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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the Fiscal Year Ended October 31, 2003

                      OR          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

Commission File Number 1-8929

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes X  No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.       

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes X  No  

As of April 30, 2003 (the last business day of registrant’s most recently completed second fiscal quarter), non-affiliates of the registrant beneficially owned shares of the registrant’s common stock with an aggregate market value of $541,504,655, computed by reference to the price at which the common stock was last sold.

As of December 31, 2003, there were 48,530,777 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be used by the Company in connection with its 2004 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

ABM Industries Incorporated

PART I

ITEM 1. BUSINESS

       ABM Industries Incorporated (“ABM”) is one of the largest facility services contractors listed on the New York Stock Exchange. With annual revenues in excess of $2.2 billion and more than 64,000 employees, ABM and its subsidiaries (the “Company”) provide janitorial, parking, engineering, security, lighting and mechanical services for thousands of commercial, industrial, institutional and retail facilities in hundreds of cities in the United States and British Columbia, Canada.

      The Company also provided elevator services until August 15, 2003, on which date substantially all of the operating assets of Amtech Elevator Services, Inc., a wholly-owned subsidiary of ABM (“Amtech Elevator”), were sold to Otis Elevator Company, a wholly-owned subsidiary of United Technologies Corporation (“Otis Elevator”). See “Discontinued Operation” contained in Item 7.

      ABM was reincorporated in Delaware on March 19, 1985, as the successor to a business founded in California in 1909. The corporate headquarters of the Company is located at 160 Pacific Avenue, Suite 222, San Francisco, California 94111, and the Company’s telephone number at that location is (415) 733-4000. The Company’s Website is www.abm.com. Through a link on the Investor Relations section of the Company’s Website, the following filings are made available as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: (1) Annual Reports on Form 10-K, (2) Quarterly Reports on Form 10-Q, (3) Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as (4) the Section 16 filings by ABM’s directors and executive officers. All such filings are available free of charge. In addition, ABM makes available on its Website certain materials related to its corporate governance.

Industry Information

      The Company conducts business through a number of subsidiaries, which are grouped into seven segments based on the nature of the business operations. The operating subsidiaries within each segment generally report to the same senior management. Referred to collectively as the “ABM Family of Services,” at October 31, 2003 the seven segments were:

         • Janitorial

     The Company also provided elevator services until August 15, 2003 when it sold substantially all of the operating assets of its Elevator segment. See “Discontinued Operation” contained in Item 7.

      The business activities of the Company by industry segment, as they existed at October 31, 2003, are more fully described below.

      • Janitorial. The Company performs janitorial services through a number of the Company’s subsidiaries, primarily operating under the names “ABM Janitorial Services,” “American Building Maintenance” and “ABM Lakeside Building Maintenance.” The Company provides a wide range of basic janitorial services for a variety of facilities, including commercial office buildings, industrial plants, financial institutions, retail stores, shopping centers, warehouses, airport terminals, health and educational facilities, stadiums and arenas, and government buildings. Services provided include floor cleaning and finishing, window washing, furniture polishing, carpet cleaning and dusting, as well as other building cleaning services. The Company’s Janitorial subsidiaries maintain 111 offices in 42 states, the District of Columbia and one Canadian province, and operate under thousands of individually negotiated building maintenance contracts, nearly all of which are obtained by competitive bidding. The Company’s Janitorial contracts are either fixed-price agreements or they contain clauses under which the customer agrees to reimburse the full amount of wages, payroll taxes, insurance charges and other expenses plus a profit percentage. Generally, profit margins on maintenance contracts tend to be inversely proportional to the size of the contract. The majority of Janitorial contracts are for one-year periods, but are subject to termination by either party after 30 to 90 days’ written notice and contain automatic renewal clauses.

      • Parking. The Company provides parking services through a number of subsidiaries, primarily operating under the names “Ampco System Parking” “Ampco System Airport Parking” and “Ampco Express Airport Parking.” The Company’s Parking

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      • Engineering. The Company provides engineering services through a number of subsidiaries, primarily operating under the name “ABM Engineering Services.” The Company provides facilities with on-site engineers to operate, maintain and repair electrical, energy management, mechanical and plumbing systems utilizing in part computerized maintenance management systems. These services are designed to maintain equipment at optimal efficiency for customers such as high-rise office buildings, schools, computer centers, shopping malls, manufacturing facilities, museums and universities. The Company’s Engineering subsidiaries operate in 23 states through 13 branch and regional offices, five of which are in California and one each in Arizona, Colorado, Florida, Illinois, Massachusetts, New York, Pennsylvania and Texas. The majority of Engineering contracts contain clauses under which the customer agrees to reimburse the full amount of wages, payroll taxes, insurance charges and other expenses plus a profit percentage. Additionally, the majority of Engineering contracts are for one-year periods, but are subject to termination by either party after 30 to 90 days’ written notice. ABM Engineering Services Company, a wholly-owned subsidiary has maintained ISO 9002 Certification for the past five years, the only national engineering services provider of on-site operating engineers to earn this prestigious designation. ISO is a quality standard comprised of a rigorous set of guidelines and good business practices against which companies are evaluated through a comprehensive independent audit process.

      • Security. The Company provides security services through a number of subsidiaries, primarily operating under the names “American Commercial Security Services,” “ACSS” and “ABM Security Services.” The Company provides security guards; electronic monitoring of fire, life safety systems and access control devices; and security consulting services to a wide range of businesses. The Company’s Security subsidiaries maintain 25 offices and operates in the major metropolitan areas of Phoenix, Arizona; Los Angeles, Sacramento, San Diego, San Francisco and Santa Clara, California; Chicago, Illinois; New Orleans, Louisiana; Minneapolis, Minnesota; Portland, Oregon; Houston, Dallas, Fort Worth, Austin and San Antonio, Texas; Seattle, Washington; New York City, New York; and Philadelphia and Pittsburgh, Pennsylvania. The sales under the majority of Security contracts are based on actual hours of service at contractually specified rates. Additionally, the majority of Security contracts are for one-year periods, but are subject to termination by either party after 30 to 90 days’ written notice and contain automatic renewal clauses.

      • Lighting. The Company provides lighting services through a number of subsidiaries, primarily operating under the name “Amtech Lighting Services.” The Company provides relamping, fixture cleaning, and periodic lighting maintenance service to a variety of commercial, industrial and retail facilities. The Company’s Lighting subsidiaries also repair and maintain electrical outdoor signage, and provide electrical service and repairs. The Company’s Lighting subsidiaries operate 27 offices, eight of which are located in California, four in Texas, two in North Carolina, and one office in each of the following states: Alabama, Arizona, Florida, Georgia, Illinois, Kentucky, Louisiana, Minnesota,

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      • Mechanical. The Company provides mechanical services through a number of subsidiaries, primarily operating under the names “CommAir Mechanical Services” and “CommAir Preferred Mechanical Services.” The Company installs, maintains and repairs heating, ventilation and air conditioning and refrigeration equipment, performs chemical water treatment and provides energy conservation services for commercial, industrial and institutional facilities. The Company’s Mechanical subsidiaries maintain nine offices, eight of which are located in California and one in Phoenix, Arizona. Mechanical contracts are either fixed-price agreements or time and materials based where the customer is billed according to actual hours of service and materials used at contractually specified prices. The majority of such contracts are for one-year periods, but are subject to termination by either party after 30 to 90 days’ written notice. Contracts for projects, however, typically cannot be cancelled.

      • Facility Services. The Company provides facility services through a number of subsidiaries, primarily operating under the name “ABM Facility Services.” The Company provides customers with streamlined, centralized control and coordination of multiple facility service needs. This process is consistent with the greater competitive demands on corporate organizations to become more efficient in the business market today. By leveraging the core competencies of the Company’s other service offerings, the Company attempts to reduce overhead (such as redundant personnel) for its customers by providing multiple services under a single contract, with one contact and one invoice. Its National Service Call Center provides centralized dispatching, emergency services, accounting and related reports to financial institutions, high-tech companies and other customers regardless of industry or size. Facility Services is headquartered in San Francisco, where it also maintains its National Service Call Center.

      Additional information relating to the Company’s industry segments appears in Note 13 of Notes to Consolidated Financial Statements.

Trademarks

      The Company believes that it owns or is licensed to use all corporate names, tradenames, trademarks, service marks, copyrights, patents and trade secrets which are material to the Company’s operations.

Competition

      The Company believes that each aspect of its business is highly competitive, and that such competition is based primarily on price and quality of service. The Company provides nearly all its services under contracts originally obtained through competitive bidding. The low cost of entry to the facilities services business has led to strongly competitive markets made up of large numbers of mostly regional and local owner-operated companies, located in major cities throughout the United States and in British Columbia, Canada (with particularly intense competition in its janitorial business in the Southeast and South Central regions of the United States). The Company also competes with the operating divisions of a few large, diversified facility service and manufacturing companies on a national basis. Indirectly, the Company competes with building owners and tenants that perform internally one or more of the services provided by the Company. These building owners and tenants might have a competitive advantage when the Company’s services are subject to sales tax and internal operations are not. Furthermore, competitors may have lower costs because privately-owned companies operating in a limited geographic area may have significantly lower labor and overhead costs. These strong competitive pressures could inhibit the Company’s success in bidding for profitable business and its ability to increase prices even as costs rise, thereby reducing margins.

Sales and Marketing

      The Company’s sales and marketing efforts are conducted by its corporate, subsidiary, region, branch and district offices. Sales, marketing, management and operations personnel in each of these offices participate directly in selling and servicing customers. The broad geographic scope of these offices enables

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      The Company has a broad customer base, including, but not limited to, commercial office buildings, industrial plants, financial institutions, retail stores, shopping centers, warehouses, airports, health and educational facilities, stadiums and arenas, government buildings, apartment complexes, and theme parks. No customer accounted for more than 5% of its revenues during the fiscal year ended October 31, 2003.

Employees

      The Company employs over 64,000 persons, of whom the vast majority are service employees who perform janitorial, parking, engineering, security, lighting and mechanical services. Approximately 28,000 of these employees are covered under collective bargaining agreements at the local level. There are about 3,700 employees with executive, managerial, supervisory, administrative, professional, sales, marketing or clerical responsibilities, or other office assignments.

Environmental Matters

      The nature of the Company’s operations, primarily services, would not ordinarily involve it in environmental contamination. However, the Company’s operations are subject to various federal, state and/or local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment, such as discharge into soil, water and air, and the generation, handling, storage, transportation and disposal of waste and hazardous substances. These laws generally have the effect of increasing costs and potential liabilities associated with the conduct of the Company’s operations, although historically they have not had a material adverse effect on the Company’s financial position, results of operations, or cash flows.

      The Company is currently involved in two proceedings relating to environmental matters: one involving alleged potential soil contamination at a former Company facility in Arizona and one involving alleged potential soil and groundwater contamination at a Company facility in Florida. While it is difficult to predict the ultimate outcome of these matters, based on information currently available, management believes that neither of these matters, individually or in the aggregate, are reasonably likely to have a material adverse effect on the Company’s financial position, results of operations, or cash flows. As any liability related to these claims is neither probable nor estimable, no accruals have been made related to these matters.

      Three other environmental proceedings were settled during fiscal year 2003 for approximately $0.6 million.

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Executive Officers of the Registrant

      The executive officers of ABM are as follows:

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ITEM 2. PROPERTIES

       The Company has corporate, subsidiary, regional, branch or district offices in over 220 locations throughout the United States and in British Columbia, Canada. Fourteen of these facilities are owned by the Company. At October 31, 2003, the real estate owned by the Company had an aggregate net book value of $3.4 million and was located in: Phoenix, Arizona; Fresno, California; Jacksonville and Tampa, Florida; Portland, Oregon; Arlington, Houston and San Antonio, Texas; and Kennewick, Seattle, Spokane and Tacoma, Washington.

      Rental payments under long and short-term lease agreements amounted to $96.9 million for the fiscal year ended October 31, 2003. Of this amount, $64.2 million in rental expense was attributable to public parking lots and garages leased and operated by Parking. The remaining expense was for the rental or lease of office space, computers, operating equipment and motor vehicles.

ITEM 3. LEGAL PROCEEDINGS

       In September 1999, a former employee filed a gender discrimination lawsuit against ABM in the state of Washington. On May 19, 2003, a Washington state court jury for the Spokane County Superior Court, in the case named Forbes v. ABM, awarded $4.0 million in damages, and the court later awarded costs of $0.7 million to the former employee. In addition, the court may award the plaintiff up to $0.8 million to mitigate the federal tax impact of the plaintiff’s award (the Washington Supreme Court is currently deciding whether amounts to mitigate federal tax consequences may be awarded in wrongful termination cases). ABM will appeal the jury’s verdict to the State Court of Appeals as well as the award of costs on the grounds that it was denied a fair trial. There can be no assurance that ABM will prevail in this matter. ABM, however, believes that the award against ABM was excessive and that the verdict was inconsistent with the law and the evidence. Because ABM believes that the judgment will be reversed upon appeal, ABM has not recorded any liability in its financial statements associated with the judgment. However, as of October 31, 2003, ABM has incurred and recorded legal fees of $0.1 million associated with the appeal. These fees, which include the cost of a new trial, are expected to total approximately $0.4 million.

      The Company and some of its subsidiaries have been named defendants in certain other litigation arising in the ordinary course of business. In the opinion of management, based on advice of legal counsel, such matters should have no material effect on the Company’s financial position, results of operations or cash flows.

       Not applicable.

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PART II

       ABM’s common stock is listed on the New York Stock Exchange. The following table sets forth the high and low intra-day prices of ABM’s common stock on the New York Stock Exchange and quarterly cash dividends declared on common shares for the periods indicated:

      At December 31, 2003, there were 4,199 registered holders of ABM’s common stock, in addition to stockholders in street name. To the Company’s knowledge, there are no current factors that are likely to materially limit the Company’s ability to pay comparable dividends for the foreseeable future.

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ITEM 6. SELECTED FINANCIAL DATA

     The following selected financial data is derived from the Company’s consolidated financial statements for each of the years in the five-year period ended October 31, 2003. It should be read in conjunction with the consolidated financial statements and the notes thereto, as well as the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this report.

     (1) Certain prior year amounts have been reclassified to conform to the current year presentation. The results from operations of the Company’s Elevator segment, which was sold on August 15, 2003, have been classified as income from discontinued operation and the assets and liabilities have been classified as held for sale in the accompanying consolidated financial statements and this table.

     (2) The World Trade Center represented the Company’s largest worksite; its destruction has directly and indirectly impacted subsequent Company results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

     (3) In 2002, the Company adopted SFAS No. 142 under which goodwill is no longer amortized, but is subject to at least an annual assessment for impairment.

     (4) Stockholders’ equity per common share is calculated by dividing stockholders’ equity at the end of the fiscal year by the number of shares of common stock outstanding at that date. This calculation may not be comparable to similarly titled measures reported by other companies.

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       The following discussion should be read in conjunction with the consolidated financial statements of the Company and the notes thereto contained in Item 8, “Financial Statements and Supplementary Data.” All information in the discussion and references to the years are based on the Company’s fiscal year that ends on October 31.

Overview

      The Company provides janitorial, parking, engineering, security, lighting and mechanical services for thousands of commercial, industrial, institutional and retail facilities in hundreds of cities in the United States and British Columbia, Canada. The Company also provided elevator services until August 15, 2003, when it sold substantially all of the operating assets of its Elevator segment (see “Discontinued Operation”). The largest segment of the Company’s business is Janitorial which generated over 60% of the Company’s sales and other income from continuing operations (hereinafter called “sales”) and over 64% of its operating profit before corporate expenses for fiscal 2003.

      The Company’s sales are substantially based on the performance of labor-intensive services at contractually specified prices. Janitorial and other maintenance service contracts are either fixed-price or “cost-plus” (i.e., the customer agrees to reimburse the full amount of wages, payroll taxes, insurance charges and other expenses plus a profit percentage). The majority of the Company’s contracts are for one-year periods, but are subject to termination by either party after 30 to 90 days’ written notice. In addition to services defined within the scope of the contract, the Company also generates sales from extra services where the customer might require additional cleaning or emergency repair services.

      Sales have historically been the major source of cash for the Company while payroll expenses, which are directly related to sales, have been the largest use of cash. Hence operating cash flows significantly depend on the sales level and timing of collections, as well as the quality of the customer receivable. The timing and level of the payments to suppliers and other vendors, as well as the magnitude of self-insured claims, also affect operating cash flows. The Company’s management views operating cash flows as a good indicator of financial strength. Strong operating cash flows provide opportunities for growth both internally and through acquisitions.

      The Company faces many challenges that affect its sales and profitability. Recent results have been negatively influenced by declines in office building occupancy, weakness in airline travel and the hospitality industry and a slowdown in capital investment by customers. In the long run, achieving the desired levels of sales and profitability will depend on the Company’s ability to retain more customers than it loses, at acceptable profit margins, in the face of competition, particularly from privately-owned companies that typically have the lower cost advantage.

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. Additionally, the Company received a total of $112.4 million in cash proceeds from the Elevator divestiture during 2003 (see “Discontinued Operation”).

      During 2003, 2002 and 2001, operating activities generated net cash of $60.1 million, $110.9 million and $65.8 million, respectively. Cash from operations was higher in 2002 compared to 2003 and 2001 primarily due to greater collection of outstanding accounts receivable during 2002. In addition, cash from operations for the year ended October 31, 2002 included the receipt of two partial settlements totaling $13.3 million in gross insurance proceeds related to the World Trade Center (“WTC”) insurance claim.

      Net cash provided by investing activities in 2003 was $66.1 million, compared to net cash used in investing activities in 2002 and 2001 of $59.3 million and $27.0 million, respectively. The increase in net cash provided by investing activities in 2003 from 2002 was due to the $112.4 million proceeds received from the Elevator divestiture during 2003 (see “Discontinued Operation”). Net cash used for the purchase of business in 2003 was $40.6 million compared to $52.4 million in 2002 of which $36.9 million was used for the initial payment for the purchase of the operations of Lakeside Building Maintenance, Inc. and an affiliated company (collectively, “Lakeside”) in July 2002, the largest acquisition ever made by the Company. The increase in cash used in investing activities in 2002 from 2001 primarily reflects the payment for the acquisition of

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      Net cash used in financing activities was $34.7 million in 2003, $35.2 million in 2002 and $37.7 million in 2001. The decrease in 2003 from 2002 was primarily due to no debt repayments in 2003 compared to $11.8 million in 2002, offset by greater common stock purchases and lower common stock issuance in 2003. The slight decrease in net cash used in financing activities in 2002 from 2001 was primarily due to reduced debt repayments partially offset by common stock purchases in 2002.

      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 common stock at any time through December 31, 2001, which authorization was later 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 additional shares of the Company’s outstanding common stock at any time through December 31, 2003. As of October 31, 2003, the Company purchased 1.4 million shares under this authorization at a cost of $21.1 million (an average price per share of $15.04) and 0.6 million shares were available for purchase.

      On December 9, 2003, the Company’s Board of Directors authorized the purchase of up to 2.0 million additional shares of the Company’s outstanding common stock at any time through December 31, 2004.

      In April 2003, the Company increased the amount of its syndicated line of credit, which will expire July 1, 2005, to $250.0 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 0.875% to 1.50% or, for overnight borrowings, at the prime rate plus a spread of 0.00% to 0.25% or, for overnight to one week, at the Interbank Offered Rate (“IBOR”) plus a spread of 0.875% 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 0.20%, 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 October 31, 2003 and 2002, the total outstanding amounts under this facility were $69.0 million and $102.0 million, respectively, in the form of standby letters of credit. The decrease is due to the reduction of the use of standby letters of credit for certain self-insurance agreements, specifically in the State of California where the Company now participates in the state’s Self-Insurers’ Security Fund in lieu 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 October 31, 2003. The Company’s effective weighted average interest rate (excluding amortization of related fees) for all LIBOR, prime and IBOR borrowings for the year ended October 31, 2003 was 2.60%.

      Working capital increased by $28.9 million to $244.0 million at October 31, 2003 from $215.1 million at October 31, 2002 primarily due to the net impact of the Elevator divestiture during 2003 (see “Discontinued Operation”). The largest component of working capital consists of trade accounts receivable that totaled $287.9 million at October 31, 2003, compared to $296.6 million at October 31, 2002. These amounts were net of allowances for doubtful accounts of $6.3 million and $5.5 million at October 31, 2003 and October 31, 2002, respectively. As of October 31, 2003, accounts receivable that were over 90 days past due had decreased $8.5 million to $28.2 million (9.8% of the total net outstanding) from $36.7 million (12.4% of the total net outstanding) at October 31, 2002.

      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 $150.0 million of coverage above the self-insured retention limits (i.e., deductible). For claims incurred after November 1, 2002, substantially all of the self-insured retentions increased from $0.5 million to $1.0 million. Effective April 14, 2003, the deductible for California workers’ compensation insurance increased to $2.0 million per

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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 WTC complex in New York was the Company’s largest single job-site with annual sales of approximately $75.0 million (3% of the Company’s consolidated sales for 2001). The Company provided its insurance carrier, Zurich Insurance (“Zurich”), claim information regarding the lost business income and, as described further below, substantially settled the property portion of the claim. As of October 31, 2002, Zurich had paid two partial settlements totaling $13.3 million, of which $10.0 million was for business interruption and $3.3 million for property damage. The Company realized a pretax gain of $10.0 million in 2002 on the proceeds received.

      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 $10.0 million. On June 2, 2003, the court ruled on certain summary judgment motions in favor of Zurich. Subsequent to the June ruling, additional rulings by the court have limited the Company’s recourse under the policy to the amounts paid plus additional amounts related to physical property of the Company located on the WTC premises and certain accounts receivable from customers that could not be collected. 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 $10.0 million sub-limit on contingent business interruption and that the Company’s losses under its WTC contracts are eligible for additional business interruption coverage up to the policy maximum of $124.0 million. Therefore, the Company is appealing the court’s rulings.

      Under the guidance published by the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) “Accounting for the Impact of the Terrorist Attacks of September 11, 2001,” the Company has not recognized future amounts it expects to recover from its business interruption insurance as income. Any gain from insurance proceeds is considered a contingent gain and, under Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies,” can only be recognized as income in the period when any and all contingencies for that portion of the insurance claim have been resolved.

Off-Balance Sheet Arrangements

      As of October 31, 2003, the Company does not have any off-balance sheet arrangements as defined by Item 303(a)(4) of the Securities and Exchange Commission Regulation S-K.

Effect of Inflation and Energy Crisis

      The low rates of inflation experienced in recent years have had no material impact on the financial statements of the Company. The Company attempts to recover increased costs by increasing sales prices to the extent permitted by contracts and competition.

      The energy crisis in the State of California has not had a material impact on the Company.

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Contractual Obligations, Commercial Commitments and Other Long-Term Liabilities

      The Company is contractually obligated to make future payments under non-cancelable operating lease agreements for various facilities, vehicles, and other equipment. As of October 31, 2003, future contractual payments were as follows:

      Additionally, the Company has the following commercial commitments and other long-term liabilities:

      Although a portion of insurance claims is classified as long-term liabilities, insurance claims are not included in the above table as they are not contractual obligations.

Acquisitions and Divestitures

      The operating results of businesses acquired have been included in the accompanying consolidated financial statements from their respective dates of acquisition and acquisitions made in 2003 are discussed in Note 9 of Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data.” Acquisitions made during the three years ended October 31, 2003 contributed approximately $334.6 million (14.8%) to 2003 sales.

      On April 30, 2001, the Company sold Easterday for $12.0 million and realized a pretax gain of $0.7 million. Prior to its sale, Easterday’s operating results were included in “Other” segment.

      On August 15, 2003, ABM sold substantially all of the operating assets of Amtech Elevator, which represented the Company’s Elevator segment, to Otis Elevator. The consideration in connection with the sale included $112.4 million in cash and Otis Elevator’s assumption of trade payables and accrued liabilities. The Company realized a gain on the sale of $51.5 million, net of $31.9 million of income taxes. See “Discontinued Operation.”

Results of Continuing Operations

      In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 became effective in fiscal years beginning after December 15, 2001, with early adoption permitted. The Company adopted the provisions of SFAS No. 142 beginning with the first quarter of 2002. In accordance with this standard, goodwill is no longer amortized, but is subject to an annual assessment for impairment. The Company is required to perform goodwill impairment tests on an annual basis and, in certain circumstances, between annual tests. As of October 31, 2003, no impairment of the Company’s goodwill carrying value has been indicated. For comparative purposes, goodwill amortization has been segregated from the operating profits of the segments for the year ended October 31, 2001 and reported separately.

      In January 2002, the 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 and had no impact on the Company’s operating profits or net income. Parking sales related solely to the reimbursement of expenses totaled $215.3 million, $203.8 million and $199.1 million for years ended October 31, 2003, 2002 and 2001, respectively.

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COMPARISON OF 2003 TO 2002 — CONTINUING OPERATIONS

      Income From Continuing Operations. Income from continuing operations in 2003 was $36.4 million ($0.73 per diluted share), a decrease of $7.7 million or 17.4% from $44.1 million ($0.86 per diluted share) in 2002. A number of items affected the comparability of the fiscal years. Fiscal 2002 results benefited from a $10.0 million pretax gain ($6.3 million after-tax, $0.12 per diluted share) from the receipt of two partial settlements totaling $13.3 million from the WTC insurance claim, and $2.0 million of income tax benefit ($0.04 per diluted share) from the adjustment of prior-year estimated tax liabilities, partially offset by $3.2 million of costs ($2.0 million after-tax, $0.04 per diluted share) associated with senior management changes. Fiscal 2003 results included $9.6 million ($6.0 million after-tax, $0.12 per diluted share) of higher operating profits contributed by acquisitions that did not significantly impact results until after July 31, 2002. However, the positive impact of the acquisitions on fiscal 2003 results was more than offset by declines in operating profits in 2003 from Janitorial, primarily in the Northeast and Northwest regions, as well as Lighting and Parking, see “Segment Information”.

      Sales. Sales in 2003 of $2,262.5 million increased by $194.4 million or 9.4% from $2,068.1 million in 2002. Acquisitions that did not significantly impact results until after July 31, 2002 contributed $182.0 million to the sales increase, primarily Lakeside acquired on July 12, 2002, the commercial self-performed janitorial cleaning operations of Horizon National Commercial Services (“Horizon”) acquired on January 31, 2003, Valet Parking Services (“Valet”) acquired on April 30, 2003, and HGO Services (“HGO”) acquired on August 29, 2003. 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 vacancies and decreased project work and extra services as customers tightened their budgets.

      Operating Expenses and Cost of Goods Sold. As a percentage of sales, operating expenses and cost of goods sold were 90.0% for 2003, compared to 89.7% for 2002. Consequently, as a percentage of sales, the Company’s gross profit of 10.0% in 2003 was lower than the gross profit of 10.3% in 2002. The decline was due primarily to lower margins on new business, delays in planned terminations of unprofitable contracts in the Northeast region of Janitorial, a decline in sales from higher margin business due to increased vacancies in commercial office buildings, and higher reimbursements for out-of-pocket expenses from managed parking lot clients for which Parking had no margin benefit. Additionally, operating expenses for 2003 included higher insurance costs that could not be fully offset by price increases.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses for 2003 were $171.1 million compared to $156.0 million for 2002. The $15.1 million increase included $12.6 million additional expenses contributed by acquisitions that did not impact results until after July 31, 2002, higher insurance costs, and annual salary increases. Additionally, corporate expenses in 2003 included higher directors and officers’ insurance costs and professional fees. However, 2002 also reflected a total of $7.0 million of charges including $3.2 million of costs associated with the elimination of the Chief Administrative Officer position, the early retirement of the former Corporate General Counsel, the replacement of the President of Facility Services, as well as $3.8 million higher bad debt provision in 2002 than in 2003. As a percentage of sales, selling, general and administrative expenses were 7.6% in 2003, compared to 7.5% in 2002.

      Interest Expense. Interest expense, which includes loan amortization and commitment fees for the revolving credit facility, was $0.8 million in 2003 compared to $1.1 million in 2002. The decrease was primarily due to lower borrowings and interest rates during 2003, compared to 2002.

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      Income Taxes. The effective federal and state income tax rate for income from continuing operations was 33.6% for 2003, compared to 32.2% for 2002. Income tax provision for continuing operations for 2002 included a tax benefit of $2.0 million principally from tax liability adjustments made after the filing of the 2001 income tax returns, while 2003 included $0.7 million of tax benefit from the filing of the 2002 state and federal tax returns and $0.2 million of income tax refund from filing prior years’ amended returns.

Segment Information

      Under SFAS No. 131 criteria, Janitorial, Parking, Engineering, Security, and Lighting are reportable segments. The operating results of the former Elevator segment are reported separately under discontinued operation and are excluded from the table below, see “Discontinued Operation.” All other services are included in the “Other” segment. Corporate expenses are not allocated.

      Janitorial. Sales for Janitorial were $171.2 million or 14.3% higher in 2003 than in 2002, primarily due to the $172.8 million contribution from Lakeside, Horizon and HGO. These gains in sales were substantially offset by the termination of unprofitable jobs in the Northeast and Southeast regions, the termination of a major contract due to collection issues in the Northwest region, and declines in sales from existing contracts due to increased vacancies and decreased extra services as customers tightened their budgets. In addition, sales for 2002 included $1.0 million of interest on receivables from the resolution of past-due balances with two customers.

      Operating profits in 2003 were $0.9 million or 1.6% lower than in 2002 primarily due to the $7.7 million and $2.5 million decline in operating profits in the Northeast and Northwest regions, respectively, which was partially offset by $8.8 million of operating profit improvement from Lakeside, Horizon and HGO.

      The decline in operating profits in the Northeast region of Janitorial, especially in New York City, was primarily due to new business priced at lower margins as a result of competitive pressures and a decline in sales from higher margin business due to increased vacancies. The benefit of terminating some unprofitable contracts has been offset by customer cancellations of some profitable service contracts. Further, first quarter 2002 results for New York City operations benefited from the extra clean-up work performed following the September 11th attacks. The region’s operating profits in 2003 were impacted by legal fees associated with a lawsuit related to the collection of a past-due accounts receivable from a large former customer and costs associated with implementing management changes in this region.

      The decline in operating profits in the Northwest region of Janitorial was due to the loss of a major contract, reduced revenues from existing contracts and higher legal fees primarily due to a gender discrimination lawsuit filed against ABM by a former employee in September 1999 in the State of Washington. ABM has not recorded any liability in its financial statements associated with the damages and costs awarded to the former employee. However, as of October 31, 2003, ABM has incurred and recorded legal fees of $0.1 million associated with the appeal. See Item 3, “Legal Proceedings.”

      Parking. Parking sales increased by $17.1 million or 4.7%, while operating profits decreased by $0.6 million or 8.6% during 2003 compared to 2002. The sales increase included $11.5 million of higher reimbursements for out-of-pocket expenses from managed parking lot clients for which Parking had no margin benefit, sales from the Valet acquisition, and the receipt of a $1.1 million settlement for prior period services performed related to a managed parking lot contract in Houston, Texas. These sales increases were partially offset by declines in sales from the hi-tech sectors of

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      Engineering. Engineering sales increased $6.7 million or 3.8% during 2003 compared to 2002 primarily due to new business, offset in part by a $7.0 million decline in sales from existing large customers that have reduced their spending. Operating profits decreased by $0.1 million or 1.1% from 2002 to 2003 primarily due to settlements of disputed amounts with two customers totaling $0.5 million, a settlement with a competing firm on a bid-related issue requiring payment while the customer contract is in force, and consulting costs associated with a study to assist Engineering to expand into new markets and broaden the scope of its services.

      Security. Security sales increased $19.1 million or 13.6% for 2003 compared to 2002 primarily due to an increase of $9.5 million in the sales contributed by the operations acquired from Triumph Security Corporation (“Triumph”) in New York City on January 26, 2002 and Foulke Associates, Inc. (“Foulke”), located throughout Georgia, Florida, Maryland, Pennsylvania and Virginia, on February 28, 2002. In addition, the award of a national contract from a Real Estate Investment Trust (“REIT”) added $8.4 million in sales for 2003. Operating profits increased by $0.8 million or 15.0% due to increased sales and tight control over operating expenses, partially offset by start-up costs incurred in 2003 related to the new contract with the REIT.

      Lighting. Lighting sales decreased $3.3 million or 2.5% and operating profits decreased $2.6 million or 31.7% during 2003 compared to 2002. The decrease in sales, particularly in the Northeast and North Central regions, was primarily due to significantly less retrofit projects in 2003 compared to 2002 and the termination of several national service contracts during 2003. Lighting’s customers, especially retailers, significantly reduced their capital budgets and spent less on energy saving initiatives in 2003. The decline in operating profits was primarily due to lower sales and higher selling, general and administrative expenses, partially offset by a $0.3 million gain recognized in the first quarter of 2003 related to the early termination of a contract. The Northeast and North Central regions hired additional managers in several branches and incurred higher labor-related costs due to training and management duplication during the transition.

      Other. Sales for the Other segment were down $16.6 million or 26.7% in 2003 compared to 2002. The lower sales in 2003 were primarily due to decreased capital project work as customers tightened their budgets and Facility Services’ loss of the Consolidated Freightways account due to bankruptcy in September 2002. The Other segment produced a profit of $1.3 million in 2003 compared to a loss of $1.2 million in 2002. Operating loss in 2002 included a $1.2 million write-down of work-in-progress in Mechanical, a $1.3 million bad debt provision in Facility Services for the Consolidated Freightways account, as well as $0.4 million in costs associated with the replacement of the President of Facility Services.

      Corporate. Corporate expenses for 2003 were down $0.4 million from 2002. However, 2002 included $2.8 million of costs associated with the elimination of the Chief Administrative Officer position and the early retirement of the former General Counsel. Corporate expenses for 2003 reflected a $1.1 million increase in premiums paid for directors and officers’ liability insurance (from $0.3 million in 2002 to $1.4 million in 2003), as well as higher professional fees related to the due diligence performed for a proposed acquisition that was not completed, Sarbanes-Oxley compliance, and additional use of outside legal counsel while in the process of recruiting a new General Counsel. The new General Counsel was hired on May 1, 2003.

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COMPARISON OF 2002 TO 2001 — CONTINUING OPERATIONS

      Income From Continuing Operations. Income from continuing operations for 2002 was $44.1 million ($0.86 per diluted share), an increase of 47.5% from the income from continuing operations of $29.9 million ($0.59 per diluted share) for 2001.

      The results for 2002 included a $10.0 million pretax gain from the receipt of two partial settlements from Zurich totaling $13.3 million related to the WTC; the impact of new acquisitions, primarily Lakeside in July 2002, which contributed $3.5 million of operating profit in 2002; a $2.0 million income tax benefit from the adjustment of prior year estimated tax liabilities; and a $1.4 million tax benefit from a lower income tax rate. The results for 2002 were adversely impacted by a $3.2 million pretax provision for costs associated with the elimination of the Chief Administrative Officer position, the early retirement of the former Corporate General Counsel and the replacement of the President of Facility Services; and a $3.2 million pretax increase in operating expenses in New York City as a result of the WTC related increase in seniority-based payroll and unemployment insurance costs at other job-sites in New York City. Additionally, the bad debt expense for 2002 was $5.0 million higher than 2001, primarily due to increased bankruptcies. Lastly, the business lost at the WTC had higher profit margins than those obtained on new business.

      Results for 2001 included a $20.0 million pretax insurance charge; $12.1 million of pretax goodwill amortization expense; and a pretax gain of $0.7 million from the divestiture of Easterday. Additionally, for the fiscal year ended October 31, 2001, the Company realized pretax income of $8.4 million on revenue of $71.0 million from the WTC and adjacent facilities.

      Sales. Sales for 2002 of $2,068.1 million increased by 2.0% compared to $2,027.8 million for 2001 despite the loss of the WTC and the sale of Easterday. Easterday contributed $16.0 million to sales for the first six months of 2001. Offsetting the absence of the WTC and Easterday sales in 2002 were sales from the newly acquired operations of Lakeside in the Midwest and other new business, primarily in Security. Sales generated from acquisitions during 2001 contributed $10.8 million of the 2002 increase, while 2002 acquisitions added $69.8 million. Also included in sales for 2002 was $1.0 million of interest income from the resolution of past due balances with two janitorial customers and $0.5 million of pretax gain from the early termination of a lease at Parking.

      Operating Expenses and Cost of Goods Sold. As a percentage of sales, operating expenses and cost of goods sold was 89.7% for 2002, compared to 89.8% for 2001. Consequently, as a percentage of sales, the Company’s gross profit of 10.3% in 2002 was higher than the gross profit of 10.2% in 2001. Operating expenses and cost of goods sold for fiscal 2002 included a $1.2 million pretax write-down of work-in-progress.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses were $156.0 million in 2002, an increase of 7.7% from $144.9 million in 2001. The increase in selling, general and administrative expenses was primarily due to the $3.2 million costs associated with the above-mentioned personnel changes, $5.0 million of higher bad debt expense due to increased bankruptcies, and $1.0 million of professional expenses associated with the WTC insurance claim. Accordingly, as a percentage of sales, selling, general and administrative expenses increased to 7.5% in 2002 from 7.1% in 2001.

      Interest Expense. Interest expense was $1.1 million in 2002 compared to $2.6 million for 2001, a decrease of $1.5 million. This decrease was primarily due to lower weighted average borrowings and lower interest rates in 2002.

      Income Taxes. The effective tax rate for income from continuing operations for 2002 was 32.2%, compared to 37.9% for 2001. The decline was primarily due to a $2.0 million benefit from the adjustment of the prior year’s estimated tax liabilities

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Segment Information

      Under SFAS No. 131 criteria, all services other than Janitorial, Parking, Engineering, Security, and Lighting are included in the “Other” segment, including Easterday, prior to its sale on April 29, 2001. The operating results of the former Elevator segment are reported separately under discontinued operation and are excluded from the table below, see “Discontinued Operation.” Corporate expenses are not allocated. Goodwill amortization has been segregated from the operating profits of the segments for 2001 and reported separately to provide a comparable analysis.

      Janitorial. Janitorial reported sales for 2002 of $1,197.0 million, an increase of 3.2% from 2001. Sales included $1.0 million of interest on receivables from the resolution of past due balances with two customers. Janitorial accounted for nearly 58% of the Company’s consolidated sales in 2002. Janitorial sales increased primarily due to the impact of new acquisitions partially offset by the loss of the WTC. Sales generated from acquisitions during 2001 contributed $14.2 million of the 2002 increase, while the 2002 acquisitions added a total of $53.4 million, of which $51.6 million was contributed by Lakeside. Operating profits decreased 19.6% in 2002 to $54.3 million as compared to 2001 due to the loss of the WTC, and $3.2 million of pretax increase in operating expenses in New York City as a result of the WTC related increase in seniority-based payroll and unemployment insurance costs which could not be offset by price increases. Furthermore, bad debt expense increased to $6.3 million in 2002 compared to $2.1 million in 2001 due to increased bankruptcies.

      Parking. Parking sales decreased by 0.4% to $363.5 million in 2002, while its operating profits increased 5.0% to $6.9 million in 2002 compared to 2001. The decrease in sales was due to the loss of an airport contract and the continuing effects of the terrorist attacks of September 11, 2001 on sales at airport and hotel facilities, partially offset by sales from new parking contracts. The increase in operating profits resulted from higher margins on new parking contracts, discontinuation of unprofitable contracts and a $0.5 million gain on the early termination of a parking lease, which more than offset increased insurance costs that could not be fully offset by price increases.

      Engineering. Sales for Engineering increased 1.5% to $173.6 million in 2002 compared to 2001, due to an increased customer base in all regions and, in the second quarter of 2002, the resolution of disputed additional work performed for the Port Authority of New York. This was partially offset by the absence of the WTC contract. Operating profits increased 6.7% to $10.0 million from 2001 to 2002, due to increased business and improved profit margins.

      Security. Security sales increased 35.2% to $140.6 million due to the acquisitions of Sundown Security in June 2001, Triumph in January 2002, and Foulke in February 2002, as well as the addition of several large customer accounts. Sales generated by extra services were also higher due to heightened security concerns after the terrorist attacks on September 11, 2001. Operating profits increased 77.7% to $5.6 million in 2002 compared to fiscal year 2001 primarily due to increased sales and lower costs due to tighter control over labor and operating expenses.

      Lighting. Lighting reported a 9.3% decrease in sales to $130.9 million for 2002 compared to 2001, and a decrease in operating profits by 31.1% to $8.3 million in 2002. The decrease in sales and profits was primarily due to decreased business in the Southeast and Southwest regions, mostly related to non-recurring energy conservation projects in 2001, and the loss of sales and profits from the WTC.

      Other. Sales for the Other segment, which included Easterday prior to its sale on April 29, 2001, were down 24.6% to $62.0 million in 2002 compared

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      Corporate. Corporate expenses for 2002 included a $2.8 million pretax provision for costs associated with the elimination of the Chief Administrative Officer position and the early retirement of the former Corporate General Counsel, and $1.0 million of professional fees related to the WTC insurance claim. Included in 2001 was $20.0 million of pretax insurance charge to strengthen the Company’s self-insurance reserves, reflecting the results of the annual independent actuarial review completed in December 2001. While virtually all insurance claims arise from the operating segments, this adjustment is included in unallocated corporate expenses. Had the Company allocated the insurance charge among the segments, the reported pre-tax operating profits of the segments, as a whole, would have been reduced by $20.0 million, with an equal and offsetting change to unallocated corporate expenses and therefore no change to consolidated pre-tax earnings. Based on the annual actuarial review completed in November 2002, the self-insurance reserves as of the end of 2002 were deemed adequate.

Discontinued Operation

      On August 15, 2003, ABM completed the sale of substantially all of the operating assets of Amtech Elevator to Otis Elevator. The operating assets sold included customer contracts, accounts receivable, facility leases and other assets, as well as a perpetual license to the name “Amtech Elevator Services.” The consideration in connection with the sale included $112.4 million in cash and Otis Elevator’s assumption of trade payables and accrued liabilities. The Company realized a gain on the sale of $51.5 million, net of $31.9 million of income taxes. See Note 10 of Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data.”

      The assets and liabilities of the Elevator segment have been segregated and classified as held for sale and the operating results and cash flows have been reported as discontinued operation in the accompanying consolidated financial statements. Income taxes have been allocated using the estimated combined federal and state tax rates applicable to Elevator for each of the periods presented. The prior periods presented have been reclassified.

      The operating results of the discontinued operation for fiscal 2003, 2002 and 2001 are shown below. Fiscal 2003 includes operating results for the period beginning November 1, 2002 through the date of sale, August 15, 2003.

Recent Accounting Pronouncements

      In July 2002, FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, or other exit or disposal activity. SFAS No. 146 replaces EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material effect on the consolidated financial statements of the Company.

      In November 2002, FASB issued Financial Interpretation No. (FIN) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”

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      In November 2002, the EITF issued a final consensus on EITF Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.” EITF Issue No. 02-16 provides accounting guidance on how a customer (end-user) and a reseller should characterize certain consideration received from a vendor (such as a rebate) and when to recognize and how to measure that consideration in its income statement. EITF Issue No. 02-16 is effective for fiscal periods beginning after December 15, 2002 for resellers, with early application permitted, while for customers it is effective prospectively for arrangements entered into after November 21, 2002. The Company, as a reseller of certain supplies and equipment, has adopted the provisions of EITF Issue No. 02-16. The adoption had no material effect on the Company’s results of operations or financial condition.

      In January 2003, FASB issued FIN 46, “Consolidation of Variable Interest Entities,” an interpretation of Accounting Research Bulletin No. 51. FIN 46 addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. FIN 46 applied immediately to variable interests in variable interest entities created after January 31, 2003; and for the first fiscal year or interim period beginning after June 15, 2003 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Analysis of the Company’s interest in variable interest entities at October 31, 2003 indicates that no consolidation will be required. The application of FIN 46 had no material effect on the Company’s results of operations or financial condition.

      In May 2003, the EITF released Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides accounting guidance on when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF Issue No. 00-21 is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The Company adopted the provisions of EITF Issue No. 00-21 effective in the fourth quarter of 2003. The Company’s Lighting segment earns revenues under service contracts that have multiple deliverables including initial services of relamping or retrofitting and future services of periodic maintenance. Lighting’s multiple deliverable contracts do not meet the criteria for treating the deliverables as separate units of accounting, hence the revenues and costs associated with the initial services are deferred and amortized over the service period on a straight-line basis. This is consistent with the revenue recognition methodology used by Lighting prior to the adoption of EITF Issue No. 00-21. Therefore, the adoption had no material effect on the Company’s results of operations or financial condition.

Critical Accounting Policies and Estimates

      The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses. On an ongoing basis, the Company evaluates its estimates, including those related to self-insurance reserves, allowance for doubtful accounts, valuation allowance for the net deferred income tax asset, contingencies and litigation liabilities. The Company bases its estimates on historical experience, independent valuations and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

      The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

      Self-Insurance Reserves: Certain insurable risks such as general liability, automobile property damage and workers’ compensation are self-insured by the Company. However, the Company has umbrella insurance coverage for certain risk exposures subject to specified limits. Accruals for claims under the Company’s self-insurance program are recorded on a claim-incurred basis. The Company uses an independent actuarial firm to annually evaluate and estimate the range of the Company’s claim costs and liabilities. The Company accrues the minimum amount of the actuarial range of exposure. Using the annual actuarial report, management develops annual insur-

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      Allowance for Doubtful Accounts: The Company’s accounts receivable arise from services provided to its customers and are generally due and payable on terms varying from the receipt of invoice to net thirty days. The Company estimates an allowance for accounts it does not consider collectible. Changes in the financial condition of the customer or adverse development in negotiations or legal proceedings to obtain payment could result in the actual loss exceeding the estimated allowance.

      Deferred Income Tax Asset Valuation Allowance: Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. If management determines it is more likely than not that the net deferred tax asset will be realized, no valuation allowance is recorded. At October 31, 2003, the net deferred tax asset was $68.8 million and no valuation allowance was recorded. Should future income be less than anticipated, the net deferred tax asset may not be fully recoverable.

      Contingencies and Litigation: ABM and certain of its subsidiaries have been named defendants in certain litigations arising in the ordinary course of business including certain environmental matters. When a loss is probable and estimable the Company records the estimated loss. The actual loss may be greater than estimated, or litigation where the outcome was not considered probable might result in a loss.

Factors That May Affect Future Results

      The disclosure and analysis in this Annual Report on Form 10-K contain some forward-looking statements that set forth anticipated results based on management’s plans and assumptions. From time to time, the Company also provides forward-looking statements in other written materials released to the public as well as oral forward-looking statements. Such statements give the Company’s current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Management tries, wherever possible, to identify such statements by using words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan, “project,” and similar expressions. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, and the outcome of contingencies and other uncertainties, such as legal proceedings, and financial results.

      Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. Investors should bear this in mind as they evaluate forward-looking statements.

      The Company undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. Investors are advised, however, to consult any future disclosures the Company makes on related subjects in its Form 10-Q and Form 8-K reports to the Securities and Exchange Commission. Set forth below are factors that the Company thinks, individually or in the aggregate, could cause the Company’s actual results to differ materially from past results or those anticipated, estimated or projected. The Company notes these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. The public should understand that it is not possible to predict or identify all such factors. Consequently, the following should not be considered to be a complete discussion of all potential risks or uncertainties.

      A further decline in commercial office building occupancy and rental rates could affect the Company’s sales and profitability. The Company’s sales directly depend on commercial real estate occupancy levels and the rental income of building owners. Decreases in these levels reduce demand and also create pricing pressures on building maintenance and other services provided by the Company. In certain geographic areas and service segments, the Company’s most profitable work includes jobs performed for tenants in buildings in which it performs building services for the property owner or management company. A decline in occupancy rates can result in a decline in fees paid by landlords as well as tenant work which will lower sales and

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      An increase in costs that the Company cannot pass on to customers could affect profitability. The Company attempts to negotiate contracts under which its customers agree to pay for increases in certain underlying costs associated with providing its services, particularly labor costs, workers’ compensation and other insurance costs, and any applicable payroll taxes. If the Company cannot pass through increases in its costs to its customers under its contracts in a timely manner or at all, then the Company’s expenses will increase without a corresponding increase in sales. Further, if the Company’s sales decline, the Company may not be able to reduce its expenses correspondingly or at all.

      The financial difficulties or bankruptcy of one or more of the Company’s major customers could adversely affect results. The Company’s ability to collect its accounts receivable and future sales depend, in part, on the financial strength of its customers. The Company estimates an allowance for accounts it does not consider collectible and this allowance adversely impacts profitability. In the event customers experience financial difficulty, and particularly if bankruptcy results, profitability is further impacted by the Company’s failure to collect accounts receivable in excess of the estimated allowance. Additionally, the Company’s future sales would be reduced.

      The Company could experience major collective bargaining disputes that would lead to the loss of sales or expense increases. Approximately 44% of the Company’s employees are subject to collective bargaining agreements at the local level. When one or more of the collective bargaining agreements are subject to renegotiation, the Company and the union may not agree on terms, which could result in a strike, work slow down or other job action at one or more of the Company’s locations, which could disrupt the Company in providing its service. Alternatively, the result of renegotiating a collective bargaining agreement could be a substantial increase in labor and benefits expenses that the Company could be unable to pass through to its customers for some period of time. In addition, the Company’s non-union competitors may attempt to use any disputes that the Company has with its unions to the competitors’ advantage in gaining market share.

      The Company is subject to intense competition. The Company believes that each aspect of its business is highly competitive, and that such competition is based primarily on price and quality of service. The Company provides nearly all its services under contracts originally obtained through competitive bidding. The low cost of entry to the facilities services business has led to strongly competitive markets made up of large numbers of mostly regional and local owner-operated companies, located in major cities throughout the United States and in British Columbia, Canada (with particularly intense competition in its janitorial business in the Southeast and South Central regions of the United States). The Company also competes with the operating divisions of a few large, diversified facility service and manufacturing companies on a national basis. Indirectly, the Company competes with building owners and tenants that perform internally one or more of the services provided by the Company. These building owners and tenants might have a competitive advantage when the Company’s services are subject to sales tax and internal operations are not. Furthermore, competitors may have lower costs because privately-owned companies operating in a limited geographic area may have significantly lower labor and overhead costs. These strong competitive pressures could inhibit the Company’s success in bidding for profitable business and its ability to increase prices even as costs rise, thereby reducing margins.

      The Company’s success depends on its ability to preserve its long-term relationships with its customers. The Company’s contracts with its customers are generally cancelable upon relatively short notice. However, the work associated with long-term relationships is generally more profitable than that from short-term relationships because the Company incurs initial costs with many new contracts, particularly for training, operating equipment and uniforms. Once these costs are expensed or fully depreciated over the appropriate periods, the underlying contracts become more profitable. Therefore, the Company’s loss of long-term customers could have an adverse impact on its profitability even if the Company generates equivalent sales from new customers.

      Weakness in airline travel and the hospitality industry could adversely impact the Company’s Parking results. A significant portion of the Company’s parking sales is tied to the numbers of

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      A continued slowdown in capital investments by customers could negatively impact the project sales of the Lighting and Mechanical segments. While the economy appears to be recovering in recent months, the commercial office building and retail sectors have been slow to make capital expenditures for lighting and mechanical projects. While we expect capital investment in these areas to increase in the coming year, customers’ capital projects budget could continue at low levels, which would adversely impact the Company’s results.

      Acquisition activity could slow or be unsuccessful. A significant portion of the Company’s historic growth has come through acquisitions. A slowdown in acquisitions could lead to a slower growth rate. Because new contracts frequently involve start-up costs, sales associated with acquired operations generally have higher margins than new sales associated with internal growth. Therefore a slowdown in acquisition activity could lead to higher costs as well as lower revenue growth. Because contracts in the Company’s businesses are generally short-term and personal relationships are significant in retaining customers, the Company relies on its ability to retain the managers of its acquired businesses. An inability to retain the services of the former owners and senior managers of acquired businesses could adversely affect the projected benefits of an acquisition. Moreover, the inability to successfully integrate acquisitions into the Company or to achieve the operational efficiencies anticipated in acquisitions could adversely impact sales and costs.

      The Company incurs significant accounting and other control costs, which could increase. As a publicly-traded corporation, the Company incurs certain additional costs to comply with regulatory requirements. Most of the Company’s competitors are privately-owned so these costs can be a competitive disadvantage for the Company. Should the Company’s sales decline, its costs associated with regulatory compliance will rise as a percentage of sales and under certain circumstances could increase in dollars as well.

      An inadequacy in the Company’s self-insurance reserves, or the cancellation or nonrenewal of the Company’s primary insurance policies, could adversely impact the Company’s results. The Company’s financial resources and its insurance coverage gives it a competitive advantage over smaller companies. Many customers, particularly institutional owners and large property management companies, prefer to do business with contractors who can provide substantial insurance coverage including, in the case of certain primary coverages, adequate self-insurance, and limits. Should the Company be unable to renew its umbrella and other commercial insurance policies at competitive rates, this loss would have an adverse impact on the Company’s business. While the size of the Company’s self-insurance reserves is determined by an actuarial analysis, an unanticipated increase in the frequency or severity of claims against the Company would have an adverse financial impact. In addition, catastrophic uninsured claims against the Company or the inability of the Company’s insurance carriers to pay otherwise insured claims would have an adverse financial impact.

      Other issues and uncertainties may include:

•	labor shortages that adversely affect the Company’s ability to employ entry level personnel
•	a reduction or revocation of the Company’s line of credit that could increase interest expense and the cost of capital
•	legislation or other governmental action that detrimentally impacts the Company’s expenses or reduces sales by adversely affecting the Company’s customers such as state or locally-mandated healthcare benefits
•	new accounting pronouncements or changes in accounting policies
•	impairment of goodwill
•	the resignation, termination, death or disability of one or more of the Company’s key executives that adversely affects customer retention or day-to-day management of the Company
•	inclement weather which could disrupt the Company in providing its services

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      The Company believes that it has the services, human and financial resources for business success, but future profit and cash flow can be adversely (or advantageously) influenced by a number of factors, including those discussed above, any and all of which are inherently difficult to forecast.

       The Company does not issue or invest in financial instruments or their derivatives for trading or speculative purposes. The operations of the Company are conducted primarily in the United States, and, as such, are not subject to material foreign currency exchange rate risk. At October 31, 2003, the Company had no outstanding long-term debt. Although the Company’s assets included over $110.9 million in cash and cash equivalents at October 31, 2003, market rate risk associated with changing interest rates in the United States is not material.

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Independent Auditors’ Report

To the Stockholders and Board of Directors

      We have audited the accompanying consolidated balance sheets of ABM Industries Incorporated and subsidiaries as of October 31, 2003 and 2002, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended October 31, 2003. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement Schedule II. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ABM Industries Incorporated and subsidiaries as of October 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement Schedule II, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

San Francisco, California

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ABM Industries Incorporated and Subsidiaries

CONSOLIDATED BALANCE SHEETS