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<SEC-DOCUMENT>0000950149-00-000101.txt : 20000203
<SEC-HEADER>0000950149-00-000101.hdr.sgml : 20000203
ACCESSION NUMBER: 0000950149-00-000101
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 17
CONFORMED PERIOD OF REPORT: 19991031
FILED AS OF DATE: 20000128
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ABM INDUSTRIES INC /DE/
CENTRAL INDEX KEY: 0000771497
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TO DWELLINGS & OTHER BUILDINGS [7340]
IRS NUMBER: 941369354
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1031
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-08929
FILM NUMBER: 516563
BUSINESS ADDRESS:
STREET 1: 160 PACIFIC AVENUE
STREET 2: SUITE 222
CITY: SAN FRANCISCO
STATE: CA
ZIP: 94111
BUSINESS PHONE: 4157334000
MAIL ADDRESS:
STREET 1: 160 PACIFIC AVENUE
STREET 2: SUITE 222
CITY: SAN FRANCISCO
STATE: CA
ZIP: 94111
FORMER COMPANY:
FORMER CONFORMED NAME: ABM INDUSTRIES INC
DATE OF NAME CHANGE: 19950110
FORMER COMPANY:
FORMER CONFORMED NAME: AMERICAN BUILDING MAINTENANCE INDUSTRIES INC
DATE OF NAME CHANGE: 19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<DESCRIPTION>ANNUAL REPORT FOR THE YEAR ENDED OCTOBER 31, 1999
<TEXT>
<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
<TABLE>
<CAPTION>
(Mark One)
<S> <C> <C>
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
</TABLE>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
<TABLE>
<S> <C> <C>
OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
</TABLE>
For the Transition Period from __________ to __________ .
Commission File Number 1-8929
ABM INDUSTRIES INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-1369354
(State or other jurisdiction of incorporation or (IRS Employer Identification Number)
organization)
</TABLE>
160 PACIFIC AVENUE, SUITE 222, SAN FRANCISCO, CALIFORNIA 94111
(Address and zip code of principal executive offices)
TELEPHONE: 415/733-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
Title of Each Class Name of Each Exchange on Which Registered
<S> <C>
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No _
As of December 31, 1999, nonaffiliates of the registrant beneficially owned
16,859,393 shares of the registrant's common stock with an aggregate market
value of $343,510,132.
As of December 31, 1999, there were 22,148,348 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be used by the Company in connection with its
2000 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Form 10-K.
<PAGE> 2
ABM INDUSTRIES INCORPORATED
FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1 Business.................................................... 3
Executive Officers of the Company........................... 6
Item 2 Properties.................................................. 7
Item 3 Legal Proceedings........................................... 7
Item 4 Submission of Matters to a Vote of Security Holders......... 7
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 7
Item 6 Selected Consolidated Financial Data........................ 8
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 7A Qualitative and Quantitative Disclosures About Market
Risk........................................................ 13
Item 8 Financial Statements and Financial Statement Schedule....... 14
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 30
PART
III
Item 10 Directors and Executive Officers of the Registrant.......... 30
Item 11 Executive Compensation...................................... 30
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 30
Item 13 Certain Relationships and Related Transactions.............. 30
PART IV
Item 14 Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K......................................... 30
Signatures.................................................. 32
Exhibit Index............................................... 33
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS.
ABM Industries Incorporated ("ABM") is the largest facility services
contractor listed on the New York Stock Exchange. With annual revenues exceeding
$1.6 billion and more than 57,000 employees, ABM and its subsidiaries (the
"Company") provide air conditioning, elevator, engineering, janitorial,
lighting, parking and security services to thousands of commercial, industrial
and institutional customers who outsource these services in hundreds of cities
across North America.
ABM was reincorporated in Delaware on March 19, 1985, as the successor to a
business founded in California in 1909. The Corporate Headquarters of the
Company are located at 160 Pacific Avenue, Suite 222, San Francisco, California
94111, and its telephone number is 415/733-4000.
INDUSTRY SEGMENT INFORMATION
The Company's operations are grouped into nine industry segments or
divisions (comprised of one or more subsidiaries of the Company). Referred to as
"ABM Industries Incorporated Family of Services", they are listed below by their
respective division name:
<TABLE>
<S> <C>
- - ABM Engineering Services - Amtech Elevator Services
- - ABM Facility Services - Amtech Lighting Services
- - ABM Janitorial Services - CommAir Mechanical
- - American Commercial Services
Security - Easterday Janitorial
- - Ampco System Parking Supply Company
</TABLE>
Additional information relating to the Company's industry segments appears
in Note 14 of Notes to Consolidated Financial Statements contained in Item 8,
Financial Statements and Financial Statement Schedule. The business activities
of the Company's industry segments, as they existed at October 31, 1999, are
more fully described below.
M ABM ENGINEERING SERVICES provides building owners and managers with
on-site engineers to operate, maintain and repair electrical, energy
management, mechanical, and plumbing systems utilizing computerized
maintenance management systems (CMMS). This service is primarily for
high-rise office buildings, but customers also include schools, warehouses,
factories, shopping malls and universities. ABM Engineering Services
operates in 25 states through seven regional offices, two of which are in
California and one each in Chicago, Illinois; Denver, Colorado;
Philadelphia, Pennsylvania; New York, New York; and Phoenix, Arizona. In
1999, this Division earned ISO 9002 Certification, the first national
engineering services provider of on-site operating engineers to earn this
exclusive designation. ISO is a quality standard comprised of a rigorous
set of guidelines and good business practices against which companies are
rated through a comprehensive independent audit process that can take
several years.
M ABM FACILITY SERVICES provides customers with streamlined,
centralized control and coordination of multiple facility service needs.
This process is consistent with the greater competitive demands on
corporate organizations to become more efficient in the business market
today. By leveraging the core competencies of the Company's other
affiliated divisions, this Division attempts to reduce overhead, such as
redundant personnel, for its customers by providing multiple services under
a single contract, with one contact and one invoice. Its National Service
Center provides centralized dispatching, emergency services, accounting and
related reports to financial institutions, high-tech companies, and other
customers regardless of industry or size. ABM Facility Services is
headquartered in San Francisco, where it also maintains its National
Service Center.
M ABM JANITORIAL SERVICES (also known as "American Building
Maintenance") 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, as well as other building
cleaning services. ABM Janitorial Services maintains 106 offices in 35
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 this Division's maintenance
contracts are fixed-price agreements, others contain clauses under which
the customer agrees to reimburse the full amount of wages, payroll taxes,
insurance charges and
3
<PAGE> 4
other expenses plus a profit percentage. The majority of ABM Janitorial
Services 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.
M AMERICAN COMMERCIAL SECURITY (also known as "ACS" and "ABM Security
Services") provides security guards, electric monitoring of fire, life,
safety, and access control devices, and security consulting services to a
wide range of businesses in the major metropolitan areas of Phoenix,
Arizona; San Francisco, San Diego and Los Angeles, California; Chicago,
Illinois; New Orleans, Louisiana; Minneapolis, Minnesota; Portland, Oregon;
Houston, Dallas, Fort Worth, Austin and San Antonio, Texas; Seattle,
Washington; and Salt Lake City, Utah. Much like ABM Janitorial Services,
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.
M AMPCO SYSTEM PARKING (also known as "Ampco System Airport Parking"
and "Ampco Express Airport Parking") operates approximately 1,500 parking
lots and garages, which are either leased from or operated for third
parties. The lease terms generally range from 5 to 20 years and usually
contain provisions for renewal options. Leases which expire may continue on
a month-to-month basis or are replaced by similar leases. Many leases
contain provisions for contingent rentals based on revenues. Ampco System
Parking currently operates in 24 states, including five of the 20 busiest
international airports in the U.S.: Denver, Honolulu, Newark, Phoenix, and
San Francisco. In conjunction with its on-airport parking services, this
Division also operates off-airport parking facilities in Philadelphia,
Houston, and Los Angeles, and parking shuttle bus service at thirteen
locations.
M AMTECH ELEVATOR SERVICES maintains, modernizes and repairs elevators
and escalators in major metropolitan areas of California; 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 17 offices and several
parts warehouses, and operates a fleet of radio-equipped service vehicles.
M AMTECH LIGHTING SERVICES (also known as "Sica Lighting & Electrical
Services") provides relamping, fixture cleaning and periodic maintenance
service to its customers. Amtech Lighting Services also repairs, services,
designs and installs outdoor signage. This Division maintains 24 offices,
eight of which are located in California; four of which are in Texas; and
one office in each of the following states: Arizona, Florida, Georgia,
Illinois, Maryland, Minnesota, Nevada, New Jersey, New Mexico, New York,
Louisiana, and Oklahoma.
M COMMAIR MECHANICAL SERVICES (also known as "CommAir Preferred
Mechanical Services") installs, maintains, and repairs heating, ventilation
and air conditioning equipment, performs chemical water treatment, and
provides energy conservation services for commercial, industrial and
institutional facilities. CommAir Mechanical Services maintains ten
offices, nine of which are located in California, and one in Phoenix,
Arizona.
M 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 over 30 sub-distributors to serve ABM
Janitorial Services and any customer in 26 other states and the District of
Columbia. Aside from sales to ABM Janitorial Services, which, in 1999,
accounted for approximately 29% of Easterday Janitorial Supply's total
revenues, the principal customers for this Division are industrial plants,
schools, commercial buildings, industrial organizations, transportation
terminals, theaters, hotels, retail stores, restaurants, military
establishments and janitorial service companies. Among the products sold
are cleaning equipment, disinfectants, floor cleaners, floor finishes,
glass cleaners, paper products and polishes. The products sold include many
nationally advertised brands, which, in large part, are manufactured by
others. This Division blends certain cleaning agents and floor finishes,
which it sells under the Easterday trade name, and provides sanitation
services to the food industry.
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.
4
<PAGE> 5
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. Many contracts are obtained through competitive bidding. 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 operate in a limited geographic area, the
operating divisions of a few large, diversified facility service companies
compete with the Company on a national basis.
SALES AND MARKETING
The Company's sales and marketing efforts are conducted by its corporate,
division, region, branch and district offices. Sales, marketing, management and
operations personnel in each of these offices participate directly in selling
and servicing customers. The broad geographic scope of these offices enables the
Company to provide a full range of facility services through intercompany sales
referrals, multi-service "bundled" sales and national account sales. The Company
also has designated a nationwide group of "ABM Family of Services" executives to
market all of the Company's facility services capabilities.
The Company has a broad customer base including airports, apartment
complexes, city centers, colleges and universities, financial institutions,
industrial plants, office buildings, retail stores, shopping centers and theme
parks. No customer accounted for more than 5% of its revenues during the fiscal
year ended October 31, 1999.
EMPLOYEES
The Company employs over 57,000 persons, of whom the vast majority are
service employees who perform air conditioning, elevator, engineering,
janitorial, lighting, parking and security services. Approximately 24,400 of
these employees are covered under collective bargaining agreements. There are
about 3,300 employees with executive, managerial, supervisory, administrative,
professional, sales, marketing, clerical and other office assignments.
ENVIRONMENTAL MATTERS
The discussion of the Company's environmental matters can be found in Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations.
5
<PAGE> 6
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS AND BUSINESS EXPERIENCE
NAME AGE DURING PAST FIVE YEARS
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------
William W. Steele 63 President & Chief Executive Officer since November 1994
Martinn H. Mandles 59 Chairman of the Board since December 1997; Chief
Administrative Officer since November 1991; Executive Vice
President from November 1991 to December 1997
Jess E. Benton, III 59 Executive Vice President of the Company since November 1999;
Senior Vice President of the Company from July 1994 through
October 1999
Henrik C. Slipsager 44 Executive Vice President of the Company, and President of
ABM Janitorial Services Division, since November 1999;
Senior Vice President of the Company from March 1998 through
October 1999; Executive Vice President of the ABM Janitorial
Services Division from January 1997 through October 1999;
President & Chief Executive Officer, ISS International
Service System, Inc. prior to January 1997
Donna M. Dell 51 Senior Vice President since November 1999; Vice President &
Chief Employment Counsel since April 1997; Vice President &
Director of Human Resources from July 1994 through October
1999
David H. Hebble 64 Senior Vice President since November 1999; Chief Financial
Officer since November 1979; Vice President from November
1979 through October 1999
Harry H. Kahn 56 Senior Vice President since November 1999; General Counsel &
Corporate Secretary since November 1991; Vice President from
November 1991 through October 1999
Sherrill F. Sipes, Jr. 64 Senior Vice President since July 1994
John F. Egan 63 Vice President since March 1984; Special Assistant to the
President since November 1999; President of the Company's
ABM Janitorial Services Division from 1984 through October
1999
Douglas B. Bowlus 55 Vice President since November 1999; Corporate Treasurer
since March 1996; Treasurer from February 1984 through
February 1996.
Anthony D. Lackey 36 Vice President since November 1999; Director of Electronic
Services & Chief Technology Officer since 1996; Assistant
Vice President from July 1996 through October 1999; various
positions of increasing responsibility in the Company's
Electronic Services Department from November 1987 through
June 1996
Terry D. McNeil 52 Vice President since November 1999; Director of Insurance
Services since October 1988; Assistant Vice President from
July 1996 through October 1999
Vernon E. Skelton 55 Vice President since November 1999; Controller & Chief
Accounting Officer since April 1997; Assistant Vice
President from July 1996 through October 1999; Director of
Accounting from November 1991 through March 1997
Eleonora C. Walsh 59 Vice President since November 1999; Director of
Administrative Services since November 1991; Assistant Vice
President from July 1996 through October 1999
</TABLE>
6
<PAGE> 7
ITEM 2. PROPERTIES.
The Company has corporate, division, regional, branch, or district offices
in over 250 locations throughout the United States, and Canada. Twelve of these
facilities are owned by the Company and the remainder are leased. At October 31,
1999, the real estate owned by the Company had an aggregate net book value of
$3.2 million and was located in: Phoenix, Arizona; Fresno, California;
Jacksonville and Tampa, Florida; Elko, Nevada; Portland, Oregon; Houston and San
Antonio, Texas; and Kennewick, Seattle, Spokane and Tacoma, Washington.
Rental payments under long and short-term lease agreements amounted to
$96.4 million for the fiscal year ended October 31, 1999. Of this amount, $72.0
million in rental expense was attributable to public parking lots and garages
that Ampco System Parking leases and operates. The remaining expense was for the
rental or lease of office space, computers, operating equipment and motor
vehicles.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
MARKET INFORMATION AND DIVIDENDS
The Company's common stock is listed on the New York Stock Exchange. The
Company's credit agreement places certain limitations on dividend payments based
on net income (see Note 5 of Notes to Consolidated Financial Statements
contained 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>
- ---------------------------------------------------------------------------------------------------------
1998
Price range of common stock:
High $31.50 $37.00 $32.06 $31.25 $37.00
Low $25.94 $28.13 $25.31 $25.00 $25.00
Dividends per share $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.48
1999
Price range of common stock:
High $35.06 $33.13 $30.75 $28.75 $35.06
Low $27.88 $25.75 $25.19 $21.88 $21.88
Dividends per share $ 0.14 $ 0.14 $ 0.14 $ 0.14 $ 0.56
- ---------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1999, there were approximately 7,292 registered holders of
the Company's common stock, in addition to stockholders in street name.
7
<PAGE> 8
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, 1999:
<TABLE>
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts and
ratios) 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------------------------------------
OPERATIONS
Revenues and other income $965,381 $1,086,925 $1,252,472 $1,501,827 $1,629,716
- -------------------------------------------------------------------------------------------------------------
Expenses
Operating expenses and cost of goods sold 830,749 940,296 1,076,078 1,298,423 1,413,541
Selling, general and administrative 100,481 105,943 126,755 142,431 146,984
Interest 2,739 2,581 2,675 3,465 1,959
- -------------------------------------------------------------------------------------------------------------
933,969 1,048,820 1,205,508 1,444,319 1,562,484
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 31,412 38,105 46,964 57,508 67,232
Income taxes 13,193 16,385 19,725 23,578 27,565
- -------------------------------------------------------------------------------------------------------------
Net income $ 18,219 $ 21,720 $ 27,239 $ 33,930 $ 39,667
=============================================================================================================
Net income per common share
Basic $ 0.96 $ 1.11 $ 1.33 $ 1.58 $ 1.77
Diluted $ 0.92 $ 1.05 $ 1.22 $ 1.44 $ 1.65
=============================================================================================================
Common and common equivalent shares
Basic 18,415 19,123 20,143 21,110 22,067
Diluted 19,179 20,241 21,872 23,161 23,748
=============================================================================================================
FINANCIAL STATISTICS
Dividends per common share $ 0.30 $ 0.35 $ 0.40 $ 0.48 $ 0.56
Stockholders' equity per common share $ 7.55 $ 8.41 $ 9.64 $ 10.96 $ 12.36
Working capital $ 95,209 $ 119,579 $ 137,223 $ 165,788 $ 184,279
Current ratio 1.83 2.05 1.89 2.05 2.01
Long-term debt $ 22,575 $ 33,664 $ 38,402 $ 33,720 $ 28,903
Redeemable cumulative preferred stock $ 6,400 $ 6,400 $ 6,400 $ 6,400 $ 6,400
Stockholders' equity $141,368 $ 163,915 $ 197,278 $ 236,838 $ 276,951
Total assets $334,973 $ 379,770 $ 464,251 $ 501,363 $ 563,384
Property, plant and equipment -- net $ 22,647 $ 22,570 $ 26,584 $ 27,307 $ 35,181
Capital expenditures $ 10,225 $ 10,751 $ 13,272 $ 11,715 $ 19,451
Depreciation and amortization $ 11,527 $ 13,651 $ 16,118 $ 19,593 $ 20,698
Accounts receivable -- net $158,075 $ 183,716 $ 234,464 $ 260,549 $ 297,596
=============================================================================================================
</TABLE>
All share and per share amounts have been restated to retroactively reflect
a two-for-one common stock split in 1996. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
8
<PAGE> 9
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 contained
in Item 8. All information in the discussion and references to the years are
based on the Company's fiscal year that ends on October 31.
Funds provided from operations and bank borrowings have historically been
the sources for meeting working capital requirements, financing capital
expenditures, acquisitions and paying cash dividends. Management believes that
funds from these sources will remain available and adequately serve the
Company's liquidity needs. The Company has an unsecured revolving credit
agreement with a syndicate of U.S. banks that provides a $150 million line of
credit expiring July 1, 2002. At the Company's option, the credit facility
provides interest at the prime rate or IBOR+.35%. As of October 31, 1999, the
total amount outstanding was approximately $90 million, which was comprised of
loans in the amount of $26 million and standby letters of credit of $64 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
addition, the Company has a loan agreement with a major U.S. bank with a balance
of $3,386,000 at October 31, 1999. This loan bears interest at a fixed rate of
6.78% with annual payments of principal, in varying amounts, and interest due
each February 15 through 2003. The Company's effective interest rate for all
long-term debt bank borrowings for the year ended October 31, 1999 was 6.8%.
Operating activities generated cash flows in 1997, 1998 and 1999 of $27.7
million, $32.1 million and $35.3 million, respectively. Cash paid for
acquisitions during the fiscal years ended October 31, 1997, 1998 and 1999,
including payments pursuant to contractual arrangements involved in prior
acquisitions, were approximately $28.6 million, $10.0 million and $11.0 million,
respectively. Capital expenditures during fiscal years 1997, 1998 and 1999 were
$13.3 million, $11.7 million and $19.5 million, respectively. Cash dividends
paid to stockholders of common and redeemable preferred stock and amounts used
to repurchase common stock were approximately $8.6 million in 1997, $10.7
million in 1998 and $18.5 million in 1999. At October 31, 1998, working capital
was $165.8 million as compared to $184.3 million at October 31, 1999.
EFFECT OF INFLATION
The low rates of inflation experienced in recent years have had no material
impact on the financial statements of the Company. The Company attempts to
recover inflationary costs by increasing sales prices to the extent permitted by
contracts and competition.
ENVIRONMENTAL MATTERS
The nature of the Company's operations, primarily services, would not
ordinarily involve it in environmental contamination. However, the Company's
operations are subject to various federal, state and/or local laws regulating
the discharge of materials into the environment or otherwise relating to the
protection of the environment, such as discharge into soil, water and air, and
the generation, handling, storage, transportation and disposal of waste and
hazardous substances. These laws generally have the effect of increasing costs
and potential liabilities associated with the conduct of the Company's
operations, although historically they have not had a material adverse effect on
the Company's financial position, cash flows or its results of operations.
The Company is currently involved in four proceedings relating to
environmental matters: one involving alleged potential soil and groundwater
contamination at a Company facility in Florida; one involving alleged potential
soil contamination at a former Company facility in Arizona; one involving
alleged potential soil and groundwater contamination of a parking garage
previously operated by the Company in Washington; and, one involving alleged
potential soil and groundwater contamination at a former dry-cleaning facility
leased by the Company in Nevada. While it is difficult to predict the ultimate
outcome of these matters, based on information currently available, management
believes that none of these matters, individually or in the aggregate, are
reasonably likely to have a material adverse effect on the Company's financial
position, cash flows, or its results of operations.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written and
embedded chips being designed that used two digits rather than four digits to
define the applicable year. As a result, there
9
<PAGE> 10
existed a potential that existing computer programs and hardware would be unable
to accurately process dates beyond the year 1999. In mid-1997, the Company
established a dedicated project team that developed a detailed plan for making
the Company Year 2000 compliant. The plan encompassed both information
technology-related systems, such as the Company's accounting software and non-IT
related systems, as well as the impact to the Company due to the non-compliance
of major vendors or customers. The Company completed its plan with respect to
hardware and software prior to the end of 1999. It also surveyed significant
vendors with respect to their Year 2000 compliance and where deemed appropriate
identified alternate suppliers. The Company also established contingency plans.
The aggregate expense of these efforts was approximately $3.0 million. As of
January 26, 2000, the Company has not experienced any significant Y2K failures.
Several minor issues were reported to the Y2K project team, but did not affect
business and have been corrected. There can be no certainty that failures or
problems related to Year 2000 might not develop in the future, but management
believes no such failure or problem is reasonably likely to materially disrupt
the Company's business.
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 in Note 12 to the Consolidated Financial
Statements. Acquisitions made during the three fiscal years ended October 31,
1999, contributed approximately $235 million to fiscal 1999 revenues, including
the August 1997 acquisition in New York which contributed $153 million of these
revenues.
INTERNAL INVESTIGATION
During fiscal year 1999, the Audit Committee of the Board of Directors
conducted an investigation of alleged questionable payments and related
accounting practices in connection with janitorial service contracts
representing less than 5% of the Company's consolidated revenues. The Company
does not believe that the matter investigated will have any material impact on
its financial condition, cash flow or results of operations. However, in an
abundance of caution, the Company has referred the matter to appropriate
government authorities.
RESULTS OF OPERATIONS
COMPARISON OF 1999 TO 1998
The Company reported record revenues and earnings for 1999. Revenues and
other income (hereinafter called "revenues") were $1.6 billion in 1999, up $128
million or 9%, from $1.5 billion reported in 1998. The increase in revenues in
1999 over 1998 was attributable to new business and price increases as well as
acquisitions made during the prior years. Acquisitions during 1999 accounted for
approximately $11 million, or approximately 9% of the total revenue increase of
$128 million for 1999.
As a percentage of revenues, operating expenses and cost of goods sold was
86.7% for 1999, compared to 86.5% in 1998. Consequently, as a percentage of
revenues, the Company's gross profit (revenues minus operating expenses and cost
of goods sold) of 13.3% in 1999 was slightly lower than the gross profit of
13.5% in 1998. The decrease in gross profit as a percentage of revenues was
mostly due to higher labor and related costs, particularly workers' compensation
insurance and continued competitive pressure to maintain or lower prices. The
Company anticipates such increased costs may be gradually recovered through
future price increases. For the next fiscal year, management has committed to
negotiating with its customers appropriate price increases.
Selling, general and administrative expenses increased 3.2% for 1999
compared to 1998. However, as a percentage of revenues, selling, general and
administrative expenses decreased from 9.5% for 1998, to 9.0% for 1999,
primarily due to certain costs (such as health insurance and legal fees) that do
not increase at the same rate as sales. The dollar increase in selling, general
and administrative expenses is primarily due to salaries and expenses associated
with acquisitions including the amortization of goodwill.
Interest expense was $2.0 million in 1999 compared to $3.5 million for
1998, a decrease of $1.5 million. This decrease was primarily due to lower
weighted average borrowings.
The income before income taxes (pre-tax income) for 1999 was $67.2 million
compared to $57.5 million, an increase of 17% over 1998. The growth in pre-tax
income outpaced the revenue growth for 1999 primarily due to the reduction (as a
percentage of revenues) of selling, general and administrative expenses.
10
<PAGE> 11
The estimated effective income tax rate for 1999 and 1998 was 41.0%.
Net income for 1999 was $39.7 million, an increase of 17%, compared to net
income of $33.9 million in 1998. Diluted net income per common share rose 15% to
$1.65 for 1999 compared to $1.44 for the same period in 1998. The percentage
increase in diluted net income per share was less than the increase in net
income due to the 3% increase in number of diluted shares outstanding that
primarily resulted from stock purchased by employees under the Company's
Employee Stock Purchase Plan as well as stock options exercised. On September
22, 1999 the Company announced a stock repurchase program for up to one million
outstanding shares. As of October 31, 1999, 220,000 shares had been reacquired.
Earnings per share calculations also include the effect of a preferred stock
dividend deduction of $512,000 in both 1999 and 1998.
The Company is organized into nine separate operating divisions as defined
under Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information". However, only the ABM
Janitorial, Amtech Elevator, ABM Engineering, Amtech Lighting, and Ampco System
Parking Divisions are reportable using the criteria under SFAS 131. The results
of operations from these five reportable operating divisions for 1999 as
compared to 1998 are more fully described below:
The ABM Janitorial Services Division reported revenues for 1999 of $933.7
million, an increase of approximately $74.2 million, or 9%, over 1998. This is
the Company's largest Division and accounted for approximately 57% of the
Company's consolidated revenues in 1999. ABM Janitorial Services revenues
increased as a result of new business, particularly in the Gulf Central,
Mid-Atlantic and Southwest regions. Revenues generated from acquisitions during
the prior year contributed about $8.7 million of the 1999 increase while the
current year acquisitions added $9.1 million. ABM Janitorial Services' operating
profits increased 11% in 1999 to $49.5 million when compared to 1998. This
profit increase was due primarily to the increase in revenues, reduced legal
fees and slightly lower labor and labor related costs.
Revenues for Amtech Elevator Services were $96.6 million, up by 8% for 1999
over 1998, largely due to an increased customer base in the maintenance and
repair sector. The Amtech Elevator Division reported a 3% increase in operating
profits in 1999 to $6.7 million compared to 1998. The smaller increase in
operating profits can be attributed primarily to the inability of the Division
to pass on increased labor and insurance costs.
The ABM Engineering Services Division increased revenues by 13% to $153.9
million and its operating profits increased 4% to $8.4 million for 1999 compared
to 1998. The large revenue increase was due primarily to new business in the
Midwest, Arizona, and Southern California regions. The smaller percentage
increase in operating profits is due to lower margins on contracts particularly
in the New York and Philadelphia regions and pressure from competition to reduce
fees.
Amtech Lighting Services reported a 9% revenue increase to $95.8 million
due to increased business in the Atlanta, Chicago, New Orleans, New York, and
Oakland markets. Operating profits increased by 8% to $7.5 million during 1999
compared to the prior year primarily due to the increased sales.
Ampco System Parking increased revenues to $162.4 million or 5% over 1999,
while its operating profits increased 22% to $8.5 million during 1999 compared
to 1998. The increase in revenues was mostly due to growth in its California
region. The operating profit increase was due for the most part to the
conversion from leased lots to management contracts, which have higher margins,
as well as improved profits related to off-airport parking operations.
COMPARISON OF 1998 TO 1997
Revenues were $1.5 billion in 1998, up $249 million or 20%, from $1.3
billion reported in 1997. The 20% increase in revenues in 1998 over 1997 was
attributable to 1997 acquisitions, particularly large acquisitions in New York
of janitorial, engineering and lighting businesses, as well as sales and price
increases. Acquisitions made during 1998 accounted for approximately $6 million,
or approximately 2.4% of the total revenue increase of $249 million for 1998.
As a percentage of revenues, operating expenses and cost of goods sold was
86.5% for 1998, compared to 85.9% in 1997. Consequently, the Company's gross
profit as a percentage of revenues of 13.5% in 1998 was lower than the gross
profit of 14.1% in 1997. The gross profit percentage declined mostly due to
higher labor and related costs and continued competitive pressure to lower
prices.
Selling, general and administrative expenses for 1998 were $142.4 million
compared to $126.8 million in 1997. As a percentage of revenues, selling,
general and administrative expenses decreased from 10.1% for 1997, to 9.5% for
1998, primarily as a result of
11
<PAGE> 12
certain costs not increasing at the same rate as sales. The dollar increase in
selling, general and administrative expenses of $15.6 million is primarily due
to expenses related to growth and to a lesser extent expenses associated with
acquisitions including the amortization of goodwill.
Interest expense was $3.5 million in 1998 compared to $2.7 million for
1997, an increase of $790,000. This increase was primarily due to higher
weighted average borrowings during 1998, which were needed to fund acquisitions
and working capital.
The income before income taxes (pre-tax income) for 1998 was $57.5 million
compared to $47.0 million, an increase of 22% over 1997. The growth in pre-tax
income outpaced the revenue growth for 1998 primarily due to lower insurance
costs as a percent of revenues.
The estimated effective income tax rate for 1998 was 41.0%, compared to
42.0% in 1997. The lower tax rate was due for the most part to an increase in
various federal and state tax credits.
Net income for 1998 was $33.9 million, an increase of 25%, compared to net
income of $27.2 million in 1997. Diluted net income per common share rose 18% to
$1.44 for 1998 compared to $1.22 for the same period in 1997. The increase in
diluted net income per share was not proportional to the increase in net income
due to the 6% increase in number of diluted shares outstanding primarily a
result of purchases made by employees under the Company's Employee Stock
Purchase Plan. Earnings per share calculations also include the effect of a
preferred stock dividend deduction of $512,000 in both 1998 and 1997.
The results of operations from the Company's five reportable operating
divisions for 1998 as compared to 1997 are more fully described below:
Revenues of the ABM Janitorial Services Division increased by 25% during
1998 to $859.4 million, as compared to 1997, as a result of several acquisitions
made during 1997, particularly in the Northeast and the Southwest regions.
Revenues generated from those acquisitions during 1997 contributed $142 million
of the 1998 increase. Operating profits increased to $44.6 million in 1998, or
36%, when compared to 1997. This profit increase was due primarily to the
increase in revenues and lower labor and labor related costs.
Revenues for the Amtech Elevator Services Division were $89.3 million, up
by 8% for 1998 over 1997, largely due to an increased customer base in the
maintenance and repair sector. The Amtech Elevator Division reported operating
profits of $6.5 million in 1998, a 39% increase compared to 1997. This increase
in operating profits can be attributed primarily to a higher profit margin on
service contracts and a substantial reduction of insurance costs.
The ABM Engineering Services Division's revenues increased by 45% to $136.8
million and its operating profits increased 9% to $8.0 million for 1998 compared
to 1997. The revenue increase was due primarily to an acquisition in New York in
August 1997 and new business in the Midwest and West Central regions. The
smaller percentage increase in operating profits is due to lower margins
particularly on contracts purchased through the New York acquisition, increased
insurance costs and pressure from competition to reduce fees.
Amtech Lighting Services reported a 10% revenue increase to $88.2 million
due to increased revenues in the Northeast and Dallas markets as well as from a
small acquisition in the Midwest. Operating profits increased by 11% to $6.9
million during 1998 compared to the prior year primarily due to the increased
sales.
The Ampco System Parking Division's revenues increased by 7% to $154.1
million, while its profits increased 10% to $7.0 million during 1998 compared to
1997. The increase in revenues was mostly due to growth in its national airport
business and its Texas region. The operating profit increase was due for the
most part to lower payroll tax expense and the increased sales.
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)
significant decreases in commercial real estate occupancy, resulting in reduced
demand and prices for building maintenance and other facility services in the
Company's major markets, (2) loss or bankruptcy of one or more of the Company's
major customers, which could adversely affect the Company's ability to collect
its accounts receivable or recover its deferred costs,
12
<PAGE> 13
(3) major collective bargaining issues that may cause loss of revenues or cost
increases that non-union companies can use to their advantage in gaining market
share, (4) significant shortfalls in adding additional customers in existing and
new territories and markets, (5) a protracted slowdown in the Company's
acquisition program, (6) legislation or other governmental action that severely
impacts one or more of the Company's lines of business, such as price controls
that could restrict price increases, or the unrecovered cost of any universal
employer-paid health insurance, as well as government investigations that
adversely affect the Company, (7) reduction or revocation of the Company's line
of credit, which would increase interest expense or the cost of capital, (8)
cancellation or nonrenewal of the Company's primary insurance policies, as many
customers contract out services based on the contractor's ability to provide
adequate insurance coverage and limits, (9) catastrophic uninsured or
underinsured claims against the Company, the inability of the Company's
insurance carriers to pay otherwise insured claims, or inadequacy in the
Company's reserve for self-insured claims, (10) resignation, termination, death
or disability of one or more of the Company's key executives, which could
adversely affect customer retention and day-to-day management of the Company,
(11) inability to employ entry level personnel due to labor shortages, and (12)
other material factors that are disclosed from time to time in the Company's
public filings with the United States Securities and Exchange Commission, such
as reports on Forms 8-K, 10-K and 10-Q.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not issue or invest in financial instruments or their
derivatives for trading or speculative purposes. The operations of the Company
are conducted primarily in the United States, and, as such, are not subject to
material foreign currency exchange rate risk. Although the Company has
outstanding debt and related interest expense, market risk in interest rate
exposure in the United States is currently not material.
ITEM 8. FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE.
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, 1998 and 1999, and
the related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended October 31, 1999. In connection with our audits of the consolidated
financial statements, we also have audited the related 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, 1998 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended October 31, 1999, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule II, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG LLP
- --------------------------
KPMG LLP
San Francisco, California
December 13, 1999
13
<PAGE> 14
ABM Industries Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
October 31 1998 1999
(in thousands of dollars except share amounts)
<S> <C> <C>
- ----------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 1,844 $ 2,139
Accounts receivable (less allowances of $6,761 and $7,490) 260,549 297,596
Inventories 22,965 23,296
Deferred income taxes 10,505 14,163
Prepaid expenses and other current assets 28,445 30,395
- ----------------------------------------------------------------------------------
Total current assets 324,308 367,589
Investments and long-term receivables 12,405 14,290
Property, plant and equipment -- net 27,307 35,181
Intangible assets (less accumulated amortization of $39,420
and $49,297) 102,776 105,583
Deferred income taxes 27,509 30,388
Other assets 7,058 10,353
- ----------------------------------------------------------------------------------
$501,363 $563,384
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
LIABILITIES
Current portion of long-term debt $ 865 $ 898
Bank overdraft 2,475 4,967
Trade accounts payable 34,992 45,596
Income taxes payable 5,527 7,318
Accrued liabilities:
Compensation 40,914 45,170
Taxes -- other than income 15,887 16,505
Insurance claims 29,254 35,139
Other 28,606 27,717
- ----------------------------------------------------------------------------------
Total current liabilities 158,520 183,310
Long-term debt 33,720 28,903
Retirement plans 15,974 19,294
Insurance claims 49,911 48,526
- ----------------------------------------------------------------------------------
Total liabilities 258,125 280,033
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 and 100,000,000
shares authorized; 21,601,000 and 22,407,000 shares issued
and outstanding at October 31, 1998 and 1999, respectively 216 224
Additional capital 79,904 93,336
Accumulated other comprehensive income (696) (635)
Retained earnings 157,414 184,026
- ----------------------------------------------------------------------------------
Total stockholders' equity 236,838 276,951
- ----------------------------------------------------------------------------------
$501,363 $563,384
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
14
<PAGE> 15
ABM Industries Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended October 31 1997 1998 1999
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES AND OTHER INCOME $1,252,472 $1,501,827 $1,629,716
- --------------------------------------------------------------------------------------------------
EXPENSES
Operating expenses and cost of goods sold 1,076,078 1,298,423 1,413,541
Selling, general and administrative 126,755 142,431 146,984
Interest 2,675 3,465 1,959
- --------------------------------------------------------------------------------------------------
1,205,508 1,444,319 1,562,484
- --------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 46,964 57,508 67,232
Income taxes 19,725 23,578 27,565
- --------------------------------------------------------------------------------------------------
Net income $ 27,239 $ 33,930 $ 39,667
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic $ 1.33 $ 1.58 $ 1.77
Diluted $ 1.22 $ 1.44 $ 1.65
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
COMMON AND COMMON EQUIVALENT SHARES
Basic 20,143 21,110 22,067
Diluted 21,872 23,161 23,748
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999 --------------- PAID-IN COMPREHENSIVE RETAINED
(IN THOUSANDS) SHARES AMOUNT CAPITAL INCOME EARNINGS TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE OCTOBER 31, 1996 19,489 $195 $48,548 $(378) $115,550 $163,915
Comprehensive income:
Net income 27,239 27,239
Other comprehensive income:
Foreign currency translation (157) (157)
--------
Total Comprehensive income 27,082
Dividends:
Common stock (8,085) (8,085)
Preferred stock (512) (512)
Stock issued under employees' stock purchase and option
plans 975 10 14,868 14,878
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE OCTOBER 31, 1997 20,464 205 63,416 (535) 134,192 197,278
Comprehensive income:
Net income 33,930 33,930
Other comprehensive income:
Foreign currency translation (161) (161)
--------
Total Comprehensive income 33,769
Dividends:
Common stock (10,196) (10,196)
Preferred stock (512) (512)
Tax benefit from exercise of stock options 718 718
Stock issued under employees' stock purchase and option
plans and for acquisition 1,137 11 15,770 15,781
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE OCTOBER 31, 1998 21,601 216 79,904 (696) 157,414 236,838
Comprehensive income:
Net income 39,667 39,667
Other comprehensive income:
Foreign currency translation 61 61
--------
Total Comprehensive income 39,728
Dividends:
Common stock (12,543) (12,543)
Preferred stock (512) (512)
Tax benefit from exercise of stock options 387 387
Stock repurchased (220) (2) (5,446) (5,448)
Stock issued under employees' stock purchase and option
plans and for acquisition 1,026 10 18,491 18,501
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE OCTOBER 31, 1999 22,407 $224 $93,336 $(635) $184,026 $276,951
================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
15
<PAGE> 16
ABM Industries Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended October 31 1997 1998
(in thousands) 1999
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 1,203,314 $ 1,463,918 $ 1,589,775
Other operating cash receipts 1,126 1,331 1,491
Interest received 552 682 870
Cash paid to suppliers and employees (1,154,572) (1,406,600) (1,522,495)
Interest paid (2,685) (3,334) (2,025)
Income taxes paid (19,988) (23,936) (32,311)
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,747 32,061 35,305
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (13,272) (11,715) (19,451)
Proceeds from sale of assets 660 497 922
Decrease (increase) in investments and long-term receivables 3,041 495 (1,885)
Intangible assets acquired (28,606) (10,010) (10,980)
- -------------------------------------------------------------------------------------------------------
Net cash used in investing activities (38,177) (20,733) (31,394)
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued, including tax benefit 8,778 15,151 17,178
Common stock repurchased -- -- (5,448)
Dividends paid (8,597) (10,708) (13,055)
Increase (decrease) in bank overdraft 8,035 (10,500) 2,492
Long-term borrowings 116,145 93,204 57,064
Repayments of long-term borrowings (113,715) (98,414) (61,847)
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 10,646 (11,267) (3,616)
- -------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 216 61 295
Cash and cash equivalents beginning of year 1,567 1,783 1,844
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents end of year $ 1,783 $ 1,844 $ 2,139
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net income $ 27,239 $ 33,930 $ 39,667
ADJUSTMENTS:
Depreciation and amortization 16,118 19,593 20,698
Impairment of long-lived assets 2,700 -- --
Provision for bad debts 2,988 2,821 2,257
Gain on sale of assets (257) (202) (160)
Increase in deferred income taxes (1,777) (4,521) (6,537)
Increase in accounts receivable (50,312) (28,907) (39,304)
Increase in inventories (4,069) (1,768) (331)
Increase in prepaid expenses and other current assets (5,628) (2,440) (1,950)
Decrease (increase) in other assets 1,580 454 (3,295)
Increase in income taxes payable 1,514 4,163 1,791
Increase in retirement plans accrual 3,273 2,561 3,320
Increase (decrease) in insurance claims liability 5,212 (778) 4,500
Increase in trade accounts payable and other accrued
liabilities 29,166 7,155 14,649
- -------------------------------------------------------------------------------------------------------
Total adjustments to net income 508 (1,869) (4,362)
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 27,747 $ 32,061 $ 35,305
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Non-cash investing activities:
Common stock issued for net assets of business acquired $ 6,100 $ 1,348 $ 1,710
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE> 17
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.
The Company is implementing an enterprise-wide information system. External
direct costs of materials and services and payroll-related costs of employees
working solely on the development of the system are capitalized. In addition, in
1999 related interest costs of approximately $135,000 were capitalized.
Capitalized costs of the project will be amortized over a period of five years
beginning when the system is placed in service. Training costs are expensed as
incurred.
INTANGIBLE ASSETS: Intangible assets consist of goodwill in the amount of
$152,477,000 and other intangible assets in the amount of $2,403,000, net of
accumulated amortization of $49,297,000. 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's ABM Janitorial Division 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.
17
<PAGE> 18
NET INCOME PER COMMON SHARE: The company has reported its earnings in
accordance with Statement of Financial Accounting Standards No. 128, "Earnings
per Share". Basic net income per common share, after the reduction for preferred
stock dividends, is based on the weighted average number of shares actually
outstanding during the period. Diluted net income per common share, after the
reduction for preferred stock dividends, is based on the weighted average number
of shares outstanding during the period, including common stock equivalents.
Diluted net income per common share is consistent with the Company's former
presentation of primary net income per common share. The calculation of these
amounts is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1997 1998 1999
- -----------------------------------------------------------------
<S> <C> <C> <C>
Net Income $27,239,000 $33,930,000 $39,667,000
Preferred Stock
Dividends (512,000) (512,000) (512,000)
- -----------------------------------------------------------------
$26,727,000 $33,418,000 $39,155,000
=================================================================
Common shares
outstanding -- basic: 20,143,000 21,110,000 22,067,000
Effect of dilutive
securities:
Stock options 1,381,000 1,852,000 1,544,000
Other 348,000 199,000 137,000
- -----------------------------------------------------------------
Common shares
outstanding --
diluted 21,872,000 23,161,000 23,748,000
=================================================================
</TABLE>
For the purposes of computing diluted net income per common share, weighted
average common share equivalents do not include stock options with an exercise
price that exceeds the average fair market value of the Company's common stock
for the period. On October 31, 1999, options to purchase approximately 1,268,000
shares of common stock at a weighted average exercise price of $31.09 were
outstanding, but were excluded from the computation because the options'
exercise price was greater than the average market price of the common shares.
At October 31, 1998, 938,000 shares of common stock at a weighted average
exercise price of $31.78 were outstanding, but were excluded from the
computation because the options' exercise price was greater than the average
market price of the common shares.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
instruments with original maturities of three months or less to be cash and cash
equivalents.
STOCK-BASED COMPENSATION: The Company accounts 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".
COMPREHENSIVE INCOME: In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". The Company adopted SFAS 130 during fiscal 1999. The new
rules established standards for the reporting of comprehensive income and its
components in financial statements. Comprehensive income consists of net income
and other related gains and losses affecting shareholder's equity that, under
generally accepted accounting principles, are excluded from net income. For the
Company, such comprehensive income items consist of foreign currency gains and
losses, the tax effect of such was insignificant. The adoption of SFAS 130
affected the presentation in the accompanying consolidated balance sheets and
consolidated statements of stockholders' equity and comprehensive income. Prior
year financial statements have been reclassified to conform to the new
requirements.
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, 1998 and 1999 was $79,165,000 and
$83,665,000, respectively. In connection with certain self-insurance agreements,
the Company has standby letters of credit at October 31, 1999 supporting the
estimated unpaid liability in the amounts of $62,557,000.
3. INVENTORIES
The inventories at October 31, consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(in thousands of dollars) 1998 1999
- ---------------------------------------------------------------
<S> <C> <C>
Janitorial supplies and equipment held for
sale $ 4,839 $ 4,176
Parts and materials 14,510 14,766
Work in process 3,616 4,354
- ---------------------------------------------------------------
$22,965 $23,296
===============================================================
</TABLE>
18
<PAGE> 19
4. PROPERTY, PLANT AND EQUIPMENT -- NET
Property, plant and equipment at October 31, consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(in thousands of dollars) 1998 1999
- ---------------------------------------------------------------
<S> <C> <C>
Land $ 834 $ 800
Buildings 3,968 3,726
Transportation equipment 11,633 13,104
Machinery and other equipment 51,528 61,390
Leasehold improvements 13,096 14,425
- ---------------------------------------------------------------
81,059 93,445
Less accumulated depreciation and
amortization (53,752) (58,264)
- ---------------------------------------------------------------
$ 27,307 $ 35,181
===============================================================
</TABLE>
5. LONG-TERM DEBT AND CREDIT AGREEMENT
The Company has a $150 million syndicated line of credit expiring July 1,
2002. 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, 1999, the
total outstanding amount under this facility was $90 million comprised of $26
million in loans and $64 million in standby letters of credit. The interest
rates at October 31, 1999 on loans outstanding under this agreement ranged from
5.79% to 8.25%. 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.
The Company has a loan agreement with a major U.S. bank with a balance of
$3,386,000 at October 31, 1999. This loan bears interest at a fixed rate of
6.78% with annual payments of principal, in varying amounts, and interest due
each February 15 through 2003.
The long-term debt of $29,801,000 matures in the years ending October 31 as
follows: $898,000 in 2000; $902,000 in 2001; $26,916,000 in 2002, $990,000 in
2003, $47,000 in 2004, and $48,000 in subsequent years.
Long-term debt at October 31, is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(in thousands of dollars) 1998 1999
- ---------------------------------------------------------------
<S> <C> <C>
Revolving credit facility with interest at
5.79 -- 8.25% $30,000 $26,000
Note payable to bank with interest at
6.78% 4,104 3,386
Other 481 415
- ---------------------------------------------------------------
34,585 29,801
Less current portion 865 898
- ---------------------------------------------------------------
$33,720 $28,903
===============================================================
</TABLE>
6. EMPLOYEE BENEFIT PLANS
(A) RETIREMENT AGREEMENTS
The Company has unfunded retirement agreements for approximately 44 current
and former directors and senior executives, many of which are fully vested. The
agreements provide for annual benefits for ten years commencing at the later of
the respective retirement dates of those executives or age 65. The benefits are
accrued over the period these directors and senior executives are expected to be
employed by the Company. During 1997, 1998 and 1999, amounts accrued under these
agreements were $629,000, $513,000 and $674,000, respectively. Payments were
made in 1997, 1998 and 1999 in the amounts of $124,000, $207,000 and $231,000,
respectively.
(B) 401(K) AND PROFIT SHARING PLAN
The Company has a profit sharing and 401(k) plan covering certain qualified
employees, which includes employer participation in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The plan allows
participants to make pretax contributions and the Company matches certain
percentages of employee contributions depending on the participant's length of
service. The profit sharing portion of the plan is discretionary and
noncontributory. All amounts contributed to the plan are deposited into a trust
fund administered by independent trustees.
The Company provided for profit sharing contributions of $1,336,000,
$1,534,000 and $1,643,000 for 1997, 1998 and 1999, respectively. The Company's
matching 401(k) contributions required by the 401(k) plan for 1997, 1998 and
1999 were approximately $873,000, $1,066,000 and $1,210,000, respectively.
19
<PAGE> 20
(C) SERVICE AWARD BENEFIT PLAN
In 1989 the Company adopted an unfunded service award benefit plan, with a
retroactive vesting period of five years. This plan is a "severance pay plan" as
defined by the Employee Retirement Income Security Act (ERISA) and covers
certain qualified employees. The plan provides participants, upon termination,
with a guaranteed seven days pay for each year of employment subsequent to
November 1, 1989. The Company, at its discretion, may also award additional days
each year.
Net cost of the plan is comprised of:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
(in thousands of dollars) 1997 1998 1999
- -----------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 298 $ 300 $ 396
Interest 233 247 255
- -----------------------------------------------------------------
Net cost $ 531 $ 547 $ 651
=================================================================
Actuarial present value of:
Vested benefit obligation $2,964 $3,280 $3,724
Accumulated benefit obligation $3,102 $3,391 $3,850
Projected benefit obligation $3,853 $4,072 $4,571
=================================================================
</TABLE>
Assumptions used in accounting for the plan as of October 31 were:
<TABLE>
<CAPTION>
- ------------------------------------------------------
1997 1998 1999
- ------------------------------------------------------
<S> <C> <C> <C>
Weighted average discount rate 7% 7% 6.5%
Rate of increase in compensation
level 5% 5% 5%
======================================================
</TABLE>
(D) PENSION PLANS UNDER COLLECTIVE BARGAINING
Certain qualified employees of the Company are covered under
union-sponsored collectively bargained multi-employer defined benefit plans.
Contributions for these plans were approximately $14,993,000, $20,763,000 and
$25,516,000 in 1997, 1998 and 1999, 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.
As of October 31, 1999, future minimum lease commitments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Years ending (in thousands of dollars)
- ---------------------------------------------------------------
<S> <C>
2000 $ 40,128
2001 32,223
2002 26,231
2003 19,544
2004 13,507
Thereafter 70,841
- ---------------------------------------------------------------
Total minimum lease commitments $202,474
===============================================================
</TABLE>
Rental expense for the years ended October 31, is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(in thousands of dollars) 1997 1998 1999
- ---------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals under
noncancelable leases $52,997 $61,648 $52,231
Contingent rentals 32,031 26,071 41,441
Short-term rental agreements 12,201 11,379 2,758
- ---------------------------------------------------------------
$97,229 $99,098 $96,430
===============================================================
</TABLE>
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, 1998 and
20
<PAGE> 21
1999 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, 1999, 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
In March 1999, the stockholders approved an amendment to the Company's
Certificate of Incorporation to increase the number of shares of common stock,
par value $.01 per share, authorized for issue from 28,000,000 to 100,000,000.
The Company is also 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.
In March 1998, the Company's Board of Directors adopted a stockholder
rights plan to replace an existing rights plan that expired on April 22, 1998.
The new plan provides for a dividend distribution of one preferred stock
purchase right (a "Right") for each outstanding share of common stock,
distributed to stockholders of record on April 22, 1998. The Rights will be
exercisable only if a person or group acquires 20% or more of the Company's
common stock (an "Acquiring Person") or announces a tender offer for 20% or more
of the common stock. Each Right will entitle stockholders to buy one-thousandth
of a share of newly created Participating Preferred Stock, par value $.01 per
share, of the Company at an initial exercise price of $175 per Right, subject to
adjustment from time to time. However, if any person becomes an Acquiring
Person, each Right will then entitle its holder (other than the Acquiring
Person) to purchase at the exercise price common stock (or, in certain
circumstances, Participating Preferred Stock) of the Company having a market
value at that time of twice the Right's exercise price. These Rightsholders
would also be entitled to purchase an equivalent number of shares at the
exercise price if the Acquiring Person were to control the Company's Board of
Directors and cause the Company to enter into certain mergers or other
transactions. In addition, if an Acquiring Person acquired between 20% and 50%
of the Company's voting stock, the Company's Board of Directors may, at its
option, exchange one share of the Company's common stock for each Right held
(other than Rights held by the Acquiring Person). Rights held by the Acquiring
Person will become void. The Rights Plan excludes from its operation The
Theodore Rosenberg Trust and The Sydney J. Rosenberg Trust, and certain related
persons, and, as a result, their holdings will not cause the Rights to become
exercisable or nonredeemable or trigger the other features of the Rights. The
Rights will expire on April 22, 2008, unless earlier redeemed by the Board at
$0.01 per Right.
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and its related interpretations. Accordingly, no compensation
expense has been recognized in the financial statements for employee stock
awards.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", requires the disclosure of pro forma net earnings and
earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option pricing models. The use of
these models requires subjective assumptions, including future stock price
volatility and expected time to exercise, which can have a significant effect on
the calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected life 9.8 years, 11.4 years, and 11.9 years from the date
of grant in fiscal 1997, 1998, and 1999, respectively; expected stock price
volatility of 19.5%, 25.3%, and 26.2%, respectively; expected dividend yields of
2.6%, 1.5%, and 1.9%, and risk free interest rates of 6.5%, 6.0%, and 5.0% in
fiscal 1997, 1998, and 1999, respectively.
The Company's calculations are based on a single option valuation approach
and forfeitures are
21
<PAGE> 22
recognized as they occur. If the computed fair values of the fiscal 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,
$27,496,000 ($1.17 per share) for fiscal 1998, and $35,409,000 ($1.47 per share)
for fiscal 1999. The impact of outstanding stock options granted prior to fiscal
1996 has been excluded from the pro forma calculation; accordingly, the fiscal
1997, 1998, and 1999 pro forma adjustments are not indicative of future period
pro forma adjustments, when the calculation will apply to all future applicable
stock grants.
Although most of the options granted under the "Price-Vested" Performance
Stock Option Plan adopted in fiscal 1996 were granted in fiscal 1997, the
recognition of expense in the SFAS 123 footnote for this Plan increased from
$724,296 in fiscal 1997 to $5,879,059 in fiscal 1998. This accounts for the
majority of the increase in the total recognition from all plans from $4,682,235
in fiscal 1997 to $10,513,464 in fiscal 1998. This large increase results from
the requirements contained in SFAS 123. The options from this Plan were granted
with a ten-year term. If, during the first four years, the stock price achieved
and maintained a set price for ten out of thirty consecutive trading days, the
options associated with the price would vest. The prices established were $25,
$30, $35 and $40, with 25% of the options vesting at each price point. If, at
the end of four years, any of the stock price performance targets were not
achieved, then the remaining options would vest at the end of eight years from
the date the options were granted. SFAS 123 requires that the projected value of
the options be determined on the grant date and recognized over the period in
which the options are earned (the vesting period). For these options, the
projected value of the options was determined and that value was to be
recognized over the eight-year vesting period unless vesting occurred at an
earlier date. In fiscal 1998 ABM stock achieved and maintained for the requisite
ten-day period, the first three price targets. As a result, 75% of the options
are now vested, and the projected value of that 75% less the amount recognized
in fiscal 1997 for those options is recognized in this year's footnote. Of the
remaining 25% of the originally granted options yet to be vested, one-eighth was
recognized in each of the last three years. The remaining amount will be
recognized over the next five years unless sooner vested by the stock achieving
a price of $40 per share and maintaining that price for ten out of 30
consecutive trading days.
"Time-Vested" Incentive Stock Option Plan adopted in 1987, as amended
In 1987, the Company adopted a stock option plan under which 1,200,000
shares were reserved for grant until December 31, 1996. In March 1994, this plan
was amended to reserve an additional 1,000,000 shares. In March 1996, the plan
was amended again to reserve another 2,000,000 shares. Options which terminate
without being exercised may be reissued. At October 31, 1999, 1,017,210 shares
remained available for grant.
Transactions under this plan are summarized as follows:
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------
Weighted
Average
Number of Exercise
Options Price
- ---------------------------------------------------------------
Balance October 31, 1996 2,398,000 $12.21
Granted (Weighted average fair value of
$4.55) 89,000 $19.83
Exercised (108,000) $ 8.70
Terminated (64,000) $13.28
- ---------------------------------------------------------------
Balance October 31, 1997 2,315,000 $12.41
Granted (Weighted average fair value of
$10.20) 266,000 $32.28
Exercised (486,000) $ 7.35
Terminated (83,000) $15.16
- ---------------------------------------------------------------
Balance October 31, 1998 2,012,000 $16.40
Granted (Weighted average fair value of
$8.34) 126,000 $30.86
Exercised (296,000) $10.28
Terminated (35,000) $18.30
- ---------------------------------------------------------------
Balance October 31, 1999 1,807,000 $18.37
===============================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
Outstanding Exercisable
- ---------------------------------------------------- --------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of of Contractual Exercise of Exercise
Prices Options Life (Years) Price Options Price
- ---------------------------------------------------------------------------
$ 8.49 - 13.32 604,000 3.9 $ 9.03 598,000 $ 9.00
$17.44 - 26.94 849,000 6.8 $19.18 549,000 $19.01
$29.41 - 36.59 354,000 8.5 $32.31 103,000 $32.39
===========================================================================
</TABLE>
"Price-Vested" Performance Stock Option Plan adopted in 1996
In December 1996, the Company adopted a stock option plan under which
1,500,000 shares have been reserved. The options expire 10 years after the date
of grant and any options which terminate without being exercised may be
reissued. Each option will have a pre-defined vesting price which provides for
accelerated vesting if the fair market value of the Company's common stock is
equal to or greater than the pre-defined vesting price for 10 trading days in
any period of 30 consecutive trading days. Vested options will become
exercisable only after the first anniversary of its grant date. Any option that
has not
22
<PAGE> 23
vested prior to the fourth anniversary of its grant date will vest on the
eighth anniversary of its grant date. At October 31, 1999, 310,000 shares
remained available for grant.
Transactions under this plan are summarized as follows:
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------
Weighted
Average
Number of Exercise
Options Price
- ---------------------------------------------------------------
Granted December 17, 1996 (Weighted
average fair value of $6.32) 1,120,000 $20.40
Terminated (40,000) $20.00
- ---------------------------------------------------------------
Balance October 31, 1997 1,080,000 $20.41
Granted (Weighted average fair value of
$14.95) 140,000 $36.59
Exercised (70,000) $20.00
- ---------------------------------------------------------------
Balance October 31, 1998 1,150,000 $22.40
Exercised (15,000) $20.00
- ---------------------------------------------------------------
Balance October 31, 1999 1,135,000 $22.37
===============================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
Outstanding Exercisable
- ---------------------------------------------------- --------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of of Contractual Exercise of Exercise
Prices Options Life (Years) Price Options Price
- ---------------------------------------------------------------------------
$20.00 - 25.59 995,000 7.2 $20.45 770,000 $20.44
$36.59 140,000 8.4 $36.59 70,000 $36.59
===========================================================================
</TABLE>
"Age-Vested" Career Stock Option Plan
adopted in 1984, as amended
In 1984, the Company adopted a stock option plan whereby 680,000 shares
were reserved for grant. In March of 1996, another 1,000,000 shares were
reserved for grant under the plan. As amended December 20, 1994, options which
have been granted at fair market value are 50% exercisable when the option
holders reach their 61st birthday and the remaining 50% will vest on their 64th
birthday. To the extent vested, the options may be exercised at any time prior
to one year after termination of employment. Options which terminate without
being exercised may be reissued. At October 31, 1999, 434,000 shares remained
available for grant.
Transactions under this plan are summarized as follows:
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------
Weighted
Average
Number of Exercise
Options Price
- ---------------------------------------------------------------
Balance October 31, 1996 639,000 $ 7.55
Granted (Weighted average fair value of
$6.65) 6,000 $19.44
Terminated (22,000) $11.25
- ---------------------------------------------------------------
Balance October 31, 1997 623,000 $ 7.53
Granted (Weighted average fair value of
$13.79) 573,000 $30.01
Terminated (12,000) $18.82
- ---------------------------------------------------------------
Balance October 31, 1998 1,184,000 $18.29
Granted (Weighted average fair value of
$14.59) 75,000 $31.88
Exercised (56,000) $ 6.22
Terminated (16,000) $ 9.31
- ---------------------------------------------------------------
Balance October 31, 1999 1,187,000 $19.86
===============================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
Outstanding Exercisable
- ---------------------------------------------------- --------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of of Contractual Exercise of Exercise
Prices Options Life (Years) Price Options Price
- ---------------------------------------------------------------------------
$ 5.72 - 8.72 382,000 4 $ 5.96 135,000 $ 6.39
$11.25 - 13.28 159,000 7 $11.33 29,000 $11.25
$19.44 6,000 12 $19.44 -- --
$29.41 - 36.94.. 640,000 12 $30.23 86,000 $29.41
===========================================================================
</TABLE>
Employee Stock Purchase Plan
adopted in 1985, as amended
In 1985, the Company adopted 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 were authorized, and again in
March of 1999, 1,200,000 additional shares were authorized under this plan. 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 1997, 1998, and 1999, 520,000,
562,160, and 602,000 shares of stock were issued under the plan for an aggregate
purchase price of $7,841,000, $10,873,000, and $13,632,000, respectively. The
weighted average fair value per share of purchases in 1997, 1998, and 1999 was
$5.75, $5.11, and $7.32, respectively, and were issued at a weighted-average
price of $15.08, $19.34, and $23.25, respectively. At October 31, 1999, 908,000
shares remained unissued under the plan.
23
<PAGE> 24
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) 1997 1998 1999
- ---------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $18,685 $22,415 $29,807
State 2,809 5,647 4,286
Foreign 8 37 9
Deferred
Federal (1,619) (4,149) (6,022)
State (158) (372) (515)
- ---------------------------------------------------------------
$19,725 $23,578 $27,565
===============================================================
</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>
- -------------------------------------------------------------
1997 1998 1999
- -------------------------------------------------------------
<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 % 5.6 % 5.5 %
Tax credits (0.9)% (2.7)% (2.6)%
Nondeductible expenses and
other -- net 4.5 % 3.1 % 3.1 %
- -------------------------------------------------------------
42.0 % 41.0 % 41.0 %
=============================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at October 31,
are presented below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(in thousands of dollars) 1998 1999
- ---------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Self-insurance claims $28,767 $30,484
Bad debt allowance 1,073 2,401
Deferred and other compensation 6,103 7,361
Intangible amortization 2,853 3,384
State taxes 1,105 1,408
Other 3,122 3,172
- ---------------------------------------------------------------
Total gross deferred tax assets 43,023 48,210
- ---------------------------------------------------------------
Deferred tax liabilities:
Union pension contributions (5,161) (4,051)
Depreciation 152 392
- ---------------------------------------------------------------
Total gross deferred tax
liabilities (5,009) (3,659)
- ---------------------------------------------------------------
Net deferred tax assets $38,014 $44,551
===============================================================
</TABLE>
Management has determined the total net deferred tax asset will more likely
than not be realized.
At October 31, 1999, ABM has a capital loss carryover of $1,135,516, which
can be carried forward to offset capital gains, if any, to reduce future federal
income taxes through October 31, 2001.
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 $11 million in 1999. In addition, common shares, with a fair
market value of approximately $1.7 million at the date of issuance, were issued
in 1999 under the contingent payment provisions of a prior year acquisition.
Acquisitions and dispositions made during the fiscal year 1999 are discussed
below:
Effective February 1, 1999, the Company acquired the operations and
selected assets of VIP Valet Parking, with customers located in Austin and
Houston, Texas. The terms for the purchase of this acquisition were a cash
downpayment made at closing plus annual contingent payments based on operating
profits to be made over five years. This acquisition contributed approximately
$0.9 million in revenues in fiscal year 1999.
Effective April 1, 1999, the Company acquired the operations and selected
assets of Commercial Landscaping Services, with operations located in the
Carolinas and Tennessee. The terms for the purchase of this acquisition were a
cash downpayment made at closing plus annual contingent payments based on
operating profits to be made over five years. This acquisition contributed
approximately $4 million in revenues in fiscal year 1999.
Effective April 1, 1999, the Company acquired the operations and selected
assets of Integra Services Corporation, with customers located in Des Moines,
Iowa. The terms for the purchase of this acquisition were a cash downpayment
made at closing plus annual contingent payments based on operating profits to be
made over five years. This acquisition contributed approximately $2.3 million in
revenues in fiscal year 1999.
Effective May 1, 1999, the Company acquired the operations and stock of
Masterclean Systems, Inc., with customers located in Louisville, Kentucky, and
24
<PAGE> 25
Master-Klean, Inc. with customers in Indianapolis, Indiana. The terms for the
purchase of these acquisitions were a cash downpayment made at closing plus
annual contingent payments based on gross profits to be made over five years.
This acquisition contributed approximately $1.9 million in revenues in fiscal
year 1999.
Effective July 1, 1999, the Company acquired the operations and selected
assets of Suburban Lighting Company, with customers located in Minnesota and
other parts of the upper Midwest. The terms for the purchase of this acquisition
were a cash downpayment made at closing plus annual contingent payments based on
operating profits to be made over five years. This acquisition contributed
approximately $1.3 million in revenues in fiscal year 1999.
Effective August 1, 1999, the Company acquired the operations and selected
assets of FaciliTech, with customers located in the Minneapolis/St. Paul
metropolitan area of Minnesota. The terms for the purchase of this acquisition
were a cash downpayment made at closing plus annual contingent payments based on
gross profits to be made over three years. This acquisition contributed
approximately $0.9 million in revenues in fiscal year 1999.
Effective August 1, 1999, the Company acquired the operations and selected
assets of Private Patrol Agency, with customers located in San Jose, California.
The terms for the purchase of this acquisition were a cash payment made at
closing.
These seven business combinations were accounted for under the purchase
method of accounting. The aggregate consideration paid for these acquisitions
consisted of $7,199,000. The aggregate purchase price does not include payments
of contingent consideration based upon the results of operations of the
businesses acquired.
Effective November 1, 1999, the Company acquired the operations and
selected assets of NPS Corporation, with customers located in Anchorage, Alaska.
The terms for the purchase of this acquisition were a cash downpayment made at
closing plus annual contingent payments based on operating profits to be made
over five years.
Effective December 1, 1999, the Company acquired the operations and
selected assets of Centre City Parking, with customers located in Miami,
Florida. The terms for the purchase of this acquisition were a cash downpayment
made at closing plus annual contingent payments based on operating profits to be
made over five years.
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