DAVEY TREE EXPERT CO - 10-K Annual Report

THE DAVEY TREE EXPERT COMPANY
(Exact name of registrant as specified in its charter)

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 X 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. X

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes X No

There were 7,817,297 Common Shares outstanding as of March 1, 2004. The aggregate market value of the Common Shares held by nonaffiliates of the registrant as of June 28, 2003 was $82,907,542. For purposes of this calculation, it is assumed that the registrant's affiliates include the registrant's Board of Directors and its executive officers.

Portions of the registrant's definitive Proxy Statement for the 2004 Annual Meeting of Shareholders, to be held on May 18, 2004 are incorporated by reference into Part III (to be filed).

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:

- Our business, other than tree services to utility customers, is highly seasonal, and weather dependent.

- Significant customers, particularly utilities, may experience financial difficulties, resulting in payment
delays or delinquencies.

- 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, which was founded in 1880 and 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.

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, our competition is primarily landscape construction and maintenance companies as well as residential and commercial lawn care companies. At a local and regional level, our 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 2003, we had sales of approximately $48.8 million to Pacific Gas & Electric Company ("PG&E"), one of our largest customers.

On April 6, 2001, 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's administrative expenses.

On September 20, 2001, PG&E filed a reorganization plan as part of its Chapter 11 bankruptcy proceeding that seeks to pay all of its creditors in full. In addition to PG&E's reorganization plan, there was a competing alternative proposed plan of reorganization filed by the California Public Utilities Commission and the Official Committee of Unsecured Creditors ("CPUC/OCC plan"). The bankruptcy court began confirmation hearings in December 2002 to determine whether to confirm the PG&E plan, the CPUC/OCC plan or neither plan. The bankruptcy court subsequently suspended the confirmation trial process in early 2003 and ordered mandatory settlement discussions.

On June 19, 2003, it was announced that Pacific Gas & Electric Corporation ("PG&E Corporation," the parent company of PG&E), the staff of the California Public Utilities Commission ("CPUC"), and PG&E entered into a proposed settlement agreement that contemplates a new plan of reorganization (the "Settlement Plan") to supersede the competing plans. Subsequently, PG&E Corporation, PG&E, and the Official Committee of Unsecured Creditors ("OCC"), as co-proponents, filed the Settlement Plan with the bankruptcy court. The Settlement Plan contemplates the payment of all creditors, in full and in cash.

Confirmation hearings were concluded in the U.S. Bankruptcy Court for the Northern District of California and the Settlement Plan was confirmed and the confirmation order was signed on December 22, 2003. In addition, the CPUC held hearings on the Settlement Plan and on December 18, 2003 voted three-to-two in favor of the plan that was confirmed by the bankruptcy court. Certain appeals and legal challenges are currently pending with regard to both the bankruptcy court order and the CPUC decision. The effective date of the plan of reorganization as contemplated in the confirmation order entered by the bankruptcy court is March 31, 2004. That date may be changed to a date in the second quarter of 2004 to accommodate contingencies that must be met before the plan can become effective. Legal challenges and the appeals filed in response to the confirmation order and the CPUC decision could lead to other delays.

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. Because of the uncertainty as to when payment will be received, the prepetition receivables are classified as noncurrent other assets.

The balance of prepetition accounts receivable,$11,931,has been reduced from the initial April 6, 2001 balance outstanding, $13,326, by interest payments received from PG&E totaling $559 during 2003 and $836 during 2002.

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.

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.

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 to provide the necessary funds for our operations. You can find more information about our bank commitments in "Liquidity and Capital Resources" under "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 17-20 of this report.

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.

We employed approximately 5,100 employees at December 31, 2003. However, employment levels fluctuate due to seasonal factors affecting our business. We consider our employee relations to be good.

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.

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 report.

Davey Tree's internet address is http://www.davey.com. Through our internet website, by hyperlink to the SEC's website (http://www.sec.gov), Davey Tree makes available, free of charge, it's Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports. Availability of the reports occurs contemporaneous with the electronic posting to the SEC's website as the reports are electronically filed with or furnished to the Securities and Exchange Commission.

The following documents are also made available on the Company's website and a copy will be mailed, without charge, upon request to our Corporate Secretary:

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' administrative functions are conducted through properties located 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:

None of our owned or rented properties used by our business segments is individually material to our operations.

We are a party to routine litigation incidental to our business. We do not believe that this litigation, individually or in the aggregate, will have a material affect on our business, financial condition or results of operations.

No matters were submitted to a vote of our shareholders during the fourth quarter of 2003.

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. Comport was elected Treasurer in May 2001. Prior to that time, he served as Corporate Controller.

Ms. Conner was elected Assistant Secretary in May 1998. Prior to that time, she served as Manager of Legal and Treasury Services.

Dr. Funk was elected Vice President and General Manager - The Davey Institute in May 1996.

Mr. Johnson was elected Corporate Vice President in January 2003. From 1999 to January 2003, he served as Vice President of Operations Support Services. Prior to joining us, Mr. Johnson served in various capacities, including director of operations and director of sales, at Lesco, Inc., a specialty provider of products for the professional turf care and green industry markets, from 1986 to 1999. Prior to joining Lesco, Mr. Johnson held various management positions at TruGreen/Chemlawn, a provider of lawn care, tree and shrub services and a segment of The Servicemaster Company, from 1979 to 1986.

Mr. Marshall was elected Vice President and General Manager of Eastern Utility Services in January 2003. Prior to that time, he served as Vice President - Northern Operations, Utility Service.

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. 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.

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.

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

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. Since 1979, the Company has provided a ready market for all shareholders through its direct purchase of their common shares.

On March 1, 2004, we had 7,817,297 common shares outstanding, options exercisable to purchase 496,870 common shares, partially-paid subscriptions for 808,555 common shares and purchase rights outstanding for 257,900 common shares.

The partially-paid subscriptions related to common shares purchased at $12.00 per share, in connection with the stock subscription offering completed in August 2002, whereby some employees opted to finance their subscription with a down-payment of at least 10% of their total purchase price and a seven-year promissory note for the balance due, with interest at 4.75%. Promissory note payments, of both principal and interest, are made either by payroll deduction or annual lump-sum payment. The promissory notes are collateralized with the common shares subscribed and the common shares are only issued when the related promissory note is paid-in-full. Dividends are paid on all unissued subscribed shares.

The purchase rights outstanding were granted to purchase one additional common share at the price of $12.00 per share for every two common shares purchased in connection with the stock subscription offering completed in August 2002. Each right may be exercised at the rate of one-seventh per year and will expire seven years after the date that the right was granted. Employees may not exercise a right should they cease to be employed by the Company.

The following table sets forth, for the periods indicated, the dividends declared on our common shares (in cents):

	Year Ended December 31,
Quarter	2003	2002
1	6.0	6.0
2	6.0	6.0
3	6.0	6.0
4	6.5	6.0

Total	24.5	24.0

We presently expect to pay comparable cash dividends in 2004.

Page 10

Recent Sale of Unregistered Securities

None.

Equity Compensation Plan Information

The following table summarizes the information about our equity compensation plans as of
December 31, 2003.

Equity Compensation Plan Information ⁽¹⁾

Plan category	Number of securities to be issued upon exercise of outstanding options and rights (a)	Weighted-average exercise price of outstanding options and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) ⁽³⁾ (c)

Equity compensation plans approved by security holders	1,277,979	$11.16	557,500


Equity compensation plans not approved by security holders ⁽²⁾	None	None	None

     (1)   The equity compensation plans included in this table consist of stock options which were granted under
             the 1987 Incentive Stock Option Plan or the 1994 Omnibus Stock Plan, which were approved by the
             security holders at the Company's annual meeting in 1987 and 1994, respectively. The table also
             includes stock rights granted to employees under the 2002 Stock Subscription Plan, which was
             authorized under the 1994 Omnibus Stock Plan. All options and rights were granted at the fair market
             value of the stock, as determined by the independent stock valuation firm, as of the date of the grant.

(2) No equity securities have been issued or authorized for issuance under any plan that has not been
approved by the security holders of the Company.

(3) Reflects common shares reserved under the 1994 Omnibus Stock Plan for stock option grants that
have not been granted or forfeited.

Page 11

Item 6. Selected Financial Data.

	Fiscal Year Ended December 31,
	2003	2002	2001	2000	1999
	(In thousands, except ratio and per share data)
Operating Statement Data:

Revenues	$ 346,263	$ 319,273	$ 321,284	$ 322,236	$ 308,144

Costs and expenses:
Operating	226,454	211,549	212,783	226,441	210,628
Selling	56,758	50,865	50,564	49,978	45,403
General and administrative	25,947	22,800	22,567	23,015	21,742
Depreciation	19,274	19,370	19,054	20,722	20,019
Amortization of intangible assets	1,501	692	466	459	393

Income from operations	16,329	13,997	15,850	1,621	9,959

Interest expense	(2,062)	(3,121)	(4,993)	(6,217)	(4,947)
Gain on sale of assets	931	2,054	1,023	1,172	1,487
Other expense	(465)	(993)	(744)	(60)	(349)

Income (loss) before income taxes	14,733	11,937	11,136	(3,484)	6,150
Income taxes (benefit)	6,016	4,716	4,405	(1,080)	2,435

Net income (loss)	$ 8,717	$ 7,221	$ 6,731	$ (2,404)	$ 3,715


Net income (loss) per share--diluted	$ .99	$ .85	$ .82	$ (.30)	$ .42

Shares used for computing per share amounts--diluted (a)	8,806	8,508	8,231	7,929	8,872


Other Financial Data:

Depreciation and amortization	$ 20,775	$ 20,062	$ 19,520	$ 21,181	$ 20,412

Capital expenditures	19,975	16,127	11,692	17,476	20,580

Cash flow provided by (used in):
Operating activities	28,263	29,427	29,813	31,267	(3,835)
Investing activities	(19,740)	(16,670)	(10,356)	(14,209)	(18,707)
Financing activities	(8,903)	(12,572)	(19,108)	(17,058)	21,335

Dividends per share (a)	$ .24	$ .24	$ .22	$ .22	$ .20

Page 12

		As of December 31,
		2003	2002	2001	2000	1999
		(In thousands, except ratio and per share data)
Balance Sheet Data:

Working capital		$ 20,208	$ 15,422	$ 16,255	$ 35,386	$ 46,714

Current ratio		1.42	1.33	1.39	2.09	2.62

Property and equipment, net		66,753	66,863	70,111	78,076	84,008

Total assets		166,837	161,156	155,473	159,382	176,682

Long-term debt		30,178	36,605	41,887	57,414	65,904

Other long-term liabilities		26,323	24,335	21,904	22,078	19,826

Shareholders' equity		62,147	54,135	50,250	47,392	56,240


Common shares (a):
Issued		10,728	10,728	10,728	10,728	10,728
In treasury		2,924	3,048	3,000	2,932	2,601

Net outstanding		7,804	7,680	7,728	7,796	8,127


Stock options (a):
Outstanding		1,019	868	1,205	1,342	1,395
Exercisable		507	868	1,205	1,236	1,183

ESOT valuation per share		$ 15.70	$ 12.80	$ 12.00	$ 11.00	$ 13.00


(a)	On May 19, 1999, the Company's Board of Directors declared a 2-for-1 stock split in the form of a 100% stock dividend on outstanding shares, to shareholders of record as of June 1, 1999. To effect the stock split, the Board of Directors authorized the retirement of 1,981,894 common shares held in treasury. Common share disclosures have also been restated, where appropriate, to reflect the 2-for-1 stock split.

Page 13

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

(Amounts in thousands, except share data)

You should read the following discussion in conjunction with our consolidated financial statements for the three-year period ended December 31, 2003, and the notes thereto, included elsewhere in this annual report.

GENERAL

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

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

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

RESULTS OF OPERATIONS

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

	Year Ended December 31,
	2003	2002	2001
Revenues	100.0%	100.0%	100.0%

Costs and expenses:
Operating	65.5	66.3	66.2
Selling	16.4	15.9	15.7
General and administrative	7.5	7.1	7.1
Depreciation	5.6	6.1	6.0
Amortization of intangible assets	.4	.2	.1

	95.4	95.6	95.1

Income from operations	4.6	4.4	4.9

Other income (expense):
Interest expense	(.6)	(1.0)	(1.5)
Gain on sale of assets	.3	.6	.3
Other	(.1)	(.3)	(.2)


Income before income taxes	4.2	3.7	3.5
Income taxes	1.7	1.4	1.4


Net income	2.5%	2.3%	2.1%

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Overview

Revenues of $346,263 were 8.5% higher than last year's revenues of $319,273. All operating segments experienced revenue increases from the prior year. Utility Services revenues increased 9.6% while Residential and Commercial Services were up 6.8%. All other revenues, comprised of the Canadian operations and Davey Resource Group, were up 11.7%.

Overall, income from operations of $16,329 increased 16.7% from the $13,997 experienced in the prior year. Utility Services increased 11.0%, a reflection of the strong demand for Utility services. Residential and Commercial Services increased 8.5% due to continuing strong demand for these services. All other operations, comprised of the Canadian operations and Davey Resource Group, were up 30.3%.

Net income of $8,717 was $1,496 or 20.7% higher than the $7,221 earned in 2002 and was favorably impacted not only by higher income from operations but also by a decrease in interest expense of $1,059, the result of our continuing efforts to aggressively manage our cash flow, reduce debt and increase our equity-to-debt ratio. As of December 31, 2003 our bank debt, consisting of borrowings on our revolving credit facility had declined $5,100 from the prior year end.

As we await final resolution to the Pacific Gas and Electric Company ("PG&E") bankruptcy and payment of our prepetition accounts receivable of $11,931, we continue to receive interest payments. As of December 31, 2003, interest of $1,395 has been received and is reflected as a reduction to the initial prepetition receivable of $13,326. We remain confident that we will be paid in full once a final resolution is reached.

Fiscal 2003 Compared to Fiscal 2002

Revenues--Revenues of $346,263 increased $26,990 over the $319,273 in 2002. Utility Services increased $12,763 or 9.6% from the prior year and is the result of additional contracts and pricing adjustments within our western utility operations as well as additional revenues in our eastern utility operations due to additional storm-damage work in North Carolina. Residential and Commercial Services increased $10,635 or 6.8% over 2002, primarily related to acquisitions made in 2003 and the latter half of 2002 as well as more favorable weather conditions during the year.

Operating Expenses--Operating expenses of $226,454 increased $14,905 from the prior year, but as a percentage of revenues decreased .8% to 65.5%. Utility Services experienced an increase of $11,756 from the prior year, the result of labor and equipment costs associated with new contracts obtained within our western utility operations. Residential and Commercial increased $3,785 primarily the result of storm-damage work in North Carolina.

Selling Expenses--Selling expenses of $56,758 increased $5,893 from 2002 and as a percentage of revenues increased .5% to 16.4%. Residential and Commercial Services increased $6,214, primarily for field management wages, branch office expenses and wages associated with purchased operations that were acquired in 2003 and the latter half of 2002. All other segments combined decreased $321.

General and Administrative Expenses--General and administrative expenses increased $3,147 to $25,947 or 13.8% from the $22,800 experienced in 2002. The increase is attributable to: (a) an increase in professional services of $1,197, arising from a $600 credit in 2002 from the resolution of disputed services; (b) the recognition of pension expense in 2003 as compared to income in 2002, a change of $1,025; and, (c) an increase in employee wage and incentive expense of $550.

Page 15

Depreciation and Amortization Expense--Depreciation and amortization expense of $20,775 increased $713 from the prior year but as a percentage of revenues decreased .3% to 6.0%. The $713 increase is the result of additional capital expenditures for equipment and business acquisitions within Residential and Commercial Services. Depreciation and amortization expense in 2004 is anticipated to increase over 2003 as a result of acquisitions.

Interest Expense--Interest expense of $2,062 declined $1,059 or 33.9% from the $3,121 incurred in 2002.

Lower average debt-levels and lower interest rates on bank borrowings account for the decrease.

Gain on Sale of Assets--For 2003, the gain on the sale of assets was $931. Last year, the gain on the sale of assets totaled $2,054, including $919 from the 2002 sale of a facility associated with our Residential and Commercial Services operations.

Income Taxes--Income tax expense for 2003 was $6,016. The 2003 effective rate of 40.8% includes a 6.7% effect of state income taxes.

Net Income--Net income of $8,717 exceeded 2002's net income by $1,496, or an increase of .2% as a percentage of revenues.

Fiscal 2002 Compared to Fiscal 2001

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

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

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

General and Administrative Expenses--General and administrative expenses increased 1.0% to $22,800 from the $22,567 experienced in 2001, the result of higher employee incentive expense and a decrease in pension income.

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

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

Page 16

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

Cash decreased $380 during the year ended December 31, 2003. Net cash provided by operating activities of $28,263 were offset by uses of cash consisting of $19,740 for investing activities and $8,903 for financing activities.

Net Cash Provided by Operating Activities

Operating activities in 2003 provided cash of $28,263, or $1,164 lower than the $29,427 provided in 2002. The $1,164 net decline was due to an increase in accounts receivable and deferred taxes, lower increases in prepaid insurance premiums and gain on the sale of property which were partially offset by increases in self-insurance accruals and lower increases in accounts payable and accrued expenses.

Net income of $8,717 increased $1,496 when compared to the $7,221 in 2002.

Overall, accounts receivable dollars increased $4,017 in 2003 as compared to the $689 increase experienced in 2002. The "day-sales-outstanding" in accounts receivable decreased 3 days as at December 31, 2003 as compared with the prior year end. We continue to strive to collect accounts receivable dollars and reduce days-sales-outstanding.

On April 6, 2001, one of the Company's largest utility customers, 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's administrative expenses.

Page 17

Confirmation hearings were concluded in the U.S. Bankruptcy Court for the Northern District of California and the Settlement Plan was confirmed and the confirmation order was signed on December 22, 2003. In addition, the CPUC held hearings on the bankruptcy Settlement Plan and on December 18, 2003 voted three-to-two in favor of the plan that was confirmed by the bankruptcy court. Certain appeals and legal challenges are currently pending with regard to both the bankruptcy court order and the CPUC decision. The effective date of the plan of reorganization as contemplated in the confirmation order entered by the bankruptcy court is March 31, 2004. That date may be changed to a date in the second quarter of 2004 to accommodate contingencies that must be met before the plan can become effective. Legal challenges and the appeals filed in response to the confirmation order and the CPUC decision could lead to other delays.

Accounts payable and accrued expenses increased $379 in 2003, a decrease of $3,209 when compared to the increase of $3,588 experienced in 2002. The increase is primarily attributable to an increase in self-insured medical claims, commercial insurance liabilities, income taxes payable and accrued vacation. These increases were partially offset by decreases in trade payables, employee compensation and tax liabilities.

Self-insurance accruals increased $4,534 in 2003, $1,242 more than the increase experienced in 2002. The increase occurred in all classifications, workers compensation, general liability and vehicle liability and resulted primarily from an overall increase in deductible amounts under commercial insurance, or the self-insured risk retention.

Other assets increased $906 in 2003, a change of $1,668 over the $2,574 increase in 2002. The increase is the result of advance payments for insurance premiums related to our workers compensation, vehicle liability and general liability policies.

Net Cash Used in Investing Activities

Investing activities used $19,740 in cash, or $3,070 more than that used in 2002, the result of higher expenditures for equipment and business acquisitions. The expenditures were offset by lesser proceeds from the sale of property and equipment. We anticipate the level of capital expenditures in 2004 will exceed that of 2003.

Net Cash Used in Financing Activities

Financing activities used $8,903 in 2003, a decrease of $3,669 over the $12,572 used in 2002. Net borrowings outstanding, from the revolving credit agreement, decreased by $5,100. The continued decrease was consistent with our planned efforts to reduce debt levels. Borrowings of notes payable increased $638 and other debt and capital lease obligations decreased $2,825. Purchases of common shares for treasury of $5,987 was offset by cash received from the sale of common shares of $5,245 and $1,210 of cash received on our common share subscription. Dividends paid during 2003 totaled $2,084.

Page 18

X	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the fiscal year ended December 31, 2003

	OR

	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from ______________ to ______________

	Commission file number 0-11917

Ohio	34-0176110
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

1500 North Mantua Street P.O. Box 5193
Kent, Ohio 44240 (Address of principal executive offices) (Zip code)

(330) 673-9511 (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Shares, $1.00 par value

THE DAVEY TREE EXPERT COMPANY FORM 10-K For the Fiscal Year Ended December 31, 2003 TABLE OF CONTENTS

	Page
Note Regarding Forward-Looking Statements	2

PART I
Item 1: Business	4
Item 2: Properties	7
Item 3: Legal Proceedings	7
Item 4: Submission of Matters to a Vote of Security Holders	8
Item 4A: Executive Officers of the Registrant	8

PART II
Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	10
Item 6: Selected Financial Data	12
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A: Quantitative and Qualitative Disclosures About Market Risk	22
Item 8: Financial Statements and Supplementary Data	22
Item 9: Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	22
Item 9A: Controls and Procedures	22

PART III
Item 10: Directors and Executive Officers of the Registrant	23
Item 11: Executive Compensation	23
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters	23
Item 13: Certain Relationships and Related Transactions	23
Item 14: Principal Accountant Fees and Services	23

PART IV
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K	24

Signatures	25

Exhibit Index	26

Segment	Number of Properties	How Held	Square Footage	Number of States or Provinces

Residential and Commercial	20	Owned	167,457	12

Residential, Commercial and Utility	2	Owned	12,400	2

Utility	5	Owned	40,587	5

Canada	3	Owned	9,975	2


Our executive officers and their present positions and ages as of March 5, 2004 follows:

Name	Position	Age

R. Douglas Cowan	Chairman and Chief Executive Officer	63

Karl J. Warnke	President and Chief Operating Officer	52

David E. Adante	Executive Vice President, Chief Financial Officer and Secretary	52

Howard D. Bowles	Senior Vice President and General Manager, Davey Tree Surgery Company	60

C. Kenneth Celmer	Senior Vice President and General Manager, Residential and Commercial Services	57

Bradley L. Comport, CPA (inactive)	Treasurer	52

Marjorie L. Conner, Esquire	Assistant Secretary	46


Dr. Roger C. Funk	Vice President and General Manager, The Davey Institute	59

Frederick W. Johnson	Corporate Vice President	59

Steven A. Marshall	Vice President and General Manager, Eastern Utility Services	52

Rosemary T. Nicholas	Assistant Secretary	60

Gordon L. Ober	Vice President - Personnel Recruiting and Development	54

Richard A. Ramsey	Vice President and General Manager, Canadian Operations	54

Nicholas R. Sucic, CPA	Corporate Controller	57