Feasibility Study for

Commercial Cleaning Cooperative in

Washington, D.C.

Prepared for: National Cooperative Business Association and the Urban Cooperative Development Task Force Washington, D.C.

Prepared by: The ICA Group Brookline, Massachusetts

November 2003

Table of Contents 1.0 Executive Summary ................................................................................................................ 1 2.0 Introduction............................................................................................................................. 4 3.0 Commercial Cleaning Industry ............................................................................................. 5

3.1 National Market .................................................................................................................. 5 3.2 DC Metro Area Market....................................................................................................... 7

4.0 Assessment of Local Market Demand................................................................................... 9 4.1 Commercial Office Cleaning Demand Model .................................................................... 9 4.2 Required Market Capture.................................................................................................. 11 4.3 Local Market Sectors ........................................................................................................ 11 4.4 Customer Survey Results.................................................................................................. 14

5.0 Competition Analysis............................................................................................................ 18 5.1 Description of Firms ......................................................................................................... 18 5.2 Survey Results .................................................................................................................. 22

6.0 Analysis of Market Niche Opportunities ............................................................................ 24 6.1 Customer Niche Markets .................................................................................................. 24 6.2 Service Niche Markets...................................................................................................... 25

7.0 Assessment of Local Labor Supply ..................................................................................... 26 7.1 Demographic Profile......................................................................................................... 26 7.2 Unemployment and Workforce Mobility.......................................................................... 27 7.3 Union Representation........................................................................................................ 28

8.0 Operations ............................................................................................................................. 29 8.1 Management...................................................................................................................... 29 8.2 Worker/Owners................................................................................................................. 29 8.3 Services and Work Flow................................................................................................... 30 8.4 Equipment and Materials .................................................................................................. 31 8.5 Job Quality and Worker Compensation............................................................................ 31

9.0 Financial Plan........................................................................................................................ 32 9.1 Billing Rate and Revenue Forecast................................................................................... 32 9.2 Breakeven Analysis .......................................................................................................... 32 9.3 Capital Expenditures......................................................................................................... 32 9.4 Financial Projections......................................................................................................... 33 9.5 Capitalization .................................................................................................................... 33 9.6 Assumptions...................................................................................................................... 33

10.0 Methodology for Future Replication of Cooperative Business....................................... 35 10.1 Partner-Based Replication Strategy ................................................................................ 35 10.2 Market-Based Replication Strategy ................................................................................ 36

11.0 Conclusions and Next Steps ............................................................................................... 38 Appendix A: Customer Survey List Appendix B: Financial Projections

1.0 Executive Summary The ICA Group and the National Cooperative Business Association have undertaken this feasibility study on behalf of the Urban Cooperative Development Task Force to explore the prospects for a commercial cleaning cooperative that would create quality employment opportunities for low-income residents in Washington, DC. The study indicates that developing such an enterprise would be a difficult endeavor, and the ability of this venture to generate reasonable financial returns and fulfill its promise as a model for urban economic development is doubtful. Key findings are as follows: ��Nationally, janitorial service revenues are continuing to grow, fueled in part by increased

outsourcing for commercial cleaning services. The industry is also experiencing continued diversification and consolidation by large firms, and more market specialization by smaller firms.

��DC metro area janitorial service companies generated nearly a billion dollars in total revenue

in 2001. Between 1998 and 2001, revenues grew at a compound annual growth rate (CAGR) of 6.8%, slightly slower than the national CAGR of 7.3% for the same period.

��The DC metro janitorial service industry is highly penetrated, with a strong mix of

competitors including large, national multi-service firms, well-established family-owned cleaning companies, over two dozen 8(a) minority-owned businesses and several large, non-profit rehabilitation programs that employ workers with disabilities to fulfill federal government contracts.

��The DC metro area janitorial services industry employs some 37,000 people. Based on

projected new office construction and occupancy rates, the metro area will add about 2,750 new cleaning positions during 2004 through 2007. Most of these will be in northern Virginia and the District of Columbia.

��Demand for cleaning services from a new company is weak. Across various sectors and areas

within the metro DC market, customers who outsource for commercial cleaning services express high satisfaction and strong loyalty to their existing vendors, and are disinclined to consider new contractors, so long as service standards are met and pricing is reasonable. This holds true even among large co-op organizations and other customers surveyed who are considered friendly to the goals of the proposed company. Among property managers who bid out cleaning contracts, experience is a key selection criterion.

��One market opportunity for a social purpose cleaning cooperative may be in servicing HUD-

financed public and other affordable rental housing properties. Section 3 of the HUD law requires housing authorities to contract with companies owned by or employing public housing residents or other low-income individuals “to the greatest extent possible.” The DC Housing Authority has recently undertaken efforts to expand its Section 3 compliance and is eager to work with the task force. The initial scale of business involved is likely to be small, however.

1

��The largest local pool of unskilled workers is found in the District of Columbia, which has a

significantly poorer and less educated population than its suburban neighbors, and twice the level of unemployment. New immigrants attracted to the DC area settle mainly in suburban counties, and El Salvador is the country of origin for the largest percentage of legal immigrants settling in the metro region during the last decade.

��The wage scale for janitors in the DC metro market is low. Some 5,300 SEIU janitors

covered under Master Commercial Agreements in DC and suburban Maryland start at $8.00 per hour, and non-union janitors at $6.15. About 10% of these union janitors receive employer-paid health insurance. A new contract will increase the union wage to $8.40 in 2004, with annual increases of five percent through 2008. By contrast, hourly wages for union janitors in Boston and New York currently start in the $10 to $16 range.

��The financial projections assume year one sales of $262,000, increasing to $1.5 million in

year five, and a gross margin of 22%. Based on the projected overhead cost structure, annual breakeven revenue is $1.2 million. At this level of sales, the company would employ 46 full-time equivalent cleaners and four administrative staff. Breakeven revenue represents a capture rate of 0.1% of the total DC metro market and an estimated 3% of new office cleaning business forecast through 2007.

��$250,000 total capitalization is required, with $200,000 in equity and $50,000 in term debt. A

line of credit is also required beginning in year three. ��The company’s low profit margins limit its capacity to provide employee benefits and

distribute patronage dividends. Wages have been budgeted to match the local union scale, and workers receive five paid personal days each year, but no health insurance benefits. These compensation constraints, along with the company’s lack of earnings potential, raise serious questions relating to overall job quality and retention of worker members.

��If the task force opts to proceed with a cleaning cooperative, it can enter the market in one of

two ways: First, the cleaning co-op can begin doing business on a very small scale, build its reputation and grow slowly over time. In lieu of previous experience, the co-op can enhance its credibility and possibly accelerate its sales growth by attracting a manager with a proven performance record in the local market. The employment of public housing residents might also unlock cleaning service opportunities with HUD-financed properties. Still, initial job creation is likely to be small, and the company’s impact as a development strategy may be insufficient to gain the serious attention of policy makers and funders. Alternately, the task force can identify a large, friendly customer that is willing to contract for cleaning services with the new company. This option would jump-start the business on a larger scale, guaranteeing a minimum sales volume that would support more immediate job creation and constitute a more impressive “model” of economic development. Finding a

2

friendly customer with significant business volume has proven difficult to date, and additional, aggressive networking would be needed by the task force to pursue this option.

��Taken together, the weak customer demand, intense competition and adverse cost structure in the metro DC market argue against developing a commercial cleaning company as a model urban cooperative.

3

2.0 Introduction The ICA Group and the National Cooperative Business Association have undertaken this feasibility study on behalf of the Urban Cooperative Development Task Force to explore the prospects for a commercial cleaning cooperative that would create quality employment opportunities for low-income residents in Washington, DC. The task force is seeking to create a business that will inform policy makers and legislators about the benefits and importance of cooperatives as an urban economic development tool. The task force also aims to create a worker cooperative development model that can be replicated in other cities throughout the US. As an urban economic development strategy, cooperatives have the power to create quality employment opportunities for their worker members in the form of equitable compensation, supportive working conditions, democratic decision-making, participation in business profits and ongoing opportunities to learn and advance. A future business would be designed to deliver all of those benefits to its worker members, who would be recruited through community-based organizations that represent disadvantaged residents. Since the workers would likely lack personal financial resources to invest in the company, social purpose equity would be a major source of capital for this venture. Commercial cleaning was selected as a promising business sector for this study for several reasons. First, the work is low-skilled, making it accessible to people who lack a higher education and/or previous work experience. Second, it permits a team approach, which can provide a supportive work environment for new or inexperienced workers, and non-English speakers. Third, it requires a fairly modest capital investment. These low barriers to entry make commercial cleaning an intensely competitive business, however. As such, in the course of this study, ICA and NCBA sought to identify market niches, in terms of both customers and services, that could help a new company differentiate itself in the market and quickly establish a customer base. The study begins with an overview of the national commercial cleaning market, followed by an in-depth analysis of the DC metro janitorial services market, including its size, future growth prospects, competitive climate and potential opportunities within specific customer and service niche markets. Next, the study identifies the resources needed to operate the business and identifies its anticipated cost structure and capital requirements. Finally, the study outlines two alternative strategies for replication and recommends next steps for the Urban Cooperative Development Task Force.

4

3.0 Commercial Cleaning Industry 3.1 National Market Industry Description Commercial cleaning consists of janitorial services provided to a variety of commercial property types: office, retail, industrial, medical facilities, and multi-family apartment common space, among others. Common services offered include vacuuming, dusting, scrubbing, trash removal, floor buffing, rug cleaning, and window washing. While some firms provide services to both the commercial and the residential market, most commercial firms exclusively serve the commercial market. Commercial cleaning is typically performed in the evenings and early mornings while the employees of a commercial property are away from the site. Industry Size, Structure and General Characteristics Janitorial services is a $30 billion industry employing some 930,000 workers in the U.S. Revenues have risen steadily in recent years, at a compound annual growth rate of 7.3% between 1998 and 2001.1 Annual Revenues, Janitorial Services, 1998-2001

$0

$10,000

$20,000

$30,000

$40,000

1998 1999 2000 2001

(Mill

ions

of d

olla

rs)

The janitorial services industry, though not recession-proof, is somewhat resistant to economic downturns due to the relatively inelastic demand for cleaning services. In late 2001, industry revenues were predicted to grow by 5.5% annually through 2005, driven mainly by continued outsourcing.2 Since then, the general economic slowdown has no doubt been felt by janitorial service providers as part of the overall weaker demand for business services. Office and institutional building markets account for about two-thirds of commercial cleaning demand, and when building occupancies decline, fees paid to contract providers for janitorial services also fall. Customers’ efforts to trim costs by reducing the frequency of cleaning services also results in lower revenues for contract providers.

5

1 1997 Economic Census and 2001 Service Annual Survey, U.S. Census Bureau 2 Freedonia Group, October 2001

While the number of janitorial service employees nationwide grew by 6% between 1998 and 2001, the total number of firms declined slightly, by one-and-a half percent or nearly 800 firms, during the same period. The biggest percentage loss was among companies with 4 or fewer employees, although firms of this size continue to be the most common in the industry, accounting for over half of the nearly 55,000 total firms in 2001.3 Given the low-skilled nature of the work and low barriers to entry, the industry is intensely competitive and yields modest profit margins. These factors keep wages low and tempt many contractors to use and exploit undocumented workers, a practice that persists in urban centers with high immigrant populations. Industry Trends Increased Outsourcing for Cleaning Services Increasingly, companies are seeking to reduce their facilities management expenses by outsourcing these tasks. In one recent survey of facilities managers, custodial and housekeeping services topped the list of most frequently outsourced functions, and were among the three services “least likely to be brought back in-house.”4 Continued Diversification and Consolidation by Large Firms Large facility services firms are expanding their businesses into multiple sectors as a way to add value, improve efficiency and increase sales, and many have achieved this through mergers and acquisitions.5 ABM Industries, for example, the largest US-owned facility services contractor, provides janitorial as well as elevator, lighting, parking, security, engineering and air conditioning services for its customers. Aramark has completed nine acquisitions since 2000, including ServiceMaster Company in 2001, and now offers janitorial services in addition to dining and catering, mailroom operations, uniform and clothing rental, and plant operations and maintenance, among other services. Market Specialization and Segmentation by Smaller Firms As the industry consolidates, smaller companies are beginning to focus on niche cleaning, such as mold remediation, indoor air quality, specialty floor care, window washing and disaster clean-up.6 These services are typically provided less frequently than general maintenance services. Improved Products and Equipment An increased focus on indoor air quality and greater environmental awareness is driving the use of new, less toxic cleaning supplies. The industry is also benefiting from the availability of more efficient and ergonomic equipment, such as automated floor cleaning systems, micro-fiber cloths and mops, and backpack vacuums.7

3 County Business Patterns, NAICS 56172 - Janitorial Services, 1998-2001 4 International Facility Management Association, World Workplace Conference Attendees, 2001 5 Brereton Industry Reporter, February 2003 6 International Custodial Advisor’s Network, 2003 Annual Forecast 7 Freedonia Group, October 2001

6

3.2 DC Metro Area Market The DC metro area, for purpose of this study, consists of the District of Columbia, the suburban Maryland counties of Montgomery and Prince George’s, and the City of Alexandria, Arlington County and Fairfax County in northern Virginia. As a rough measure of relative size, northern Virginia has the largest share of office space inventory, about 44%, compared to DC with 33% and suburban Maryland with 23%. DC metro area janitorial service companies generated nearly a billion dollars in total revenue in 2001. Between 1998 and 2001, metro area revenues grew at a compound annual growth rate (CAGR) of 6.8%, a bit slower than the national CAGR of 7.3% for the same period, but a healthy pace nonetheless. As shown in the following graph, the experience reported by individual markets within the DC metro area varied widely: DC Metro Area Janitorial Service Revenues

0

50,000

100,000

150,000

200,000

250,000

300,000

1998 1999 2000 2001

Dol

lars

($1,

000s

) Fairfax Co, VAMont Co, MDDCPG Co, MDArl Co, VAAlex, VA

The suburban Maryland counties of Montgomery and Prince George’s marked the upper and lower extremes of sales growth during the 3-year period ending 2001, with CAGRs of 15.4% and a negative 4.1% respectively. In Virginia, Fairfax County posted a better than average gain of 8.8%, compared with Alexandria, where revenues grew at a compound annual rate of 2.5%, and Arlington County, where sales growth remained nearly flat. Revenues in the District of Columbia grew slightly slower than the metro area overall, at a compound annual rate of 5.9%. It is important to note that annual revenue data corresponds to the counties where cleaning companies have their offices, not necessarily to where the work is being performed, so sales activity in the market as a whole is a more important indicator than sales activity within individual localities. Still, the higher revenue growth in Montgomery and Fairfax Counties may correspond in part to more new office space coming on line and more private sector outsourcing in these locations, while the slower growth in Alexandria and Arlington County may reflect the greater maturity of these markets.

7

Firm Characteristics According to the Census Bureau, there were 1,030 janitorial service establishments8 employing 36,702 people in the DC metro area in 2001.9 The average local establishment had 36 employees, $969,000 in annual revenues and $27,200 in billings per employee. Comparable national figures show that the average janitorial establishment in the US had 17 employees, $521,000 in revenues and $30,700 in billings per employee. Commercial cleaning establishments in DC thus appear to be larger than the average national establishment.

DC Metro Janitorial Service Establishments by Number of Employees

>4991%

100-4995%

20-9915%

1-1979%

Penetration Ratios The DC metro janitorial services market has substantially higher rates of penetration than the national market. Nationally, there is one janitorial service employee for every 306 persons, while the local ratio is one janitorial service employee per every 98 persons, indicating a much higher density of local janitorial service activity in the DC metro area. The disparity is due in part to differences in revenue generation. Nationally, the industry generates $100 in revenue per capita, while in the DC metro market, the industry generates $279 in revenue per capita. Comparative Population per

Janitorial Service Worker, 2001

98

306

DC Metro National

Comparative Janitorial Services Revenue per Capita, 2001

$279

$100

DC Metro National

8 Note: County Business Pattern data tracks establishments (physical locations) rather than firms. Although total establishments can vary greatly from total firms in some industries, the national ratio of establishments to firms in the janitorial service industry is 1.04. For purpose of this report, establishments and firms can be treated as roughly equivalent. 9 U.S. Census Bureau, County Business Patterns, 2001 (NAICS #56172)

8

4.0 Assessment of Local Market Demand 4.1 Commercial Office Cleaning Demand Model Demand for janitorial/commercial cleaning services is heavily tied to the real estate market. Growth in the commercial cleaning industry depends upon either increased outsourcing or the construction of new properties with cleaning needs. Demand for new janitorial positions can therefore be forecast by building a model based on projected new construction and occupancy rates in the DC metro market. (Outsourced positions are difficult to project and do not, in any event, represent new jobs.) ICA’s demand model focuses on the office market as the largest component, about three-fourths, of the local commercial cleaning market. The DC metro office market is among the strongest in the country, with the federal government, government contractors, association headquarters and numerous professional services firms providing a stable base of tenants. Within the three main submarkets: ��DC has the lowest historical vacancy rates, due to supply constraints caused partly by

building height limits. Government agencies own or lease nearly half of DC’s commercial office space, and law firms are among the larger private sector tenants. With the delivery of new space in 2004, vacancy rates are projected to peak at 9.2% (from a low of 3.6% in 2000) and then decline over the next three years, to 6.7% in 2007, as construction slows and the new space is absorbed.10

��Suburban Maryland’s office market is considered fairly stable, with a concentration of

tenants serving the health care, biological and pharmaceutical industries. Despite a slow economy, the 2003 vacancy rate of 12% remained even with the market’s 15-year historical average. With modest levels of new construction planned, this rate is forecast to fall slightly each year through 2007, and remain near 11% overall.11

��Northern Virginia is traditionally the most volatile of the three markets, particularly Fairfax

County, which is dominated by private sector tenants, including many computer technology and telecom businesses. Alexandria and Arlington County enjoy steadier demand from the federal agencies, defense contractors and associations located inside the Beltway. Despite its higher vacancy rates, northern Virginia has the most new construction planned through 2007, and vacancy rates are expected to remain fairly constant around 15%.12

In the following model, the number of janitorial workers needed to meet the new office market demand for cleaning services has been projected by holding constant the ratio of office cleaners to occupied space (based on actual activity during 1998-2001):

10 Reis, Inc. and Greater Washington Commercial Association of Realtors, 2002 Area Market Wrap Up 11 Ibid. 12 Ibid.

9

Table 1. Commercial Office Cleaning Demand Model2002 2003 2004 2005 2006 2007

Completed New Office Construction (sq. ft.) Total 8,627,000 3,461,000 3,949,000 5,068,000 5,740,000 4,911,000

DC 2,361,000 2,157,000 2,525,000 1,452,000 1,440,000 1,310,000MD 1,842,000 380,000 290,000 886,000 1,619,000 1,604,000VA 4,424,000 924,000 1,134,000 2,730,000 2,681,000 1,997,000

Total Office Inventory (sq. ft.) Total 269,846,000 272,695,000 276,644,000 281,712,000 287,452,000 292,363,000

DC 83,730,000 85,275,000 87,800,000 89,252,000 90,692,000 92,002,000MD 61,701,000 62,081,000 62,371,000 63,257,000 64,876,000 66,480,000VA 124,415,000 125,339,000 126,473,000 129,203,000 131,884,000 133,881,000

Vacancy % Total 11.3% 12.3% 12.3% 12.2% 11.7% 10.8%

DC 6.8% 8.1% 9.2% 9.0% 7.9% 6.7%MD 11.5% 12.0% 11.3% 10.9% 10.7% 10.2%VA 14.3% 15.2% 15.0% 15.1% 14.7% 14.0%

Vacant Office Space (sq. ft.) Total 30,503,000 33,408,000 34,035,000 34,466,000 33,525,000 31,693,000

DC 5,683,000 6,866,000 8,051,000 8,032,000 7,177,000 6,177,000MD 7,090,000 7,468,000 7,019,000 6,925,000 6,965,000 6,783,000VA 17,730,000 19,074,000 18,965,000 19,509,000 19,383,000 18,733,000

Occupied Office Space (sq. ft.) Total 239,343,000 239,287,000 242,609,000 247,246,000 253,927,000 260,670,000

DC 78,047,000 78,409,000 79,749,000 81,220,000 83,515,000 85,825,000MD 54,611,000 54,613,000 55,352,000 56,332,000 57,911,000 59,697,000VA 106,685,000 106,265,000 107,508,000 109,694,000 112,501,000 115,148,000

Cleanable Occupied Office Space (85%) Total 203,441,550 203,393,950 206,217,650 210,159,100 215,837,950 221,569,500

Occupied Office Space per Janitor (sq. ft.) Total 6,600 6,600 6,600 6,600 6,600 6,600

New Janitors Needed to Meet Demand Total - -7 428 597 860 868

DC 47 173 189 296 298MD 0 95 126 203 230VA -54 160 282 362 341

Employment - Janitorial Services Total 37,127 37,120 37,548 38,145 39,005 39,874

Sources: ICA estimates based on data from Reis, Inc. and County Business Patterns

The model predicts that after small net job losses in 2003, demand will exist for an additional 2,747 cleaners through 2007. The majority of these jobs will be in northern Virginia and the District of Columbia as follows:

Northern Virginia 1,090 39.7%District of Columbia 1,002 36.5%Suburban Maryland 655 23.8%Total 2,747 100.0%

Table 2. New Janitors Needed, 2003-2007

Low vacancy rates in DC, coupled with the steady completion of new office space there, will create new jobs within the District at nearly the same pace as in northern Virginia. Existing firms will, of course, capture much of the increased demand. Nevertheless, the figures indicate that the office market can support a number of startup firms in the DC metro market. Given an average of

10

36 employees per firm (see Firm Characteristics on page 8), and assuming that new firms capture 10 percent of the new demand, the office market could support about seven to eight new firms of this size over the next four years. It should be noted that this analysis focuses only on the office market. The retail, institutional and industrial markets could provide additional sources of new demand. 4.2 Required Market Capture Another way of assessing the viability of a startup commercial cleaning business is to look at the percentage of the total janitorial services market that a new company would have to capture in order to achieve breakeven sales. Given the assumptions contained in the Financial Plan section of this report, breakeven revenue for a cleaning enterprise with a 22% gross margin and year one wages of $8.40 per hour is $1.2 million. An individual company would have to capture 0.1% of the total metro DC janitorial services market to achieve breakeven. 4.3 Local Market Sectors Federal Government Market Federal agencies owned or occupied 87 million square feet of office space in the metro DC area as of 2002.13 Over half this space is in the District of Columbia where federal agencies awarded about $40 million in janitorial service contracts in 2000.14 (An additional $34.4 million in contract awards were made in the Maryland, Virginia and West Virginia areas encompassed by the DC primary metropolitan statistical area.15) Many of these contracts are set asides for entities that meet certain socioeconomic criteria. Under the Javits-Wagner-O’Day Act (JWOD), for example, federal government agencies are encouraged to outsource with community rehabilitation programs (CRPs) that employ blind and disabled populations. Other contracts may be set aside for 8(a) minority-owned companies, small or small, disadvantaged businesses, women-owned businesses, veteran-owned businesses or HUB Zone businesses. An independent federal agency, The Committee for Purchase From People Who Are Blind or Severely Disabled, administers the JWOD program through two non-profit agencies, National Industries for the Blind (NIB) and National Industries for the Severely Handicapped (NISH). NISH serves as an agent to market janitorial (and other) services to individual federal agency sites, and when an agency elects to assign its janitorial contract to NISH, the Committee assesses whether the set-aside will cause an “adverse impact” on the existing, for-profit contractor.16 If the Committee approves the set-aside, NISH selects the local program provider, negotiates the

13 Center for Regional Analysis, George Mason University, The Impact of Federal Procurement on the National Capital Region, October 2002 14 Ibid. 15 Eagle Eye, Inc. 16 In assessing adverse impact, the Committee considers the impact on the existing contractor’s total sales, and its history as a continuous government supplier which may make it more dependent on these sales.

11

contract and recommends a price (also subject to the Committee’s approval). Once a site has been added to the Committee’s procurement list, NISH essentially becomes the permanent mandatory, sole source provider. In the DC market, NISH reports that it has captured about 20% of the federal janitorial services market, through a half dozen or so Community Rehab Program affiliates. These include Chimes, Inc., Davis Memorial Goodwill Industries, Melwood and ServiceSource (described in more detail in the Competition section of this study). One of NISH’s major federal customers is the General Services Administration. (Nationally, GSA and the Department of Defense are the top two federal agency purchasers of janitorial services.17) Each federal agency annually sets its own procurement goals (subject to Congressional approval) and determines how to meet them. As a new business, the cooperative could easily qualify as a small business or HUB Zone business, and might also qualify as a small, disadvantaged business. The potential dollar volume may be limited, however. Of the approximately $40 million cleaning contracts awarded in DC in 2000, only $560,000 went to HUBZone businesses.18 Section 8(a) status is more lucrative, but harder to achieve, requiring a minimum of two years’ experience before a firm can apply. Local Government Market DC officials were generally unresponsive to inquiries about potential opportunities to contract for cleaning services (except for the DC Public Housing Authority, which is discussed in the next section). Several calls to the Office of Property Management, which manages properties owned and leased by the District of Columbia government, were not returned. At the suggestion of Manna, Inc., ICA also contacted the Department of Housing and Community Development to explore opportunities for post-construction cleaning of HUD-financed housing units in conjunction with a new federal Lead Safe Housing Rule. ICA spoke with the Project Manager to request information needed to assess the market potential for this niche service, including the volume of housing stock affected by this rule and a list of local developers, but he failed to provide this. ICA subsequently spoke with the Vice President for Housing and Community Development at Marshall Heights Community Development Organization, who reported that the inventory of housing stock subject to this rule is small, finite and volatile from year to year depending on how funds are allocated for new construction or rehab of older units. Housing and Urban Development (HUD) Section 3 Section 3 of the Housing and Urban Development (HUD) Act of 1968 requires that, “to the greatest extent possible,” recipients of HUD public housing and community development funds provide employment opportunities or award subcontracts to public housing residents and other

17 Eagle Eye, Inc. 18 The Federal Procurement Data Center did not respond to a written request for contract award totals in the DC area for all socioeconomic program categories.

12

low-income individuals. Most of these opportunities are in the building trades.19 For Housing and Community Development fund recipients, Section 3 applies only to contracts or subcontracts exceeding $100,000 for certain construction-related projects, and does not include routine maintenance.20 For Public and Indian Housing fund recipients, however, Section 3 applies to any expenditure, including operations. Public housing and other agencies that are subject to Section 3 can comply in two ways, by directly hiring Section 3 residents, or by awarding contracts to Section 3 resident-owned businesses or to contractors that provide training, employment and contracting opportunities to Section 3 residents. The law offers flexibility for recipients to alternately provide “other economic opportunities,” such as sponsoring job information meetings, conducting job readiness classes or coordinating with federally funded job training programs. These allowances result in low compliance by many public housing authorities in meeting their hiring and contracting obligations. Locally, ICA spoke with the DC Public Housing Authority and the Housing Opportunity Commission of Montgomery County, Maryland to obtain additional information.21 In DC, the Section 3 Compliance Specialist said a strong effort is underway to push their existing vendors (of all services) to train and hire residents, and they would welcome the creation of a cleaning company that is owned and controlled by residents. Although it has been difficult to attract residents’ participation in programs that promote entrepreneurship, she felt that a cooperative business model might have more appeal. She was unable to provide details about potential business volume, but mentioned Henson Ridge, a new 600-unit development that will include some 30 to 40 rental properties whose managers would be keen to contract with a cleaning company that employs resident workers. She will be arranging a meeting with property managers sometime after early December and invited a representative of the initiative to participate. Montgomery County, which manages about 8,000 public housing units, reported that it takes Section 3 into account for construction-related contracts over $100,000 only. Some buildings have on-site custodial staff and others outsource for cleaning services. The contracts are for one year, and contractors frequently change. Price, responsiveness to the proposal request, and reliability, as demonstrated by business references are the most important selection criteria. A startup business would not qualify as a contractor, and no preference would be given to a resident-owned business. Nationally, Congress authorizes nearly $3 billion dollars to public housing authorities each year for their operation expenses.22 Although Section 3 is not strictly enforced, opportunities may exist for a resident-owned cleaning cooperative to capture some share of local housing authority cleaning contracts. The DC Housing Authority certainly appears open to this concept. Teaming with a local neighborhood group that can organize residents and apply pressure to area housing

19 National Low Income Housing Coalition 20 Housing & Community Development funds include a dozen funding sources, including Community Development Block Grants, HOME and Section 202 Senior Housing funds. 21 ICA also contacted Housing Authorities in Alexandria and Fairfax County, Virginia, which did not respond. 22 National Low Income Housing Coalition

13

authority officials to maximize future contracting opportunities could enhance the successful pursuit of this business. Private Sector Market Major customer segments in the private sector office market include association headquarters, professional service firms, defense contractors, and large commercial tenants, including computer technology and telecom businesses, among others. In targeting specific customer segments, ICA and NCBA focused on national associations and other nonprofit organizations, and professional service firms, including law firms and property management companies. These segments were selected on the basis of their size and stability in the market, and the expectation that nonprofit organizations and particularly cooperative associations, would be more receptive to supporting a social purpose cleaning cooperative. 4.4 Customer Survey Results ICA and NCBA surveyed 36 potential customers across various sectors and areas within metro DC in order to assess the level of demand for the services of a commercial cleaning cooperative and help identify potential market opportunities. Based on these interviews, it is clear that demand for services from a new cleaning company is weak. The consistent response received from cooperative organizations, nonprofits, law firms and property management companies is that they value the experience and performance of their existing vendors and are not interested in considering a new company. The completion of new office space will increase demand for cleaners, but experience is a key criterion for property managers who award this business. One property management company that manages low-income rental housing echoed this sentiment but said it might consider a startup that employed its residents. It should also be noted that the sample of cooperative and nonprofit organizations that were surveyed is small. Inasmuch as DC is home to some 2,000 association headquarters, it is conceivable that a few may be persuaded to steer their cleaning business to the proposed cooperative. Making the right connections to access this business, however, will require high-level networking. The survey results are presented below, and a listing of organizations surveyed is found in Appendix A. Cooperative Organizations NCBA contacted three national cooperative organizations to assess their interest in supporting a commercial cleaning cooperative. The National Rural Electric Coop Association (NRECA) was approached about opportunities to clean its 258,000 sq. ft. facility in Ballston,Virginia. NRECA, which also owns and manages a large office building in Dupont Circle, has used the same contractor for five years and stated that it would only consider doing business with a company

14

that has an established presence in the market. Outreach to the National Rural Utilities Cooperative Finance Corporation in Herndon, Virginia yielded no response. NCBA also spoke with the Amalgamated Life Insurance Company to explore potential opportunities to do disaster cleanup through an insurance industry partner such as the Union Labor Insurance Company (ULICO), but received a negative response. DC Credit Union League NCBA contacted the DC Credit Union League, which agreed to send surveys to its member credit unions. Ten responses were received, and of these, only two outsource for cleaning services. One, the Police Federal Credit Union, has 1,600 sq. ft. of space and would consider using the services of a new cleaning cooperative when their current contract expires in 2005. The second, Transportation Federal Credit Union, occupies 6,000 sq. ft. of space and has used the same contractor for over 10 years. They are satisfied with their existing vendor and doubt they would consider using a new co-op company. The remaining eight credit unions reported that they receive cleaning services as part of their lease or through their sponsor organization. Property Management Companies ICA contacted four commercial property management companies serving the DC metro area: Cassidy & Pinkard, which manages 30 commercial buildings totaling 5 million sq. ft., Bernstein Management Company, which manages a mix of commercial and residential space (2.6 million and 2.4 million sq. ft. respectively), KSI Management Corporation, which manages 8,000 apartment units (affordable, market and luxury) in multi-family buildings that range from 100 to 400 units each, and E and G Group, which manages 1,600 units in five rental communities, mainly in DC. Cassidy & Pinkard contracts with seven to eight janitorial service providers, selected from proposals requested annually from 10 to 15 companies. Cassidy & Pinkard generally limits this group to firms they know, although they sometimes include new ones. The company notes, “it’s hard for new companies to get a foot in the door.” References, cleaning protocols, responsiveness to the request for proposal, and price are their most important selection criteria. Bernstein Management outsources all of its janitorial service needs. On the commercial side, individual building managers oversee the bid process and award contracts for a two-year period. In its residential division, Bernstein uses two long-term cleaning contractors and periodically bids this business out, but is satisfied with its current vendors. For both types of properties, tenant satisfaction is the most important criteria. So long as the tenants are happy and the price remains reasonable, they do not change cleaning vendors. Bernstein would only consider a new company for a new property where the existing contractor was not acceptable. KSI Management’s cleaning arrangements for the common space, leasing offices and apartment turnovers in their buildings vary by property. Some have in-house cleaning staff and others outsource for cleaning services, and some vendors service multiple buildings. Contracts are bid

15

out yearly at the discretion of individual property managers who select contractors subject to the management company’s approval. The most important criteria in selecting cleaning vendors are thoroughness, behavior toward residents, price and experience. A new company could approach individual property managers about future bid opportunities, but their satisfaction with existing contractors and the extent to which they are willing to consider new firms is unknown. The E and G Group has vacillated between in-house custodial staff and outside cleaning contractors, and is not loyal to any particular firm. E and G would be nervous about contracting with a startup company, however, and the pricing would need to be competitive. An initiative employing their residents would be compelling, though, and their Chief Operating Officer seemed open to considering such a company. ICA also contacted two nonprofit housing developers, Wesley Housing Development Corporation and Manna, Inc., in Alexandria, Virginia and Washington, DC, to explore potential opportunities to provide cleaning services for multi-family properties they own and operate. Wesley, which manages 16 affordable rental properties in northern Virginia, has used the same cleaning contractor for 15 years and has no plans to change. Manna, Inc. develops housing, including new construction and rehab of existing properties, mainly for sale. Its cleaning needs are therefore limited to one-time post-construction cleaning which is sometimes handled by the contractor or arranged by the construction site manager, if needed. In either case, this represents one-time, low volume business. Conference for Catholic Facility Management At the suggestion of the U.S. Conference of Catholic Bishops, ICA contacted the Conference for Catholic Facility Management in Bowie, Maryland, a network of facility and real estate managers with responsibility for a variety of buildings and other properties owned by some 250 dioceses and religious orders throughout the US. Local property holdings can be extensive. The Archdiocese of New York, for example, has a portfolio of over 2,000 buildings and properties including over 400 churches, 300 elementary and high schools, and hundreds of residences, office buildings, hospitals, nursing homes and miscellaneous institutional projects. The executive director was not willing to disclose information about his members but offered to email information about the cleaning co-op initiative to conference members in the DC area, with a request for them to contact ICA directly if interested. No responses to this outreach were received. Law Firms ICA contacted three law firms – Walsh, Colucci, Lubely, Emrich & Terpak (WCLET), McGuire Woods, and Crowell & Moring – with offices in DC and northern Virginia that range in size from 12,500 to over 200,000 sq ft. Both WCLET and Crowell & Moring, with the largest space, outsource for cleaning and are satisfied with their existing vendors. Neither expects to bid out their janitorial services unless there is a significant change in quality or price. McGuire Woods

16

does not contract for cleaning services, which are included in its leases for office space in both DC and Virginia. Nonprofit and Government Organizations ICA contacted four national and one local nonprofit organizations. The American Red Cross, which occupies a million sq. ft. in seven buildings in DC and northern Virginia, uses a single contractor for routine cleaning and three small companies for periodic cleaning of marble, wood and stainless steel. Likewise, the U.S. Conference of Catholic Bishops uses a single contractor (of 14 years) to clean its 170,000 sq. ft. facility. Both are satisfied with their existing vendors and have no interest in considering a new supplier. Public Citizen, a nonprofit with 33,000 sq. ft., has a full-time custodian and outsources for quarterly carpet cleaning and occasional disaster cleaning. ICA also contacted the Washington Metro & Transportation Authority, which reported they use in-house custodial staff to clean their administrative offices plus the Metro stations, trains and buses throughout the region. Calls to The World Bank, which occupies three million square feet in eight buildings, were not returned. Downtown Cluster of Congregations The Downtown Cluster of Congregations sent customer surveys to senior clergy at all of its 38 member congregations. Three responded to NCBA, and ICA contacted six additional members as a follow-up to the survey. All of these congregations use in-house custodial staff and only one church, St. Paul’s, said they are considering contract cleaning services for the future, noting that keeping their buildings clean “has always been an issue.” Three other congregations currently outsource for carpet cleaning and/or window washing and one uses a contractor for occasional cleaning of its stone exterior. Of these, one indicated they would consider using the co-op to provide window cleaning services.

17

5.0 Competition Analysis DC metro’s competitive field is formidable, including a strong mix of large, national multi-service firms, well-established family-owned cleaning companies, over two dozen 8(a) minority-owned businesses and several large, non-profit rehabilitation programs that employ workers with disabilities to fulfill federal government contracts. As noted in the customer survey results, many customers are very loyal to their cleaning vendors and disinclined to even consider new contractors if the service is satisfactory and the pricing reasonable. Contract pricing is an important competitive factor, but generally is weighed in the context of other considerations such as reliability, trust, quality and responsiveness to special cleaning needs that arise from time to time. 5.1 Description of Firms The Census Bureau reports 1,030 janitorial service establishments (i.e., total locations) in metro DC as of 2001. Excluding those with fewer than five employees reduces this number by half to 510. The latter number is consistent with a check of current yellow pages listings, which yields 590 establishments (520 firms) and Dun and Bradstreet’s database which includes slightly fewer total firms (463) using similar search criteria. These figures do not include some of the companies that provide janitorial services in combination with other facilities support services (e.g., Aramark), and therefore are somewhat understated. Following are descriptions of a sampling of firms that characterize the various commercial cleaning competitors in the DC metro market. Large Competitors (500+ employees) American Building Maintenance, also know as ABM Janitorial Services, is the largest division of ABM Industries, Inc., a national, publicly-traded company based in San Francisco, with $2 billion in annual revenue and over 62,000 employees. About half of this revenue comes from the janitorial business, and ABM Janitorial Services operates over 200 branch offices nationwide, including three in DC and four in northern Virginia. Other corporate divisions provide parking, engineering, security, lighting, elevator, mechanical and network services for commercial, industrial, institutional and retail facilities throughout across North America. Capital Building Maintenance Corp. (CBMC), Inc. is a non-union provider of janitorial and building maintenance services based in College Park, Maryland and employing some 1,800 workers. Cavalier Services, Inc., a Fairfax, Virginia firm, provides cleaning and maintenance services for commercial office buildings, owner-occupied facilities, industrial buildings, medical facilities, and residential common areas. Specialized services include floor care and restroom floor restoration, carpet and upholstery cleaning, construction clean-up and light building repair. The

18

president of Cavalier Services, Steve Rohan, served as lead negotiator for the Washington Service Contractors Association in master contract negotiations with SEIU Local 82. Centennial One, Inc. is a local, 27-year-old janitorial service company based in Landover, Maryland, owned by Lillian Lincoln, a black woman who initially built her business with government contracts obtained through 8(a) set asides, then shifted her marketing focus to commercial accounts when the company’s 8(a) status expired in 1985. Major customers include Dulles Airport and buildings owned by Computer Sciences, Northrup-Grumman and Arthur D. Little. As of five years ago, the company employed 1,200 people and reported $18 million in revenue, and Ms. Lincoln had begun to prepare her daughter Tasha to eventually take over the management of the company. In addition to its Prince George’s County headquarters, Centennial One has three offices in DC. P & R Enterprises, Inc., headquartered in Falls Church, Virginia, provides janitorial and building maintenance services to commercial and institutional facilities, including Georgetown University. P & R Enterprises has two offices in DC and is one of two associate members of the National Service Alliance in the metro DC area. Potomac Services is a 32-year-old company based in Bethesda, Maryland that “maintains personalized business relationships and develops customized cleaning programs” for 82 client sites in the DC metro area (and 17 in Florida), claiming a customer retention rate of nearly 100%. Locally, the company has four branch offices in DC. Total annual revenues (including Florida sales) are $18 million. Red Coats, Inc. is a 40-year-old, family-owned business, headquartered in Bethesda, Maryland and employing over 3,700 people throughout the mid-Atlantic and Florida. The company provides commercial cleaning services to offices, residential buildings, shopping malls and medical facilities, and offers a full line of special services including carpet maintenance, recycling, marble and stone restoration, pressure washing, window cleaning, and fire, smoke and water damage restoration. Locally, Red Coats has three locations in DC, two in Montgomery County and two in Fairfax County. Two sister companies provide security services. UNICCO Service Company is a 54-year-old company based in Newton, Massachusetts, with over $600 million sales and 20,000 employees. The company offers a wide range of facilities services including maintenance, operations, engineering, cleaning, lighting and administrative/ office services, and has a strong presence in the DC area, with 15 offices in DC, two in Montgomery County and five in northern Virginia. The corporation claims a 95% customer retention rate. Small and Medium-Size Competitors (<500 employees) Capitol Hill Building Maintenance is a 15-year-old company owned by an African immigrant woman (from Sierra Leone) and former welfare recipient. Based in Landover, Maryland, the business currently employs some 200 people and bills over $3 million dollars annually. Capitol Hill Building Maintenance is also a co-owner with transport and grounds maintenance

19

companies in a separate entity, COSTAR III, LLC, an entity formed to compete for federal contracts that recently won a $6.6 million contract (with three one-year renewal options) to provide operating services at the Naval Air Station Patuxent River. The business owner actively hires people who rely on public assistance, including immigrants, as a way to help them achieve financial independence, and COSTAR III included three small, disadvantaged subcontractors in its winning Naval Air Station bid. Christos Building Services is a 15-year-old company in Vienna, Virginia that provides contract cleaning for both commercial and residential buildings in the DC metro area. Christos has two sister companies, Metropolitan Carpet Specialists and Paramount Building Services, a construction company specializing in kitchen and bath renovations. Mister Kleen Maintenance Company is a 25-year-old business in Alexandria, Virginia that maintains over 100 commercial facilities and provides cleaning services to the residential market as well. USSI, Inc. is a 90-year-old commercial contract cleaner serving the DC/Baltimore metro area and the state of Florida. Specialty services include carpet cleaning, specialty floor programs, pressure washing, construction detail cleaning, tenant move-in and move-out, light maintenance, periodic detail cleaning, garage cleaning and assistance with recycling programs. The company has branch offices in Vienna, Virginia and Silver Spring, Maryland, in addition to its Washington, DC headquarters. Niche Competitors Able Service Contractors is a 25-year-old, Hispanic-owned company in Annandale, Virginia that specializes in large facility and hospital sanitation. The company graduated from the 8(a) program in 1992 but is among the top cleaning firms that do business with the federal government. As of 2000, Able was ranked the 10th largest prime contractor and fifth largest small business contractor receiving federal janitorial service contract awards, which averaged $5 million annually (for the three-year period ending 2000).23 One large government customer is the National Naval Medical Center in Bethesda, where the company has offered free English classes to workers, as an employee benefit and to help them advance into supervisory positions. Quality Touch, Inc. is a janitorial and maintenance service company in Washington, DC that offers commercial and residential office cleaning, in addition to disaster cleaning, apartment turnover cleaning and post-mortem clean-up. The company also features maintenance services for health care, education and church facilities. Its listing as an affiliate of the Community Business Partnership (a foundation-supported initiative to promote small businesses in selected DC communities) describes its cleaning services as “environmentally health conscious.” Teltara, Inc., a Native-American owned company based in Scottsdale, Arizona, supplies custodial services, hospital housekeeping, security guards and grounds maintenance to the federal government, as both a direct contractor and subcontractor to DTI Associates, based in 23 Eagle Eye, Inc.

20

Arlington, Virginia. As of 2000, Teltara was ranked as the third largest prime contractor and top small business contractor receiving federal janitorial service contract awards, which averaged $15.5 million annually (for the three-year period ending 2000).24 The company operates in 10 states from Alaska to Florida, and the Defense Department is its largest customer. In DC, local contracts include the IRS headquarters and Washington Navy Yard. 8(a) Certified Companies ��Gali Service Industries Inc. is an Hispanic-owned, 8(a) certified business in Bethesda, MD,

which offers complete janitorial services as well as carpet cleaning, floor care for hard surfaces, hygienic maintenance for medical facilities, pre- and post-construction cleaning, computer room cleaning (including cleaning under raised floors), window and glass cleaning, and pressure washing and exterior maintenance.

��Makro Janitorial Services is an Hispanic-owned, 8(a) certified company in Gaithersburg,

Maryland with $5.3 million in annual sales and about 200 employees. As a contract provider to the National Naval Medical Center in Bethesda, the company participated in an ESL program for immigrant workers in 1999.

��R & R Janitorial, Painting, & Building Service is an 8(a) certified company with four

locations in DC. The company has formerly provided contract cleaning services to the DC Metro Police department and the Department of Parks and Recreation.

JWOD Federal Contractors ��Chimes, a group of not-for-profit agencies serving people with barriers to independent living

in five mid-Atlantic states,25 is one of a half dozen or so NISH affiliates in the DC metro area. Many of its JWOD contracts are for custodial and janitorial services, including hospital housekeeping, but some involve central facility management, commissary services, grounds maintenance, furnishings management, food service support and mail room management. Chimes employs some 1,300 to 1,400 people with disabilities and cleans over 20 million sq. ft. of federal office space. Current contract customers include the Library of Congress and Departments of Commerce, Interior and Veterans Affairs in DC, the Social Security Metro West complex in Maryland, and the Pentagon in Virginia.

��Nationally, Goodwill Industries was ranked the federal government’s top prime contractor

for janitorial services, averaging $35 million in annual awards during the three years ending 2000. In Washington, DC, Davis Memorial Goodwill Industries (DMGI) launched its janitorial services division in 1981 with a large contract with the U.S. Bureau of Engraving and Printing. Today, the division employs 350 people and generates $10.7 million in annual revenue, and government facilities continue to be its main customer. In 1998, DMGI launched a new division, Best Kept Buildings (BKB), to expand into the commercial office sector, and an advisory board of local senior property managers played a critical role in helping BKB develop “Class A” commercial office clients.

24 Eagle Eye, Inc. 25 Maryland, Virginia, Delaware, Pennsylvania and New Jersey

21

��Melwood, another NISH affiliate, is a not-for-profit social service agency in Upper Marlboro,

Maryland that serves people with disabilities and provides janitorial services throughout the metro DC area. Employing over 550 janitorial workers, Melwood supplies contract cleaning services to the Smithsonian Institution, the US Departments of Agriculture, Justice, Treasury and Navy, the General Services Administration and NASA’s Goddard Space Flight Center, in addition to local hotels and businesses. Melwood also offers landscaping, mailroom and facility management services to other governmental and business customers.

��ServiceSource, a NISH affiliate in Fairfax, Virginia, serves over 1,600 people with

disabilities and is one of the largest 50 employers in Fairfax County. ServiceSource employees perform a variety of services including custodial support, mail center management, grounds maintenance, food service operations, digital imaging and scanning, and data entry. ServiceSource has recently teamed with Logistics, Engineering and Environmental Support Services, Inc. (LESCO) to provide janitorial services to NASA’s headquarters in Washington, DC. (LESCO is a tech systems and design company based in Huntsville, Alabama with 8(a) status until January 2004).

5.2 Survey Results NCBA requested information from eight area cleaning companies about their services and rates to clean a 50,000 sq. ft. office space in Washington DC, in addition to asking them about their wages and benefits, and main competitive strength. The companies surveyed vary in size and years of experience: five are local and three operate in the eastern US region or nationally. All but two generate 80% to 100% of their revenues from commercial cleaning sales. To do basic cleaning, trash removal and some floor, wall and exterior cleaning tasks on a nightly basis, half of the companies quoted a rate in the $.80 to $1.00 per sq. ft. range. One company quoted a price of $1.00 to $1.30 per sq. ft., but also estimated more hours to complete the work. These rates are consistent with contract pricing reported by two customers surveyed, both with offices in Virginia. One pays $.81 per sq. ft. and another $1.20 per sq. ft. Several factors may account for this range, including differences in floor surfaces, volume of outside visitors, prevalence of glass doors and partitions, and the amount of trash generated. Another factor is the total square footage of space. In the example cited, the $.81 customer has eight times the total space of the $1.20 customer, and for smaller customers, the contractor has to factor in travel time between jobs. Hourly wages paid by these five companies are $7.00 to $8.25 per hour. All claimed to offer health insurance to workers in DC and Maryland where the SEIU has contracts, but would not elaborate on the details of this benefit. One company specified that its workers in DC and Maryland are eligible for union health benefits while its workers in Virginia receive vacation and sick leave benefits only. Two of the companies surveyed were low-price bidders, with quotes in the $.16 to $.25 per sq. ft. range, although both proposed nightly service for the same number of hours as the companies

22

above. For one company, this price covered basic cleaning only; supplies, trash removal, and floor, wall and exterior cleaning were extra. The second company included all of those services in its quote but was unwilling to disclose the wages paid, noting only that cleaning was a second job for most of its workers. The final company surveyed was at the opposite extreme rate-wise, quoting $2.50 per sq. ft., although it also reported the highest wages – $9.00 per hour plus benefits for full-time workers and $10.00 per hour for part-time workers – and indicated it was “flexible on pricing.” When asked about their competitive strength, the companies cited a variety of advantages. Several named their ability to respond to emergencies, performance record, reliable workforce, and additional services offered (e.g., security and engineering). Individual companies also mentioned their local ownership, bilingual managers, quality assurance program and pride taken in their work as distinguishing characteristics. The survey results underscore the highly competitive pricing of commercial cleaning services in the DC metro market and the competitive advantage of firms that have built a successful track record.

23

6.0 Analysis of Market Niche Opportunities Given the commodity nature of commercial cleaning and entrenched position of competitors that provide routine cleaning services, a new company should seek to differentiate itself by serving a market niche. This involves pursuing particular customer niches for which a social purpose and/or worker-owned company has special appeal or offering a specialized service such as disaster restoration, mold remediation or use of eco-friendly products. Several potential strategies are briefly summarized below: 6.1 Customer Niche Markets ��Cooperative Organizations

The weak response to NCBA’s initial outreach to large cooperative organizations in the DC metro area is not encouraging. Securing a contract to service just a single facility the size of NRECA’s (about 250,000 sq. ft.) would be sufficient to launch a new venture. The ability of the task force to find a “friendly” co-op customer of this scale is one way to position the new company to establish a track record and succeed in a highly competitive market.

��Nonprofit Organizations and Institutions This is a fairly broad niche, encompassing non-profit associations, foundations and community development corporations, and large institutions, such as schools, museums and churches. While these customers are often receptive to social marketing pitches, their quality and price standards are similar to those of mainstream corporate customers. The lack of interest by members of the Downtown Cluster of Congregations and Conference for Catholic Facility Management indicates that it may be difficult to penetrate this market through arms length marketing efforts. Outreach to the American Red Cross and World Bank was likewise unfruitful. As with the co-op market, serving this niche will require more networking by task force members to identify organizations that are friendly to the initiative’s goals and willing to use their purchasing prerogative to support a new venture.

��Medical Facilities

Another customer niche is medical facilities, including hospitals, clinics, rehabilitation facilities, medical offices and laboratories. Hospital cleaning involves more interaction with building occupants, and all medical facility cleaning requires special protocols for infection control and handling of radioactive and biological wastes. In general, medical contracts require prior experience and are difficult for a startup to get. ICA did explore the possibility of partnering with a Massachusetts-based company that uses ultrasound technology to clean hospital equipment (stretchers, wheelchairs, IV poles and carts). The privately-held company is seeking to expand its business nationally; the owner was skeptical about a joint venture, however, and the volume of potential job creation appeared relatively small.

��Government Agencies

Concentrating on sales to government customers has both positive and negative aspects. On the positive side, it is possible to secure a large block of demand from a single customer. On

24

the negative side, the bidding process and contract requirements can often be burdensome, and government entities tend to be slow payers. As previously discussed, many federal agency cleaning contracts are set-asides for NISH-affiliated agencies or businesses that qualify under various socioeconomic programs. The cooperative’s best opportunity to qualify for federal set-aside contracts would be as a HUB Zone business located in Washington, DC, although the volume of HUB Zone contracts is relatively small. (Janitorial service contracts awarded in 2000 to all HUB businesses in DC totaled $558,000.)

6.2 Service Niche Markets ICA explored a number of specialized services, from floor care, upholstery cleaning (including office partitions) and window washing to disaster restoration, post-construction clean-up and mold remediation. Some niche services represent a more predictable stream of business revenue than others. Window washing, hard-surface floor care and HVAC cleaning, for example, may be scheduled on a regular or seasonal basis, although many of these services are performed only once or twice per year. Specialty services like disaster restoration or carpet and upholstery cleaning are one-time or very infrequent, and all of these services require a larger customer base and more operating capital to cover sales and cash flow fluctuations. Many niche services also require a relatively higher initial investment in specialty equipment and workforce training, and involve higher physical risks and commensurately higher costs for liability and worker compensation insurance. Partnering with a large insurance company to provide disaster cleaning is one way the cooperative might generate a stream of steady business in this particular service niche. The Union Labor Insurance Company was explored as a prospect, but was found not to be a possibility. An additional market niche is green cleaning, which involves the use of non-toxic and non-polluting cleaning products that reduce exposure to hazardous chemicals and improve indoor air quality (benefiting both building occupants and janitorial workers). Anecdotal evidence indicates that the market for environmentally friendly cleaning services is growing. Increasingly, some states and municipalities are requiring the use of “environmentally preferred products,”26 and many residential customers, particularly those with children, are responsive to the health and safety benefits. WAGES, a California-based organization that sponsors women-owned cleaning cooperatives, has had some success in making an environmental marketing pitch to residential customers and reports that delivering environmentally friendly services does not significantly raise direct costs for their companies. Commercial customers are less attuned to environmental considerations, however. Serving the residential cleaning market is a possibility but would involve starting very small and building volume slowly over time, which may not be compatible with the initiative’s goal to influence policy makers.

26 Building Services Management, Green Cleaning: What is it and Who Decides?, April 2003

25

7.0 Assessment of Local Labor Supply The largest local pool of unskilled workers is found in the District of Columbia, which has a significantly poorer and less educated population than its suburban neighbors, and twice the unemployment. The DC area attracts a high number of immigrants, mainly to its suburban counties. El Salvador is the country of origin for the largest percentage of legal immigrants who have settled there during the last decade. 7.1 Demographic Profile Population The DC primary metropolitan statistical area (PMSA), including outlying counties in Maryland, Virginia and West Virginia, ranks as the sixth largest population center in the U.S., with about five million residents. About 70% live within the metro area encompassed by this study, with the greatest number of people found in the Maryland suburbs as follows:

DC Metro Population, 2001 Estimates

1,301,403

1,708,138

571,822DC

Suburban MD(PG & Mont)

Northern VA(Alex, Arl &Fairfax)

While suburban Maryland has the most people, northern Virginia experienced the most population growth during the last decade, increasing by 17%, in comparison with 12.7% growth in suburban Maryland (and 13.1% for the nation as a whole). During the same period, the District of Columbia lost 5.7% of its population. Immigrants accounted directly for 49% of the PMSA’s population increase during the last decade, with an annual average of over 29,000 immigrants settling in the area since 1990. About one-third of all immigrants were from El Salvador, Vietnam, China, India and the Philippines. El Salvador was the largest single country of origin, with 11.5% of the total.27 Income Economically, distinct lines of poverty and prosperity can be seen among the various locales that comprise metro DC. DC itself is by far the poorest community, with some 20.2% of residents living below poverty and a median household income of $40,127, according to the 2000 Census.

26

27 Federation for American Immigration Reform

At the opposite end of the scale, Fairfax County’s poverty rate is 4.5%, and its median household income is $81,050. Unlike most large cities, where communities grew more economically mixed during the last decade, DC’s poverty became more concentrated. In 2000, 24% of its poor residents lived amid “concentrated poverty” (defined as neighborhoods where at least 40% of residents are poor), compared to only 9% in 1990.28 Nationally in 2000, 12% of the urban poor lived in census tracts with concentrated poverty, a decline from 17% in 1990. The worsening numbers in DC are attributed mainly to a breakdown in city services that motivated middle class families to move out of the city, and to a lesser extent, gentrification within the District that priced people out of some neighborhoods and into poorer ones. Education Levels The District of Columbia has low literacy levels (the worst in the country) and high dropout rates. Of the 78% of DC residents 25 and older who are high school graduates, many test at or below a 5th grade reading level. In contrast, 85% to 91% of Montgomery County, Maryland and northern Virginia residents are high school graduates, and over half have Bachelor’s degrees or higher. Eighty-five percent of Prince Georges County residents are high school graduates and 27% have advanced degrees. Race and Ethnicity The District of Columbia and Prince Georges County are predominantly black jurisdictions (60-63%), while Montgomery County and northern Virginia are mainly white (60-70%). Montgomery County and the City of Alexandria have the most ethnically diverse populations, and Arlington and Fairfax counties have the greatest concentrations of Hispanic and Asian residents (18% and 13% respectively). 7.2 Unemployment and Workforce Mobility A comparison of current unemployment rates underscores the economic disparities between the District and its suburban neighbors. In 2002, 6.4% of District residents were unemployed (and seeking work) compared with 3.7% of all residents within the PMSA. As of May 2003, DC had an unemployed labor force of some 18,400 persons, about 19% of the total 96,600 unemployed persons within the greater PMSA. (These numbers do not include so-called “discouraged workers,” individuals who cannot find jobs and have stopped seeking them.) Only 28% of DC residents commute to jobs outside the District. By comparison, 82% of all residents in the DC PMSA travel outside their place of residence to work, into DC or between suburbs.29

28 Washington Post, May 18, 2003, D.C. Pockets of Poverty Growing 29 DC Workforce Investment Council, State of the Workforce Study, January 2003,

27

7.3 Union Representation Of some 37,000 janitorial service workers in the DC metro area, 5,300 are represented by Local 82 of the Service Employees International Union (SEIU) under Master Commercial Agreements in DC and Montgomery County, Maryland; only about 10% of these janitors are full-time and receive health insurance. Separate contracts cover direct service and maintenance workers, including janitors, at many academic institutions and public venues (e.g., Howard University, George Washington University, The Kennedy Center and MCI Center). Health insurance benefits vary by individual contract. Local 82 also represents some 1,500 workers under various contracts in federal and district government buildings, and most of these workers receive health insurance. The starting union wage is $8.00 per hour. A new Master Commercial Agreement ratified in DC earlier this year provides for wage increases of 5% annually for five years, from $8.40 in 2004 to $10.20 in 2008. Union janitors in buildings over 100,000 sq. ft. are guaranteed a minimum 25 hours’ work per week. Those working in buildings over 500,000 sq. ft. are guaranteed a minimum 30 hours’ work per week. Beginning in January 2005, 750 part-time workers covered under that agreement will begin receiving health insurance.

28

8.0 Operations 8.1 Management Hiring a cooperative manager with strong sales ability would be key to the success of this initiative. Attracting an individual with a record of satisfied accounts would add credibility to the new company and encourage customers to give it a chance. In addition to marketing and customer relations, the manager would perform or supervise other functions including training, scheduling, crew supervision, quality control, billing, purchasing and payroll. The financial model in this study assumes a general manager with primary responsibility for sales and financial management, plus supervisors who are responsible for training, scheduling, customer relations and quality control. Annual salaries at startup are budgeted at $55,000 for the general manager and $35,000 for supervisors. In the first year, a half-time supervisor supports the general manager. Thereafter, as the company grows, the ratio of managers to workers is 1:10 (based on a typical ratio of 1:8 to 1:12). 8.2 Worker/Members Recruitment If the decision is made to go forward, a critical task of this initiative will be to find motivated workers that will form the membership of the cleaning cooperative. In the course of this study, ICA and NCBA approached the Latino Economic Development Corporation (LEDC), a community development organization, as a potential source of labor. LEDC focuses on business development, housing and real estate development, including training and technical assistance, lending and tenant organizing. The organization mainly serves the Mount Pleasant, Adams Morgan and Columbia Heights neighborhoods of DC, but also attracts Latino immigrants from suburban Maryland and Virginia because its services are bilingual. In a meeting in September, LEDC’s executive director pledged their assistance to provide outreach to the local Latino population to recruit workers for a new entity. As previously noted, local public housing residents represent another potential labor pool. Workers would be screened for their motivation and physical capacity to perform the work. Workers need to be organized and able to follow instructions, and they need physical strength and stamina to lift and push equipment, transfer and dispose trash, and bend and reach to perform other cleaning tasks. Workers may be subject to criminal record checks (a common requirement in buildings occupied by government agencies), and bonding may be required. Training Workers would be thoroughly trained in standard cleaning procedures and sound safety and health practices, including the handling of cleaning chemicals, proper use and care of equipment and tools, and first aid procedures. The training would include a combination of classroom and

29

hands-on instruction. ICA has identified two potential training vendors – Davis Memorial Goodwill Industries in DC and Spartan Chemical Company, a supplier of cleaning and maintenance products that offers generic training materials, in-service workshops, and various training and certification programs. 8.3 Services and Work Flow For purpose of this study, the company is assumed to provide general cleaning services for a niche customer, as opposed to delivering a specialty service. The company would offer some or all of the following services:

Vacuuming Dusting Trash removal Bathroom cleaning Kitchen cleaning (for office kitchens)

Spot removal/carpet cleaning Floor buffing/waxing Window cleaning Exterior/sidewalk cleaning In general, the company would provide new customers with a thorough “deep” clean on the first day of services, followed by “maintenance” cleans on as frequent a basis as the client is willing to pay for (daily is optimal). Depending upon the use of the space and its cleaning patterns, the company would periodically perform deep cleans to maintain customer satisfaction. Commercial cleaning services in office settings are generally performed in the evening (5:00 to 11:00 p.m.). Some contract types – schools, medical facilities, etc. – provide opportunities for daytime hours. To maximize productivity, workers would work in teams, an arrangement that also facilitates cross training and fosters a sense of unity and mutual support. In team cleaning, team members function as specialists, with each worker responsible for one particular aspect of the cleaning performed in an area (versus zone cleaning, where an individual worker is responsible for all of the cleaning tasks in an assigned area). There are four basic types of specialists (described on the following page), and the utility specialist often functions as the team leader. A team can be comprised of any number of people and any configuration of specialties, depending on the need. Multiple teams of four or more, for example, might be required to service large contracts, while two-person teams might suffice to service smaller contracts. Workers would be cross-trained in each specialty to be able to rotate tasks and to cover absences of other worker owners for illness and vacation.

30

Specialist Tasks Tools

Light Duty Dust, spot clean, remove trash

Large wheeled trash can with accessory apron, labeled spray bottles, personal protective equipment (PPE)

Vacuum Vacuum, check trash, turn out lights, secure area

Backpack vacuum with four filtration system, PPE

Restroom Clean and disinfect fixtures and floors, fill dispensers, empty trash

Restroom cart, mop and bucket, disinfectant applicator, wet floor sign, stock solution bottle, cleaning cloths, disinfectant spray bottle, PPE

Utility

Haul out trash, clean entryways, spot clean carpet, handle light maintenance and any other specialty service

Large wheeled trash collection bin, floor buffer/scrubber, carpet extractor, PPE

8.4 Equipment and Supplies The company would utilize vacuum cleaners, mops and buckets, floor buffers/scrubbers, carpet extractors, restroom carts and trash collection bins. In addition, the company would use a variety of supplies including cleaning cloths, cleaning solutions, gloves and trash bags. Depending on the size of their space, customers might be expected to provide space for supplies and possibly some equipment on-site. Equipment used less frequently, such as carpet extractors, would be mobile. 8.5 Wages and Job Quality The starting wage for union janitors working under SEIU Master Commercial Agreements in DC and Maryland is $8.00 per hour, and a new contract in DC includes 5% annual increases through 2008 ($8.40 in 2004). Non-union janitors earn the DC minimum wage of $6.15 per hour. Union janitors are guaranteed a minimum of 25 to 30 hours per week and some receive employer-paid health insurance. The financial model in this study assumes a beginning wage of $8.40 per hour and annual increases of 5%. A 30-hour work week is also assumed. Five paid personal days (30 hours) have been budgeted for direct workers, but no health insurance.

31

9.0 Financial Plan 9.1 Billing Rate and Revenue Forecast Rates for office cleaning services in the DC metro area range between $.80 to $1.25 per square foot, depending on the building and location. Other factors that affect the rate charged include frequency of cleaning, total area cleaned, differences in floor surfaces, volume of “traffic” from outside visitors, prevalence of glass doors and partitions, and amount of trash generated. For purpose of this study, a billing rate of $1.05 per sq. ft. has been used in year one, and assumes daily cleaning services at 1¾ hours per site. Rates increase by five percent annually thereafter. The revenue forecast assumes a partner-based scenario, in which two to five large customers contract for cleaning services to help launch the cooperative. Revenues grow steadily over five years, with monthly break-even sales achieved midway through year three as follows:

Table 3. Five Year Sales SummaryYear 1 Year 2 Year 3 Year 4 Year 5

Number of Square Feet Cleaned 250,000 500,000 750,000 975,000 1,170,000Billing Rate per Square Foot $1.05 $1.10 $1.16 $1.22 $1.28Total Sales $262,500 $551,250 $868,219 $1,185,119 $1,493,249

9.2 Breakeven Analysis The target gross margin for the company is 22%. Given the projected overhead cost structure, annual breakeven revenues are about $1.2 million. The financial projections indicate that a company with this cost structure and sales growth would achieve breakeven sales in year four of operations. 9.3 Capital Expenditures Capital expenditures would be required for cleaning equipment, computer equipment and office furniture. The financial model assumes that both categories of equipment have a useful life of three years. Purchases of direct equipment are based on a ratio of:

��1 Vacuum cleaner per 3 direct workers ��1 Floor buffer per 5 direct workers ��1 Carpet extractor per 10 workers

The following table provides a summary of all capital expenditures:

32

Table 4. Capital ExpendituresYear 1 Year 2 Year 3 Year 4 Year 5

Vacuum cleaners $3,019 $126 $2,044 $3,962 $1,352Floor buffers 3,170 132 2,146 4,160 8,042Carpet extractors 2,943 123 1,993 3,863 1,318Computer hardware 1,600 800 800 2,400 1,600Computer software 5,000 0 0 2,000 0Office furniture 1,000 500 500 500 500Total $16,732 $1,681 $7,483 $16,886 $12,813

9.4 Financial Projections Appendix B contains detailed financial projections for the startup company. First-year sales are projected at $262,500. At this level of sales, the company would employ 12 full-time equivalent (FTE) cleaning workers. Over the course of five years, the business grows steadily to nearly $1.5 million in sales and 55 FTE workers. The company achieves profitability on a monthly basis in month 31 and earns modest profits in years four and five.

Table 5. Five Year Financial SummaryYear 1 Year 2 Year 3 Year 4 Year 5

Number of Square Feet Cleaned 250,000 500,000 750,000 975,000 1,170,000FTE Cleaning Workers 11.8 23.6 35.4 46.0 55.2Sales $262,500 $551,250 $868,219 $1,185,119 $1,493,249Gross Margin $55,549 $119,916 $191,931 $265,828 $337,673Gross Margin % 21% 22% 22% 22% 23%Net Income ($59,788) ($47,004) ($10,183) ($551) $8,576Net Income % -23% -9% -1% 0% 1%

9.5 Capitalization ICA estimates that the startup capitalization needed by the new company would be $250,000. Of this, $200,000 is equity and $50,000 is long-term debt. The model assumes debt financing in the form of a term loan beginning at the end of year two. A line of credit at 75% of accounts receivable is also required beginning midway through year three of operations. No member contributions have been budgeted. These are expected to be nominal, given the low level of compensation, and would not materially affect the financials. 9.6 Assumptions The financial projections are based on the following assumptions:

33

��Annual billing rate: $1.05 per sq. ft. ��Direct wage, year one: $8.40 per hour ��Duration and frequency of cleaning jobs: 1.75 hours each @ 5 nights per week ��Travel time: 2 trips of 20 minutes each per night (not including first and last trips) ��Expense inflation: 3% ��Wage inflation: 5% ��Billing rate inflation: 5% ��Accounts receivable: 45 days ��Accounts payable: 30 days ��Long-term debt: 5 year term at 8% interest ��Interest on line of credit: 8% ��Office rental: 500 sq. ft. @ $20 per sq. ft. ��Annual health insurance premium (management staff only): $4,500

34

10.0 Methodology for Future Replication of Cooperative Business In pursuing replication of the cooperative cleaning company, the task force can consider a partner-based or market-based strategy. A partner-based strategy represents a “wholesale” approach in which the partner is the key link to business volume in local markets. In contrast, a market-based strategy represents a “retail” approach in which local markets are directly targeted, and businesses are developed in each site through alliances with individual local partners. The partner-based approach is likely to assure higher initial sales volume and therefore more job creation at startup and a shorter time to profitability. In contrast, a market-based approach generally takes longer to achieve scale. The methodology for each approach is outlined below. 10.1 Partner-Based Replication Strategy 1. Identify and interview national firms or organizations that can deliver guaranteed business

volume in a particular market niche. To access federal contracts, for example, the task force could approach large national contractors like Sodexho and Aramark, who often team with community rehabilitation programs (i.e., NISH affiliates) or with small, minority, disadvantaged and women-owned businesses to fulfill federal contracts. To be attractive to these national contractors, the cooperative(s) would have to meet some socioeconomic criteria – 8(a) minority certification or HUB Zone status, for example – that would enhance the partner’s federal bidding position and/or enable them to access set asides.30 In the medical sector, a national network like the Catholic Health Association could be approached about doing business with its member Catholic health care facilities and related organizations (which include two member hospitals in DC and two in Montgomery County, Maryland). Regardless of market niche, arms-length cold calling of potential partners is unlikely to be successful, and personal connections and high-level networking are essential.

2. Identify the three to five cities that the national partner has the most interest in pursuing. 3. Develop a joint strategy and memo of understanding to proceed.

The memo of understanding should include a plan for approaching local branches or other affiliates to gain their buy-in of the concept, assign responsibility for specific actions, and develop a budget for implementing the plan.

30 Certification as an 8(a) business requires at least two years’ business experience, so the cooperative could not immediately pursue this strategy.

35

4. Raise national grant funds to support the initiative. Funds would initially be raised to carry out the work plan, perform due diligence and complete business planning activities. (Funds would subsequently need to be raised to capitalize the businesses.)

5. Perform due diligence on the selected local offices or affiliates of the national partner. 6. Develop a business plan for each of the final sites. 7. Work with partner to roll out initiative. This structure has some complications for a cooperative business model. The partner(s) will likely expect some level of control in directing the company. Thus, the entity would probably have to be structured as a hybrid cooperative with some outside ownership. 10.2 Market-Based Replication Strategy 1. Analyze large metropolitan markets with significant potential, focusing on the strength of

selected niche markets, presence of potential local partners, and characteristics of the local labor supply. In each of the cities being considered, determine the:

��Size and future prospects of selected niche markets (e.g., cooperatives, nonprofits,

commercial real estate, medical facilities) ��Presence of potential local partners (e.g., CDCs, associations, employers, individuals,

etc.) ��Demographics – size, age, skills, income, unemployment – of the local labor market

2. Based on the results of the preliminary analysis, narrow the list of cities to the top three

possible sites. In each of the three sites:

3. Interview potential local partners to evaluate their fundraising connections, customer

connections, workforce connections, and business development capacity. Specifically, determine what they can deliver in terms of their: ��Capacity to raise capital and/or make a direct financial investment ��Access to friendly and/or desired niche customers ��Access to the local labor force ��Long-term business and management support

4. Select local partner(s)

Multiple partnerships are likely and the nature of various partnerships will differ, ranging from a few strategic introductions to short-term service on an Advisory Board to longer-term involvement as an investor, director or recruitment and training partner.

36

5. Raise local grants to support further feasibility and business planning work. 6. Conduct feasibility studies and develop business plans that focus on the most promising local

market niche in each site. 7. Work with partner to capitalize and launch. The market-based approach is more compatible with a pure cooperative model, although the balance of ownership and control would depend in part on the sources of social purpose capital that are raised for each site. In sum, each strategy offers the following advantages and disadvantages:

Replication Strategy Pros Cons

Larger scale Difficulty in finding committed - more immediate job creation national partner(s) - bigger public profile

Shared control by workers with Lower risk partner(s)

Established presence inmultiple markets

More control retained by Smaller scaleworkers - slower job creation

Lower startup capital required Higher risk

More effort needed to cultivate local partners in each market

Individual Market-Based

Partner-Based

37

11.0 Conclusions and Next Steps Developing a successful commercial cleaning cooperative in the metro DC area will be a difficult endeavor, and the ability of this venture to generate reasonable financial returns and fulfill its promise as a model for urban economic development is doubtful. Several forces in the market – weak customer demand, entrenched competition, and low margins – are working against the ability of a new enterprise to succeed on either front. On the market side, the local janitorial services industry is expected to grow at a modest rate during the next few years due to new office construction with projected high occupancy rates and increased outsourcing by individual companies and property managers. Market demand for cleaning services from a startup company is very weak, however. The consistent message from potential customers surveyed for this study is that they value the experience and performance of their existing cleaning vendors and have no interest in considering a new company. A few property managers who are less loyal to their current contractors are no less insistent that new cleaning vendors be established and experienced. Billing rates that are pegged to low worker wages present another formidable challenge. A new venture’s need to price its services competitively coupled with the desire to pay a decent wage produces a cost structure that delays profitability, constrains the company’s capacity to borrow capital, and allows no margin for error in achieving annual sales targets. Reducing first-year wages from the local union scale of $8.40 per hour to $8.25, for example, is a rational business response to this problem but would dilute the initiative’s objective to create quality jobs. Despite these obstacles, there are two ways a new cleaning business can enter the market should the task force opt to proceed within this environment. One option is to begin operating on a very small scale, using a few initial contracts to establish a track record, and then building on that base of satisfied customers. An opportunity to pursue this strategy may exist among public and other low-income housing developments, where Section 3 of the HUD Act encourages local housing authorities to contract with companies that are owned by or employ public housing or other low-income residents. The DC Housing Authority is receptive to this idea, and a key to pursuing this strategy will be to partner with a community-based group that can organize public housing and other neighborhood residents, engage them in this effort, and effectively apply pressure to local officials to translate good intentions into firm contracts with a new company. Still, the initial scale is expected to be small. An alternative and more promising strategy is to identify a large customer that is friendly to the initiative’s economic development goals, controls a significant volume of space, and is willing to contract with the new company at startup. Attracting such a customer would enable the cooperative to create more immediate jobs, achieve a higher profile, and accelerate the path to sustainability. A customer that has a national presence could also help the initiative enter additional markets. An essential element of pursuing this strategy is the direct (and continued) involvement of task force members in targeting prospective organizations, conducting high-level networking to make the necessary connections, and securing long-term contracting commitments.

38

In either case, however, the company would be subject to intense market pressures in terms of pricing and sales growth that would limit its earnings potential and prevent the cooperative from paying health benefits or patronage dividends. This, in turn, raises questions about long-term job quality and the company’s ability to retain worker members. Focus groups, arranged by local neighborhood groups, would be useful to get potential workers’ input and perspective to inform these questions. Altogether, though, the weak customer demand, intense competition and low wages that characterize the local market argue against developing a commercial cleaning company in metro DC as a model urban cooperative.

39

Appendix A:

Customer Survey List

Customer Survey List Amalgamated Life Insurance Company (regarding Union Labor Insurance Company) American Red Cross Asbury United Methodist Church Bernstein Management Company Calvary Baptist Church Cassidy & Pinkard Church of the Pilgrims Conference for Catholic Facility Management Constellation Federal Credit Union Crowell & Moring Department of Housing and Urban Development Federal Credit Union Department of Labor Federal Credit Union District of Columbia Department of Housing and Community Development District of Columbia Public Housing Authority E and Group Engraving and Printing Credit Union First Congregational Church Housing Opportunity Commission of Montgomery County International Brotherhood of Electrical Workers 26 Federal Credit Union KSI Management Corporation Lincoln Congregational Temple Manna, Inc.

McGuire Woods National Rural Electric Cooperative Association National Rural Utilities Cooperative Finance Corporation Naval Research Lab Federal Credit Union Organization of American States Federal Credit Union People’s Congregational Church Police Federal Credit Union Public Citizen St. John’s Church of Lafayette Square St. Paul’s Church, Rock Creek Parish Shiloh Baptist Church Transportation Federal Credit Union U.S. Conference of Catholic Bishops U.S. Post Office Federal Credit Union Walsh, Colucci, Lubely, Emrich & Terpak Washington Metro & Transportation Authority Wesley Housing Development Corporation

Appendix B:

Financial Projections

Income Statement--5 Year Summary Year 1 Year 2 Year 3 Year 4 Year 5

SalesOffice 262,500 551,250 868,219 1,185,119 1,493,249Total Gross Sales 262,500 551,250 868,219 1,185,119 1,493,249

Cost of Goods SoldDirect Labor 153,915 323,222 507,977 691,920 870,003Benefits 26,367 55,370 87,041 118,588 149,145Total Direct Labor Cost 180,282 378,592 595,018 810,508 1,019,148Direct Materials 13,125 27,563 43,411 59,256 74,662Expendable Supplies 2,625 5,513 8,682 11,851 14,932Depreciation 3,044 3,130 3,130 2,122 2,036Equipment Exp. (non-depr.) 3,938 8,269 13,023 17,777 22,399Vehicle Exp. (non-depr.) 3,938 8,269 13,023 17,777 22,399Total COGS 206,951 431,334 676,288 919,291 1,155,577

Gross Profit 55,549 119,916 191,931 265,828 337,673

Operating ExpensesAdministrative Salaries 72,500 110,725 132,613 174,836 219,474Administrative Benefits 12,977 21,160 25,788 34,800 44,311Rent 10,000 10,300 10,609 10,927 11,255Depreciation 2,400 2,767 3,133 2,500 2,867Office Supplies 300 309 318 328 338Printing & Copying 120 124 127 131 135Professional Serv.--accounting 2,600 2,678 2,758 2,841 2,926Insurance 600 618 637 656 675Postage 300 309 318 328 338Marketing 12,000 12,360 12,731 13,113 13,506Training 2,264 1,944 1,626 1,160 1,035Utilities 960 989 1,018 1,049 1,080Telephone/Communications 1,200 1,236 1,273 1,311 1,351Waste Disposal 100 103 106 109 113Payroll Service 2,704 5,679 8,925 12,158 15,287Miscellaneous 656 1,378 2,171 2,963 3,733Total Operating Expenses 121,681 172,678 204,153 259,209 318,424

Operating Profit (66,132) (52,762) (12,222) 6,619 19,248

Total Other Income 6,344 5,758 5,786 481 604

Total Other Expenses 0 0 3,747 7,650 11,276

Profit Before Tax (59,788) (47,004) (10,183) (551) 8,576

Total Taxes 0 0 0 0 0

Net Income (59,788) (47,004) (10,183) (551) 8,576

Average FTE Workers 11.8 23.6 35.4 46.0 55.2

11/26/03

Balance Sheet--5 Year Summary Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

ASSETS

Current AssetsCash 181,502 83,411 89,465 36,685 49,104 61,417Accounts Receivable 0 63,000 68,906 119,380 148,140 186,656Prepaid Expenses 1,766 0 0 0 0 0Total Current Assets 183,268 146,411 158,371 156,065 197,244 248,073

Fixed AssetsGross Fixed Assets 16,732 16,732 18,413 25,896 41,982 54,795Accumulated Depreciation 0 (5,444) (11,341) (17,604) (22,226) (27,129)Net Fixed Assets 16,732 11,288 7,072 8,292 19,756 27,666

Total Other Assets 0 0 0 0 0 0

Total Assets 200,000 157,699 165,443 164,357 216,999 275,739

LIABILITIES

Current LiabilitiesAccounts Payable 0 9,267 13,249 15,771 20,331 25,216Accrued Payroll 0 8,220 8,986 15,492 19,152 24,075Accrued Taxes 0 0 0 0 0 0Line of Credit 0 0 0 8,541 62,691 112,982Current Portion of Long Term Debt 0 0 8,472 9,175 9,937 10,761Total Current Liabilities 0 17,487 30,708 48,980 112,110 173,034

Long Term LiabilitiesLong Term Debt 0 0 41,528 32,353 22,416 11,655Other Long Term Liabilities 0 0 0 0 0 0Total Long Term Liabilities 0 0 41,528 32,353 22,416 11,655

EquityClass A Shares 0 0 0 0 0 0Contributed Equity 200,000 200,000 200,000 200,000 200,000 200,000Retained Earnings 0 (59,788) (106,792) (116,976) (117,526) (108,950)Total Net Worth 200,000 140,212 93,208 83,024 82,474 91,050

Total Liabilities & Net Worth 200,000 157,699 165,443 164,357 216,999 275,739

Check 0 0 0 0 0 0

11/26/03

Statement of Cash Flows--5 Year Summary Year 1 Year 2 Year 3 Year 4 Year 5

OPERATIONS CASH FLOWSNet Income (59,788) (47,004) (10,183) (551) 8,576Add: Depreciation & Amortization 5,444 5,897 6,263 4,622 4,903Add: Income Taxes 0 0 0 0 0Add: Other non-operating expenses 0 0 0 0 0Gross Cash Flow (54,344) (41,107) (3,920) 4,071 13,479

Changes in Assets & Liabilities(Inc) Dec Accounts Receivable (63,000) (5,906) (50,474) (28,760) (38,516)(Inc) Dec Prepaid Expenses 1,766 0 0 0 0(Inc) Dec Other Assets 0 0 0 0 0Inc (Dec) Accounts Payable 9,267 3,982 2,522 4,559 4,885Inc (Dec) Accrued Payroll 8,220 766 6,506 3,660 4,923Inc (Dec) Accrued Tax 0 0 0 0 0Inc (Dec) Other Liability 0 0 0 0 0Total changes - Operations (43,747) (1,158) (41,446) (20,540) (28,708)

Net Cashflows from Operations (98,091) (42,265) (45,366) (16,469) (15,229)

INVESTMENT & OTHER CASH FLOWS(Inc) Dec Fixed Assets 0 (1,681) (7,483) (16,086) (12,813)(Inc) Dec Other Non-Current Assets 0 0 0 0 0Net Cashflows from Investments 0 (1,681) (7,483) (16,086) (12,813)

FREE CASH FLOW FOR FINANCING (98,091) (43,945) (52,850) (32,555) (28,042)

TAXESLess: Taxes 0 0 0 0 0

Cash Flow Prior To Financing (98,091) (43,945) (52,850) (32,555) (28,042)

FINANCING CASH FLOWSInc (Dec) Line of Credit 0 0 8,541 54,149 50,292Inc (Dec) in Long Term Debt 0 50,000 (8,472) (9,175) (9,937)Inc (Dec) Class A Stock 0 0 0 0 0Inc (Dec) Contributed Equity 0 0 0 0 0Dividends Paid 0 0 0 0 0Total Financing Activities 0 50,000 69 44,974 40,355

INCREASE (DECREASE) CASH (98,091) 6,055 (52,780) 12,419 12,313

Starting Cash 181,502 83,411 89,465 36,685 49,104Ending Cash 83,411 89,465 36,685 49,104 61,417

11/26/03

Income Statement--Year 1 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Year 1

SalesOffice 0 0 10,500 10,500 15,750 21,000 21,000 31,500 31,500 36,750 42,000 42,000 262,500Total Gross Sales 0 0 10,500 10,500 15,750 21,000 21,000 31,500 31,500 36,750 42,000 42,000 262,500Total Net Sales 0 0 10,500 10,500 15,750 21,000 21,000 31,500 31,500 36,750 42,000 42,000 262,500

Cost of Goods SoldDirect Labor 0 0 6,157 6,157 9,235 12,313 12,313 18,470 18,470 21,548 24,626 24,626 153,915Benefits 0 0 1,055 1,055 1,582 2,109 2,109 3,164 3,164 3,691 4,219 4,219 26,367Total Direct Labor Cost 0 0 7,211 7,211 10,817 14,423 14,423 21,634 21,634 25,239 28,845 28,845 180,282Direct Materials 0 0 525 525 788 1,050 1,050 1,575 1,575 1,838 2,100 2,100 13,125Expendable Supplies 0 0 105 105 158 210 210 315 315 368 420 420 2,625Depreciation 254 254 254 254 254 254 254 254 254 254 254 254 3,044Equipment Exp. (non-depr.) 0 0 158 158 236 315 315 473 473 551 630 630 3,938Vehicle Exp. (non-depr.) 0 0 158 158 236 315 315 473 473 551 630 630 3,938Total COGS 254 254 8,410 8,410 12,488 16,566 16,566 24,722 24,722 28,801 32,879 32,879 206,951

Gross Profit (254) (254) 2,090 2,090 3,262 4,434 4,434 6,778 6,778 7,949 9,121 9,121 55,549

Operating ExpensesAdministrative Salaries 6,042 6,042 6,042 6,042 6,042 6,042 6,042 6,042 6,042 6,042 6,042 6,042 72,500Administrative Benefits 1,081 1,081 1,081 1,081 1,081 1,081 1,081 1,081 1,081 1,081 1,081 1,081 12,977Rent 833 833 833 833 833 833 833 833 833 833 833 833 10,000Depreciation 200 200 200 200 200 200 200 200 200 200 200 200 2,400Office Supplies 25 25 25 25 25 25 25 25 25 25 25 25 300Printing & Copying 10 10 10 10 10 10 10 10 10 10 10 10 120Professional Serv.--accounting 217 217 217 217 217 217 217 217 217 217 217 217 2,600Insurance 50 50 50 50 50 50 50 50 50 50 50 50 600Postage 25 25 25 25 25 25 25 25 25 25 25 25 300Marketing 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 12,000Training 0 0 566 0 283 283 0 566 0 283 283 0 2,264Utilities 80 80 80 80 80 80 80 80 80 80 80 80 960Telephone/Communications 100 100 100 100 100 100 100 100 100 100 100 100 1,200Waste Disposal 8 8 8 8 8 8 8 8 8 8 8 8 100Payroll Service 0 0 108 108 162 216 216 325 325 379 433 433 2,704Miscellaneous 0 0 26 26 39 53 53 79 79 92 105 105 656Total Operating Expenses 9,671 9,671 10,372 9,806 10,156 10,223 9,940 10,641 10,075 10,425 10,492 10,209 121,681

Operating Profit (9,925) (9,925) (8,282) (7,716) (6,894) (5,789) (5,506) (3,863) (3,297) (2,476) (1,371) (1,088) (66,132)

Total Other Income 568 568 561 551 538 531 522 514 507 499 495 489 6,344

Other ExpensesInterest on Long Term Debt 0 0 0 0 0 0 0 0 0 0 0 0 0Interest on LOC 0 0 0 0 0 0 0 0 0 0 0 0 0Total Other Expenses 0 0 0 0 0 0 0 0 0 0 0 0 0

Profit Before Tax (9,357) (9,357) (7,721) (7,165) (6,356) (5,258) (4,984) (3,349) (2,790) (1,976) (876) (599) (59,788)

Total Taxes 0 0 0 0 0 0 0 0 0 0 0 0 0

Net Income (9,357) (9,357) (7,721) (7,165) (6,356) (5,258) (4,984) (3,349) (2,790) (1,976) (876) (599) (59,788)

11/26/03

Balance Sheet--Year 1 Month 0 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12

ASSETS

Current AssetsCash 181,502 181,838 173,524 161,360 145,664 137,324 126,462 116,708 108,774 99,219 93,493 87,012 83,411Accounts Receivable 0 0 0 7,875 15,750 19,688 27,563 31,500 39,375 47,250 51,188 59,063 63,000Prepaid Expenses 1,766 1,178 589 0 1,178 589 0 1,178 589 0 1,178 589 0Total Current Assets 183,268 183,016 174,113 169,235 162,591 157,601 154,024 149,386 148,738 146,469 145,858 146,664 146,411

Fixed AssetsGross Fixed Assets 16,732 16,732 16,732 16,732 16,732 16,732 16,732 16,732 16,732 16,732 16,732 16,732 16,732Accumulated Depreciation 0 (454) (907) (1,361) (1,815) (2,268) (2,722) (3,176) (3,629) (4,083) (4,537) (4,990) (5,444)Net Fixed Assets 16,732 16,278 15,825 15,371 14,917 14,464 14,010 13,556 13,103 12,649 12,195 11,742 11,288

Total Other Assets 0 0 0 0 0 0 0 0 0 0 0 0 0

Total Assets 200,000 199,294 189,937 184,606 177,509 172,064 168,034 162,942 161,840 159,118 158,053 158,405 157,699

LIABILITIES

Current LiabilitiesAccounts Payable 0 8,588 8,588 8,938 9,006 8,898 9,106 8,998 9,207 9,274 9,166 9,375 9,267Accrued Payroll 0 63 63 2,102 2,102 3,122 4,142 4,142 6,181 6,181 7,200 8,220 8,220Accrued Taxes 0 0 0 0 0 0 0 0 0 0 0 0 0Line of Credit 0 0 0 0 0 0 0 0 0 0 0 0 0Current Portion of Long Term Debt 0 0 0 0 0 0 0 0 0 0 0 0 0Total Current Liabilities 0 8,651 8,651 11,041 11,108 12,020 13,248 13,140 15,388 15,455 16,367 17,595 17,487

Long Term LiabilitiesLong Term Debt 0 0 0 0 0 0 0 0 0 0 0 0 0Other Long Term Liabilities 0 0 0 0 0 0 0 0 0 0 0 0 0Total Long Term Liabilities 0 0 0 0 0 0 0 0 0 0 0 0 0

EquityClass A Shares 0 0 0 0 0 0 0 0 0 0 0 0 0Contributed Equity 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000Retained Earnings 0 (9,357) (18,714) (26,435) (33,599) (39,955) (45,214) (50,198) (53,547) (56,337) (58,313) (59,190) (59,788)Total Net Worth 200,000 190,643 181,286 173,565 166,401 160,045 154,786 149,802 146,453 143,663 141,687 140,810 140,212

Total Liabilities & Net Worth 200,000 199,294 189,937 184,606 177,509 172,064 168,034 162,942 161,840 159,118 158,053 158,405 157,699

Check 0 0 0 0 0 0 0 0 0 0 0 0 0

11/26/03

Statement of Cash Flows--Year 1 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12

OPERATIONS CASH FLOWSNet Income (9,357) (9,357) (7,721) (7,165) (6,356) (5,258) (4,984) (3,349) (2,790) (1,976) (876) (599)Add: Depreciation & Amortization 454 454 454 454 454 454 454 454 454 454 454 454Add: Income Taxes 0 0 0 0 0 0 0 0 0 0 0 0Add: Other non-operating expenses 0 0 0 0 0 0 0 0 0 0 0 0Gross Cash Flow (8,903) (8,903) (7,267) (6,711) (5,902) (4,805) (4,531) (2,896) (2,336) (1,522) (423) (145)

Changes in Assets & Liabilities(Inc) Dec Accounts Receivable 0 0 (7,875) (7,875) (3,938) (7,875) (3,938) (7,875) (7,875) (3,938) (7,875) (3,938)(Inc) Dec Prepaid Expenses 589 589 589 (1,178) 589 589 (1,178) 589 589 (1,178) 589 589(Inc) Dec Other Assets 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Accounts Payable 8,588 0 350 67 (108) 209 (108) 209 67 (108) 209 (108)Inc (Dec) Accrued Payroll 63 0 2,039 0 1,020 1,020 0 2,039 0 1,020 1,020 0Inc (Dec) Accrued Tax 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Other Liability 0 0 0 0 0 0 0 0 0 0 0 0Total changes - Operations 9,240 589 (4,897) (8,985) (2,437) (6,058) (5,223) (5,038) (7,219) (4,203) (6,058) (3,457)

Net Cashflows from Operations 337 (8,314) (12,164) (15,696) (8,339) (10,863) (9,754) (7,934) (9,555) (5,726) (6,481) (3,602)

INVESTMENT & OTHER CASH FLOWS(Inc) Dec Fixed Assets 0 0 0 0 0 0 0 0 0 0 0 0(Inc) Dec Other Non-Current Assets 0 0 0 0 0 0 0 0 0 0 0 0Net Cashflows from Investments 0 0 0 0 0 0 0 0 0 0 0 0

FREE CASH FLOW FOR FINANCING 337 (8,314) (12,164) (15,696) (8,339) (10,863) (9,754) (7,934) (9,555) (5,726) (6,481) (3,602)

TAXESLess: Taxes 0 0 0 0 0 0 0 0 0 0 0 0

Cash Flow Prior To Financing 337 (8,314) (12,164) (15,696) (8,339) (10,863) (9,754) (7,934) (9,555) (5,726) (6,481) (3,602)

FINANCING CASH FLOWSInc (Dec) Line of Credit 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) in Long Term Debt 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Class A Stock 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Contributed Equity 0 0 0 0 0 0 0 0 0 0 0 0Dividends Paid 0 0 0 0 0 0 0 0 0 0 0 0Total Financing Activities 0 0 0 0 0 0 0 0 0 0 0 0

INCREASE (DECREASE) CASH 337 (8,314) (12,164) (15,696) (8,339) (10,863) (9,754) (7,934) (9,555) (5,726) (6,481) (3,602)

Starting Cash 181,502 181,838 173,524 161,360 145,664 137,324 126,462 116,708 108,774 99,219 93,493 87,012Ending Cash 181,838 173,524 161,360 145,664 137,324 126,462 116,708 108,774 99,219 93,493 87,012 83,411

11/26/03

Income Statement--Year 2 Month 13 Month 14 Month 15 Month 16 Month 17 Month 18 Month 19 Month 20 Month 21 Month 22 Month 23 Month 24 Year 2

SalesOffice 45,938 45,938 45,938 45,938 45,938 45,938 45,938 45,938 45,938 45,938 45,938 45,938 551,250Total Gross Sales 45,938 45,938 45,938 45,938 45,938 45,938 45,938 45,938 45,938 45,938 45,938 45,938 551,250Total Net Sales 45,938 45,938 45,938 45,938 45,938 45,938 45,938 45,938 45,938 45,938 45,938 45,938 551,250

Cost of Goods SoldDirect Labor 26,935 26,935 26,935 26,935 26,935 26,935 26,935 26,935 26,935 26,935 26,935 26,935 323,222Benefits 4,614 4,614 4,614 4,614 4,614 4,614 4,614 4,614 4,614 4,614 4,614 4,614 55,370Total Direct Labor Cost 31,549 31,549 31,549 31,549 31,549 31,549 31,549 31,549 31,549 31,549 31,549 31,549 378,592Direct Materials 2,297 2,297 2,297 2,297 2,297 2,297 2,297 2,297 2,297 2,297 2,297 2,297 27,563Expendable Supplies 459 459 459 459 459 459 459 459 459 459 459 459 5,513Depreciation 261 261 261 261 261 261 261 261 261 261 261 261 3,130Equipment Exp. (non-depr.) 689 689 689 689 689 689 689 689 689 689 689 689 8,269Vehicle Exp. (non-depr.) 689 689 689 689 689 689 689 689 689 689 689 689 8,269Total COGS 35,945 35,945 35,945 35,945 35,945 35,945 35,945 35,945 35,945 35,945 35,945 35,945 431,334

Gross Profit 9,993 9,993 9,993 9,993 9,993 9,993 9,993 9,993 9,993 9,993 9,993 9,993 119,916

Operating ExpensesAdministrative Salaries 9,227 9,227 9,227 9,227 9,227 9,227 9,227 9,227 9,227 9,227 9,227 9,227 110,725Administrative Benefits 1,763 1,763 1,763 1,763 1,763 1,763 1,763 1,763 1,763 1,763 1,763 1,763 21,160Rent 858 858 858 858 858 858 858 858 858 858 858 858 10,300Depreciation 231 231 231 231 231 231 231 231 231 231 231 231 2,767Office Supplies 26 26 26 26 26 26 26 26 26 26 26 26 309Printing & Copying 10 10 10 10 10 10 10 10 10 10 10 10 124Professional Serv.--accounting 223 223 223 223 223 223 223 223 223 223 223 223 2,678Insurance 52 52 52 52 52 52 52 52 52 52 52 52 618Postage 26 26 26 26 26 26 26 26 26 26 26 26 309Marketing 1,030 1,030 1,030 1,030 1,030 1,030 1,030 1,030 1,030 1,030 1,030 1,030 12,360Training 324 0 324 0 324 0 324 0 324 0 324 0 1,944Utilities 82 82 82 82 82 82 82 82 82 82 82 82 989Telephone/Communications 103 103 103 103 103 103 103 103 103 103 103 103 1,236Waste Disposal 9 9 9 9 9 9 9 9 9 9 9 9 103Payroll Service 473 473 473 473 473 473 473 473 473 473 473 473 5,679Miscellaneous 115 115 115 115 115 115 115 115 115 115 115 115 1,378Total Operating Expenses 14,552 14,228 14,552 14,228 14,552 14,228 14,552 14,228 14,552 14,228 14,552 14,228 172,678

Operating Profit (4,559) (4,235) (4,559) (4,235) (4,559) (4,235) (4,559) (4,235) (4,559) (4,235) (4,559) (4,235) (52,762)

Total Other Income 499 492 490 488 483 481 479 474 473 471 466 464 5,758

Other ExpensesInterest on Long Term Debt 0 0 0 0 0 0 0 0 0 0 0 0 0Interest on LOC 0 0 0 0 0 0 0 0 0 0 0 0 0Total Other Expenses 0 0 0 0 0 0 0 0 0 0 0 0 0

Profit Before Tax (4,060) (3,743) (4,069) (3,747) (4,076) (3,754) (4,080) (3,761) (4,086) (3,764) (4,093) (3,771) (47,004)

Total Taxes 0 0 0 0 0 0 0 0 0 0 0 0 0

Net Income (4,060) (3,743) (4,069) (3,747) (4,076) (3,754) (4,080) (3,761) (4,086) (3,764) (4,093) (3,771) (47,004)

11/26/03

Balance Sheet--Year 2 Month 12 Month 13 Month 14 Month 15 Month 16 Month 17 Month 18 Month 19 Month 20 Month 21 Month 22 Month 23 Month 24

ASSETS

Current AssetsCash 83,411 75,632 72,581 70,175 64,575 62,162 60,072 54,140 52,042 49,619 44,003 41,573 89,465Accounts Receivable 63,000 65,953 68,906 68,906 68,906 68,906 68,906 68,906 68,906 68,906 68,906 68,906 68,906Prepaid Expenses 0 2,344 1,172 0 2,344 1,172 0 2,344 1,172 0 2,344 1,172 0Total Current Assets 146,411 143,929 142,659 139,081 135,825 132,241 128,978 125,390 122,121 118,526 115,253 111,651 158,371

Fixed AssetsGross Fixed Assets 16,732 18,413 18,413 18,413 18,413 18,413 18,413 18,413 18,413 18,413 18,413 18,413 18,413Accumulated Depreciation (5,444) (5,935) (6,427) (6,918) (7,410) (7,901) (8,392) (8,884) (9,375) (9,867) (10,358) (10,849) (11,341)Net Fixed Assets 11,288 12,477 11,986 11,494 11,003 10,512 10,020 9,529 9,037 8,546 8,055 7,563 7,072

Total Other Assets 0 0 0 0 0 0 0 0 0 0 0 0 0

Total Assets 157,699 156,406 154,644 150,575 146,828 142,752 138,998 134,919 131,158 127,072 123,307 119,214 165,443

LIABILITIES

Current LiabilitiesAccounts Payable 9,267 11,269 13,249 13,249 13,249 13,249 13,249 13,249 13,249 13,249 13,249 13,249 13,249Accrued Payroll 8,220 8,986 8,986 8,986 8,986 8,986 8,986 8,986 8,986 8,986 8,986 8,986 8,986Accrued Taxes 0 0 0 0 0 0 0 0 0 0 0 0 0Line of Credit 0 0 0 0 0 0 0 0 0 0 0 0 0Current Portion of Long Term Debt 0 0 0 0 0 0 0 0 0 0 0 0 8,472Total Current Liabilities 17,487 20,255 22,236 22,236 22,236 22,236 22,236 22,236 22,236 22,236 22,236 22,236 30,708

Long Term LiabilitiesLong Term Debt 0 0 0 0 0 0 0 0 0 0 0 0 41,528Other Long Term Liabilities 0 0 0 0 0 0 0 0 0 0 0 0 0Total Long Term Liabilities 0 0 0 0 0 0 0 0 0 0 0 0 41,528

EquityClass A Shares 0 0 0 0 0 0 0 0 0 0 0 0 0Contributed Equity 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000Retained Earnings (59,788) (63,848) (67,591) (71,660) (75,407) (79,483) (83,237) (87,317) (91,077) (95,164) (98,928) (103,021) (106,792)Total Net Worth 140,212 136,152 132,409 128,340 124,593 120,517 116,763 112,683 108,923 104,836 101,072 96,979 93,208

Total Liabilities & Net Worth 157,699 156,406 154,644 150,575 146,828 142,752 138,998 134,919 131,158 127,072 123,307 119,214 165,443

Check 0 0 0 0 0 0 0 0 0 0 0 0 0

11/26/03

Statement of Cash Flows--Year 2 Month 13 Month 14 Month 15 Month 16 Month 17 Month 18 Month 19 Month 20 Month 21 Month 22 Month 23 Month 24

OPERATIONS CASH FLOWSNet Income (4,060) (3,743) (4,069) (3,747) (4,076) (3,754) (4,080) (3,761) (4,086) (3,764) (4,093) (3,771)Add: Depreciation & Amortization 491 491 491 491 491 491 491 491 491 491 491 491Add: Income Taxes 0 0 0 0 0 0 0 0 0 0 0 0Add: Other non-operating expenses 0 0 0 0 0 0 0 0 0 0 0 0Gross Cash Flow (3,569) (3,251) (3,578) (3,256) (3,584) (3,263) (3,588) (3,269) (3,595) (3,273) (3,602) (3,280)

Changes in Assets & Liabilities(Inc) Dec Accounts Receivable (2,953) (2,953) 0 0 0 0 0 0 0 0 0 0(Inc) Dec Prepaid Expenses (2,344) 1,172 1,172 (2,344) 1,172 1,172 (2,344) 1,172 1,172 (2,344) 1,172 1,172(Inc) Dec Other Assets 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Accounts Payable 2,001 1,981 0 0 0 0 0 0 0 0 0 0Inc (Dec) Accrued Payroll 766 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Accrued Tax 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Other Liability 0 0 0 0 0 0 0 0 0 0 0 0Total changes - Operations (2,529) 200 1,172 (2,344) 1,172 1,172 (2,344) 1,172 1,172 (2,344) 1,172 1,172

Net Cashflows from Operations (6,098) (3,052) (2,406) (5,600) (2,413) (2,091) (5,932) (2,097) (2,423) (5,617) (2,430) (2,108)

INVESTMENT & OTHER CASH FLOWS(Inc) Dec Fixed Assets (1,681) 0 0 0 0 0 0 0 0 0 0 0(Inc) Dec Other Non-Current Assets 0 0 0 0 0 0 0 0 0 0 0 0Net Cashflows from Investments (1,681) 0 0 0 0 0 0 0 0 0 0 0

FREE CASH FLOW FOR FINANCING (7,778) (3,052) (2,406) (5,600) (2,413) (2,091) (5,932) (2,097) (2,423) (5,617) (2,430) (2,108)

TAXESLess: Taxes 0 0 0 0 0 0 0 0 0 0 0 0

Cash Flow Prior To Financing (7,778) (3,052) (2,406) (5,600) (2,413) (2,091) (5,932) (2,097) (2,423) (5,617) (2,430) (2,108)

FINANCING CASH FLOWSInc (Dec) Line of Credit 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) in Long Term Debt 0 0 0 0 0 0 0 0 0 0 0 50,000Inc (Dec) Class A Stock 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Contributed Equity 0 0 0 0 0 0 0 0 0 0 0 0Dividends Paid 0 0 0 0 0 0 0 0 0 0 0 0Total Financing Activities 0 0 0 0 0 0 0 0 0 0 0 50,000

INCREASE (DECREASE) CASH (7,778) (3,052) (2,406) (5,600) (2,413) (2,091) (5,932) (2,097) (2,423) (5,617) (2,430) 47,892

Starting Cash 83,411 75,632 72,581 70,175 64,575 62,162 60,072 54,140 52,042 49,619 44,003 41,573Ending Cash 75,632 72,581 70,175 64,575 62,162 60,072 54,140 52,042 49,619 44,003 41,573 89,465

11/26/03

Income Statement--Year 3 Month 25 Month 26 Month 27 Month 28 Month 29 Month 30 Month 31 Month 32 Month 33 Month 34 Month 35 Month 36 Year 3

SalesOffice 65,116 65,116 65,116 65,116 65,116 65,116 79,587 79,587 79,587 79,587 79,587 79,587 868,219Total Gross Sales 65,116 65,116 65,116 65,116 65,116 65,116 79,587 79,587 79,587 79,587 79,587 79,587 868,219Total Net Sales 65,116 65,116 65,116 65,116 65,116 65,116 79,587 79,587 79,587 79,587 79,587 79,587 868,219

Cost of Goods SoldDirect Labor 38,098 38,098 38,098 38,098 38,098 38,098 46,565 46,565 46,565 46,565 46,565 46,565 507,977Benefits 6,528 6,528 6,528 6,528 6,528 6,528 7,979 7,979 7,979 7,979 7,979 7,979 87,041Total Direct Labor Cost 44,626 44,626 44,626 44,626 44,626 44,626 54,543 54,543 54,543 54,543 54,543 54,543 595,018Direct Materials 3,256 3,256 3,256 3,256 3,256 3,256 3,979 3,979 3,979 3,979 3,979 3,979 43,411Expendable Supplies 651 651 651 651 651 651 796 796 796 796 796 796 8,682Depreciation 261 261 261 261 261 261 261 261 261 261 261 261 3,130Equipment Exp. (non-depr.) 977 977 977 977 977 977 1,194 1,194 1,194 1,194 1,194 1,194 13,023Vehicle Exp. (non-depr.) 977 977 977 977 977 977 1,194 1,194 1,194 1,194 1,194 1,194 13,023Total COGS 50,748 50,748 50,748 50,748 50,748 50,748 61,967 61,967 61,967 61,967 61,967 61,967 676,288

Gross Profit 14,369 14,369 14,369 14,369 14,369 14,369 17,620 17,620 17,620 17,620 17,620 17,620 191,931

Operating ExpensesAdministrative Salaries 11,051 11,051 11,051 11,051 11,051 11,051 11,051 11,051 11,051 11,051 11,051 11,051 132,613Administrative Benefits 2,149 2,149 2,149 2,149 2,149 2,149 2,149 2,149 2,149 2,149 2,149 2,149 25,788Rent 884 884 884 884 884 884 884 884 884 884 884 884 10,609Depreciation 261 261 261 261 261 261 261 261 261 261 261 261 3,133Office Supplies 27 27 27 27 27 27 27 27 27 27 27 27 318Printing & Copying 11 11 11 11 11 11 11 11 11 11 11 11 127Professional Serv.--accounting 230 230 230 230 230 230 230 230 230 230 230 230 2,758Insurance 53 53 53 53 53 53 53 53 53 53 53 53 637Postage 27 27 27 27 27 27 27 27 27 27 27 27 318Marketing 1,061 1,061 1,061 1,061 1,061 1,061 1,061 1,061 1,061 1,061 1,061 1,061 12,731Training 876 0 0 0 0 0 751 0 0 0 0 0 1,626Utilities 85 85 85 85 85 85 85 85 85 85 85 85 1,018Telephone/Communications 106 106 106 106 106 106 106 106 106 106 106 106 1,273Waste Disposal 9 9 9 9 9 9 9 9 9 9 9 9 106Payroll Service 669 669 669 669 669 669 818 818 818 818 818 818 8,925Miscellaneous 163 163 163 163 163 163 199 199 199 199 199 199 2,171Total Operating Expenses 17,660 16,785 16,785 16,785 16,785 16,785 17,720 16,970 16,970 16,970 16,970 16,970 204,153

Operating Profit (3,292) (2,416) (2,416) (2,416) (2,416) (2,416) (101) 650 650 650 650 650 (12,222)

Total Other Income 517 497 486 485 480 479 479 473 473 473 473 473 5,786

Other ExpensesInterest on Long Term Debt 0 333 329 324 320 315 310 306 301 296 291 287 3,412Interest on LOC 0 0 0 0 0 0 0 25 81 68 88 73 335Total Other Expenses 0 333 329 324 320 315 310 331 382 364 380 359 3,747

Profit Before Tax (2,775) (2,252) (2,259) (2,255) (2,256) (2,252) 68 792 741 759 743 763 (10,183)

Total Taxes 0 0 0 0 0 0 0 0 0 0 0 0 0

Net Income (2,775) (2,252) (2,259) (2,255) (2,256) (2,252) 68 792 741 759 743 763 (10,183)

11/26/03

Balance Sheet--Year 3 Month 24 Month 25 Month 26 Month 27 Month 28 Month 29 Month 30 Month 31 Month 32 Month 33 Month 34 Month 35 Month 36

ASSETS

Current AssetsCash 89,465 66,285 52,538 51,476 45,443 44,813 44,183 36,685 36,685 36,685 36,685 36,685 36,685Accounts Receivable 68,906 83,290 97,675 97,675 97,675 97,675 97,675 108,527 119,380 119,380 119,380 119,380 119,380Prepaid Expenses 0 3,606 1,803 0 3,606 1,803 0 3,606 1,803 0 3,606 1,803 0Total Current Assets 158,371 153,181 152,015 149,151 146,723 144,291 141,857 148,818 157,868 156,065 159,671 157,868 156,065

Fixed AssetsGross Fixed Assets 18,413 25,896 25,896 25,896 25,896 25,896 25,896 25,896 25,896 25,896 25,896 25,896 25,896Accumulated Depreciation (11,341) (11,863) (12,385) (12,906) (13,428) (13,950) (14,472) (14,994) (15,516) (16,038) (16,560) (17,082) (17,604)Net Fixed Assets 7,072 14,033 13,511 12,989 12,467 11,945 11,423 10,901 10,380 9,858 9,336 8,814 8,292

Total Other Assets 0 0 0 0 0 0 0 0 0 0 0 0 0

Total Assets 165,443 167,214 165,526 162,140 159,190 156,236 153,281 159,720 168,247 165,923 169,006 166,682 164,357

LIABILITIES

Current LiabilitiesAccounts Payable 13,249 14,775 16,024 15,586 15,586 15,586 15,586 16,054 16,147 15,771 15,771 15,771 15,771Accrued Payroll 8,986 12,687 12,687 12,687 12,687 12,687 12,687 15,492 15,492 15,492 15,492 15,492 15,492Accrued Taxes 0 0 0 0 0 0 0 0 0 0 0 0 0Line of Credit 0 0 0 0 0 0 0 3,806 12,163 10,191 13,238 10,898 8,541Current Portion of Long Term Debt 8,472 8,528 8,585 8,643 8,700 8,758 8,817 8,875 8,935 8,994 9,054 9,114 9,175Total Current Liabilities 30,708 35,990 37,297 36,916 36,974 37,032 37,090 44,228 52,736 50,448 53,555 51,275 48,980

Long Term LiabilitiesLong Term Debt 41,528 40,791 40,049 39,302 38,551 37,794 37,032 36,265 35,493 34,716 33,933 33,146 32,353Other Long Term Liabilities 0 0 0 0 0 0 0 0 0 0 0 0 0Total Long Term Liabilities 41,528 40,791 40,049 39,302 38,551 37,794 37,032 36,265 35,493 34,716 33,933 33,146 32,353

EquityClass A Shares 0 0 0 0 0 0 0 0 0 0 0 0 0Contributed Equity 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000Retained Earnings (106,792) (109,567) (111,819) (114,078) (116,334) (118,589) (120,841) (120,773) (119,981) (119,241) (118,482) (117,739) (116,976)Total Net Worth 93,208 90,433 88,181 85,922 83,666 81,411 79,159 79,227 80,019 80,759 81,518 82,261 83,024

Total Liabilities & Net Worth 165,443 167,214 165,526 162,140 159,190 156,236 153,281 159,720 168,247 165,923 169,006 166,682 164,357

Check 0 0 0 0 0 0 0 0 0 0 0 0 0

11/26/03

Statement of Cash Flows--Year 3 Month 25 Month 26 Month 27 Month 28 Month 29 Month 30 Month 31 Month 32 Month 33 Month 34 Month 35 Month 36

OPERATIONS CASH FLOWSNet Income (2,775) (2,252) (2,259) (2,255) (2,256) (2,252) 68 792 741 759 743 763Add: Depreciation & Amortization 522 522 522 522 522 522 522 522 522 522 522 522Add: Income Taxes 0 0 0 0 0 0 0 0 0 0 0 0Add: Other non-operating expenses 0 0 0 0 0 0 0 0 0 0 0 0Gross Cash Flow (2,253) (1,730) (1,737) (1,733) (1,734) (1,730) 590 1,314 1,263 1,281 1,265 1,285

Changes in Assets & Liabilities(Inc) Dec Accounts Receivable (14,384) (14,384) 0 0 0 0 (10,853) (10,853) 0 0 0 0(Inc) Dec Prepaid Expenses (3,606) 1,803 1,803 (3,606) 1,803 1,803 (3,606) 1,803 1,803 (3,606) 1,803 1,803(Inc) Dec Other Assets 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Accounts Payable 1,525 1,250 (438) 0 0 0 468 92 (375) 0 0 0Inc (Dec) Accrued Payroll 3,701 0 0 0 0 0 2,805 0 0 0 0 0Inc (Dec) Accrued Tax 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Other Liability 0 0 0 0 0 0 0 0 0 0 0 0Total changes - Operations (12,764) (11,332) 1,365 (3,606) 1,803 1,803 (11,186) (8,957) 1,428 (3,606) 1,803 1,803

Net Cashflows from Operations (15,017) (13,062) (372) (5,339) 69 73 (10,596) (7,644) 2,690 (2,325) 3,068 3,088

INVESTMENT & OTHER CASH FLOWS(Inc) Dec Fixed Assets (7,483) 0 0 0 0 0 0 0 0 0 0 0(Inc) Dec Other Non-Current Assets 0 0 0 0 0 0 0 0 0 0 0 0Net Cashflows from Investments (7,483) 0 0 0 0 0 0 0 0 0 0 0

FREE CASH FLOW FOR FINANCING (22,500) (13,062) (372) (5,339) 69 73 (10,596) (7,644) 2,690 (2,325) 3,068 3,088

TAXESLess: Taxes 0 0 0 0 0 0 0 0 0 0 0 0

Cash Flow Prior To Financing (22,500) (13,062) (372) (5,339) 69 73 (10,596) (7,644) 2,690 (2,325) 3,068 3,088

FINANCING CASH FLOWSInc (Dec) Line of Credit 0 0 0 0 0 0 3,806 8,357 (1,972) 3,048 (2,341) (2,356)Inc (Dec) in Long Term Debt (680) (685) (690) (694) (699) (703) (708) (713) (718) (722) (727) (732)Inc (Dec) Class A Stock 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Contributed Equity 0 0 0 0 0 0 0 0 0 0 0 0Dividends Paid 0 0 0 0 0 0 0 0 0 0 0 0Total Financing Activities (680) (685) (690) (694) (699) (703) 3,098 7,644 (2,690) 2,325 (3,068) (3,088)

INCREASE (DECREASE) CASH (23,181) (13,747) (1,062) (6,033) (630) (630) (7,498) 0 0 0 0 0

Starting Cash 89,465 66,285 52,538 51,476 45,443 44,813 44,183 36,685 36,685 36,685 36,685 36,685Ending Cash 66,285 52,538 51,476 45,443 44,813 44,183 36,685 36,685 36,685 36,685 36,685 36,685

11/26/03

Income Statement--Year 4 Month 37 Month 38 Month 39 Month 40 Month 41 Month 42 Month 43 Month 44 Month 45 Month 46 Month 47 Month 48 Year 4

SalesOffice 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 1,185,119Total Gross Sales 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 1,185,119Total Net Sales 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 98,760 1,185,119

Cost of Goods SoldDirect Labor 57,660 57,660 57,660 57,660 57,660 57,660 57,660 57,660 57,660 57,660 57,660 57,660 691,920Benefits 9,882 9,882 9,882 9,882 9,882 9,882 9,882 9,882 9,882 9,882 9,882 9,882 118,588Total Direct Labor Cost 67,542 67,542 67,542 67,542 67,542 67,542 67,542 67,542 67,542 67,542 67,542 67,542 810,508Direct Materials 4,938 4,938 4,938 4,938 4,938 4,938 4,938 4,938 4,938 4,938 4,938 4,938 59,256Expendable Supplies 988 988 988 988 988 988 988 988 988 988 988 988 11,851Depreciation 177 177 177 177 177 177 177 177 177 177 177 177 2,122Equipment Exp. (non-depr.) 1,481 1,481 1,481 1,481 1,481 1,481 1,481 1,481 1,481 1,481 1,481 1,481 17,777Vehicle Exp. (non-depr.) 1,481 1,481 1,481 1,481 1,481 1,481 1,481 1,481 1,481 1,481 1,481 1,481 17,777Total COGS 76,608 76,608 76,608 76,608 76,608 76,608 76,608 76,608 76,608 76,608 76,608 76,608 919,291

Gross Profit 22,152 22,152 22,152 22,152 22,152 22,152 22,152 22,152 22,152 22,152 22,152 22,152 265,828

Operating ExpensesAdministrative Salaries 14,570 14,570 14,570 14,570 14,570 14,570 14,570 14,570 14,570 14,570 14,570 14,570 174,836Administrative Benefits 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 34,800Rent 911 911 911 911 911 911 911 911 911 911 911 911 10,927Depreciation 208 208 208 208 208 208 208 208 208 208 208 208 2,500Office Supplies 27 27 27 27 27 27 27 27 27 27 27 27 328Printing & Copying 11 11 11 11 11 11 11 11 11 11 11 11 131Professional Serv.--accounting 237 237 237 237 237 237 237 237 237 237 237 237 2,841Insurance 55 55 55 55 55 55 55 55 55 55 55 55 656Postage 27 27 27 27 27 27 27 27 27 27 27 27 328Marketing 1,093 1,093 1,093 1,093 1,093 1,093 1,093 1,093 1,093 1,093 1,093 1,093 13,113Training 1,160 0 0 0 0 0 0 0 0 0 0 0 1,160Utilities 87 87 87 87 87 87 87 87 87 87 87 87 1,049Telephone/Communications 109 109 109 109 109 109 109 109 109 109 109 109 1,311Waste Disposal 9 9 9 9 9 9 9 9 9 9 9 9 109Payroll Service 1,013 1,013 1,013 1,013 1,013 1,013 1,013 1,013 1,013 1,013 1,013 1,013 12,158Miscellaneous 247 247 247 247 247 247 247 247 247 247 247 247 2,963Total Operating Expenses 22,664 21,504 21,504 21,504 21,504 21,504 21,504 21,504 21,504 21,504 21,504 21,504 259,209

Operating Profit (512) 648 648 648 648 648 648 648 648 648 648 648 6,619

Total Other Income 31 41 41 41 41 41 41 41 41 41 41 41 481

Other ExpensesInterest on Long Term Debt 282 277 272 267 262 257 252 247 242 237 231 226 3,051Interest on LOC 57 340 406 396 431 417 403 438 424 410 445 432 4,599Total Other Expenses 339 617 678 663 693 674 655 685 666 647 677 658 7,650

Profit Before Tax (820) 73 11 26 (4) 15 34 4 23 42 12 31 (551)

Total Taxes 0 0 0 0 0 0 0 0 0 0 0 0 0

Net Income (820) 73 11 26 (4) 15 34 4 23 42 12 31 (551)

11/26/03

Balance Sheet--Year 4 Month 36 Month 37 Month 38 Month 39 Month 40 Month 41 Month 42 Month 43 Month 44 Month 45 Month 46 Month 47 Month 48

ASSETS

Current AssetsCash 36,685 49,104 49,104 49,104 49,104 49,104 49,104 49,104 49,104 49,104 49,104 49,104 49,104Accounts Receivable 119,380 133,760 148,140 148,140 148,140 148,140 148,140 148,140 148,140 148,140 148,140 148,140 148,140Prepaid Expenses 0 4,873 2,436 0 4,873 2,436 0 4,873 2,436 0 4,873 2,436 0Total Current Assets 156,065 187,737 199,680 197,244 202,117 199,680 197,244 202,117 199,680 197,244 202,117 199,680 197,244

Fixed AssetsGross Fixed Assets 25,896 41,982 41,982 41,982 41,982 41,982 41,982 41,982 41,982 41,982 41,982 41,982 41,982Accumulated Depreciation (17,604) (17,989) (18,374) (18,760) (19,145) (19,530) (19,915) (20,300) (20,685) (21,071) (21,456) (21,841) (22,226)Net Fixed Assets 8,292 23,992 23,607 23,222 22,837 22,452 22,067 21,681 21,296 20,911 20,526 20,141 19,756

Total Other Assets 0 0 0 0 0 0 0 0 0 0 0 0 0

Total Assets 164,357 211,730 223,288 220,466 224,954 222,132 219,311 223,798 220,977 218,155 222,643 219,821 216,999

LIABILITIES

Current LiabilitiesAccounts Payable 15,771 18,631 20,910 20,331 20,331 20,331 20,331 20,331 20,331 20,331 20,331 20,331 20,331Accrued Payroll 15,492 19,152 19,152 19,152 19,152 19,152 19,152 19,152 19,152 19,152 19,152 19,152 19,152Accrued Taxes 0 0 0 0 0 0 0 0 0 0 0 0 0Line of Credit 8,541 50,951 60,899 59,393 64,606 62,545 60,470 65,691 63,637 61,569 66,797 64,751 62,691Current Portion of Long Term Debt 9,175 9,236 9,298 9,360 9,422 9,485 9,548 9,612 9,676 9,741 9,806 9,871 9,937Total Current Liabilities 48,980 97,970 110,259 108,235 113,511 111,512 109,501 114,785 112,795 110,792 116,085 114,104 112,110

Long Term LiabilitiesLong Term Debt 32,353 31,555 30,751 29,942 29,128 28,309 27,483 26,653 25,817 24,975 24,128 23,275 22,416Other Long Term Liabilities 0 0 0 0 0 0 0 0 0 0 0 0 0Total Long Term Liabilities 32,353 31,555 30,751 29,942 29,128 28,309 27,483 26,653 25,817 24,975 24,128 23,275 22,416

EquityClass A Shares 0 0 0 0 0 0 0 0 0 0 0 0 0Contributed Equity 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000Retained Earnings (116,976) (117,795) (117,723) (117,711) (117,685) (117,689) (117,674) (117,640) (117,635) (117,612) (117,570) (117,558) (117,526)Total Net Worth 83,024 82,205 82,277 82,289 82,315 82,311 82,326 82,360 82,365 82,388 82,430 82,442 82,474

Total Liabilities & Net Worth 164,357 211,730 223,288 220,466 224,954 222,132 219,311 223,798 220,977 218,155 222,643 219,821 216,999

Check 0 0 0 0 0 0 0 0 0 0 0 0 0

11/26/03

Statement of Cash Flows--Year 4 Month 37 Month 38 Month 39 Month 40 Month 41 Month 42 Month 43 Month 44 Month 45 Month 46 Month 47 Month 48

OPERATIONS CASH FLOWSNet Income (820) 73 11 26 (4) 15 34 4 23 42 12 31Add: Depreciation & Amortization 385 385 385 385 385 385 385 385 385 385 385 385Add: Income Taxes 0 0 0 0 0 0 0 0 0 0 0 0Add: Other non-operating expenses 0 0 0 0 0 0 0 0 0 0 0 0Gross Cash Flow (434) 458 396 411 382 400 419 390 408 427 398 416

Changes in Assets & Liabilities(Inc) Dec Accounts Receivable (14,380) (14,380) 0 0 0 0 0 0 0 0 0 0(Inc) Dec Prepaid Expenses (4,873) 2,436 2,436 (4,873) 2,436 2,436 (4,873) 2,436 2,436 (4,873) 2,436 2,436(Inc) Dec Other Assets 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Accounts Payable 2,859 2,280 (580) 0 0 0 0 0 0 0 0 0Inc (Dec) Accrued Payroll 3,660 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Accrued Tax 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Other Liability 0 0 0 0 0 0 0 0 0 0 0 0Total changes - Operations (12,733) (9,664) 1,857 (4,873) 2,436 2,436 (4,873) 2,436 2,436 (4,873) 2,436 2,436

Net Cashflows from Operations (13,168) (9,206) 2,253 (4,462) 2,818 2,837 (4,454) 2,826 2,845 (4,446) 2,834 2,853

INVESTMENT & OTHER CASH FLOWS(Inc) Dec Fixed Assets (16,086) 0 0 0 0 0 0 0 0 0 0 0(Inc) Dec Other Non-Current Assets 0 0 0 0 0 0 0 0 0 0 0 0Net Cashflows from Investments (16,086) 0 0 0 0 0 0 0 0 0 0 0

FREE CASH FLOW FOR FINANCING (29,254) (9,206) 2,253 (4,462) 2,818 2,837 (4,454) 2,826 2,845 (4,446) 2,834 2,853

TAXESLess: Taxes 0 0 0 0 0 0 0 0 0 0 0 0

Cash Flow Prior To Financing (29,254) (9,206) 2,253 (4,462) 2,818 2,837 (4,454) 2,826 2,845 (4,446) 2,834 2,853

FINANCING CASH FLOWSInc (Dec) Line of Credit 42,410 9,948 (1,506) 5,213 (2,061) (2,075) 5,221 (2,054) (2,068) 5,228 (2,046) (2,060)Inc (Dec) in Long Term Debt (737) (742) (747) (752) (757) (762) (767) (772) (777) (782) (788) (793)Inc (Dec) Class A Stock 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Contributed Equity 0 0 0 0 0 0 0 0 0 0 0 0Dividends Paid 0 0 0 0 0 0 0 0 0 0 0 0Total Financing Activities 41,673 9,206 (2,253) 4,462 (2,818) (2,837) 4,454 (2,826) (2,845) 4,446 (2,834) (2,853)

INCREASE (DECREASE) CASH 12,419 0 0 0 0 0 0 0 0 0 0 (0)

Starting Cash 36,685 49,104 49,104 49,104 49,104 49,104 49,104 49,104 49,104 49,104 49,104 49,104Ending Cash 49,104 49,104 49,104 49,104 49,104 49,104 49,104 49,104 49,104 49,104 49,104 49,104

11/26/03

Income Statement--Year 5 Month 49 Month 50 Month 51 Month 52 Month 53 Month 54 Month 55 Month 56 Month 57 Month 58 Month 59 Month 60 Year 5

SalesOffice 124,437 124,437 124,437 124,437 124,437 124,437 124,437 124,437 124,437 124,437 124,437 124,437 1,493,249Total Gross Sales 124,437 124,437 124,437 124,437 124,437 124,437 124,437 124,437 124,437 124,437 124,437 124,437 1,493,249Total Net Sales 124,437 124,437 124,437 124,437 124,437 124,437 124,437 124,437 124,437 124,437 124,437 124,437 1,493,249

Cost of Goods SoldDirect Labor 72,500 72,500 72,500 72,500 72,500 72,500 72,500 72,500 72,500 72,500 72,500 72,500 870,003Benefits 12,429 12,429 12,429 12,429 12,429 12,429 12,429 12,429 12,429 12,429 12,429 12,429 149,145Total Direct Labor Cost 84,929 84,929 84,929 84,929 84,929 84,929 84,929 84,929 84,929 84,929 84,929 84,929 1,019,148Direct Materials 6,222 6,222 6,222 6,222 6,222 6,222 6,222 6,222 6,222 6,222 6,222 6,222 74,662Expendable Supplies 1,244 1,244 1,244 1,244 1,244 1,244 1,244 1,244 1,244 1,244 1,244 1,244 14,932Depreciation 170 170 170 170 170 170 170 170 170 170 170 170 2,036Equipment Exp. (non-depr.) 1,867 1,867 1,867 1,867 1,867 1,867 1,867 1,867 1,867 1,867 1,867 1,867 22,399Vehicle Exp. (non-depr.) 1,867 1,867 1,867 1,867 1,867 1,867 1,867 1,867 1,867 1,867 1,867 1,867 22,399Total COGS 96,298 96,298 96,298 96,298 96,298 96,298 96,298 96,298 96,298 96,298 96,298 96,298 1,155,577

Gross Profit 28,139 28,139 28,139 28,139 28,139 28,139 28,139 28,139 28,139 28,139 28,139 28,139 337,673

Operating ExpensesAdministrative Salaries 18,290 18,290 18,290 18,290 18,290 18,290 18,290 18,290 18,290 18,290 18,290 18,290 219,474Administrative Benefits 3,693 3,693 3,693 3,693 3,693 3,693 3,693 3,693 3,693 3,693 3,693 3,693 44,311Rent 938 938 938 938 938 938 938 938 938 938 938 938 11,255Depreciation 239 239 239 239 239 239 239 239 239 239 239 239 2,867Office Supplies 28 28 28 28 28 28 28 28 28 28 28 28 338Printing & Copying 11 11 11 11 11 11 11 11 11 11 11 11 135Professional Serv.--accounting 244 244 244 244 244 244 244 244 244 244 244 244 2,926Insurance 56 56 56 56 56 56 56 56 56 56 56 56 675Postage 28 28 28 28 28 28 28 28 28 28 28 28 338Marketing 1,126 1,126 1,126 1,126 1,126 1,126 1,126 1,126 1,126 1,126 1,126 1,126 13,506Training 1,035 0 0 0 0 0 0 0 0 0 0 0 1,035Utilities 90 90 90 90 90 90 90 90 90 90 90 90 1,080Telephone/Communications 113 113 113 113 113 113 113 113 113 113 113 113 1,351Waste Disposal 9 9 9 9 9 9 9 9 9 9 9 9 113Payroll Service 1,274 1,274 1,274 1,274 1,274 1,274 1,274 1,274 1,274 1,274 1,274 1,274 15,287Miscellaneous 311 311 311 311 311 311 311 311 311 311 311 311 3,733Total Operating Expenses 27,484 26,449 26,449 26,449 26,449 26,449 26,449 26,449 26,449 26,449 26,449 26,449 318,424

Operating Profit 655 1,690 1,690 1,690 1,690 1,690 1,690 1,690 1,690 1,690 1,690 1,690 19,248

Total Other Income 41 51 51 51 51 51 51 51 51 51 51 51 604

Other ExpensesInterest on Long Term Debt 221 216 210 205 200 194 189 183 178 172 167 161 2,295Interest on LOC 418 704 793 774 812 790 767 805 783 760 798 776 8,981Total Other Expenses 639 920 1,003 979 1,012 984 956 989 961 932 965 937 11,276

Profit Before Tax 57 822 738 763 730 758 786 753 781 809 777 805 8,576

Total Taxes 0 0 0 0 0 0 0 0 0 0 0 0 0

Net Income 57 822 738 763 730 758 786 753 781 809 777 805 8,576

11/26/03

Balance Sheet--Year 5 Month 48 Month 49 Month 50 Month 51 Month 52 Month 53 Month 54 Month 55 Month 56 Month 57 Month 58 Month 59 Month 60

ASSETS

Current AssetsCash 49,104 61,417 61,417 61,417 61,417 61,417 61,417 61,417 61,417 61,417 61,417 61,417 61,417Accounts Receivable 148,140 167,398 186,656 186,656 186,656 186,656 186,656 186,656 186,656 186,656 186,656 186,656 186,656Prepaid Expenses 0 6,102 3,051 0 6,102 3,051 0 6,102 3,051 0 6,102 3,051 0Total Current Assets 197,244 234,917 251,124 248,073 254,175 251,124 248,073 254,175 251,124 248,073 254,175 251,124 248,073

Fixed AssetsGross Fixed Assets 41,982 54,795 54,795 54,795 54,795 54,795 54,795 54,795 54,795 54,795 54,795 54,795 54,795Accumulated Depreciation (22,226) (22,635) (23,043) (23,452) (23,860) (24,269) (24,678) (25,086) (25,495) (25,903) (26,312) (26,720) (27,129)Net Fixed Assets 19,756 32,160 31,751 31,343 30,934 30,526 30,117 29,709 29,300 28,891 28,483 28,074 27,666

Total Other Assets 0 0 0 0 0 0 0 0 0 0 0 0 0

Total Assets 216,999 267,077 282,875 279,416 285,109 281,650 278,190 283,884 280,424 276,964 282,658 279,198 275,739

LIABILITIES

Current LiabilitiesAccounts Payable 20,331 23,291 25,734 25,216 25,216 25,216 25,216 25,216 25,216 25,216 25,216 25,216 25,216Accrued Payroll 19,152 24,075 24,075 24,075 24,075 24,075 24,075 24,075 24,075 24,075 24,075 24,075 24,075Accrued Taxes 0 0 0 0 0 0 0 0 0 0 0 0 0Line of Credit 62,691 105,626 118,964 116,092 121,838 118,468 115,076 120,815 117,438 114,039 119,771 116,388 112,982Current Portion of Long Term Debt 9,937 10,003 10,070 10,137 10,204 10,272 10,341 10,410 10,479 10,549 10,619 10,690 10,761Total Current Liabilities 112,110 162,994 178,841 175,520 181,333 178,031 174,707 180,515 177,208 173,879 179,681 176,369 173,034

Long Term LiabilitiesLong Term Debt 22,416 21,552 20,682 19,806 18,924 18,036 17,143 16,243 15,338 14,426 13,508 12,585 11,655Other Long Term Liabilities 0 0 0 0 0 0 0 0 0 0 0 0 0Total Long Term Liabilities 22,416 21,552 20,682 19,806 18,924 18,036 17,143 16,243 15,338 14,426 13,508 12,585 11,655

EquityClass A Shares 0 0 0 0 0 0 0 0 0 0 0 0 0Contributed Equity 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000Retained Earnings (117,526) (117,469) (116,648) (115,910) (115,147) (114,418) (113,660) (112,874) (112,122) (111,341) (110,532) (109,755) (108,950)Total Net Worth 82,474 82,531 83,352 84,090 84,853 85,582 86,340 87,126 87,878 88,659 89,468 90,245 91,050

Total Liabilities & Net Worth 216,999 267,077 282,875 279,416 285,109 281,650 278,190 283,884 280,424 276,964 282,658 279,198 275,739

Check 0 0 0 0 0 0 0 0 0 0 0 0 0

11/26/03

Statement of Cash Flows--Year 5 Month 49 Month 50 Month 51 Month 52 Month 53 Month 54 Month 55 Month 56 Month 57 Month 58 Month 59 Month 60

OPERATIONS CASH FLOWSNet Income 57 822 738 763 730 758 786 753 781 809 777 805Add: Depreciation & Amortization 409 409 409 409 409 409 409 409 409 409 409 409Add: Income Taxes 0 0 0 0 0 0 0 0 0 0 0 0Add: Other non-operating expenses 0 0 0 0 0 0 0 0 0 0 0 0Gross Cash Flow 466 1,230 1,147 1,171 1,138 1,166 1,194 1,161 1,189 1,218 1,185 1,213

Changes in Assets & Liabilities(Inc) Dec Accounts Receivable (19,258) (19,258) 0 0 0 0 0 0 0 0 0 0(Inc) Dec Prepaid Expenses (6,102) 3,051 3,051 (6,102) 3,051 3,051 (6,102) 3,051 3,051 (6,102) 3,051 3,051(Inc) Dec Other Assets 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Accounts Payable 2,960 2,443 (518) 0 0 0 0 0 0 0 0 0Inc (Dec) Accrued Payroll 4,923 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Accrued Tax 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Other Liability 0 0 0 0 0 0 0 0 0 0 0 0Total changes - Operations (17,477) (13,764) 2,533 (6,102) 3,051 3,051 (6,102) 3,051 3,051 (6,102) 3,051 3,051

Net Cashflows from Operations (17,012) (12,534) 3,680 (4,931) 4,189 4,217 (4,908) 4,212 4,241 (4,884) 4,236 4,264

INVESTMENT & OTHER CASH FLOWS(Inc) Dec Fixed Assets (12,813) 0 0 0 0 0 0 0 0 0 0 0(Inc) Dec Other Non-Current Assets 0 0 0 0 0 0 0 0 0 0 0 0Net Cashflows from Investments (12,813) 0 0 0 0 0 0 0 0 0 0 0

FREE CASH FLOW FOR FINANCING (29,825) (12,534) 3,680 (4,931) 4,189 4,217 (4,908) 4,212 4,241 (4,884) 4,236 4,264

TAXESLess: Taxes 0 0 0 0 0 0 0 0 0 0 0 0

Cash Flow Prior To Financing (29,825) (12,534) 3,680 (4,931) 4,189 4,217 (4,908) 4,212 4,241 (4,884) 4,236 4,264

FINANCING CASH FLOWSInc (Dec) Line of Credit 42,935 13,338 (2,871) 5,745 (3,370) (3,392) 5,739 (3,376) (3,399) 5,732 (3,383) (3,406)Inc (Dec) in Long Term Debt (798) (803) (809) (814) (820) (825) (831) (836) (842) (847) (853) (859)Inc (Dec) Class A Stock 0 0 0 0 0 0 0 0 0 0 0 0Inc (Dec) Contributed Equity 0 0 0 0 0 0 0 0 0 0 0 0Dividends Paid 0 0 0 0 0 0 0 0 0 0 0 0Total Financing Activities 42,137 12,534 (3,680) 4,931 (4,189) (4,217) 4,908 (4,212) (4,241) 4,884 (4,236) (4,264)

INCREASE (DECREASE) CASH 12,313 0 (0) 0 0 (0) 0 0 0 0 0 0

Starting Cash 49,104 61,417 61,417 61,417 61,417 61,417 61,417 61,417 61,417 61,417 61,417 61,417Ending Cash 61,417 61,417 61,417 61,417 61,417 61,417 61,417 61,417 61,417 61,417 61,417 61,417

11/26/03