SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, D. C.  20549

                                     FORM 10 Q

(Mark One)
 X        QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES 
- ---                             EXCHANGE ACT OF 1934

                   For the quarterly period ended     JULY 31, 1998

                                         OR

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

              For the transition period from  ________ to  _________

                        Commission file Number   1-8929

                          ABM INDUSTRIES INCORPORATED
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               (Exact name of registrant as specified in its charter)

             DELAWARE                                94-1369354
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    (State or other jurisdiction of                (IRS Employer
     incorporation or organization)              Identification No.)


         160 PACIFIC AVENUE SUITE 222, SAN FRANCISCO, CALIFORNIA 94111
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      (Address of principal executive offices)               (Zip Code)

Registrant's telephone number, including area code:    (415) 733-4000

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 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  
   ---   ---

Number of shares of Common Stock outstanding as of July 31, 1998: 21,382,393




                            ABM INDUSTRIES INCORPORATED
                                     FORM 10-Q
              FOR THE THREE MONTHS AND NINE MONTHS ENDED JULY 31, 1998
                                 TABLE OF CONTENTS

PART I PAGE - ------ ---- Item 1 Consolidated Financial Statements . . . . . . . . . . . . . . . . 2 Notes to the Consolidated Financial Statements . . . . . . . . . 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . 9 PART II Item 5 Other Information . . . . . . . . . . . . . . . . . . . . . . . 18 Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 18
1 PART 1. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands except share amounts)
- ------------------------------------------------------------------------------- OCTOBER 31, JULY 31, ASSETS: 1997 1998 - ------------------------------------------------------------------------------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents $1,783 $1,815 Accounts receivable, net 234,464 255,723 Inventories 21,197 22,320 Deferred income taxes 10,968 9,368 Prepaid expenses and other current assets 26,005 29,620 - ------------------------------------------------------------------------------- Total current assets 294,417 318,846 - ------------------------------------------------------------------------------- INVESTMENTS AND LONG-TERM RECEIVABLES 12,900 12,890 PROPERTY, PLANT AND EQUIPMENT, AT COST: Land and buildings 4,684 4,753 Transportation equipment 11,211 11,931 Machinery and other equipment 46,147 49,956 Leasehold improvements 10,476 11,828 - ------------------------------------------------------------------------------- 72,518 78,468 Less accumulated depreciation and amortization 45,934 51,800 - ------------------------------------------------------------------------------- Property, plant and equipment, net 26,584 26,668 - ------------------------------------------------------------------------------- INTANGIBLE ASSETS - NET 100,313 102,227 DEFERRED INCOME TAXES 25,426 28,305 OTHER ASSETS 7,512 6,988 - ------------------------------------------------------------------------------- $467,152 $495,924 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
(Continued) 2 ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands except share amounts)
- ------------------------------------------------------------------------------- OCTOBER 31, JULY 31, LIABILITIES AND STOCKHOLDERS' EQUITY: 1997 1998 - ------------------------------------------------------------------------------- (Unaudited) CURRENT LIABILITIES: Current portion of long-term debt $1,393 $1,538 Bank overdraft 12,975 14,870 Trade accounts payable 34,555 31,256 Income taxes payable 4,265 5,388 Accrued Liabilities: Compensation 35,965 37,129 Taxes - other than income 12,609 14,529 Insurance claims 25,479 25,158 Other 29,419 28,207 - ------------------------------------------------------------------------------- Total current liabilities 156,660 158,075 Long-Term Debt (less current portion) 38,402 37,710 Retirement plans 13,413 15,537 Insurance claims 54,464 54,349 - ------------------------------------------------------------------------------- Total Liabilities 262,939 265,671 - ------------------------------------------------------------------------------- SERIES B 8% SENIOR REDEEMABLE CUMULATIVE PREFERRED STOCK 6,400 6,400 STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, 500,000 _ _ shares authorized; none issued Common stock, $.01 par value, 28,000,000 shares authorized; 20,464,000 and 21,382,000 shares issued and outstanding at October 31, 1997 and July 31, 1998, respectively 205 256 Additional capital 63,416 75,027 Retained earnings 134,192 148,570 - ------------------------------------------------------------------------------- Total stockholders' equity 197,813 223,853 - ------------------------------------------------------------------------------- $467,152 $495,924 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 3 ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands except per share amounts)
- -------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED JULY 31 JULY 31 1997 1998 1997 1998 - -------------------------------------------------------------------------------------------------------------- REVENUES AND OTHER INCOME $ 308,471 $ 381,036 $ 894,418 $ 1,108,817 EXPENSES: Operating Expenses and Cost of Goods Sold 264,738 328,744 770,744 961,766 Selling, General and Administrative 30,168 35,198 90,538 106,169 Interest 659 811 1,800 2,650 - -------------------------------------------------------------------------------------------------------------- Total Expenses 295,565 364,753 863,082 1,070,585 - -------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 12,906 16,283 31,336 38,232 INCOME TAXES 5,420 6,757 13,161 15,866 - -------------------------------------------------------------------------------------------------------------- NET INCOME $ 7,486 $ 9,526 $ 18,175 $ 22,366 - -------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE Basic $ 0.37 $ 0.44 $ 0.89 $ 1.05 Diluted $ 0.34 $ 0.40 $ 0.82 $ 0.95 AVERAGE NUMBER OF SHARES OUTSTANDING Basic 20,210 21,304 20,060 20,980 Diluted 21,858 23,237 21,624 23,116 DIVIDENDS PER COMMON SHARE $ 0.10 $ 0.12 $ 0.30 $ 0.36
The accompanying notes are an integral part of the consolidated financial statements. 4 ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED JULY 31, 1997 AND 1998 (In thousands)
- ------------------------------------------------------------------------------- 1997 1998 - ------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 881,230 $1,082,151 Other operating cash receipts 1,063 971 Interest received 434 484 Cash paid to suppliers and employees (841,525) (1,053,787) Interest paid (1,935) (2,559) Income taxes paid (13,648) (16,022) - ------------------------------------------------------------------------------- Net cash provided by operating activities 25,619 11,238 - ------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (8,699) (8,235) Proceeds from sale of assets 239 395 Decrease in investments and long-term receivable 330 10 Intangible assets acquired (7,257) (7,050) - ------------------------------------------------------------------------------- Net cash used in investing activities (15,387) (14,880) - ------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Common stock issued 6,360 10,314 Dividends paid (6,422) (7,988) Increase (decrease) in cash overdraft (1,152) 1,895 Increase (decrease) in notes payable 482 145 Long-term borrowings 64,662 80,172 Repayments of long-term borrowings (74,064) (80,864) - ------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (10,134) 3,674 - ------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 98 32 CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 1,567 1,783 - ------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS END OF PERIOD $ 1,665 $ 1,815 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
(Continued) 5 ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED JULY 31, 1997 AND 1998 (In thousands)
- ------------------------------------------------------------------------------- 1997 1998 - ------------------------------------------------------------------------------- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net Income $ 18,175 $ 22,366 Adjustments: Depreciation and amortization 11,485 14,395 Provision for bad debts 1,442 2,177 Gain on sale of assets (15) (155) Deferred income taxes (848) (1,279) Decrease (increase) in accounts receivable (11,864) (23,436) Increase in inventories (2,944) (1,123) Increase in prepaid expenses and other current assets (3,369) (3,615) Decrease in other assets 1,344 524 Increase in income taxes payable 361 1,123 Increase in retirement plans accrual 2,813 2,124 Increase (decrease) in insurance claims liability 4,218 (436) Increase in accounts payable and other accrued liabilities 4,821 (1,427) - ------------------------------------------------------------------------------- Total Adjustments to net income 7,444 (11,128) - ------------------------------------------------------------------------------- Net Cash Provided by Operating Activities $25,619 $11,238 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 6 ABM INDUSTRIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. GENERAL In the opinion of management, the accompanying unaudited consolidated financial statements contain all material adjustments which are necessary to present fairly the Company's financial position as of July 31, 1998, and the results of operations and cash flows for the three and nine months then ended. These adjustments are of a normal, recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Form 10-K filed for the fiscal year ended October 31, 1997 with the Securities and Exchange Commission. 2. NET INCOME PER COMMON SHARE The company has reported its earnings in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share. Basic net income per common share, after the reduction for preferred stock dividends, is based on the weighted average number of shares actually outstanding during the period. Diluted net income per common share, after the reduction for preferred stock dividends, is based on the weighted average number of shares outstanding during the period, including common stock equivalents. Diluted net income per common share is consistent with the Company's former presentation of primary net income per common share. The calculation of these amounts is as follows:
Nine Months Ended Nine Months Ended July 31, 1997 July 31, 1998 ------------- ------------- Net Income $ 18,175,000 $ 22,366,000 Preferred Stock Dividends (384,000) (384,000) --------- --------- $ 17,791,000 $ 21,982,000 ---------- ---------- ---------- ---------- Common shares outstanding - basic 20,060,000 20,980,000 Effect of dilutive securities: Stock options 1,216,000 1,937,000 Other 348,000 199,000 ---------- ---------- Common shares outstanding - diluted 21,624,000 23,116,000 ---------- ---------- ---------- ----------
7
Three Months Ended Three Months Ended July 31, 1997 July 31, 1998 ------------- ------------- Net Income $ 7,486,000 $9,526,000 Preferred Stock Dividends (128,000) (128,000) --------- --------- $ 7,358,000 $9,398,000 --------- --------- --------- --------- Common shares outstanding - basic 20,210,000 21,304,000 Effect of dilutive securities: Stock options 1,300,000 1,734,000 Other 348,000 199,000 --------- --------- Common shares outstanding - diluted 21,858,000 23,237,000 ----------- ----------- ----------- -----------
In March 1998, the Company's Board of Directors adopted a stockholder rights plan to replace an existing rights plan that expired on April 22, 1998. The new plan provides for a dividend distribution of one preferred stock purchase right (a "Right") for each outstanding share of common stock, distributed to stockholders of record on April 22, 1998. The Rights will be exercisable only if a person or group acquires 20% or more of the Company's common stock (an "Acquiring Person") or announces a tender offer for 20% or more of the common stock. Each Right will entitle stockholders to buy one-thousandth of a share of newly created Participating Preferred Stock, par value $.01 per share, of the Company at an initial exercise price of $175 per Right, subject to adjustment from time to time. However, if any person becomes an Acquiring Person, each Right will then entitle its holder (other than the Acquiring Person) to purchase at the exercise price common stock (or, in certain circumstances, Participating Preferred Stock) of the Company having a market value at that time of twice the Right's exercise price. These Rightsholders would also be entitled to purchase an equivalent number of shares at the exercise price if the Acquiring Person were to control the Company's Board of Directors and cause the Company to enter into certain mergers or other transactions. In addition, if an Acquiring Person acquired between 20% and 50% of the Company's voting stock, the Company's Board of Directors may, at its option, exchange one share of the Company's common stock for each Right held (other than Rights held by the Acquiring Person). Rights held by the Acquiring Person will become void. The Rights Plan excludes from its operation Theodore Rosenberg and Sydney J. Rosenberg, and certain related persons, and, as a result, their holdings will not cause the Rights to become exercisable or nonredeemable or trigger the other features of the Rights. The Rights will expire on April 22, 2008, unless earlier redeemed by the Board at $0.01 per Right. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Cash provided from operations and bank borrowings have historically been the sources for meeting working capital requirements, financing capital expenditures and acquisitions, and paying cash dividends. Management believes that cash from these sources will remain available and adequately serve the Company's liquidity needs. The Company has an unsecured revolving credit agreement with a syndicate of U.S. banks. This agreement had a $125 million line of credit expiring July 1, 2002. Effective November 1, 1997, the agreement was amended to increase the amount available to $150 million. At the Company's option, the credit facility provides interest at the prime rate or IBOR+.35%. As of July 31, 1998, the total amount outstanding was approximately $105.0 million, which was comprised of loans in the amount of $34.0 million and standby letters of credit of $71.0 million. 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 February 1996, the Company entered into a loan agreement with a major U.S. bank which provides a seven-year term loan of $5 million. This loan bears interest at a fixed rate of 6.78 % with annual payments of principal in varying amounts, and interest due each February 15 through 2003. The Company's effective interest rate for all long term debt for the nine months ended July 31, 1998 was 7.02%. At July 31, 1998, working capital was $160.8 million, as compared to $137.8 million at October 31, 1997. EFFECT OF INFLATION The low rates of inflation experienced in recent years had no material impact on the financial statements of the Company. The Company attempts to recover inflationary costs by increasing sales prices to the extent permitted by contracts and competition. ENVIRONMENTAL MATTERS The nature of the Company's operations, primarily services, would not ordinarily involve it in environmental contamination. However, the Company's operations are subject to various federal, state and/or local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment, such as discharge into soil, water and air, and the generation, handling, storage, transportation and disposal of waste and hazardous substances. These laws 9 generally have the effect of increasing costs and potential liabilities associated with the conduct of the Company's operations, although historically they have not had a material adverse effect on the Company's financial position or its results of operations. The Company is currently involved in four proceedings relating to environmental matters: one involving alleged potential soil and groundwater contamination at a Company facility in Florida; one involving alleged soil contamination at a former Company facility in Arizona; one involving alleged potential soil and groundwater contamination of a parking garage previously operated by the Company; and, one involving alleged potential soil and groundwater contamination at a former dry-cleaning facility leased by the Company in Nevada. While it is difficult to predict the ultimate outcome of these matters, based on information currently available, management believes that none of these matters, individually or in the aggregate, are reasonably likely to have a material adverse affect on the Company's financial position or its results of operations. YEAR 2000 ISSUE The Company recognizes the significance of the Year 2000 Issue and is currently in the process of becoming "Year 2000 compliant". The Company has established a project team specifically to work on the Year 2000 issue and has developed a detailed plan for becoming Year 2000 compliant consisting of the following phases: awareness, inventory, risk assessment, remediation, testing, implementation, and certification. This plan includes both information technology ("IT") related systems and non-IT related systems. The project team is currently in the remediation and testing phases for the core application programs, such as its accounting programs, service dispatch systems, and labor control systems. The team is in the assessment and remediation phases of the other IT systems and all non-IT systems, and is also currently reviewing its vendors' and customers' compliance with regard to the Year 2000 issue. There can be no assurance that the systems of other companies on which the Company relies will be Year 2000 compliant, or that the failure of such systems to be Year 2000 compliant will not have a material adverse effect on the Company's business, financial condition and results of operations. As it is in its assessment and remediation phases of its plan, the Company can only estimate the total cost of becoming year 2000 compliant. Based upon assumptions and forecasts of management at this time, the Company estimates the cost of becoming year 2000 compliant to be approximately $1.5 to $2.0 million. There can be no assurance that all the Company's systems will be Year 2000 compliant, that the costs to be Year 2000 compliant will not exceed management's current expectations, or that the failure of such 10 systems to be Year 2000 compliant will not have a material adverse effect on the Company's business, financial condition and results of operations. The company has not yet completed a contingency plan in the event that any systems are not Year 2000 compliant. ACQUISITIONS The operating results of businesses acquired have been included in the accompanying consolidated financial statements from their respective dates of acquisition. RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements of the Company. All information in the discussion and references to the years and quarters are based on the Company's fiscal year and third quarter which end on October 31 and July 31, respectively. THREE MONTHS ENDED JULY 31, 1998 VS. THREE MONTHS ENDED JULY 31, 1997 Revenues and other income (hereafter called revenues) for the third quarter of 1998 were $381.0 million compared to $308.5 million in 1997, a 24% increase over the same quarter of the prior year. Much of this growth was attributable to acquisitions during 1997 as well as new business and price increases. For the quarter ended July 31, 1998, the increase in revenues relating to acquisitions made during 1997 was approximately $43.8 million, or 60% of the total revenue increase of $72.6 million. As a percentage of revenues, operating expenses and cost of goods sold were 86.3% for the third quarter of 1998, compared to 85.8% in 1997. Consequently, as a percentage of revenues, the Company's gross profit (revenue minus operating expenses and cost of goods sold) of 13.7% in the third quarter of 1998 was lower than the gross profit of 14.2% for the third quarter of 1997. The gross profit percentage declined mostly due to higher labor and related costs. The Company anticipates these costs to be gradually recovered through future price increases. Selling, general and administrative expenses for the third quarter of 1998 were $35.2 million compared to $30.2 million for the corresponding three months of 1997. As a percentage of revenues, selling, general and administrative expenses decreased from 9.8% for the three months ended July 31, 1997, to 9.2% for the same period in 1998, primarily as a result of certain fixed and variable costs not increasing at the same rate as revenues. The $5.0 million increase in selling, general and administrative expenses for the three months ended July 31, 1998, compared to the same period in 1997, is primarily due to expenses related to growth, including the amortization of goodwill, and expenses associated with acquisitions. 11 Interest expense was $811,000 for the third quarter of 1998 compared to $659,000 for the same period in 1997, an increase of $152,000. This increase was primarily due to higher weighted average borrowings during the third quarter of 1998, which were needed to fund acquisitions and working capital. The pre-tax income for the third quarter of 1998 was $16,283,000 compared to $12,906,000, an increase of 26% over the same quarter of 1997. Most of the Company's divisions reported profit percentage increases higher than the corresponding revenue increases and are discussed below. The estimated effective income tax rate for the third quarter of 1998 was 41.5%, compared to 42% in the third quarter of 1997. The lower tax rate was for the most part attributed to an increase in various federal and state tax credits. Net income for the third quarter of 1998 was $9.5 million, an increase of 27% compared to the net income of $7.5 million for the third quarter of 1997. Diluted net income per common share rose 18% to 40 cents for the third quarter of 1998 compared to 34 cents for the same period in 1997. The increase in diluted net income per share was not proportional to the increase in net income due to a 6% increase in diluted shares outstanding. The results of operations from the Company's three industry segments and its nine operating divisions for the three months ended July 31, 1998, as compared to the three months ended July 31, 1997, are more fully described below: The Janitorial Divisions segment, which includes American Building Maintenance (also known as ABM Janitorial Services) and Easterday Janitorial Supply, reported revenues for the third quarter of 1998 of $225.9 million, an increase of approximately $51.5 million, or 30%, over the third quarter of 1997. This segment's operating profits (revenues minus expenses, excluding interest and corporate allocations) increased by 44% over the comparable quarter of 1997. This is the Company's largest segment and accounted for approximately 59% of the Company's total revenues for the current quarter. AMERICAN BUILDING MAINTENANCE revenues increased by 31% during the third quarter of 1998 as compared to the same quarter of 1997 as a result of several acquisitions made during the latter half of 1997, particularly in New York. This division's operating profits increased 43% when compared to the same period last year. The increase in operating profits is principally due to increased revenues. Operating profits increased at a higher rate than revenues due primarily to slightly lower labor and labor related costs, insurance expense, as well as administrative expense. EASTERDAY JANITORIAL SUPPLY'S 1998 third quarter revenue increased by approximately 2% compared to the same quarter in 1997. The relatively small increase was generally due to weak sales in the Sacramento, Portland, and San Francisco markets. Operating profits 12 increased 65% in the 3rd quarter of 1998, compared to the same quarter of 1997, primarily due to an acquisition, improved margins and vendor rebate programs. Revenues of the Public Service Divisions segment, which includes American Commercial Security Services (also known as "ACSS" and "ABM Security Services"), Ampco System Parking, and ABM Facility Services, for the third quarter of 1998 were approximately $63.1 million, a 1.9% increase over the same quarter of 1997. Public Service Divisions accounted for approximately 17% of the Company's revenues for the quarter. The operating profits of this segment increased 13% in the third quarter of 1998 as both Ampco System Parking and American Commercial Security Services reported increased profits when compared to the prior year quarter. AMERICAN COMMERCIAL SECURITY SERVICES reported a very small decrease in revenues, but its operating profits were up by 24% in the third quarter of 1998 compared to the same period of 1997. The revenue decline was largely due to loss of a several large customers in the San Francisco Bay area and in Minneapolis, Minnesota. The increase in operating profits was primarily due to a reduction in insurance charges and slightly lower labor costs. AMPCO SYSTEM PARKING revenues increased by 2%, while its operating profits increased 11% during the third quarter of 1998 compared to the third quarter of 1997. The increase in revenues was primarily due to growth in its national airport business, as well as in Texas. The operating profits increase was primarily due to a reduction in payroll tax expense. The Company's new division, ABM FACILITY SERVICES, was established in November of 1997 as a result of customer requests to provide services from two or more of its divisions (the ABM Family of Services) under one management. Because this division is new and depends primarily on management fees for its income, start up costs exceeded revenues during the current quarter. Management does not expect this division to be profitable during the current year. Revenues generated by this division are generally reported by the respective divisions providing services and contribute to the operating profits of those divisions. The Company's Technical Divisions segment includes ABM Engineering Services, Amtech Elevator Services, Amtech Lighting Services and CommAir Mechanical Services. This segment reported revenues of $92.0 million, which represents approximately 24% of the Company's revenues for the third quarter of 1998. Revenues increased approximately 28% over the same quarter of last year due to increases in revenues reported by all its divisions. Operating profits of this segment increased 16% compared to the third quarter of 1997 due to increases in operating profits of all of the divisions except Amtech Lighting Services. ABM ENGINEERING SERVICES' revenues increased by 68% and its operating profits increased 24% for the third quarter of 1998 compared to the same period in 1997. The large revenue increase was due primarily to an acquisition in New York in August 1997. The smaller percentage increase in operating profits is due to increased insurance costs and lower margins on contracts purchased through 13 the New York acquisition. Revenues for AMTECH ELEVATOR SERVICES were up by 10% for the third quarter of 1998 over the same quarter of 1997 primarily due to an increased customer base in the maintenance and repair sector. The Division also posted a 24% increase in operating profit for the third quarter compared to the corresponding quarter of 1997. This proportionally larger increase in operating profits can be attributed primarily to higher profit margin on service contracts, as well as a reduction in insurance costs. AMTECH LIGHTING SERVICES reported a 9% revenue increase and operating profits decreased by 11% during the third quarter of 1998 compared to the same quarter of the prior year. The decrease in operating profits was primarily due to increased sales of maintenance-based contracts that require more administrative support than retrofit projects. COMMAIR MECHANICAL SERVICES revenues increased by 14%, resulting primarily from an acquisition in Southern California during the third quarter of 1997. Operating profits for the third quarter of 1998 increased by 60% from the prior year third quarter as a result of an increase in more profitable service revenues due to unseasonably hot weather in California. NINE MONTHS ENDED JULY 31, 1998 VS. NINE MONTHS ENDED JULY 31, 1997 Revenues and other income for the first nine months of 1998 were $1,108.8 million compared to $894.4 million in 1997, a 24% increase over the same period of the prior year. Much of this growth was attributable to acquisitions during 1997 as well as new business and price increases. For the nine months ended July 31, 1998, the increase in revenues relating to acquisitions made during 1997 was approximately $131.9 million or 62% of the total revenue increase of $214.4 million. As a percentage of revenues, operating expenses and cost of goods sold were 86.7% for the first nine months of 1998, compared to 86.2% in 1997. Consequently, as a percentage of revenues, the Company's gross profit of 13.3% in the first nine months of 1998 was lower than the gross profit of 13.8% for the first nine months of 1997. The gross profit percentage declined mostly due to higher labor and related costs. The Company anticipates these costs to be gradually recovered through price increases. Selling, general and administrative expenses for the first nine months of 1998 were $106.2 million compared to $90.5 million for the corresponding nine months of 1997. As a percentage of revenues, selling, general and administrative expenses decreased slightly, from 10.1% for the nine months ended July 31, 1997, to 9.6% for the same period in 1998, primarily as a result of certain fixed and variable costs not increasing at the same rate as sales. The increase in the dollar amount of selling, general and administrative expenses, $15.7 million, for the nine months ended July 31, 1998, compared to the same period in 1997, is primarily due to expenses related to growth and to a somewhat lesser extent expenses associated with acquisitions including the amortization of goodwill. 14 Interest expense was $2,650,000 for the first nine months of 1998 compared to $1,800,000 for the same period in 1997, an increase of $850,000. This increase was primarily due to higher weighted average borrowings during the first nine months of 1998, which were needed to fund acquisitions and working capital. The pre-tax income for the first nine months of 1998 was $38.2 million compared to $31.3 million, an increase of 22% over the same period in 1997. The growth in pre-tax income did not keep pace with revenue growth for the first nine months of 1998 due to lower gross profit. The estimated effective income tax rate for the first nine months of 1998 was 41.5%, compared to 42.0% in the first nine months of 1997. The lower tax rate was due for the most part to an increase in various federal and state tax credits. Net income for the first nine months of 1998 was $22.4 million, an increase of 23%, compared to net income of $18.2 million for the same period in 1997. Diluted net income per common share rose 16% to 95 cents for the first nine months of 1998 compared to 82 cents for the same period in 1997. The increase in diluted net income per share was not proportional to the increase in net income due to the increased average number of common and common equivalent shares outstanding. The results of operations from the Company's three industry segments and its nine operating divisions for the nine months ended July 31, 1998, as compared to the nine months ended July 31, 1997, are more fully described below: The Janitorial Divisions segment, which includes the operating divisions of American Building Maintenance (also known as ABM Janitorial Services) and Easterday Janitorial Supply, reported revenues for the first nine months of 1998 of $656.5 million, an increase of approximately $151.8 million, or 30%, over the same period of 1997. This segment's operating profits increased by 32% over the comparable period of 1997. This is the Company's largest segment and accounted for approximately 59% of the Company's total revenues for the current nine months. AMERICAN BUILDING MAINTENANCE'S revenues increased by 31% during the first nine months of 1998, as compared to the same period in 1997, as a result of several acquisitions made during the latter half of 1997, particularly in the Midwest and New York. This division's operating profits increased 32% when compared to the same period last year. Operating profits increased due primarily to lower labor and labor related costs. EASTERDAY JANITORIAL SUPPLY'S revenues for the first nine months of 1998 increased by approximately 12% compared to the same period in 1997 generally due to strong sales in the Los Angeles and Houston markets. An increase of 29% in operating profits was achieved primarily due to an acquisition and improved margins. 15 Revenues of the Public Service Divisions segment, which includes American Commercial Security Services (also known as "ACSS" and "ABM Security Services"), Ampco System Parking, and ABM Facility Services, for the first nine months of 1998 were approximately $189.5 million, a 6.2% increase over the same period of 1997. Public Service Divisions accounted for approximately 17% of the Company's revenues. The operating profits of this segment increased 13.0% in the first nine months of 1998 as both Ampco System Parking and American Commercial Security Services reported increased profits when compared to the prior year period. AMERICAN COMMERCIAL SECURITY SERVICES reported a decrease in revenues of almost 2%, but its operating profits were up by 20% in the first nine months of 1998 compared to the same period of 1997. The revenue decline was largely due to loss of a several large customers in the San Francisco Bay Area and in Minneapolis, Minnesota. The increase in operating profits was primarily due to a reduction in insurance charges. Due to low unemployment levels in this division's major markets, labor and labor-related costs increased, but were offset by price increases. AMPCO SYSTEM PARKING Division's revenues increased by 10%, while its profits increased 18% during the first nine months of 1998 compared to the first nine months of 1997. The increase in revenues was mostly due to growth in its national airport business, as well as the Texas region. The operating profit increase was due for the most part to lower payroll tax expense, decreased legal costs and increased sales. As reported previously, this segment now includes the Company's new division, ABM FACILITY SERVICES. The Company has responded to customer requests to provide services from two or more of its divisions (the ABM Family of Services) under one management. Because this division is new and depends primarily on management fees for its income, start up costs exceeded revenues during the first nine months. Management does not expect this division to be profitable during the current year. Revenues generated by this division are generally reported by the respective divisions providing services and contribute to the operating profits of those divisions. The Company's Technical Divisions segment includes ABM Engineering Services (also known as Amtech Engineering Services), Amtech Elevator Services, Amtech Lighting Services and CommAir Mechanical Services. This segment reported revenues of $262.2 million, which represent approximately 24% of the Company's revenues for the first nine months of 1998. This represents an increase of approximately 24% over the same nine months of last year due to increases in revenues reported by all its divisions. The operating profits of this segment increased 11% compared to the first nine months of 1997 due to increases in operating profits of all of its divisions, except Amtech Lighting Services. ABM ENGINEERING SERVICES' revenues increased by 59% and its operating profits increased 11% for the first nine months of 1998 compared to the same period in 1997. The large revenue increase was due primarily to an acquisition in New York in August 1997. The smaller percentage increase in operating profits is due to lower gross profits on existing jobs due to increased insurance costs and 16 pressure from competition to reduce fees, and lower margins on contracts purchased through the New York acquisition. Revenues for AMTECH ELEVATOR SERVICES were up by 10% for the first nine months of 1998 over the same period of 1997 largely due to an increased customer base in the maintenance and repair sector. The division posted a 35% increase in operating profits for the first nine months compared to the corresponding period of 1997. This increase in operating profits can be attributed primarily to a higher profit margin on service contracts and reduction of insurance costs. AMTECH LIGHTING SERVICES reported an 8% revenue increase due to increased revenues in most regions. Operating profits decreased by 5% during the first nine months of 1998 compared to the same period of the prior year primarily due to increases in administrative expenses related to increased sales of maintenance-based contracts that require more administrative support than retrofit projects, and costs associated with a computer system upgrade. COMMAIR MECHANICAL SERVICES revenues increased by 15%, resulting primarily from an acquisition in Southern California during the third quarter of 1997. Operating profits for the first nine months of 1998 increased by 15% from the prior year period as a result of increased profit margin sales during the current quarter due to the unseasonably hot weather in California. SAFE HARBOR STATEMENT Cautionary Safe Harbor Disclosure for Forward Looking Statements under the Private Securities Litigation Reform Act of 1995: Because of the factors set forth below, as well as other variables affecting the Company's operating results, past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. The statements contained herein which are not historical facts are forward-looking statements that are subject to meaningful risks and uncertainties, including, but not limited to: (1) the widespread failure of commercial real estate occupancy to improve in the Company's major markets since it relates directly to the need for janitorial and other buildings services, (2) the loss or bankruptcy of one or more of the Company's major customers, which could adversely affect the Company's ability to collect deferred costs or its accounts receivable, (3) the untimely departure of one or more of the Company's key executives, which could affect retention of customers as well as the day to day management of operations, (4) any major labor disruptions that may cause loss of revenue or cost increases that non-union companies can use to their advantage in obtaining market share, (5) significant shortfall in achieving any acquisition plan to acquire either businesses in new markets or expand customer base in existing ones, (6) any legislation or other government action that severely impacts one or more of the Company's lines of business, such as price controls that could prevent cost recovery and fuel restrictions that might increase the cost to deliver services, (7) the reduction or revocation of the Company's lines of credit which would increase interest expense or the cost of capital, (8) the cancellation or non-renewal of the Company's primary insurance 17 policies, as many customers retain services based on the provider's ability to provide adequate insurance including performance bonds and proof of adequate insurance, (9) any catastrophic uninsured or underinsured claims against the Company, which also might include insurance companies financially incapable of paying claims, (10) the inability to recruit and hire entry level personnel due to labor shortages, (11) the failure of the Company's IT or non-IT systems, or those of its customers or vendors, to be Year 2000 compliant, and (12) other material factors that are disclosed from time-to-time in the Company's public filings with the United States Securities and Exchange Commission, such as reports on Forms 8-K, 10-K and 10-Q. PART II. OTHER INFORMATION Item 5. Other Information In accordance with Rule 14-a-4(c)(1) promulgated by the Securities and Exchange Commission, management proxies intend to use their discretionary voting authority with respect to any shareholder proposal raised at the Company's annual meeting as to which the proponent fails to notify the Company on or before January 3, 1999. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10.40 - Amendment of Corporate Executive Employment Agreement with Martinn H. Mandles Exhibit 10.41 - Amendment of Corporate Executive Employment Agreement with Jess E. Benton III Exhibit 27.1 - Financial Data Schedule (a) Reports on form 8-K: No reports on form 8-K were filed during the quarter ended July 31, 1998. 18 SIGNATURES Pursuant to the requirements 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 September 14, 1998 /s/ David H. Hebble - ----------------------- ------------------------------- Vice President, Principal Financial Officer 19

Exhibit 10.40

                                             June 30, 1998



Mr. Martinn H. Mandles
ABM Industries Incorporated
160 Pacific Avenue, Suite 222
San Francisco, CA 94111

RE:  AMENDMENT OF DIVISION EXECUTIVE EMPLOYMENT AGREEMENT --
     INCREASE IN SUPPLEMENTAL EXECUTIVE RETIREMENT PENSION ("SERP")

Dear Martinn:

I am pleased to inform you that the Executive Officer Compensation and Stock
Option Committee of ABM's Board of Directors has approved an increase in the
monthly benefit payable to you to $4,167.00 under this plan.  Accordingly, the
maximum benefit payable to you shall increase to $500,000.

This letter shall, in this regard, amend your executive Employment Agreement, as
follows:

     The monthly Consulting Fees benefit set forth in paragraph X.5
     CONSULTANCY shall be $4,167.00.

Please sign and date all three (3) originals and return two (2) of them to me.

Very truly yours,

/s/ William W. Steele

William W. Steele


I hereby agree to the foregoing amendment.


                      
/s/ Martinn H. Mandles             Dated: June 30, 1998.
- ---------------------------------         --------------
Martinn H. Mandles




EXHIBIT 10.41



June 30, 1998



Mr. Jess E. Benton, III
ABM Industries Incorporated
160 Pacific Avenue, Suite 222
San Francisco, CA  94111


RE:  AMENDMENT OF DIVISION EXECUTIVE EMPLOYMENT AGREEMENT --
     INCREASE IN SUPPLEMENTAL EXECUTIVE RETIREMENT PENSION ("SERP")


Dear Jay:

I am pleased to inform you that the Executive Officer Compensation and Stock
Option Committee of ABM's Board of Directors has approved an increase in the
monthly benefit payable to you to $2,083.00 under this plan.  Accordingly, the
maximum benefit payable to you shall increase to $250,000.00.

This letter shall, in this regard, amend your Executive Employment Agreement, as
follows:

     The monthly Consulting Fees benefit set forth in paragraph X.5 CONSULTANCY
     shall be $2083.00.

Please sign and date all three (3) originals and return two (2) of them to me.
  
Very truly yours,

/s/ William W. Steele

William W. Steele




I hereby agree to the foregoing amendment.

/s/ Jess E. Benton III                  June 30        
                              Dated:              , 1998
Jess E. Benton, III



 


5 1,000 9-MOS OCT-31-1998 APR-30-1998 1,815 0 255,723 0 22,320 318,846 78,468 51,800 495,924 158,075 0 0 6,400 256 223,597 495,924 1,108,817 1,108,817 1,067,935 1,067,935 0 0 2,650 38,232 15,866 22,366 0 0 0 22,366 1.05 0.95

Minimum 15 minutes delayed. Source: LSEG