UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995 OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the Transition Period from _________ to _________ Commission File Number 1-8929 ABM INDUSTRIES INCORPORATED (Exact name of registrant as specified in its charter) DELAWARE 94-1369354 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 50 FREMONT STREET, 26TH FLOOR, SAN FRANCISCO, CALIFORNIA 94105 (Address and zip code of principal executive offices) TELEPHONE: (415) 597-4500 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Name of Each Exchange on Which Title of Each Class Registered COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE AND PACIFIC STOCK EXCHANGE PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE AND PACIFIC STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X As of December 31, 1995, nonaffiliates of the registrant beneficially owned shares of the registrant's common stock with an aggregate market value of $197,113,717. As of December 31, 1995, there were 9,412,719 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement to be used by the Company in connection with its 1996 Annual Meeting of Stockholders is incorporated by reference into Part III of this Form 10-K.
PART I ITEM 1. BUSINESS. ABM Industries Incorporated ("ABM") is the largest American-owned facility services contractor listed on the New York Stock Exchange. With annual revenues approaching $1 billion and more than 45,000 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 facilities 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. By vote of the stockholders on March 16, 1994, the Company's name was changed from American Building Maintenance Industries, Inc. to ABM Industries Incorporated. The corporate headquarters of the Company is located at 50 Fremont Street, 26th Floor, San Francisco, California 94105, and its telephone number is (415) 597-4500. BUSINESS SEGMENT INFORMATION The Company's divisions (consisting of one or more subsidiaries of the Company), listed below, operate in three functionally oriented segments of the building services industry -- Janitorial Divisions, Public Service Divisions and Technical Divisions. <TABLE> <CAPTION> JANITORIAL PUBLIC SERVICE TECHNICAL DIVISIONS DIVISIONS DIVISIONS - -------------------------------------------------------------------------------- <S> <C> <C> ABM Janitorial Services ABM Security Services Amtech Elevator Easterday Janitorial Supply Ampco System Parking Services Amtech Engineering Services Amtech Lighting Services CommAir Mechanical Services </TABLE> Additional information relating to the Company's three industry segments appears in Note 15 of Item 8, Financial Statements and Supplementary Data of this Form 10-K. The business activities of the Company's three industry segments and eight operating divisions, as they existed at October 31, 1995, are more fully described below. JANITORIAL DIVISIONS The Janitorial Divisions provide janitorial cleaning services as well as janitorial supplies and equipment to their customers. Operating from 86 offices throughout the United States and Canada, this segment accounted for approximately 57%, 54% and 53% of the Company's revenues in the fiscal years ended October 31, 1993, 1994 and 1995, respectively. / / ABM JANITORIAL SERVICES provides a wide range of basic janitorial services for a variety of structures and organizations, including office buildings, industrial plants, banks, department stores, theaters, warehouses, educational and health institutions and airport terminals. Services provided by ABM Janitorial Services include floor cleaning and finishing, wall and window washing, furniture polishing, rug cleaning, dusting, and other building cleaning services. This Division maintains 80 offices in 33 states, the District of Columbia and two Canadian provinces and operates under thousands of individually negotiated building maintenance contracts, the majority of which are obtained by competitive bidding. Generally, profit margins on maintenance contracts tend to be inversely proportional to the size of the contract. Although many of the Division's maintenance contracts are fixed price agreements, others contain clauses under which the customer agrees to reimburse the Division for the full amount of wages, payroll taxes, insurance premiums and other expenses plus a profit percentage. The majority of the Division's contracts are for one-year periods, contain automatic renewal clauses and are subject to termination by either party upon 30 to 90 days written notice. / / EASTERDAY JANITORIAL SUPPLY markets janitorial supplies and equipment through six sales offices located in San Francisco, Los Angeles and Sacramento, California; Portland, Oregon; Reno, Nevada; and Houston, Texas. Aside from sales to ABM Janitorial Services, which, in 1995, accounted for approximately 32% of Easterday Janitorial Supply's total revenues (before intercompany eliminations), the principal customers for this division are industrial plants, schools, commercial buildings, industrial organizations, transportation terminals, theaters, hotels, retail stores, restaurants, military establishments and janitorial service companies. Among the products sold are paper products, disinfectants, floor cleaners, polishes, glass cleaners, waxes and cleaning equipment. The products sold include a number of nationally advertised brands and, in large part, are manufactured by others. This Division manufactures certain cleaning agents and waxes which it sells, but its manufacturing operations are not significant in relation to Easterday Janitorial Supply as a whole. 2
PUBLIC SERVICE DIVISIONS At October 31, 1995, operations of the Company's Public Service Divisions segment provided parking facility management services and commercial security and investigative services to their customers. The Public Service Divisions operated from 44 offices which were located throughout the United States. For the fiscal years ended October 31, 1993, 1994 and 1995, this segment accounted for approximately 16%, 20% and 21%, respectively, of the Company's revenues. The two Public Service Divisions are described below: / / ABM SECURITY SERVICES provides security guards and special investigative and security consulting services to a wide range of businesses in the major metropolitan areas of San Francisco, San Diego and Los Angeles, California; Houston, Dallas/Fort Worth, Austin and San Antonio, Texas; Chicago, Illinois; Phoenix, Arizona; Seattle, Washington; Portland, Oregon; New Orleans, Louisiana; Minneapolis, Minnesota; Kansas City, Missouri; and the District of Columbia. 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. / / AMPCO SYSTEM PARKING operates approximately 1,425 parking lots and garages which are either leased from or managed for third parties. Ampco System Parking currently has parking facilities in 23 states: Arizona, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Michigan, Missouri, Nebraska, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, Texas, Utah, Washington and Wisconsin. TECHNICAL DIVISIONS The Technical Divisions segment provides its customers with a wide range of elevator, engineering, lighting and mechanical services through its four divisions. The Company believes that the offering of such a wide range of services by an affiliated group provides its customers with an attractive alternative to obtaining the services of a larger number of unrelated individual contractors and/or subcontractors. A number of the Divisions' service contracts are for one to three years and are generally renewed after expiration. Installation contracts are either individually negotiated or obtained through competitive bidding. This segment's primary market consists of retail and commercial businesses with multiple locations scattered over wide geographic areas. Examples of such customers include high-rise office buildings, bank and savings and loan branch systems, shopping centers, restaurant chains, service stations, supermarkets and drug, convenience and discount store chains. The Technical Divisions operate from 47 offices located in Arizona, California, Colorado, Florida, Georgia, Illinois, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Nevada, New Jersey, New Mexico, Oregon, Pennsylvania, Texas, Washington, Washington, D.C., Wisconsin and Mexico. For the fiscal years ended October 31, 1993, 1994 and 1995, this segment accounted for approximately 27%, 26% and 26%, respectively, of the Company's revenues. Operations of the four Technical Divisions during fiscal year 1995 are described below: / / AMTECH ELEVATOR SERVICES installs, maintains and repairs elevators and escalators in major metropolitan areas of California; Houston, Texas; Detroit, Michigan; Upper Marlboro, Maryland; Las Vegas, Nevada; Pennsauken, New Jersey; Atlanta, Georgia; Philadelphia, Pennsylvania; Denver, Colorado; Chicago, Illinois; Cincinnati, Ohio; and Washington, D.C. Amtech Elevator Services builds elevator units in Rosarito, Mexico, maintains fourteen offices and several parts warehouses and operates a fleet of radio-equipped service vehicles. / / AMTECH ENGINEERING SERVICES provides building owners and managers with staffs of on-site operating engineers to operate, maintain and repair electrical, mechanical, and plumbing systems within a facility. This service is primarily for high-rise office buildings, but customers also include schools, warehouses and factories. Amtech Engineering Services maintains five offices, two of which are in California and one each in Chicago, Illinois; Philadelphia, Pennsylvania; and Phoenix, Arizona. / / AMTECH LIGHTING SERVICES provides relamping, fixture cleaning and periodic maintenance service to its customers. Amtech Lighting Services also repairs, services, designs and installs outdoor signage. This division maintains sixteen offices, six of which are located in California; and one office in each of Austin, Dallas, Houston and San Antonio, Texas; Phoenix, Arizona; Albuquerque, New Mexico; New Orleans, Louisiana; Atlanta, Georgia; and Tampa and Ft. Lauderdale, Florida. / / COMMAIR MECHANICAL SERVICES installs and services air conditioning, ventilation and heating equipment and provides energy management 3
services to commercial, industrial and institutional facilities. CommAir Mechanical Services maintains eleven offices, ten of which are located in California, and one in Phoenix, Arizona. TRADEMARKS The Company believes that it owns or is licensed to use all corporate names, trade names, trademarks, service marks, copyrights, patents and trade secrets which are material to the Company's operations. COMPETITION The Company believes that each aspect of its business is highly competitive, and that such competition is based primarily on price and quality of service. The Company's competitors include a large number of regional and local companies located in major cities throughout the United States and Canada. While the majority of the Company's competitors in the janitorial and building maintenance business operate in a limited geographic area, the operating divisions of a few large, diversified companies compete with the Company on a national basis. In addition, a number of the Company's competitors do not operate under collective bargaining agreements. Generally, these nonunion competitors are able to operate with lower labor and employee benefit costs, thus permitting them to more aggressively compete on the basis of price in geographic areas where the Company has union operations. MARKETING AND SALES The Company's marketing and sales efforts are conducted by its various divisions and regional offices. Sales, marketing and operations executives in each of the regional and some of the major branch offices participate directly in obtaining new customers and also service the existing ones. The broad geographic base of the Company's division, regional and branch offices enables the Company to provide a full range of facility services, which are available individually or as a part of the Company's multi-service marketing program. 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. The Company estimates that no customer accounted for more than 5% of its revenues during the fiscal year ended October 31, 1995. EMPLOYEES The Company employs approximately 45,000 persons, of whom about 3,100 are in executive, managerial, administrative, professional, sales and clerical positions. The remaining employees perform air conditioning, elevator, engineering, janitorial, lighting, parking and security services. Approximately 18,400 employees are covered under collective bargaining agreements. 4
PRINCIPAL OFFICERS OF THE COMPANY The principal officers of the Company are as follows: <TABLE> <CAPTION> PRINCIPAL OCCUPATIONS AND BUSINESS EXPERIENCE NAME AGE DURING PAST FIVE YEARS <S> <C> <C> - ------------------------------------------------------------------------------------------------------------ Sydney J. Rosenberg 81 Chairman of the Board; Chief Executive Officer from November 1991 to November 1994 William W. Steele 59 Chief Executive Officer since November 1994; President since November 1991; Executive Vice President from April 1988 to October 1991 Martinn H. Mandles 55 Executive Vice President since November 1991; Vice President from October 1972 to November 1991 J. E. Benton, III 55 Senior Vice President, Office of the President, since July 1994; Vice President of the Company from November 1977 to July 1994 Sherrill F. Sipes, Jr. 60 Senior Vice President, Office of the President, since July 1994; Vice President from May 1968 to July 1994 William C. Banner 61 Vice President of the Company, and President of the Security Services Division Donna M. Dell 47 Vice President and Director of Human Resources since July 1994; Vice President and Counsel, Wells Fargo Bank, from February 1990 to June 1994 John F. Egan 59 Vice President of the Company, and President of the Janitorial Services Division David H. Hebble 60 Vice President and Chief Financial Officer Harry H. Kahn 52 Vice President, General Counsel and Secretary Douglas B. Bowlus 51 Treasurer Hussain A. Khan 59 Controller and Chief Accounting Officer since March 1993; Controller from March 1983 to March 1993 </TABLE> 5
ITEM 2. PROPERTIES. The Company has sales, operations, warehouse and administrative facilities in over 200 locations throughout the United States, Canada and Mexico. Fifteen of these facilities are owned by the Company and the remainder are leased. At October 31, 1995, the real estate owned by the Company had an aggregate net book value of $4,619,000 and was located in: Phoenix, Arizona; San Francisco, Los Angeles and Fresno, California; Jacksonville and Tampa, Florida; Portland, Oregon; Houston and Austin, Texas; Seattle, Spokane and Tacoma, Washington; Winnipeg, Manitoba, Canada; and Rosarito Beach, Baja, Mexico. Rental payments under long and short-term lease agreements amounted to $87,349,000 for the fiscal year ended October 31, 1995. Of this amount, $50,922,000 in rental expense was attributable to Ampco System Parking Division for the public parking lots and garages that it manages and operates. The remaining rent expense was for equipment, vehicles, office and warehouse space. ITEM 3. LEGAL PROCEEDINGS. Effective June 30, 1995 and July 20, 1995, respectively, the Company and all current and former officers and directors of the Company who participated in the proposed management led buyout of the Company and who were named defendants in the action entitled ACS FINANCIAL INC. ET AL V AMERICAN BUILDING MAINTENANCE INDUSTRIES, INC. ET AL and/or related cross actions (all of which action and cross-actions had been fully and finally settled as among the various parties on or about October 18, 1994) completed settlements with the Company and its Directors and Officers Liability Insurance carrier, respectively, for all claims for indemnification and expense reimbursement under the Company's existing by-laws, indemnification agreements and insurance policies. These settlements finally conclude all issues arising out of the above-referenced matters. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION AND DIVIDENDS The Company's common stock is listed on the New York Stock Exchange and Pacific Stock Exchange. The Company's credit agreement places certain limitations on dividend payments based on net income (see note 5 to the consolidated financial statements in item 8). The following table sets forth the high and low prices of the Company's common stock and quarterly cash dividends on common shares for the periods indicated: <TABLE> <CAPTION> FISCAL QUARTER -------------------------------------- FIRST SECOND THIRD FOURTH YEAR <S> <C> <C> <C> <C> <C> - ------------------------------------------------------------------------------------------------------------ 1994 Price range of common stock: High $19 1/4 $19 $23 5/8 $23 Low $16 1/8 $17 1/8 $17 3/4 $19 7/8 Dividends per share $ 0.125 $ 0.13 $ 0.13 $ 0.13 $ 0.515 1995 Price range of common stock: High $24 1/4 $24 1/8 $25 $27 5/8 Low $20 1/4 $21 1/2 $22 $25 1/8 Dividends per share $ 0.15 $ 0.15 $ 0.15 $ 0.15 $ 0.60 - ------------------------------------------------------------------------------------------------------------ </TABLE> At December 31, 1995, there were approximately 4,100 holders of the Company's common stock. 6
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, 1995: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------ (in thousands, except per share amounts and ratios) 1991 1992 1993 1994 1995 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> OPERATIONS Revenues and other income $ 745,721 $ 760,097 $ 773,312 $ 884,633 $ 965,381 - ------------------------------------------------------------------------------------------------------------ Expenses Operating expenses and cost of goods sold 632,792 643,346 658,503 760,056 830,749 Selling, general and administrative 91,230 94,273 92,403 96,059 99,521 Interest 3,121 2,061 2,164 3,459 3,699 - ------------------------------------------------------------------------------------------------------------ 727,143 739,680 753,070 859,574 933,969 - ------------------------------------------------------------------------------------------------------------ Income before income taxes 18,578 20,417 20,242 25,059 31,412 Income taxes 7,478 8,425 7,596 9,890 13,193 - ------------------------------------------------------------------------------------------------------------ Net income $ 11,100 $ 11,992 $ 12,646 $ 15,169 $ 18,219 - ------------------------------------------------------------------------------------------------------------ Net income per common share $ 1.36 $ 1.43 $ 1.45 $ 1.65 $ 1.85 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ Common and common equivalent shares 8,146 8,397 8,646 8,908 9,590 FINANCIAL STATISTICS Dividends per common share $ 0.473 $ 0.49 $ 0.50 $ 0.515 $ 0.60 Stockholders' equity per common share $ 10.53 $ 11.54 $ 12.55 $ 13.74 $ 15.14 Working capital $ 62,905 $ 76,484 $ 76,613 $ 90,165 $ 95,627 Current ratio 1.79 2.00 1.85 1.91 1.84 Long-term debt $ 9,477 $ 15,435 $ 20,937 $ 25,254 $ 22,575 Redeemable cumulative preferred stock $ -- $ -- $ 6,400 $ 6,400 $ 6,400 Stockholders' equity $ 86,938 $ 98,209 $ 110,188 $ 124,331 $ 141,786 Total assets $ 209,036 $ 223,724 $ 268,140 $ 299,470 $ 334,973 Property, plant and equipment -- net $ 15,595 $ 15,009 $ 17,043 $ 19,819 $ 22,647 Capital expenditures $ 5,647 $ 5,225 $ 6,187 $ 8,539 $ 10,225 Depreciation and amortization $ 6,970 $ 6,634 $ 7,158 $ 9,300 $ 11,527 Accounts receivable -- net $ 110,472 $ 120,885 $ 127,908 $ 140,788 $ 158,075 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ </TABLE> All share and per share amounts have been restated to retroactively reflect the two-for-one stock split in 1992. 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FINANCIAL CONDITION 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. Prior to September 22, 1994, the Company had short-term and long-term lines of credit totaling $33,000,000. These lines were canceled as of September 22, 1994, in conjunction with the signing of a new unsecured revolving credit agreement with a syndicate of U.S. banks. This agreement has a $125 million line of credit expiring September 22, 1998, which at the Company's option, may be extended one year. The credit facility provides, at the Company's option, interest at the prime rate or IBOR+.45%. As of October 31, 1995, the total amount outstanding was approximately $93 million which was comprised of loans in the amount of $21 million and standby letters of credit of $72 million. The interest rate at October 31, 1995 was 7.8 %. This agreement requires the Company to meet certain financial ratios and places some limitations on dividend payments and outside borrowing. The Company is prohibited from declaring or paying cash dividends exceeding 50% of its net income for any fiscal year. In connection with the acquisition of System Parking on September 1, 1993, the Company assumed a note payable in the amount of $3,818,000. Interest on this note is payable at an annual rate of 9.35%, with principal amounts of $636,000 due annually through October 1, 1998. At October 31, 1995, the balance remaining on this note was $1,909,000. Operating activities in 1994 generated a cash flow of $21.9 million compared to $13.8 million in 1995. At October 31, 1994, working capital was $90.2 million, as compared to $95.6 million at October 31, 1995. Cost of acquisitions during the fiscal years ended October 31, 1993, 1994 and 1995 (hereinafter referred to as 1993, 1994 and 1995, respectively), including payments pursuant to contractual arrangements involved in prior acquisitions, were approximately $24.1 million, $7.1 million and $12.5 million, respectively. Capital expenditures, including assets acquired for cash through acquisitions, during 1993, 1994, and 1995 were $6.2 million, $8.5 million, and $10.2 million, respectively. Cash dividends paid to stockholders of common and redeemable preferred stock were approximately $4.4 million in 1993, $5.1 million in 1994 and $6.1 million in 1995. ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. It also applies to transactions in which a company issues equity to acquire goods or services from non-employees. The statement defines a fair value based method of accounting for an employee stock option plan and encourages all entities to adopt this method. The statement also, however, allows an entity the option to continue to measure compensation cost for those plans using the intrinsic value based method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), but then requires the entity to adopt the positions of SFAS 123 through pro forma disclosures. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. Fair value is determined using an option pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock, expected dividends, and the risk-free interest rate over the expected life of the option. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date over the amount the employee must pay to acquire the stock. As ABM's stock option plans have historically issued options at the market value of the stock on the date of the grant, no compensation cost has been recognized in accordance with APB 25. The Company will continue to account for its stock option issuances under the provisions of APB 25 and will make the required pro forma disclosures as prescribed by SFAS 123. The Company plans to implement this statement as required in its fiscal year beginning November 1, 1996. 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. 8
ENVIRONMENTAL MATTERS 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 have the effect of increasing costs and potential liabilities associated with the conduct of the Company's operations, although historically they have not had a material adverse effect on the Company's financial position or its results of operations. The Company is currently involved in various stages of environmental investigation and/or remediation relating to certain current and former Company facilities. While it is difficult to predict the ultimate outcome of these investigations, or to assess the likelihood and scope of further investigation and remediation activities, based on information currently available, management believes that the costs of these matters are not reasonably likely to have a material adverse affect on the Company's financial position or its results of operations. ACQUISITIONS The operating results of businesses acquired have been included in the accompanying consolidated financial statements from their respective dates of acquisition. The following acquisitions made during the fiscal year 1995 accounted for approximately $17.1 million in revenues and had an impact of approximately $0.08 on earnings per share: Effective November 1, 1994, the Company's ABM Janitorial Services Division acquired substantially all of the maintenance services contracts from Quality Building Maintenance, Inc. of Seattle. This acquisition added approximately $3.4 million in annual revenues during the fiscal year 1995 to the Division's Northwest Region in Seattle. The South Central Region of ABM Janitorial Services Division acquired the janitorial business of Consolidated Chemical of Tyler, Texas on January 1, 1995, and this acquisition added approximately $800,000 in revenues during the fiscal year 1995. As of January 1, 1995, the Company's Ampco System Parking Division acquired the parking operations of Pansini Corporation. The parking contracts obtained as a result of this acquisition added approximately 100 facilities in California and Hawaii and approximately $8.5 million in revenues during the fiscal year 1995. On July 1, 1995, the Company's ABM Janitorial Services Division acquired the janitorial operations of United Cleaning Specialists Corp. in Atlanta, Georgia. For the fiscal year 1995, this acquisition contributed approximately $3.7 million in revenues to the Division's Southeast Region. United Cleaning Specialists operated in Alabama, Florida, Georgia, North and South Carolina, Tennessee and Virginia. On September 1, 1995, the Company's ABM Janitorial Services Division acquired the janitorial operations of Allied Janitorial Service Company of Spokane, Washington that operated in Eastern Washington and Idaho. This acquisition added approximately $700,000 to the revenues of this Division's Northwest Region for the two months ended October 31, 1995. RESULTS OF OPERATIONS COMPARISON OF 1995 TO 1994 The following discussion should be read in conjunction with the consolidated financial statements of the Company and the notes thereto. All information in the discussion and references to the years are based on the Company's fiscal year which ends on October 31. The Company reported record revenues and earnings for 1995. Revenues and other income (hereinafter called "revenues") were $965 million in 1995, up $80 million or 9%, from the prior year revenues of $885 million. The 9% increase in revenues in 1995 over 1994 was attributable to volume and price increases as well as revenues generated from acquisitions. All eight divisions of the Company reported revenue growth in 1995 except the Amtech Elevator Services Division, and all divisions posted increased operating profits (revenues minus total expenses) for 1995. Net income for 1995 was $18.2 million, a 20% increase, compared to $15.2 million in 1994. As a percentage of revenues, operating expenses and cost of goods sold were 85.9% in 1994 and 86.1% in 1995. Consequently, as a percentage of revenues, gross profit (revenues minus operating expenses and cost of goods sold) was 13.9% in 1995 as compared to 14.1% in 1994. The principal factors that contributed to the slight decline of gross profit percentage were competitive market conditions and pricing pressures experienced by several of the Company's divisions, as well as the impact from certain larger Ampco System Parking Division contracts which had lower gross profit percentages. However, the dollar amount of the Company's gross profit increased resulting from higher revenues more than offset the impact of a lower gross profit percentage in 1995. The total insurance expense included in 9
operating expenses and cost of goods sold increased 2% to $46 million in 1995 from $45 million in 1994. The increase in insurance expense was proportionately less than the 9% increase in revenue growth in 1995 over 1994. With the Company's continued emphasis on safety programs, management expects the insurance costs to increase at a modest rate in relation to the revenue growth. Selling, general and administrative expenses were $99.5 million in 1995, up $3.4 million, or 4% from $96.1 million in 1994. As a percentage of revenues, these expenses were down to 10% in 1995 from 11% in 1994. The selling, general and administrative expenses decline as a percentage of revenues reflects the Company's continued efforts to contain costs in this area. This percentage decline in selling, general and administrative expenses was partially offset by an increase in profit sharing expense. Higher debt levels during 1995 caused the interest expense in 1995 to be $3.7 million as compared with $3.5 million in 1994, an increase of $200,000, or 6%. The increase in interest expense was due to higher average bank borrowings in 1995 primarily necessitated by acquisitions and interest assessed on fully accrued state and federal income taxes. The income tax provisions for the fiscal years 1995 and 1994 were based on annual effective rates of 42.0% and 39.5%, respectively. The annual effective rate for 1995 is higher than 1994 primarily due to the unavailability of certain tax credits in 1995 that were previously available and also due to the increase in nondeductible expenses. Net income for 1995 was $18.2 million, an increase of 20%, compared to the prior years net income of $15.2 million. As a result of the exercise of stock options and purchases made by employees under the Company's Employee Stock Purchase Plan, the number of common and common equivalent shares increased from 8,908,000 shares in 1994 to 9,590,000 shares in 1995, an increase of approximately 8%. The resultant earnings per share increased 12% to $1.85 for 1995 compared to $1.65 in 1994. Earnings per share calculations include the effects of a preferred stock dividend deduction of $512,000 for 1994 and 1995. The results of operations from the Company's three industry segments and its operating divisions for 1995 as compared to 1994 are more fully described below: Revenues for the Janitorial Divisions segment in 1995 were $512 million, an increase of $30 million, or 6% over 1994, while its operating profits increased by 10% over 1994. The Janitorial Divisions segment, which includes ABM Janitorial Services and Easterday Janitorial Supply, accounted for approximately 53% of the Company's consolidated revenues for 1995. Revenues of ABM Janitorial Services increased by 6% in 1995 as compared to 1994 as a result of acquisitions and internal growth by all of its regions except its Southwest and Canadian Regions. As a result of the revenue increase, ABM Janitorial Services' operating profits increased 10% in 1995 compared to 1994. Labor and labor related expenses and other direct costs were slightly higher for the fiscal year 1995 over the prior year primarily due to start-up expenses associated with new contracts as well as acquisitions. This Division's operating expenses (indirect, selling and administrative expenses excluding costs of goods sold) were in line with its revenue growth. Easterday Janitorial Supply's revenues for 1995 were up approximately 9% compared to 1994 generally due to revenue increases in Northern California from obtaining several large customers. An increase of 11% in operating profits was a result of a larger sales volume as well as the Supply Division's efforts to control its selling, general and administrative expenses, which were partially offset by lower margins resulting from increased material costs. Revenues from the Public Service Divisions segment for 1995 were $206 million, an increase of 18% over 1994. Public Service Divisions accounted for approximately 21% of the Company's consolidated revenues in 1995. The operating profits of this segment were up by 30% per the discussion that follows of its ABM Security Services ("Security") and Ampco System Parking ("Parking") Divisions. Security reported an increase in revenues of 22% in 1995 compared to 1994 and its profits increased by 10%, primarily due to obtaining new customers. This Division was also successful in securing several large contracts, especially in the San Francisco Bay Area. The gross profit amount increased as a result of higher revenues; however, the gross profit percentage declined as the Security Division had to bid for contracts at lower margins in order to be competitive. The Company's Parking Division revenues increased by 17% while its profits increased by 50% in 1995 over 1994. The increase in revenues is primarily due to the January 1995 acquisition of a parking business based in Northern California with operations in California and Hawaii, and also from obtaining contracts to manage parking operations at several major U.S. airports. Several factors contributed to the increase in operating profits: the acquisitions of the parking business discussed above; improved business condition in its Southern California region which was partially offset by 10
loss of a few large contracts in its Northeast Region; and income derived from its expanded airport operations. The Technical Divisions segment through its four divisions reported revenues of $248 million, which represent approximately 26% of the Company's consolidated revenues for 1995, and an increase of approximately 8% over last year. Profits of the Technical Divisions were up 36% compared to 1994. The Amtech Engineering Services Division's revenues increased by 22% and reported a 45% increase in operating profits for 1995 compared to 1994. Revenues increased generally from the start-up of the Midwest and Northeast Regions and obtaining several new contracts. Operating profits increased from new business and the reduction in insurance and other direct expenses, as well as containing its selling, general and administrative expenses. Revenues for Amtech Elevator Services Division were down by 10% for 1995 from 1994, principally due to phasing out its new construction market and a slow-down caused by the Mexican economy. However, this Division increased its operating profits by 55% in 1995 over the prior year. The improved operating results are due to a fundamental change in management's strategy to emphasize services related to maintenance and repair business; this change enabled Amtech Elevator Services to improve its gross profits. Additionally, this Division's reduction of its selling, general and administrative expenses was partially offset by currency translation losses arising from its Mexican subsidiary. Amtech Lighting Services Division's revenues were up 23% largely due to increased sales volume posted by the majority of its branches through obtaining additional time and material contracts, supplemented by increased business from its nationwide customers. Operating profits increased by 18% during 1995, primarily due to increased sales volume and efficiencies realized in the selling, general and administrative areas, particularly in payroll, travel and other office expenses. The CommAir Mechanical Services Division's revenues and operating profits for 1995 increased by 9% and 37%, respectively. The revenue increase was primarily due to increased level of construction and installation contracts. Although the margins on some job categories decreased, this Division's successful efforts in increasing its revenues, coupled with management's efforts to reduce overhead expenses, more than offset the decrease in margins. COMPARISON OF 1994 TO 1993 Revenues and other income rose to $885 million in 1994, up $112 million, or 14%, from $773 million in 1993. The 14% increase in revenues in 1994 over 1993 was attributable to volume and price increases as well as revenues generated from acquisitions. Net income for 1994 was $15.2 million, a 21% increase compared to $12.6 million in 1993. Earnings per share increased 14% to $1.65 in 1994 from $1.45 in 1993. Operating expenses and cost of goods sold expressed as a percentage of revenues were 85.2% in 1993 and 85.9% in 1994. The increase in operating expenses and cost of goods sold from $659 million in 1993 to $760 million in 1994 was $101 million, or 15%. As a result of this increase, the Company's gross profit percentage declined although the gross profit amount for 1994 exceeded 1993's gross profit by approximately $9.8 million. The gross profit amount increase resulting from higher revenues more than offset the impact of a lower gross profit percentage in 1994. The gross profit percentage was unfavorably impacted by intense competition and pricing pressures experienced by some of the operating divisions of the Company, as well as the impact from certain larger Ampco System Parking Division contracts whose gross profit percentage is much lower. The Company's total insurance expense increased 7% to $45 million in 1994 from $42.1 million in 1993. The increase in insurance expense was lower than the 14% revenue growth in 1994 over 1993. The Company's safety program impacted the frequency and severity of workers' compensation claims which led to a reduction in claims expense. This expense decrease was more than offset by an escalating dollar value of liability claims, leading to the overall increase in insurance expense. Selling, general and administrative expenses were $96.1 million in 1994, up $3.7 million, or 4% from $92.4 million in 1993. As a percentage of revenues, these expenses were down to 11% in 1994 from 12% in 1993. Management was successful in attaining its cost containment goals as revenues grew 14% while selling, general and administrative expense growth was only 4%. Higher debt levels during 1994 caused the interest expense in 1994 to be $3.5 million as compared with $2.2 million in 1993, an increase of $1.3 million, or 59%. The increase in bank borrowing was necessitated primarily by acquisitions. The effective income tax rates for 1994 and 1993 were 39.5% and 37.5%, respectively. The effective income tax rate for 1994 would be comparable to 1993 after taking into account the decrease in income tax expenses for 1993 of $540,000 arising from the effect of the Omnibus Budget Reconciliation Act of 1993's federal income tax rate change on the Company's deferred taxes as calculated under Statement of Financial Accounting Standards No. 109. 11
The Company's pre-tax income in 1994 was $25.1 million, an increase of 24%, compared to $20.2 million in 1993. The growth in pre-tax income outpaced the revenue growth in 1994 due primarily to benefits arising from the realization of certain operating consolidation economies from recent acquisitions and, in part, due to lower selling, general and administrative expenses resulting from cost containment programs. The results of operations from the Company's three industry segments and its operating divisions for 1994 as compared to 1993 are more fully described below: Revenues for the Janitorial Divisions segment in 1994 were $482 million, an increase of $39 million, or 9% over 1993, while its operating profits increased by 13% over 1993. The Janitorial Divisions segment accounted for approximately 54% of the Company's consolidated revenues for 1994. Revenue of ABM Janitorial Services increased by 9% in 1994 as compared to 1993 primarily as a result of acquisitions and, to a lesser extent, revenue increases from internal growth by this Division's Northeast, Northwest and Southeast Regions. As a result of the revenue increase, ABM Janitorial Services' operating profits increased 13% in 1994 compared to 1993. Continued decreases in labor and labor-related expenses contributed to an improvement in gross profit for this Division in 1994 over the prior year. The Division's selling, general and administrative expenses were in line with its revenue growth. Easterday Janitorial Supply's revenues for 1994 were up approximately 9% compared to 1993 generally due to revenue increases in Northern California from obtaining several large customers. In 1994, compared to 1993, an increase of 12% in operating profits was attained even with a lower than expected gross profit percentage as a result of higher sales volume and a reduction in selling, general and administrative expenses. Revenues from the Public Service Divisions segment for 1994 were $174 million, a 44% increase over 1993. The Company's Public Service Divisions accounted for approximately 20% of the Company's consolidated revenues. The operating profits of these Divisions were up by 35% principally due to acquisitions and new contracts obtained by Ampco System Parking. ABM Security Services reported a slight decrease in revenues from loss of certain large accounts and its profits increased by 8% in 1994 compared to 1993. The increase in operating income in 1994 as compared to 1993 was due to a decrease in direct labor and related expenses and a decrease in selling, general and administrative expenses which resulted from this Division's cost cutting measures. Ampco System Parking's revenues increased by 93% and its profits increased by 78% in 1994 over 1993. The increases in revenues and operating profits were primarily due to the acquisition of System Parking and from obtaining contracts to manage parking operations at several major airports in the U.S., including Los Angeles, California; Honolulu, Hawaii; Cedar Rapids, Iowa; Newark, New Jersey and Buffalo, New York, among others. The Technical Divisions segment reported revenues of $229 million, which represent approximately 26% of the Company's consolidated revenues for 1994, an increase of approximately 9% over last year. Profit of the Technical Divisions increased 19% compared to 1993. Amtech Engineering Services reported increased revenues of 12% and a 45% increase in operating profits for 1994 compared to 1993. Revenue increases generally were recorded by all its regions due to geographic expansion and penetration into new markets. The increase in operating profits continues to result from increased volume, reductions in payroll related costs including insurance expense and containment of selling, general and administrative expenses. Revenues for Amtech Elevator Services were up by 8% for 1994 over 1993 principally due to increases in its service, repair and installation lines of business, as well as an improved performance by its Mexican subsidiary. Amtech Elevator's operating profits for 1994 compared to 1993 were up by 45% due to a combination of increased revenues, improved gross profits and containment of selling, general and administrative expenses. Amtech Lighting Services' revenues were up 10% largely due to an expanded contract base from existing customers, as well as obtaining a large one-time energy saving retrofit contract. Operating profits decreased by 3% during 1994 primarily due to start-up administrative expenses and lower than expected gross margins associated with the opening of three new branches. CommAir Mechanical Services' revenues for 1994 were 5% above 1993, primarily due to construction revenues which more than offset the decline in service maintenance revenues. Operating profits of this Division were up 15% largely due to the start and completion of a large installation contract during the fourth quarter of 1994 and a reduction in selling, general and administrative expenses. 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors ABM Industries Incorporated: We have audited the accompanying consolidated balance sheets of ABM Industries Incorporated and subsidiaries as of October 31, 1994 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended October 31, 1995. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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, 1994 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 1995, 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. KPMG Peat Marwick LLP San Francisco, California December 15, 1995 13
ABM Industries Incorporated and Subsidiaries CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------- OCTOBER 31 1994 1995 (in thousands of dollars except share amounts) - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Cash and cash equivalents $ 7,368 $ 1,840 Accounts receivable (less allowances of $3,067 and $3,755) 140,788 158,075 Inventories 17,420 19,389 Deferred income taxes 11,638 11,429 Prepaid expenses and other current assets 12,228 19,134 - ----------------------------------------------------------------------------------------------------------- Total current assets 189,442 209,867 Investments and long-term receivables 6,841 5,988 Property, plant and equipment -- at cost 56,902 61,648 Less accumulated depreciation and amortization (37,083) (39,001) - ----------------------------------------------------------------------------------------------------------- Property, plant and equipment -- net 19,819 22,647 Intangible assets (less accumulated amortization of $15,095 and $19,688) 61,373 69,279 Deferred income taxes 14,982 18,745 Other assets 7,013 8,447 - ----------------------------------------------------------------------------------------------------------- $ 299,470 $ 334,973 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- LIABILITIES Current portion of long-term debt $ 683 $ 679 Bank overdraft -- 5,361 Trade accounts payable 26,187 25,453 Income taxes payable 1,961 2,270 Accrued liabilities: Compensation 19,807 25,595 Taxes -- other than income 8,693 10,725 Insurance claims 27,185 27,532 Other 14,761 16,625 - ----------------------------------------------------------------------------------------------------------- Total current liabilities 99,277 114,240 Long-term debt 25,254 22,575 Retirement plans 5,978 7,627 Insurance claims 38,230 42,345 Commitments and contingencies Series B 8% Senior redeemable cumulative preferred stock 6,400 6,400 STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 500,000 shares authorized; none issued -- -- Common stock, $.01 par value; 12,000,000 shares authorized: 9,049,000 and 9,366,000 shares issued and outstanding in 1994 and 1995, respectively 90 94 Additional capital 35,334 40,627 Retained earnings 88,907 101,065 - ----------------------------------------------------------------------------------------------------------- Total stockholders' equity 124,331 141,786 - ----------------------------------------------------------------------------------------------------------- $ 299,470 $ 334,973 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 14
ABM Industries Incorporated and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------- YEARS ENDED OCTOBER 31 1993 1994 1995 (in thousands, except per share amounts) - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> REVENUES AND OTHER INCOME $ 773,312 $ 884,633 $ 965,381 - ----------------------------------------------------------------------------------------------------------- EXPENSES Operating expenses and cost of goods sold 658,503 760,056 830,749 Selling, general and administrative 92,403 96,059 99,521 Interest 2,164 3,459 3,699 - ----------------------------------------------------------------------------------------------------------- 753,070 859,574 933,969 - ----------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 20,242 25,059 31,412 Income taxes 7,596 9,890 13,193 - ----------------------------------------------------------------------------------------------------------- NET INCOME $ 12,646 $ 15,169 $ 18,219 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE $ 1.45 $ 1.65 $ 1.85 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- COMMON AND COMMON EQUIVALENT SHARES 8,646 8,908 9,590 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- </TABLE> CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------- COMMON STOCK YEARS ENDED OCTOBER 31, 1993, 1994 AND 1995 -------------------------- ADDITIONAL RETAINED (in thousands, except per share amounts) SHARES AMOUNT CAPITAL EARNINGS - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> BALANCE OCTOBER 31, 1992 8,514 $ 85 $ 27,488 $ 70,636 Net income 12,646 Dividends: Common stock at $0.50 per share (4,339) Preferred stock at $13.56 per share (87) Stock issued under employees' stock purchase and option plans 264 3 3,756 - --------------------------------------------------------------------------------------------------------------------- BALANCE OCTOBER 31, 1993 8,778 88 31,244 78,856 Net income 15,169 Dividends: Common stock at $0.515 per share (4,606) Preferred stock at $80.00 per share (512) Stock issued under employees' stock purchase and option plans 271 2 4,090 - --------------------------------------------------------------------------------------------------------------------- BALANCE OCTOBER 31, 1994 9,049 90 35,334 88,907 Net income 18,219 Dividends: Common stock at $0.60 per share (5,549) Preferred stock at $80.00 per share (512) Stock issued under employees' stock purchase and option plans 317 4 5,293 - --------------------------------------------------------------------------------------------------------------------- BALANCE OCTOBER 31, 1995 9,366 $ 94 $ 40,627 $ 101,065 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 15
ABM Industries Incorporated and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------- YEARS ENDED OCTOBER 31 1993 1994 1995 (in thousands of dollars) - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 766,610 $ 868,041 $ 944,570 Other operating cash receipts 2,334 1,638 1,931 Interest received 634 505 489 Cash paid to suppliers and employees (739,819) (830,861) (912,617) Interest paid (2,689) (3,982) (4,096) Income taxes paid (9,825) (13,485) (16,438) - ---------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 17,245 21,856 13,839 - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (6,187) (8,539) (10,225) Proceeds from sale of assets 320 162 590 Decrease in investments and long-term receivables 1,071 288 853 Intangible assets acquired (17,694) (7,148) (12,499) - ---------------------------------------------------------------------------------------------------------- Net cash used in investing activities (22,490) (15,237) (21,281) - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Common stock issued 3,759 4,092 5,297 Dividends paid (4,426) (5,118) (6,061) Increase (decrease) in bank overdraft 4,231 (4,231) 5,361 Decrease in notes payable (1,301) -- (4) Long-term borrowings 15,000 50,000 89,000 Repayments of long-term borrowings (12,695) (45,682) (91,679) - ---------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 4,568 (939) 1,914 - ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (677) 5,680 (5,528) Cash and cash equivalents beginning of year 2,365 1,688 7,368 - ---------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS END OF YEAR $ 1,688 $ 7,368 $ 1,840 - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 12,646 $ 15,169 $ 18,219 ADJUSTMENTS: Depreciation and amortization 7,158 9,300 11,527 Provision for bad debts 2,187 1,915 1,536 Gain on sale of assets (147) (141) (127) Deferred income taxes (4,256) (2,353) (3,554) Increase in accounts receivable (3,767) (14,793) (18,823) Increase in inventories (2,486) (1,132) (1,969) Increase in prepaid expenses and other current assets (2,707) (2,139) (6,906) Increase in other assets (1,055) (1,070) (1,434) Increase (decrease) in income taxes payable 2,027 (1,242) 309 Increase in retirement plans accrual 926 1,404 1,649 Increase in insurance claims liability 4,948 4,086 4,462 Increase in trade accounts payable and other accrued liabilities 1,771 12,852 8,950 - ---------------------------------------------------------------------------------------------------------- Total adjustments to net income 4,599 6,687 (4,380) - ---------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 17,245 $ 21,856 $ 13,839 - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 16
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 all 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. 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: Major renewals, replacements and betterments are capitalized at cost. 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 is 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 terms of the respective leases. AMORTIZATION OF INTANGIBLE ASSETS: Intangible assets consist of goodwill, customer lists and noncompete agreements. Goodwill, which represents the excess of cost over fair value of 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 $1,094,000 at cost until such time as there may be evidence of diminution in value. Customer lists and noncompete agreements are amortized over the estimated period to be benefited, generally from 5 to 15 years. The Company annually evaluates the existence of goodwill impairment on the basis of whether the goodwill is fully recoverable from projected, undiscounted net cash flows of the related business unit. Impairment would be recognized in operating results if a permanent diminution in value were to occur. 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 recorded at the time services are performed or when products are shipped except for long-term contracts that are recorded on the percentage-of-completion method. The percentage-of-completion method is used by both the Amtech Elevator Services and CommAir Mechanical Services Divisions of the Technical Divisions segment for their long-term contracts. Revenues and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Revenues and gross profit are adjusted prospectively for revisions in estimated total contract costs and contract values. Estimated losses are recorded when identified. NET INCOME PER COMMON SHARE: Net income per common share and common equivalent share (principally outstanding stock options), after the reduction for preferred stock dividends in the amount of $87,000 in 1993 and $512,000 in 1994 and 1995, is based on the weighted average number of shares outstanding during the year and the common stock equivalents that have a dilutive effect. Net income per common share assuming full dilution is not significantly different than net income per share as shown. STATEMENTS OF CASH FLOWS: For purposes of the comparative statements of cash flows, the Company considers all highly liquid instruments with original maturities of three months or less to be cash and cash equivalents. 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 17
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, 1994 and 1995 was $65,415,000 and $69,877,000, respectively. In connection with certain self-insurance agreements, the Company has standby letters of credit at October 31, 1995 supporting the estimated unpaid liability in the amounts of $71,895,000. 3. INVENTORIES The inventories at October 31, consisted of the following: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1994 1995 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> Janitorial supplies and equipment held for sale $ 3,278 $ 3,301 Parts and materials 12,683 14,444 Work in process 1,459 1,644 - ------------------------------------------------------------------------------------------------------- $17,420 $19,389 - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- </TABLE> 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at October 31, consisted of the following: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1994 1995 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> Land $ 1,901 $ 1,718 Buildings 4,162 4,647 Transportation equipment 8,599 9,825 Machinery and other equipment 33,187 37,076 Leasehold improvements 9,053 8,382 - ------------------------------------------------------------------------------------------------------- $56,902 $61,648 - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- </TABLE> 5. LONG-TERM DEBT AND CREDIT AGREEMENT Prior to September 22, 1994, the Company had a $20,000,000 credit agreement with a major U.S. bank. In conjunction with the negotiation of the new credit facility described below, this line was terminated. On September 22, 1994, the Company signed a new $100,000,000 credit agreement with a syndicate of U.S. banks. This agreement expires September 22, 1998, and at the Company's option, may be extended one year. This agreement was amended effective May 1, 1995 to increase the amount available to $125,000,000. The unsecured revolving credit facility provides, at the Company's option, interest at the prime rate or IBOR+.45%. The facility calls for a commitment fee payable quarterly, in arrears, of .15% 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, 1995, the total outstanding amount under this facility was $93,255,000 comprised of $21 million in loans and $72,255,000 in standby letters of credit. The interest rate at October 31, 1995 was 7.8%. The Company is required, under this agreement, to maintain financial ratios and places certain limitations on dividend payments. The Company is prohibited from paying cash dividends exceeding 50% of its net income for any fiscal year. In connection with the Company's acquisition of System Parking, $3,818,000 of 9.35% fixed rate fully amortizing debt with a major insurance company was assumed. Terms call for monthly interest payments and equal annual principal payments. The loan matures October 1, 1998. The long-term debt of $22,575,000 matures in the years ending October 31 as follows: $679,000 in 1997; $21,679,000 in 1998; $43,000 in 1999; $43,000 in 2000; and $131,000 in subsequent years. Long-term debt at October 31, is summarized as follows: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1994 1995 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> Note payable to bank $23,000 $21,000 Note payable to insurance company 2,545 1,909 Notes payable, contracts and annuities payable with interest rates from 8% to 8.75% payable through 2001 392 345 - ------------------------------------------------------------------------------------------------------- 25,937 23,254 Less current portion 683 679 - ------------------------------------------------------------------------------------------------------- $25,254 $22,575 - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- </TABLE> 6. EMPLOYEE BENEFIT PLANS (A) RETIREMENT AGREEMENTS The Company has unfunded retirement agreements for 27 current and former senior executives, all of which are fully vested. The agreements provide for annual benefits for ten years commencing with the respective retirement dates of those executives. The benefits are being accrued over the period the senior executives are expected to be employed by the Company. During 1993, 1994 and 1995, amounts accrued under these agreements were $301,000, $178,000 and $307,000, respectively. Payments were made in 1993, 1994 and 1995 in the amounts of $150,000, $112,000 and $112,000, respectively. (B) PROFIT SHARING AND EMPLOYEE SAVINGS PLAN The Company has a discretionary noncontributory profit sharing and employee savings plan covering all nonmanual employees (except highly compensated individuals) not covered under collective bargaining agreements, which includes employer participation in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The plan allows participants to make pretax contributions and the Company matches certain percentages of employee contributions depending on the participant's length of service. All amounts contributed to the plan are deposited in a trust fund 18
with a national bank and administered by independent trustees. The Company provided for profit sharing contributions of $417,000, $385,000 and $920,000 for 1993, 1994 and 1995, respectively. The Company's matching contributions required by the employee savings plan for 1993, 1994 and 1995 were approximately $567,000, $500,000 and $602,000, respectively. (C) SERVICE AWARD BENEFIT PLAN The Company established an unfunded service award benefit plan effective November 1, 1989, with a retroactive vesting period of five years. This plan is a "severance pay plan" as defined by the Employee Retirement Income Security Act (ERISA) and covers all highly compensated nonmanual employees excluded from the Profit Sharing and Employee Savings Plan discussed above. The plan provides participants, upon termination, with a guaranteed seven days pay for each year of employment subsequent to November 1, 1989. The Company, at its discretion, may also award additional days each year. Net cost of the plan is comprised of: <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1993 1994 1995 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Service cost $ 380 $ 324 $ 352 Interest 91 108 139 - ---------------------------------------------------------------------------------------------------------------- Net cost $ 471 $ 432 $ 491 - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- Actuarial present value of: Vested benefit obligation $ 1,053 $ 1,436 $ 1,863 Accumulated benefit obligation $ 1,164 $ 1,523 $ 1,949 Projected benefit obligation $ 1,833 $ 1,970 $ 2,470 - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- </TABLE> Assumptions used in accounting for the plan as of October 31, were: <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------- 1993 1994 1995 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Weighted average discount rate 7% 7% 7% Rates of increase in compensation level 6% 5% 5% <CAPTION> - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- </TABLE> (D) PENSION PLAN UNDER COLLECTIVE BARGAINING Certain employees of the Company are covered under union-sponsored collectively bargained multi-employer defined benefit plans. Contributions for these plans were approximately $8,600,000, $10,800,000 and $10,100,000 in 1993, 1994 and 1995, respectively. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts. 7. LEASE COMMITMENTS AND RENTAL EXPENSE The Company is obligated under noncancelable operating leases for various facilities and equipment. Assets held under these leases consist of offices, warehouses, vehicles and parking facilities. As of October 31, 1995, future minimum lease commitments under noncancelable operating leases are as follows: <TABLE> <CAPTION> - --------------------------------------------------------------- <S> <C> Years ending (in thousands of dollars) - --------------------------------------------------------------- 1996 $ 58,367 1997 52,353 1998 29,150 1999 13,740 2000 6,525 Thereafter 8,498 - --------------------------------------------------------------- Total minimum lease commitments $ 168,633 - --------------------------------------------------------------- - --------------------------------------------------------------- </TABLE> Rental expense for the years ended October 31, is summarized as follows: <TABLE> <CAPTION> - ------------------------------------------------------------------ (in thousands of dollars) 1993 1994 1995 - ------------------------------------------------------------------ <S> <C> <C> <C> Minimum rentals under noncancelable leases $ 26,565 $ 36,724 $ 47,114 Contingent rentals 9,648 17,398 16,400 Short-term rental agreements 5,792 20,855 23,835 - ------------------------------------------------------------------ $ 42,005 $ 74,977 $ 87,349 - ------------------------------------------------------------------ - ------------------------------------------------------------------ </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 some 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 financial position. 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 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 19
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 annual earnout requirements. 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 1984, the Company adopted an executive stock option plan whereby 340,000 shares were reserved for grant. 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, 1995, 19,500 options were exercisable and 500 options remained available for grant. Transactions under this plan are summarized as follows: <TABLE> <CAPTION> - --------------------------------------------------------------- Number of Shares under Option Price Option per Share - --------------------------------------------------------------- <S> <C> <C> Balance October 31, 1992 238,000 $11.44 - $17.44 Options exercised (6,000) $11.44 - --------------------------------------------------------------- Balance October 31, 1993 232,000 $11.44 - $17.44 Options terminated (3,000) $11.44 - --------------------------------------------------------------- Balance October 31, 1994 229,000 $11.44 - $17.44 Granted 104,500 $22.50 - $26.56 Options exercised (6,000) $11.44 - --------------------------------------------------------------- Balance October 31, 1995 327,500 $11.44 - $26.56 - --------------------------------------------------------------- - --------------------------------------------------------------- </TABLE> In 1987, the Company adopted a stock option plan under which 600,000 shares were reserved for grant until December 31, 1996. In March 1994, this plan was amended to reserve an additional 500,000 shares. During 1994, 454,500 options were granted at a fair market price of $17.81 and $19.59. During 1995, 18,000 options were granted at a fair market price of $20.63 to $26.56. Options which terminate without being exercised may be reissued. Transactions under this plan are summarized as follows: <TABLE> <CAPTION> - --------------------------------------------------------------- Number of Shares under Option Price Option per Share - --------------------------------------------------------------- <S> <C> <C> Balance October 31, 1992 516,990 $ 9.57 - $16.97 Options exercised (26,485) $11.56 - $16.97 Options terminated (6,640) $12.13 - $16.97 - --------------------------------------------------------------- Balance October 31, 1993 483,865 $ 9.57 - $16.97 Granted 454,500 $17.81 - $19.59 Options exercised (15,600) $12.13 - $16.97 Options terminated (26,400) $12.13 - $16.97 - --------------------------------------------------------------- Balance October 31, 1994 896,365 $ 9.57 - $19.59 Granted 18,000 $20.63 - $26.56 Options exercised (27,305) $11.44 - $17.81 Options terminated (22,200) $12.13 - $20.63 - --------------------------------------------------------------- Balance October 31, 1995 864,860 $ 9.57 - $26.56 - --------------------------------------------------------------- - --------------------------------------------------------------- </TABLE> At October 31, 1995, there were 451,260 options exercisable and 82,140 options remained available for grant. The Company has an employee stock purchase plan under which sale of 2.5 million shares of its common stock has been authorized. The purchase price of the shares under the plan is the lesser of 85% of the fair market value at the commencement of each plan year or 85% of the fair market value on the date of purchase. Employees may designate up to 10% of their compensation for the purchase of stock. During 1993, 1994 and 1995, 232,000, 255,000 and 283,000 shares of stock were issued under the plan for an aggregate purchase price of $3,362,000, $3,849,000 and $4,805,000, respectively. At October 31, 1995, 368,992 shares remained unissued under the plan. The Company is authorized to issue 500,000 shares of preferred stock, of which 50,000 shares have been designated as Series A Junior Participating Preferred Stock of $.01 par value. None of these preferred shares have been issued. On April 22, 1988, the Company distributed a dividend of one half of one right for each outstanding share of common stock. The rights are attached to all outstanding shares of common stock. Each right entitles the holder to purchase 1/100 of a share of the Series A Junior Participating Preferred Stock for $80, subject to adjustment. The rights are exercisable only after a third party (other than Sydney and Theodore Rosenberg, individually or as members of a group, or their permitted transferees) acquires 20% or more or commences a tender offer which would result in such party's acquiring 30% or more of the Company's common stock. The rights expire on April 22, 1998, 20
and may be redeemed at a price of $.01 under certain circumstances. After the rights become exercisable, if the Company is acquired and is not the surviving corporation or 50% or more of its assets or its earnings power is transferred, each right will entitle its holder to purchase shares of the acquiring company at a 50% discount. If the Company is acquired and is the surviving corporation, or a 20% or greater holder engages in "self-dealing" transactions or increases its beneficial ownership of the Company by more than 1% in a transaction involving the Company, each right will entitle its holder, other than the acquirer, to purchase common stock of the Company at a similar 50% discount. 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) 1993 1994 1995 - ------------------------------------------------------------------- <S> <C> <C> <C> Current Federal $ 9,693 $ 9,621 $ 14,630 State 2,325 1,992 2,016 Foreign 224 630 100 Deferred Federal (3,947) (2,111) (3,237) State (699) (242) (316) - ------------------------------------------------------------------- $ 7,596 $ 9,890 $ 13,193 - ------------------------------------------------------------------- - ------------------------------------------------------------------- </TABLE> The 1993 deferred federal income tax benefit includes a $540,000 benefit associated with the Omnibus Budget Reconciliation Act of 1993 enacted on August 10, 1993. 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> - -------------------------------------------------------------------------- 1993 1994 1995 - -------------------------------------------------------------------------- <S> <C> <C> <C> Statutory rate 35.0% 35.0% 35.0% State and local taxes on income, net of federal tax benefit 5.2% 4.5% 3.4% Tax rate change on deferred tax assets and liabilities (2.7)% -- -- Targeted job tax credits (2.0 )% (2.6 )% (1.5 )% Nondeductible expenses and other -- net 2.0 % 2.6 % 5.1 % - -------------------------------------------------------------------------- 37.5 % 39.5 % 42.0 % - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- </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) 1994 1995 - ----------------------------------------------------------------- <S> <C> <C> Deferred tax assets: Self-insurance claims $ 23,930 $ 25,396 Bad debt allowance 1,480 1,737 Deferred and other compensation 2,847 3,719 State taxes 508 827 Other 419 1,060 - ----------------------------------------------------------------- Total deferred tax assets 29,184 32,739 - ----------------------------------------------------------------- Deferred tax liabilities: Union pension contributions (2,179) (2,426) Customer lists (118) (21) Depreciation (267) (118) - ----------------------------------------------------------------- Total deferred tax liabilities (2,564) (2,565) - ----------------------------------------------------------------- Net deferred tax assets $ 26,620 $ 30,174 - ----------------------------------------------------------------- - ----------------------------------------------------------------- </TABLE> The Company believes that a valuation reserve is not needed to reduce deferred tax assets because it is expected that all deferred assets will ultimately be realized. 12. ACQUISITIONS AND DIVESTITURES All acquisitions have been accounted for as purchases; 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 or customer lists when paid. Cost of acquisitions, including amounts based on subsequent earnings, were approximately $24.1 million in 1993, $7.1 million in 1994 and $12.5 million in 1995. Included in the 1993 amount is the redemption value of redeemable preferred stock of the Company of $6,400,000 issued in conjunction with the acquisition of System Parking (see Note 9). On November 1, 1994, the Company acquired the janitorial operations of Quality Building Maintenance, Inc. of Seattle, Washington. In addition to the amount paid in cash at closing of this transaction, annual contingent payments based on gross profit of acquired contracts will be made over a four-year period. On January 1, 1995, the janitorial operations of Consolidated Chemical of Tyler, Texas were acquired for a cash down payment plus contingent payments to be made over a period of four years based on gross profit from the contracts acquired. 21
On January 1, 1995, the Company's subsidiary, Ampco Auto Parks, Inc., acquired in a cash transaction, substantially all of the parking operations of Pansini Corporation, a San Francisco based company that had approximately 100 facilities in California and Hawaii. In addition to amounts paid at closing, the acquisition agreement provides for additional payments over the subsequent five years based upon the gross profit of contracts acquired. On July 1, 1995, the Company acquired the janitorial operations of United Cleaning Specialists Corp. of Atlanta, Georgia. United Cleaning Specialists provided janitorial services in Alabama, Florida, Georgia, North and South Carolina, Tennessee and Virginia. In addition to the amount paid at closing, annual contingent payments based upon gross profit of acquired contracts will be made over the next five years. On September 1, 1995, the Company acquired the janitorial business of Allied Janitorial Service Company of Spokane, Washington, for a cash down payment plus contingent payments to be made over a five-year period based on gross profits derived from the contracts acquired. 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 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. 14. QUARTERLY INFORMATION (UNAUDITED) (in thousands, except earnings per share) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------------- FISCAL QUARTER -------------------------------------- OPERATIONS FIRST SECOND THIRD FOURTH YEAR - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 1994 Revenues and other income $210,839 $215,872 $224,965 $232,957 $884,633 Gross profit 29,363 31,234 30,562 33,418 124,577 Net income 2,827 3,318 4,146 4,878 15,169 Net income per common share 0.31 0.36 0.45 0.53 1.65 1995 Revenues and other income $232,062 $234,396 $245,792 $253,131 $965,381 Gross profit 32,139 33,407 33,325 35,761 134,632 Net income 3,387 3,943 5,010 5,879 18,219 Net income per common share 0.35 0.40 0.51 0.59 1.85 - ----------------------------------------------------------------------------------------------------------------------------- </TABLE> 22
15. SEGMENT INFORMATION (in thousands of dollars) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------------ PUBLIC JANITORIAL SERVICE TECHNICAL CONSOLIDATED FOR THE YEAR ENDED OCTOBER 31, 1993 DIVISIONS DIVISIONS DIVISIONS CORPORATE ELIMINATIONS TOTALS - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Revenues and other income $442,241 $121,053 $209,520 $ 498 $ $773,312 Intersegment revenues 9,609 60 293 (9,962) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total Revenues $451,850 $121,113 $209,813 $ 498 $ (9,962) $773,312 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Operating profit $ 19,545 $ 4,797 $ 9,111 $(11,047) $ $ 22,406 Interest, expense (45) (5) (47) (2,067) (2,164) - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes $ 19,500 $ 4,792 $ 9,064 $(13,114) $ $ 20,242 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Identifiable assets $ 99,128 $ 64,545 $ 75,628 $ 28,839 $ $268,140 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Depreciation expense $ 2,059 $ 963 $ 1,615 $ 368 $ $ 5,005 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Amortization expense $ 763 $ 754 $ 636 $ $ $ 2,153 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Capital expenditures $ 2,764 $ 1,008 $ 2,020 $ 395 $ $ 6,187 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ FOR THE YEAR ENDED OCTOBER 31, 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues and other income $481,604 $173,707 $228,962 $ 360 $ $884,633 Intersegment revenues 9,944 61 175 (10,180) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total Revenues $491,548 $173,768 $229,137 $ 360 $(10,180) $884,633 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Operating profit $ 22,045 $ 6,480 $ 10,817 $(10,824) $ $ 28,518 Interest, expense (36) (10) (632) (2,781) (3,459) - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes $ 22,009 $ 6,470 $ 10,185 $(13,605) $ $ 25,059 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Identifiable assets $111,869 $ 71,418 $ 81,913 $ 34,270 $ $299,470 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Depreciation expense $ 2,283 $ 1,328 $ 1,723 $ 409 $ $ 5,743 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Amortization expense $ 1,298 $ 1,619 $ 640 $ $ $ 3,557 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Capital expenditures $ 2,946 $ 2,092 $ 1,987 $ 1,514 $ $ 8,539 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ FOR THE YEAR ENDED OCTOBER 31, 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues and other income $511,801 $205,578 $247,748 $ 254 $ $965,381 Intersegment revenues 11,135 75 239 (11,449) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total Revenues $522,936 $205,653 $247,987 $ 254 $(11,449) $965,381 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Operating profit $ 24,211 $ 8,449 $ 14,665 $(12,214) $ $ 35,111 Interest, expense (34) (11) (93) (3,561) (3,699) - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes $ 24,177 $ 8,438 $ 14,572 $(15,775) $ $ 31,412 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Identifiable assets $130,657 $ 82,580 $ 90,403 $ 31,333 $ $334,973 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Depreciation expense $ 2,706 $ 1,701 $ 1,964 $ 563 $ $ 6,934 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Amortization expense $ 1,832 $ 2,085 $ 676 $ $ $ 4,593 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Capital expenditures $ 3,871 $ 3,405 $ 2,248 $ 701 $ $ 10,225 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> Intersegment revenues are recorded at prices negotiated between the entities. 23
SCHEDULE II ABM Industries Incorporated and Subsidiaries CONSOLIDATED VALUATION ACCOUNTS For the Three Years Ended October 31, 1993, 1994 and 1995 (in thousands of dollars) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> BALANCE CHARGES TO DEDUCTIONS BEGINNING COSTS AND NET OF OTHER ADDITIONS BALANCE OF YEAR EXPENSES RECOVERIES (REDUCTIONS) END OF YEAR <S> <C> <C> <C> <C> <C> - --------------------------------------------------------------------------------------------------------------------------- Allowance for Doubtful Accounts Years ended October 31: 1993 $ 2,806 $ 1,187 $ (892) $ 3,101 1994 3,101 1,915 (1,949) 3,067 1995 3,067 1,536 (848) 3,755 - --------------------------------------------------------------------------------------------------------------------------- </TABLE> 24
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item is incorporated by reference to the information set forth under the caption "Election of Directors" contained in the Proxy Statement to be used by the Company in connection with its 1996 Annual Meeting of Stockholders. See also the cover page of this Form 10-K and item 1. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated by reference to the information set forth under the caption "Executive Compensation" contained in the Proxy Statement to be used by the Company in connection with its 1996 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is incorporated by reference to the information set forth under the caption "Principal Stockholders" contained in the Proxy Statement to be used by the Company in connection with its 1996 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated by reference to the information set forth under the captions "Executive Compensation" and "Certain Relationships and Related Transactions" contained in the Proxy Statement to be used by the Company in connection with the 1996 Annual Meeting of Stockholders. 25
PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS FORM 10-K: 1. and 2. Consolidated Financial Statements and Consolidated Financial Statement Schedule. The following consolidated financial statements of ABM Industries Incorporated and subsidiaries are included in Item 8: Independent Auditors' Report Consolidated balance sheets -- October 31, 1994 and 1995 Consolidated statements of income -- Years ended October 31, 1993, 1994 and 1995 Consolidated statements of stockholders' equity -- Years ended October 31, 1993, 1994 and 1995 Consolidated statements of cash flows -- Years ended October 31, 1993, 1994 and 1995 Notes to consolidated financial statements -- October 31, 1995. The following consolidated financial statement schedule of ABM Industries Incorporated and subsidiaries is included in Item 8. Schedule II -- Consolidated Valuation Accounts for the Three Years Ended October 31, 1993, 1994 and 1995. All other schedules are omitted because they are not applicable or because the required information is included in the consolidated financial statements or the notes thereto. The individual financial statements of the registrant's subsidiaries have been omitted since the registrant is primarily an operating company and all subsidiaries included in the consolidated financial statements are wholly-owned subsidiaries. <TABLE> <CAPTION> -------------------------------------------------- <C> <S> <C> Exhibit Number Description <CAPTION> --------------------------------------------------------------- <C> <S> <C> 3.1 [j] Certificate of Incorporation, as amended. 3.2 Restated Bylaws, as amended effective September 19, 1995. 4.1 [l] Credit Agreement, dated September 22, 1994, between Bank of America National Trust and Savings Association and the Company. 4.2 [k] First Amendment to Credit Agreement dated September 22, 1994. 4.3 [k] Second Amendment to Credit Agreement dated September 22, 1994. 10.2 [a]* 1985 Employee Stock Purchase Plan. 10.3 [b]* Supplemental Medical and Dental Plan. 10.4 [m]* 1984 Executive Stock Option Plan. 10.6 [f]* Consulting Agreement with R. David Anacker. 10.7 [f]* Executive Employment Agreement with Sydney J. Rosenberg. 10.9 [f]* Short Form Deed of Trust and Assignment of Rents (dated December 17, 1991) between the Company and John F. Egan, together with the related Promissory Note (dated January 1, 1992). 10.13 [c]* 1987 Stock Option Plan. 10.16 [d] Rights Agreement, dated as of April 11, 1988, between the Company and Bank of America National Trust and Savings Association, as Rights Agent with Chemical Trust Company of California as successor-in-interest to Bank of America as Rights Agent. 10.19 [e]* Service Award Plan. 10.20 [f]* Executive Employment Agreement with William W. Steele. 10.21 [f]* Amended and Restated Retirement Plan for Outside Directors. 10.22 [f]* Amendment No. 1 to Service Award Plan. 10.23 [g]* Form of Outside Director Retirement Agreement (dated June 16, 1992). 10.24 [g]* Executive Employment Agreement with John F. Egan. 10.25 [g]* Executive Employment Agreement with Jess. E. Benton, III. 10.27 [h] Guaranty of American Building Maintenance Industries, Inc. 10.28 [i]* Deferred Compensation Plan. 10.29 [i]* Form of Existing Executive Employment Agreement Other Than Those Named Above. 10.30 [l]* Executive Employment Agreement with Martinn H. Mandles, as amended by Amendments One and Two. 10.31 [l]* Amendment of Corporate Executive Employment Agreement with William W. Steele. 10.32 [l]* First and Second Amendments of Corporate Executive Employment Agreement with John F. Egan. 10.33 [l]* Amendment of Corporate Executive Employment Agreement with Sydney J. Rosenberg. 10.34 [l]* First and Second Amendments of Corporate Executive Employment Agreement with Jess E. Benton, III. 10.35 [l]* Form of Amendments of Corporate Executive Employment Agreements with Other Than Those Named Above. 10.36 [n] Form of Indemnification for Directors 22.1 Subsidiaries of the Registrant. 24.1 Consent of Independent Certified Public Accountants. 27.1 Financial Data Schedule. </TABLE> - ------------------------------ [a] Incorporated by reference to exhibit 4.1 of the Company's Registration Statement on Form S-8 filed March 30, 1994. [b] Incorporated by reference to the exhibit bearing the same numeric description which was filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended October 31, 1984. [c] Incorporated by reference to exhibit 4.1 of the Company's Registration Statement on Form S-8 filed March 31, 1994. 26
[d] Incorporated by reference to exhibit 1 to the Company's report on Form 8-K dated April 11, 1988. [e] Incorporated by reference to the exhibit bearing the same numeric description which was filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended October 31, 1990. [f] Incorporated by reference to the exhibit bearing the same numeric description which was filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended October 31, 1991. [g] Incorporated by reference to the exhibit bearing the same numeric description which was filed as an exhibit to the Company's quarterly report on Form 10-Q for the fiscal quarter ended July 31, 1992. [h] Incorporated by reference to the exhibit bearing the same numeric reference which was filed as an exhibit to the Company's quarterly report on Form 10-Q for the fiscal quarter ended July 31, 1993. [i] Incorporated by reference to the exhibit bearing the same numeric description which was filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended October 31, 1993. [j] Incorporated by reference to the exhibit bearing the same numeric description which was filed as an exhibit to the Company's quarterly report on Form 10-Q for the fiscal quarter ended April 30, 1994. [k] Incorporated by reference to the exhibit bearing the same numeric description which was filed as an exhibit to the Company's quarterly report on Form 10-Q for the fiscal quarter ended April 30, 1995. [l] Incorporated by reference to the exhibit bearing the same numeric description which was filed as an exhibit to the Company's annual report on Form 10-K for the fiscal year ended October 31, 1994. [m] Incorporated by reference to Appendix A of the Company's Proxy Statement for the 1995 Annual Meeting. [n] Incorporated by reference to exhibit 10.20 which was filed as an exhibit to the Company's quarterly report on Form 10-Q for the fiscal quarter ended April 30, 1991. * Management contract, compensatory plan or arrangement. (B) REPORTS ON FORM 8-K: No reports on Form 8-K have been filed during the last quarter of the period covered by this report. 27
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ABM INDUSTRIES INCORPORATED By: /s/ Sydney J. Rosenberg -------------------------------------- Sydney J. Rosenberg Chairman of the Board and Director January 26, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Sydney J. Rosenberg /s/ David H. Hebble - -------------------------------------- -------------------------------------- Sydney J. Rosenberg David H. Hebble Chairman of the Board and Director Corporate Vice President and January 26, 1996 Chief Financial Officer (Principal Financial Officer) January 26, 1996 /s/ William W. Steele /s/ Hussain A. Khan - -------------------------------------- -------------------------------------- William W. Steele, President, Hussain A. Khan, Corporate Controller Chief Executive Officer and Director (Principal Accounting Officer) January 26, 1996 January 26, 1996 /s/ Maryellen B. Cattani /s/ John F. Egan - -------------------------------------- -------------------------------------- Maryellen B. Cattani, Director John F. Egan January 26, 1996 Corporate Vice President and Director January 26, 1996 /s/ Luke S. Helms /s/ Charles T. Horngren - -------------------------------------- -------------------------------------- Luke S. Helms, Director Charles T. Horngren, Director January 26, 1996 January 26, 1996 /s/ Henry L. Kotkins, Jr. /s/ Martinn H. Mandles - -------------------------------------- -------------------------------------- Henry L. Kotkins, Jr., Director Martinn H. Mandles January 26, 1996 Executive Vice President and Director January 26, 1996 /s/ Theodore Rosenberg /s/ William E. Walsh - -------------------------------------- -------------------------------------- Theodore Rosenberg, Chairman of the William E. Walsh, Director Executive Committee and Director January 26, 1996 January 26, 1996 /s/ Boniface A. Zaino - -------------------------------------- Boniface A. Zaino, Director January 26, 1996 28
BOARD OF DIRECTORS SYDNEY J. ROSENBERG (a,b) Chairman of the Board of the Company Los Angeles, California THEODORE ROSENBERG (a,c) Chairman of the Executive Committee of the Company Daly City, California MARYELLEN B. CATTANI (c,d) Executive Vice President, General Counsel and Secretary American President Companies, Ltd. Oakland, California JOHN F. EGAN Vice President of the Company, and President of the Janitorial Services Division San Francisco, California LUKE HELMS (b) Vice Chairman BankAmerica Corporation San Francisco, California CHARLES T. HORNGREN (d) Edmund W. Littlefield Professor of Accounting, Stanford University Graduate School of Business Stanford, California HENRY L. KOTKINS, JR. (b) President and Chief Executive Officer Skyway Luggage Company Seattle, Washington MARTINN H. MANDLES, (a) Executive Vice President and Chief Administrative Officer of the Company San Francisco, California WILLIAM W. STEELE (a) President and Chief Executive Officer of the Company San Francisco, California WILLIAM E. WALSH (c) Management Consultant and Author Menlo Park, California BONIFACE A. ZAINO (b,e) Managing Director of The Trust Company of the West New York, New York PRINCIPAL OFFICERS SYDNEY ROSENBERG (a,b) Chairman of the Board WILLIAM W. STEELE (a) President and Chief Executive Officer MARTINN H. MANDLES (a) Executive Vice President J.E. BENTON, III Senior Vice President, Office of the President SHERRILL F. SIPES, JR. Senior Vice President, Office of the President WILLIAM C. BANNER Vice President of the Company, and President of the Security Services Division DONNA M. DELL Vice President and Director of Human Resources JOHN F. EGAN Vice President of the Company, and President of the Janitorial Services Division DAVID H. HEBBLE Vice President and Chief Financial Officer HARRY H. KAHN Vice President, General Counsel and Secretary DOUGLAS B. BOWLUS Treasurer HUSSAIN A. KHAN Controller and Chief Accounting Officer (a) Executive Committee (b) Nominating Committee (c) Officer Compensation & Stock Option Committee (d) Audit Committee (e) Effective February 1, 1996 SPECIAL NOTES LISTINGS New York Stock Exchange Pacific Stock Exchange TICKER SYMBOL ABM REGISTRARS AND TRANSFER AGENTS Chemical Mellon Shareholder Services, L.L.C. 50 California Street, 10th Floor San Francisco, CA 94111 AUDITORS KPMG Peat Marwick LLP Three Embarcadero Center San Francisco, CA 94111 10-K REPORT Additional copies available to stockholders at no charge upon request to: ABM Corporation Communications Post Office Box 193224 San Francisco, CA 94119 STOCKHOLDERS As of December 31, 1995, there were approximately 4,100 holders of record of the Company's Common Stock. ANNUAL MEETING The Annual Meeting of Stockholders of ABM Industries Incorporated will be held on Tuesday, March 19, 1996 at 10:00 a.m. at 50 Fremont Street, San Francisco, California DIVIDENDS The Company has paid quarterly cash dividends on its Common Stock without interruption since 1965. The Board of Directors considers the payment of cash dividends on a quarterly basis, subject to the Company's earnings, financial condition and other factors.