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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition Period from _________ to _________
Commission File Number 1-8929
ABM INDUSTRIES INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-1369354
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
160 PACIFIC AVENUE, SUITE 222, SAN FRANCISCO, CALIFORNIA 94111
(Address and zip code of principal executive offices)
TELEPHONE: 415/733-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange on Which
Title of Each Class Registered
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE AND
PACIFIC EXCHANGE, INC.
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE AND
PACIFIC EXCHANGE, INC.
Securities registered pursuant to Section 12(g) of the Act: None
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.
As of December 31, 1998, nonaffiliates of the registrant beneficially owned
16,588,582 shares of the registrant's common stock with an aggregate market
value of $574,379,652.
As of December 31, 1998, there were 21,721,472 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be used by the Company in connection with its
1999 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Form 10-K.
ABM INDUSTRIES INCORPORATED
FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
TABLE OF CONTENTS
PART I PAGE
- ------- ----
Item 1 Business........................................................................ 3
Executive Officers of the Registrant............................................ 6
Item 2 Properties...................................................................... 7
Item 3 Legal Proceedings............................................................... 7
Item 4 Submission of Matters to a Vote of Security Holders............................. 7
PART II
- -------
Item 5 Market for Registrants' Common Equity and Related Stockholder Matters........... 7
Item 6 Selected Financial Data......................................................... 8
Management's Discussion and Analysis of Financial Condition and Results of
Item 7 Operations...................................................................... 9
Item 7a Qualitative and Quantitative Disclosures About Market Risk...................... 15
Item 8 Financial Statements and Supplementary Data..................................... 16
Item 9 Disagreements on Accounting and Financial Disclosure............................ 30
PART
III
- -------
Item 10 Directors and Executive Officers of The Registrant.............................. 30
Item 11 Executive Compensation.......................................................... 30
Item 12 Security Ownership of Certain Beneficial Owners and Management.................. 30
Item 13 Certain Relationships and Related Transactions.................................. 30
PART IV
- -------
Item 14 Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K... 31
Exhibit Index................................................................... 32
Signatures...................................................................... 33
PART I
ITEM 1. BUSINESS.
ABM Industries Incorporated ("ABM") is the largest facility services
contractor listed on the New York Stock Exchange. With annual revenues exceeding
$1.5 billion and more than 55,000 employees, ABM and its subsidiaries (the
"Company") provide air conditioning, elevator, engineering, janitorial,
lighting, parking and security services to thousands of commercial, industrial
and institutional customers who outsource these services in hundreds of cities
across North America.
ABM was reincorporated in Delaware on March 19, 1985, as the successor to a
business founded in California in 1909. The Corporate Headquarters of the
Company are located at 160 Pacific Avenue, Suite 222, San Francisco, California
94111, and our telephone number is 415/733-4000.
BUSINESS SEGMENT INFORMATION
The Company's nine divisions (comprised of one or more subsidiaries of the
Company), listed below by tradenames, operate in three functionally-oriented
segments of the facility services industry -- Janitorial Divisions, Public
Service Divisions and Technical Divisions.
JANITORIAL PUBLIC SERVICE TECHNICAL
DIVISIONS DIVISIONS DIVISIONS
- --------------------------------------------------------------------------------
American Building American Commercial ABM Engineering
Maintenance Security Services Services
Easterday Janitorial Supply Ampco System Parking Amtech Elevator
Services
ABM Facility Services
Amtech Lighting
Services
CommAir Mechanical
Services
Additional information relating to the Company's three industry segments
appears in Note 15 of Item 8, Financial Statements and Supplementary Data of
this Form 10-K. The business activities of the Company's three industry segments
and nine operating divisions, as they existed at October 31, 1998, are more
fully described below.
JANITORIAL DIVISIONS
The Company's Janitorial Divisions segment provides janitorial cleaning
services as well as janitorial supplies and equipment to its customers.
Operating from 85 offices throughout the United States and Canada, this segment
accounted for approximately 56%, 57% and 59% of the Company's revenues in the
fiscal years ended October 31, 1996, 1997 and 1998, respectively.
/ / AMERICAN BUILDING MAINTENANCE (also known as ABM Janitorial
Services) provides a wide range of basic janitorial services for a variety
of structures and organizations, including office buildings, industrial
plants, banks, department stores, theaters, warehouses, educational and
health institutions and airport terminals. Services provided include floor
cleaning and finishing, wall and window washing, furniture polishing, rug
cleaning, dusting, and other building cleaning services. This Division
maintains 79 offices in 37 states, the District of Columbia and one Canadian
province, and operates under thousands of individually negotiated building
maintenance contracts, the majority of which are obtained by competitive
bidding. Generally, profit margins on maintenance contracts tend to be
inversely proportional to the size of the contract. Although many of the
Division's maintenance contracts are fixed price agreements, others contain
clauses under which the customer agrees to reimburse the Division for the
full amount of wages, payroll taxes, insurance charges and other expenses
plus a profit percentage. The majority of the Division's contracts are for
one-year periods, contain automatic renewal clauses and are subject to
termination by either party upon 30 to 90 days written notice.
/ / EASTERDAY JANITORIAL SUPPLY markets janitorial supplies and
equipment through six sales offices located in San Francisco, Los Angeles
and Sacramento, California; Portland, Oregon; Reno, Nevada; and Houston,
Texas. Easterday has also approved 31 sub-distributors to serve American
Building Maintenance in 26 other states and the District of Columbia. Aside
from sales to American Building Maintenance, which, in 1998, accounted for
approximately 30% of Easterday Janitorial Supply's total revenues, the
principal customers for this Division are industrial plants, schools,
commercial buildings, industrial organizations, transportation terminals,
theaters, hotels, retail stores, restaurants, military establishments and
janitorial service companies. Among the products sold are cleaning
equipment, disinfectants, floor cleaners, floor finishes, glass cleaners,
paper products and polishes. The products sold include many nationally
advertised brands, which, in large part, are manufactured by others. This
Division blends certain cleaning agents and floor finishes which it
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sells under the Easterday tradename, and provides sanitation services to the
food industry.
PUBLIC SERVICE DIVISIONS
The Company's Public Service Divisions segment provides parking facility
services, commercial security and investigative services, and "bundled" facility
services to their customers.
The Public Service Divisions operate from 66 offices, which are located
throughout the United States. For the fiscal years ended October 31, 1996, 1997
and 1998, this segment accounted for approximately 21%, 19% and 17%,
respectively, of the Company's revenues.
The three Public Service Divisions are described below:
/ / AMERICAN COMMERCIAL SECURITY SERVICES (also known as "ACSS" and "ABM
Security Services") provides security guards, electric monitoring of fire,
life, safety, and access control devices, and security consulting services
to a wide range of businesses in the major metropolitan areas of Phoenix,
Arizona; San Francisco, San Diego and Los Angeles, California; Chicago,
Illinois; New Orleans, Louisiana; Minneapolis, Minnesota; Portland, Oregon;
Houston, Dallas, Fort Worth, Austin and San Antonio, Texas; Seattle,
Washington; and Salt Lake City, Utah. Much like American Building
Maintenance, the majority of this Division's contracts are for one-year
periods, contain automatic renewal clauses and are subject to termination by
either party upon 30 to 90 days written notice.
/ / AMPCO SYSTEM PARKING (also known as "Ampco System Airport Parking"
and "Ampco Express Airport Parking") operates approximately 1,500 parking
lots and garages, which are either leased from or operated for third
parties. The lease terms generally range from 5 to 20 years and usually
contain provisions for renewal options. Leases which expire may continue on
a month-to-month basis or are replaced by similar leases. Many leases
contain provisions for contingent rentals based on revenues. Ampco System
Parking currently operates in 24 states, including five of the 20 busiest
international airports in the U.S.: Denver, Honolulu, Newark, Phoenix, and
San Francisco. In conjunction with its on-airport parking services, this
Division also operates off-airport parking facilities in Philadelphia,
Houston, and Los Angeles, and parking shuttle bus service at twelve
locations.
/ / ABM FACILITY SERVICES provides customers with streamlined,
centralized control and coordination of multiple facility service needs.
This process is consistent with the greater competitive demands on corporate
organizations to become more efficient in the business market today. By
leveraging the core competencies of the Company's other affiliated
Divisions, this Division attempts to reduce overhead, such as redundant
personnel, for its customers by providing multiple services under a single
contract, with one contact and one invoice. The Division's National Service
Center provides centralized dispatching, emergency services, accounting and
related reports to financial institutions, high-tech companies, and other
customers regardless of industry or size. The Division is headquartered in
San Francisco and maintains its National Service Center in Sacramento.
TECHNICAL DIVISIONS
The Technical Divisions segment provides its customers with a wide range of
elevator, engineering, HVAC (heating, ventilation and air conditioning), and
lighting services through its four divisions. The Company believes that the
offering of such a wide range of services by an affiliated group provides its
customers with an attractive alternative to obtaining the services of a larger
number of unrelated individual contractors and/or subcontractors. A number of
the Divisions' service contracts are for one to three years and are generally
renewed after expiration. This segment's primary market consists of retail and
commercial businesses with multiple locations scattered over wide geographic
areas. Examples of such customers include high-rise office buildings, bank and
savings and loan branch systems, shopping centers, restaurant chains, service
stations, supermarkets, and convenience, discount and drug store chains.
The Technical Divisions operate from 46 offices located in Arizona,
California, Colorado, Florida, Georgia, Illinois, Louisiana, Maryland, Michigan,
Nevada, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, Texas,
and Washington, D.C. For the fiscal years ended October 31, 1996, 1997 and 1998,
this segment accounted for approximately 23%, 24% and 24%, respectively, of the
Company's revenues.
Operations of the four Technical Divisions during fiscal year 1998 are
described below:
/ / ABM ENGINEERING SERVICES provides building owners and managers with
on-site engineers to operate, maintain and repair electrical, energy
management, mechanical, and plumbing systems within a facility utilizing
computerized maintenance
4
management systems (CMMS). This service is primarily for high-rise office
buildings, but customers also include schools, warehouses, factories,
shopping malls and universities. ABM Engineering Services operates in
fifteen states through six regional offices, two of which are in California
and one each in Chicago, Illinois; Philadelphia, Pennsylvania; New York, New
York, and Phoenix, Arizona.
/ / AMTECH ELEVATOR SERVICES installs, maintains, modernizes and repairs
elevators and escalators in major metropolitan areas of California; Dallas
and Houston, Texas; Cincinnati, Ohio; Detroit, Michigan; Upper Marlboro,
Maryland; Las Vegas, Nevada; Pennsauken, New Jersey; Atlanta, Georgia;
Philadelphia, Pennsylvania; Phoenix, Arizona; Denver, Colorado; Chicago,
Illinois; and Washington, D.C. Amtech Elevator Services maintains seventeen
offices and several parts warehouses, and operates a fleet of radio-equipped
service vehicles.
/ / AMTECH LIGHTING SERVICES (also known as Sica Lighting & Electrical
Services) provides relamping, fixture cleaning and periodic maintenance
service to its customers. Amtech Lighting Services also repairs, services,
designs and installs outdoor signage. This Division maintains 21 offices,
eight of which are located in California; four of which are in Texas; and
one office in each of the following states: Arizona, Florida, Georgia,
Maryland, New Jersey, New Mexico, New York, Louisiana, and Oklahoma.
/ / COMMAIR MECHANICAL SERVICES (also known as "CommAir Preferred
Mechanical Services") installs, maintains, and repairs heating, ventilation
and air conditioning equipment, performs chemical water treatment, and
provides energy conservation services for commercial, industrial and
institutional facilities. CommAir Mechanical Services maintains nine
offices, eight of which are located in California, and one in Phoenix,
Arizona.
TRADEMARKS
The Company believes that it owns or is licensed to use all corporate names,
tradenames, trademarks, servicemarks, copyrights, patents and trade secrets
which are material to the Company's operations.
COMPETITION
The Company believes that each aspect of its business is highly competitive,
and that such competition is based primarily on price and quality of service.
The Company's competitors include a large number of regional and local companies
located in major cities throughout the United States and Canada. While the
majority of the Company's competitors in the janitorial and building maintenance
business operate in a limited geographic area, the operating divisions of a few
large, diversified companies compete with the Company on a national basis.
SALES AND MARKETING
The Company's sales and marketing efforts are conducted by its corporate,
division, region, branch and district offices. Sales, marketing, management and
operations personnel in each of these offices participate directly in selling
and servicing customers. The broad geographic scope of these offices enables the
Company to provide a full range of facility services through intercompany sales
referrals, multi-service "bundled" sales and national account sales. The Company
also has designated a nationwide group of "ABM Family of Services" executives to
market all of the Company's facility services capabilities.
The Company has a broad customer base including airports, apartment
complexes, city centers, colleges and universities, financial institutions,
industrial plants, office buildings, retail stores, shopping centers and theme
parks. No customer accounted for more than 5% of its revenues during the fiscal
year ended October 31, 1998.
EMPLOYEES
The Company employs over 55,000 persons, of whom the vast majority are
service employees who perform air conditioning, elevator, engineering,
janitorial, lighting, parking and security services. Approximately 25,700 of
these employees are covered under collective bargaining agreements. There are
about 3,400 employees with executive, managerial, supervisory, administrative,
professional, sales, marketing, clerical and other office assignments.
5
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company as of December 31, 1998 are as
follows:
PRINCIPAL OCCUPATIONS AND BUSINESS EXPERIENCE
NAME AGE DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------
William W. Steele 62 Chief Executive Officer since November 1994; President since
November 1991
Martinn H. Mandles 58 Chairman of the Board since December 1997; Chief Administrative
Officer since November 1991; Executive Vice President from
November 1991 to December 1997.
J. E. Benton, III 58 Senior Vice President since July 1994; Vice President from
November 1977 to July 1994
Sherrill F. Sipes, Jr. 63 Senior Vice President since July 1994; Vice President from May
1968 to July 1994
Henrik Slipsager 43 Senior Vice President of the Company since March 1998; Executive
Vice President of the Janitorial Services Division since January
1997; President & Chief Executive Officer, ISS International
Service System, Inc. from 1988 to 1994.
Donna M. Dell 50 Vice President & Chief Employment Counsel since July 1994; Vice
President & Legal Counsel, Wells Fargo Bank, from February 1990 to
June 1994
John F. Egan 62 Vice President of the Company, and President of the Janitorial
Services Division
David H. Hebble 63 Vice President & Chief Financial Officer
Harry H. Kahn 55 Vice President, General Counsel & Corporate Secretary
Douglas B. Bowlus 54 Treasurer
Vernon E. Skelton 54 Controller & Chief Accounting Officer since April 1997; Assistant
Vice President & Director of Accounting for more than five years
prior to April 1997
6
ITEM 2. PROPERTIES.
The Company has corporate, division, regional, branch, or district offices
in over 250 locations throughout the United States, and Canada. Twelve of these
facilities are owned by the Company and the remainder are leased. At October 31,
1998, the real estate owned by the Company had an aggregate net book value of
$3,380,000 and was located in: Phoenix, Arizona; Fresno, California;
Jacksonville and Tampa, Florida; Elko, Nevada; Portland, Oregon; Houston and San
Antonio, Texas; and Kennewick, Seattle, Spokane and Tacoma, Washington.
Rental payments under long and short-term lease agreements amounted to
$99,098,000 for the fiscal year ended October 31, 1998. Of this amount,
$70,072,000 in rental expense was attributable to the Ampco System Parking
Division for public parking lots and garages that it leases and operates. The
remaining expense was for the rental or lease of office space, operating
equipment and motor vehicles.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION AND DIVIDENDS
The Company's common stock is listed on the New York Stock Exchange and
Pacific Exchange, Inc. The Company's credit agreement places certain limitations
on dividend payments based on net income (see Note 5 to the Consolidated
Financial Statements in Item 8). The following table sets forth the high and low
prices of the Company's common stock and quarterly cash dividends on common
shares for the periods indicated:
FISCAL QUARTER
-----------------------------------------
FIRST SECOND THIRD FOURTH YEAR
- ---------------------------------------------------------------------------------------------------------------------
1997
Price range of common stock:
High $19 3/4 $19 1/2 $23 3/16 $29 3/16
Low $15 1/2 $17 3/8 $18 3/8 $23 1/8
Dividends per share $0. 10 $0. 10 $0. 10 $0. 10 $0.40
1998
Price range of common stock:
High $31 1/2 $37 $32 1/16 $31 1/4
Low $25 15/16 $28 1/8 $25 5/16 $25
Dividends per share $0. 12 $0. 12 $0. 12 $0. 12 $0.48
- ---------------------------------------------------------------------------------------------------------------------
At December 31, 1998, there were approximately 6,600 registered holders of
the Company's common stock, in addition to stockholders in street name.
7
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below is derived from the
Company's consolidated financial statements for each of the years in the
five-year period ended October 31, 1998:
- -----------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts and
ratios) 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------------------------------------
OPERATIONS
Revenues and other income $ 884,633 $ 965,381 $1,086,925 $1,252,472 $ 1,501,827
- -----------------------------------------------------------------------------------------------------------
Expenses
Operating expenses and cost of goods sold 760,056 830,749 940,296 1,076,078 1,298,423
Selling, general and administrative 97,017 100,481 105,943 126,755 142,431
Interest 2,501 2,739 2,581 2,675 3,465
- -----------------------------------------------------------------------------------------------------------
859,574 933,969 1,048,820 1,205,508 1,444,319
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 25,059 31,412 38,105 46,964 57,508
Income taxes 9,890 13,193 16,385 19,725 23,578
- -----------------------------------------------------------------------------------------------------------
Net income $ 15,169 $ 18,219 $ 21,720 $ 27,239 $ 33,930
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Net income per common share
Basic $ 0.82 $ 0.96 $ 1.11 $ 1.33 $ 1.58
Diluted $ 0.80 $ 0.92 $ 1.05 $ 1.22 $ 1.44
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Common and common equivalent shares
Basic 17,816 18,415 19,123 20,143 21,110
Diluted 18,288 19,179 20,241 21,872 23,161
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS
Dividends per common share $ 0.26 $ 0.30 $ 0.35 $ 0.40 $ 0.48
Stockholders' equity per common share $ 6.87 $ 7.57 $ 8.43 $ 9.67 $ 11.00
Working capital $ 90,165 $ 95,627 $ 119,957 $ 137,757 $ 166,484
Current ratio 1.91 1.84 2.05 1.90 2.05
Long-term debt $ 25,254 $ 22,575 $ 33,664 $ 38,402 $ 33,720
Redeemable cumulative preferred stock $ 6,400 $ 6,400 $ 6,400 $ 6,400 $ 6,400
Stockholders' equity $ 124,331 $ 141,786 $ 164,293 $ 197,813 $ 237,534
Total assets $ 299,470 $ 334,973 $ 379,770 $ 464,251 $ 501,363
Property, plant and equipment -- net $ 19,819 $ 22,647 $ 22,570 $ 26,584 $ 27,307
Capital expenditures $ 8,539 $ 10,225 $ 10,751 $ 13,272 $ 11,715
Depreciation and amortization $ 9,300 $ 11,527 $ 13,651 $ 16,118 $ 19,593
Accounts receivable -- net $ 140,788 $ 158,075 $ 183,716 $ 234,464 $ 260,549
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
All share and per share amounts have been restated to retroactively reflect
a two-for-one common stock split in 1996.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FINANCIAL CONDITION
The following discussion should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto. All information in
the discussion and references to the years are based on the Company's fiscal
year that ends on October 31.
Funds provided from operations and bank borrowings have historically been
the sources for meeting working capital requirements, financing capital
expenditures, acquisitions and paying cash dividends. Management believes that
funds from these sources will remain available and adequately serve the
Company's liquidity needs. The Company has an unsecured revolving credit
agreement with a syndicate of U.S. banks. This agreement has a $125 million line
of credit expiring July 1, 2002. Effective November 1, 1997, the agreement was
amended to increase the amount available to $150 million. At the Company's
option, the credit facility provides interest at the prime rate or IBOR+.35%. As
of October 31, 1998, the total amount outstanding was approximately $101
million, which was comprised of loans in the amount of $30 million and standby
letters of credit of $71 million. This agreement requires the Company to meet
certain financial ratios, places some limitations on outside borrowing and
prohibits declaring or paying cash dividends exceeding 50% of the Company's net
income for any fiscal year. In February 1996, the Company entered into a loan
agreement with a major U.S. bank which provides a seven-year term loan of $5
million. This loan bears interest at a fixed rate of 6.78% with annual payments
of principal, in varying amounts, and interest due each February 15 through
2003. The Company's effective interest rate for all long-term debt borrowings
for the year ended October 31, 1998 was 7.0 %.
Operating activities generated cash flows in 1996, 1997 and 1998 of $16.7
million, $27.7 million and $32.1 million respectively. Cash paid for
acquisitions during the fiscal years ended October 31, 1996, 1997 and 1998,
including payments pursuant to contractual arrangements involved in prior
acquisitions, were approximately $13.0 million, $28.6 million and $10.0 million,
respectively. Capital expenditures during fiscal years 1996, 1997 and 1998 were
$10.8 million, $13.3 million and $11.7 million, respectively. Cash dividends
paid to stockholders of common and redeemable preferred stock were approximately
$7.2 million in 1996, $8.6 million in 1997 and $10.7 million in 1998. At October
31, 1997, working capital was $137.8 million as compared to $166.5 million at
October 31, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
REPORTING COMPREHENSIVE INCOME: In 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, which establishes standards for reporting and displaying
comprehensive income and its components. The statement is effective for fiscal
years beginning after December 15, 1997 and will be adopted by the Company in
fiscal year 1999. The Company does not believe this statement will have a
material impact on its consolidated financial statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION: In
1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 130 establishes standards for the
way the public business enterprises are to report information about operating
segments in the annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to stockholders. The statement is effective for periods beginning
after December 15, 1997, and will be adopted by the Company in fiscal year 1999.
The Company does not believe this statement will have a material impact on its
consolidated financial statements.
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE: In 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The SOP provides guidance for
accounting for the costs of computer software for internal use whether developed
or purchased. The statement is effective for periods beginning after December
15, 1998, and will be adopted by the Company in fiscal year 2000. The Company
does not believe this statement will have a material impact on its consolidated
financial statements.
REPORTING ON THE COSTS OF START-UP ACTIVITIES: In 1998, the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities". The SOP provides guidance on
the financial reporting of start-up and organization costs. It requires costs of
start-up activities and organization costs to be
9
expensed as incurred. The statement is effective for periods beginning after
December 15, 1998, and will be adopted by the Company in fiscal year 2000. The
Company does not believe this statement will have a material impact on its
consolidated financial statements.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In 1998, the
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999, and will
be adopted by the Company in fiscal year 1999. The Company does not believe this
statement will have a material impact on its consolidated financial statements.
ACCOUNTING FOR MORTGAGE-BACKED SECURITIES: In 1998, the FASB issued SFAS
No. 134, "Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise". SFAS No. 134 changes the way mortgage banking firms account for
certain securities and other interests they retain after securitizing mortgage
loans that were held for sale. The statement is effective for all fiscal
quarters of fiscal years beginning after December 15, 1998, and will be adopted
by the Company in fiscal year 1999. The Company does not believe this statement
will have a material impact on its consolidated financial statements.
EFFECT OF INFLATION
The low rates of inflation experienced in recent years have had no material
impact on the financial statements of the Company. The Company attempts to
recover inflationary costs by increasing sales prices to the extent permitted by
contracts and competition.
ENVIRONMENTAL MATTERS
The nature of the Company's operations, primarily services, would not
ordinarily involve it in environmental contamination. However, the Company's
operations are subject to various federal, state and/or local laws regulating
the discharge of materials into the environment or otherwise relating to the
protection of the environment, such as discharge into soil, water and air, and
the generation, handling, storage, transportation and disposal of waste and
hazardous substances.
These laws generally have the effect of increasing costs and potential
liabilities associated with the conduct of the Company's operations, although
historically they have not had a material adverse effect on the Company's
financial position or its results of operations.
The Company is currently involved in four proceedings relating to
environmental matters: one involving alleged potential soil and groundwater
contamination at a Company facility in Florida; one involving alleged potential
soil contamination at a former Company facility in Arizona; one involving
alleged potential soil and groundwater contamination of a parking garage
previously operated by the Company in Washington; and, one involving alleged
potential soil and groundwater contamination at a former dry-cleaning facility
leased by the Company in Nevada. While it is difficult to predict the ultimate
outcome of these matters, based on information currently available, management
believes that none of these matters, individually or in the aggregate, are
reasonably likely to have a material adverse affect on the Company's financial
position or its results of operations.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written and
embedded chips being designed that use two digits rather than four digits to
define the applicable year. As a result, there is a potential that existing
computer programs and hardware will be unable to accurately process dates beyond
the year 1999. This could result in system errors or failures that could impact
both administration and operations. In mid-1997, the Company established a
dedicated Project Team that has initiated a Company-wide effort to mitigate the
Year 2000 Issue. The Project Team has developed a detailed plan for becoming
Year 2000 compliant that consists of the following seven phases: awareness,
inventory, risk assessment, remediation, testing, implementation, and
certification. The Year 2000 Issue encompasses both information technology
("IT") related systems, such as the Company's accounting software, and non-IT
related systems such as the impact to the Company due to the non-compliance of
major vendors or customers.
The Company is striving to make all levels of management within the Company
cognizant of the Year 2000 Issue via quarterly newsletters. This newsletter
provides Year 2000 progress updates to management, who are then able to
communicate with customers, vendors, and other third parties. Additionally, the
Year 2000 Project Team maintains a discussion database
10
that is available to managers within the Company for their review and input.
The Project Team has completed a Company-wide inventory of all office
equipment, software, hardware, and any product, equipment service or system that
could be impacted by the Year 2000 Issue. This inventory has provided a basis
for identifying and prioritizing risk associated with the equipment, hardware,
software, and services that the Company utilizes. The Project Team has attempted
to assess all relevant issues and has developed a process to assess all new
products and services introduced subsequent to the initial inventory. The
certification of all office equipment and products is approximately 70 percent
complete, and is anticipated to be finished by April 1999.
The Project Team is in the remediation and testing phases for its core
application programs. All proprietary software, such as its accounting programs,
service dispatch systems, and labor control systems, has been fully remediated
and is now being tested. Mission-critical proprietary applications, such as the
accounting and payroll programs, have also been tested and certified to be Year
2000 compliant by an outside vendor using a second generation code inspection
tool.
Six Divisions use the Company's proprietary accounting software, which is
internally maintained. The Elevator, Lighting and Mechanical Divisions use
software purchased from outside vendors. The financial software used by the
Elevator Division has been tested and reviewed by the Company and outside
consultants. The Supply Division's inventory control system and the Lighting
Division's financial applications are currently being tested for compliance. The
Mechanical Division will be replacing its accounting and dispatching software
with a Year 2000 compliant system.
The Project Team has identified vendors that represent 80 percent of the
Company's total purchases, and in October 1998, began surveying these vendors to
identify their plans to address the Year 2000 Issue. This process is expected to
be complete by March 1999. All vendors with mission-critical IT-related products
or services are being tested as mentioned above. The Company is amending its
vendor selection process, as needed, to minimize potential vendor-related Year
2000 risks.
The Company has remediated and is testing Company-owned equipment and
software that could have an impact on operations, and indirectly the Company's
customers. The Company believes that appropriate steps are being taken to
minimize potential risk to its customers; however, there is a concern that
customer-owned equipment may not be Year 2000 compliant, which will adversely
impact the Company's operational performance. Additionally, there may be a
misconception among customers that ABM is responsible for all Year 2000 Issues.
The Company plans to inform all customers in writing of the responsibility that
the Company is taking with regard to the Year 2000 Issue. There can be no
assurance that the systems of other companies on which the Company relies will
be Year 2000 compliant, or that the failure of such systems to be Year 2000
compliant will not have a material adverse effect on the Company's business,
financial condition and results of operations.
Based upon assumptions and forecasts of management at this time, the Company
estimates the cost of becoming Year 2000 compliant to be approximately $3.0
million, funded by operating cash flows. The Company believes it is making the
necessary modifications and changes to mitigate the Year 2000 Issue. However,
there can be no assurance that all the Company's systems will be Year 2000
compliant, that the costs to be Year 2000 compliant will not exceed management's
current expectations, or that the failure of such systems to be Year 2000
compliant will not have a material adverse effect on the Company's business,
financial condition and results of operations. The Company is establishing
contingency plans for all its major IT systems, field office locations, and
largest accounts, in case of unexpected Year 2000 failures. As part of its
contingency plans, the Company intends to prepare process manuals that will
document the necessary procedures in the event of IT-related failures, such as
hardware or software applications, as well as non-IT failures. These procedures
will be tested to be certain that the procedures are viable alternatives in the
case of a Year 2000 disruption. These manuals will be distributed to all offices
of the Company for its preparation for Year 2000.
ACQUISITIONS
The operating results of businesses acquired have been included in the
accompanying consolidated financial statements from their respective dates of
acquisition and are fully discussed on Note 12 to the Consolidated Financial
Statements. Acquisitions made in the three fiscal years ended October 31, 1998
contributed approximately $246 million to fiscal 1998 revenues.
11
RESULTS OF OPERATIONS
COMPARISON OF 1998 TO 1997
The Company reported record revenues and earnings for 1998. Revenues and
other income (hereinafter called "revenues") were $1.502 billion in 1998, up
$249,355,000 or 20%, from $1.252 billion reported in 1997. The 20% increase in
revenues in 1998 over 1997 was attributable to acquisitions, particularly during
the prior year, as well as sales and price increases. Acquisitions made during
1998 accounted for approximately $6 million, or approximately 2.4% of the total
revenue increase of $249 million for 1998.
As a percentage of revenues, operating expenses and cost of goods sold was
86.5% for 1998, compared to 85.9% in 1997. Consequently, as a percentage of
revenues, the Company's gross profit (revenues minus operating expenses and cost
of goods sold) of 13.5% in 1998 was lower than the gross profit of 14.1% of
1997. The gross profit percentage declined mostly due to higher labor and
related costs as a result of continued competitive pressure to lower prices. The
Company anticipates these costs may be gradually recovered through future price
increases.
Selling, general and administrative expenses for 1998 were $142.4 million
compared to $126.8 million in 1997. As a percentage of revenues, selling,
general and administrative expenses decreased from 10.1% for 1997, to 9.5% for
1998, primarily as a result of certain fixed and variable costs not increasing
at the same rate as sales. The dollar increase in selling, general and
administrative expenses of $15.6 million is primarily due to expenses related to
growth and to a lesser extent expenses associated with acquisitions including
the amortization of goodwill.
Interest expense was $3,465,000 in 1998 compared to $2,675,000 for 1997, an
increase of $790,000. This increase was primarily due to higher weighted average
borrowings during 1998, which were needed to fund acquisitions and working
capital.
The income before income taxes (pre-tax income) for 1998 was $57.5 million
compared to $47.0 million, an increase of 22% over 1997. The growth in pre-tax
income outpaced the revenue growth for 1998 primarily due to lower insurance
costs as a percent to sales.
The estimated effective income tax rate for 1998 was 41.0%, compared to
42.0% in 1997. The lower tax rate was due for the most part to an increase in
various federal and state tax credits.
Net income for 1998 was $33.9 million, an increase of 25%, compared to net
income of $27.2 million in 1997. Diluted net income per common share rose 18% to
$1.44 for 1998 compared to $1.22 for the same period in 1997. The increase in
diluted net income per share was not proportional to the increase in net income
due to the 6% increase in number of diluted shares outstanding primarily a
result of purchases made by employees under the Company's Employee Stock
Purchase Plan. Earnings per share calculations also include the effect of a
preferred stock dividend deduction of $512,000 in both 1998 and 1997.
The results of operations from the Company's three industry segments and its
nine operating divisions for 1998 as compared to 1997 are more fully described
below:
The Janitorial Divisions segment, which includes the operating divisions of
American Building Maintenance and Easterday Janitorial Supply, reported revenues
for 1998 of $889.4 million, an increase of approximately $176.1 million, or 25%,
over 1997. This segment's operating profits increased by 36% over 1997. This is
the Company's largest segment and accounted for approximately 59% of the
Company's consolidated revenues for the current year. Revenues of American
Building Maintenance increased by 25% during 1998, as compared to 1997, as a
result of several acquisitions made during 1997, particularly in the Northeast
and the Southwest regions. Revenues generated from acquisitions during the prior
year contributed $142 million of the 1998 increase. This Division's operating
profits increased 36% when compared to last year. This profit increase was due
primarily to the increase in revenues and lower labor and labor related costs.
Easterday Janitorial Supply's revenues for 1998 increased by approximately 8%
compared to 1997 generally due to strong sales in the Los Angeles market and a
small acquisition in Houston. An increase of 29% in operating profits was
achieved primarily due to its distributor program, the Houston acquisition and
generally improved margins.
Revenues of the Public Service Divisions segment, which includes American
Commercial Security Services, Ampco System Parking, and ABM Facility Services,
during 1998 were approximately $253.9 million, a 4.5% increase over 1997. Public
Service Divisions accounted for approximately 17% of the Company's 1998
consolidated revenues. The operating profits of this segment increased 10% in
1998 as both Ampco System Parking and American Commercial Security Services
reported increased profits when compared to the prior year period. American
Commercial Security
12
Services' revenues for 1998 were basically flat compared to 1997, but its 1998
operating profits were up by 23.5% compared to 1997. Revenue was impacted by the
loss of several large customers in the San Francisco Bay Area and in
Minneapolis, Minnesota. The increase in operating profits was primarily due to a
reduction in insurance charges and improved margins particularly in Southern
California. Due to low unemployment levels in this Division's major markets,
labor and labor-related costs increased, but were offset by price increases.
Ampco System Parking's revenues increased by 7%, while its profits increased 10%
during 1998 compared to 1997. The increase in revenues was mostly due to growth
in its national airport business and its Texas region. The operating profit
increase was due for the most part to lower payroll tax expense and the
increased sales. As reported previously in the Company's Form 10-Q filings, this
segment now includes the Company's new Division, ABM Facility Services. The
establishment of this Division was a result of customer requests to provide
services from two or more of its other Divisions (the ABM Family of Services)
under one management. Much of the revenues generated by this Division are
reported by the respective ABM Divisions that perform the services, and
therefore contribute to the operating profits of those Divisions. Because this
Division is new and depends primarily on management fees for its income, start
up costs exceeded those fees during its first year. At the present time,
management does not expect this Division to be profitable during 1999 because
anticipated management fees are not yet adequate to support the necessary
infrastructure.
The Company's Technical Divisions segment includes ABM Engineering Services,
Amtech Elevator Services, Amtech Lighting Services, and CommAir Mechanical
Services. This segment reported revenues of $358.0 million, which represents
approximately 24% of the Company's consolidated revenues for 1998. The revenue
of this segment increased approximately 21.1% over last year due to increases in
revenues reported by all its Divisions. The operating profits of this segment
increased 17.9% compared to 1997 also due to increases in operating profits of
all of its Divisions. ABM Engineering Services' revenues increased by 45% and
its operating profits increased 9% for 1998 compared to 1997. The large revenue
increase was due primarily to an acquisition in New York in August 1997 and new
business in the Midwest and West Central regions. The smaller percentage
increase in operating profits is due to lower margins particularly on contracts
purchased through the New York acquisition, increased insurance costs and
pressure from competition to reduce fees. Revenues for Amtech Elevator Services
were up by 8% for 1998 over 1997 largely due to an increased customer base in
the maintenance and repair sector. The Division reported a 39% increase in
operating profits compared to 1997. This increase in operating profits can be
attributed primarily to a higher profit margin on service contracts and a
substantial reduction of insurance costs. Amtech Lighting Services reported a
10% revenue increase due to increased revenues in the Northeast and Dallas
markets as well as from a small acquisition in the Midwest. Operating profits
increased by 11% during 1998 compared to the prior year primarily due to the
increased sales. CommAir Mechanical Services' revenues increased by 13%,
resulting primarily from an acquisition in Southern California during 1997 and
increased business in Northern California. Operating profits for 1998 increased
by 26% from the prior year as a result of increased profit margin on sales
related to the unseasonably hot weather in California and improved performance
in the Arizona operation.
COMPARISON OF 1997 TO 1996
The Company's revenues and other income were $1.252 billion in 1997, up $165
million or 15%, from $1.087 billion reported in 1996. The 15% increase in
revenues in 1997 over 1996 was attributable to volume and price increases as
well as revenues generated from acquisitions. Acquisitions made during 1997
accounted for approximately $60 million, or approximately 36% of the total
revenue increase of $165 million for 1997. Gross profit increased $29 million to
$176 million from $147 million a year ago. The gross profit as a percentage of
revenues increased slightly to 14.1% in 1997 from 13.5% in 1996. The increase in
gross profit amount was primarily due to increases in revenues and decreases in
labor and labor related costs relative to sales, particularly the Company's self
insurance costs. As discussed in previous years, the Company's continued
emphasis on safety training and education programs, along with aggressively
settling claims, has helped management to control the insurance expenses.
Selling, general and administrative expense increased $20.9 million from
$105.9 million in 1996 to $126.8 million in 1997 but increased slightly as a
percentage of revenues from 9.7% to 10.1% in 1997. The dollar amount of increase
in selling, general and administrative expense is due to increases in marketing
expenses as well as legal, accounting, and goodwill amortization expenses
associated with acquisitions.
In 1997, interest expense was $2,675,000 as compared to $2,581,000 in 1996,
an increase of $94,000.
13
Although average debt was lower in 1997 than 1996, the effective interest rate
was slightly higher during the current year: 7.1% in 1997 as compared to 6.9% in
1996. Therefore, the increase was mostly due to certain other components of
interest expense not related to long term debt.
The income before income tax (pretax income) for 1997 was $47.0 million, an
increase of 23% over the prior year. The growth in pre-tax income outpaced the
revenue growth for 1997 primarily due to continued implementation of cost
controls, contribution from acquisitions made over the past few years, and
stable insurance expenses.
The effective income tax rate decreased from 43% in 1996 to 42% in 1997, due
for the most part to increased various federal and state tax credits.
Net income increased $27.2 million in 1997, or 25%, from $21.7 million in
1996. Diluted net income per common share for the current year increased to
$1.22 from $1.05 in 1996 which represents a 16% increase. The average number of
shares used for the calculation of earnings per share increased from
approximately 20.2 million to 21.9 million. The increase in common and common
equivalent shares resulted mainly from the exercise of stock options, higher
common stock equivalents due to a higher average share price, and purchases made
by employees under the Company's Employee Stock Purchase Plan. Net income per
share calculations also include the effect of a preferred stock dividend
deduction of $512,000 in both 1997 and 1996.
The results of operations from the Company's three industry segments and its
operating divisions for 1997 as compared to 1996 are more fully described below:
Revenues for the Janitorial Divisions segment in 1997 were $713 million, an
increase of $106 million or 17% over 1996, while its operating profits increased
18% over 1996. The Janitorial Divisions segment, which includes American
Building Maintenance and Easterday Janitorial Supply, accounted for
approximately 57% of the Company's consolidated revenues for 1997. Revenues of
American Building Maintenance increased by 17% in 1997 as compared to 1996
primarily as a result of significant increases in its Midwest, Northeast,
Northern California, and Southwest regions; moderate increases in Southeast,
Gulf Central, and Ohio Valley regions; offset by slight decreases in its
Canadian, Mid-Pacific, Mid-Atlantic, and South Central regions. Revenues also
increased approximately $29 million from acquisitions made during the fiscal
year 1997 including acquisition of all the building maintenance operations in
New York City from Ogden Corporation on August 1, 1997. This Division's
operating profits (revenues minus total expenses) increased by 18% when compared
to 1996. The increase in operating profits is principally due to the increased
revenues, particularly from the acquisition in New York City, and slightly lower
insurance costs. Easterday Janitorial Supply's revenues to non-affiliates for
1997 increased by approximately 17% compared to 1996 generally due to increases
in its customer base particularly in Portland, Oregon and Sacramento,
California. Operating profits increased 13% as a result of the increased sales
volume though at somewhat lower margins.
Revenues in 1997 from the Public Service Divisions segment, which includes
the American Commercial Security Services and Ampco System Parking Divisions,
were $243 million, an increase of 7% over 1996. Public Service Divisions
accounted for approximately 19% of the Company's consolidated revenues in 1997.
The operating profits of this segment were up 3%. American Commercial Security
Services reported an increase in revenues of 7% in 1997 as compared to 1996
primarily due to obtaining new customers, particularly in the Southwest and
Midwest regions. However, the Division's operating profits decreased by 10%
compared to 1996 due primarily to certain large contracts which were bid at
smaller margins in order to remain competitive, and an increase in labor costs
due to overtime. Ampco System Parking's revenues increased by approximately 7%
in 1997 when compared to 1996 and its operating profits increased by 14%. The
primary factors accounting for the growth in revenues were increased business at
its airport operations and new parking locations in the Northwest region. The
improvement of 14% in operating profits is largely due to the increased business
in the Northwest and increases in profit margins on its Southern California
business as building occupancy improves.
The Company's Technical Divisions segment includes ABM Engineering Services,
Amtech Elevator Services, Amtech Lighting Services, and CommAir Mechanical
Services. The Technical Divisions segment through its four Divisions reported
revenues of $296 million, an increase of approximately 17% over last year. These
revenues represent approximately 24% of the Company's consolidated revenues for
1997. Operating profits of the Technical Divisions increased approximately 30%
in 1997 over 1996. ABM Engineering Services Division reported increased revenues
of 18% and a 6% increase in operating profits for 1997 as compared to 1996,
mostly due to new business in the Northeast region obtained through the
Company's acquisition of the on-site engineering operations from
14
Ogden Corporation. The proportionately lower operating profits increase reflects
the lower margins on the business acquired in the Northeast. For 1997, Amtech
Elevator Services reported a 10% increase in revenues when compared to the prior
year essentially due to strong growth in the service and repair business. This
Division's operating profits were up 121%, primarily due to the absence of
losses reported in the prior year by its Mexican subsidiary, which was sold May
31, 1996, and lower insurance costs, offset by continuing start up costs of new
branches. Amtech Lighting Services' revenues for 1997 increased by 23% while its
operating profits increased by 34%. Revenues and operating profits were up as a
result of the acquisition of Sica Electrical and Maintenance of New York in
November 1, 1996. CommAir Mechanical Services' revenues and operating profits in
1997 increased by 18% and 8%, respectively, over the prior year. The revenue
increase is attributable to an increase in construction project work as well as
the acquisition on March 1, 1997 of Preferred Mechanical Service in Southern
California. A relatively smaller percentage increase in operating profits for
the current year is a result of lower margins from larger projects as well as a
slight increase in selling, general and administrative expenses.
SAFE HARBOR STATEMENT
Cautionary Safe Harbor Disclosure for Forward Looking Statements under the
Private Securities Litigation Reform Act of 1995: Because of the factors set
forth below, as well as other variables affecting the Company's operating
results, past financial performance should not be considered a reliable
indicator of future performance and investors should not use historical trends
to anticipate results or trends in future periods. The statements contained
herein which are not historical facts are forward-looking statements that are
subject to meaningful risks and uncertainties, including, but not limited to:
(1) the widespread failure of commercial real estate occupancy to improve in the
Company's major markets since it relates directly to the need for janitorial and
other buildings services, (2) the loss or bankruptcy of one or more of the
Company's major customers, which could adversely affect the Company's ability to
collect deferred costs or its accounts receivable, (3) any major labor
disruptions that may cause loss of revenue or cost increases that non-union
companies can use to their advantage in obtaining market share, (4) the failure
of the Company's IT or non-IT systems, or those of its customers or vendors, to
be Year 2000 compliant, (5) significant shortfall in achieving any acquisition
plan to acquire either businesses in new markets or expand customer base in
existing ones, (6) any legislation or other government action that severely
impacts one or more of the Company's lines of business, such as price controls
that could prevent cost recovery and fuel restrictions that might increase the
cost to deliver services, (7) the reduction or revocation of the Company's lines
of credit which would increase interest expense or the cost of capital, (8) the
cancellation or non-renewal of the Company's primary insurance policies, as many
customers retain services based on the provider's ability to provide adequate
insurance including performance bonds and proof of adequate insurance, (9) any
catastrophic uninsured or underinsured claims against the Company, which also
might include insurance companies financially incapable of paying claims, (10)
the untimely departure of one or more of the Company's key executives, which
could affect retention of customers as well as the day to day management of
operations, (11) the inability to recruit and hire entry level personnel due to
labor shortages, and (12) other material factors that are disclosed from time-
to-time in the Company's public filings with the United States Securities and
Exchange Commission, such as reports on Forms 8-K, 10-K and 10-Q.
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not issue or invest in financial instruments or their
derivatives for trading or speculative purposes. The operations of the Company
are conducted primarily in the United States, and, as such, are not subject to
material foreign currency exchange rate risk. Although the Company has market
risk in interest rate exposure in the United States, outstanding debt and the
related interest expense is currently not material.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
ABM Industries Incorporated:
We have audited the accompanying consolidated balance sheets of ABM
Industries Incorporated and subsidiaries as of October 31, 1997 and 1998, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended October 31, 1998. In
connection with our audits of the consolidated financial statements, we also
have audited financial statement schedule II. These consolidated financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ABM
Industries Incorporated and subsidiaries as of October 31, 1997 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended October 31, 1998, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule II, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/S/ KPMG LLP
San Francisco, California
December 14, 1998
16
ABM Industries Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------
OCTOBER 31 1997 1998
(in thousands of dollars except share amounts)
- -----------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 1,783 $ 1,844
Accounts receivable (less allowances of $5,923 and $6,761) 234,464 260,549
Inventories 21,197 22,965
Deferred income taxes 8,067 10,505
Prepaid expenses and other current assets 26,005 28,445
- -----------------------------------------------------------------------------------------------------------
Total current assets 291,516 324,308
Investments and long-term receivables 12,900 12,405
Property, plant and equipment -- net 26,584 27,307
Intangible assets (less accumulated amortization of $30,595 and $39,420) 100,313 102,776
Deferred income taxes 25,426 27,509
Other assets 7,512 7,058
- -----------------------------------------------------------------------------------------------------------
$ 464,251 $ 501,363
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
LIABILITIES
Current portion of long-term debt $ 1,393 $ 865
Bank overdraft 12,975 2,475
Trade accounts payable 34,555 34,992
Income taxes payable 1,364 5,527
Accrued liabilities:
Compensation 35,965 40,914
Taxes -- other than income 12,609 15,887
Insurance claims 25,479 29,254
Other 29,419 27,910
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 153,759 157,824
Long-term debt 38,402 33,720
Retirement plans 13,413 15,974
Insurance claims 54,464 49,911
- -----------------------------------------------------------------------------------------------------------
Total liabilities 260,038 257,429
SERIES B 8% SENIOR REDEEMABLE CUMULATIVE PREFERRED STOCK,
6,400 shares authorized, issued and outstanding, stated at redemption value,
$1,000 per share 6,400 6,400
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 500,000 shares authorized; none issued -- --
Common stock, $.01 par value; 28,000,000 shares authorized; 20,464,000 and
21,601,000 shares issued and outstanding in 1997 and 1998, respectively 205 216
Additional capital 63,416 79,904
Retained earnings 134,192 157,414
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 197,813 237,534
- -----------------------------------------------------------------------------------------------------------
$ 464,251 $ 501,363
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
17
ABM Industries Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31 1996 1997 1998
(in thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------
REVENUES AND OTHER INCOME $1,086,925 $1,252,472 $ 1,501,827
- ----------------------------------------------------------------------------------------------------------
EXPENSES
Operating expenses and cost of goods sold 940,296 1,076,078 1,298,423
Selling, general and administrative 105,943 126,755 142,431
Interest 2,581 2,675 3,465
- ----------------------------------------------------------------------------------------------------------
1,048,820 1,205,508 1,444,319
- ----------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 38,105 46,964 57,508
Income taxes 16,385 19,725 23,578
- ----------------------------------------------------------------------------------------------------------
NET INCOME $ 21,720 $ 27,239 $ 33,930
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic $ 1.11 $ 1.33 $ 1.58
Diluted $ 1.05 $ 1.22 $ 1.44
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
COMMON AND COMMON EQUIVALENT SHARES
Basic 19,123 20,143 21,110
Diluted 20,241 21,872 23,161
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------
COMMON STOCK
YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998 ------------------------ ADDITIONAL RETAINED
(in thousands, except per share amounts) SHARES AMOUNT CAPITAL EARNINGS
- --------------------------------------------------------------------------------------------------------------------
BALANCE OCTOBER 31, 1995 9,366 $ 94 $ 40,627 $ 101,065
Net income 21,720
Dividends:
Common stock (6,723)
Preferred stock (512)
Two-for-one stock split 9,669 97 (97)
Stock issued under employees' stock purchase and option plans 454 4 8,018
- --------------------------------------------------------------------------------------------------------------------
BALANCE OCTOBER 31, 1996 19,489 195 48,548 115,550
Net income 27,239
Dividends:
Common stock (8,085)
Preferred stock (512)
Stock issued under employees' stock purchase and option plans
and for acquisition 975 10 14,868
- --------------------------------------------------------------------------------------------------------------------
BALANCE OCTOBER 31, 1997 20,464 205 63,416 134,192
Net income 33,930
Dividends:
Common stock (10,196)
Preferred stock (512)
Tax benefit from exercise of stock options 718
Stock issued under employees' stock purchase and option plans
and for acquisition 1,137 11 15,770
- --------------------------------------------------------------------------------------------------------------------
BALANCE OCTOBER 31, 1998 21,601 $ 216 $ 79,904 $ 157,414
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
18
ABM Industries Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31 1996 1997 1998
(in thousands of dollars)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 1,055,112 $ 1,203,314 $ 1,463,918
Other operating cash receipts 1,270 1,126 1,331
Interest received 449 552 682
Cash paid to suppliers and employees (1,017,329) (1,154,572) (1,406,600)
Interest paid (2,418) (2,685) (3,334)
Income taxes paid (20,355) (19,988) (23,936)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 16,729 27,747 32,061
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (10,751) (13,272) (11,715)
Proceeds from sale of assets 777 660 497
Increase (decrease) in investments and long-term receivables (5,657) 3,041 495
Intangible assets acquired (13,044) (28,606) (10,010)
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (28,675) (38,177) (20,733)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued, including tax benefit 8,022 8,778 15,151
Dividends paid (7,235) (8,597) (10,708)
Increase (decrease) in bank overdraft (426) 8,035 (10,500)
Increase (decrease) in notes payable 223 491 (528)
Long-term borrowings 110,777 115,654 93,204
Repayments of long-term borrowings (99,688) (113,715) (97,886)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,673 10,646 (11,267)
- ----------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (273) 216 61
Cash and cash equivalents beginning of year 1,840 1,567 1,783
- ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS END OF YEAR $ 1,567 $ 1,783 $ 1,844
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Net income $ 21,720 $ 27,239 $ 33,930
ADJUSTMENTS:
Depreciation and amortization 13,651 16,118 19,593
Impairment of long-lived assets -- 2,700 --
Provision for bad debts 2,039 2,988 2,821
Gain on sale of assets (314) (257) (202)
Increase (decrease) in deferred income taxes (3,556) 237 (4,521)
Increase in accounts receivable (26,890) (50,312) (28,907)
Decrease (increase) in inventories 516 (4,069) (1,768)
Increase in prepaid expenses and other current assets (1,170) (5,628) (2,440)
Decrease (increase) in other assets (645) 1,580 454
Increase (decrease) in income taxes payable (414) (500) 4,163
Increase in retirement plans accrual 2,513 3,273 2,561
Increase (decrease) in insurance claims liability 4,854 5,212 (778)
Increase in trade accounts payable and other accrued liabilities 4,425 29,166 7,155
- ----------------------------------------------------------------------------------------------------------
Total adjustments to net income (4,991) 508 (1,869)
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 16,729 $ 27,747 $ 32,061
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Non-cash investing activities:
Common stock issued for net assets of business acquired -- $ 6,100 $ 1,348
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
19
ABM Industries Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of ABM Industries Incorporated and its subsidiaries ("the
Company"). All material intercompany transactions and balances have been
eliminated. Certain reclassifications of prior year amounts have been made to
conform with the current year presentation.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and related notes to financial statements. Changes in such
estimates may affect amounts reported in future periods.
ACCOUNTS RECEIVABLE: The Company's accounts receivable are principally
trade receivables arising from services provided to its customers and are
generally due and payable on terms varying from the receipt of invoice to net
thirty days. The Company does not believe that it has any material exposure due
to either industry or regional concentrations of credit risk.
INVENTORIES: Inventories are valued at amounts approximating the lower of
cost (first-in, first-out basis) or market.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost less accumulated depreciation and amortization. At the time property, plant
and equipment is retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in income. Maintenance and repairs are charged against income.
Depreciation and amortization are calculated principally on the
straight-line method. Lives used in computing depreciation for transportation
equipment average 3 to 5 years and 2 to 20 years for machinery and other
equipment. Buildings are depreciated over periods of 20 to 40 years. Leasehold
improvements are amortized over the shorter of the terms of the respective
leases, or the assets' useful lives.
INTANGIBLE ASSETS: Intangible assets consist of goodwill in the amount of
$139,796,000 and other intangible assets in the amount of $2,400,000, net of
accumulated amortization of $39,420,000. Goodwill, which represents the excess
of cost over fair value of tangible assets of businesses acquired, is amortized
on a straight-line basis over periods not exceeding 40 years. It is the
Company's policy to carry goodwill applicable to acquisitions prior to 1971 of
$1,450,000 at cost until such time as there may be evidence of diminution in
value.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company annually reviews its
long-lived assets, including goodwill. Impairment is evaluated on the basis of
whether the asset is fully recoverable from projected, undiscounted net cash
flows of the related business unit, in accordance with Statement of Financial
Accounting Standards No. 121. Impairment is recognized in operating results when
a permanent diminution in value is believed to have occurred. The Company
measures impairment as the excess of any unamortized goodwill over the estimated
future discounted cash flows over the remaining life of the asset. During the
year ended October 31, 1997, the Company wrote off $2,700,000 of goodwill that
was deemed to be permanently impaired.
INCOME TAXES: Income tax expense is based on reported results of operations
before income taxes. In accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, deferred income taxes reflect
the impact of temporary differences between the amount of assets and liabilities
recognized for financial reporting purposes and such amounts recognized for tax
purposes. These deferred taxes are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled.
REVENUE RECOGNITION: Revenues are generally recorded at the time services
are performed or when products are shipped.
NET INCOME PER COMMON SHARE: The company has reported its earnings in
accordance with Statement of Financial Accounting Standards No. 128, Earnings
per Share. Basic net income per common share, after the reduction for preferred
stock dividends, is based on the weighted average number of shares actually
outstanding during the period. Diluted net income per common share, after the
reduction for preferred stock dividends, is based on the weighted average number
of shares outstanding during the period, including common stock equivalents.
Diluted net income per
20
common share is consistent with the Company's former presentation of primary net
income per common share. The calculation of these amounts is as follows:
- --------------------------------------------------------------------------------------------------------
1996 1997 1998
- --------------------------------------------------------------------------------------------------------
Net Income $21,720,000 $27,239,000 $33,930,000
Preferred Stock Dividends (512,000) (512,000) (512,000)
- --------------------------------------------------------------------------------------------------------
$21,208,000 $26,727,000 $33,418,000
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Common shares outstanding -- basic: 19,123,000 20,143,000 21,110,000
Effect of dilutive securities:
Stock options 1,118,000 1,381,000 1,852,000
Other 0 348,000 199,000
- --------------------------------------------------------------------------------------------------------
Common shares outstanding -- diluted 20,241,000 21,872,000 23,161,000
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
instruments with original maturities of three months or less to be cash and cash
equivalents.
STOCK-BASED COMPENSATION: Effective November 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, and has elected to account for its stock-based awards using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. See Note 10.
2. INSURANCE
Certain insurable risks such as general liability, property damage and
workers' compensation are self-insured by the Company. However, the Company has
umbrella insurance coverage for certain risk exposures subject to specified
limits. Accruals for claims under the Company's self-insurance program are
recorded on a claim-incurred basis. Under this program, the estimated liability
for claims incurred but unpaid at October 31, 1997 and 1998 was $79,943,000 and
$79,165,000, respectively. In connection with certain self-insurance agreements,
the Company has standby letters of credit at October 31, 1998 supporting the
estimated unpaid liability in the amounts of $70,069,000.
3. INVENTORIES
The inventories at October 31, consisted of the following:
- -------------------------------------------------------------------------------------------------------
(in thousands of dollars) 1997 1998
- -------------------------------------------------------------------------------------------------------
Janitorial supplies and equipment held for sale $ 4,562 $ 4,839
Parts and materials 13,643 14,510
Work in process 2,992 3,616
- -------------------------------------------------------------------------------------------------------
$21,197 $22,965
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
4. PROPERTY, PLANT AND EQUIPMENT -- NET
Property, plant and equipment at October 31, consisted of the following:
- -------------------------------------------------------------------------------------------------------
(in thousands of dollars) 1997 1998
- -------------------------------------------------------------------------------------------------------
Land $ 911 $ 834
Buildings 3,773 3,968
Transportation equipment 11,211 11,633
Machinery and other equipment 46,147 51,528
Leasehold improvements 10,476 13,096
- -------------------------------------------------------------------------------------------------------
72,518 81,059
Less accumulated depreciation and amortization 45,934 53,752
- -------------------------------------------------------------------------------------------------------
$26,584 $27,307
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
5. LONG-TERM DEBT AND CREDIT AGREEMENT
During the third quarter of 1997, the Company replaced its $125 million
syndicated line of credit expiring September 22, 1999 with a new $125 million
syndicated line of credit expiring July 1, 2002. Effective November 1, 1997, the
agreement was amended to increase the amount available to $150 million. The
unsecured revolving credit facility provides, at the Company's option, interest
at the prime rate or IBOR+.35%. The facility calls for a commitment fee payable
quarterly, in arrears, of .12% based on the average, daily, unused portion. For
purposes of this calculation, irrevocable standby letters of credit issued in
conjunction with the Company's self-insurance program plus cash borrowings are
considered to be outstanding amounts. As of October 31, 1998, the total
outstanding amount under this facility was $101 million comprised of $30 million
in loans and $71 million in standby letters of credit. The interest rate at
October 31, 1998 on loans outstanding under this agreement ranged from 5.54% to
6.16%. The Company is required, under this agreement to maintain financial
ratios and places certain limitations on dividend payments. The Company is
prohibited from paying cash dividends exceeding 50% of its net income for any
fiscal year.
In February 1996, the Company entered into a loan agreement with a major
U.S. bank which provides a seven-year term loan of $5 million. This loan bears
interest at a fixed rate of 6.78% with annual payments of principal, in varying
amounts, and interest due February 15, 1997 through February 15, 2003.
The long-term debt of $34,585,000 matures in the years ending October 31 as
follows: $865,000 in 1999; $859,000 in 2000; $895,000 in 2001, $30,907,000 in
2002, $981,000 in 2003,and $78,000 in subsequent years.
21
Long-term debt at October 31, is summarized as follows:
- -------------------------------------------------------------------------------------------------------
(in thousands of dollars) 1997 1998
- -------------------------------------------------------------------------------------------------------
Notes payable to bank with interest at 5.54 - 8.25% $34,000 $30,000
Note payable to bank with interest at 6.78% 4,777 4,104
Note payable to insurance company with interest at 9.35% 636 0
Notes payable with interest at 8.75% 238 177
Other 144 304
- -------------------------------------------------------------------------------------------------------
39,795 34,585
Less current portion 1,393 865
- -------------------------------------------------------------------------------------------------------
$38,402 $33,720
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
6. EMPLOYEE BENEFIT PLANS
(A) RETIREMENT AGREEMENTS
The Company has unfunded retirement agreements for approximately 36 current
and former directors and senior executives, many of which are fully vested. The
agreements provide for annual benefits for ten years commencing at the later of
the respective retirement dates of those executives or age 65. The benefits are
accrued over the period these directors and senior executives are expected to be
employed by the Company. During 1996, 1997 and 1998, amounts accrued under these
agreements were $398,000, $629,000 and $513,000 respectively. Payments were made
in 1996, 1997 and 1998 in the amounts of $124,000, $124,000 and $207,000,
respectively.
(B) 401(k) AND PROFIT SHARING PLAN
The Company has a profit sharing and 401(k) plan covering certain qualified
employees, which includes employer participation in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The plan allows
participants to make pretax contributions and the Company matches certain
percentages of employee contributions depending on the participant's length of
service. The profit sharing portion of the plan is discretionary and
noncontributory. All amounts contributed to the plan are deposited into a trust
fund administered by independent trustees.
The Company provided for profit sharing contributions of $1,084,000,
$1,336,000 and $1,534,000 for 1996, 1997 and 1998, respectively. The Company's
matching 401(k) contributions required by the 401(k) plan for 1996, 1997 and
1998 were approximately $664,000, $873,000 and $1,066,000, respectively.
(C) SERVICE AWARD BENEFIT PLAN
In 1989 the Company adopted an unfunded service award benefit plan, with a
retroactive vesting period of five years. This plan is a "severance pay plan" as
defined by the Employee Retirement Income Security Act (ERISA) and covers
certain qualified employees. The plan provides participants, upon termination,
with a guaranteed seven days pay for each year of employment subsequent to
November 1, 1989. The Company, at its discretion, may also award additional days
each year.
Net cost of the plan is comprised of:
- ---------------------------------------------------------------------
(in thousands of dollars) 1996 1997 1998
- ---------------------------------------------------------------------
Service cost $ 371 $ 298 $ 300
Interest 176 233 247
- ---------------------------------------------------------------------
Net cost $ 547 $ 531 $ 547
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Actuarial present value of:
Vested benefit obligation $ 2,436 $ 2,964 $ 3,280
Accumulated benefit obligation $ 2,522 $ 3,102 $ 3,391
Projected benefit obligation $ 3,064 $ 3,853 $ 4,072
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Assumptions used in accounting for the plan as of October 31 were:
- --------------------------------------------------------------------------------
(in thousands of dollars) 1996 1997 1998
- --------------------------------------------------------------------------------
Weighted average discount rate 7% 7% 7%
Rate of increase in compensation level 5% 5% 5%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(D) PENSION PLAN UNDER COLLECTIVE BARGAINING
Certain qualified employees of the Company are covered under union-sponsored
collectively bargained multi-employer defined benefit plans. Contributions for
these plans were approximately $11,900,000, $14,993,000 and $20,763,000 in 1996,
1997 and 1998, respectively. These plans are not administered by the Company and
contributions are determined in accordance with provisions of negotiated labor
contracts.
7. LEASE COMMITMENTS AND RENTAL EXPENSE
The Company is obligated under noncancelable operating leases for various
facilities and equipment.
22
As of October 31, 1998, future minimum lease commitments under noncancelable
operating leases are as follows:
- -----------------------------------------------------
Years ending (in thousands of dollars)
- -----------------------------------------------------
1999 $ 34,708
2000 26,622
2001 20,165
2002 14,238
2003 10,611
Thereafter 44,601
- -----------------------------------------------------
Total minimum lease commitments $ 150,945
- -----------------------------------------------------
- -----------------------------------------------------
Rental expense for the years ended October 31, is summarized as follows:
- ------------------------------------------------------------------
(in thousands of dollars) 1996 1997 1998
- ------------------------------------------------------------------
Minimum rentals under
noncancelable leases $ 50,834 $ 52,997 $ 61,648
Contingent rentals 29,470 32,031 26,071
Short-term rental agreements 11,364 12,201 11,379
- ------------------------------------------------------------------
$ 91,668 $ 97,229 $ 99,098
- ------------------------------------------------------------------
- ------------------------------------------------------------------
Contingent rentals are applicable to leases of parking lots and garages and
are based on percentages of the gross receipts attributable to the related
facilities.
8. COMMITMENTS AND CONTINGENCIES
The Company and certain of its subsidiaries have been named defendants in
certain litigation arising in the ordinary course of business. In the opinion of
management, based on advice of legal counsel, such matters should have no
material effect on the Company's consolidated financial statements taken as a
whole.
9. REDEEMABLE CUMULATIVE PREFERRED STOCK
On June 23, 1993, the Company authorized 6,400 shares of preferred stock
having a par value of $0.01 per share. These shares designated as Series B 8%
Senior Redeemable Cumulative Preferred Stock (Series B Preferred Stock) shall be
entitled to one vote per share on all matters upon which common stockholders are
entitled to vote and have a redemption price of $1,000 per share, together with
accrued and unpaid dividends thereon. Redemption of the Series B Preferred Stock
is at the option of the holders for any or all of the outstanding shares after
September 1, 1998 or at the option of the Company after September 1, 2002. The
total redemption value of the shares outstanding at October 31, 1997 and 1998 in
an amount of $6,400,000 is classified on the Company's balance sheet as
redeemable cumulative preferred stock. In the event of any liquidation,
dissolution or winding up of the affairs of the Company, holders of the Series B
Preferred Stock shall be paid the redemption price plus all accrued dividends to
the date of liquidation, dissolution or winding up of affairs before any payment
to other stockholders.
On September 1, 1993, the Company issued 6,400 shares of its Series B
Preferred Stock in conjunction with the acquisition of System Parking. The
acquisition agreement provided that one-half, or 3,200 shares, of the Series B
Preferred Stock be placed in escrow and will be released upon certain earnout
requirements. As of October 31, 1998, none of these shares have been released.
Dividends of $128,000 are due and payable each quarter and are deducted from
net income in determining net income per common share.
10. CAPITAL STOCK
The Company is authorized to issue 500,000 shares of preferred stock, of
which 50,000 shares have been designated as Series A Junior Participating
Preferred Stock of $.01 par value. None of these preferred shares have been
issued.
On June 18, 1996, the Company's Board of Directors approved a two-for-one
stock split, payable to shareholders of record as of the close of business on
July 15, 1996. A total of 9,669,000 shares of common stock were issued in
connection with the stock split. The stated par value of the shares was not
changed from $0.01. A total of $96,690 was reclassified from the Company's
additional paid in capital account to the Company's common stock account. All
share and per share amounts have been restated to retroactively reflect the
stock split.
In March 1998, the Company's Board of Directors adopted a stockholder rights
plan to replace an existing rights plan that expired on April 22, 1998. The new
plan provides for a dividend distribution of one preferred stock purchase right
(a "Right") for each outstanding share of common stock, distributed to
stockholders of record on April 22, 1998. The Rights will be exercisable only if
a person or group acquires 20% or more of the Company's common stock (an
"Acquiring Person") or announces a tender offer for 20% or more of the common
stock. Each Right will entitle stockholders to buy one-thousandth of a share of
newly created Participating Preferred Stock, par value $.01 per share, of the
Company at an initial exercise price of $175 per Right, subject to adjustment
from time to time. However, if any person becomes an Acquiring Person, each
Right will then entitle its holder (other than the Acquiring Person) to purchase
at the exercise price common stock (or, in certain circumstances, Participating
Preferred Stock) of the Company having a market
23
value at that time of twice the Right's exercise price. These Rightsholders
would also be entitled to purchase an equivalent number of shares at the
exercise price if the Acquiring Person were to control the Company's Board of
Directors and cause the Company to enter into certain mergers or other
transactions. In addition, if an Acquiring Person acquired between 20% and 50%
of the Company's voting stock, the Company's Board of Directors may, at its
option, exchange one share of the Company's common stock for each Right held
(other than Rights held by the Acquiring Person). Rights held by the Acquiring
Person will become void. The Rights Plan excludes from its operation The
Theodore Rosenberg Trust and The Sydney J. Rosenberg Trust, and certain related
persons, and, as a result, their holdings will not cause the Rights to become
exercisable or nonredeemable or trigger the other features of the Rights. The
Rights will expire on April 22, 2008, unless earlier redeemed by the Board at
$0.01 per Right.
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", and its
related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock awards because the
exercise price at date of grant equals or exceeds the market price on that date.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", requires the disclosure of pro forma net earnings and
earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option pricing models. The use of
these models requires subjective assumptions, including future stock price
volatility and expected time to exercise, which can have a significant effect on
the calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected life 6.4 years, 9.8 years and 11.4 years from the date of
grant in fiscal 1996, 1997 and 1998, respectively; expected stock price
volatility of 19.5%, 19.5% and 25.3%, respectively; expected dividend yields of
2.6%, 2.6% and 1.5%; and risk free interest rates of 6.8%, 6.5% and 6.0% in
fiscal 1996, 1997 and 1998, respectively.
The Company's calculations are based on a single option valuation approach
and forfeitures are recognized as they occur. If the computed fair values of the
fiscal 1996, 1997 and 1998 awards had been amortized to expense over the vesting
period of the awards, pro forma net earnings would have been $19,948,000 ($0.96
per share) for fiscal 1996, $24,376,000 ($1.09 per share) for fiscal 1997 and
$27,496,000 ($1.17 per share) in fiscal 1998. The impact of outstanding stock
options granted prior to fiscal 1996 has been excluded from the pro forma
calculation; accordingly, the fiscal 1996, 1997 and 1998 pro forma adjustments
are not indicative of future period pro forma adjustments, when the calculation
will apply to all future applicable stock grants.
Although most of the options granted under the "Price-Vested" Performance
Stock Option Plan adopted in 1996 were granted in 1997, the recognition of
expense in the SFAS 123 footnote for this Plan increased from $724,296 in 1997
to $5,879,059 in 1998. This accounts for the majority of the increase in the
total recognition from all plans from $4,682,235 in 1997 to $10,513,464 in 1998.
This large increase results from the requirements contained in SFAS 123. The
options from this Plan were granted with a ten-year term. If, during the first
four years, the stock price achieved and maintained a set price for ten out of
thirty consecutive trading days, the options associated with the price would
vest. The prices established were $25, $30, $35 and $40, with 25% of the options
vesting at each price point. If, at the end of four years, any of the stock
price performance targets were not achieved, then the remaining options would
vest at the end of eight years from the date the options were granted. SFAS 123
requires that the projected value of the options be determined on the grant date
and recognized over the period in which the options are earned (the vesting
period). For these options, the projected value of the options was determined
and that value was to be recognized over the eight-year vesting period unless
vesting occurred at an earlier date. In 1998 ABM stock achieved and maintained
for the requisite ten-day period, the first three price targets. As a result,
75% of the options are now vested, and the projected value of that 75% less the
amount recognized in 1997 for those options recognized in this year's footnote.
Of the remaining 25% of the originally granted options yet to be vested,
one-eighth was recognized last year and one-eighth recognized this year. The
remaining amount will be recognized over the next six years unless sooner vested
by the stock achieving a price of $40 per share and maintaining that price for
ten out of 30 consecutive trading days.
24
"AGE-VESTED" CAREER STOCK OPTION PLAN ADOPTED IN 1984, AS AMENDED
In 1984, the Company adopted a stock option plan whereby 680,000 shares were
reserved for grant. In March of 1996, another 1,000,000 shares were reserved for
grant under the plan. As amended December 20, 1994, options which have been
granted at fair market value are 50% exercisable when the option holders reach
their 61st birthday and the remaining 50% will vest on their 64th birthday. To
the extent vested, the options may be exercised at any time prior to one year
after termination of employment. Options which terminate without being exercised
may be reissued.
Transactions under this plan are summarized as follows:
- --------------------------------------------------------------
Weighted
Number of Average
Options Exercise Price
- --------------------------------------------------------------
Balance October 31, 1995 655,000 7.64
Terminated (16,000) 11.25
- --------------------------------------------------------------
Balance October 31, 1996 639,000 7.55
Granted (Weighted average fair
value of $6.65) 6,000 19.44
Terminated (22,000) 11.25
- --------------------------------------------------------------
Balance October 31, 1997 623,000 7.53
Granted (Weighted average fair
value of $13.79) 573,000 30.01
Terminated (12,000) 18.82
- --------------------------------------------------------------
Balance October 31, 1998 1,184,000 $18.29
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------------------------------
Outstanding Exercisable
- ------------------------------------------------------------ ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number of Contractual Exercise Number of Exercise
Prices Options Life (Years) Price Options Price
- --------------------------------------------------------------------------------------
$5.72 - 8.72 446,000 4 $ 5.92 140,000 $ 6.04
$11.25 - 13.28 164,000 8 $ 11.32 24,000 $ 11.25
$19.44 6,000 13 $ 19.44 -- --
$29.41 - $36.94 568,000 12 $ 30.01 66,000 $ 29.41
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
"TIME-VESTED" INCENTIVE STOCK OPTION PLAN ADOPTED IN 1987, AS AMENDED
In 1987, the Company adopted a stock option plan under which 1,200,000
shares were reserved for grant until December 31, 1996. In March 1994, this plan
was amended to reserve an additional 1,000,000 shares. In March 1996, the plan
was amended again to reserve another 2,000,000 shares. Options which terminate
without being exercised may be reissued.
Transactions under this plan are summarized as follows:
- --------------------------------------------------------------
Weighted
Number of Average
Options Exercise Price
- --------------------------------------------------------------
Balance October 31, 1995 1,730,000 8.19
Granted (Weighted average fair
value of $4.93) 928,000 18.59
Exercised (195,000) 7.96
Terminated (65,000) 9.32
- --------------------------------------------------------------
Balance October 31, 1996 2,398,000 12.21
Granted (Weighted average fair
value of $4.55) 89,000 19.83
Exercised (108,000) 8.70
Terminated (64,000) 13.28
- --------------------------------------------------------------
Balance October 31, 1997 2,315,000 12.41
Granted (Weighted average fair
value of $10.20) 266,000 32.28
Exercised (486,000) 7.35
Terminated (83,000) 15.16
- --------------------------------------------------------------
Balance October 31, 1998 2,012,000 $16.40
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------------------------
Outstanding Exercisable
- ------------------------------------------------------ ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number of Contractual Exercise Number of Exercise
Prices Options Life (Years) Price Options Price
- --------------------------------------------------------------------------------
$8.49 - 13.32 862,000 4.9 $ 8.98 804,000 $ 8.91
$17.44 - 26.94 919,000 8.1 $ 19.16 412,000 $ 18.92
$29.41 - 36.59 231,000 9.3 $ 33.09 34,000 $ 32.49
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
"PRICE-VESTED" PERFORMANCE STOCK OPTION PLAN ADOPTED IN 1996
In December 1996, the Company adopted a stock option plan under which
1,500,000 shares have been reserved. The options expire 10 years after the date
of grant and any options which terminate without being exercised may be
reissued. Each option will have a pre-defined vesting price which provides for
accelerated vesting if the fair market value of the Company's common stock is
equal to or greater than the pre-defined vesting price for 10 trading days in
any period of 30 consecutive trading days. Vested options will become
exerciseable only after the first anniversary of its grant date. Any option that
has not vested prior to the fourth anniversary of its grant date will vest on
the eighth anniversary of its grant date.
25
Transactions under this plan are summarized as follows:
- --------------------------------------------------------------
Weighted
Number of Average
Options Exercise Price
- --------------------------------------------------------------
Granted 12/17/96 (Weighted average
fair value of $6.32) 1,120,000 $20.40
Terminated (40,000) 20.00
- --------------------------------------------------------------
Balance October 31, 1997 1,080,000 20.41
Granted (Weighted average fair
value of $14.95) 140,000 36.59
Exercised (40,000) 20.00
- --------------------------------------------------------------
Balance October 31, 1998 1,180,000 $22.35
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------------------------------
Outstanding Exercisable
- ------------------------------------------------------------ ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number of Contractual Exercise Number of Exercise
Prices Options Life (Years) Price Options Price
- --------------------------------------------------------------------------------------
$20.00 - 25.59 1,040,000 8.3 $ 20.43 770,000 $ 20.44
$36.59 140,000 9.4 $ 36.59 70,000 $ 36.59
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
For purposes of the SFAS No. 123 calculation, the weighted average fair value
per option was $6.32 and $14.95 for fiscal 1997 and 1998, respectively, which
will be amortized over eight years unless accelerated as previously described.
EMPLOYEE STOCK PURCHASE PLAN ADOPTED IN 1985, AS AMENDED
In 1985, the Company adopted an employee stock purchase plan that is offered
to all employees of the Company, under which sale of 5,000,000 shares of its
common stock has been authorized. In March of 1996, the sale of an additional
1,200,000 shares under this plan was authorized. The purchase price of the
shares under the plan is the lesser of 85% of the fair market value at the
commencement of each plan year or 85% of the fair market value on the date of
purchase. Employees may designate up to 10% of their compensation for the
purchase of stock. During 1996, 1997 and 1998, 562,000, 520,000 and 562,000
shares of stock were issued under the plan for an aggregate purchase price of
$6,437,000, $7,841,000 and $10,873,000, respectively. At October 31, 1998,
294,000 shares remained unissued under the plan.
11. INCOME TAXES
The provision for income taxes is made up of the following components for
each of the years ended October 31:
- ------------------------------------------------------------------
(in thousands of dollars) 1996 1997 1998
- ------------------------------------------------------------------
Current
Federal $ 17,368 $ 18,685 $ 22,415
State 2,521 2,809 5,647
Foreign 52 8 37
Deferred
Federal (3,250) (1,619) (4,149)
State (306) (158) (372)
- ------------------------------------------------------------------
$ 16,385 $ 19,725 $ 23,578
- ------------------------------------------------------------------
- ------------------------------------------------------------------
Income tax expense attributable to income from operations differs from the
amounts computed by applying the U.S. statutory rates to pretax income from
operations as a result of the following for the years ended October 31:
- --------------------------------------------------------------------------
1996 1997 1998
- --------------------------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
State and local taxes on income, net
of federal tax benefit 3.8% 3.4% 5.6%
Tax credits (0.1)% (0.9)% (2.7)%
Nondeductible expenses and other --
net 4.3% 4.5% 3.1%
- --------------------------------------------------------------------------
43.0% 42.0% 41.0%
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at October 31,
are presented below:
- -----------------------------------------------------------------
(in thousands of dollars) 1997 1998
- -----------------------------------------------------------------
Deferred tax assets:
Self-insurance claims $ 29,217 $ 28,767
Bad debt allowance (1,374) 1,073
Deferred and other compensation 5,161 6,103
Intangible amortization 2,314 2,853
State taxes 1,103 1,105
Other 1,988 3,122
- -----------------------------------------------------------------
Total gross deferred tax assets 38,409 43,023
- -----------------------------------------------------------------
Deferred tax liabilities:
Union pension contributions (4,907) (5,161)
Depreciation (9) 152
- -----------------------------------------------------------------
Total gross deferred tax liabilities (4,916) (5,009)
- -----------------------------------------------------------------
Net deferred tax assets $ 33,493 $ 38,014
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Management has determined the total net deferred tax asset will more likely
than not be realized.
At October 31, 1998, ABM has a capital loss carryover of $1,135,516, which
can be carried forward to offset capital gains, if any, to reduce future federal
income taxes through October 31, 2001.
26
12. ACQUISITIONS AND DIVESTITURES
All acquisitions have been accounted for using the purchase method of
accounting; operations of the companies and businesses acquired have been
included in the accompanying consolidated financial statements from their
respective dates of acquisition. The excess of the purchase price over fair
value of the net assets acquired is generally included in goodwill. Most
purchase agreements provide for contingent payments based on the annual pretax
income for subsequent periods ranging generally from three to five years. Any
such future payments are generally capitalized as goodwill when paid. Cash paid
for acquisitions, including any contingent amounts based on subsequent earnings,
were approximately $10 million in 1998. In addition, common shares, with a fair
market value of approximately $1.3 million at the date of issuance, were issued
in 1998 under the contingent payment provisions of a prior year acquisition.
Acquisitions and dispositions made during the fiscal year 1998 are discussed
below:
Effective November 14, 1997, the Company, through one of its subsidiaries,
acquired contracts and certain operating assets of Cleaning Products, Inc. of
Houston, Texas. The terms of purchase for this acquisition were a cash payment
for certain operating assets at closing, plus annual contingent payments based
on a percentage of revenues to be made over a period of five years. This
acquisition contributed approximately $1.2 million in revenues in fiscal year
1998.
Effective June 1, 1998, the Company, through one of its subsidiaries,
acquired the operations and selected assets of Lighting Maintenance, Inc. (LMI)
and Fecht Electric Company. Both LMI and Fecht are based in Chicago, Illinois
and perform lighting, sign and electrical maintenance and repair. The terms of
the purchase for this acquisition were a cash downpayment made at the time of
the closing plus annual contingent payments based on operating profits to be
made over five years. In 1998 this acquisition contributed approximately $1.5
million in revenues.
Effective March 1, 1998, the Company acquired janitorial contracts and
selected assets of Maintenance Center Building Services, with customers located
in Boston, Massachusetts. The terms of the purchase for this acquisition were a
cash downpayment made at the time of the closing plus a commission expense based
on a percentage of revenues for a period of five years. In fiscal 1998 this
acquisition contributed approximately $2.8 million in revenues.
Effective September 1, 1998, the Company acquired janitorial contracts and
selected assets of Professional Corporate Services of Phoenix, Arizona. The
terms of purchase for this acquisition were a cash payment for net assets at
closing, plus annual contingent payments based on the operating profit to be
made over a period of five years. This acquisition contributed approximately
$700,000 in revenues in fiscal year 1998.
13. DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate fair value due to the short-maturity of these
instruments.
Financial instruments included in investments and long-term receivables have
no quoted market prices and, accordingly, a reasonable estimate of fair market
value could not be made without incurring excessive costs. However, the Company
believes by reference to stated interest rates and security held, the fair value
of the assets would not differ significantly from the carrying value.
The fair value of the Company's long-term debt approximates carrying value
based on the quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same remaining maturities.
The Company believes that it is not practical to estimate a fair market
value different from the redeemable cumulative preferred stock's carrying value
of $6.4 million, as this security was issued in conjunction with an acquisition
and has numerous features unique to this security as described in Note 9.
However, the Company believes the carrying value would not differ significantly
from the fair value.
27
14. QUARTERLY INFORMATION (UNAUDITED)
(in thousands, except net income per common share)
- --------------------------------------------------------------------------------------------------------------------------------
FISCAL QUARTER
--------------------------------------
OPERATIONS FIRST SECOND THIRD FOURTH YEAR
- --------------------------------------------------------------------------------------------------------------------------------
1997
Revenues and other income $291,638 $294,309 $308,471 $358,054 $ 1,252,472
Gross profit 38,887 41,054 43,733 52,720 176,394
Net income 4,840 5,849 7,486 9,064 27,239
Net income per common share:
Basic 0.24 0.29 0.36 0.44 1.33
Diluted 0.22 0.26 0.34 0.40 1.22
1998
Revenues and other income $358,747 $369,034 $381,036 $393,010 $ 1,501,827
Gross profit 46,253 48,506 52,292 56,353 203,404
Net income 5,735 7,105 9,526 11,564 33,930
Net income per common share:
Basic 0.27 0.33 0.44 0.53 1.58
Diluted 0.25 0.30 0.40 0.49 1.44
- --------------------------------------------------------------------------------------------------------------------------------
15. SEGMENT INFORMATION
The operations of the Company are divided into the following three business
segments of the facility services industry for financial reporting purposes:
/ / JANITORIAL DIVISIONS: Provides janitorial cleaning services as well
as janitorial supplies and equipment to its customers. Services provided
include floor cleaning and finishing, wall and window washing, furniture
polishing, rug cleaning, dusting, and other building cleaning services. In
addition, this segment markets janitorial supplies and equipment which
include cleaning equipment, cleaners, disinfectants, floor cleaners, floor
finishes, glass cleaners, and paper products.
/ / PUBLIC SERVICE DIVISIONS: Operates approximately 1,500 parking lots
and garages which are either leased from or operated for third parties. This
segment also provides uniformed security guards and special investigative
and security consulting services. Finally, this segment provides "bundled"
facility services for its customers.
/ / TECHNICAL DIVISIONS: Provides a wide range of elevator, engineering,
lighting, and HVAC (heating, ventilation and air conditioning) services
through its four Divisions. This includes on-site operating engineers to
operate, maintain and repair electrical, mechanical, and plumbing systems
primarily for high-rise office buildings. It also provides installation,
repair and maintenance of elevators and escalators, indoor and outdoor
lighting fixtures, and HVAC equipment, as well as energy management
consulting services.
28
SEGMENT INFORMATION (in thousands of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
PUBLIC
JANITORIAL SERVICE TECHNICAL CONSOLIDATED
FOR THE YEAR ENDED OCTOBER 31, 1996 DIVISIONS DIVISIONS DIVISIONS CORPORATE ELIMINATIONS TOTALS
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues and other income $607,355 $226,312 $252,854 $ 404 $ 1$,086,925
Intersegment revenues 12,829 65 350 (13,244) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenues $620,184 $226,377 $253,204 $ 404 $(13,244) 1$,086,925
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Operating profit $ 29,006 $ 9,626 $ 15,469 $(13,415) $ $ 40,686
Interest, expense (29) (11) 4 (2,545) (2,581)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 28,977 $ 9,615 $ 15,473 $(15,960) $ $ 38,105
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $157,656 $ 90,129 $ 85,872 $ 46,113 $ $379,770
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation expense $ 3,565 $ 2,176 $ 2,080 $ 589 $ $ 8,410
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Amortization expense $ 2,506 $ 2,085 $ 650 $ 0 $ $ 5,241
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 5,607 $ 2,902 $ 1,858 $ 384 $ $ 10,751
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues and other income $713,366 242,943 295,653 510 1,252,472
Intersegment revenues 13,430 108 1,152 (14,690) 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenues $726,796 $243,051 $296,805 $ 510 $(14,690) 1$,252,472
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Operating profit $ 34,173 $ 9,961 $ 20,155 $(14,650) $$49,639
Interest, expense (24) (13) 1 (2,639) (2,675)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 34,149 $ 9,948 $ 20,156 $(17,289) $ $ 46,964
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $206,456 $ 91,893 $120,858 $ 45,044 $ $464,251
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation expense $ 3,869 $ 2,446 $ 2,372 $ 634 $ $ 9,321
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Amortization expense $ 3,537 $ 2,431 $ 829 $ 0 $ $ 6,797
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 4,882 $ 4,257 $ 2,966 $ 1,167 $ $ 13,272
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues and other income $889,432 253,912 357,954 529 1,501,827
Intersegment revenues 12,901 116 943 (13,960) 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenues $902,333 $254,028 $358,897 $ 529 $(13,960) 1$,501,827
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Operating profit $ 46,330 $ 10,994 $ 23,771 $(20,122) $ $ 60,973
Interest, expense (19) (9) 1 (3,438) (3,465)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 46,311 $ 10,985 $ 23,772 $(23,560) $ $ 57,508
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $223,463 $ 96,936 $135,983 $ 44,981 $ $501,363
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation expense $ 4,608 $ 2,531 $ 2,450 $ 1,109 $ $ 10,698
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Amortization expense $ 5,166 $ 2,544 $ 1,185 $ 0 $ $ 8,895
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 8,174 $ 1,820 $ 1,721 $ 0 $ 11,715
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Intersegment revenues are recorded at prices negotiated between the entities.
29
SCHEDULE II
ABM Industries Incorporated and Subsidiaries
CONSOLIDATED VALUATION ACCOUNTS
Years ended October 31, 1996, 1997 and 1998
(in thousands of dollars)
- ------------------------------------------------------------------------------------------------
BALANCE CHARGES TO DEDUCTIONS
BEGINNING COSTS AND NET OF OTHER ADDITIONS BALANCE END
OF YEAR EXPENSES RECOVERIES (REDUCTIONS) OF YEAR
- ------------------------------------------------------------------------------------------------
Allowance for Doubtful
Accounts
Years ended October 31:
1996 $ 3,755 $ 2,039 ($ 1,352) $ 0 $ 4,442
1997 4,442 2,988 (1,507) 0 5,923
1998 5,923 2,821 (1,983) 0 6,761
- ------------------------------------------------------------------------------------------------
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference to the
information set forth under the caption "Election of Directors" contained in the
Proxy Statement to be used by the Company in connection with its 1999 Annual
Meeting of Stockholders. See also the cover page of this Form 10-K and item 1.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the
information set forth under the caption "Executive Compensation" contained in
the Proxy Statement to be used by the Company in connection with its 1999 Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
information set forth under the caption "Principal Stockholders" contained in
the Proxy Statement to be used by the Company in connection with its 1999 Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
information set forth under the captions "Executive Compensation" and "Certain
Relationships and Related Transactions" contained in the Proxy Statement to be
used by the Company in connection with the 1999 Annual Meeting of Stockholders.
30
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) The following documents are filed as part of this Form 10-K:
1. and 2. Consolidated Financial Statements and Consolidated
Financial Statement Schedule.
The following consolidated financial statements of ABM Industries
Incorporated and subsidiaries are included in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets -- October 31, 1997 and 1998
Consolidated Statements of Income -- Years ended October 31, 1996,
1997 and 1998
Consolidated Statements of Stockholders' Equity -- Years ended
October 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows -- Years ended October 31,
1996, 1997 and 1998
Notes to Consolidated Financial Statements -- October 31, 1998.
The following consolidated financial statement schedule of ABM Industries
Incorporated and subsidiaries is included in Item 8.
Schedule II -- Consolidated Valuation Accounts -- Years ended October 31,
1996, 1997 and 1998.
All other schedules are omitted because they are not applicable or because
the required information is included in the consolidated financial statements or
the notes thereto.
The individual financial statements of the registrant's subsidiaries have
been omitted since the registrant is primarily an operating company and all
subsidiaries included in the consolidated financial statements are wholly-owned
subsidiaries.
31
3. Exhibits:
--------------------------------------------------
Exhibit
Number Description
---------------------------------------------------------------
3.1 [j] Certificate of Incorporation, as amended.
3.2 [a] Restated Bylaws, as amended effective September 19, 1995.
4.1 [k] Credit Agreement, dated June 25, 1997, between Bank of America National
Trust and Savings Association and the Company.
4.2 [n] First Amendment to Credit Agreement dated as of October 21, 1997.
4.5 [c] Business Loan Agreement dated February 13, 1996.
10.2 [j]* 1985 Employee Stock Purchase Plan as amended effective December 19, 1995.
10.3 [b]* Supplemental Medical and Dental Plan.
10.4 [j]* 1984 Executive Stock Option Plan as amended effective December 19, 1995.
10.7 [f]* Executive Employment Agreement with Sydney J. Rosenberg.
10.9 [f]* Short Form Deed of Trust and Assignment of Rents (dated December 17, 1991)
between the Company and John F. Egan, together with the related Promissory
Note (dated January 1, 1992).
10.13 [j]* 1987 Stock Option Plan as amended effective December 19, 1995.
10.16 [d] Rights Agreement, dated as of March 17, 1998, between the Company and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent.
10.19 [e]* Service Award Plan.
10.20 [f]* Executive Employment Agreement with William W. Steele.
10.21 [f]* Amended and Restated Retirement Plan for Outside Directors.
10.22 [f]* Amendment No. 1 to Service Award Plan.
10.23 [g]* Form of Outside Director Retirement Agreement (dated June 16, 1992).
10.24 [g]* Executive Employment Agreement with John F. Egan.
10.25 [g]* Executive Employment Agreement with Jess. E. Benton, III.
10.27 [h] Guaranty of American Building Maintenance Industries, Inc.
10.28 [i]* Deferred Compensation Plan.
10.29 [i]* Form of Existing Executive Employment Agreement Other Than Those Named
Above.
10.30 [l]* Executive Employment Agreement with Martinn H. Mandles, as amended by
Amendments One and Two.
10.31 [l]* Amendment of Corporate Executive Employment Agreement with William W.
Steele.
10.32 [l]* First and Second Amendments of Corporate Executive Employment Agreement
with John F. Egan.
10.33 [l]* Amendment of Corporate Executive Employment Agreement with Sydney J.
Rosenberg.
10.34 [l]* First and Second Amendments of Corporate Executive Employment Agreement
with Jess E. Benton, III.
10.35 [l]* Form of Amendments of Corporate Executive Employment Agreements with Other
Than Those Named Above.
10.36 [m]* Form of Indemnification for Directors
10.37 [n]* Second Amendment of Corporate Executive Employment Agreement with William
W. Steele.
10.38 [n]* Second Amendment of Corporate Executive Employment Agreement with Sydney J.
Rosenberg
10.39 [n]* Third Amendment of Corporate Executive Employment Agreement with Martinn H.
Mandles
10.40 [p]* 1996 ABM Industries Incorporated Long-Term Senior Executive Stock Option
Plan.
10.40 [o]* Amendment of Corporate Executive Employment Agreement with Martinn H.
Mandles
10.41 [o]* Amendment of Corporate Executive Employment Agreement with Jess E. Benton
III
10.42 * Executive Employment Agreement with Henrik Slipsager
10.43 * Second Amendment of Division Executive Employment Agreement with Henrik
Slipsager
10.44 * Third Amendment of Division Executive Employment Agreement with Henrik
Slipsager
10.45 * Amendment of Division Executive Employment Agreement with Henrik Slipsager
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Certified Public Accountants.
27.1 Financial Data Schedule.
- ------------------------------
[a] Incorporated by reference to the exhibit bearing the same numeric
description which was filed as an exhibit to the Company's annual report on
Form 10-K for the fiscal year ended October 31, 1995.
[b] Incorporated by reference to the exhibit bearing the same numeric
description which was filed as an exhibit to the Company's annual report on
Form 10-K for the fiscal year ended October 31, 1984.
[c] Incorporated by reference to the exhibit bearing the same numeric
description which was filed as an exhibit to the Company's quarterly report
on Form 10-Q for the fiscal quarter ended January 31, 1996.
[d] Incorporated by reference to exhibit 4.1 to the Company's report on Form 8-K
dated March 17, 1998.
[e] Incorporated by reference to the exhibit bearing the same numeric
description which was filed as an exhibit to the Company's annual report on
Form 10-K for the fiscal year ended October 31, 1990.
[f] Incorporated by reference to the exhibit bearing the same numeric
description which was filed as an exhibit to the Company's annual report on
Form 10-K for the fiscal year ended October 31, 1991.
[g] Incorporated by reference to the exhibit bearing the same numeric
description which was filed as an exhibit to the Company's quarterly report
on Form 10-Q for the fiscal quarter ended July 31, 1992.
[h] Incorporated by reference to the exhibit bearing the same numeric reference
which was filed as an exhibit to the Company's quarterly report on Form 10-Q
for the fiscal quarter ended July 31, 1993.
[i] Incorporated by reference to the exhibit bearing the same numeric
description which was filed as an exhibit to the Company's annual report on
Form 10-K for the fiscal year ended October 31, 1993.
[j] Incorporated by reference to the exhibit bearing the same numeric
description which was filed as an exhibit to the Company's quarterly report
on Form 10-Q for the fiscal quarter ended April 30, 1996.
[k] Incorporated by reference to the exhibit bearing the same numeric
description which was filed as an exhibit to the Company's quarterly report
on Form 10-Q for the fiscal quarter ended July 31, 1997.
[l] Incorporated by reference to the exhibit bearing the same numeric
description which was filed as an exhibit to the Company's annual report on
Form 10-K for the fiscal year ended October 31, 1994.
[m] Incorporated by reference to exhibit 10.20 which was filed as an exhibit to
the Company's quarterly report on Form 10-Q for the fiscal quarter ended
April 30, 1991.
[n] Incorporated by reference to the exhibit bearing the same numeric
description which was filed as an exhibit to the Company's annual report on
Form 10-K for the fiscal year ended October 31, 1996.
[o] Incorporated by reference to the exhibit bearing the same numeric
description which was filed as an exhibit to the Company's quarterly report
on Form 10-Q for the fiscal quarter ended July 31, 1998.
[p] Incorporated by reference to the exhibit bearing the same numeric
description which was filed as an exhibit to the Company's quarterly report
on Form 10-Q for the fiscal quarter ended April 30, 1997.
* Management contract, compensatory plan or arrangement.
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K have been filed during the last quarter of the period
covered by this report.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ABM INDUSTRIES INCORPORATED
By: /s/ William W. Steele
-------------------------------------------------
William W. Steele
President, Chief Executive Officer and Director
January 27, 1999
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 and
on the dates indicated.
/s/ William W. Steele /s/ Martinn H. Mandles
-------------------------------------------------- --------------------------------------------------
William W. Steele Martinn H. Mandles
President, Chief Executive Officer and Director Chairman of the Board, Chief Administrative Officer
(Principal Executive Officer) and Director
January 27, 1999 January 27, 1999
/s/ David H. Hebble /s/ Vernon E. Skelton
-------------------------------------------------- --------------------------------------------------
David H. Hebble Vernon E. Skelton
Vice President & Chief Financial Officer Controller & Chief Accounting Officer
(Principal Financial Officer) (Principal Accounting Officer)
January 27, 1999 January 27, 1999
/s/ Maryellen B. Cattani /s/ Linda Chavez
-------------------------------------------------- --------------------------------------------------
Maryellen B. Cattani Linda Chavez
Director Director
January 27, 1999 January 27, 1999
/s/ John F. Egan /s/ Luke S. Helms
-------------------------------------------------- --------------------------------------------------
John F. Egan Luke S. Helms
Vice President and Director Director
January 27, 1999 January 27, 1999
/s/ Charles T. Horngren /s/ Henry L. Kotkins, Jr.
-------------------------------------------------- --------------------------------------------------
Charles T. Horngren Henry L. Kotkins, Jr.
Director Director
January 27, 1999 January 27, 1999
/s/ Theodore Rosenberg /s/ William E. Walsh
-------------------------------------------------- --------------------------------------------------
Theodore Rosenberg William E. Walsh
Chairman of the Executive Committee and Director Director
January 27, 1999 January 27, 1999
33