, urban and utility forestry research and development and environmental planning. We also maintain research, technical support and laboratory diagnostic facilities. Competition and Customers Our Residential and Commercial services group is one of the largest national tree care organizations, and competes with other national and local firms with respect to its services. On a national level, the competition is primarily in the context of landscape construction and maintenance as well as residential and commercial lawn care. At a local and regional level, its competition comes mainly from other companies which are engaged primarily in tree care. Our Utility services group is the second largest organization in the industry, and competes principally with one major national competitor, as well as several smaller regional firms. Principal methods of competition in both operating segments are advertising, customer service, image, performance and reputation. Our program to meet our competition stresses the necessity for our employees to have and project to customers a thorough knowledge of all horticultural services provided, and utilization of modern, well-maintained equipment. Pricing is not always a critical factor in a customer's decision with respect to Residential and Commercial services; however, pricing is generally the principal method of competition for our Utility services, although in most instances consideration is given to reputation and past production performance. We provide a wide range of horticultural services to private companies, public utilities, local, state and federal agencies, and a variety of industrial, commercial and residential customers. During 2001, we had sales of approximately $51.2 million to Pacific Gas & Electric Company (PG&E). On April 6, 2001, PG&E, one of our largest utility customers, filed a voluntary bankruptcy petition under Chapter 11 of the U.S. Bankruptcy Code. Subsequent to the bankruptcy petition date, we continued to provide services under the terms of our contracts with PG&E and we receive payment for those services as part of PG&E's administrative expenses. At December 31, 2001, we had net prepetition accounts receivable from PG&E of approximately $13,326,000 which are related to services provided by us to PG&E prior to the bankruptcy petition date. 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. PG&E has stated that it expects to complete the reorganization process by the end of 2002. We have monitored the situation closely and will continue to assess the collectibility of our receivables from PG&E. In our opinion, the prepetition receivables from PG&E are collectible. Regulation and Environment Our facilities and operations, in common with those of the industry generally, are subject to governmental regulations designed to protect the environment. This is particularly important with respect to our services regarding insect and disease control, because these services involve to a considerable degree the blending and application of spray materials, which require formal licensing in most areas. Constant changes in environmental conditions, environmental awareness, technology and social attitudes make it necessary for us to maintain a high degree of awareness of the impact such changes have on the market for our services. We believe that we are in substantial compliance with existing federal, state and local laws regulating the use of materials in our spraying operations as well as the other aspects of our business that are subject to any such regulation. Marketing We solicit business from residential customers principally through direct mail programs and to a lesser extent through the placement of advertisements in national magazines and trade journals, local newspapers and "yellow pages" telephone directories. Business from utility customers is obtained principally through negotiated contracts and competitive bidding. We carry out all of our sales and services through our employees. We do not generally use agents and do not franchise our name or business. Seasonality Our business is seasonal, primarily due to fluctuations in horticultural services provided to Residential and Commercial customers and to a lesser extent by budget constraints imposed on our utility customers. Because of this seasonality, we have historically incurred losses in the first quarter, while sales and earnings are generally highest in the second and third quarters of the calendar year. Consequently, this has created heavy demands for additional working capital at various times throughout the year. We borrow primarily against bank commitments in the form of a revolving credit agreement with two banks to provide the necessary funds for our operations. Other Factors Due to rapid changes in equipment technology, we must constantly update our equipment and processes to ensure that we provide competitive services to our customers. Also, we must continue to assure our compliance with the Occupational Safety and Health Act. We own several trademarks including "Davey", "Davey and design", "Arbor Green", "Davey Tree and design", "Davey Expert Co. and design" and "Davey and design (Canada)". Through substantial advertising and use, we believe that these trademarks have become of value in the identification and acceptance of our products and services. Employees We employ between 5,000 and 6,000 employees, depending upon the season, and consider our employee relations to be good. Foreign and Domestic Operations We sell our services to customers in the United States and Canada. We do not consider our foreign operations to be material and consider the risks attendant to our business with foreign customers, other than currency exchange risks, to be not materially different from those attendant to our business with domestic customers. Financial Information About Segments and Geographic Areas Certain financial information regarding our operations by segment and geographic area is contained in Note O to our consolidated financial statements, which are included in Part II, Item 8 of this Form 10-K. Item 2. Properties. Our corporate headquarters campus is located in Kent, Ohio which, along with several other properties in the surrounding area, includes the Davey Resource Group's research, technical support and laboratory diagnostic facilities. We conduct administrative functions through our headquarters and our offices in Livermore, California (Utility Services). Our Canadian operations have key properties in the provinces of Ontario and British Columbia. We believe our properties are well maintained, in good condition and suitable for our present operations. A summary of our properties follows: Number Number of Square of Segment Properties How Footage States Held or Provinc es Residential and 21 Owned 178,757 11 Commercial Residential, Commercial 2 Owned 12,400 2 and Utility Utility 5 Owned 40,587 5 Canada 2 Owned 6,300 2 We also rent for our use by the business segments, approximately 70 properties, in 31 states and three provinces. Under our revolving credit facility agreement, the banks have a blanket lien on all our personal property and liens on certain real property. None of our owned or rented properties, used by our business segments, is individually material to our operations. Item 3. Legal Proceedings. There are no legal proceedings, other than ordinary routine litigation incidental to our business, to which we or any of our subsidiaries is a party or of which any of our property is the subject. This routine litigation is not material to us. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the fourth quarter of 2001 to a vote of security holders, through the solicitation of proxies or otherwise. Item 4A. Executive Officers of the Registrant. Our executive officers and their present positions and ages are as follows: Name Position Age R. Douglas Cowan Chairman and Chief Executive 61 Officer Karl J. Warnke President and Chief Operating 50 Officer David E. Adante Executive Vice President, Chief 50 Financial Officer and Secretary Howard D. Bowles Senior Vice President and General 58 Manager, Davey Tree Surgery Company C. Kenneth Celmer Senior Vice President and General 55 Manager, Residential and Commercial Services Nicholas R. Sucic, CPA Corporate Controller 55 Bradley L. Comport, CPA Treasurer 51 Dr. Roger C. Funk Vice President and General 57 Manager, The Davey Institute Rosemary T. Nicholas Assistant Secretary 58 Marjorie L. Conner, Assistant Secretary 44 Esquire Gordon L. Ober Vice President - Personnel 52 Recruiting and Development Richard A. Ramsey Vice President and General 52 Manager, Canadian Operations Wayne M. Parker Vice President and General 46 Manager, Eastern Utility Services Mr. Cowan was initially elected Chairman and Chief Executive Officer on March 11, 1999. Previously he had served as Chairman, President and Chief Executive Officer since May 1997. Prior to that time, he served as President and Chief Executive Officer. Mr. Warnke was initially elected President and Chief Operating Officer on March 11, 1999. Prior to that time, he served as Executive Vice President and General Manager - Utility Services. Mr. Adante was elected Executive Vice President, Chief Financial Officer and Secretary in May 1993. Mr. Bowles was elected Senior Vice President and General Manager of Davey Tree Surgery Company in January 2000. Prior to that time, he served as Vice President and General Manager of Davey Tree Surgery Company. Mr. Celmer was elected Senior Vice President and General Manager - - Residential and Commercial Services in January 2000. Prior to that time, he served as Vice President and General Manager - Residential Services. Mr. Sucic was elected Corporate Controller in November 2001 when he joined the Company. He is a certified public accountant. Prior to joining us, Mr. Sucic served as chief financial officer of Vesper Corporation, a manufacturer of products for industry, from 2000 to 2001; of Advanced Lighting Technologies, Inc., a designer, manufacturer and marketer of metal halide lighting products, from 1996 to 2000; and of various asset management units at The Prudential Investment Corporation, from 1989 to 1996. Prior to joining Prudential, Mr. Sucic was a partner with Ernst & Young LLP, having been associated with that firm since 1970. Mr. Comport was elected Treasurer in May 2001. Prior to that time, he served as Corporate Controller. Dr. Funk was elected Vice President and General Manager - The Davey Institute in May 1996. Prior to that time, he served as Vice President - Human and Technical Resources. Ms. Nicholas was elected Assistant Secretary in May 1982. Ms. Conner was elected Assistant Secretary in May 1998. Prior to that time, she served as Manager of Legal and Treasury Services. Mr. Ober was elected Vice President - Personnel Recruiting and Development in February 2000. Prior to that time, he served as Vice President - New Ventures. Mr. Ramsey was elected Vice President and General Manager - Canadian Operations in January 2000. Prior to that time, he served as Vice President and General Manager - Commercial Services. Mr. Parker was elected Vice President and General Manager - Eastern Utility Services in January 2000. Prior to that time, he served as Vice President - Northern Operations, Utility Services. Our officers serve from the date of their election to the next organizational meeting of the Board of Directors and until their respective successors are elected. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Our common shares are not listed or traded on an established public trading market and market prices are, therefore, not available. Semiannually, for purposes of our 401KSOP, the fair market value of our common shares, based upon our performance and financial condition, is determined by an independent stock valuation firm. Our agreements with our lenders allow for the payment of cash dividends provided that the terms and conditions of the agreements, particularly those dealing with shareholders' equity, and the ratios of EBIT (earnings before interest and taxes on income) to interest expense and maximum consolidated funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization), are maintained. Those restrictions have not historically restricted our ability to pay dividends, and we do not expect that they will do so in the future. As of March 21, 2002, we had 7,831,032 common shares issued and outstanding and we had 2,212 record holders of our common shares. As of March 21, 2002, we had options outstanding to purchase 1,067,147 common shares. The following table sets forth, for the periods indicated, the dividends declared on our common shares (in cents): Year Ended December 31, Quarter 2001 2000 1 5.5 5.5 2 5.5 5.5 3 5.5 5.5 4 5.5 5.5 Total 22.0 22.0 We currently expect to pay comparable cash dividends in 2002. Item 6. Selected Financial Data. Fiscal Year Ended December 31, 200 200 199 199 199 1 0 9 8 7 (In thousands, except ratio and per share data) Operating Statement Data: Revenues $ 321, $ 322, $ 308, $ 313, $ 295, 284 236 144 887 079 Costs and expenses: Operating 212,783 226,441 210,628 210,921 197,726 Selling 50,564 49,978 45,403 39,601 37,832 General and 22,567 23,015 21,742 22,764 20,297 administrative Depreciation 19,054 20,722 20,019 19,563 17,000 Amortization of intangible assets 466 459 393 371 375 Income from operations 15,850 1,621 9,959 20,667 21,849 Interest expense (4,993) (6,217) (4,947) (3,391) (2,703) Gain on sale of assets 1,023 1,172 1,487 587 325 Other expense (744 (60 (349) (22 (220) ) ) ) Income (loss) before 11,136 (3,484) 6,150 17,841 19,251 income taxes Income taxes 4,405 (1,080) 2,435 7,244 7,972 Net income (loss) $ $ ( $ $ 10 $ 11 6,731 2,404) 3,715 ,597 ,279 Net income (loss) per $ $ $ $ $ share--diluted 0.82 (.30 .42 1.15 1.19 ) Shares used for computing per share amounts--diluted 8,231 7,929 8,872 9,228 9,452 (a) Other Financial Data: Depreciation and $ 1 $ 2 $ 2 $ 1 $ 1 amortization 9,520 1,181 0,412 9,934 7,375 EBITDA (b) 35,649 23,914 31,509 41,166 39,329 Capital expenditures 11,692 17,476 20,580 34,009 27,003 Cash flow provided by (used in): Operating 29,813 31,267 (3,835) 28,193 26,934 activities Investing (10,356 (14,209 (18,707 (32,841 (26,314 activities ) ) ) ) ) Financing (19,108 (17,058 21,335 5,190 (525) activities ) ) Dividends per share $ $ $ $ $ (a) 0.22 0.22 0.20 0.19 0.17 As of December 31, 200 200 199 199 199 1 0 9 8 7 (In thousands, except ratio and per share data) Balance Sheet Data: Working capital $ 16 $ 35 $ 46 $ 27 $ 19 ,255 ,386 ,714 ,562 ,194 Current ratio 1.39 2.09 2.62 1.81 1.58 Property and 70,111 78,076 84,008 79,433 66,274 equipment, net Total assets 155,473 159,382 176,682 149,086 127,825 Long-term debt 41,887 57,414 65,904 42,893 24,104 Other long-term 21,904 22,078 19,826 15,059 12,992 liabilities Shareholders' 5 47 5 57 57 equity 0,250 ,392 6,420 ,268 ,887 Common shares (a): Issued 10,728 10,728 10,728 10,728 10,728 In treasury 3,000 2,932 2,601 2,755 2,130 Net outstanding 7,728 7,796 8,127 7,973 8,598 Stock options (a): Outstanding 1,205 1,342 1,395 1,828 1,956 Exercisable 1,205 1,236 1,183 1,510 1,532 ESOT valuation $ $ 1 $ 1 $ 1 $ 1 per share 12.00 1.00 3.00 6.00 3.03 ( On May 19, 1999, the Company's Board of Directors declared a 2- a 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. ( EBITDA is provided because it is a measure commonly used to b 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) The following discussion and analysis should be read in conjunction with our consolidated financial statements for the three-year period ended December 31, 2001, and the notes thereto, included elsewhere in this annual report. GENERAL We provide a wide range of horticultural services to residential, commerical, 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 receivables, 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 16% of revenues during 2001, 2000 and 1999. 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. 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, 2001 2000 1999 Revenues 100.0% 100.0 100.0% % Costs and expenses: Operating 66.2 70.3 68.4 Selling 15.7 15.5 14.7 General and 7.1 7.1 7.1 administrative Depreciation 6.0 6.5 6.5 Amortization of 0 0. 0 intangible assets .1 1 .1 95. 99.5 96. 1 8 Income from operations 4.9 0.5 3.2 Other income (expense): Interest expense (1.5) (1.9) (1.6) Gain on sale of assets 0.3 0.3 0.5 Other (0. (0.0 (0 2) ) .1) Income (loss) before income 3.5 (1.1) 2.0 taxes Income taxes (benefit) 1 (0.3 0. .4 ) 8 Net income (loss) 2 (0.8 1. .1% )% 2% 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 continues to be 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%. Revenue growth is expected in 2002. 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 total lower labor costs and reduced repair and equipment costs associated with the reduction in revenues. The decrease in Utility Services is 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, advertising and branch offices 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, is directly attributable to the consolidation of the Utility Services accounting-related functions from our Livermore, California, facility to our corporate headquarters in Kent, Ohio. Depreciation Expense--Depreciation expense of $19,054 decreased $1,668 from the prior year and as a percentage of revenues declined to 6.0% from 6.5%. The reduction is 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. Amortization Expense--Amortization expense of $466 remained stable as a percentage of revenues at .1%. 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 and local 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. Fiscal 2000 Compared to Fiscal 1999 Revenues--Revenues of $322,236 increased $14,092, or 4.6%, compared to 1999. Residential and Commercial Services revenues improved $14,871, or 12.3%, over 1999, and were partially offset by the $7,734, or 4.6%, decline in Utility Services revenues. Our 2000 Residential and Commercial Services revenues benefited from focused sales efforts, a continuation of relatively good economic conditions and gains derived from some small selective acquisitions we have made over the last several years. Further, we also benefited from several new commercial contracts obtained during 2000. The decline in Utility Services revenues stemmed primarily from lower negotiated pricing on contracts, but to a lesser extent was also due to declines in productivity as well as shutdowns on certain contracts. Operating Expenses--Our operating expenses of $226,441 increased $15,813, or 1.9%, as a percentage of revenues. These expenses have remained higher throughout 2000 due to higher relative labor costs associated with productivity declines as well as those required to complete certain contracts without the concomitant level of revenues, a higher level of start-up and shutdown costs, increased fuel and repair costs, and higher casualty insurance costs. Selling Expenses--Selling expenses of $49,978 were $4,575 higher than last year, and at 15.5% were .8% higher as a percentage of revenues. The increase is attributable to higher branch office costs, field management wages and district incentives, and related payroll costs in Residential and Commercial Services, as well as higher group health insurance and workers compensation expense. General and Administrative Expenses--Our general and administrative expenses of $23,015 increased $1,273, but as a percentage of revenues they remained at 7.1%. Most of the increase is due to an increase in salaries and related payroll taxes. Efforts during the latter half of 2000 held professional services costs related to a new computer system for the entire year to below the expense incurred in 1999. Depreciation Expense--Depreciation expense of $20,722 increased $703 as compared with 1999 and remained stable as a percentage of revenues. Amortization Expense--Amortization expense of $459 remained stable as a percentage of revenues at .1%. Interest Expense--Interest expense of $6,217 was $1,270 higher than in 1999, and as a percentage of revenues it increased .3% to 1.9%. This was due to our increased level of borrowings in 2000, as well as a higher level of interest rates over 1999 generally, and increased LIBOR spreads associated with amendments to our revolving credit facility. Gain on Sale of Assets--The $315 decrease in 2000 compared to 1999 relates to the 1999 gain realized on the sale of our Troy, Michigan facility. Income Taxes--Our income tax benefit for 2000 was $1,080. The effective rate for the 2000 income tax benefit was 31.0%, reflecting a 5.0% loss of tax benefit related to meals disallowance. Net Loss--Our net loss of $2,404 fell below 1999's net income by $6,119, and as a percentage of revenues it declined 2.0%. LIQUIDITY AND CAPITAL RESOURCES Our principal financial requirements are for capital spending, working capital and business acquisitions. Cash increased $349 during the year ended December 31, 2001. Uses of cash consisted of $10,356 used in investing activities and $19,108 used in financing activities. Net cash provided by operating activities of $29,813 offset these uses of cash. Net Cash Provided by Operating Activities Operating activities in 2001 provided cash of $29,813, which was $1,454 lower than the $31,267 provided in 2000. The $1,454 net decline was due to an increase in accounts receivable, lower depreciation expense and deferred income taxes offset by increases in net income, accounts payable and accrued expenses, self-insurance accruals and other assets. Net income of $6,731 increased $9,135 when compared to the $2,404 loss in 2000. Utility Services operating income improved dramatically despite lower revenues, the result of improved pricing negotiated in the latter half of 2000, as well as better productivity on certain contracts and lower equipment costs. Residential and Commercial Services operating income also improved, a reflection of continued pricing strength and increased revenues. Overall, accounts receivable increased $4,475 as compared to the decrease of $15,129 experienced in 2000. The "day-sales- outstanding" in accounts receivable increased as compared to 2000, a trend among all operating segments (This included, at December 31, 2001, noncurrent accounts receivable of $13,326 discussed in the following paragraph). We continue to strive to collect accounts receivable dollars and reduce days-sales- outstanding. On April 6, 2001, one of our 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, we continued to provide services under the terms of our contracts with PG&E. We continue to perform services for PG&E and receive payment for post-petition date services performed, as part of PG&E's administrative expenses. At December 31, 2001, we had net prepetition accounts receivable from PG&E of approximately $13,326 which are related to services provided by us to PG&E prior to the bankruptcy petition date. 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. PG&E has stated that it expects to complete the reorganization process by the end of 2002. We have monitored the situation closely and will continue to assess the collectibility of our receivables from PG&E. As we anticipate receiving payment after 2002, the $13,326 of prepetition accounts receivable has been classified in our consolidated balance sheet as noncurrent other assets. Accounts payable and accrued expenses increased $5,985, a $6,009 change when compared to the decrease of $24 in 2000. The increase is driven by continued working capital management. Income tax liabilities also increased due to higher levels of pretax income. Self-insurance accruals increased $2,798 or $1,872 more than the increase experienced in 2000. The increase occurred in all classifications--workers compensation, vehicle liability and general liability--and is the result of adverse claims experience. Other assets decreased $813, a change of $3,774 over the $2,961 increase in 2000. The change results from using the 2000 refundable income taxes to offset a portion of 2001 income taxes payable and the recognition of lower net pension income in 2001 as compared to 2000. Net pension income for 2002 is estimated to be one-third of that recognized in 2001. Net Cash Used in Investing Activities Investing activities used $10,356 in cash, or $3,853 less than that used in 2000, a result of lower capital expenditures. We have made and will continue to make capital expenditures for equipment and business acquisitions. We anticipate the level of capital equipment spending will increase in 2002 as compared to 2001. Net Cash Used in Financing Activities Financing activities used $19,108 in 2001, an increase of $2,050 over the $17,058 used in 2000. The net borrowings outstanding, as at December 31, 2001, of the revolving credit facility decreased by $15,100. This 2001 decrease was $4,900 greater than 2000 and consistent with our planned efforts to reduce debt levels. Common share purchases for treasury during 2001 totaled $5,541, offset by cash inflows from the sale of common shares of $3,833. Dividends during 2001 were $1,701. Other financing activities consisted of $887 of payments on other debt and capital lease obligations and $288 of notes payable borrowings. Revolving Credit Facility--We have a revolving credit facility that permits borrowings, as defined, up to $90,000 with a letter of credit sublimit of $25,000, through April 2003. Interest rates on borrowings outstanding are based, at our option, at the agent bank's prime rate, or LIBOR, plus a margin adjustment. A commitment fee is also required of between .25% and .35% of the average daily-unborrowed commitment. The agreement was amended in March 2001 because of constraints in the financial covenants, the LIBOR margin adjustment was changed to 2.4% and the financial covenants were modified. Under the most restrictive covenants of the amended agreement, we are obligated to maintain minimum shareholders' equity, as defined. The agreement also has restrictive financial covenants requiring a maximum ratio of funded debt, as defined, to EBITDA (earnings before interest, taxes, depreciation and amortization) and a minimum ratio of EBIT (earnings before interest and taxes) to interest expense. The revolving credit facility agreement requires, all as defined: (a) a maximum ratio of funded debt to EBITDA of 2.75 to 1.00; (b) a minimum ratio of EBIT to interest expense of 3.00 to 1.00; and, (c) a minimum net worth of $47,500 increased as at the last day of each fiscal year after December 31, 2001 by 30% of consolidated earnings. Contractual Obligations Summary The following is a summary of our long-term contractual obligations, as at December 31, 2001, to make future payments for the periods indicated. Contractual Obligations Due-- Year Ending December 31, Description Tot 20 20 20 20 20 Therea al 02 03 04 05 06 fter Revolving credit $ 41 $ $ 41 $ $ $ $ facility ,300 ,300 - - - - - Subordinated notes 777 388 389 - - - - Term loans 237 39 43 38 36 40 41 Capital lease 4,133 533 569 607 785 605 1,034 obligations Operating lease 5,307 1,711 1,107 845 607 381 656 obligations Self-insurance 2 3 1 1 accruals 1,825 8,14 5,15 ,085 ,842 ,093 2,51 0 4 1 $ 73 $ 10 $ 48 $ 4 $ 3 $ 2 $ 4, ,579 ,811 ,562 ,575 ,270 ,119 242 The self-insurance accruals in the summary above reflect the total of the undiscounted amount accrued as at December 31, 2001 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, 2001, we were contingently liable to our principal banks in the amount of $18,399 for letters of credit outstanding 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 2002 through 2005. 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 facility and several other short-term lines of credit that approximated $17,282 as at December 31, 2001 (of which $15,000 expires in May 2002). We are continuously reviewing our existing sources of financing and evaluating alternatives. At December 31, 2001, we had working capital of $16,255 and approximately $30,361 of availability under our revolving credit facility. 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 July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 141, "Business Combinations," and FAS 142, "Goodwill and Intangible Assets." FAS 141 is effective for all business combinations completed after June 30, 2001, and requires using the purchase method of accounting. FAS 142 is effective for fiscal years beginning after December 15, 2001. Goodwill, as well as intangible assets with indefinite lives, will no longer be subject to amortization. Also, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator. In August 2001, the FASB issued FAS 143, "Accounting for Asset Retirement Obligations," which is effective for fiscal years beginning January 1, 2003, and addresses financial accounting and reporting for obligations associated with the retirement of tangible, long-lived assets and the associated asset retirement costs. In August 2001, the FASB issued FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for fiscal years beginning January 1, 2002. FAS 144 supercedes and clarifies the accounting in FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. We do not expect these new pronouncements to have a material impact on our consolidated financial position or results of operations. 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 swap 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, 2001, about our debt obligations and interest rate swap. For debt obligations, the table presents principal cash flows, weighted- average interest rates by expected maturity dates and fair values. For the interest rate swap, the table presents the underlying face (notional) amount, weighted-average interest rate by contractual maturity dates and the fair value to settle the swap at December 31, 2001. 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, 2001. Fair Value December Decemb 31, er 31, 2 2 20 2 Ther T 2002 003 004 05 006 eaft otal 2001 er Liabilities Long-term Fixed rate $ $ $ $ $ $ $ $ 36 4 236 39 43 38 0 41 237 Average 10.8 10.8 10.4 10.0% 10.0 10.0 interest rate % % % % % Variable $ $ 41 - - - - $ 42 $ 42,0 rate 38 ,689 ,077 77 8 Average 5.4% 7.7% interest rate Interest rate derivative financial instruments Interest rate swap: Pay fixed, - $ 1 - - - - $ 1 $ notional amount 0,00 0,00 589 0 0 Average pay 6.53 6.53 rate % % Average 3.56 5.92 receive rate % % Liabilities at December 31, 2001, included $237 of fixed-rate debt and $42,077 of variable-rate debt. Interest rates, as of December 31, 2001, on the fixed-rate debt ranged from 10.0% to 12.7% and interest rates on the variable-rate debt ranged from 4.4% to 8.1%. The interest rate swap has an underlying face (notional) amount of $10,000, 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, 2001 (fair value), we would pay $589. 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. 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, 2001, 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 the results of operations and, as at December 31, 2001, the change would not have a material effect on 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 under the subcaption "Market Risk Disclosures" contained in 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 report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. On October 19, 2001, we filed a Current Report on Form 8-K, reporting under Item 4 the engagement of the Company's new independent auditors, Ernst & Young LLP, and also reporting the dismissal of Deloitte & Touche LLP. On October 31, 2001, we filed an amended Current Report on Form 8-K/A, which contained the response of Deloitte & Touche LLP. 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 on Form 10-K. Information about our directors is in the section "Election of Directors" of the 2002 Proxy Statement, all of 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 "Remuneration of Executive Officers" of the 2002 Proxy Statement, all of which is incorporated into this report by reference. 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 2002 Proxy Statement, all of 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 2002 Proxy Statement, all of which is incorporated into this report by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) (1) and (a) (2) Financial Statements and Schedules. The response to this portion of Item 14 is set forth on page F-1 of this report on Form 10-K. (a) (3) Exhibits. The response to this portion of Item 14 is set forth on the accompanying index of exhibits immediately following the financial statements. (b) Reports on Form 8-K. During the quarter ended December 31, 2001, we filed one Current Report on Form 8-K, as amended. On October 19, 2001, the Company filed a Current Report on Form-8- K dated October 19, 2001, reporting under Item 4 the engagement of the Company's new independent auditors, Ernst & Young LLP, and also reporting the dismissal of Deloitte & Touche LLP. On October 31, 2001, we filed an amended Current Report on Form 8- K/A dated October 31, 2001, which contained the response of Deloitte & Touche LLP. 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 29, 2002. 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 29, 2002. /s/ R. Douglas /s/ Karl J. Cowan Warnke R. Douglas Cowan, Director, Karl J. Warnke, Director, Chairman and Chief Executive President and Chief Operating Officer Officer (Principal Executive Officer) /s/ R. Cary /s/ David E. Blair Adante R. Cary Blair, 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 /s/ James H. Miller James H. Miller, Director INDEX OF EXHIBITS Exhibit Description No. (3)(i) 1991 Amended Articles of Incorporation (3)(ii) 1987 Amended and Restated Regulations of The Davey Tree Expert Company (10)(a) 1987 Incentive Stock Option Plan (Incorporated by reference to Exhibit (10)(a) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). (10)(b) 1994 Omnibus Stock Plan (Incorporated by reference to Exhibit (10)(b) to the Registrant's Annual Report on Form 10-Q for the quarter ended July 3, 1999). (16) Letter re: change in certifying accountant (Incorporated by reference to Exhibit 16 to the Registrant's Current Report on Form 8- K/A dated October 31, 2001). (21) Subsidiaries of the Registrant (23.1) Consent of Ernst & Young LLP, Independent Auditors (23.2) Consent of Deloitte & Touche LLP, Independent Auditors The documents listed as Exhibits 10(a) and 10(b) 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. ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14 (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, 2001 THE DAVEY TREE EXPERT COMPANY KENT, OHIO LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FORM 10-KITEM 14(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 F-2 Auditors Report of Deloitte & Touche LLP, Independent F-3 Auditors Consolidated Balance SheetsDecember 31, 2001 and F-4 2000 Consolidated Statements of OperationsYears ended F-5 December 31, 2001, 2000 and 1999 Statements of Consolidated Shareholders' EquityYears ended December 31, 2001, F-6 2000 and 1999 Consolidated Statements of Cash FlowsYears ended F-7 December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements F-8 December 31, 2001 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. 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 sheet of The Davey Tree Expert Company as of December 31, 2001 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides 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, 2001 and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Akron, Ohio February 22, 2002 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 balance sheets of The Davey Tree Expert Company and its subsidiaries as of December 31, 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period 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 audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Davey Tree Expert Company and its subsidiaries as of December 31, 2000, and the results of their operations and their cash flows for each of the two years in the period 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 THE DAVEY TREE EXPERT COMPANY CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) Dece mber 31, 2 2 001 000 Assets Current assets: Cash and cash equivalents $ $ 4 06 57 Accounts receivable, net 47,672 56,523 Operating supplies 2,724 2,574 Prepaid expenses 3,478 3,814 Other current assets 3,40 4,91 7 6 Total current assets 57,687 67,884 Property and equipment: Land and land improvements 6,436 6,429 Buildings and leasehold improvements 18,594 18,714 Equipment 2 200,488 02,975 225,518 228,118 Less accumulated depreciation 1 155,407 50,042 70,111 78,076 Other assets 25,147 10,468 Identified intangible assets and goodwill, net 2,52 2,95 8 4 $ 1 $ 1 55,473 59,382 Liabilities and shareholders' equity Current liabilities: Short-term debt $ $ 1,541 1,255 Accounts payable 16,919 12,914 Accrued expenses 14,249 12,269 Self-insurance accruals 8,190 5,559 Current portion of capital lease obligations 5 5 33 01 Total current liabilities 41,432 32,498 Long-term debt 41,887 57,414 Capital lease obligations 3,600 4,090 Self-insurance accruals 11,444 11,277 Deferred income taxes 6,350 5,920 Other liabilities 5 79 10 1 105,223 111,990 Common shareholders' equity: Common shares, $1.00 par value, per share; 12,000 shares authorized; 10,728 shares issued and 10,728 10,728 outstanding as of December 31, 2001 and 2000 Additional paid-in-capital 5,163 4,308 Retained earnings 77,358 72,328 Accumulated other comprehensive income (loss) (1,209 (745 ) ) 92,040 86,619 Less cost of Common shares held in treasury: 3,000 in 2001 and 2,932 in 2000 41,790 39,227 50,250 47,392 $ 1 $ 15 55,473 9,382 See notes to consolidated financial statements. THE DAVEY TREE EXPERT COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year Ended December 31, 200 200 199 1 0 9 Revenues $ 321,2 $ 322,2 $ 308,1 84 36 44 Costs and expenses: Operating 212,783 226,441 210,628 Selling 50,564 49,978 45,403 General and administrative 22,567 23,015 21,742 Depreciation 19,054 20, 20, 722 019 Amortization of intangible assets and goodwill 466 459 393 305, 320,6 298,1 434 15 85 Income from operations 15,850 1,621 9,959 Other income (expense): Interest expense (4,993) (6,217) (4,947) Gain on sale of assets 1,023 1,172 1,487 Other (744) (60) (349) Income (loss) before income taxes 11,136 (3,484) 6,150 Income taxes (benefit) (1 4,405 ,080) 2,435 Net income (loss) $ $ (2, $ 6,731 404) 3,715 Net income (loss) per share: Basic $ $ $ .87 (.30) .47 Diluted $ $ $ .82 (.30) .42 See notes to consolidated financial statements. THE DAVEY TREE EXPERT COMPANY STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (In thousands, except per share amounts) Accumul Addit ated Common Common ional Retai Other Shares Shares Paid- ned in In Compreh Treasury ensive Sh Amo Ca Earn Income Shar Amo To ares unt pital ings (Loss) es unt tal Balance, January 8,72 $ $ $ 9 $ 4,737 $ ( $ 5 1, 1999 8 8,7 5,89 4,547 (745) 51,15 7,268 28 3 5) Comprehensi ve income: Net 3,715 3,715 income Other comprehensive income F oreign currency 202 20 translation 2 adjustments Comprehensi 3,917 ve income Stock dividend and 2,00 2,00 (3,98 (19,7 (1,98 21,74 share 0 0 2) 59) 2) 1 retirement Shares 422 (6,76 (6,76 purchased 3) 3) Shares sold 1,033 (146) 847 1,880 to employees Options 192 (430) 1,974 2,166 exercised Dividends, $.20 per share (2,04 (2,04 8) 8) Balance, 10,7 10,7 3,136 76,45 (543) 2,601 (33,3 56,42 December 31, 28 28 5 56) 0 1999 Comprehensi ve income: Net (2,40 (2,40 loss 4) 4) Other comprehensive income F oreign currency (202) (20 translation 2) adjustments Comprehensi ( ve loss 2,606 ) Shares 640 (8,20 (8,20 purchased 5) 5) Shares sold 1,162 (251) 1,960 3,122 to employees Options 10 (58) 374 384 exercised Dividends, $.22 per share (1,72 (1,72 3) 3) Balance, 10,7 10,7 4,308 72,32 (745) 2,932 (39,2 47,39 December 31, 28 28 8 27) 2 2000 Comprehensi ve income: Net 6,731 6,731 income Other comprehensive income F oreign currency (99) (99) translation adjustments D erivative instrument: C umulative effect (105) (105) of accounting change U nrealized loss (260) on (2 60) interest rate swap Comprehensi 6,267 ve income Shares 492 (5,54 (5,54 purchased 1) 1) Shares sold 918 (284) 2,021 2,939 to employees Options (63) (140) 957 894 exercised Dividends, $.22 per share (1,70 (1,7 1) 01) Balance, $ $ $ 7 $ $ ( $ December 31, 10,7 10,7 5,16 7,358 (1,209) 3 41,79 50,25 2001 28 28 3 ,000 0) 0 See notes to consolidated financial statements. THE DAVEY TREE EXPERT COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2 1 2001 000 999 Operating activities Net income (loss) $ $ ( $ 6,731 2,404) 3,715 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 19,054 20,722 20,019 Amortization 466 459 393 Gain on sale of property (1,023) (1,172) (1,487) Deferred income taxes (342) 568 971 Other ( (2 194) 24 90) 24,692 18,197 23,321 Changes in operating assets and liabilities: Accounts receivable (4,475) 15,129 (20,091) Accounts payable 5,985 (24) (2,077) and accrued expenses Self-insurance 2,798 926 (856) accruals Other assets, net (2,96 (4,13 813 1) 2) 5, 13,07 (27,156 121 0 ) Net cash 29,813 provided by (used in) operating 31,267 ( activities 3,835) Investing activities Capital expenditures: Equipment (11,593) (17,099) (18,006) Land and buildings (99) (377) (2,574) Proceeds from sales of property and 1,419 3,719 2,730 equipment Purchases of businesses (4 (85 (83) 52) 7) Net cash used in investing activities (10,356 (14,209 (18,707) ) ) Increase (decrease) in cash 19,457 17,058 (22,542) before financing activities Financing activities Revolving credit facility (15,100) (10,200) 25,700 (payments) proceeds, net Borrowings of notes payable 288 326 500 Payments of long-term debt and (887) (762) (547) capital leases Purchase of Common shares for (5,541) (8,205) (6,763) treasury Sale of Common shares from 3,833 3,506 4,046 treasury Dividends (1,70 (1,723 (1,60 1) ) 1) Net cash (used in) provided by financing activities (19,108 (17,058) 21,33 ) 5 Increase (decrease) in cash and cash 349 - (1,207) equivalents Cash and cash equivalents, beginning of year 1,26 57 57 4 $ $ $ Cash and cash equivalents, end of year 406 57 57 See notes to consolidated financial statements. The Davey Tree Expert Company Notes to Consolidated Financial Statements December 31, 2001 (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. Significant 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 29, 2001, December 30, 2000 and January 1, 2000. For purposes of the consolidated financial statements, the year-end is referred to as December 31 for all periods 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. The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (In thousands, except share data) B. Significant 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 an interest rate swap 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 16% of revenues during 2001, 2000 and 1999. 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--Amortization is computed for identified intangible assets and goodwill by the straight-line method, based on estimated useful lives, as follows: Customer lists 3 to 10 years Employment contracts Life of contract; ranging from 3 to 10 years Goodwill 10 to 15 years Long-Lived Assets--The Company assesses potential impairment to its long-lived assets 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. The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (In thousands, except share data) B. Significant Accounting Policies (continued) Stock Compensation Arrangements--The Company accounts for stock compensation arrangements using the intrinsic value based method in APB Opinion No. 25 "Accounting for Stock Issued to Employees." 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. 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, an appropriate 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. 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. 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. The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (In thousands, except share data) B. Significant Accounting Policies (continued) 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 swap. Fair Values--The carrying amount of cash and cash equivalents, receivables, accounts payable and debt approximates fair value as of December 31, 2001 and 2000. Financial Statement Presentation Changes--Certain amounts for prior years have been reclassified to conform to the current year presentation. New Accounting Standard 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 exchange agreements (swaps), 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, was not significant. Recently Issued Accounting Pronouncements--In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 141, "Business Combinations," and FAS 142, "Goodwill and Intangible Assets." FAS 141 is effective for all business combinations completed after June 30, 2001 and requires using the purchase method of accounting. FAS 142 is effective for fiscal years beginning after December 15, 2001. Goodwill, as well as intangible assets with indefinite lives, will no longer be subject to amortization. Also, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator. In August 2001, the FASB issued FAS 143, "Accounting for Asset Retirement Obligations," which is effective for the Company's year beginning January 1, 2003, and addresses financial accounting and reporting for obligations associated with the retirement of tangible, long-lived assets and the associated asset retirement costs. In August 2001, the FASB issued FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for the Company's year beginning January 1, 2002. FAS 144 supercedes and clarifies the accounting in FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. The Company does not expect these new pronouncements to have a material impact on the Company's consolidated financial position or results of operations. The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (In thousands, except share data) C. Accounts Receivable, Net Accounts receivable, net, consisted of the following: December 31, 2001 2000 Accounts receivable $ 59 $ 48 ,102 ,395 Receivables under contractual 1 arrangements 3,174 0,248 62,276 58,643 Less prepetition accounts receivable from PG&E classified as noncurrent other assets 1 3,326 - 48,950 58,643 Less allowances for doubtful accounts 1,278 2,120 $ 47 $ 56 ,672 ,523 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. At December 31, 2001, the Company had net prepetition accounts receivable from PG&E that approximated $13,326 and related to services provided by the Company to PG&E prior to the bankruptcy petition date. 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. PG&E has stated that it expects to complete the reorganization process by the end of 2002. 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. As the Company anticipates receiving payment after 2002, the $13,326 of prepetition accounts receivable has been classified as noncurrent other assets. The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (In thousands, except share data) D. Supplemental Balance Sheet and Cash Flow Information Other current assets consisted of: D ecember 31, 2001 2000 Refundable $ - $ income taxes 2,281 Deferred income 3,407 taxes 2,635 Total $ 3,407 $ 4,916 Other assets consisted of: De cember 31, 2001 2000 Prepaid pension costs $ 10, $ 922 9,352 Prepetition accounts 13,326 - receivable from PG&E Deposits 899 1,116 Total $ 25, $ 10 147 ,468 Identified intangible assets and goodwill, net, consisted of: December 31, 200 200 1 0 Customer lists $ 2 $ 2 ,950 ,906 Noncompete agreements 563 562 Goodwill 2,651 2,656 6,164 6,124 Less accumulated amortization 3,636 3,170 Total $ 2 $ 2 ,528 ,954 Accrued expenses consisted of the following: December 31, 200 200 1 0 Employee compensation $ 5 $ 5 ,845 ,652 Accrued vacation 2,491 2,713 Self-insured medical claims 919 984 Commercial insurance payable 1,475 694 Income taxes payable 1,416 - Taxes, other than income 601 501 Other 1 1,502 ,725 Total $ 14, $ 12, 249 269 The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (In thousands, except share data) D. Supplemental Balance Sheet and Cash Flow Information (continued) Year Ended December 31, 200 200 199 1 0 9 Proceeds from revolving $ 48 $ 115, $ 68, credit facility ,300 245 826 Payments of revolving credit (63,40 (125,4 (43,12 facility 0) 45) 6) Interest paid 5,330 5,957 4,912 Income taxes paid (refunds 2,465 (1,742 2,591 received), net ) Noncash transactions: Equipment acquired through capital leases - - 4,947 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: Decembe r 31, 20 200 01 0 Change in benefit obligation Projected benefit $ $ obligation at beginning of 13,411 12,778 year Service cost 786 607 Interest cost 973 924 Amendments 574 - Actuarial loss 933 321 Benefit payments (1,258) (1,219 ) Projected benefit $ $ obligation at end of year 15,419 13,411 Decembe r 31, 20 200 01 0 Change in plan assets Fair value of plan $ $ assets at beginning of year 33,840 38,569 Actual return on plan (3,169) (3,510) assets Benefit payments (1,258) (1,219) Fair value of plan $ $ assets at end of year 29,413 33,840 The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (In thousands, except share data) E. Pension Plans (continued) Decembe r 31, 20 200 01 0 Funded status Fair value of plan $ $ assets at end of year 29,413 33,840 Projected benefit obligation at end of year 15,419 13,411 Plan assets in excess 13,994 20,429 of benefit obligation Unrecognized net (2,404) (9,729) actuarial gain Unrecognized prior 46 (562) service cost Unrecognized transition asset (71 (786 4) ) Prepaid pension costs recognized $ $ in balance sheet 10,922 9,352 The assumptions used in developing the benefit obligations were as follows: Decembe r 31, 20 200 01 0 Weighted-average assumptions Discount rate used to determine projected 7.25% 7.50% benefit obligation Expected return on 8.00 8.25 plan assets Rate of increase in 5.0 5.0 compensation Net periodic benefit income associated with the defined benefit pension plans included the following components: Year Ended December 31, 2001 2000 1999 Components of pension expense (income) Service costs--increase $ $ $ in benefit obligation earned 786 607 699 Interest cost on 973 924 887 projected benefit obligation Expected return on plan (2,732) (3,129) (2,644) assets Recognized net actuarial (491) (1,096) (759) gains Amortization of prior (34) (34) (34) service cost Amortization of (72) (72) (72) transition asset Settlement gain (191) - - Net pension income of $ ( $ ( $ ( defined benefit pension plans 1,570) 2,800) 2,114) In addition to the Company sponsored defined benefit plans, the Company contributes to several multiemployer plans. Total pension expense for multiemployer plans was $289 in 2001, $183 in 2000, and $194 in 1999. The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (In thousands, except share data) F. Short-Term and Long-Term Debt Short-term debt consisted of the following: Decembe r 31, 200 200 1 0 Notes payable, bank $ $ 1,114 826 Current portion of long-term debt 427 429 $ $ 1,541 1,255 The note payable is due on demand and bears interest at the bank's prime interest rate (4.25% at December 31, 2001 and 9.29% at December 31, 2000). At December 31, 2001 the Company also had unused short-term lines of credit with several banks totaling $17,282, generally at the banks' prime rate (of which $15,000 expires in May 2002). Long-term debt consisted of the following: Decembe r 31, 200 200 1 0 Revolving credit facility Prime rate borrowings $ $ 1,300 6,400 LIBOR borrowings 40,000 50,000 41,300 56,400 Subordinated notes, share 777 1,166 redemption Term loans 23 27 7 7 42,314 57,843 Less current portion 42 42 7 9 $ $ 41,887 57,414 Revolving Credit Facility--The Company has a revolving credit facility with a group of banks that permits borrowings, as defined, up to $90,000, with a letter of credit sublimit of $25,000, through April 2003. Interest rates on borrowings outstanding are based, at the Company's option, at the agent bank's prime rate or LIBOR plus a margin adjustment of 2.4%. A commitment fee is also required of between .25% and .35% of the average daily-unborrowed commitment. Under the revolving credit facility agreement, the banks have a blanket lien on all personal property and liens on certain real property of the Company. The agreement was amended in March 2001 because of constraints in the financial covenants, the LIBOR margin adjustment was changed to 2.4% and the financial covenants were modified. Under the most restrictive covenants of the amended agreement, the Company is obligated to maintain minimum shareholders' equity, as defined. The agreement also has restrictive financial covenants requiring a maximum ratio of funded debt, as defined, to EBITDA (earnings before interest, taxes, depreciation and amortization) and a minimum ratio of EBIT (earnings before interest and taxes) to interest expense. The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (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 (4.99% in 2001 and 6.36% in 2000). Term Loans--The weighted-average interest on the term loans approximated 10.37% (10.42% at December 31, 2000). Interest rate swap--(Interest rate "swaps" are the exchange of interest rate payments based on fixed versus floating interest rates which reduce the risk on interest-rate changes on future interest expense_ "hedging")--The Company has an interest rate swap with an underlying face (notional) amount of $10,000 that matures on March 31, 2003 and requires interest to be paid at 6.53%. The fair value of the swap is the amount quoted by the financial institution that the Company would pay to terminate the swap, a liability of $589 at December 31, 2001. In adopting FAS 133 during 2001, the Company determined that the interest rate swap meets the criteria for cash flow hedge accounting. The 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. During the year ended December 31, 2001, the Company recognized $365, net of tax, in other comprehensive income related to change in the fair value of the interest rate swap. Prior to 2001, the Company accounted for the interest rate swap using the settlement method or the "matched swap" method in which the quarterly net cash settlements of the agreements were recognized in interest expense. Interest expense was decreased by $8 in 2000 and increased by $82 in 1999. Aggregate Maturities of Long-Term Debt--Aggregate maturities of long-debt for the five years subsequent to December 31, 2001 were as follows: 2002--$427; 2003--$41,732; 2004--$38; 2005--$36 and 2006--$40. G. Self-Insurance Accruals Components of the Company's self-insurance accruals for workers' compensation, vehicle liability and general liability follow: Decemb er 31, 20 20 01 00 Workers' compensation $ $ 12,761 11,248 Present value discount 2,19 1,5 1 97 10,570 9,651 Vehicle liability 4,325 3,225 General liability 4,73 3,96 9 0 Total 19,634 16,836 Less current portion 8,19 5,55 0 9 Noncurrent portion $ $ 11,444 11,277 The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (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. Decemb er 31, 20 20 01 00 Balance, beginning of year $ $ 16,836 15,910 Provision for claims 20,212 17,556 Increase (decrease) cost from change in 91 308 discount rate Payment of claims 17,50 16,93 5 8 Balance, end of year $ $ 19,634 16,836 Workers compensation discount rate 4.75% 5.00% H. Lease Obligations Assets acquired under capital leases and included in property and equipment consisted of the following: Decemb er 31, 20 20 01 00 Equipment $ $ 4,94 4,94 7 7 Less accumulated amortization 1,50 8 7 35 $ $ 3,44 4,11 0 2 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, 2001 were as follows: Lease Obligations Cap Operat ital ing Minimum lease obligations Year ending December 31, $ $ 2002 790 1,711 2003 790 1,107 2004 790 845 2005 919 607 2006 696 381 2007 and after 1,056 65 6 Total minimum lease payments 5,041 $ 5,307 Amounts representing interest 90 8 Present value of net minimum lease 4,133 payments Less current portion 53 3 Long-term capital lease $ obligations December 31, 2001 3,600 Total rent expense under all operating leases was $2,437 in 2001, $2,295 in 2000 and $2,000 in 1999. The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (In thousands, except share data) 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, 2001. The number of shares in the treasury for each of the three years ended December 31, 2001 were as follows: 2001-- 2,999,526; 2000-- 2,932,289; and, 1999-- 2,601,058. 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 2001, purchases of common shares totaled 491,700 shares for $5,541 in cash; the Company also had direct sales, to directors and employees of 6,773 shares for $75, excluding those shares issued through either the exercise of options or the employee stock purchase plan. It also sold 102,546 shares from the Company's 401(k) plan for $1,130 and issued 41,632 shares to participant accounts to satisfy its liability for the 2000 employer match in the amount of $458. The liability accrued at December 31, 2001 for the 2001 employer match was $500. There were also 132,963 shares purchased during 2001 under the employee stock purchase plan. 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 $500 in 2001, $466 in 2000, and $489 in 1999. The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (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, 200 200 199 1 0 9 Number of employees 900 1,032 1,025 participating Shares purchased during the 132,96 131,30 103,03 year 3 9 8 Weighted-average per share $9.59 $10.75 $13.63 purchase price paid Cumulative shares purchased 3,438, 3,305, 3,174, since 1982 562 599 290 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 1,128,658. 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, 2001 were 478,729. A summary of the Company's stock option activity, excluding director options, is presented below: 2001 2000 1999 Weigh Weigh Weigh ted- ted- ted- Avera Avera Avera Options Opti ge Opt ge Opt ge ons Exerc ions Exerc ions Exerc ise ise ise Pr Pr Pri ice ice ce Outstanding, 1,301 $ 1,351 $ 1,772 $ beginning of ,696 7.07 ,344 7.05 ,430 6.55 year Granted - - - - - - Exercised (140, 6.36 (49,6 6.54 (414, 4.93 549) 48) 273) Forfeited - - 4.70 (6,81 - - 3) Outstanding, 1,16 7.15 1,301 7.07 1,351 7.05 end of year 1,147 ,696 ,344 The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (In thousands, except share data) K. Employee Stock Purchase Plan and Stock Option Plans (continued) The following table summarizes information about stock options outstanding and exercisable, excluding director options at December 31, 2001: Optio Options ns Exercisable Outstanding Weighte d- Weight Weight Average ed- ed- Exerci Remaini Averag Averag se Opt ng e Op e Pri ions Contrac Exerci tions Exerci ces tual se se Lif Pr Pr e ice ice $ 36,500 1.0 $ 36,500 $ 5.95 years 5.95 5.95 6.22 256,19 .3 6.22 256,19 6.22 8 years 8 6.92 368,80 2.0 6.92 368,80 6.92 0 years 0 7.90 4.9 7.90 7.90 499,6 years 499,6 49 49 1, 1, 161,14 161,14 7 7 A summary of the status of the Company's director options is presented below: 2001 2000 1999 Weigh Weigh Weigh ted- ted- ted- Avera Avera Avera Options Opti ge Opti ge Opti ge ons Exerc ons Exerc ons Exerc ise ise ise Pr Pr Pr ice ice ice Outstanding, 40,00 $ 44,00 $ 56,00 $ beginning of 0 11.6 0 10.2 0 9.07 year 0 0 Granted 12,00 11.00 8,000 13.00 4,000 16.00 0 Exercised - - (8,00 7.41 (16,0 7.68 0) 00) Forfeited 7.41 9.10 - (8,00 (4,00 0) 0) - Outstanding and 12.16 4 11.60 10.20 exercisable, 44,00 0,000 44,00 end of 0 0 year FAS No. 123, "Accounting for Stock-Based Compensation," requires the pro forma disclosure of the effect on net income and net income per share when applying the fair value method of valuing stock based compensation. In calculating the pro forma impact on net income, 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 1996 options vest at the rate of 20% annually. Year Ended December 31, 200 2000 1999 1 Net income (loss) as $ $ ( $ reported 6,731 2,404) 3,715 Pro forma 6,374 (2,688) 3,510 Net income (loss) per share- -diluted As reported $ $ $ .82 (.30) .42 Pro forma .77 (.34) .40 The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (In thousands, except share data) L. Other Comprehensive Income (Loss) The components of accumulated other comprehensive income (loss) follows: Year Ended December 31, 20 200 199 01 0 9 Comprehensive Income Net Income (loss) $ $ (2 $ 6,731 ,404) 3,715 Other comprehensive income (loss) Foreign currency (99) (202) 202 translation adjustments Derivative instrument: Cumulative (170) - - effect of accounting change Change in fair value of interest rate swap (419) - - (589) - - Other comprehensive income (loss), (688) (202) 202 before income taxes Income tax benefit, related to items of other 224 - - comprehensive income Other comprehensive income (loss) (464) (202) 202 Comprehensive income $ $ (2 $ (loss) 6,267 ,606) 3,917 Year Ended December 31, 20 200 199 01 0 9 Accumulated comprehensive income (loss) Foreign currency $ $ $ translation adjustments (844) (745) (543) Fair value of interest rate swap (365) - - Accumulated $ (1 $ $ comprehensive income (loss) ,209) (745) (543) M. Income Taxes Income (loss) before income taxes were attributable to the following sources: Year Ended December 31, 200 2000 1999 1 United States $ 1 $ ( $ 0,287 3,011) 6,364 Canada 849 (473) (214 ) Totals $ 1 $ ( $ 1,136 3,484) 6,150 The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (In thousands, except share data) M. Income Taxes (continued) Income taxes have been provided as follows: Year Ended December 31, 200 2000 1999 1 Current: Federal $ $ ( $ 3,180 1,360) 1,085 State and local 900 (140) 400 Canadian 442 (148) (21) 4,522 (1,648) 1,464 Deferred: Federal 291 512 932 State and local (244) 82 (43) Canadian (164) (26) 82 (117) 568 971 $ $ (1 $ 4,405 ,080) 2,435 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 and liabilities at December 31, were as follows: Year Ended December 31, 2 20 001 00 Deferred tax assets: Accrued compensated absences $ $ 504 591 Self-insurance accruals 2,417 1,382 Other 486 662 Net deferred income tax assets-- $ $ current 3,407 2,635 Significant components of the Company's noncurrent net deferred tax assets and liabilities at December 31, were as follows: Year Ended December 31, 2 20 001 00 Deferred tax assets: Self-insurance accruals $ $ 4 3,836 ,171 Other 189 (18) 4,025 4,153 Deferred tax liabilities: Tax over financial reporting 6,662 6,893 depreciation and amortization Prepaid pension costs 3,713 3,180 1 1 0,375 0,073 Net deferred income tax liability-- $ ( $ ( noncurrent 6,350) 5,920) The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (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 follow: Year Ended December 31, 20 200 199 01 0 9 Statutory U.S. federal tax rate 34.0% (34.0) 34.0% % State and local income taxes, 5.4 (2.6) 4.3 net of federal benefit Effect of Canadian income taxes (.1) (.4) .2 Meals disallowance .9 5.0 1.9 Other ( 1.0 (.8 .6) ) Effective income tax rate 39. (31.0 39.6% 6% )% N. Net Income Per Share Net income per share is computed as follows: Year Ended December 31, 20 200 199 01 0 9 Income available to common shareholders: Net income (loss) $ $ (2 $ 6,731 ,404) 3,715 Weighted-average shares Basic 7,756, 7,929, 7,971, 949 210 810 Effect of stock options 47 89 3,740 - 9,742 Diluted weighted- 8,230 7,929 8,871 average shares ,689 ,210 ,552 Net income (loss) per share Net income (loss) per $ $ $ share -- Basic .8 (.30 . 7 ) 47 Net income (loss) per $ $ $ share -- Diluted .8 (.30 . 2 ) 42 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. 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 Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (In thousands, except share data) O. Operations by Segment and Geographic Information (continued) 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." During the fourth quarter 2001, the Company aligned its reporting to more closely reflect its management structure. The amounts in the table below for 2000 and 1999 have been conformed to the 2001 reporting. 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 and local 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. The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (In thousands, except share data) O. Operations by Segment and Geographic Information (continued) Residen Utili tial Reconci ty Commerc All ling Consoli Ser ial Other Adjustm dated vices Servi ents ces Fiscal Year 2001 Revenues $ 148 $ 1 $ 2 $ $ ,295 45,723 7,266 321,284 - Income (3,171) ( 15,850 (loss) from 3,5 14,331 1,1 a operations 35 55 ) Interes 4,993 4,993 t expense Other income (expense), 27 net 9 279 Income before income 11,1 taxes 36 Depreciation $ $ $ $ ( $ and amortization 8,30 6,830 1,40 2,522 b 19,054 2 0 ) Capital 4,209 3,576 1,907 2,000 11,692 expenditures Segment ( assets, total 45,57 37,812 9,1 62,989 c 155,473 1 01 ) Fiscal Year 2000 Revenues $ 159 $ 13 $ 2 $ $ 32 ,414 5,868 6,954 2,236 - Income (4,729) ( 1,621 (loss) from (5,89 11,134 1,1 a operations 6) 12 ) Interes 6,217 6,217 t expense Other income (expense), 1,112 1,11 net 2 Income before income (3,484 taxes ) Depreciation $ $ $ $ ( $ and amortization 9,80 6,639 1,40 2,880 b 20,722 2 1 ) Capital 7,106 5,596 1,446 3,328 17,476 expenditures Segment ( 1 assets, total 61,66 39,763 7,77 50,180 c 59,382 3 6 ) Fiscal Year 1999 Revenues $ 167 $ 120 $ 1 $ $ 30 ,148 ,997 9,999 8,144 - Income 420 ( 9,959 (loss) from 6,5 6,236 (3,24 a operations 52 9) ) Interes 4,947 4,947 t expense Other income (expense), 1,138 1,13 net 8 Income before income 6,15 taxes 0 Depreciation $ 1 $ $ $ ( $ and amortization 0,511 5,836 1,27 2,400 b 20,019 2 ) Capital 10,41 5,855 1,902 2,404 20,580 expenditures 9 Segment 6 ( 17 assets, total 66,29 0,416 10,28 39,882 c 6,876 1 7 ) 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. The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (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, 20 20 19 01 00 99 Revenues United States $ 304 $ 306 $ 293 ,109 ,387 ,541 Canada 1 1 1 7,175 5,849 4,603 $ 321 $ 322 $ 308 ,284 ,236 ,144 Decembe r 31, 20 20 01 00 Long-lived assets, net United States $ 68 $ 77 ,512 ,288 Canada 4,127 3,742 $ 72 $ 81 ,639 ,030 P. Commitments and Contingencies At December 31, 2001, the Company was contingently liable to its principal banks in the amount of $18,399 for letters of credit outstanding 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. The Davey Tree Expert Company Notes to Consolidated Financial Statements(Continued) December 31, 2001 (In thousands, except share data) Q. Quarterly Results of Operations (Unaudited) The following is a summary of the quarterly results of operations for the years ended December 31, 2001 and 2000. Fiscal 2001, Three Months Ended Mar Jun Sep Dec 31 30 29 31 Net sales $ 67, $ 93 $ 85 $ 75, 360 ,279 ,251 394 Gross profit 19,463 34,173 29,470 25,395 Income (loss) from (2,519 10,047 5,828 2,494 operations ) 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 $ 1 $ 1 $ 1 $ 1 share 1.00 1.60 1.60 2.00 Fiscal 2000, Three Months Ended Apr Jul Sep Dec 1 1 30 31 Net sales $ 67, $ 88 $ 85 $ 81 391 ,070 ,440 ,335 Gross profit 15,408 29,374 28,494 22,519 Income (loss) from (6,449 4,754 3,378 (62) operations ) Net income (loss) (4 (1 ,279) 1,909 1,272 ,306) Earnings (loss) per $ $ $ $ share --Basic (.53) .24 .16 (.17) Earnings (loss) per $ $ $ $ share --Diluted (.53) .22 .15 ( .17) ESOT valuation per $ 1 $ 1 $ 1 $ 11 share 3.00 2.30 2.30 .00 EX-3.I 3 ex3i.txt EXHIBIT 3I EXHIBIT 3(i) 1991 AMENDED ARTICLES OF INCORPORATION OF THE DAVEY TREE EXPERT COMPANY FIRST. The name of the Company is THE DAVEY TREE EXPERT COMPANY. SECOND. The place in the State of Ohio where the principal office of the Company is located is the City of Kent, in Portage County. THIRD. The purposes for which the Company is formed are: (a) To engage in all phases of the tree and lawn care business, including without limitation, the care, treatment, preservation, propagation, cultivation, planting, removal and sale of trees, plants, shrubs and vines, the practice of landscape architecture, the trimming of trees and other forms of line clearing, including right-of-way clearance for power and telephone companies or others, the publication of books, pamphlets, periodicals and other literature for free distribution or sale, the manufacturing, jobbing, buying and selling at wholesale or retail of any and all tools, materials, supplies, implements or equipment, the practice of forestry, the logging, sawing, milling, processing and marketing of forest products, the development of recreation areas and facilities and the acquisition, operation and sales of farms, manufacturing establishments and other enterprises; (b) To manufacture, to purchase, lease or otherwise acquire, to hold and use, to sell, lease or otherwise dispose of and to deal in or with personal property of any description and any interest therein; (c) To purchase, lease or otherwise acquire, to invest in, hold, use and encumber, to sell, lease, exchange, transfer or otherwise dispose of and to construct, develop, improve, equip, maintain and operate structures and real property of any description and any interest therein; (d) To borrow money, to issue, sell and pledge its notes, bonds and other evidence of indebtedness, to secure any of its obligations by mortgage, pledge or deed of trust of all or any of its property and to guarantee and secure obligations of any person, firm or corporation, all to the extent necessary, useful or conducive to carrying out any of the other purposes of the Company; (e) To invest its funds in any shares or other securities of another corporation, business or undertaking of a government, governmental authority or governmental subdivision; and (f) To do whatever is deemed necessary, useful or conducive to carrying out any of the purposes of the Company and to engage in any lawful activity for which corporations may be formed under the Ohio General Corporation Law. FOURTH. The authorized number of shares of the Company is 16,000,000, consisting of 4,000,000 Preferred Shares, without par value (the "Preferred Shares"), and 12,000,000 Common Shares with par value of $1 each (the "Common Shares"). DIVISION A. Express Terms of Preferred Shares. The Preferred Shares shall be issuable only to holders of Common Shares of the Company as a class, unless the holders of Common Shares as a class waive such right of issuance, and the Directors, without any further action by the shareholders, may, at any time and from time to time, adopt an amendment or amendments to the Articles of Incorporation of the Company in respect of any Preferred Shares which constitute unissued or treasury shares at the time of such adoption, for the purpose of dividing any or all of such Preferred Shares into such series as the Directors shall determine, each of which series shall bear such distinguishing designation as the Directors shall determine and within the limitations prescribed by the provisions of the Ohio General Corporation Law, fix the express terms of any such series of Preferred Shares, which may include statements specifying: (a) Dividend rights, which may be cumulative or non- cumulative, at a specified rate, amount or proportion, with or without further participation rights, and in preference to, junior to, or on a parity in whole or in part with dividend rights of shares of any other class or series; (b) Liquidation rights, preferences, and price; (c) Redemption rights and price or prices, if any; (d) Sinking fund requirements, if any, which may require the Company to provide a sinking fund out of earnings or otherwise for the purchase or redemption of such shares or for dividends thereon; (e) Conversion rights, if any, and the conversion rate or rates or price or prices and the adjustments thereof, if any, and all other terms and conditions upon which conversions may be made; and (f) Restrictions on the issuance of shares of any class or series of the Company. DIVISION B. Express Terms of Common Shares. The Common Shares shall be subject to the express terms of the Preferred Shares and any series thereof. Each Common Share shall be equal to every other common share. The holders of Common Shares shall be entitled to one vote for each share held by them upon all matters presented to the shareholders. FIFTH. The Company, by action of its directors and without action by its shareholders, may purchase its own shares in accordance with the provisions of the Ohio General Corporation Law. Such purchases may be made either in the open market or at public or private sale, in such manner and amounts, from such holder or holders of outstanding shares of the Company and at such prices as the directors may from time to time determine. SIXTH. When a shareholder, or a shareholder's estate upon the death of a shareholder, proposes to sell, give or otherwise transfer Common Shares, whether voluntarily or involuntarily, other than (i) transfers to a current Employee (as defined), (ii) transfers by a current or former Employee to members of his or her Immediate Family (as defined), and (iii) transfers by a deceased current or former Employee to members of his or her Immediate Family, the Company and the ESOT (as defined) shall have the right, at their option, to purchase all (but not less than all) of the Common Shares held by the shareholder on the terms and conditions set forth in this article SIXTH. (a) For purposes of this Article SIXTH, the following definitions apply: (i) "Employee" means an hourly or salaried employee of the Company or of any subsidiary of the Company. For this purpose, a "subsidiary" is another corporation of which the Company owns, directly or indirectly through another subsidiary, more than 50% of the voting power. (ii) "ESOT" means the trust for the Company's Employee Stock Ownership Plan, or any replacement or substitute for that Plan, as amended from time to time. (iii) Member of an Employee's "Immediate Family" means the Employee's spouse, children (including any adopted children and step children), and any trust established for the benefit of one or more of them. (b) The purchase price per share shall be the most recent available valuation of the Common Shares conducted for the ESOT, provided that these valuations continue to be made at least once a year. If these valuations are no longer made or are made less frequently than once a year, the purchase price per Common Share shall be the fair market value per Common Share determined using another method established from time to time by the Company's Board of Directors. (c) In the event of the death of a shareholder and the proposed transfer of the shareholder's Common Shares to anyone other than an Employee or a member of an Employee's Immediate Family, the right of the Company and the ESOT to purchase the Common Shares may be exercised by written notice to the representatives of the shareholder's estate. The notice of exercise may be delivered at any time on or before the 30th day after the Company receives written notice of (i) the shareholder's death and (ii) the identity and address of the representatives of the shareholder's estate. Upon delivery of the notice of exercise on or before the 30th day and tender of the purchase price for the Common Shares by the Company, all rights of the representatives in respect of the Common Shares shall cease, and the representatives shall deliver to the Company any certificate or certificates representing the Common Shares. If the Company and the ESOT fail to deliver the notice of exercise on or before the 30th day, the representatives of the shareholder's estate and heirs can take and hold the Common Shares, subject to the restrictions set forth in this Article SIXTH. (d) In the event of a proposed sale, gift, or other transfer of Common Shares to anyone other than an Employee of the Company or a member of an Employee's Immediate Family, the right of the Company and the ESOT to purchase the Common Shares may be exercised at any time within 30 days after the certificate or certificates representing the Common Shares have been surrendered to the Company or its transfer agent for transfer. Upon delivery of the notice of exercise within the 30-day period and tender of the purchase price for the Common Shares by the Company, all rights of the former shareholder in respect of the Common Shares shall cease, and the Company may retain the certificate or certificates representing the Common Shares. If the Company and the ESOT fail to deliver the notice of exercise within the 30-day period, the shareholder may proceed with the proposed transfer, and the recipient can take and hold the Common Shares, subject to the restrictions set forth in this Article SIXTH. (e) Whenever both the Company and the ESOT desire to purchase Common Shares under this Article SIXTH, the Company shall have the first right to purchase the Common Shares, and the ESOT shall have the right to purchase any Common Shares not purchased by the Company. (f) All Common Shares shall bear a legend referring to the restrictions on transfer set forth in this Article SIXTH. SEVENTH. These 1991 Amended Articles of Incorporation supersede the existing 1987 Amended Articles of Incorporation of the Company and all amendments thereto. THE DAVEY TREE EXPERT COMPANY 1987 AMENDED AND RESTATED REGULATIONS ADOPTED: May 19, 1987 ARTICLE I SHAREHOLDERS SECTION 1. ANNUAL MEETING. The annual meeting of Shareholders of the Company for the election of directors, the consideration of reports to be laid before such meeting, and the transaction of such other business as may properly be brought before such meeting shall be held, at the principal office of the Company in the City of Kent, in Portage County, or at such other place either within or without the State of Ohio as may be designated by the Board of Directors, by the Chairman of the Board, or by the President and specified in the notice of such meeting, at two o'clock p.m. on the third Tuesday of May in each year, if not a legal holiday, and, if a legal holiday, then on the next succeeding business day, or such other date or time as may be designated by the Board of Directors, by the Chairman of the Board of Directors, or by the President and specified in the notice of the meeting. SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders of the Company may be held on any business day, when called by the Chairman of the Board, by the Vice Chairman of the Board, by the President, by an Executive Vice President, by a Senior Vice President, by a Vice President, or by the Board of Directors acting at a meeting, or by a majority of the directors acting without a meeting, or by the persons who hold twenty-five percent of all the shares outstanding and entitled to vote thereat. Upon request in writing delivered either in person or by registered mail to the President or the Secretary by any persons entitled to call a meeting of shareholders, such officer shall forthwith cause to be given to the shareholders entitled thereto notice of a meeting to be held on a date not less than seven or more than sixty days after the receipt of such request, as such officer may fix. If such notice is not given within thirty days after the delivery or mailing of such request, the person calling the meeting may fix the time of the meeting and give notice thereof in the manner provided by law or as provided in these Regulations, or cause such notice to be given by any designated representative. Each special meeting shall be called to convene between nine o'clock a.m. and four o'clock p.m., shall be held at the principal office of the Company, unless the same is called by the directors, acting with or without a meeting, in which case such meeting may be held at any place either within or without the State of Ohio designated by the Board of Directors and specified in the notice of such meeting. SECTION 3. NOTICE OF MEETINGS. Not less than seven or more than sixty days before the date fixed for a meeting of shareholders, written notice stating the time, place and purposes of such meeting shall be given by or at the direction of the Secretary, or Assistant Secretary, or any other person or persons required or permitted by these Regulations to give such notice. The notice shall be given by personal delivery or by mail to each shareholder entitled to notice of the meeting who is of record as of the day next preceding the day on which notice is given or, if a record date therefore is duly fixed, of record as of said date; if mailed, the notice shall be addressed to the shareholders at their respective addresses as they appear on the records of the Company. Notice of the time, place, and purposes of any meeting of shareholders may be waived in writing, either before or after the holding of such meeting, by any shareholder, which writing shall be filed with or entered upon the records of the meeting. The attendance of any shareholder at any such meeting without protesting, prior to or at the commencement of the meeting, the lack of proper notice shall be deemed to be a waiver by him or notice of such meeting. SECTION 4. QUORUM; ADJOURNMENT. Except as may be otherwise provided by law or by the Articles of Incorporation, at any meeting of the shareholders the holders of shares entitling them to exercise a majority of the voting power of the Company present in person or by proxy shall constitute a quorum for such meeting; provided, however, that no action required by law, by the Articles, or by these Regulations to be authorized or taken by a designated proportion of the shares of any particular class or of each class of the Company may be authorized or taken by a less proportion; and provided, further, that the holders of a majority of the voting shares represented thereat, whether or not a quorum is present, may adjourn such meeting from time to time; if any meeting is adjourned, notice of such adjournment need not be given if the time and place to which such meeting is adjourned are fixed and announced at such meeting. SECTION 5. PROXIES. Persons entitled to vote shares or to act with respect to shares may vote or act in person or by proxy. The person appointed as proxy need not be a shareholder. Unless the writing appointing a proxy otherwise provides, the presence at a meeting of the person having appointed a proxy shall not operate to revoke the appointment. Notice to the Company, in writing or in open meeting, of the revocation of the appointment of a proxy shall not affect any vote or act previously taken or authorized. SECTION 6. APPROVAL AND RATIFICATION OF ACTS OF OFFICERS AND BOARD OF DIRECTORS. Except as otherwise provided by the Articles of Incorporation or by law, any contract, act, or transaction, prospective or past, of the Company, or of the Board of Directors, or of the officers may be approved or ratified by the affirmative vote at a meeting of the shareholders, or by the written consent, with or without a meeting, of the holders of record of shares entitling them to exercise a majority of the voting power of the Company, and such approval or ratification shall be as valid and binding as though affirmatively voted for or consented to by every shareholder of the Company. ARTICLE 11 BOARD OF DIRECTORS SECTION 1. NUMBER AND CLASSIFICATION. The Board of Directors will be divided into three classes consisting of not less than three directors each. The number of directors may be fixed or changed by the shareholders at any meeting of shareholders called to elect directors at which a quorum is present, by the vote of the holders of a majority of the shares represented at the meeting and entitled to vote on the proposal. The terms in office of the directors in each of the classes will expire in consecutive years. At each annual election of directors, directors will be elected to the class whose term in office expires in that year and will hold office for a term of three years and until their respective successors are elected. In case of any increase in the number of directors of any class, the additional director or directors elected to that class will hold office for the remainder of the term in office of that class. SECTION 2. RESIGNATION; REMOVAL; VACANCIES. Any director may resign at any time by oral statement made at a meeting of the Board of Directors or in a writing delivered to the secretary; the resignation will take effect immediately or at such other time as the director may specify. No director may be removed prior to the expiration of his term except for gross negligence or willful misconduct in the performance of his duties as a director. No reduction in the number of directors of any class, and no modification or elimination of the classification of the Board of Directors, will of itself have the effect of shortening the term of nay incumbent director. In the event of any vacancy or vacancies in the Board of Directors, however caused, the directors then in office, though less than a majority of the authorized number of directors, may, by the vote of a majority of their number, fill each vacancy for the remainder of the term in office of the director whose resignation, removal, or death resulted in the vacancy. SECTION 3. NOMINATION OF CANDIDATES FOR ELECTION AS DIRECTORS. At a meeting of shareholders at which directors are to be elected, only persons nominated as candidates will be eligible for election as directors. Candidates may be nominated either by the Board of Directors or by any shareholder entitled to vote at the meeting. Nominations by the Board of Directors may be made at a meeting or in an action without a meeting, not less than 30 days prior to the meeting at which the directors are to be elected. Each candidate nominated by the board will, at the request of the secretary, provide the company with all of the information about himself required, under rules of The Securities and Exchange Commission, to be included in the company's proxy statement for the meeting. Any shareholder who proposes to nominate one or more candidates for election as director must, not less than 30 days prior to the meeting at which the directors are to be elected, notify the secretary of his intention to make the nomination and provide the company with all of the information about each of the candidates as would be required, under the rules of The Securities and Exchange Commission, to be included in a proxy statement soliciting proxies for the election of the candidate, including (i) his name, age, and business and residence addresses, (ii) his principal occupations or employment during the last five years, (iii) the number of shares of the company beneficially owned by him, and (iv) transactions between him and the Company. In the event that a candidate validly nominated by the Board or by a shareholder thereafter becomes unable or unwilling to stand for election as a director, the Board or the shareholder who nominated the candidate, as the case may be, may nominate a substitute candidate. If the Chairman or other officer presiding at the meeting determines that one or more candidates were not nominated in accordance with these procedures, he may rule the nomination of these candidates to be out-of-order and void. SECTION 4. ORGANIZATION MEETING. Immediately after each annual meeting of the shareholders, the newly elected directors shall hold an organization meeting for the purpose of electing officers and transacting any other business. Notice of such meeting need not be given. SECTION 5. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held at such times and places within or without the State of Ohio as may be provided for in bylaws or resolutions adopted by the Board of Directors and upon such notice, if any, as shall be so provided. SECTION 6. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any time within or without the State of Ohio upon call by the Chairman of the Board, the Vice Chairman of the Board, the President, an Executive Vice President, Senior Vice President, or a Vice President or any two directors. Written notice of the time and place of each such meeting shall be given to each director either by personal delivery or by mail, telegram, or cablegram at least two days before the meeting, which notice need not specify the purposes of the meeting; provided, however, that attendance of any director at any such meeting without protesting, prior to or at the commencement of the meeting, the lack of proper notice shall be deemed to be a waiver by him of notice of such meeting and such notice may be waived in writing, either before or after the holding of such meeting, by any director, which writing shall be filed with or entered upon the records of the meeting. Unless otherwise indicated in the notice thereof, any business may be transacted at any organization, regular, or special meeting. SECTION 7. QUORUM; ADJOURNMENT. A quorum of the Board of Directors shall consist of a majority of the directors then in office; provided, that a majority of the directors present at a meeting duly held, whether or not a quorum is present, may adjourn such meeting from time to time, if any meeting is adjourned, notice of such adjournment need not be given if the time and place to which such meeting is adjourned are fixed and announced at such meeting. At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by a majority vote of those present except as in these Regulations otherwise expressly provided. SECTION 8. ACTION WITHOUT A MEETING. Any action which may be authorized or taken at a meeting of the Board of Directors may be authorized or taken without a meeting in a writing or writings signed by all of the directors, which writing or writings shall be filed with or entered upon the records of the Company. SECTION 9. COMMITTEES. The Board of Directors may at any time appoint from its members an Executive, Finance, or other committee or committees, consisting of such number of members, not less than three, as the Board of Directors may deem advisable, together with such alternates as the Board of Directors may deem advisable, to take the place of any absent member or members at any meeting of such committee. Each such member and each such alternate shall hold office during the pleasure of the Board of Directors. Any such committee shall act only in the intervals between meetings of the Board of Directors and shall have such authority to fill vacancies in the Board of Directors or in any committee of the Board of Directors. Subject to the aforesaid exceptions, any person dealing with the Company shall be entitled to rely upon any act or authorization of an act by any such committee, to the same extent as an act or authorization of the Board of Directors. Each committee shall keep full and complete records of all meetings and actions, which shall be open to inspection by the directors. Unless otherwise ordered by the Board of Directors, any such committee may prescribe its own rules for calling and holding meetings, and for its own method of procedure, and may act at a meeting by a majority of its members or without a meeting by a writing or writings signed by all of its members. SECTION 10. DIRECTORS ADVISORY COMMITTEE. The Board of Directors may establish a Directors Advisory Committee and appoint to such Committee such number of persons as the Board of Directors may deem advisable. No member of the Board of Directors shall serve on the Directors Advisory Committee, but the Board of Directors may appoint to such Committee any former directors or officers of the Company and such other persons as it may deem advisable. Each member of the Directors Advisory Committee shall be appointed for a term of three years, and no member of the Directors Advisory Committee shall serve for more than two such three-year terms. The Directors Advisory Committee shall exercise an advisory function with respect to only such matters as the Board of Directors may specifically submit to such Committee, provided, however, that the Directors Advisory Committee shall in no event have any authority whatsoever with respect to the operations or management of the Company or to authorize, require, or approve any expenditure, payment, or donation of any funds of the Company. ARTICLE III OFFICERS SECTION 1. ELECTION AND DESIGNATION OF OFFICERS. The Board of Directors shall elect a President, a Secretary, a Treasurer, and, in its discretion, may elect a Chairman of the Board, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as the Board of Directors may deem necessary. The Chairman of the Board, the Vice Chairman of the Board, and the President shall be directors, but no one of the other officers need be a director. Any two or more of such offices may be held by the same person, but no officer shall execute, acknowledge, or verify any instrument in more than one capacity, if such instrument is required to be executed, acknowledged, or verified by two or more officers. SECTION 2. TERM OF OFFICE; VACANCIES. The officers of the Company shall hold office until the next organization meeting of the Board of Directors and until their successors are elected, except in case of resignation, removal from office, or death. The Board of Directors may remove any officer at any time with or without cause by a majority vote of the directors then in office. Any vacancy in any office may be filled by the Board of Directors. SECTION 3. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of the Board of Directors and shall have such authority and shall perform such other duties as may be determined by the Board of Directors. SECTION 4. PRESIDENT. The President shall preside at all meetings of the shareholders and shall preside at all meetings of the Board of Directors, except for meetings of the Board of Directors at which the Chairman of the Board, if any, presides in accordance with the preceding Section. Subject to directions of the Board of Directors, the President shall have general executive supervision over the property, business, and affairs of the Company. He may execute all authorized deeds, mortgages, bonds, contracts, and other authority and shall perform such other duties as may be determined by the Board of Directors. SECTION 5. VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board shall exercise all of the authority of, and perform all of the duties, of the Chairman in case of the absence or inability of the Chairman to act an shall have such other authority and perform such other duties as may be determined by the Board of Directors. SECTION 6. EXECUTIVE VICE PRESIDENTS. The Executive Vice Presidents shall, respectively, have such authority and perform such duties as may be determined by the Board of Directors. SECTION 7. SENIOR VICE PRESIDENTS. The Senior Vice Presidents shall, respectively, have such authority and perform such duties as may be determined by the Board of Directors. SECTION 8. VICE PRESIDENTS. The Vice Presidents shall, respectively, have such authority and perform such duties as may be determined by the Board of Directors. SECTION 9. SECRETARY. The Secretary shall keep the minutes of the shareholders and of the Board of Directors. He shall keep such books as may be required by the Board of Directors, shall give notices of shareholders meetings and of Board meetings required by law, or by these Regulations, or otherwise, and shall have such authority an shall perform such other duties as may be determined by the Board of Directors. SECTION 10. TREASURER. The Treasurer shall receive and have in charge all money, bills, notes, bonds, stocks in other corporations, and similar property belonging to the Company, and shall do with the same as may be ordered by the Board of Directors. He shall keep accurate financial accounts and hold the same open for the inspection and examination of the directors and shall have such authority and shall perform such other duties as may be determined by the Board of Directors. SECTION 11. OTHER OFFICERS. The Assistant Secretaries and Assistant Treasurers, if any, and any other officers whom the Board of Directors may elect shall, respectively, have such authority and perform such other duties as may be determined by the Board of Directors. SECTION 12. DELEGATION OF AUTHORITY AND DUTIES. The Board of Directors is authorized to delegate the authority and duties of any officer to any other officer and generally to control the action of the officers and to require the performance of duties in addition to those mentioned herein. ARTICLE IV COMPENSATION SECTION 1. DIRECTORS AND MEMBERS OF COMMITTEES. Members of the Board of Directors and members of any committee of the Board of Directors shall, as such, receive such compensation, which may be either a fixed sum for attendance at each meeting of the Board of Directors, or at each meeting of the committee, or stated compensation payable at intervals, or shall otherwise be compensated as may be determined by or pursuant to authority conferred by the Board of Directors or any committee of the Board of Directors, which compensation may be in different amounts for various members of the Board of Directors or any committee. No member of the Board of Directors and no member of any committee of the Board of Directors shall be disqualified from being counted in the determination of a quorum or from acting at any meeting of the Board of Directors or of a committee of the Board of Directors by reason of the fact that matters affecting his own compensation as a director, member of a committee of the Board of Directors, officer, or employee are to be determined. SECTION 2. OFFICERS AND EMPLOYEES. The compensation of officers and employees of the Company, or the method of fixing such compensation, shall be determined by or pursuant to authority conferred by the Board of Directors or any committee of the Board of Directors. Such compensation may include pension, disability, and death benefits, and may be by way of fixed salary, or on the basis of earnings of the Company, or any combination thereof, or otherwise, as may be determined or authorized from time to time by the Board of Directors or any committee of the Board of Directors. ARTICLE V INDEMNIFICATION SECTION 1. THIRD PARTY ACTIONS. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (other than an action or suit by or in the right of the Company), by reason of the fact that he is or was a director, officer, employee, or agent of the Company, or is or was serving at the request of the Company as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. SECTION 2. DERIVATIVE ACTIONS. Other than in connection with an action or suit in which the liability of a director under Section 1701.95 of the Ohio Revised Code is the only liability asserted, the Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee, or agent to the Company, or is or was serving at the request of the Company as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, except that: (a) no indemnification of a director shall be made if its is proved by clear and convincing evidence in a court of competent jurisdiction that his action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the Company or undertaken with reckless disregard for the best interests of the Company; and (b)no indemnification of an officer, employee, or agent, regardless of his status as a director, shall be made in respect of any claim, issue, or matter as to which he is adjudged to be liable for negligence or misconduct in the performance of his duty to the Company; unless and only to the extent that the Court of Common Pleas or the court in which the action or suit was brought determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, he is fairly and reasonably entitled to indemnity for such expenses as the Court of Common Pleas or the other court shall deem proper. SECTION 3. RIGHTS AFTER SUCCESSFUL DEFENSE. To the extent that a director, trustee, officer, employee, or agent has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in Section 1 or Section 2, or in defense of any claim, issue, or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the action, suit or proceeding. SECTION 4. OTHER DETERMINATIONS OF RIGHTS. Except in a situation governed by Section 3, any indemnification under Section 1 or Section 2 (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, employee, or agent is proper in the circumstances because he has met the applicable standard or conduct set forth in Section 1 or Section 2. The determination shall be made (a) by a majority vote, at a meeting of directors, of those directors who constitute a quorum and who also were not and are not parties to or threatened with any such action, suit, or proceeding or (b) if such a quorum is not obtainable (or even if obtainable) and a majority of disinterested directors so directs, in a written opinion by independent legal counsel (compensated by the Company) or (c) by the affirmative vote in person or by proxy of the holders of record of a majority of the shares held by persons who were not and are not parties to or threatened with any such action, suit, or proceeding and entitled to vote in the election of directors, without regard to voting power which may thereafter exist upon a default, failure, or other contingency or (d) by the Court of Common Pleas or the court in which such action, suit, or proceeding was brought. SECTION 5. ADVANCES OF EXPENSES. Unless at the time of a director's act or omission that is the subject of an action, suit, or proceeding referred to in Section 1 or Section 2 hereof, the only liability asserted against a director in the action, suit, or proceeding referred to in Section 1 or Section 2 hereof is pursuant to Section 1701.95 of the Revised Code: (a) expenses, including attorney's fees, incurred by a director in defending the action, suit, or proceeding shall be paid by the company as they are incurred, in advance of the final disposition of the action, suit, or proceeding upon receipt or an undertaking by or on behalf of the director in which he agrees both: (i) to repay the amount if it is proved by clear and convincing evidence in a court of competent jurisdiction that his action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the company or undertaken with reckless disregard for the best interests of the company and (ii) to reasonably cooperate with the company concerning the action, suit, or proceeding. (b) expenses (including attorney's fees), incurred by a director, officer, employee, or agent in defending any action, suit or proceeding referred to in Section 1 or Section 2 of this Article V may be paid by the Company, as they are incurred, in advance of final disposition of the action, suit, or proceeding, as authorized by the Board of Directors in the specific case, upon receipt of an undertaking by or on behalf of the director, officer, employee, or agent to repay the amount if it is ultimately determined that he is not entitled to be indemnified by the Company. SECTION 6. PURCHASE OF INSURANCE. The Company may purchase and maintain insurance or furnish similar protection, including but not limited to trust funds, letters of credit, or self-insurance, on behalf of or for any person who is or was a director, officer, employee, or agent of the Company, or is or was serving at the request of the Company as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against any liability asserted against him and incurred by him in any capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against liability under the provisions of this Article or of the Ohio General Corporation Law. Insurance may be purchased from or maintained with a person in which the Company has a financial interest. SECTION 7. MERGERS. In the case of a merger into this Company of a constituent corporation which, if its separate existence had continued, would have been required to indemnify directors, trustees, officers, employees, or agents in specified situations, any person who served as a director, officer, employee or agent of the constituent corporation, or served at the request of the constituent corporation as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, shall be entitled to indemnification by this Company (as the surviving corporation) to the same extent he would have been entitled to indemnification by the constituent corporation if its separate existence had continued. SECTION 8. NON-EXCLUSIVITY; HEIRS. Indemnification authorized by this Article shall not be exclusive of , and shall be in addition to, any other rights granted to those seeking indemnification as a matter of law or under the Articles, these Regulations, any agreement, a vote of shareholders or disinterested directors, any insurance purchased by the Company, any action by the directors to take into account amendments to the Ohio General Corporation Law that expand the authority of the Company to indemnify a director, officer, employee, or agent of the Company, or otherwise, both as to action in his official capacity and as to action in another capacity while holding an office, and shall continue as to a person who has ceased to be a director, trustee, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. ARTICLE VI RECORD DATE For any lawful purpose, including, without limitation, the determination of the shareholders who are entitled to receive notice of or to vote at a meeting of shareholders, the Board of Directors may fix a record date in accordance with the provisions of the Ohio General Corporation Law. The record date for the purpose of the determination of the shareholders who are entitled to receive notice of or to vote at a meeting of shareholders shall continue to be the record date for all adjournments of such meeting, unless the Board of Directors or the persons who shall have fixed the original record date shall, subject to the limitations set forth in the Ohio General Corporation Law, fix another date, and, in case a new record date is so fixed, notice thereof and of the date to which the meeting shall have been adjourned shall be given to shareholders of record as of such date in accordance with the same requirements as those applying to a meeting newly called. The Board of Directors may close the share transfer books against transfers of shares during the whole or any part of the period provided for in this Article, including the date of the meeting of shareholders and the period ending with the date, if any, to which adjourned. If no record date is fixed therefore, the record for determining the shareholders who are entitled to receive notice of or to vote at a meeting of shareholders shall be the date next preceding the day on which notice is given, or the date next preceding the day on which the meeting is held, as the case may be. ARTICLE VII CERTIFICATES FOR SHARES SECTION 1. FORM OF CERTIFICATES AND SIGNATURES. Each holder of shares shall be entitled to one or more certificates, signed by the Chairman of the Board, the Vice Chairman of the Board, the President, an Executive Vice President, Senior Vice President, or a Vice President and by the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer of the Company, which shall certify the number of class of shares held by him in the Company, but no certificate for shares shall be executed or delivered until such shares are fully paid. When such a certificate is countersigned by an incorporated transfer agent or registrar, the signature of any of said officers of the Company may be facsimile, engraved, stamped, or printed. Although any officer of the Company whose manual or facsimile signature is affixed to such a certificate ceases to be such officer before the certificate is delivered, such certificate nevertheless shall be effective in all respects when delivered. SECTION 2. TRANSFER OF SHARES. Shares of the Company shall be transferable upon the books of the Company by the holders thereof, in person, or by a duly authorized attorney, upon surrender and cancellation of certificates for a like number of shares of the same class or series, with duly executed assignment and power of transfer endorsed thereon or attached thereto, and with such proof of the authenticity of the signatures to such assignment and power of transfer as the Company or its agents may reasonably require. SECTION 3. LOST, STOLEN, OR DESTROYED CERTIFICATES. The Company may issue a new certificate for shares in place of any certificate theretofore issued by it and alleged to have been lost, stolen, or destroyed, and the Board of Directors may, in its discretion, require the owner, or his legal representatives, to give the Company a bond containing such terms as the Board of Directors may require to protect the Company or any person injured by the execution and delivery of a new certificate. SECTION 4. TRANSFER AGENT AND REGISTRAR. The Board of Directors may appoint, or revoke the appointment of, transfer agents and registrars and may require all certificates for shares to bear the signature of such transfer agents and registrars, or any of them. ARTICLE VIII CORPORATE SEAL The corporate seal of this Company shall be circular in form and shall contain the name of the Company. Failure to affix the corporate seal to any instrument executed on behalf of the Company shall not affect the validity of such instrument. ARTICLE IX AMENDMENTS The Regulations of the Company may be amended, or new Regulations may be adopted, by the shareholders at a meeting held for such purpose, by affirmative vote of the holders of shares entitling them to exercise a majority of the voting power on such proposal or, without a meeting, by the written consent of the holders of shares entitling them to exercise two-thirds of the voting power on such proposal. If the Regulations are amended or new Regulations are adopted without a meeting of the shareholders, the Secretary of the Company shall mail a copy of the amendment or the new Regulations to each shareholder who would have been entitled to vote thereon and did not participate in the adoption thereof. EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The Registrant has three wholly-owned subsidiaries, Davey Tree Surgery Company (incorporated in Ohio), Davey Tree Expert Co. of Canada, Limited (incorporated in Canada) and B.D. Wilhelm Company (incorporated in Colorado), each of which did business in 1996 under its corporate name. EX-3.II 4 ex3ii.txt EXHIBIT 3II EXHIBIT 3(ii) THE DAVEY TREE EXPERT COMPANY 1987 AMENDED AND RESTATED REGULATIONS ADOPTED: May 19, 1987 ARTICLE I SHAREHOLDERS SECTION 1. ANNUAL MEETING. The annual meeting of Shareholders of the Company for the election of directors, the consideration of reports to be laid before such meeting, and the transaction of such other business as may properly be brought before such meeting shall be held, at the principal office of the Company in the City of Kent, in Portage County, or at such other place either within or without the State of Ohio as may be designated by the Board of Directors, by the Chairman of the Board, or by the President and specified in the notice of such meeting, at two o'clock p.m. on the third Tuesday of May in each year, if not a legal holiday, and, if a legal holiday, then on the next succeeding business day, or such other date or time as may be designated by the Board of Directors, by the Chairman of the Board of Directors, or by the President and specified in the notice of the meeting. SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders of the Company may be held on any business day, when called by the Chairman of the Board, by the Vice Chairman of the Board, by the President, by an Executive Vice President, by a Senior Vice President, by a Vice President, or by the Board of Directors acting at a meeting, or by a majority of the directors acting without a meeting, or by the persons who hold twenty-five percent of all the shares outstanding and entitled to vote thereat. Upon request in writing delivered either in person or by registered mail to the President or the Secretary by any persons entitled to call a meeting of shareholders, such officer shall forthwith cause to be given to the shareholders entitled thereto notice of a meeting to be held on a date not less than seven or more than sixty days after the receipt of such request, as such officer may fix. If such notice is not given within thirty days after the delivery or mailing of such request, the person calling the meeting may fix the time of the meeting and give notice thereof in the manner provided by law or as provided in these Regulations, or cause such notice to be given by any designated representative. Each special meeting shall be called to convene between nine o'clock a.m. and four o'clock p.m., shall be held at the principal office of the Company, unless the same is called by the directors, acting with or without a meeting, in which case such meeting may be held at any place either within or without the State of Ohio designated by the Board of Directors and specified in the notice of such meeting. SECTION 3. NOTICE OF MEETINGS. Not less than seven or more than sixty days before the date fixed for a meeting of shareholders, written notice stating the time, place and purposes of such meeting shall be given by or at the direction of the Secretary, or Assistant Secretary, or any other person or persons required or permitted by these Regulations to give such notice. The notice shall be given by personal delivery or by mail to each shareholder entitled to notice of the meeting who is of record as of the day next preceding the day on which notice is given or, if a record date therefore is duly fixed, of record as of said date; if mailed, the notice shall be addressed to the shareholders at their respective addresses as they appear on the records of the Company. Notice of the time, place, and purposes of any meeting of shareholders may be waived in writing, either before or after the holding of such meeting, by any shareholder, which writing shall be filed with or entered upon the records of the meeting. The attendance of any shareholder at any such meeting without protesting, prior to or at the commencement of the meeting, the lack of proper notice shall be deemed to be a waiver by him or notice of such meeting. SECTION 4. QUORUM; ADJOURNMENT. Except as may be otherwise provided by law or by the Articles of Incorporation, at any meeting of the shareholders the holders of shares entitling them to exercise a majority of the voting power of the Company present in person or by proxy shall constitute a quorum for such meeting; provided, however, that no action required by law, by the Articles, or by these Regulations to be authorized or taken by a designated proportion of the shares of any particular class or of each class of the Company may be authorized or taken by a less proportion; and provided, further, that the holders of a majority of the voting shares represented thereat, whether or not a quorum is present, may adjourn such meeting from time to time; if any meeting is adjourned, notice of such adjournment need not be given if the time and place to which such meeting is adjourned are fixed and announced at such meeting. SECTION 5. PROXIES. Persons entitled to vote shares or to act with respect to shares may vote or act in person or by proxy. The person appointed as proxy need not be a shareholder. Unless the writing appointing a proxy otherwise provides, the presence at a meeting of the person having appointed a proxy shall not operate to revoke the appointment. Notice to the Company, in writing or in open meeting, of the revocation of the appointment of a proxy shall not affect any vote or act previously taken or authorized. SECTION 6. APPROVAL AND RATIFICATION OF ACTS OF OFFICERS AND BOARD OF DIRECTORS. Except as otherwise provided by the Articles of Incorporation or by law, any contract, act, or transaction, prospective or past, of the Company, or of the Board of Directors, or of the officers may be approved or ratified by the affirmative vote at a meeting of the shareholders, or by the written consent, with or without a meeting, of the holders of record of shares entitling them to exercise a majority of the voting power of the Company, and such approval or ratification shall be as valid and binding as though affirmatively voted for or consented to by every shareholder of the Company. ARTICLE 11 BOARD OF DIRECTORS SECTION 1. NUMBER AND CLASSIFICATION. The Board of Directors will be divided into three classes consisting of not less than three directors each. The number of directors may be fixed or changed by the shareholders at any meeting of shareholders called to elect directors at which a quorum is present, by the vote of the holders of a majority of the shares represented at the meeting and entitled to vote on the proposal. The terms in office of the directors in each of the classes will expire in consecutive years. At each annual election of directors, directors will be elected to the class whose term in office expires in that year and will hold office for a term of three years and until their respective successors are elected. In case of any increase in the number of directors of any class, the additional director or directors elected to that class will hold office for the remainder of the term in office of that class. SECTION 2. RESIGNATION; REMOVAL; VACANCIES. Any director may resign at any time by oral statement made at a meeting of the Board of Directors or in a writing delivered to the secretary; the resignation will take effect immediately or at such other time as the director may specify. No director may be removed prior to the expiration of his term except for gross negligence or willful misconduct in the performance of his duties as a director. No reduction in the number of directors of any class, and no modification or elimination of the classification of the Board of Directors, will of itself have the effect of shortening the term of nay incumbent director. In the event of any vacancy or vacancies in the Board of Directors, however caused, the directors then in office, though less than a majority of the authorized number of directors, may, by the vote of a majority of their number, fill each vacancy for the remainder of the term in office of the director whose resignation, removal, or death resulted in the vacancy. SECTION 3. NOMINATION OF CANDIDATES FOR ELECTION AS DIRECTORS. At a meeting of shareholders at which directors are to be elected, only persons nominated as candidates will be eligible for election as directors. Candidates may be nominated either by the Board of Directors or by any shareholder entitled to vote at the meeting. Nominations by the Board of Directors may be made at a meeting or in an action without a meeting, not less than 30 days prior to the meeting at which the directors are to be elected. Each candidate nominated by the board will, at the request of the secretary, provide the company with all of the information about himself required, under rules of The Securities and Exchange Commission, to be included in the company's proxy statement for the meeting. Any shareholder who proposes to nominate one or more candidates for election as director must, not less than 30 days prior to the meeting at which the directors are to be elected, notify the secretary of his intention to make the nomination and provide the company with all of the information about each of the candidates as would be required, under the rules of The Securities and Exchange Commission, to be included in a proxy statement soliciting proxies for the election of the candidate, including (i) his name, age, and business and residence addresses, (ii) his principal occupations or employment during the last five years, (iii) the number of shares of the company beneficially owned by him, and (iv) transactions between him and the Company. In the event that a candidate validly nominated by the Board or by a shareholder thereafter becomes unable or unwilling to stand for election as a director, the Board or the shareholder who nominated the candidate, as the case may be, may nominate a substitute candidate. If the Chairman or other officer presiding at the meeting determines that one or more candidates were not nominated in accordance with these procedures, he may rule the nomination of these candidates to be out-of-order and void. SECTION 4. ORGANIZATION MEETING. Immediately after each annual meeting of the shareholders, the newly elected directors shall hold an organization meeting for the purpose of electing officers and transacting any other business. Notice of such meeting need not be given. SECTION 5. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held at such times and places within or without the State of Ohio as may be provided for in bylaws or resolutions adopted by the Board of Directors and upon such notice, if any, as shall be so provided. SECTION 6. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any time within or without the State of Ohio upon call by the Chairman of the Board, the Vice Chairman of the Board, the President, an Executive Vice President, Senior Vice President, or a Vice President or any two directors. Written notice of the time and place of each such meeting shall be given to each director either by personal delivery or by mail, telegram, or cablegram at least two days before the meeting, which notice need not specify the purposes of the meeting; provided, however, that attendance of any director at any such meeting without protesting, prior to or at the commencement of the meeting, the lack of proper notice shall be deemed to be a waiver by him of notice of such meeting and such notice may be waived in writing, either before or after the holding of such meeting, by any director, which writing shall be filed with or entered upon the records of the meeting. Unless otherwise indicated in the notice thereof, any business may be transacted at any organization, regular, or special meeting. SECTION 7. QUORUM; ADJOURNMENT. A quorum of the Board of Directors shall consist of a majority of the directors then in office; provided, that a majority of the directors present at a meeting duly held, whether or not a quorum is present, may adjourn such meeting from time to time, if any meeting is adjourned, notice of such adjournment need not be given if the time and place to which such meeting is adjourned are fixed and announced at such meeting. At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by a majority vote of those present except as in these Regulations otherwise expressly provided. SECTION 8. ACTION WITHOUT A MEETING. Any action which may be authorized or taken at a meeting of the Board of Directors may be authorized or taken without a meeting in a writing or writings signed by all of the directors, which writing or writings shall be filed with or entered upon the records of the Company. SECTION 9. COMMITTEES. The Board of Directors may at any time appoint from its members an Executive, Finance, or other committee or committees, consisting of such number of members, not less than three, as the Board of Directors may deem advisable, together with such alternates as the Board of Directors may deem advisable, to take the place of any absent member or members at any meeting of such committee. Each such member and each such alternate shall hold office during the pleasure of the Board of Directors. Any such committee shall act only in the intervals between meetings of the Board of Directors and shall have such authority to fill vacancies in the Board of Directors or in any committee of the Board of Directors. Subject to the aforesaid exceptions, any person dealing with the Company shall be entitled to rely upon any act or authorization of an act by any such committee, to the same extent as an act or authorization of the Board of Directors. Each committee shall keep full and complete records of all meetings and actions, which shall be open to inspection by the directors. Unless otherwise ordered by the Board of Directors, any such committee may prescribe its own rules for calling and holding meetings, and for its own method of procedure, and may act at a meeting by a majority of its members or without a meeting by a writing or writings signed by all of its members. SECTION 10. DIRECTORS ADVISORY COMMITTEE. The Board of Directors may establish a Directors Advisory Committee and appoint to such Committee such number of persons as the Board of Directors may deem advisable. No member of the Board of Directors shall serve on the Directors Advisory Committee, but the Board of Directors may appoint to such Committee any former directors or officers of the Company and such other persons as it may deem advisable. Each member of the Directors Advisory Committee shall be appointed for a term of three years, and no member of the Directors Advisory Committee shall serve for more than two such three-year terms. The Directors Advisory Committee shall exercise an advisory function with respect to only such matters as the Board of Directors may specifically submit to such Committee, provided, however, that the Directors Advisory Committee shall in no event have any authority whatsoever with respect to the operations or management of the Company or to authorize, require, or approve any expenditure, payment, or donation of any funds of the Company. ARTICLE III OFFICERS SECTION 1. ELECTION AND DESIGNATION OF OFFICERS. The Board of Directors shall elect a President, a Secretary, a Treasurer, and, in its discretion, may elect a Chairman of the Board, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as the Board of Directors may deem necessary. The Chairman of the Board, the Vice Chairman of the Board, and the President shall be directors, but no one of the other officers need be a director. Any two or more of such offices may be held by the same person, but no officer shall execute, acknowledge, or verify any instrument in more than one capacity, if such instrument is required to be executed, acknowledged, or verified by two or more officers. SECTION 2. TERM OF OFFICE; VACANCIES. The officers of the Company shall hold office until the next organization meeting of the Board of Directors and until their successors are elected, except in case of resignation, removal from office, or death. The Board of Directors may remove any officer at any time with or without cause by a majority vote of the directors then in office. Any vacancy in any office may be filled by the Board of Directors. SECTION 3. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of the Board of Directors and shall have such authority and shall perform such other duties as may be determined by the Board of Directors. SECTION 4. PRESIDENT. The President shall preside at all meetings of the shareholders and shall preside at all meetings of the Board of Directors, except for meetings of the Board of Directors at which the Chairman of the Board, if any, presides in accordance with the preceding Section. Subject to directions of the Board of Directors, the President shall have general executive supervision over the property, business, and affairs of the Company. He may execute all authorized deeds, mortgages, bonds, contracts, and other authority and shall perform such other duties as may be determined by the Board of Directors. SECTION 5. VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board shall exercise all of the authority of, and perform all of the duties, of the Chairman in case of the absence or inability of the Chairman to act an shall have such other authority and perform such other duties as may be determined by the Board of Directors. SECTION 6. EXECUTIVE VICE PRESIDENTS. The Executive Vice Presidents shall, respectively, have such authority and perform such duties as may be determined by the Board of Directors. SECTION 7. SENIOR VICE PRESIDENTS. The Senior Vice Presidents shall, respectively, have such authority and perform such duties as may be determined by the Board of Directors. SECTION 8. VICE PRESIDENTS. The Vice Presidents shall, respectively, have such authority and perform such duties as may be determined by the Board of Directors. SECTION 9. SECRETARY. The Secretary shall keep the minutes of the shareholders and of the Board of Directors. He shall keep such books as may be required by the Board of Directors, shall give notices of shareholders meetings and of Board meetings required by law, or by these Regulations, or otherwise, and shall have such authority an shall perform such other duties as may be determined by the Board of Directors. SECTION 10. TREASURER. The Treasurer shall receive and have in charge all money, bills, notes, bonds, stocks in other corporations, and similar property belonging to the Company, and shall do with the same as may be ordered by the Board of Directors. He shall keep accurate financial accounts and hold the same open for the inspection and examination of the directors and shall have such authority and shall perform such other duties as may be determined by the Board of Directors. SECTION 11. OTHER OFFICERS. The Assistant Secretaries and Assistant Treasurers, if any, and any other officers whom the Board of Directors may elect shall, respectively, have such authority and perform such other duties as may be determined by the Board of Directors. SECTION 12. DELEGATION OF AUTHORITY AND DUTIES. The Board of Directors is authorized to delegate the authority and duties of any officer to any other officer and generally to control the action of the officers and to require the performance of duties in addition to those mentioned herein. ARTICLE IV COMPENSATION SECTION 1. DIRECTORS AND MEMBERS OF COMMITTEES. Members of the Board of Directors and members of any committee of the Board of Directors shall, as such, receive such compensation, which may be either a fixed sum for attendance at each meeting of the Board of Directors, or at each meeting of the committee, or stated compensation payable at intervals, or shall otherwise be compensated as may be determined by or pursuant to authority conferred by the Board of Directors or any committee of the Board of Directors, which compensation may be in different amounts for various members of the Board of Directors or any committee. No member of the Board of Directors and no member of any committee of the Board of Directors shall be disqualified from being counted in the determination of a quorum or from acting at any meeting of the Board of Directors or of a committee of the Board of Directors by reason of the fact that matters affecting his own compensation as a director, member of a committee of the Board of Directors, officer, or employee are to be determined. SECTION 2. OFFICERS AND EMPLOYEES. The compensation of officers and employees of the Company, or the method of fixing such compensation, shall be determined by or pursuant to authority conferred by the Board of Directors or any committee of the Board of Directors. Such compensation may include pension, disability, and death benefits, and may be by way of fixed salary, or on the basis of earnings of the Company, or any combination thereof, or otherwise, as may be determined or authorized from time to time by the Board of Directors or any committee of the Board of Directors. ARTICLE V INDEMNIFICATION SECTION 1. THIRD PARTY ACTIONS. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (other than an action or suit by or in the right of the Company), by reason of the fact that he is or was a director, officer, employee, or agent of the Company, or is or was serving at the request of the Company as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. SECTION 2. DERIVATIVE ACTIONS. Other than in connection with an action or suit in which the liability of a director under Section 1701.95 of the Ohio Revised Code is the only liability asserted, the Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee, or agent to the Company, or is or was serving at the request of the Company as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, except that: (a) no indemnification of a director shall be made if its is proved by clear and convincing evidence in a court of competent jurisdiction that his action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the Company or undertaken with reckless disregard for the best interests of the Company; and (b) no indemnification of an officer, employee, or agent, regardless of his status as a director, shall be made in respect of any claim, issue, or matter as to which he is adjudged to be liable for negligence or misconduct in the performance of his duty to the Company; unless and only to the extent that the Court of Common Pleas or the court in which the action or suit was brought determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, he is fairly and reasonably entitled to indemnity for such expenses as the Court of Common Pleas or the other court shall deem proper. SECTION 3. RIGHTS AFTER SUCCESSFUL DEFENSE. To the extent that a director, trustee, officer, employee, or agent has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in Section 1 or Section 2, or in defense of any claim, issue, or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the action, suit or proceeding. SECTION 4. OTHER DETERMINATIONS OF RIGHTS. Except in a situation governed by Section 3, any indemnification under Section 1 or Section 2 (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, employee, or agent is proper in the circumstances because he has met the applicable standard or conduct set forth in Section 1 or Section 2. The determination shall be made (a) by a majority vote, at a meeting of directors, of those directors who constitute a quorum and who also were not and are not parties to or threatened with any such action, suit, or proceeding or (b) if such a quorum is not obtainable (or even if obtainable) and a majority of disinterested directors so directs, in a written opinion by independent legal counsel (compensated by the Company) or (c) by the affirmative vote in person or by proxy of the holders of record of a majority of the shares held by persons who were not and are not parties to or threatened with any such action, suit, or proceeding and entitled to vote in the election of directors, without regard to voting power which may thereafter exist upon a default, failure, or other contingency or (d) by the Court of Common Pleas or the court in which such action, suit, or proceeding was brought. SECTION 5. ADVANCES OF EXPENSES. Unless at the time of a director's act or omission that is the subject of an action, suit, or proceeding referred to in Section 1 or Section 2 hereof, the only liability asserted against a director in the action, suit, or proceeding referred to in Section 1 or Section 2 hereof is pursuant to Section 1701.95 of the Revised Code: (a) expenses, including attorney's fees, incurred by a director in defending the action, suit, or proceeding shall be paid by the company as they are incurred, in advance of the final disposition of the action, suit, or proceeding upon receipt or an undertaking by or on behalf of the director in which he agrees both: (i) to repay the amount if it is proved by clear and convincing evidence in a court of competent jurisdiction that his action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the company or undertaken with reckless disregard for the best interests of the company and (ii) to reasonably cooperate with the company concerning the action, suit, or proceeding. (b) expenses (including attorney's fees), incurred by a director, officer, employee, or agent in defending any action, suit or proceeding referred to in Section 1 or Section 2 of this Article V may be paid by the Company, as they are incurred, in advance of final disposition of the action, suit, or proceeding, as authorized by the Board of Directors in the specific case, upon receipt of an undertaking by or on behalf of the director, officer, employee, or agent to repay the amount if it is ultimately determined that he is not entitled to be indemnified by the Company. SECTION 6. PURCHASE OF INSURANCE. The Company may purchase and maintain insurance or furnish similar protection, including but not limited to trust funds, letters of credit, or self-insurance, on behalf of or for any person who is or was a director, officer, employee, or agent of the Company, or is or was serving at the request of the Company as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against any liability asserted against him and incurred by him in any capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against liability under the provisions of this Article or of the Ohio General Corporation Law. Insurance may be purchased from or maintained with a person in which the Company has a financial interest. SECTION 7. MERGERS. In the case of a merger into this Company of a constituent corporation which, if its separate existence had continued, would have been required to indemnify directors, trustees, officers, employees, or agents in specified situations, any person who served as a director, officer, employee or agent of the constituent corporation, or served at the request of the constituent corporation as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, shall be entitled to indemnification by this Company (as the surviving corporation) to the same extent he would have been entitled to indemnification by the constituent corporation if its separate existence had continued. SECTION 8. NON-EXCLUSIVITY; HEIRS. Indemnification authorized by this Article shall not be exclusive of , and shall be in addition to, any other rights granted to those seeking indemnification as a matter of law or under the Articles, these Regulations, any agreement, a vote of shareholders or disinterested directors, any insurance purchased by the Company, any action by the directors to take into account amendments to the Ohio General Corporation Law that expand the authority of the Company to indemnify a director, officer, employee, or agent of the Company, or otherwise, both as to action in his official capacity and as to action in another capacity while holding an office, and shall continue as to a person who has ceased to be a director, trustee, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. ARTICLE VI RECORD DATE For any lawful purpose, including, without limitation, the determination of the shareholders who are entitled to receive notice of or to vote at a meeting of shareholders, the Board of Directors may fix a record date in accordance with the provisions of the Ohio General Corporation Law. The record date for the purpose of the determination of the shareholders who are entitled to receive notice of or to vote at a meeting of shareholders shall continue to be the record date for all adjournments of such meeting, unless the Board of Directors or the persons who shall have fixed the original record date shall, subject to the limitations set forth in the Ohio General Corporation Law, fix another date, and, in case a new record date is so fixed, notice thereof and of the date to which the meeting shall have been adjourned shall be given to shareholders of record as of such date in accordance with the same requirements as those applying to a meeting newly called. The Board of Directors may close the share transfer books against transfers of shares during the whole or any part of the period provided for in this Article, including the date of the meeting of shareholders and the period ending with the date, if any, to which adjourned. If no record date is fixed therefore, the record for determining the shareholders who are entitled to receive notice of or to vote at a meeting of shareholders shall be the date next preceding the day on which notice is given, or the date next preceding the day on which the meeting is held, as the case may be. ARTICLE VII CERTIFICATES FOR SHARES SECTION 1. FORM OF CERTIFICATES AND SIGNATURES. Each holder of shares shall be entitled to one or more certificates, signed by the Chairman of the Board, the Vice Chairman of the Board, the President, an Executive Vice President, Senior Vice President, or a Vice President and by the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer of the Company, which shall certify the number of class of shares held by him in the Company, but no certificate for shares shall be executed or delivered until such shares are fully paid. When such a certificate is countersigned by an incorporated transfer agent or registrar, the signature of any of said officers of the Company may be facsimile, engraved, stamped, or printed. Although any officer of the Company whose manual or facsimile signature is affixed to such a certificate ceases to be such officer before the certificate is delivered, such certificate nevertheless shall be effective in all respects when delivered. SECTION 2. TRANSFER OF SHARES. Shares of the Company shall be transferable upon the books of the Company by the holders thereof, in person, or by a duly authorized attorney, upon surrender and cancellation of certificates for a like number of shares of the same class or series, with duly executed assignment and power of transfer endorsed thereon or attached thereto, and with such proof of the authenticity of the signatures to such assignment and power of transfer as the Company or its agents may reasonably require. SECTION 3. LOST, STOLEN, OR DESTROYED CERTIFICATES. The Company may issue a new certificate for shares in place of any certificate theretofore issued by it and alleged to have been lost, stolen, or destroyed, and the Board of Directors may, in its discretion, require the owner, or his legal representatives, to give the Company a bond containing such terms as the Board of Directors may require to protect the Company or any person injured by the execution and delivery of a new certificate. SECTION 4. TRANSFER AGENT AND REGISTRAR. The Board of Directors may appoint, or revoke the appointment of, transfer agents and registrars and may require all certificates for shares to bear the signature of such transfer agents and registrars, or any of them. ARTICLE VIII CORPORATE SEAL The corporate seal of this Company shall be circular in form and shall contain the name of the Company. Failure to affix the corporate seal to any instrument executed on behalf of the Company shall not affect the validity of such instrument. ARTICLE IX AMENDMENTS The Regulations of the Company may be amended, or new Regulations may be adopted, by the shareholders at a meeting held for such purpose, by affirmative vote of the holders of shares entitling them to exercise a majority of the voting power on such proposal or, without a meeting, by the written consent of the holders of shares entitling them to exercise two-thirds of the voting power on such proposal. If the Regulations are amended or new Regulations are adopted without a meeting of the shareholders, the Secretary of the Company shall mail a copy of the amendment or the new Regulations to each shareholder who would have been entitled to vote thereon and did not participate in the adoption thereof. EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The Registrant has three wholly-owned subsidiaries, Davey Tree Surgery Company (incorporated in Ohio), Davey Tree Expert Co. of Canada, Limited (incorporated in Canada) and B.D. Wilhelm Company (incorporated in Colorado), each of which did business in 1996 under its corporate name. EX-21 5 ex21.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction of Organization Davey Tree Surgery Company Ohio Davey Tree Expert Co. of Canada Canada, Limited EX-23.1 6 ex23a.txt EXHIBIT 23 EXHIBIT 23.2 Consent of Independent Auditors We consent to the incorporation by reference in Registration Statement Nos. 33-21072, 33-59347 and 333-24135 on Forms S-8 relating to The Davey Tree Expert Company 1987 Incentive Stock Option Plan, The Davey Tree Expert Company 1994 Omnibus Stock Plan, and The Davey Tree Expert 1997 401KSOP and ESOP and in Registration Statement No. 33-28041 on Form S-2 relating to The Davey Tree Expert Company 1989 Stock Subscription Plan and in the related prospectus, of our report dated March 7, 2001 appearing in this Annual Report on Form 10-K of The Davey Tree Expert Company for the year ended December 31, 2001. /s/ Deloitte & Touche LLP Cleveland, Ohio March 29, 2002 EX-23.2 7 ex23b.txt EXHIBIT 23 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference of our report dated February 22, 2002, with respect to the consolidated financial statements of The Davey Tree Expert Company included in this Annual Report (Form 10-K) for the year ended December 31, 2001, in the following Registration Statements and in the related Prospectuses: Registra tion Description of Number Registration Statement 33-21072 The Davey Tree Expert Company 1987 Incentive Stock Option Plan - Form S-8 33-28041 The Davey Tree Expert Company 1989 Stock Subscription Plan - Amendment No. 2 to Form S-2 33-59347 The Davey Tree Expert Company 1994 Omnibus Stock Plan - Form S-8 333- The Davey 401KSOP and ESOP - Form S-8 24155 /s/ Ernst & Young LLP Akron, Ohio March 25, 2002 -----END PRIVACY-ENHANCED MESSAGE-----