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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the Fiscal Year Ended October 31, 2002

Commission File Number 1-8929

160 Pacific Avenue, Suite 222, San Francisco, California 94111

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.       

As of November 30, 2002, nonaffiliates of the registrant beneficially owned 39,011,613 shares of the registrant’s common stock with an aggregate market value of $578,932,337.

As of November 30, 2002, there were 49,070,289 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 2003 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 the largest facility services contractor listed on the New York Stock Exchange. With annual revenues exceeding $2.1 billion and more than 62,000 employees, ABM and its subsidiaries (the “Company”) provide janitorial, parking, engineering, security, lighting, elevator and air conditioning services to thousands of commercial, industrial, institutional and retail facilities in hundreds of cities across North America.

      ABM was reincorporated in Delaware on March 19, 1985, as the successor to a business founded in California in 1909. 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.

Industry Information

      The Company’s operations are grouped into eight divisions (each comprised of one or more subsidiaries of the Company), as they existed at October 31, 2002. Referred to as the “ABM Family of Services”, they are:

         • ABM Janitorial Services

     Additional information relating to the Company’s industry segments appears in Note 13 of Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data.” The business activities of the Company’s industry segments, as they existed at October 31, 2002, are more fully described below.

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Trademarks

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

Competition

      The Company believes that each aspect of its business is highly competitive, and that such competition is based primarily on price and quality of service. Nearly all services provided by the Company are under contracts originally obtained through competitive bidding. The majority of the Company’s competitors are regional and local companies located in major cities throughout the United States and Canada that operate in a limited geographic area. The operating divisions of a few large, diversified facility service and manufacturing companies compete with the Company on a national basis.

Sales and Marketing

      The Company’s sales and marketing efforts are conducted by its corporate, division, 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 the Company to provide a full range of facility services through intercompany sales referrals, multi-service “bundled” sales and national account sales. The Company also has designated a nationwide group of “ABM Family of Services” executives to market all of the Company’s facility services capabilities.

      The Company has a broad customer base, including airports, apartment complexes, city centers, colleges and universities, financial institutions, industrial plants, office buildings, retail stores, shopping centers and theme parks. No customer accounted for more than 5% of its revenues during the fiscal year ended October 31, 2002.

Employees

      The Company employs over 62,000 persons, of whom the vast majority are service employees who perform janitorial, parking, engineering, security, lighting, elevator and air conditioning services. Approximately 27,800 of these employees are covered under collective bargaining agreements. 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, cash flows or its results of operations.

      The Company is currently involved in five proceedings relating to environmental matters: one involving alleged potential soil and groundwater contamination at a Company facility in Florida; one involving alleged potential soil contamination at a former Company facility in Arizona; one involving alleged potential soil and groundwater contamination at a former dry-cleaning facility leased by the Company in Nevada; one involving alleged potential soil contamination at a former parking facility leased by the Company in Washington; and one involving alleged potential soil and groundwater contamination at a third party recycling center in Southern California. While it is difficult to predict the ultimate outcome of these matters, based on information currently available, management believes that none of these matters, individually or in the aggregate, are reasonably likely to have a material adverse effect on the Company’s financial position, cash flows, or results of operations. Two of the five proceedings are subject to ongoing settlement negotiations and a reserve of $300,000 has been set aside for the potential liability. The liability related to the other three claims is neither probable nor estimable, hence no accruals have been made related to these matters.

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Executive Officers of ABM

      The executive officers of ABM are as follows:

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ITEM 2. PROPERTIES

       The Company has corporate, division, regional, branch or district offices in over 250 locations throughout the United States and Canada. Fourteen of these facilities are owned by the Company. At October 31, 2002, the real estate owned by the Company had an aggregate net book value of $3.6 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 $100.2 million for the fiscal year ended October 31, 2002. Of this amount, $65.8 million in rental expense was attributable to public parking lots and garages leased and operated by Ampco System Parking. The remaining expense was for the rental or lease of office space, computers, operating equipment and motor vehicles.

ITEM 3. LEGAL PROCEEDINGS

       Not applicable.

       Not applicable.

PART II

Market Information and Dividends

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

      On March 12, 2002, ABM’s Board of Directors declared a 2-for-1 split of ABM’s common stock in the form of a 100% stock dividend payable on May 7, 2002 to stockholders of record on March 29, 2002. The per share amounts set forth above have been retroactively restated to reflect the stock split.

      At November 30, 2002, there were 4,451 registered holders of ABM’s common stock, in addition to stockholders in street name.

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ITEM 6. SELECTED FINANCIAL DATA

       The selected financial data presented below is derived from the Company’s consolidated financial statements for each of the years in the five-year period ended October 31, 2002. The share data has been retroactively restated to reflect the stock split on March 12, 2002.

      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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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

       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.

      On March 12, 2002, ABM’s Board of Directors declared a 2-for-1 split of ABM’s common stock in the form of a 100% stock dividend payable on May 7, 2002 to stockholders of record on March 29, 2002. Unless otherwise stated, all references to the number of shares of ABM’s common stock and per share amounts of ABM’s common stock have been retroactively restated to reflect the increased number of shares resulting from the stock split.

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. On June 28, 2002, the Company entered into a three-year unsecured revolving credit agreement with a syndicate of U.S. banks that provides a $150 million line of credit. This agreement replaced the Company’s unsecured revolving credit agreement in an equal amount that expired on July 1, 2002. Under the terms of the new credit facility, no compensating balances are required and the interest rate is determined at the time of borrowing based on the London interbank offered rate (LIBOR) plus a spread, or prime rate for overnight borrowing. As of October 31, 2002, the total amount outstanding in the form of standby letters of credit was $102 million compared to $52 million as of October 31, 2001, which was comprised of $10 million of loans and $42 million of standby letters of credit. The increase is primarily due to the use of standby letters of credit instead of financial responsibility bonds for certain self-insurance agreements. The credit agreement requires the Company to meet certain financial ratios, places some limitations on outside borrowings, and restricts the amount of capital stock that the company may repurchase during a fiscal year. The Company’s effective weighted average interest rate (excluding amortization of related fees) for all Eurodollar, Prime and Fixed Rate borrowings for the year ended October 31, 2002 was 3.20%.

      Operating activities generated cash flows in 2002, 2001 and 2000 of $110.9 million, $65.8 million and $18.9 million, respectively. Operating cash flows have increased significantly, primarily due to higher cash collection from customers, and in 2002 the receipt of two partial settlements totaling $13.3 million in gross insurance proceeds related to the destruction of the World Trade Center in 2001.

      Net cash used in investing activities in 2002, 2001 and 2000 was $59.3 million, $27.0 million and $31.4 million, respectively. The increase in cash used in investing activities in 2002 from 2001 primarily reflects the down payment for the acquisition of Lakeside Building Maintenance (see Footnote 10 of the Financial Statements), which was by far the largest acquisition made by the Company during the last three years, offset by the decrease in capital expenditures in 2002 due to reduced investment in information technology as implementation of the Company’s new accounting system nears completion (see Footnote 1 of the Financial Statements). The cash used in investing activities in 2001 included $12 million of proceeds from the sale of Easterday Janitorial Supply in April 2001.

      Net cash used in financing activities decreased slightly to $35.2 million in 2002 from $37.7 million in 2001 primarily due to lower debt repayments partially offset by common stock purchases in 2002. In 2000, financing activities provided $12.3 million of net cash. This change in 2001 from 2000 was primarily due to repayments of bank debt in 2001 of $41.8 million compared with net borrowings in 2000 of $18.9 million.

      On September 16, 2001 the Company’s Board of Directors authorized the purchase of up to two million shares (post-split) of its outstanding stock at any time through December 31, 2001. On December 17, 2001, the Board of Directors extended this authorization to purchase until December 31, 2002. On December 10, 2002, the Board of Directors extended this authorization through January 31, 2003. As of October 31, 2002, the Company had purchased 1.4 million shares at a cost of $23.6 million (i.e. an average price per share of $16.88) under this authorization.

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      At October 31, 2002, working capital was $210.7 million, compared to $229.5 million at October 31, 2001. The largest component of working capital consists of trade accounts receivable that totaled $318.4 million at October 31, 2002, compared to $367.2 million at October 31, 2001. These amounts were net of allowances for uncollectible accounts of $6.6 million and $9.4 million at October 31, 2002 and October 31, 2001, respectively. As of October 31, 2002, accounts receivable that were over 90 days past due had decreased by $14.3 million to $41.6 million (13% of the total outstanding) from $55.9 million (15% of the total outstanding) at October 31, 2001, primarily due to increased collection efforts.

      The Company made five cash advances totaling $3.4 million in 2002 to SiteStuff, Inc. as part of a secured convertible promissory note agreement. SiteStuff, Inc. is an e-commerce enterprise within the real estate industry designed to provide owners and managers of real estate the ability to aggregate their buying power for procurement of goods and services. The provisions of this note agreement provide for additional advances payable upon written request by SiteStuff, Inc. at any time prior to May 13, 2003, up to a maximum advance of the lesser of $4.0 million or 80% of its current customer receivables. Interest of 5% on any outstanding amount is payable in arrears at the end of each calendar quarter. The note is secured by the customer accounts of SiteStuff, Inc., as well as records, cash accounts and proceeds related to those accounts.

      The Company self-insures certain insurable risks such as general liability, property damage and workers’ compensation. Commercial umbrella policies are obtained to provide for $125 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 $500,000 to $1 million per occurrence due to the general insurance market conditions. Despite the increased retention, the price of recent renewals of 2003 umbrella policies is significantly higher and this 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.

Contractual Obligations and Commercial Commitments

      The Company is contractually obligated to make future payments under non-cancelable operating lease agreements. As of October 31, 2002, future contractual payments were as follows:

      Additionally, the Company has the following commercial commitments (in thousands):

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

      The Company has 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 has been working with its insurance carrier, Zurich Insurance, in providing claim information regarding the lost business income and, as described further below, has 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

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      Under the guidance published by the Emerging Issues Task Force of the Financial Accounting Standards Board “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 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.

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.

Acquisitions

      The operating results of businesses acquired have been included in the accompanying consolidated financial statements from their respective dates of acquisition and are more fully discussed in Note 10 to the Consolidated Financial Statements. Acquisitions made during the three years ended October 31, 2002, contributed approximately $175 million (8%) to 2002 sales.

Results of Operations

      In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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 has 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 will be 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, 2002, 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 divisions for the years ended October 31, 2001 and 2000 and reported separately.

      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 the third quarter of fiscal 2002. For the Company’s Ampco System Parking Division, this pronouncement requires both revenues and expenses be classified, in equal amounts, for costs directly reimbursed for the parking facilities that it manages on behalf of its 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 classification of any other ABM divisions. 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 $203.8 million, $199.1 million and $186.3 million for years ended October 31, 2002, 2001 and 2000, respectively. This reclassification has no impact on operating profits or net income.

COMPARISON OF 2002 TO 2001

      Net income for 2002 was $46.7 million ($0.92 per diluted share), an increase of 42.4% from the net income of $32.8 million ($0.65 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 Insurance totaling $13.3 million related to the World Trade Center; the impact of new acquisitions, primarily Lakeside Building Maintenance in July 2002, which contributed $3.5 million of operating

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      Results for 2001 included a $20 million pretax insurance charge; $12.3 million of pretax goodwill amortization expense; and a pretax gain of $0.7 million from the sale of Easterday Janitorial Supply in April 2001. Additionally, for the fiscal year ended October 31, 2001, the Company realized pretax income of $8.4 million on revenue of $71 million from the World Trade Center and adjacent facilities.

      Sales and other income (hereinafter called “sales”) for 2002 of $2.2 billion increased by 1.5% compared to $2.1 billion for 2001 despite the loss of the World Trade Center and the sale of Easterday Janitorial Supply. Easterday contributed $16 million to sales for the first six months of 2001. Offsetting the absence of the World Trade Center and Easterday sales in 2002 were sales from the newly acquired operations of Lakeside Building Maintenance in the Midwest and other new business, primarily in the American Commercial Security Services. Sales generated from acquisitions during the prior year contributed $10.8 million of the 2002 increase, while the current year 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 Ampco System Parking.

      As a percentage of sales, operating expenses and cost of goods sold was 89.2% for 2002, compared to 89.3% for 2001. Consequently, as a percentage of sales, the Company’s gross profit (sales minus operating expenses and cost of goods sold) of 10.8% in 2002 was higher than the gross profit of 10.7% in 2001.

      Selling, general and administrative expenses were $174.8 million in 2002, an increase of 7.7% from $162.3 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, $5.8 million of higher bad debt expense due to increased bankruptcies, and $1.0 million of professional expenses associated with the World Trade Center insurance claim. Accordingly, as a percentage of sales, selling, general and administrative expenses increased to 8.0% in 2002 from 7.6% in 2001.

      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.

      The effective tax rate for 2002 was 32.6%, compared to 38.0% for 2001. The decline was primarily due to a $2.0 million non-recurring benefit from the adjustment of the prior year’s estimated tax liabilities and a $1.4 million benefit from the reduction in the state tax rate and non-deductible expenses.

      The Company is currently organized into eight separate operating divisions. Using the criteria of Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information”, ABM Janitorial Services, Ampco System Parking, ABM Engineering Services, American Commercial Security Services, Amtech Lighting Services, and Amtech Elevator Services are reportable segments. Results of ABM Service Network, CommAir Mechanical Services and Easterday Janitorial Supply, prior to its sale on April 29, 2001, are included in the Other segment. Additional information relating to the Company’s industry segments appears in Note 13 of Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data.” The results of operations from the Company’s operating divisions for 2002 as compared to 2001 are more fully described below. The comparison of the fiscal years are related to the sales and operating profits in Note 13. Operating profits exclude goodwill

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      ABM Janitorial Services reported sales for 2002 of $1.2 billion, an increase of 3.2%, from 2001. Sales included $1.0 million of interest income from the resolution of past due balances with two customers. Janitorial accounted for nearly 55% of the Company’s consolidated sales in 2002. ABM Janitorial Services sales increased primarily due to the impact of new acquisitions partially offset by the loss of the World Trade Center. 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 ABM Lakeside Building Maintenance. Operating profits decreased 19.6% in 2002 to $54.3 million as compared to 2001 due to the loss of the World Trade Center, and $3.2 million of pretax increase in operating expenses in New York City as a result of the World Trade Center related increase in seniority-based payroll and unemployment insurance costs which could not be absorbed through increased pricing. Furthermore, bad debt expense increased to $6.3 million in 2002 compared to $2.1 million in 2001 due to increased bankruptcies.

      Ampco System 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 absorbed through increased pricing.

      Sales for ABM Engineering Services 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 World Trade Center contract. Operating profits increased 6.7% to $10.0 million from 2001 to 2002, due to increased business and improved profit margins at the contract level.

      American Commercial Security Services sales increased 35.2% to $140.6 million due to the acquisitions of Sundown Security in June 2001, Triumph Security in January 2002, and Foulke Security in February 2002, as well as the addition of several large accounts including Microsoft Corporation. Tag sales, or sales in addition to recurring fees, were also higher due to heightened security concerns after the September 11, 2001 terrorist attacks. Operating profits increased 77.7% to $5.6 million in 2002 compared to fiscal year 2001 operating profits primarily due to increased sales and lower costs due to tighter control over labor and operating expenses.

      Amtech Lighting Services 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 World Trade Center.

      Sales for Amtech Elevator Services decreased by 6.2% to $113.9 million in 2002 compared to 2001, primarily due to the decline in service and modernization contract work and the loss of two large service contracts in San Francisco and Orange County. The Division reported a 13.8% decrease in operating profits for 2002 to $4.3 million as compared to 2001. This reduction in operating profits can be attributed primarily to completed contracts; lower margins on modernization projects, primarily in the Division’s Chicago, Philadelphia and Atlanta offices; and higher operating expenses, including data processing, insurance and bad debt expense.

      Sales for Other Divisions were down 24.6% to $62.0 million, and contributed a loss of $1.2 million in 2002 compared to a profit of $5.3 million in 2001. The loss was primarily due to lower sales from fewer projects, a write-down of work-in-progress and an additional bad debt provision totaling approximately $1.7 million in the CommAir Mechanical Services Division, a $1.3 million bad debt provision in the ABM Service Network Division related to the bankruptcy of Consolidated Freightways in September of 2002, as well as $0.4 million in costs associated with the replacement of the President of ABM Services Network. Included in the results for 2001 was the pretax gain of $0.7 million from the sale of Easterday Janitorial Supply in the second quarter of 2001.

      Corporate expenses for 2002 include a $2.8 million pretax provision for costs associated with the elimination of the Chief Administrative Officer

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COMPARISON OF 2001 TO 2000

      Net income for 2001 fell by 26% to $32.8 million ($0.65 per diluted share) from $44.3 million ($0.92 per diluted share) in 2000 primarily due to a $12.4 million after tax charge ($0.25 per diluted share) to strengthen the Company’s self-insurance reserves reflecting the results of the annual independent actuarial review completed in December 2001. Excluding the insurance charge, net income per diluted share declined 3% primarily due to the increase in diluted average shares outstanding resulting from the exercise of stock options.

      The actuarial report in 2001 revealed that while the frequency of claims was trending favorably as expected, the severity of claims in 2000 and 2001 trended higher than anticipated in the report received in 2000. The impact of these trends on known claims and claims incurred but not reported called for an increase of approximately $8.5 million for 2001 claims, while approximately $10.5 million reflects the unfavorable trend on pre-2001 claims. Additionally, 2001 required a loss of $1.0 million in claims related to the World Trade Center terrorist attack. As a result of the Company’s 2001 claims experience, the Company increased the self-insurance rates that it charged to the divisions in 2002 by 21% over 2001. The estimated future charge was intended to account for the 2001 experience and trends.

      Sales and other income were over $2.1 billion in 2001, up $155 million or 8% from $2.0 billion in 2000. The increase in sales in 2001 over 2000 was attributable to new business and acquisitions made during the prior years. Sales generated from acquisitions during 2000 contributed $9.4 million of the 2001 increase, while the 2001 acquisitions added $65.7 million.

      As a percentage of sales, operating expenses and cost of goods sold were 89.3% for 2001, compared to 88.2% in 2000. Consequently, as a percentage of sales, the Company’s gross profit of 10.7% in 2001 was lower than the gross profit of 11.8% in 2000. The decrease in gross profit as a percentage of sales was mostly due to the $20 million insurance adjustment, higher labor and related costs, and continued competitive pressure to maintain or lower prices.

      Selling, general and administrative expenses were $162.3 million in 2001, an increase of 9% from $149.0 million in 2000. As a percentage of sales, selling, general and administrative expenses increased to 7.6% for 2001 from 7.5% for 2000, primarily due to an increase in bad debt expense of $3.2 million over the prior year and to salaries and expenses associated with acquisitions.

      Interest expense was $2.6 million in 2001, compared to $3.3 million for 2000, a decrease of $0.7 million. This decrease was primarily due to lower weighted average borrowings and lower interest rates in 2001.

      The effective income tax rate for 2001 was 38%, compared to 39% in 2000. The lower tax rate was due for the most part to a significant increase in the federal work opportunity tax credits in relation to pre-tax income. Hence, income taxes for 2001 included $0.5 million of tax benefit from a lower tax rate.

      The results of operations from the Company’s operating divisions for 2001 as compared to 2000 are more fully described below:

      ABM Janitorial Services reported sales for 2001 of $1.2 billion, a 10% increase of $107 million from 2000. Sales increased as a result of acquisitions and new business, particularly in the Mid-Atlantic and Northeast regions. Sales generated from acquisitions during 2000 contributed $4.8 million of the 2001 increase while the 2001 acquisitions added $51.1 million. ABM Janitorial Services’ operating profits increased 13% in 2001 to $67.6 million when compared to 2000. The higher percentage increase in profits compared to sales can be primarily attributed to the Company’s fixed price contracts on which hourly workers were paid one less workday in 2001 compared to 2000. The change in the number of workdays affects the profit margin on this type of contract.

      Ampco System Parking reported a 2% increase in sales to $365 million during 2001 compared to 2000. Operating profits decreased by 42% to $6.6 million during 2001 compared to 2000. The decrease in operating profits resulted from the loss

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      ABM Engineering Services increased sales by 9% in 2001 from 2000 to $171 million, while its operating profits increased 10% to $9.4 million for 2001 compared to 2000. The sales increase was due primarily to additional business. The increase in operating profits was due to the increase in sales and slightly higher profit margins as a result of lower administrative costs.

      American Commercial Security Services sales increased by 2% to $104 million, and its operating profit increased by 61% to $3.2 million, in 2001 compared to 2000. The increase in operating profits resulted from lower costs due to tighter control over labor and operating expenses.

      Amtech Lighting Services reported a 22% sales increase to $144 million in 2001 from 2000 due to acquired business from the purchase of SLI Lighting Solutions in March 2001, and sales increases in the Northwest region. The smaller increase in operating profits of 11% to $12.0 million during 2001 compared to the prior year is attributable to lower margins in the Southeast on business acquired in 2000.

      Sales for Amtech Elevator Services were $121 million, up by 6% for 2001 over 2000, largely due to an increased customer base. The Amtech Elevator Division reported $5.0 million in operating profits in 2001, a 29% decrease compared to 2000. This decrease in operating profits can be attributed primarily to lower margins on maintenance contracts and losses on several modernization contracts, as well as higher insurance, bad debt, communications and computer related expenses.

      The Other Segment represents the results of the remaining divisions including the operating results of Easterday Janitorial Supply Company prior to its sale effective April 30, 2001, which includes a pre-tax gain of $0.7 million. The sales price of $12 million included a $3.7 million premium over the book value of the net assets sold. The pre-tax gain is net of Easterday-specific insurance expenses of $1.3 million, reserves for sale contingencies (including the guarantee of sold receivables and expenses of winding-up Easterday operations) of $1 million, write-offs of intangible assets of $0.3 million, and second quarter operating losses of $0.4 million. The loss of Easterday’s income in the third and fourth quarter of 2001 was more than offset by the increase in the operating profits of the Company’s CommAir Mechanical Services Division.

      The significant increase in unallocated Corporate expenses for 2001 included the $20 million insurance adjustment mentioned previously, and centralization of marketing and sales expenses compared to the prior year. While virtually all insurance claims arise from the operating divisions, this adjustment was included in unallocated corporate expenses. Had the Company allocated the insurance adjustment among the divisions, the reported pre-tax operating profits of the divisions, as a whole, would have been reduced by $20 million, with an equal and offsetting change to unallocated Corporate expenses, and therefore no change to consolidated pre-tax earnings.

Recent Accounting Pronouncements

      In June 2001, FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”, which addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not anticipated to have a material effect on the Company’s results of operations or financial condition.

      In August 2001, FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of”, and elements of APB 30, “Reporting the Results of Operations — Reporting the Effects on Disposal of a Segment of a Business and Extraordinary, Unusual or Infrequently Occurring Events and Transactions”. SFAS No. 144 establishes a single-accounting model for long-lived assets to be disposed of while maintaining many of the provisions relating to impairment testing and valuation. SFAS No. 144 is effective for fiscal years beginning after December 31, 2001. The adoption of SFAS No. 144 is not anticipated to have a material effect on the Company’s results of operations or financial condition.

      In July 2002, FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 requires compa-

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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, 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 insurance costs for each division, expressed as a rate per $100 of exposure (labor and revenue) to estimate insurance costs on a quarterly basis. Additionally, management monitors new claims and claim development to assess the adequacy of the insurance reserves. The estimated future charge is intended to reflect the recent experience and trends. If the number of claims incurred were to increase, or the severity of the claims were to increase, the Company may be required to record an additional expense for self-insurance liabilities.

      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, 2002, the net deferred tax asset was $63.5 million and no valuation allowance was recorded. Should future income be less than anticipated, the net deferred tax asset may not be recoverable.

      Contingencies and Litigation: ABM and certain of its subsidiaries have been named defendants in certain litigation 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 may result in a loss.

Safe Harbor Statement

      Cautionary Safe Harbor Disclosure for Forward Looking Statements under the Private Securities Litigation Reform Act of 1995: Because of the factors set forth below, as well as other variables affecting the Company’s operating results, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future

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       The Company does not issue or invest in financial instruments or their derivatives for trading or speculative purposes, although options on the Company’s common stock are traded on the American Stock Exchange without the Company’s approval and consent. 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. The Company has no outstanding debt. Although the Company had over $19 million in cash and cash equivalents, at year-end, market rate risk associated with falling 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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2002, 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

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ABM Industries Incorporated and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME