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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, 1997
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)
50 FREMONT STREET, 26TH FLOOR, SAN FRANCISCO, CALIFORNIA 94105
(Address and zip code of principal executive offices)
TELEPHONE: (415) 597-4500
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 STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE AND
PACIFIC STOCK EXCHANGE
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.
X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
As of December 31, 1997, nonaffiliates of the registrant beneficially owned
shares of the registrant's common stock with an aggregate market value of
$489,359,354.
As of December 31, 1997, there were 20,611,800 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement to be used by the Company in connection with its 1998 Annual
Meeting of Stockholders is incorporated by reference into Part III of this Form
10-K.
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PART I
ITEM 1. BUSINESS.
ABM Industries Incorporated ("ABM") is the largest U.S.-based facility
services contractor listed on the New York Stock Exchange. With annual revenues
exceeding $1.25 billion and more than 52,000 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 is located at 50 Fremont Street, 26th Floor, San Francisco, California
94105, and its telephone number is (415) 597-4500.
BUSINESS SEGMENT INFORMATION
The Company's divisions (consisting of one or more subsidiaries of the
Company), listed below, operate in three functionally oriented segments of the
building services industry -- Janitorial Divisions, Public Service Divisions and
Technical Divisions.
<TABLE>
<CAPTION>
JANITORIAL PUBLIC SERVICE TECHNICAL
DIVISIONS DIVISIONS DIVISIONS
- --------------------------------------------------------------------------------
<S> <C> <C>
American Building American Commercial ABM Engineering
Maintenance Security Services Services
Easterday Janitorial Supply Ampco System Parking Amtech Elevator
Services
Amtech Lighting
Services
CommAir Mechanical
Services
</TABLE>
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 eight operating divisions, as they existed at October 31, 1997, are more
fully described below.
JANITORIAL DIVISIONS
The Janitorial Divisions segment provides janitorial cleaning services as
well as janitorial supplies and equipment to its customers. Operating from 78
offices throughout the United States and Canada, this segment accounted for
approximately 53%, 56% and 57% of the Company's revenues in the fiscal years
ended October 31, 1995, 1996 and 1997, 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 72 offices in 31 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 premiums 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 1997, 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 paper products,
disinfectants, floor cleaners, polishes, glass cleaners, waxes and cleaning
equipment. The products sold include a number of nationally advertised
brands and, in large part, are manufactured by others. This Division blends
certain cleaning agents and waxes which it sells under the Easterday name,
but these operations
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are not significant in relation to Easterday Janitorial Supply as a whole.
PUBLIC SERVICE DIVISIONS
At October 31, 1997, operations of the Company's Public Service Divisions
segment provided parking facility management services and commercial security
and investigative services to their customers.
The Public Service Divisions operated from 46 offices, which were located
throughout the United States. For the fiscal years ended October 31, 1995, 1996
and 1997, this segment accounted for approximately 21%, 21% and 19%,
respectively, of the Company's revenues.
The two Public Service Divisions are described below:
/ / AMERICAN COMMERCIAL SECURITY SERVICES (also known as "ACSS" and
"ABM Security Services") provides security guards and special investigative
and security consulting services to a wide range of businesses in the major
metropolitan areas of San Francisco, San Diego and Los Angeles, California;
Houston, Dallas/Fort Worth, Austin and San Antonio, Texas; Chicago,
Illinois; Phoenix, Arizona; Seattle, Washington; Portland, Oregon; New
Orleans, Louisiana; Minneapolis, Minnesota; 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 operates approximately 1,400 parking lots and
garages which are either leased from or managed for third parties. The lease
terms generally range from 5 to 10 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 seven of the 20 busiest international
airports in the U.S.: Denver, Honolulu, Los Angeles, Newark, Orlando,
Phoenix, and San Francisco.
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 53 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, 1995, 1996 and 1997,
this segment accounted for approximately 26%, 23% and 24%, respectively, of the
Company's revenues.
Operations of the four Technical Divisions during fiscal year 1997 are
described below:
/ / ABM ENGINEERING SERVICES (also known as Amtech Engineering
Services) provides building owners and managers with staffs of on-site
operating engineers to operate, maintain and repair electrical, mechanical,
and plumbing systems within a facility. This service is primarily for
high-rise office buildings, but customers also include schools, warehouses,
factories, shopping malls and universities. ABM Engineering Services
maintains five offices, two of which are in California and one each in
Chicago, Illinois; Philadelphia, Pennsylvania; and Phoenix, Arizona.
/ / AMTECH ELEVATOR SERVICES installs, maintains 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 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, seven of which are located in California;
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five 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 installs, maintains, and repairs
heating, ventilation and air conditioning equipment, and provides energy
management services for commercial, industrial and institutional facilities.
CommAir Mechanical Services maintains ten offices, nine 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,
trade names, trademarks, service marks, 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.
MARKETING AND SALES
The Company's marketing and sales efforts are conducted by its corporate,
division, region and branch offices. Sales 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 inter-service sales referrals, multi-service
"bundled" sales and national account sales.
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, 1997.
EMPLOYEES
The Company employs over 52,000 persons, of whom the vast majority perform
air conditioning, elevator, engineering, janitorial, lighting, parking and
security services. Approximately 22,700 of these employees are covered under
collective bargaining agreements. There are about 3,500 employees with
executive, managerial, administrative, professional, sales, marketing, clerical
and other office assignments.
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EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS AND BUSINESS EXPERIENCE
NAME AGE DURING PAST FIVE YEARS
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
William W. Steele 61 Chief Executive Officer since November 1994; President since
November 1991
Martinn H. Mandles 57 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 57 Senior Vice President since July 1994; Vice President from
November 1977 to July 1994
Sherrill F. Sipes, Jr. 62 Senior Vice President since July 1994; Vice President from May
1968 to July 1994
William C. Banner 63 Vice President of the Company, and Chairman of the Security
Services Division
Donna M. Dell 49 Vice President & Chief Employment Counsel since July 1994; Vice
President and Legal Counsel, Wells Fargo Bank, from February 1990
to June 1994
John F. Egan 61 Vice President of the Company, and President of the Janitorial
Services Division
David H. Hebble 62 Vice President & Chief Financial Officer
Harry H. Kahn 54 Vice President, General Counsel & Secretary
Douglas B. Bowlus 53 Treasurer
Vernon E. Skelton 53 Controller & Chief Accounting Officer since April 1997; Assistant
Vice President & Director of Accounting for more than five years
prior to April 1997
</TABLE>
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ITEM 2. PROPERTIES.
The Company has sales, operations, warehouse and administrative facilities
in over 200 locations throughout the United States, and Canada. Thirteen of
these facilities are owned by the Company and the remainder are leased. At
October 31, 1997, the real estate owned by the Company had an aggregate net book
value of $3,480,000 and was located in: Phoenix, Arizona; San Francisco and
Fresno, California; Jacksonville and Tampa, Florida; Elko, Nevada; Portland,
Oregon; Houston and San Antonio, Texas; Kennewick, Seattle, Spokane and Tacoma,
Washington.
Rental payments under long and short-term lease agreements amounted to
$97,229,000 for the fiscal year ended October 31, 1997. Of this amount,
$78,828,000 in rental expense was attributable to the Ampco System Parking
Division for public parking lots and garages that it leases and operates. The
remaining rent expense was for equipment, vehicles, office and warehouse space.
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 Stock Exchange. 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:
<TABLE>
<CAPTION>
FISCAL QUARTER
--------------------------------------
FIRST SECOND THIRD FOURTH YEAR
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
1996
Price range of common stock:
High $14 1/4 $17 5/8 $20 1/4 $19 3/8
Low $13 1/8 $13 1/2 $17 1/8 $15 1/2
Dividends per share $0.0875 $0.0875 $0.0875 $0.0875 $0.35
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
- ------------------------------------------------------------------------------------------------------------
</TABLE>
All share and per share amounts have been restated to retroactively reflect the
two-for-one common stock split on July 15, 1996.
At December 31, 1997, there were approximately 5,500 holders of the Company's
common stock.
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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, 1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts and
ratios) 1993 1994 1995 1996 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Revenues and other income $ 773,312 $ 884,633 $ 965,381 $1,086,925 $ 1,252,472
- -----------------------------------------------------------------------------------------------------------
Expenses
Operating expenses and cost of goods sold 658,503 760,056 830,749 940,296 1,076,078
Selling, general and administrative 93,136 97,017 100,481 105,943 126,755
Interest 1,431 2,501 2,739 2,581 2,675
- -----------------------------------------------------------------------------------------------------------
753,070 859,574 933,969 1,048,820 1,205,508
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 20,242 25,059 31,412 38,105 46,964
Income taxes 7,596 9,890 13,193 16,385 19,725
- -----------------------------------------------------------------------------------------------------------
Net income $ 12,646 $ 15,169 $ 18,219 $ 21,720 $ 27,239
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Net income per common share $ 0.73 $ 0.82 $ 0.92 $ 1.05 $ 1.22
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Common and common equivalent shares 17,291 17,816 19,179 20,241 21,872
FINANCIAL STATISTICS
Dividends per common share $ 0.25 $ 0.26 $ 0.30 $ 0.35 $ 0.40
Stockholders' equity per common share $ 6.28 $ 6.87 $ 7.57 $ 8.43 $ 9.67
Working capital $ 76,613 $ 90,165 $ 95,627 $ 119,957 $ 137,757
Current ratio 1.85 1.91 1.84 2.05 1.88
Long-term debt $ 20,937 $ 25,254 $ 22,575 $ 33,664 $ 38,402
Redeemable cumulative preferred stock $ 6,400 $ 6,400 $ 6,400 $ 6,400 $ 6,400
Stockholders' equity $ 110,188 $ 124,331 $ 141,786 $ 164,293 $ 197,813
Total assets $ 268,140 $ 299,470 $ 334,973 $ 379,770 $ 467,152
Property, plant and equipment -- net $ 17,043 $ 19,819 $ 22,647 $ 22,570 $ 26,584
Capital expenditures $ 6,187 $ 8,539 $ 10,225 $ 10,751 $ 13,272
Depreciation and amortization $ 7,158 $ 9,300 $ 11,527 $ 13,651 $ 16,118
Accounts receivable -- net $ 127,908 $ 140,788 $ 158,075 $ 183,716 $ 234,464
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
All share and per share amounts have been restated to retroactively reflect
a two-for-one common stock split in 1996.
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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 which 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, 1997, the total amount outstanding was approximately $105
million, which was comprised of loans in the amount of $34 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 February 15, 1997 through
February 15, 2003. The Company's effective interest rate for all long-term debt
borrowings for the year ended October 31, 1997 was 7.1 %.
Operating activities generated cash flows in 1995, 1996 and 1997 of $13.8
million, $16.7 million and $27.7 million respectively. Cash paid for
acquisitions during the fiscal years ended October 31, 1995, 1996 and 1997
including payments pursuant to contractual arrangements involved in prior
acquisitions, were approximately $12.5 million, $13.0 million and $28.6 million,
respectively. Capital expenditures during fiscal years 1995, 1996, and 1997 were
$10.2 million, $10.8 million, and $13.3 million, respectively. Cash dividends
paid to stockholders of common and redeemable preferred stock were approximately
$6.1 million in 1995, $7.2 million in 1996 and $8.6 million in 1997. At October
31, 1997, working capital was $137.8 million as compared to $120.0 million at
October 31, 1996.
RECENT ACCOUNTING PRONOUNCEMENTS
EARNINGS PER SHARE: In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, Earnings per Share.
The statement specifies the computation, presentation and disclosure
requirements for earnings per share and is effective for periods ending after
December 15, 1997. This statement will be adopted by the Company in fiscal year
1998. The Company has not determined the impact of this statement on its
consolidated financial statements.
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 issued Statement of Financial
Accounting Standards No. 131, disclosures about Segments of an Enterprise and
Related Information, which 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.
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.
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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; 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 Company has identified the software it uses which is not year 2000
compliant and has begun its effort to coordinate the identification, evaluation,
and implementation of changes to its computer systems and applications necessary
to achieve a year 2000 date conversion. The total cost of compliance and its
effect on the Company's financial condition and future results of operations
have not been determined.
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 ending October 31, 1997
contributed approximately $123 million to fiscal 1997 revenues.
RESULTS OF OPERATIONS
COMPARISON OF 1997 TO 1996
The Company reported record revenues and earnings for 1997. Revenues and
other income (hereinafter called "revenues") 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 (revenues minus
operating expenses and cost of goods sold) 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. 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.
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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 to $27.2 million in 1997, or 25%, from $21.7 million in
1996. Earnings per 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. Earnings 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 Division'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 Division'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 Ogden
Corporation. The proportionately lower operating profits increase reflects the
lower margins on the business acquired in the Northeast. For 1997, Amtech
Elevator Services Division 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 Division's revenues for 1997
increased by 23% while its operating profits increased by 34%. Revenues and
operating profits were up as a
10
<PAGE>
result of the acquisition of Sica Electrical and Maintenance of New York in
November 1, 1996. CommAir Mechanical Services Division's 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.
COMPARISON OF 1996 TO 1995
The Company's revenues and other income were $1.087 billion in 1996, up $122
million or 13%, from $965 million reported in 1995. The 13% increase in revenues
in 1996 over 1995 was attributable to volume and price increases as well as
revenues generated from acquisitions. Acquisitions made during 1996 accounted
for approximately $15 million, or approximately 12% of the total revenue
increase of $122 million for 1996. Gross profit increased $12 million to $147
million from $135 million a year ago. The ratio of gross profit to revenues
declined slightly to 13.5% in 1996 from 13.9% in 1995. The increase in gross
profit amount was primarily due to increases in revenues and was partially
offset by increases in labor and labor related costs. Even with increased
revenues, the Company's insurance cost did not substantially increase in 1996.
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 $5.5 million from
$100.4 million in 1995 to $105.9 million in 1996 but decreased slightly as a
percentage of revenues from 10.4% to 9.7% in 1996. 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. The percentage of selling, general and
administrative expense in relation to revenues, decreased for 1996 as a result
of management's successful cost control measures, coupled with economies of
scale.
In 1996, interest expense was $2,581,000 as compared to $2,739,000 in 1995,
a decrease of $158,000. Although the average debt was higher in 1996 than 1995,
the effective interest rate was lower during the current year: 6.9% in 1996 as
compared to 7.8% in 1995. Consequently, the lower effective rate in 1996 helped
to offset the interest expense caused by higher average borrowing. Interest
expense was also higher in 1995 because the Company paid interest on fully
accrued state and federal income taxes.
The pretax income for 1996 was $38.1 million, an increase of 21% over the
prior year. The growth in pre-tax income outpaced the revenue growth for 1996
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 was 43% in 1996 and 42% in 1995. The higher
rate in 1996 reflects the loss of certain tax credits and higher non-deductible
expenses for tax purposes.
Net income increased to $21.7 million in 1996, or 19%, from $18.2 million in
1995. Earnings per share for the current year increased to $1.05 from $0.92 in
1995 which represents a 14% increase. The average number of shares used for the
calculation of earnings per share increased from approximately 19.2 million to
20.2 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. Earnings per share calculations also
includes the effect of a preferred stock dividend deduction of $512,000 for 1996
and 1995.
The results of operations from the Company's three industry segments and its
operating divisions for 1996 as compared to 1995 are more fully described below:
Revenues for the Janitorial Divisions segment in 1996 were $607 million, an
increase of $96 million or 19% over 1995, while its operating profits increased
20% over 1995. The Janitorial Divisions segment, which includes American
Building Maintenance and Easterday Janitorial Supply, accounted for
approximately 56% of the Company's consolidated revenues for 1996. Revenues of
American Building Maintenance increased by 19% in 1996 as compared to 1995
primarily as a result of significant increases in its Northeast, Midwest, and
Northern California Regions; moderate increases in Southeast, Gulf Central,
South Central, Northwest, Ohio Valley, and Southwest Regions; offset by slight
decreases in its Canadian and Mid-Atlantic Regions. Revenues also increased
approximately $13 million from acquisitions made during the fiscal year 1996.
This Division's operating profits increased by 20% when compared to 1995. The
increase in operating profits is principally due to the increased revenues, cost
controls of its selling and administrative expenses, contributions from recent
11
<PAGE>
acquisitions, partially offset by increased direct labor and labor related
expenses. Easterday Janitorial Supply Division's revenues for 1996 increased by
approximately 14% as compared to 1995 generally due to increases in its customer
base and additional sales generated by outside brokers. Operating profits
increased 18% as a result of increased sales volume and cost containment
efforts, partially offset by lower margins from brokerage sales.
Revenues in 1996 from the Public Service Divisions segment, which includes
the American Commercial Security Services and Ampco System Parking Divisions,
were $226 million, an increase of 10% over 1995. Public Service Divisions
accounted for approximately 21% of the Company's consolidated revenues in 1996.
The operating profits of this segment were up 14%. American Commercial Security
Services reported an increase in revenues of 20% in 1996 as compared to 1995
primarily due to obtaining new customers, particularly in the Southwest and
South Central Regions, as well as from an acquisition in Minneapolis. The
Division's operating profits increased by 16% over 1995. Operating profit
increased at a lower rate than sales due primarily to the larger contracts
obtained in 1996 which were bid at smaller margins in order to remain
competitive. Ampco System Parking Division's revenues increased by approximately
4% in 1996 when compared to 1995 and its operating profits increased by 13%. The
primary factors accounting for the growth in revenues were increased business at
its airport operations, an increase in management fee income, and partially
offset by lower monthly parking revenues in the downtown Los Angeles market due
to higher vacancy rates in office buildings. An impressive improvement of 13% in
operating profits is largely due to a higher gross margin contribution from the
Division's airport operations as well as an increase in management fee income.
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 $253 million, an increase of approximately 2% over last year. These
revenues represent approximately 23% of the Company's consolidated revenues for
1996. Operating profits of the Technical Divisions increased approximately 5% in
1996 over 1995. ABM Engineering Services Division reported increased revenues of
12% and a 28% increase in operating profits for 1996 as compared to 1995.
Revenue increases were posted by all its regions in 1996 mainly due to
geographic expansion and penetration into new markets. The increase in operating
profits continues to result from increased volume, reductions in payroll related
costs including insurance expense, and containment of selling, general and
administrative expenses. For 1996, Amtech Elevator Services Division reported a
5% decrease in revenues when compared to the prior year. The decrease in
revenues is primarily due to management's decision to gradually phase out of the
construction business, the sale of the Company's Mexican subsidiary on May 31,
1996, and offset partially by a strong growth in maintenance service base. This
Division's operating profits were negatively impacted by operating losses of its
Mexican business prior to disposal, increased marketing expenses to expand its
maintenance service base, and start-up costs incurred in opening three new
branches in 1996. Amtech Lighting Services Division's revenues for 1996
decreased by 2% while its operating profits decreased by 5%. Revenues were down
as a result of lower project oriented types of sales. The operating profit was
negatively impacted from lower revenues in 1996 as well as competitive market
conditions. CommAir Mechanical Services Division's revenues and operating
profits in 1996 increased by 5% and 2%, respectively, over the prior year. The
revenue increase is attributable to energy management category of sales, service
contracts, and partially offset by decrease in installation contracts. A
relatively smaller percentage increase in operating profits for the current year
is a result of lower margins from larger energy management projects as well as a
slight increase in operating 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) 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
12
<PAGE>
management of operations, (4) 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, (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 inability to recruit and hire entry level personnel due to labor shortages,
and (11) 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.
13
<PAGE>
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, 1996 and 1997, 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, 1997. 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, 1996 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended October 31, 1997, 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 Peat Marwick LLP San Francisco, California
December 15, 1997
14
<PAGE>
ABM Industries Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
OCTOBER 31 1996 1997
(in thousands of dollars except share amounts)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,567 $ 1,783
Accounts receivable (less allowances of $4,442 and $5,923) 183,716 234,464
Inventories 16,492 21,197
Deferred income taxes 11,684 10,968
Prepaid expenses and other current assets 20,296 26,005
- -----------------------------------------------------------------------------------------------------------
Total current assets 233,755 294,417
Investments and long-term receivables 15,941 12,900
Property, plant and equipment -- net 22,570 26,584
Intangible assets (less accumulated amortization of $23,995 and $30,595) 76,366 100,313
Deferred income taxes 22,046 25,426
Other assets 9,092 7,512
- -----------------------------------------------------------------------------------------------------------
$ 379,770 $ 467,152
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
LIABILITIES
Current portion of long-term debt $ 902 $ 1,393
Bank overdraft 4,935 12,975
Trade accounts payable 27,091 34,555
Income taxes payable 1,864 4,265
Accrued liabilities:
Compensation 27,862 35,965
Taxes -- other than income 9,952 12,609
Insurance claims 23,256 25,479
Other 17,936 29,419
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 113,798 156,660
Long-term debt 33,664 38,402
Retirement plans 10,140 13,413
Insurance claims 51,475 54,464
- -----------------------------------------------------------------------------------------------------------
Total liabilities 209,077 262,939
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; 19,489,000 and
20,464,000 shares issued and outstanding in 1996 and 1997, respectively 195 205
Additional capital 48,548 63,416
Retained earnings 115,550 134,192
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 164,293 197,813
- -----------------------------------------------------------------------------------------------------------
$ 379,770 $ 467,152
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
15
<PAGE>
ABM Industries Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31 1995 1996 1997
(in thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES AND OTHER INCOME $ 965,381 $1,086,925 $ 1,252,472
- -----------------------------------------------------------------------------------------------------------
EXPENSES
Operating expenses and cost of goods sold 830,749 940,296 1,076,078
Selling, general and administrative 100,481 105,943 126,755
Interest 2,739 2,581 2,675
- -----------------------------------------------------------------------------------------------------------
933,969 1,048,820 1,205,508
- -----------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 31,412 38,105 46,964
Income taxes 13,193 16,385 19,725
- -----------------------------------------------------------------------------------------------------------
NET INCOME $ 18,219 $ 21,720 $ 27,239
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 0.92 $ 1.05 $ 1.22
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
COMMON AND COMMON EQUIVALENT SHARES 19,179 20,241 21,872
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
COMMON STOCK
YEARS ENDED OCTOBER 31, 1995, 1996 AND 1997 ------------------------ ADDITIONAL RETAINED
(in thousands, except per share amounts) SHARES AMOUNT CAPITAL EARNINGS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE OCTOBER 31, 1994 9,049 $ 90 $ 35,334 $ 88,907
Net income 18,219
Dividends:
Common stock (5,549)
Preferred stock (512)
Stock issued under employees' stock purchase and option plans 317 4 5,293
- -------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
ABM Industries Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31 1995 1996 1997
(in thousands of dollars)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 944,570 $ 1,055,112 $ 1,203,314
Other operating cash receipts 1,931 1,270 1,126
Interest received 489 449 552
Cash paid to suppliers and employees (913,577) (1,017,329) (1,154,572)
Interest paid (3,136) (2,418) (2,685)
Income taxes paid (16,438) (20,355) (19,988)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,839 16,729 27,747
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (10,225) (10,751) (13,272)
Proceeds from sale of assets 590 777 660
Increase (decrease) in investments and long-term receivables 853 (5,657) 3,041
Intangible assets acquired (12,499) (13,044) (28,606)
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (21,281) (28,675) (38,177)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued 5,297 8,022 8,778
Dividends paid (6,061) (7,235) (8,597)
Increase (decrease) in bank overdraft 5,361 (426) 8,035
Increase (decrease) in notes payable (4) 223 491
Long-term borrowings 89,000 110,777 115,654
Repayments of long-term borrowings (91,679) (99,688) (113,715)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,914 11,673 10,646
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (5,528) (273) 216
Cash and cash equivalents beginning of year 7,368 1,840 1,567
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS END OF YEAR $ 1,840 $ 1,567 $ 1,783
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Net income $ 18,219 $ 21,720 $ 27,239
ADJUSTMENTS:
Depreciation and amortization 11,527 13,651 16,118
Impairment of long-lived assets -- -- 2,700
Provision for bad debts 1,536 2,039 2,988
Gain on sale of assets (127) (314) (257)
Deferred income taxes (3,554) (3,556) (2,664)
Increase in accounts receivable (18,823) (26,890) (50,312)
Decrease (increase) in inventories (1,969) 516 (4,069)
Increase in prepaid expenses and other current assets (6,906) (1,170) (5,628)
Decrease (increase) in other assets (1,434) (645) 1,580
(Decrease) increase in income taxes payable 309 (414) 2,401
Increase in retirement plans accrual 1,649 2,513 3,273
Increase in insurance claims liability 4,462 4,854 5,212
Increase in trade accounts payable and other accrued liabilities 8,950 4,425 29,166
- ---------------------------------------------------------------------------------------------------------
Total adjustments to net income (4,380) (4,991) 508
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 13,839 $ 16,729 $ 27,747
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Non-cash investing activities:
Common stock issued for net assets of business acquired -- -- $ 6,100
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<PAGE>
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
$128,595,000 and other intangible assets in the amount of $2,313,000, net of
accumulated amortization of $30,595,000. 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: Net income per common share and common
equivalent share (principally outstanding stock options), after the reduction
for preferred stock dividends in the amount of $512,000 in 1995, 1996 and 1997,
is based on the weighted average number of shares outstanding during the year
and the common stock equivalents that have a dilutive effect. Net income per
common share assuming full dilution is not significantly different than net
income per share as shown.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
instruments with original
18
<PAGE>
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, 1996 and 1997 was $74,731,000 and
$79,943,000, respectively. In connection with certain self-insurance agreements,
the Company has standby letters of credit at October 31, 1997 supporting the
estimated unpaid liability in the amounts of $69,905,000.
3. INVENTORIES
The inventories at October 31, consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(in thousands of dollars) 1996 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Janitorial supplies and equipment held for sale $ 4,095 $ 4,562
Parts and materials 10,971 13,643
Work in process 1,426 2,992
- -------------------------------------------------------------------------------------------------------
$16,492 $21,197
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT -- NET
Property, plant and equipment at October 31, consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(in thousands of dollars) 1996 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 960 $ 911
Buildings 3,790 3,773
Transportation equipment 9,750 11,211
Machinery and other equipment 39,899 46,147
Leasehold improvements 8,202 10,476
- -------------------------------------------------------------------------------------------------------
62,601 72,518
Less accumulated depreciation and amortization 40,031 45,934
- -------------------------------------------------------------------------------------------------------
$22,570 $26,584
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
5. LONG-TERM DEBT AND CREDIT AGREEMENT
During the third quarter of 1997, the Company replaced its $125,000,000
syndicated line of credit expiring September 22, 1999 with a new $125,000,000
syndicated line of credit expiring July 1, 2002. Effective November 1, 1997, the
agreement was amended to increase the amount available to $150,000,000. 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, 1997, the total
outstanding amount under this facility was $104,610,000 comprised of $34 million
in loans and $70,610,000 in standby letters of credit. The interest rate at
October 31, 1997 on loans outstanding under this agreement ranged from 6.04% to
6.10%. 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 $39,795,000 matures in the years ending October 31 as
follows: $1,393,000 in 1998; $783,000 in 1999; $836,000 in 2000; $860,000 in
2001, $34,896,000 in 2002, and $1,027,000 in subsequent years.
Long-term debt at October 31, is summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(in thousands of dollars) 1996 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes payable to bank with interest at 5.83 - 8.25% $28,000 $34,000
Note payable to bank with interest at 6.78% 5,000 4,777
Note payable to insurance company with interest at 9.35% 1,273 636
Notes payable with interest at 8.75% 293 238
Other 144
- -------------------------------------------------------------------------------------------------------
34,566 39,795
Less current portion 902 1,393
- -------------------------------------------------------------------------------------------------------
$33,664 $38,402
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
6. EMPLOYEE BENEFIT PLANS
(A) RETIREMENT AGREEMENTS
The Company has unfunded retirement agreements for 36 current and former
directors and senior executives, all of which are fully vested. The agreements
provide for annual benefits for ten years commencing with the respective
retirement dates of those executives. The benefits are accrued over the period
these directors and senior executives are expected to be employed by the
Company. During 1995, 1996 and 1997, amounts accrued under these agreements were
$417,000 $398,000, and $509,000 respectively. Payments were made in 1995, 1996,
and 1997 in the amounts of $322,000, $124,000 and $124,000, respectively.
(B) 401(K) AND PROFIT SHARING PLAN
The Company has a profit sharing and 401(k) plan covering all nonmanual
employees (except highly compensated individuals) not covered under collective
bargaining agreements, 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 $920,000,
$1,084,000 and $1,336,000 for 1995, 1996 and 1997, respectively. The Company's
matching 401(k) contributions required by the 401(k) plan for 1995, 1996 and
1997 were approximately $602,000, $664,000 and $873,000, respectively.
(C) SERVICE AWARD BENEFIT PLAN
The Company established an unfunded service award benefit plan effective
November 1, 1989, 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 all highly compensated nonmanual employees excluded from the
Profit Sharing and Employee Savings Plan discussed above. 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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(in thousands of dollars) 1995 1996 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 352 $ 371 $ 298
Interest 139 176 233
- ---------------------------------------------------------------------
Net cost $ 491 $ 547 $ 531
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Actuarial present value of:
Vested benefit obligation $ 1,863 $ 2,436 $ 2,964
Accumulated benefit obligation $ 1,949 $ 2,522 $ 3,102
Projected benefit obligation $ 2,470 $ 3,064 $ 3,853
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
Assumptions used in accounting for the plan as of October 31 were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands of dollars) 1995 1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average discount rate 7% 7% 7%
Rate of increase in compensation level 5% 5% 5%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(D) PENSION PLAN UNDER COLLECTIVE BARGAINING
Certain employees of the Company are covered under union-sponsored
collectively bargained multi-employer defined benefit plans. Contributions for
these plans were approximately $10,100,000, $11,900,000 and $16,800,000 in 1995,
1996 and 1997, 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. Assets held under these leases consist of offices,
warehouses, vehicles and parking facilities.
As of October 31, 1997, future minimum lease commitments under noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------
Years ending (in thousands of dollars)
- -----------------------------------------------------
<S> <C>
1998 $ 36,650
1999 21,349
2000 13,984
2001 9,862
2002 7,135
Thereafter 25,898
- -----------------------------------------------------
Total minimum lease commitments $ 114,878
- -----------------------------------------------------
- -----------------------------------------------------
</TABLE>
Rental expense for the years ended October 31, is summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
(in thousands of dollars) 1995 1996 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals under
noncancelable leases $ 47,114 $ 50,834 $ 52,997
Contingent rentals 16,400 29,470 32,031
Short-term rental agreements 23,835 11,364 12,201
- ------------------------------------------------------------------
$ 87,349 $ 91,668 $ 97,229
- ------------------------------------------------------------------
- ------------------------------------------------------------------
</TABLE>
20
<PAGE>
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, 1996 and 1997 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, 1997, 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.
On April 22, 1988, the Company distributed a dividend of one-half of one
right for each outstanding share of common stock. The rights are attached to all
outstanding shares of common stock. Each right entitles the holder to purchase
1/100 of a share of the Series A Junior Participating Preferred Stock for $80,
subject to adjustment. The rights are exercisable only after a third party
(other than Sydney and Theodore Rosenberg, individually or as members of a
group, or their permitted transferees) acquires 20% or more or commences a
tender offer which would result in such party's acquiring 30% or more of the
Company's common stock.
After the rights become exercisable, if the Company is acquired and is not
the surviving corporation or 50% or more of its assets or its earnings power is
transferred, each right will entitle its holder to purchase shares of the
acquiring company at a 50% discount. If the Company is acquired and is the
surviving corporation, or a 20% or greater holder engages in "self-dealing"
transactions or increases its beneficial ownership of the Company by more than
1% in a transaction involving the Company, each right will entitle its holder,
other than the acquirer, to purchase common stock of the Company at a similar
50% discount. The rights expire on April 22, 1998, and may be redeemed at a
price of $.01 under certain circumstances.
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.
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
21
<PAGE>
adopted the fair value method as of the beginning of fiscal year ended October
31, 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 lives of
9.8 years and 6.4 years from the date of grant in fiscal 1997 and 1996,
respectively; expected stock price volatility of 19.5%; expected dividend yield
of 2.6%; and risk free interest rates of 6.5 % and 6.8% in fiscal 1997 and 1996,
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 1997 and 1996 awards had been amortized to expense over the vesting
period of the awards, pro forma net earnings would have been $24,376,000 ($1.09
per share) for fiscal 1997 and $19,948,000 ($0.96 per share) in fiscal 1996. The
impact of outstanding stock options granted prior to fiscal 1996 has been
excluded from the pro forma calculation; accordingly, the fiscal 1997 and 1996
pro forma adjustments are not indicative of future period pro forma adjustments,
when the calculation will apply to all future applicable stock grants.
1984 "AGE-VESTED" STOCK OPTION PLAN
In 1984, the Company adopted an executive 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% 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. At October 31, 1997, 1,033,000 shares remained
available for grant.
Transactions under this plan, restated for the two-for-one stock split, are
summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Weighted
Number of Average
Options Exercise Price
- ------------------------------------------------------------------
<S> <C> <C>
Balance October 31, 1994 458,000 $5.92
Granted 209,000 11.31
Exercised (12,000) 5.72
- ------------------------------------------------------------------
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
- ------------------------------------------------------------------
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding Exercisable
<CAPTION>
- ----------------------------------------------------------- ------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number of Contractual Life Exercise Number of Exercise
Prices Options (Years) Price Options Price
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.72 - 8.72 446,000 6 $ 5.92 110,000 $ 6.13
$11.25 - 13.28 171,000 10 $ 11.32 18,000 $ 11.25
$19.44 6,000 14 $ 19.44 -- --
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
1987 "TIME-VESTED" STOCK OPTION PLAN
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 are granted at
fair market value, and those which terminate without being exercised may be
reissued. At October 31, 1997, 1,278,000 shares remained available for grant
under this plan.
22
<PAGE>
Transactions under this plan, restated for the two-for-one stock split, are
summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Weighted
Number of Average
Options Exercise Price
- --------------------------------------------------------------
<S> <C> <C>
Balance October 31, 1994 1,793,000 $8.14
Granted 36,000 10.92
Exercised (55,000) 7.74
Terminated (44,000) 8.94
- --------------------------------------------------------------
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
- --------------------------------------------------------------
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding Exercisable
<CAPTION>
- ------------------------------------------------------------ ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number of Contractual Exercise Number of Exercise
Prices Options Life (Years) Price Options Price
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.78 - 6.06 265,000 1.2 $ 5.42 265,000 $ 5.42
$8.49 - 13.32 1,097,000 5.6 $ 8.96 873,000 $ 8.87
$18.75 - 25.59 953,000 8.8 $ 18.85 248,000 $ 18.73
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
1996 "PRICE-VESTED" STOCK OPTION PLAN
In December 1996, the Company adopted the Long-Term Senior Executive Stock
Option Plan under which 1,500,000 shares have been reserved for grant. 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 exercisable only after the first anniversary of the 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.
During 1997, 1,120,000 options were granted at a weighted average exercise
price of $20.40 per share, and 40,000 options terminated at $20.00 per share.
For purposes of the SFAS No. 123 calculation, the weighted average fair value of
each option was $6.32, which will be amortized over eight years. At October 31,
1997, 1,080,000 options were outstanding of which 270,000 were vested and none
were exercisable. At October 31, 1997, 420,000 shares remained available for
grant under this plan.
EMPLOYEE STOCK PURCHASE PLAN
In 1985, the Company instituted an employee stock purchase plan under which
sale of 5 million 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 1995, 1996 and 1997, 283,000,
562,000 and 520,000 shares of stock were issued under the plan for an aggregate
purchase price of $4,805,000, $6,437,000, and $7,841,000 respectively. At
October 31, 1997, 856,530 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:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
(in thousands of dollars) 1995 1996 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 14,631 $ 17,368 $ 21,345
State 2,016 2,521 3,050
Foreign 100 52 8
Deferred
Federal (3,238) (3,250) (4,279)
State (316) (306) (399)
- ------------------------------------------------------------------
$ 13,193 $ 16,385 $ 19,725
- ------------------------------------------------------------------
- ------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
1995 1996 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State and local taxes on income, net
of federal tax benefit 3.4% 3.8% 3.4%
Targeted job tax credits (1.5)% (0.1)% (0.9)%
Nondeductible expenses and other --
net 5.1% 4.3% 4.5%
- --------------------------------------------------------------------------
42.0% 43.0% 42.0%
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets
23
<PAGE>
and deferred tax liabilities at October 31, are presented below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
(in thousands of dollars) 1996 1997
- -----------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Self-insurance claims $ 27,260 $ 29,217
Bad debt allowance 2,015 --
Deferred and other compensation 4,316 5,161
Intangible amortization 878 2,314
State taxes 955 1,103
Other 1,358 2,177
- -----------------------------------------------------------------
Total gross deferred tax assets 36,782 39,972
- -----------------------------------------------------------------
Deferred tax liabilities:
Union pension contributions (2,900) (3,569)
Depreciation (152) (9)
- -----------------------------------------------------------------
Total gross deferred tax liabilities (3,052) (3,578)
- -----------------------------------------------------------------
Net deferred tax assets $ 33,730 $ 36,394
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
Management has determined the total net deferred tax asset will more likely
than not be realized.
At October 31, 1997, ABM has a capital loss carryover of $1,283,262, which
can be carried forward to offset capital gains, if any, to reduce future federal
income taxes through October 31, 2001.
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 $12.5 million in 1995, $13 million in 1996, and $28.6 million
in 1997. Acquisitions and dispositions made during the fiscal year 1997 are
discussed below:
Effective November 1, 1996, the Company, through one of its subsidiaries,
acquired the operations and net assets of Sica Electrical and Maintenance Corp.,
of Ozone Park, New York. Sica Electrical and Maintenance Corp. is an electrical
and lighting maintenance company which operates in the greater New York City
metropolitan area, New Jersey, up-state New York, Pennsylvania, and Connecticut.
In connection with this acquisition, the Company issued 348,323 of its common
shares at the time of closing and will make additional payments in common shares
over a five-year period based on the operating profits (income before taxes and
interest) of the acquired business. A maximum of 348,323 common shares may be
issued in connection with future payments. Effective November 1, 1996, the
Company's earnings per common share calculation includes the 696,646 shares
issued and to be issued under the contract with the sellers. In 1997 this
acquisition contributed approximately $16 million in revenues.
Effective February 1, 1997, the Company acquired maintenance contracts and
selected assets of SMK Corp. of Las Vegas (also known as DeLuca Building
Maintenance), with customers located in Las Vegas, Nevada and the surrounding
area. 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
revenues of acquired contracts for the first year after acquisition. In fiscal
1997 this acquisition contributed approximately $1 million in revenues.
Effective March 1, 1997, the Company acquired HVAC (heating, ventilation,
and air conditioning) customer contracts, assets and certain liabilities from
Preferred Mechanical Services of Northridge, California. Most of the business
acquired was in Southern California, plus a few contracts in Las Vegas, Nevada.
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 $6
million in revenues in fiscal year 1997.
Effective April 1, 1997, the Company acquired janitorial contracts and
selected assets of Geoserv of Phoenix, Inc. and Janus, Inc., with customers in
the metropolitan areas of Albuquerque, New Mexico, Phoenix and Tucson, Arizona.
The terms of purchase for this acquisition were a cash downpayment at closing,
plus annual contingent payments based on the operating profit to be made over a
period of five years. In 1997, this acquisition contributed approximately $3
million in revenues.
Effective May 1, 1997, the Company acquired the janitorial contracts and
selected assets of Polaris, Inc., with customers in the metropolitan areas of
Indianapolis, Indiana, and Columbus and Cincinnati, Ohio. The terms of purchase
for this acquisition were a cash downpayment at closing, plus annual contingent
payments based on the operating profit to be made over a period of five years.
This acquisition contributed approximately $3 million in revenues in fiscal year
1997.
24
<PAGE>
Effective August 1, 1997, the Company acquired from Ogden Corporation all of
Ogden's building maintenance and on-site engineering operations in New York
City. This acquisition contributed approximately $29 million in revenues in
fiscal year 1997.
Effective October 1, 1997, the Company acquired the janitorial contracts and
selected assets of The Grawert Co., with customers in Southern Florida, and
Orlando, Florida. The terms of purchase for this acquisition were a cash
downpayment at closing, plus annual contingent payments based on the operating
profit to be made over a period of five years. This acquisition contributed
approximately $1 million in revenues in fiscal year 1997.
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.
14. QUARTERLY INFORMATION (UNAUDITED)
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FISCAL QUARTER
--------------------------------------
OPERATIONS FIRST SECOND THIRD FOURTH YEAR
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Revenues and other income $254,401 $262,069 $281,911 $288,544 $ 1,086,925
Gross profit 33,944 35,290 37,310 40,085 146,629
Net income 4,048 4,700 6,036 6,936 21,720
Net income per common share 0.20 0.23 0.29 0.33 1.05
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 0.22 0.26 0.34 0.40 1.22
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Per share amounts have been restated to retroactively reflect the two for one
common stock split on July 15, 1996.
15. SEGMENT INFORMATION
The operations of the Company are divided into the following three business
segments of the building 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 paper products,
disinfectants, floor cleaners, polishes, glass cleaners, waxes and cleaning
equipment.
PUBLIC SERVICE DIVISIONS: Operates approximately 1,400 parking lots and garages
which are either leased from or managed for third parties. This segment also
provides commercial security guards and special investigative and security
consulting services.
TECHNICAL DIVISIONS: Provides a wide range of elevator, engineering, HVAC&R
(heating, ventilation, air conditioning and refrigeration) and lighting 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&R equipment as well as energy management consulting services.
25
<PAGE>
SEGMENT INFORMATION (in thousands of dollars):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PUBLIC
JANITORIAL SERVICE TECHNICAL CONSOLIDATED
FOR THE YEAR ENDED OCTOBER 31, 1995 DIVISIONS DIVISIONS DIVISIONS CORPORATE ELIMINATIONS TOTALS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues and other income $511,801 $205,578 $247,748 $ 254 $ $965,381
Intersegment revenues 11,135 75 239 (11,449) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenues $522,936 $205,653 $247,987 $ 254 $(11,449) $965,381
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Operating profit $ 24,211 $ 8,449 $ 14,665 $(13,174) $ $ 34,151
Interest, expense (34) (11) (93) (2,601) (2,739)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 24,177 $ 8,438 $ 14,572 $(15,775) $ $ 31,412
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $130,657 $ 82,580 $ 90,403 $ 31,333 $ $334,973
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation expense $ 2,706 $ 1,701 $ 1,964 $ 563 $ $ 6,934
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Amortization expense $ 1,832 $ 2,085 $ 676 $ $ $ 4,593
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 3,871 $ 3,405 $ 2,248 $ 701 $ $ 10,225
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 47,945 $ $467,152
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 3,432 $ 1,167 $ $ 13,738
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Intersegment revenues are recorded at prices negotiated between the entities.
26
<PAGE>
SCHEDULE II
ABM Industries Incorporated and Subsidiaries
CONSOLIDATED VALUATION ACCOUNTS
Years Ended October 31, 1995, 1996 and 1997
(in thousands of dollars)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
BALANCE CHARGES TO DEDUCTIONS
BEGINNING COSTS AND NET OF OTHER ADDITIONS BALANCE END
OF YEAR EXPENSES RECOVERIES (REDUCTIONS) OF YEAR
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts
Years ended October 31:
1995 $ 3,067 $ 1,536 $ (848) -- $ 3,755
1996 3,755 2,039 (1,352) -- 4,442
1997 4,442 2,988 (1,507) -- 5,923
- ------------------------------------------------------------------------------------------------
</TABLE>
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 1998 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 1998 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 1998 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 1998 Annual Meeting of Stockholders.
27
<PAGE>
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, 1996 and 1997
Consolidated Statements of Income -- Years ended October 31, 1995,
1996 and 1997
Consolidated Statements of Stockholders' Equity -- Years ended
October 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows -- Years ended October 31,
1995, 1996 and 1997
Notes to Consolidated Financial Statements -- October 31, 1997.
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,
1995, 1996 and 1997.
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.
3. Exhibits:
<TABLE>
<CAPTION>
--------------------------------------------------
<C> <S> <C>
Exhibit
Number Description
<CAPTION>
---------------------------------------------------------------
<C> <S> <C>
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 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 April 11, 1988, between the Company and Bank
of America National Trust and Savings Association, as Rights Agent with
Chemical Trust Company of California as successor-in-interest to Bank of
America 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 * Second Amendment of Corporate Executive Employment Agreement with William
W. Steele.
10.38 * Second Amendment of Corporate Executive Employment Agreement with Sydney J.
Rosenberg
10.39 * Third Amendment of Corporate Executive Employment Agreement with Martinn H.
Mandles
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Certified Public Accountants.
27.1 Financial Data Schedule.
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE.)
28
<PAGE>
- ------------------------------
[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 1 to the Company's report on Form 8-K
dated April 11, 1988.
[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.
* 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.
29
<PAGE>
<TABLE>
<S> <C> <C>
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 S. Steele
-------------------------------------------------
William W. Steele
President, Chief Executive Officer and Director
January 27, 1998
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.
</TABLE>
<TABLE>
<S> <C>
/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, 1998 January 27, 1998
/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, 1998 January 27, 1998
/s/ Maryellen B. Cattani /s/ Linda Chavez
-------------------------------------------------- --------------------------------------------------
Maryellen B. Cattani Linda Chavez
Director Director
January 27, 1998 January 27, 1998
/s/ John F. Egan /s/ Luke S. Helms
-------------------------------------------------- --------------------------------------------------
John F. Egan Luke S. Helms
Vice President and Director Director
January 27, 1998 January 27, 1998
/s/ Charles T. Horngren /s/ Henry L. Kotkins, Jr.
-------------------------------------------------- --------------------------------------------------
Charles T. Horngren Henry L. Kotkins, Jr.
Director Director
January 27, 1998 January 27, 1998
/s/ Theodore Rosenberg /s/ William E. Walsh
-------------------------------------------------- --------------------------------------------------
Theodore Rosenberg William E. Walsh
Chairman of the Executive Committee and Director Director
January 27, 1998 January 27, 1998
</TABLE>
30
<PAGE>
EXHIBIT 4.2
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT ("AMENDMENT"), dated as of October
21, 1997, is entered into by and among ABM INDUSTRIES INCORPORATED (the
"COMPANY"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as agent for
the Banks (the "AGENT"), and the several financial institutions from time to
time party to the Credit Agreement (collectively, the "BANKS"; individually, a
"BANK").
RECITALS
A. The Company, the Banks, and the Agent are parties to a Credit
Agreement dated as of June 25, 1997 (the "CREDIT AGREEMENT") pursuant to which
the Agent and the Banks have extended to the Company a revolving credit facility
including letters of credit.
B. The Company has requested the Banks to increase the amount of credit
they have committed to extend under the revolving credit facility and, in
conjunction with such increase, the Company and the Banks have agreed to amend
the negative covenant set forth in Section 8.5 of the Credit Agreement in order
to permit the Company to incur certain Indebtedness in addition to that already
permitted by Section 8.5 and to add a new financial covenant to Section 8.14 of
the Credit Agreement.
C. The Banks are willing to amend the Credit Agreement in order to
increase the amount of each Bank's Commitment and to reflect the other changes
described in Recital B above, subject to the terms and conditions of this
Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. AMENDMENTS TO CREDIT AGREEMENT.
(a) The following new defined terms shall be added in alphabetical
order to Section 1.1 of the Credit Agreement:
"ADJUSTED CONSOLIDATED EBITDA" means, for any period, for the
Company and its Subsidiaries on a consolidated basis, Consolidated EBITDA for
such period MINUS all cash dividends paid to stockholders during such period on
a basis consistent with past practice.
"ADJUSTED CONSOLIDATED INDEBTEDNESS" means, for any period,
Indebtedness of the Company and its Subsidiaries on a consolidated basis as of
the end of such period; PROVIDED that the term "Adjusted Consolidated
Indebtedness" shall only include obligations of the types
-1-
<PAGE>
described in CLAUSE (i), CLAUSE (ii), CLAUSE (iv), and CLAUSE (v) of the
definition of the term "Indebtedness."
(b) Section 8.5 of the Credit Agreement shall be amended by deleting
the word "and" at the end of Section 8.5(c), by replacing the period at the end
of Section 8.5(d) with a semicolon followed by the word "and", and by adding the
following new Section 8.5(e):
(e) Indebtedness that (i) does not at any time exceed
$15,000,000 and (ii) consists only of (A) obligations as lessee under capital
leases or (B) obligations under notes (if any) executed to evidence contingent
obligations incurred in connection with Acquisitions, PROVIDED that in each case
such Acquisition was otherwise permitted under this agreement.
(c) The following new Section 8.14(c) shall be added to the Credit
Agreement:
(c) RATIO OF ADJUSTED CONSOLIDATED INDEBTEDNESS TO ADJUSTED
CONSOLIDATED EBITDA. Permit the ratio of Adjusted Consolidated Indebtedness to
Adjusted Consolidated EBITDA to exceed 3.00 to 1.00 for any four consecutive
fiscal quarter period ending on or after January 31, 1998.
(d) The respective amounts set forth opposite the Banks' names on the
signature pages of the Credit Agreement under the caption "Commitment" are
hereby increased to the following amounts:
BANK AMOUNT OF COMMITMENT
---- --------------------
Bank of America National Trust
and Savings Association $60,000,000
KeyBank National Association $30,000,000
United States National Bank of Oregon $30,000,000
Bank of America National Trust
and Savings Association,
doing business as Seafirst Bank $30,000,000
3. REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
warrants to the Agent and the Banks as follows:
(a) No Default or Event of Default has occurred and is continuing.
(b) The execution, delivery and performance by the Company of this
Amendment have been duly authorized by all necessary corporate and other action
and do not and will not require any registration with, consent or approval of,
notice to or action by, any Person (including any Governmental Authority) in
order to be effective and enforceable. The Credit Agreement as amended by this
Amendment constitutes the legal, valid and binding obligations of
-2-
<PAGE>
the Company, enforceable against it in accordance with its respective terms,
without defense, counterclaim or offset.
(c) All representations and warranties of the Company contained in
the Credit Agreement are true and correct.
(d) The Company is entering into this Amendment on the basis of its
own investigation and for its own reasons, without reliance upon the Agent and
the Banks or any other Person.
4. EFFECTIVE DATE. This Amendment will become effective as of November
1, 1997 (the "EFFECTIVE DATE"), PROVIDED that each of the following conditions
is satisfied:
(a) The Agent has received from the Company and the Banks a duly
executed original (or, if elected by the Agent, an executed facsimile copy) of
this Amendment.
(b) The Agent has received from the Company a copy of a resolution
passed by the board of directors of such corporation, certified by the Secretary
or an Assistant Secretary of such corporation as being in full force and effect
on the date hereof, authorizing the execution, delivery and performance of this
Amendment.
(c) All representations and warranties contained herein are true and
correct as of the Effective Date.
5. RESERVATION OF RIGHTS. The Company acknowledges and agrees that
neither the Agent's nor the Banks' willingness to enter into this Amendment, nor
the execution and delivery by the Agent and the Banks of this Amendment, shall
be deemed to create a course of dealing or other otherwise obligate the Agent or
the Banks to execute similar amendments under similar circumstances in the
future.
6. MISCELLANEOUS.
(a) Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and effect
and all references therein to such Credit Agreement shall henceforth refer to
the Credit Agreement as amended by this Amendment. This Amendment shall be
deemed incorporated into, and a part of, the Credit Agreement.
(b) This Amendment shall be binding upon and inure to the benefit of
the parties hereto and thereto and their respective successors and assigns. No
third party beneficiaries are intended in connection with this Amendment.
(c) This Amendment shall be governed by and construed in accordance
with the law of the State of California.
(d) This Amendment may be executed in any number of counterparts,
each of
-3-
<PAGE>
which shall be deemed an original, but all such counterparts together shall
constitute but one and the same instrument. Each of the parties hereto
understands and agrees that this document (and any other document required
herein) may be delivered by any party thereto either in the form of an executed
original or an executed original sent by facsimile transmission to be followed
promptly by mailing of a hard copy original, and that receipt by the Agent of a
facsimile transmitted document purportedly bearing the signature of a Bank or
the Company shall bind such Bank or the Company, respectively, with the same
force and effect as the delivery of a hard copy original. Any failure by the
Agent to receive the hard copy executed original of such document shall not
diminish the binding effect of receipt of the facsimile transmitted executed
original of such document of the party whose hard copy page was not received by
the Agent.
(e) This Amendment, together with the Credit Agreement, contains the
entire and exclusive agreement of the parties hereto with reference to the
matters discussed herein and therein. This amendment supersedes all prior
drafts and communications with respect thereto. This Amendment may not be
amended except in accordance with the provisions of Section 11.1 of the Credit
Agreement.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or the
Credit Agreement, respectively.
(g) The Company covenants to pay to or reimburse the Agent and the
Banks, upon demand, for all costs and expenses (including allocated costs of
in-house counsel) incurred in connection with the development, preparation,
negotiation, execution and delivery of this Amendment, including without
limitation appraisal, audit, search and filing fees incurred in connection
therewith.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as of the date first above written.
COMPANY: ABM INDUSTRIES INCORPORATED
By: /s/ David H. Hebble
--------------------------------
Title: V.P. Finance
--------------------------------
By: /s/ Douglas B. Bowlus
--------------------------------
Title: Treasurer
-----------------------------
AGENT: BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as Agent
By: /s/ Christine Cordi
--------------------------------
Title: Vice President
-----------------------------
ISSUING BANK: BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as Issuing Bank
By: /s/ Hagop Bouldoukian
--------------------------------
Title: Vice President
-----------------------------
BANKS: BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as a Bank
By: /s/ Hagop Bouldoukian
--------------------------------
Title: Vice President
-----------------------------
KEYBANK NATIONAL ASSOCIATION, as a Bank
By: /s/ Kevin McBride
--------------------------------
Title: Vice President
-----------------------------
UNITED STATES NATIONAL BANK OF OREGON, as a Bank
By: /s/ Aaron Gordon
--------------------------------
Title: Assistant Vice President
-----------------------------
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
doing business as SEAFIRST BANK, as a Bank
By: /s/ Susan C. Hayes
--------------------------------
Title: Vice President
-----------------------------
-5-
<PAGE>
Exhibit 21.1
<TABLE>
<CAPTION>
SUBSIDIARIES OF REGISTRANT
as of 10/31/97 Percentage
of Voting
Securities
Owned by
State of Immediate
Name Incorporation Parent
- ---- ------------- ----------
<S> <C> <C>
ABM Industries Incorporated Delaware Registrant
(*) ABM Janitorial Services - Northern California California 100%
ABM Janitorial Services - Southern California + California 100%
ABM Janitorial Services Co. Ltd. British Columbia 100%
Canadian Building Maintenance Company Ltd. British Columbia 100%
Supreme Building Maintenance Ltd. British Columbia 100%
American Building Maintenance Co. of Georgia California 100%
American Building Maintenance Co. of Illinois California 100%
American Building Maintenance Co. of Nebraska + California 100%
American Building Maintenance Co. of New York California 100%
American Building Service Company + California 100%
American Building Maintenance Co. of Utah + California 100%
American Building Maintenance Co. - West California 100%
California Janitorial and Supply Co. + California 100%
Commercial Property Services, Inc. California 100%
Bonded Maintenance Company Texas 100%
Servall Services Inc. Texas 100%
American Plant Protection, Inc. California 100%
American Public Services California 100%
Easterday Janitorial Supply Company California 100%
American Security and Investigative Services, Inc. California 100%
ABMI Investigative Services + California 100%
ABMI Security Services, Inc. California 100%
American Commercial Security Services, Inc. California 100%
Amtech Lighting Services of the Northeast. California 100%
ABM Facility Services Company California 100%
Amtech Energy Services California 100%
Amtech Lighting Services California 100%
CommAir Mechanical Services California 100%
Amtech Elevator Services California 100%
Amtech Reliable Elevator Company of Texas + Texas 100%
ABM Engineering Services Company California 100%
Bradford Building Services, Inc. California 100%
Commercial Air Conditioning of Northern California, Inc. + California 100%
Southern California Building Services + California 100%
Accurate Janitor Service, Inc. + California 100%
Ampco System Parking California 100%
Beehive Parking, Inc. Utah 100%
System Parking, Inc. California 100%
Towel and Linen Service, Inc. + California 100%
</TABLE>
(*) Subsidiary relationship to registrant or to subsidiary parents shown by
progressive indentation.
+ Inactive companies.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
ABM Industries Incorporated:
We consent to incorporation by reference in the following Registration
Statements on Form S-8 of ABM Industries Incorporated of our report dated
December 15, 1997, relating to the consolidated balance sheets of ABM Industries
Incorporated and subsidiaries as of October 31, 1997 and 1996, 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, 1997, and related
financial statement Schedule II, which report appears in the October 31, 1997,
annual report on Form 10-K of ABM Industries Incorporated.
Registration No. Form Plan
---------------- ---- ---------------------------------
2-86666 S-8 Executive Stock Option Plan
2-96416 S-8 1985 Employee Stock Purchase Plan
33-14269 S-8 1987 Stock Option Plan
/s/ KPMG Peat Marwick LLP
- -------------------------
San Francisco, California
January 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 1,783
<SECURITIES> 0
<RECEIVABLES> 240,387
<ALLOWANCES> 5,923
<INVENTORY> 21,197
<CURRENT-ASSETS> 294,417
<PP&E> 72,518
<DEPRECIATION> 45,934
<TOTAL-ASSETS> 467,152
<CURRENT-LIABILITIES> 156,660
<BONDS> 38,402
0
6,400
<COMMON> 205
<OTHER-SE> 197,608
<TOTAL-LIABILITY-AND-EQUITY> 467,152
<SALES> 1,252,472
<TOTAL-REVENUES> 1,252,472
<CGS> 1,076,078
<TOTAL-COSTS> 1,076,078
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,988
<INTEREST-EXPENSE> 2,675
<INCOME-PRETAX> 46,964
<INCOME-TAX> 19,725
<INCOME-CONTINUING> 27,239
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,239
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.22
</TABLE>
