4.

Revenue Presentation - Adoption of Emerging Issues Task Force Issue No. 01-14

     In January 2002, the Emerging Issues Task Force (EITF) released Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred,” which the Company adopted in fiscal 2002. For the Company’s Parking segment this pronouncement requires both revenues and expenses be recognized, in equal amounts, for costs directly reimbursed from its managed parking lot clients. Previously, expenses directly reimbursed under managed parking lot agreements were netted against the reimbursement received. EITF No. 01-14 did not change the income statement presentation of revenues and expenses of any other segments. Amounts have been reclassified to conform to the presentation of these reimbursed expenses in all prior periods presented. Adoption of the pronouncement resulted in an increase in total revenues and total costs and expenses in equal amounts of $51.5 million and $49.0 million for the three months ended April 30, 2003 and 2002, respectively, and $105.2 million and $100.6 million for the six months ended April 30, 2003 and 2002, respectively. This presentation change had no impact on operating profits or net income.

9

Table of Contents

5. Goodwill and Other Intangibles

     The changes in the carrying amount of goodwill for the six months ended April 30, 2003 are as follows (acquisitions are discussed in Note 6):

(In thousands)

     As of April 30, 2003 and October 31, 2002, all intangible assets other than goodwill, consisting principally of contract rights with a net book value of $4.2 million and $4.1 million, respectively, were included in other assets and are being amortized over the contract periods. Amortization expense for intangible assets other than goodwill was $0.3 million for each of the three month periods ended April 30, 2003 and 2002, and $0.6 million and $0.5 million for the six months ended April 30, 2003 and 2002, respectively. The remaining amortization period for intangible assets other than goodwill ranges from 1 to 14 years. The weighted average remaining life is 5 years at April 30, 2003.

6. Acquisitions

     All acquisitions have been accounted for using the purchase method of accounting. Operations of the companies and businesses acquired have been included in the accompanying consolidated financial statements from their respective dates of acquisition. The excess of the purchase price over fair value of the net assets acquired is generally included in goodwill. Most purchase agreements provide for contingent payments based on the annual pretax income for subsequent periods ranging generally from two to five years. Any such future payments are generally capitalized as goodwill when paid. Cash paid for acquisitions, including down payments and contingent amounts based on subsequent earnings, was $17.2 million and $11.6 million in the six months ended April 30,

10

Table of Contents

2003 and 2002, respectively. In addition, shares of common stock with a fair market value of $1.4 million at the date of issuance were issued in the first six months of 2002, which was the final payment under the contingent payment provisions of a 1997 acquisition.

     On January 31, 2003, the Company acquired the commercial self-performed janitorial cleaning operations of Horizon National Commercial Services, LLC, a provider of janitorial services based in Red Bank, New Jersey. Assets acquired by the Company include key customer accounts in the eastern, mid-western and south central United States. The total adjusted acquisition cost was $14.7 million, which included the assumption of payroll related liabilities totaling $0.2 million. Of the total adjusted acquisition cost, $13.0 million was allocated to goodwill and $1.7 million to fixed and other assets at the time of acquisition.

     On April 30, 2003, the Company acquired selected assets of Valet Parking Service, a provider of parking services based in Culver City, California. The total acquisition cost included a cash down payment of $1.6 million, most of which was allocated to goodwill, plus annual contingent payments of $0.3 million for the three years subsequent to the acquisition date, if specified levels of variable gross profits from the acquired operations are maintained.

     The operating results generated from these acquisitions will be included in the consolidated financial results of the Company from the respective dates of acquisition. Due to the relative size of these acquisitions, pro forma information is not included in the consolidated financial statements.

     During the six months ended April 30, 2003, contingent payments totaling $3.0 million were made on earlier acquisitions as provided by the respective purchase agreements. All amounts paid were added to goodwill.

7. Debt

     In April 2003, the Company increased the amount of its syndicated line of credit, which will expire July 1, 2005, to $250 million. As amended, no compensating balances are required under the facility and the interest rate is determined at the time of borrowing based on the London interbank offered rate (LIBOR) plus a spread of .875% to 1.50% or, for overnight borrowings, at the prime rate plus a spread of .00% to .25% or, for overnight to one week, at the interbank offered rate (IBOR) plus a spread of .875% to 1.50%. The spread for LIBOR, PRIME and IBOR borrowings is based on the Company’s leverage ratio. The facility calls for a commitment fee payable quarterly, in arrears, of .200%, as amended, based on

11

Table of Contents

the average, daily, unused portion. For purposes of this calculation, irrevocable standby letters of credit issued primarily in conjunction with the Company’s self-insurance program plus cash borrowings are considered to be outstanding amounts. As of April 30, 2003, the total outstanding amount under this facility was $120.5 million in the form of standby letters of credit. The provisions of the credit facility require the Company to maintain certain financial ratios and limit outside borrowings. The Company was in compliance with all covenants as of April 30, 2003.

8. Comprehensive Income (Loss)

     Comprehensive income consists of net income and other related gains and losses affecting stockholders’ equity that, under generally accepted accounting principles, are excluded from net income. For the Company, such other comprehensive income items consist of unrealized foreign currency translation gains and losses. Comprehensive income for the three and six months ended April 30, 2003 and 2002 approximated net income.

9. Treasury Stock

     On September 16, 2001, the Company’s Board of Directors authorized the purchase of up to 2.0 million shares of the Company’s outstanding stock at any time through December 31, 2001. On December 17, 2001, the Board of Directors extended this authorization through December 31, 2002 and on December 10, 2002, this authorization was extended through January 31, 2003. As of October 31, 2002, the Company had purchased 1.4 million shares at a cost of $23.6 million (an average price per share of $16.88). In the three months ended January 31, 2003, the Company purchased the remaining 0.6 million shares at a cost of $9.3 million (an average price per share of $15.50).

     On March 11, 2003, the Company’s Board of Directors authorized the purchase of up to 2.0 million shares of the Company’s outstanding stock at any time through December 31, 2003. The Company did not purchase any shares in the three months ended April 30, 2003.

10. Segment Information

     Under SFAS No. 131 criteria, Janitorial, Parking, Engineering, Security, Lighting, and Elevator are reportable segments. All other services are included in the “Other” segment. Corporate expenses are not allocated.

12

Table of Contents

11. Contingencies

     In September 1999, a former employee filed a gender discrimination lawsuit against the Company. On May 19, 2003, a Washington state court jury awarded $4 million in damages, plus plaintiff’s costs, to the former employee. The Company will ask the Superior Court, State of Washington, County of Spokane, to set aside the jury verdict and will appeal if the court denies that request. Although there can be no assurance that the Company will prevail in this matter, the Company believes that the verdict against the Company was inconsistent with the law and facts of the case and that it will be reversed upon appeal. Accordingly, the Company has not recorded any liability in its financial statements associated with the jury award.

13

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Condition

     Funds provided from operations and bank borrowings have historically been the sources for meeting working capital requirements, financing capital expenditures and acquisitions, and paying cash dividends. Management believes that funds from these sources will remain available and adequately serve the Company’s liquidity needs. In April 2003, the Company increased the amount of its syndicated line of credit, which will expire July 1, 2005, to $250 million. As amended, no compensating balances are required under the facility and the interest rate is determined at the time of borrowing based on the London interbank offered rate (LIBOR) plus a spread of .875% to 1.50% or, for overnight borrowings, at the prime rate plus a spread of .00% to .25% or, for overnight to one week, at the interbank offered rate (IBOR) plus a spread of      .875% to 1.50%. The spread for LIBOR, PRIME and IBOR borrowings is based on the Company’s leverage ratio. The facility calls for a commitment fee payable quarterly, in arrears, of .200%, as amended, based on the average, daily, unused portion. For purposes of this calculation, irrevocable standby letters of credit issued primarily in conjunction with the Company’s self-insurance program plus cash borrowings are considered to be outstanding amounts. As of April 30, 2003, the total outstanding amount under this facility was $120.5 million in the form of standby letters of credit. The provisions of the credit facility require the Company to maintain certain financial ratios and limit outside borrowings. The Company was in compliance with all covenants as of April 30, 2003.

     During the six months ended April 30, 2003 and 2002, operating activities generated net cash of $23.2 million and $40.3 million, respectively. Cash from operations for the six months ended April 30, 2002 included the receipt of the initial payment of $6.5 million from the September 11th insurance claim. Cash from operations decreased primarily due to greater collection of outstanding accounts receivable balances during the first half of 2002 compared to the first half of 2003, higher insurance premium payments, and effect of the timing of other recurring expense payments.

     Net cash used in investing activities was $21.2 million in the six months ended April 30, 2003, compared to $14.7 million in the same period of 2002. The increase is primarily due to the acquisition of the commercial self-performed janitorial cleaning operations from Horizon National Commercial Services in January 2003.

14

Table of Contents

     Net cash used in financing activities was $10.9 million in the six months ended April 30, 2003, compared to $25.9 million in the six months ended April 30, 2002. The change is principally due to the net effect of no long-term borrowings and repayments in the first six months of 2003, compared to $11.8 million of repayments of long-term borrowings in the first six months of 2002, and the use of $9.3 million to purchase the Company’s stock in the first half of 2003, compared to $16.7 million in the first half of the prior year.

     On September 16, 2001, the Company’s Board of Directors authorized the purchase of up to 2.0 million shares of the Company’s outstanding stock at any time through December 31, 2001. On December 17, 2001, the Board of Directors extended this authorization through December 31, 2002 and on December 10, 2002, this authorization was extended through January 31, 2003. As of October 31, 2002, the Company had purchased 1.4 million shares at a cost of $23.6 million (an average price per share of $16.88). In the three months ended January 31, 2003, the Company purchased the remaining 0.6 million shares at a cost of $9.3 million (an average price per share of $15.50).

     On March 11, 2003, the Company’s Board of Directors authorized the purchase of up to 2.0 million shares of the Company’s outstanding stock at any time through December 31, 2003. The Company did not purchase any shares in the three months ended April 30, 2003.

     At April 30, 2003, working capital was $194.2 million, compared to $210.7 million at October 31, 2002. The $16.5 million decline is primarily due to higher accrued liabilities as of April 30, 2003 compared to October 31, 2002 mainly due to the timing of recurring expense payments. The largest component of working capital consists of trade accounts receivable that totaled $326.2 million at April 30, 2003, compared to $318.4 million at October 31, 2002. These amounts were net of allowances for doubtful accounts of $6.4 million and $6.6 million at April 30, 2003 and October 31, 2002, respectively. As of April 30, 2003, accounts receivable that were over 90 days past due had decreased $6.7 million to $34.9 million (10.7% of the total net outstanding) from $41.6 million (13.1% of the total net outstanding) at October 31, 2002, primarily due to continued increased collection efforts.

     The Company self-insures certain insurable risks such as general liability, automobile property damage, and workers’ compensation. Commercial umbrella policies are obtained to provide for $150 million of coverage above the self-insured retention limits (i.e., deductible). As of November 1, 2002, substantially all of the self-insured retentions increased from $0.5 million to

15

Table of Contents

$1.0 million. Effective April 14, 2003, the deductible for California workers’ compensation insurance increased to $2.0 million per occurrence due to general insurance market conditions. This recent increase in retention will be taken into consideration during this year’s actuarial review of the reserves. While the increased self-insured retention increases the Company’s risk associated with workers’ compensation liabilities, during the entire history of the Company’s self-insurance program, few claims have exceeded $1.0 million. Despite the increased retention, the price of the 2003 umbrella policies is significantly higher than 2002 and this higher price has been factored into the self-insurance rates charged by the Company to its divisions in 2003. The Company annually retains an outside actuary to review the adequacy of its self-insurance claim reserves.

Insurance Claims Related to the Destruction of the World Trade Center in New York City on September 11, 2001

     The Company had commercial insurance policies covering business interruption, property damage and other losses related to this tragic incident. As previously reported by the Company, the World Trade Center complex in New York was the Company’s largest single job-site with annual sales of approximately $75 million (3% of ABM’s consolidated sales for 2001). The Company provided its insurance carrier, Zurich Insurance, claim information regarding the lost business income and, as described further below, substantially settled the property portion of the claim. In December 2001, Zurich filed a Declaratory Judgment Action in the Southern District of New York claiming the loss of the business profit falls under the policy’s contingent business interruption sub-limit of $10 million. On June 2, 2003, the court ruled in favor of Zurich. Based on a review of the policy and consultation with legal counsel and other specialists, the Company continues to believe that its business interruption claim does not fall under the $10 million sub-limit on contingent business interruption and, therefore, the Company will appeal the judge’s decision. Zurich’s filing does not impact any other aspects of the claim. As of October 31, 2002, Zurich paid two partial settlements totaling $13.3 million, of which $10 million is for business interruption and $3.3 million for property damage. The Company realized a pretax gain of $10 million in 2002 on the proceeds received.

Contractual Obligations and Commercial Commitments

     The Company is contractually obligated to make future payments under non-cancelable operating lease agreements. As of April 30, 2003, future contractual payments are as follows:

16

Table of Contents

(In thousands)

     Additionally, the Company has the following commercial commitments:

(In thousands)

Acquisitions

     The operating results of businesses acquired have been included in the accompanying consolidated financial statements from their respective dates of acquisition. Acquisitions made during the first six months of 2003 are discussed in Note 6 to the consolidated financial statements.

Results of Operations

     The following discussion should be read in conjunction with the consolidated financial statements of the Company. All information in the discussion and references to the years and quarters are based on the Company’s fiscal year and second quarter which ended on October 31 and April 30, respectively.

Three Months Ended April 30, 2003 vs. Three Months Ended April 30, 2002

     Net income for the second quarter of 2003 was $9.9 million ($0.20 per diluted share), a decrease of $4.1 million or 29.3% from the net income of $14.0 million ($0.27 per diluted share) for the second quarter of 2002. Pretax income for the second quarter of 2002 included a gain of $4.3 million from an initial payment of $6.5 million from the September 11 insurance claim. Declines in operating profits from the Janitorial segment, primarily the

17

Table of Contents

Northeast and Northwest regions, Lighting and Parking segments as well as higher Corporate expenses accounted for the decrease in net income. Partially offsetting the declines were operating profits totaling $2.7 million from acquisitions that did not impact results until after April 30, 2002, namely: Lakeside Building Maintenance (Lakeside) and the commercial self-performed janitorial cleaning operations from Horizon National Commercial Services (Horizon).

     Sales and other income (hereinafter called sales) for the second quarter of 2003 of $589.8 million increased by $63.9 million or 12.2% from $525.9 million for the second quarter of 2002. The increase is primarily due to $57.4 million in sales from acquisitions that did not impact results until after April 30, 2002. The remainder of the increase was attributable to new business, partially offset by the impact of contract terminations and declines in sales due to increased real estate vacancies and decreased capital project work and extra services as customers tightened their budgets.

     As a percentage of sales, operating expenses and cost of goods sold were 89.3% for the second quarter of 2003, compared to 89.1% for the second quarter of 2002. Consequently, as a percentage of sales, the Company’s gross profit (sales minus operating expenses and cost of goods sold) of 10.7% in the second quarter of 2003 was lower than the gross profit of 10.9% for the second quarter of 2002. The decline was due primarily to lower margins on new business, declines in sales from higher margin business due to increased vacancies, and higher reimbursements for out-of-pocket expenses from existing managed parking lot clients for which Parking had no margin benefit. Additionally, operating expenses for the second quarter of 2003 included higher insurance costs that could not be fully absorbed through increased pricing.

     Selling, general and administrative expenses for the second quarter of 2003 were $47.5 million compared to $38.8 million for the corresponding three months of 2002. The increase in selling, general and administrative expenses was due primarily to $4.3 million of selling, general and administrative expenses related to the Lakeside and Horizon acquisitions that did not impact results until after the second quarter of 2002. Additionally, corporate expenses for the first quarter of 2003 included higher directors and officers’ insurance costs and professional fees. As a percentage of sales, selling, general and administrative expenses increased to 8.0% for the three months ended April 30, 2003 from 7.4% for the same period in 2002.

     Interest expense, which includes loan amortization and commitment fees for the revolving credit facility, was $0.18 million for the second quarter of 2003 compared to $0.23 million for the same period in 2002. The decrease was primarily due to

18

Table of Contents

lower borrowings and interest rates during the second quarter of 2003, compared to the same period in 2002.

     The effective federal and state income tax rate was 36.5% for the second quarter of 2003, compared to 38.0% for the second quarter of 2002. The lower effective tax rate was primarily due to the impact of a lower estimated state tax rate and a higher proportional benefit from the same level of estimated federal tax credits applied to a lower level of pretax income.

19

Table of Contents

Segment Information

     Under SFAS No. 131 criteria, Janitorial, Parking, Engineering, Security, Lighting, and Elevator are reportable segments. All other services are included in the “Other” segment. Corporate expenses are not allocated.