e10vq
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2004

OR

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

For the transition period from                     to                    

Commission file number 1-8929

ABM INDUSTRIES INCORPORATED

(Exact name of registrant as specified in its charter)
     
Delaware   94-1369354
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
160 Pacific Avenue, Suite 222, San Francisco, California   94111
(Address of principal executive offices)   (Zip Code)

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

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

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

Number of shares of common stock outstanding as of August 31, 2004: 48,520,153

 


ABM INDUSTRIES INCORPORATED
FORM 10-Q
For the three months and nine months ended July 31, 2004

Table of Contents

             
PART I.       2  
Item 1.       2  
        6  
Item 2.       16  
Item 3.       29  
Item 4.       30  
PART II.       30  
Item 1.       30  
Item 2.       30  
Item 6.       31  
SIGNATURES     32  
EXHIBIT INDEX     33  
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

                 
    July 31,   October 31,
(In thousands except share amounts)
  2004
  2003
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 49,501     $ 110,947  
Trade accounts receivable, net
    307,900       287,906  
Inventories
    21,792       21,419  
Deferred income taxes
    37,679       36,339  
Prepaid expenses and other current assets
    41,733       44,037  
 
   
 
     
 
 
Total current assets
    458,605       500,648  
 
   
 
     
 
 
Investments and long-term receivables
    10,199       11,459  
Property, plant and equipment, at cost
               
Land and buildings
    5,051       5,009  
Transportation equipment
    14,145       13,717  
Machinery and other equipment
    74,955       71,846  
Leasehold improvements
    14,574       14,170  
 
   
 
     
 
 
 
    108,725       104,742  
Less accumulated depreciation and amortization
    (77,878 )     (74,619 )
 
   
 
     
 
 
Property, plant and equipment, net
    30,847       30,123  
 
   
 
     
 
 
Goodwill
    221,754       201,866  
Other intangibles, at cost
    30,145       7,637  
Less accumulated amortization
    (6,753 )     (3,946 )
 
   
 
     
 
 
Other intangibles, net
    23,392       3,691  
 
   
 
     
 
 
Deferred income taxes
    34,095       32,462  
Other assets
    21,722       15,734  
 
   
 
     
 
 
Total assets
  $ 800,614     $ 795,983  
 
   
 
     
 
 

(Continued)      

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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Continued)
                 
    July 31,   October 31,
(In thousands except share amounts)
  2004
  2003
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities
               
Trade accounts payable
  $ 40,461     $ 38,143  
Income taxes payable
    8,725       36,658  
Accrued liabilities:
               
Compensation
    63,105       61,691  
Taxes - other than income
    18,047       15,297  
Insurance claims
    60,068       55,499  
Other
    54,445       49,403  
 
   
 
     
 
 
Total current liabilities
    244,851       256,691  
Retirement plans
    25,081       24,175  
Insurance claims
    75,955       71,081  
 
   
 
     
 
 
Total liabilities
    345,887       351,947  
 
   
 
     
 
 
Stockholders’ equity
               
Preferred stock, $0.01 par value; 500,000 shares authorized; none issued
           
Common stock, $0.01 par value, 100,000,000 shares authorized; 52,472,000 and 51,767,000 shares issued at July 31, 2004 and October 31, 2003, respectively
    525       518  
Additional paid-in capital
    175,561       166,497  
Accumulated other comprehensive loss
    (306 )     (268 )
Retained earnings
    344,006       331,275  
Cost of treasury stock (4,000,000 and 3,400,000 shares at July 31, 2004 and October 31, 2003, respectively)
    (65,059 )     (53,986 )
 
   
 
     
 
 
Total stockholders’ equity
    454,727       444,036  
 
   
 
     
 
 
Total liabilities and stockholders’ equity
  $ 800,614     $ 795,983  
 
   
 
     
 
 

The accompanying notes are an integral part of the consolidated financial statements.

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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

                                 
    Three Months Ended   Nine Months Ended
    July 31,
  July 31,
(In thousands except per share amounts)
  2004
  2003
  2004
  2003
Revenues
                               
Sales and other income
  $ 623,773     $ 569,093     $ 1,784,941     $ 1,684,074  
Expenses
                               
Operating expenses and cost of goods sold
    555,348       511,720       1,605,307       1,520,980  
Selling, general and administrative
    46,045       41,404       132,239       126,183  
Intangible amortization
    1,294       285       4,138       844  
Interest
    255       216       746       503  
 
   
 
     
 
     
 
     
 
 
Total expenses
    602,942       553,625       1,742,430       1,648,510  
 
   
 
     
 
     
 
     
 
 
Income from continuing operations before income taxes
    20,831       15,468       42,511       35,564  
Income taxes
    7,437       4,912       15,177       12,010  
 
   
 
     
 
     
 
     
 
 
Income from continuing operations
    13,394       10,556       27,334       23,554  
Income from discontinued operation, net of income taxes
          1,182             2,414  
 
   
 
     
 
     
 
     
 
 
Net income
  $ 13,394     $ 11,738     $ 27,334     $ 25,968  
 
   
 
     
 
     
 
     
 
 
Net income per common share - Basic
                               
From continuing operations
  $ 0.27     $ 0.21     $ 0.56     $ 0.48  
From discontinued operation
          0.03             0.05  
 
   
 
     
 
     
 
     
 
 
 
  $ 0.27     $ 0.24     $ 0.56     $ 0.53  
 
   
 
     
 
     
 
     
 
 
Net income per common share - Diluted
                               
From continuing operations
  $ 0.27     $ 0.21     $ 0.55     $ 0.47  
From discontinued operation
          0.02             0.05  
 
   
 
     
 
     
 
     
 
 
 
  $ 0.27     $ 0.23     $ 0.55     $ 0.52  
 
   
 
     
 
     
 
     
 
 
Average common and common equivalent shares
                               
Basic
    48,748       49,269       48,658       49,105  
Diluted
    50,226       50,244       50,052       50,031  
Dividends declared per common share
  $ 0.10     $ 0.095     $ 0.30     $ 0.285  

The accompanying notes are an integral part of the consolidated financial statements.

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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 2004 AND 2003

                 
(In thousands)
  2004
  2003
Cash flows from operating activities:
               
Net income
  $ 27,334     $ 25,968  
Less income from discontinued operation
          (2,414 )
 
   
 
     
 
 
Income from continuing operations
    27,334       23,554  
Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities:
               
Depreciation and intangible amortization
    13,798       11,085  
Provision for bad debts
    3,133       4,665  
Gain on sale of assets
    (159 )     (77 )
Increase in deferred income taxes
    (2,973 )     (5,116 )
Increase in trade accounts receivable
    (21,371 )     (10,914 )
Decrease in inventories
    239       1,566  
Decrease (increase) in prepaid expenses and other current assets
    2,940       (1,134 )
Increase in other assets
    (5,569 )     (4,919 )
Increase in income taxes payable
    4,135       1,842  
Increase in retirement plans accrual
    906       658  
Increase in insurance claims liability
    9,443       6,780  
Increase in trade accounts payable and other accrued liabilities
    11,074       14,792  
 
   
 
     
 
 
Total adjustments to net income
    15,596       19,228  
 
   
 
     
 
 
Net cash flows from continuing operating activities
    42,930       42,782  
Net operational cash flows from discontinued operation
    (30,507 )     6,276  
 
   
 
     
 
 
Net cash provided by operating activities
    12,423       49,058  
 
   
 
     
 
 
Cash flows from investing activities:
               
Net investing cash flows from discontinued operation
          (95 )
Additions to property, plant and equipment
    (9,262 )     (7,740 )
Proceeds from sale of assets
    509       607  
Decrease in investments and long-term receivables
    1,260       1,585  
Purchase of businesses
    (48,209 )     (21,099 )
 
   
 
     
 
 
Net cash used in investing activities
    (55,702 )     (26,742 )
 
   
 
     
 
 
Cash flows from financing activities:
               
Common stock issued
    7,510       11,227  
Common stock purchases
    (11,073 )     (12,092 )
Dividends paid
    (14,604 )     (14,003 )
 
   
 
     
 
 
Net cash used in financing activities
    (18,167 )     (14,868 )
 
   
 
     
 
 
Net (decrease) increase in cash and cash equivalents
    (61,446 )     7,448  
Cash and cash equivalents beginning of period
    110,947       19,416  
 
   
 
     
 
 
Cash and cash equivalents end of period
  $ 49,501     $ 26,864  
 
   
 
     
 
 
Supplemental Data:
               
Cash paid for income taxes
  $ 44,681     $ 15,284  
 
   
 
     
 
 

     The accompanying notes are an integral part of the consolidated financial statements.

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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. General

     In the opinion of management, the accompanying unaudited consolidated financial statements contain all material adjustments which are necessary to present fairly ABM Industries Incorporated and Subsidiaries’ (the Company) financial position as of July 31, 2004 and the results of operations for the three and nine months then ended, and cash flows for the nine months then ended. These adjustments are of a normal, recurring nature, except as otherwise noted.

     The information included in this Form 10-Q should be read in conjunction with the management’s discussion and analysis, the consolidated financial statements and the notes thereto included in the Company’s Form 10-K Annual Report for the fiscal year ended October 31, 2003, as filed with the Securities and Exchange Commission.

     The operations of the Company’s Elevator segment have been classified as a discontinued operation for all periods presented. Accordingly, the operating results and cash flows are shown as discontinued operation in the accompanying consolidated financial statements. See Note 7.

     The Company has investments in two low income housing tax credit partnerships. Purchased in 1995 and 1998, these limited partnerships, organized by independent third parties and sold as investments, are variable interest entities as defined by FASB Financial Interpretation (FIN) No. 46R, a revision to FIN 46, “Consolidation of Variable Interest Entities.” In accordance with FIN 46R, these partnerships are not consolidated in the Company’s consolidated financial statements because the Company is not the primary beneficiary of the partnerships. At July 31, 2004, the at-risk book value of these investments totaled $4.2 million.

2. Net Income per Common Share

     The Company has reported its earnings in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings per Share.” Basic net income per common share is based on the weighted average number of shares outstanding during the period. Diluted net income per common share is based on the weighted average number of shares outstanding during the period, including common stock equivalents. The calculation of net income per common share is as follows:

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    Three months ended   Nine months ended
    July 31,
  July 31,
(In thousands except per share amounts)
  2004
  2003
  2004
  2003
Income from continuing operations, net of income taxes
  $ 13,394     $ 10,556     $ 27,334     $ 23,554  
Income from discontinued operation, net of income taxes
          1,182             2,414  
 
   
 
     
 
     
 
     
 
 
Net income available to common stockholders
  $ 13,394     $ 11,738     $ 27,334     $ 25,968  
 
   
 
     
 
     
 
     
 
 
Average common shares outstanding - Basic
    48,748       49,269       48,658       49,105  
Effect of dilutive securities:
                               
Stock options
    1,478       975       1,394       926  
 
   
 
     
 
     
 
     
 
 
Average common shares outstanding - Diluted
    50,226       50,244       50,052       50,031  
 
   
 
     
 
     
 
     
 
 
Net income per common share - Basic:
                               
From continuing operations
  $ 0.27     $ 0.21     $ 0.56     $ 0.48  
From discontinued operation
          0.03             0.05  
 
   
 
     
 
     
 
     
 
 
 
  $ 0.27     $ 0.24     $ 0.56     $ 0.53  
 
   
 
     
 
     
 
     
 
 
Net income per common share - Diluted:
                               
From continuing operations
  $ 0.27     $ 0.21     $ 0.55     $ 0.47  
From discontinued operation
          0.02             0.05  
 
   
 
     
 
     
 
     
 
 
 
  $ 0.27     $ 0.23     $ 0.55     $ 0.52  
 
   
 
     
 
     
 
     
 
 

     For purposes of computing diluted net income per common share, weighted average common share equivalents do not include stock options with an exercise price that exceeds the average fair market value of the Company’s common stock for the period (i.e., “out-of-the-money” options). On July 31, 2004 and 2003, options to purchase common shares of 23,250 and 3.4 million at a weighted average exercise price of $19.04 and $16.14, respectively, were excluded from the computation.

3. Stock-Based Compensation

     In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 148 amended SFAS No. 123, “Accounting for Stock-Based Compensation” to provide for alternative methods of transition to SFAS No. 123 and amended disclosure provisions. SFAS No. 148 was effective for financial statements for fiscal years ending after December 15, 2002. The Company continues to account for stock-based employee compensation plans using the intrinsic value method under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and adopted the disclosure provisions of SFAS No. 148 effective November 1, 2002. The Company’s application of APB Opinion No. 25 does not result in compensation cost because the exercise price of the options is equal to the fair value of the stock at the grant date. Under the intrinsic value method, if the fair value of the stock is greater than the exercise price at grant date, the excess is amortized to compensation expense over the estimated service life of the recipient.

     As all options granted since October 31, 1995 had an exercise price equal to the market value of the underlying common stock on the date of grant, no stock-based employee compensation cost is reflected in net income for the three and nine months ended July 31, 2004 and 2003. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to all outstanding employee options granted after October 31, 1995 using the retroactive restatement method:

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    Three months ended   Nine months ended
    July 31,
  July 31,
(In thousands except per share amounts)
  2004
  2003
  2004
  2003
Net income, as reported
  $ 13,394     $ 11,738     $ 27,334     $ 25,968  
Deduct: Stock-based employee compensation cost, net of tax effect, that would have been included in net income if the fair value method had been applied
    298       1,023       1,342       3,156  
 
   
 
     
 
     
 
     
 
 
Net income, pro forma
  $ 13,096     $ 10,715     $ 25,992     $ 22,812  
 
   
 
     
 
     
 
     
 
 
Net income per common share - Basic
                               
As reported
  $ 0.27     $ 0.24     $ 0.56     $ 0.53  
Pro forma
  $ 0.27     $ 0.22     $ 0.53     $ 0.46  
Net income per common share - Diluted
                               
As reported
  $ 0.27     $ 0.23     $ 0.55     $ 0.52  
Pro forma
  $ 0.26     $ 0.21     $ 0.52     $ 0.46  

     For purposes of calculating the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models. The use of these models requires subjective assumptions, including future stock price volatility and expected time to exercise, which can have a significant effect on the calculated values. The Company’s calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions:

                                 
    Three months ended   Nine months ended
    July 31,
  July 31,
    2004
  2003 *
  2004
  2003
Expected life from the date of grant
  8.1 years         7.3 years   7.3 years
Expected stock price volatility average
    20.5 %           24.5 %     22.9 %
Expected dividend yield
    2.1 %           2.6 %     2.6 %
Risk-free interest rate
    4.5 %           3.7 %     3.2 %
Weighted average fair value of grants
  $ 4.92           $ 4.18     $ 3.16  

* No options were granted in the three months ended July 31, 2003.

     The Company’s pro forma calculations are based on a single option valuation approach. The computed pro forma fair value of the options awards are amortized over the required vesting periods. For purposes of the pro forma calculations, should options vest earlier, the remaining unrecognized value is recognized immediately and stock option forfeitures are recognized as they occur.

4. Revenue Presentation

     The Company has reported its revenues in accordance with Emerging Issues Task Force (EITF) Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred.” 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. 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 $54.3 million and $55.1 million for the three months ended July 31, 2004 and 2003, respectively, and $160.3 million and $160.4 million for the nine months ended July 31, 2004 and 2003, respectively.

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5. Goodwill and Other Intangibles

     Goodwill. The changes in the carrying amount of goodwill for the nine months ended July 31, 2004 were as follows:

(In thousands)

                                         
            Initial           Reclassified    
    Balance as of   Payments for   Contingent   to Other   Balance as of
Segment
  October 31, 2003
  Acquisitions*
  Amounts*
  Intangibles
  July 31, 2004
Janitorial
  $ 142,658     $       2,584     ($ 11,400 )   $ 133,842  
Parking
    29,920             335       (1,657 )     28,598  
Engineering
    2,174                         2,174  
Security
    7,806       28,935       730             37,471  
Lighting
    17,356             361             17,717  
Other
    1,952                         1,952  
 
   
 
     
 
     
 
     
 
     
 
 
Total
  $ 201,866     $ 28,935     $ 4,010     ($ 13,057 )   $ 221,754  
 
   
 
     
 
     
 
     
 
     
 
 

* see Note 6, “Acquisitions”

     Correction of an error in the second quarter of fiscal 2004. In October 2002, the EITF released Issue No. 02-17, “Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination.” EITF Issue No. 02-17 provided guidance regarding the use of certain assumptions, such as expectations of future contract renewals, in estimating the fair value of customer relationship intangible assets acquired in a business combination. EITF Issue No. 02-17 was effective for business combinations consummated after October 25, 2002 but the Company failed to reflect the effect it would have had on the three business combinations completed in fiscal 2003 until the second quarter of 2004.

     Prior to adopting EITF Issue No. 02-17, the Company assigned little or no value to acquired customer contracts and related customer relationships because the contracts generally had one year terms with 30-day cancellation provisions. With the effectiveness of EITF Issue No. 02-17, assumptions regarding expectations of future contract renewals must now be incorporated in estimating the fair value of customer relationship intangible assets.

     In the second quarter of 2004, the Company engaged a third party valuation firm to independently appraise the value of the customer relationship intangible assets related to the two largest business combinations completed in 2003 namely, the acquisition of the commercial self-performed janitorial cleaning operations of Horizon National Commercial Services, LLC (Horizon) acquired on January 31, 2003 and HGO Janitorial Services (HGO) acquired on August 29, 2003. The valuation of the customer relationship intangible asset related to the smallest business combination completed in 2003, Valet Parking Services (Valet) acquired on April 30, 2003, was performed internally using the discounted cash flow technique, the same technique used by the third party valuation firm.

     As a result of these valuations, in the second quarter of 2004, the purchase accounting was adjusted to reflect a reduction in goodwill for the customer relationship intangible assets acquired in Horizon, HGO and Valet of $4.2 million, $7.1 million and $1.7 million, respectively. In addition, $0.3 million of the total HGO acquisition cost was re-allocated to trademarks and trade names. Of the $4.2 million Horizon intangible assets only $0.2 million was recorded as intangibles at the time of the acquisition. The total amount reclassified from goodwill to other intangibles was $13.1 million. The impact of these re-allocations on amortization expense is discussed below.

     Other Intangibles. Effective April 30, 2004, Other Intangibles and the related amortization expense have been presented as separate line items on the balance sheet and statement of income, respectively. Prior periods presented have been reclassified. The gross carrying amount and accumulated amortization of other intangibles apart from goodwill as of July 31, 2004 were as follows:

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    Gross Carrying Amount
  Accumulated Amortization
    October 31,           Retire-           July 31,   October 31,           Retire-   Catch-Up   July 31,
(In thousands)
  2003
  Additions*
  ments
  Reclass**
  2004
  2003
  Additions
  ments
  Amort.**
  2004
Customer contracts and related relationships
  $ 200     $ 8,010     $     $ 12,757     $ 20,967     $     $ (1,398 )   $     $ (1,385 )   $ (2,783 )
Trademarks and trade names
          2,700             300       3,000             (303 )           (83 )     (386 )
Other (contract rights, etc.)
    7,437       72       (1,331 )           6,178       (3,946 )     (969 )     1,331             (3,584 )
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total
  $ 7,637     $ 10,782     $ (1,331 )   $ 13,057     $ 30,145     $ (3,946 )   $ (2,670 )   $ 1,331     $ (1,468 )   $ (6,753 )
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 

* See Note 6, “Acquisitions”

** Reclassification of catch-up amortization recorded in the quarter ended April 30, 2004

     Correction of an error in the second quarter of fiscal 2004. As described above, a total of $13.1 million of customer relationship intangible assets and trademarks and trade names was reclassified from goodwill to other intangibles in the second quarter of 2004. These intangible assets have finite lives and must therefore be amortized. The related catch-up amortization expense recorded in the second quarter of 2004 for fiscal 2003 and the first quarter of 2004 totaled $1.5 million, as shown below.

                                                         
    Amortization Expense Catch-Up Adjustment
    Fiscal 2003 Quarters   Year Ended   First   Total
   
  October 31,   Quarter   Catch-Up
(In thousands)
  First
  Second
  Third
  Fourth
  2003
  2004
  Adjustment
Customer contracts and related relationships
  $     $ 191     $ 246     $ 429     $ 866     $ 519     $ 1,385  
Trademarks and trade names
                      33       33       50       83  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total adjustment before income taxes
  $     $ 191     $ 246     $ 462     $ 899     $ 569     $ 1,468  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
 

     The weighted average remaining life and the amortization expense for the three and nine months ended July 31, 2004 (including the $1.5 million catch-up amortization) and July 31, 2003, as well as the estimated amortization expense for each of the five succeeding fiscal years are as follows:

                                                                                 
            Amortization Expense
 
    Weighted   Three Months Ended   Nine Months Ended    
    Average
Remaining Life
  July 31
  July 31
  Estimated Amortization Expense
($ in thousands)
  (Years)
  2004
  2003
  2004
  2003
  2005
  2006
  2007
  2008
  2009
Customer contracts and related relationships
    11.7     $ 791     $     $ 2,783     $     $ 2,852     $ 2,589     $ 2,327     $ 2,064     $ 1,802  
Trademarks and trade names
    4.4       180             386             607       540       540       540       203  
Other (contract rights, etc.)
    4.2       323       285       969       844       982       712       100       74       64  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total
    10.1     $ 1,294     $ 285     $ 4,138     $ 844     $ 4,441     $ 3,841     $ 2,967     $ 2,678     $ 2,069  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 

     The customer relationship intangible assets are being amortized using the sum-of-the-years-digits method over the useful lives consistent with the estimated useful life considerations used in the determination of their fair values. The accelerated method of amortization reflects the pattern in which the economic benefits of the customer relationship intangible asset are expected to be realized. Trademarks and trade names are being amortized over their useful lives using the straight-line method. Other intangible assets, consisting principally of contract rights, are being amortized over the contract periods using the straight-line method.

6. Acquisitions

     Acquisitions have been accounted for using the purchase method of accounting. Operations of the companies and businesses acquired have been included in the accompanying consolidated financial

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statements from their respective dates of acquisition. The excess of the purchase price (including contingent amounts) over fair value of the net tangible and intangible assets acquired is included in goodwill. Most purchase agreements provide for initial payments and contingent payments based on the annual pretax income or other financial parameters for subsequent periods ranging generally from two to five years. Cash paid for acquisitions, including initial payments and contingent amounts based on subsequent earnings, was $48.2 million and $21.1 million in the nine months ended July 31, 2004 and 2003, respectively.

     The Company made the following acquisitions during the nine-month period ended July 31, 2004:

     On March 15, 2004, the Company acquired substantially all of the operating assets of Security Services of America, LLC (SSA), a North Carolina limited liability company and wholly-owned subsidiary of SSA Holdings II, LLC. SSA, also known as “Silverhawk Security Specialists” and “Elite Protection Services,” provides full service private security and investigative services to a diverse client base that includes small, medium and large businesses throughout the Southeast and Midwest regions of the United States. The total acquisition cost included an initial cash payment of $40.7 million, net of liabilities assumed totaling $0.3 million, plus contingent payments equal to 20% to 25% of adjusted earnings before interest and taxes, depending upon the level of actual earnings, for each of the years in the five-year period following the date of acquisition. Of the total purchase price, $7.1 million was allocated to customer relationship intangible asset and $2.7 million to trademarks and trade names. The values of these intangible assets were independently appraised by a third party valuation firm. The appraisal was completed in the third quarter of 2004. Additionally, $2.3 million of the total purchase price was allocated to fixed and other tangible assets and $28.9 million to goodwill.

     On April 2, 2004, the Company acquired substantially all of the commercial janitorial assets of the Northeast United States Division of Initial Contract Services, Inc., a provider of janitorial services based in New York. The acquisition included key accounts throughout the Northeast region totaling approximately 50 buildings. The total acquisition cost included an initial cash payment of $3.5 million, of which $0.9 million was allocated to customer relationship intangible asset, $1.8 million to accounts receivable and $0.8 million to other assets, plus annual contingent payments for each of the years in the five-year period following the acquisition date, calculated as follows: 3% of the acquired operation’s revenues for the first and second year, 2% for the third and fourth year, and 1% for the fifth year. The valuation of the customer relationship intangible asset related to this acquisition was performed internally using the discounted cash flow technique.

     Acquisitions made during the year ended October 31, 2003 were as follows:

     On January 31, 2003, the Company acquired the commercial self-performed janitorial cleaning operations of Horizon, a provider of janitorial services based in Red Bank, New Jersey. Assets acquired by the Company include key customer accounts in the eastern, mid-western and south central United States. The total adjusted acquisition cost was $14.7 million, which included the assumption of payroll-related liabilities totaling $0.2 million. Of the total adjusted acquisition cost, $12.9 million was allocated to goodwill and $1.8 million to fixed and other assets at the time of acquisition. In the second quarter of 2004, $4.2 million of the $12.9 million goodwill was re-allocated to other intangibles (see Note 5, “Goodwill and Other Intangibles”).

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     On April 30, 2003, the Company acquired selected assets of Valet Parking Service, a provider of parking services based in Culver City, California. The total acquisition cost included an initial cash payment of $1.7 million, most of which was allocated to goodwill, plus annual contingent payments of $0.3 million for the three years subsequent to the acquisition date, if specified levels of variable gross profits from the acquired operations are maintained. In the second quarter of 2004, the $1.7 million previously allocated to goodwill was re-allocated to other intangibles (see Note 5, “Goodwill and Other Intangibles”).

     On August 29, 2003, the Company acquired substantially all of the assets and operations of H.G.O., Inc., d/b/a HGO Services, a provider of janitorial services based in King of Prussia, Pennsylvania. Assets acquired by the Company include key customer accounts in the greater Philadelphia metropolitan area, including locations in New Jersey and Delaware. The total acquisition cost was $12.8 million, plus annual contingent amounts of approximately $1.1 million for the three years subsequent to the acquisition date if specified levels of customer accounts are retained, and additional annual contingent amounts for the three years subsequent to the acquisition date if financial performance exceeds agreed-upon levels. Of the total initial acquisition cost, $12.4 million was allocated to goodwill and $0.4 million to fixed and other assets at the time of acquisition. Contingent amounts, if paid, will be allocated to goodwill. In the second quarter of 2004, $7.4 million of the $12.4 million goodwill was re-allocated to other intangibles (see Note 5, “Goodwill and Other Intangibles”).

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

     During the nine months ended July 31, 2004 and 2003, contingent amounts totaling $4.0 million and $5.0 million, respectively, were paid on earlier acquisitions as provided by the respective purchase agreements. All amounts paid were added to goodwill.

     The original asset purchase agreement for the operations of Lakeside Building Maintenance, Inc. and an affiliated company (collectively, Lakeside) stated that the final contingent payment of $5.3 million would be paid in September 2005 provided that the gross sales of Lakeside during the third year following the acquisition are equal to or greater than $131.2 million and the seller (part of current Lakeside management) fulfills the other terms and conditions of the asset purchase agreement. As second year sales already exceeded $131.2 million at $172.5 million, the asset purchase agreement was amended to eliminate only the sales requirement to better align Lakeside management with ABM Janitorial in the renewal of customer contracts.

7. Discontinued Operation

     On August 15, 2003, ABM Industries Incorporated sold substantially all of the operating assets of Amtech Elevator Services, Inc., a wholly-owned subsidiary of ABM that represented the Company’s Elevator segment, to Otis Elevator Company, a wholly-owned subsidiary of United Technologies Corporation (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, which is net of $31.9 million of income taxes, of which $30.5 million was paid with the extension of the federal and state income tax returns on January 15, 2004.

     The operating results and cash flows of the Elevator segment 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 operating results of the discontinued operation for the three and nine months ended July 31, 2003 are shown below.

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    Three months ended   Nine months ended
(In thousands)
  July 31, 2003
  July 31, 2003
Revenues
  $ 28,270     $ 83,744  
 
   
 
     
 
 
Income before income taxes
  $ 1,912     $ 3,906  
Income taxes
    730       1,492  
 
   
 
     
 
 
Net income
  $ 1,182     $ 2,414  
 
   
 
     
 
 

8. Line of Credit Facility

     In April 2003, the Company increased the amount of its syndicated line of credit to $250.0 million. This line of credit will expire July 1, 2005. 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 spreads for LIBOR, prime and IBOR borrowings are based on the Company’s leverage ratio. The facility calls for a commitment fee payable quarterly, in arrears, of 0.175%, 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 and cash borrowings are considered to be outstanding amounts. As of July 31, 2004 and October 31, 2003, the total outstanding amounts under this facility were $92.0 million and $69.0 million, respectively, in the form of standby letters of credit. The provisions of the credit facility require the Company to maintain certain financial ratios and limit outside borrowings. The Company was in compliance with all covenants as of July 31, 2004.

9. Comprehensive Income (Loss)

     Comprehensive income consists of net income and other related gains and losses affecting stockholders’ equity that, under generally accepted accounting principles, are excluded from net income. For the Company, such other comprehensive income items consist of unrealized foreign currency translation gains and losses. Comprehensive income for the three and nine months ended July 31, 2004 and 2003 approximated net income.

10. Treasury Stock

     On September 16, 2001, the Company’s Board of Directors authorized the purchase of up to 2.0 million shares of the Company’s outstanding 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). In the two months ended December 31, 2003, the Company purchased 0.1 million shares at a cost of $1.7 million (an average price per share of $16.90).

     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 the three months ended July 31, 2004, the Company purchased 0.5 million shares under this authorization at a cost of $9.4 million (an average price per share of $18.77). As of July 31, 2004, 1.5 million shares remained available for purchase under this authorization.

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11. Employee Stock Purchase Plan

     On March 9, 2004, the stockholders of ABM approved the 2004 Employee Stock Purchase Plan under which an aggregate of 2.0 million shares may be issued. The participant’s purchase price is 85% of the lower of the fair market value of ABM’s stock on the first day of each six-month period in the fiscal year (i.e., May and November, or in the case of the first offering period, the price on August 1, 2004) or the last trading day of each month. The first offering period is a three-month period which commenced on August 1, 2004. Employees may designate up to 10% of their compensation for the purchase of stock, subject to a $25,000 annual limit. Employees will be required to hold their shares for a minimum of six months from the date of purchase.

12. Retirement and Postretirement Plans

     The net cost of the defined benefit retirement plans and the postretirement benefit plan for the three and nine months ended July 31, 2004 and July 31, 2003 were as follows:

                                 
    Three Months Ended   Nine Months Ended
    July 31,
  July 31,
(In thousands)
  2004
  2003
  2004
  2003
Defined Benefit Plans:
                               
Service Cost
  $ 78     $ 52     $ 246     $ 168  
Interest
    145       146       435       437  
 
   
 
     
 
     
 
     
 
 
Total Cost
  $ 223     $ 198     $ 681     $ 605  
 
   
 
     
 
     
 
     
 
 
Post-Retirement Plan:
                               
Service Cost
  $ 10     $ 13     $ 30     $ 39  
Interest
    69       69       207       207  
 
   
 
     
 
     
 
     
 
 
Total Cost
  $ 79     $ 82     $ 237     $ 246  
 
   
 
     
 
     
 
     
 
 

     The defined benefit plans include the Company’s retirement agreements for approximately 55 current and former directors and senior executives and an unfunded severance pay plan covering certain qualified employees. The severance pay plan was amended effective January 1, 2002 to no longer award any further benefits. The postretirement benefit plan is the Company’s unfunded postretirement death benefit plan.

     The Company made matching 401(k) contributions required by the 401(k) plan for the three and nine months ended July 31, 2004 in the amounts of $1.3 million and $3.8 million, respectively. The Company anticipates contributing an additional $1.2 million in the fourth quarter for a total of $5.0 million in fiscal 2004.

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13. Segment Information

     Under the criteria of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” Janitorial, Parking, Engineering, Security, and Lighting are reportable segments. Mechanical and Facility Services are included in the Other segment. Corporate expenses are not allocated.

                                 
    Three months ended   Nine months ended
    July 31,
  July 31,
(In thousands)
  2004
  2003
  2004
  2003
Sales and other income:
                               
Janitorial
  $ 367,539     $ 343,314     $ 1,073,475     $ 1,017,671  
Parking
    97,856       97,835       285,384       283,909  
Engineering
    51,550       44,492       148,527       134,064  
Security
    65,012       41,449       157,986       118,246  
Lighting
    27,510       30,657       83,060       97,380  
Other
    13,722       11,303       35,474       32,528  
Corporate
    584       43       1,035       276  
 
   
 
     
 
     
 
     
 
 
 
  $ 623,773     $ 569,093     $ 1,784,941     $ 1,684,074  
 
   
 
     
 
     
 
     
 
 
Operating profit:
                               
Janitorial
  $ 17,868     $ 13,859     $ 40,878     $ 37,236  
Parking
    3,457       2,326       6,158       3,938  
Engineering
    3,157       2,631       8,569       7,247  
Security
    2,594       1,897       5,787       4,399  
Lighting
    442       1,373       1,726       3,866  
Other
    531       333       937       280  
Corporate expense
    (6,963 )     (6,735 )     (20,798 )     (20,899 )
 
   
 
     
 
     
 
     
 
 
Operating profit
    21,086       15,684       43,257       36,067  
Interest expense
    (255 )     (216 )     (746 )     (503 )
 
   
 
     
 
     
 
     
 
 
Income from continuing operations before income taxes
  $ 20,831     $ 15,468     $ 42,511     $ 35,564  
 
   
 
     
 
     
 
     
 
 

14. Contingencies

     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. The court later awarded costs of $0.7 million to the plaintiff and an additional $0.8 million to mitigate the federal tax impact of the plaintiff’s award. The trial court recently reduced the tax mitigation amount to $0.4 million, a ruling that Forbes has challenged. The U.S. Supreme Court is currently deciding whether courts are permitted to award any amounts for mitigation for federal tax consequences in wrongful termination cases. ABM is appealing the jury’s verdict and the award of costs to the State Court of Appeals on the grounds that it was denied a fair trial and that Forbes failed to prove that ABM engaged in discrimination or retaliation. ABM has stayed enforcement of the judgment by procuring a $7.0 million letter of credit. At the time the letter of credit was procured, statutory interest on the judgment was 12% per year. However, Washington lowered the interest paid on judgments to 2% above the U.S. Treasury Bill rate. ABM 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 and that it will prevail in a new trial, ABM has not recorded any liability in its financial statements associated with the judgment. However, there can be no assurance that ABM will prevail in this matter. As of July 31, 2004, ABM had incurred and recorded legal fees of $0.3 million associated with the appeal. These fees, which include the cost of a new trial, are expected to total approximately $0.5 million. In addition, ABM will incur annual fees of approximately 1% of the amount of the letter of credit.

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     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.

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

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 63% of its operating profit before corporate expenses for the first nine months of 2004.

     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 agreed upon amount of wages, payroll taxes, insurance charges and other expenses plus a profit percentage). The quarterly profitability of fixed-price contracts is impacted by the variability of the number of work days in the quarter. 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, such as when the customer requires additional cleaning or emergency repair services, with extra services frequently providing higher margins.

     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 accounts 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’s most recent acquisitions significantly contributed to the growth in sales and operating profit in the first nine months of 2004 from the same period last year. Internal growth in sales also contributed to the growth in sales and operating profit but was partially offset by the reduction in retrofit jobs at Lighting and terminations of some unprofitable contracts, as well as the loss of profitable contracts to competition. Internal growth in sales represents not only sales from new customers but also expanded services or increases in the scope of work for existing customers. Sales in the Company’s Lighting and Mechanical businesses are primarily related to the level of capital investments by customers. To mitigate the adverse effect on operating profit of low levels of capital investment by customers, in the first nine months of fiscal 2004 the Company successfully lowered its overhead expenses in Lighting and Mechanical. In the long run, achieving the desired levels of sales and profitability will depend on the Company’s ability to gain and retain, at acceptable profit margins, more customers than it loses, pass on cost increases to customers, and keep overall costs down to remain competitive, particularly against privately-owned companies that typically have the lower cost advantage.

     In the short-term, management is focused on actively managing its business, converting bids into sales and integrating its most recent acquisitions. In the long-term, management is focused on

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implementing its strategic plan to grow the business through a combination of internal growth and selective acquisitions in the Company’s core disciplines.

Liquidity and Capital Resources

                         
    July 31,   October 31,    
(In thousands)
  2004
  2003
  Change
Cash and cash equivalents
  $ 49,501     $ 110,947     $ (61,446 )
Working capital
  $ 213,754     $ 243,957     $ (30,203 )
                         
    Nine months ended July 31,
       
    2004
  2003
  Change
Cash provided by operating activities from continuing operations
  $ 42,930     $ 42,782     $ 148  
Cash used in investing activities
  $ (55,702 )   $ (26,742 )   $ (28,960 )
Cash used in financing activities
  $ (18,167 )   $ (14,868 )   $ (3,299 )

     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. As of July 31, 2004 and October 31, 2003, the Company’s cash and cash equivalents totaled $49.5 million and $110.9 million, respectively. The relatively high cash balance at October 31, 2003 was primarily due to the $112.4 million of cash proceeds from the Elevator divestiture received during 2003. The decline in the first nine months of 2004 reflects the payment of estimated income taxes associated with this divestiture (see “Discontinued Operation”), the initial cash payments made for the purchases of the operations of Security Services of America (“SSA”) acquired on March 15, 2004, and Initial Contract Services, Inc. (“Initial”) acquired on April 2, 2004 and the cash payments for the purchases of 0.6 million of the Company’s common stock, offset in part by cash from operations.

     Working Capital. Working capital decreased by $30.2 million to $213.8 million at July 31, 2004 from $244.0 million at October 31, 2003 primarily due to the initial cash payments made for the purchase of SSA and Initial, offset in part by cash from operations. The largest component of working capital consists of trade accounts receivable, which totaled $307.9 million at July 31, 2004, compared to $287.9 million at October 31, 2003. These amounts were net of allowances for doubtful accounts of $7.6 million and $6.3 million at July 31, 2004 and October 31, 2003, respectively. As of July 31, 2004, accounts receivable that were over 90 days past due had decreased $4.2 million to $24.0 million (7.8% of the total net outstanding) from $28.2 million (9.8% of the total net outstanding) at October 31, 2003.

     Cash Flows from Operating Activities. Net cash generated by operating activities from continuing operations during the nine months ended July 31, 2004 increased only slightly to $42.9 million from $42.8 million for the same period in 2003 despite the increase in income from continuing operations due to slower payments by some large customers.

     Cash Flows from Investing Activities. Net cash used in investing activities for the nine months ended July 31, 2004 was $29.0 million higher than the same period last year. Net cash used for the purchase of businesses in the first nine months of 2004 was $48.2 million, of which $44.2 million was used for the purchase of the operations of SSA and Initial. In the first nine months of 2003, $21.1 million was used for the purchase of businesses of which $16.4 million was used for the purchase of the operations of Horizon National Commercial Services, LLC (“Horizon”) and Valet Parking Services (“Valet”).

     Cash Flows from Financing Activities. Net cash used in financing activities was $18.2 million in the nine months ended July 31, 2004, compared to $14.9 million in the nine months ended July 31, 2003. The Company generated less cash from the issuance of the Company’s common stock in the nine

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months ended July 31, 2004 compared to the same period last year as the employee stock purchase plan terminated upon issue of all the available shares in November 2003. A new employee stock purchase plan was approved by the stockholders in March 2004 and the first offering period began on August 1, 2004. (See Note 11, “Employee Stock Purchase Plan.”)

     Line of Credit. In April 2003, the Company increased the amount of its syndicated line of credit to $250.0 million. This line of credit will expire July 1, 2005. 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 spreads for LIBOR, prime and IBOR borrowings are based on the Company’s leverage ratio. The facility calls for a commitment fee payable quarterly, in arrears, of 0.175%, 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 July 31, 2004 and October 31, 2003, the total outstanding amounts under this facility were $92.0 million and $69.0 million, respectively, in the form of standby letters of credit. The provisions of the credit facility require the Company to maintain certain financial ratios and limit outside borrowings. The Company was in compliance with all covenants as of July 31, 2004.

Cash Requirements

     The Company is contractually obligated to make future payments under non-cancelable operating lease agreements for various facilities, vehicles, and other equipment. As of July 31, 2004, future contractual payments were as follows:

                                         
(In thousands)
  Payments Due By Period
            Less than   1 - 3   4 - 5   After 5
Contractual Obligations
  Total
  1 year
  years
  years
  years
Operating Leases
  $ 207,891     $ 47,811     $ 64,773     $ 40,764     $ 54,543  
 
   
 
     
 
     
 
     
 
     
 
 

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

                                         
(In thousands)
  Amounts of Commitment Expiration Per Period
            Less than   1 - 3   4 - 5   After 5
Commercial Commitments
  Total
  1 year
  years
  years
  years
Standby Letters of Credit
  $ 91,953     $ 91,953                    
Financial Responsibility Bonds
    4,211       4,211                    
 
   
 
     
 
     
 
     
 
     
 
 
Total
  $ 96,164     $ 96,164                    
 
   
 
     
 
     
 
     
 
     
 
 
                                         
(In thousands)
  Payments Due By Period
            Less than   1 - 3   4 - 5   After 5
Other Long-Term Liabilities
  Total
  1 year
  years
  years
  years
Retirement Plans
  $ 40,366     $ 2,221     $ 5,196     $ 5,253     $ 27,696  
 
   
 
     
 
     
 
     
 
     
 
 

     Not included in the retirement plans in the table above are union-sponsored collectively bargained multi-employer defined benefit plans under which certain union employees of the Company are covered. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts. Contributions for these plans were $24.2 million in the nine months ended July 31, 2004. Contributions for these plans averaged approximately $7.0 million per quarter in fiscal 2003.

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     The Company self-insures certain insurable risks such as general liability, automobile property damage, and workers’ compensation. Commercial policies are obtained to provide for $150.0 million of coverage for certain risk exposures above the self-insured retention limits (i.e., deductibles). For claims incurred after November 1, 2002, substantially all of the self-insured retentions increased from $0.5 million (inclusive of legal fees) to $1.0 million (exclusive of legal fees). Effective April 14, 2003, the deductible for California workers’ compensation insurance increased to $2.0 million per occurrence due to general insurance market conditions. While the higher self-insured retention increases the Company’s risk associated with workers’ compensation liabilities, during the history of the Company’s self-insurance program, few claims have exceeded $1.0 million. The Company annually retains an outside actuary to review the adequacy of its self-insurance claim reserves.

     The self-insurance claims paid for the nine months ended July 31, 2004 and 2003 were $45.8 million and $45.2 million, respectively. The total claim payments made in the fiscal years ended October 31, 2003 and 2002 were $58.9 million and $52.7 million, respectively. Claim payments vary based on the frequency and/or severity of claims incurred and timing of the settlements and therefore may have an uneven impact on the Company’s cash balances.

     In connection with the gender discrimination lawsuit against ABM in the state of Washington (see Note 14, “Contingencies”), ABM has stayed enforcement of the $4.0 million judgment, $0.7 million award of costs and an additional $0.8 million to mitigate the federal tax impact of the plaintiff’s award by procuring a $7.0 million letter of credit on February 4, 2004. In the third quarter of 2004, the trial court reduced the tax mitigation amount to $0.4 million, a ruling that Forbes has challenged. ABM will incur annual fees of approximately 1% of the amount of the related letter of credit. ABM believes that the award against ABM will be reversed upon appeal and that it will prevail in a new trial. However, the damages in this case cannot be determined at this time, and these damages may range between $0, should ABM prevail in a new trial, and an amount awarded by the jury in a new trial, should the plaintiff prevail in a new trial. If ABM does not prevail in a new trial, then the plaintiff may also receive the award of costs associated with the new trial.

     The Company has no significant commitments for capital expenditures and believes that the current cash and cash equivalents, cash generated from operations and the expected renewal of its line of credit prior to July 2005 will be sufficient to meet the Company’s cash requirements for the longer term.

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 the WTC complex in New York, which 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). As of October 31, 2002, Zurich Insurance (“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, which substantially settled the property portion of the claim. 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 2003 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

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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 July 31, 2004, the Company did not have any off-balance sheet arrangements as defined by Item 303(a)(4) of the Securities and Exchange Commission Regulation S-K.

Acquisitions

     The operating results of businesses acquired have been included in the accompanying consolidated financial statements from their respective dates of acquisition. Acquisitions made during the nine-month periods ended July 31, 2004 and 2003 are discussed in Note 6 to the consolidated financial statements.

Results of Operations

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

Three Months Ended July 31, 2004 vs. Three Months Ended July 31, 2003

                                         
    Three months           Three months        
    ended   % of   ended   % of   Increase
($ in thousands)
  July 31, 2004
  Sales
  July 31, 2003
  Sales
  (Decrease)
Revenues
                                       
Sales and other income
  $ 623,773       100.0 %   $ 569,093       100.0 %     9.6 %
Expenses
                                       
Operating expenses and cost of goods sold
    555,348       89.0 %     511,720       89.9 %     8.5 %
Selling, general and administrative
    46,045       7.4 %     41,404       7.3 %     11.2 %
Intangible amortization
    1,294       0.2 %     285       0.1 %      
Interest
    255       0.0 %     216       0.0 %     18.1 %
 
   
 
     
 
     
 
     
 
     
 
 
Total expenses
    602,942       96.7 %     553,625       97.3 %     8.9 %
 
   
 
     
 
     
 
     
 
     
 
 
Income from continuing operations before income taxes
    20,831       3.3 %     15,468       2.7 %     34.7 %
Income taxes
    7,437       1.2 %     4,912       0.9 %     51.4 %
 
   
 
     
 
     
 
     
 
     
 
 
Income from continuing operations
  $ 13,394       2.1 %   $ 10,556       1.9 %     26.9 %
 
   
 
     
 
     
 
     
 
     
 
 

     Income From Continuing Operations. Income from continuing operations for the third quarter of 2004 increased 26.9% to $13.4 million ($0.27 per diluted share) from $10.6 million ($0.21 per diluted share) for the third quarter of 2003. The impact of acquisitions and improved margins contributed to the increase in the third quarter of 2004. All operating segments showed significant improvement in income from continuing operations except for Lighting.

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     Sales and Other Income. Sales and other income for the third quarter of 2004 of $623.8 million increased by $54.7 million or 9.6% from $569.1 million for the third quarter of 2003. Acquisitions completed in fiscal year 2003 and nine months ended July 31, 2004 contributed $40.3 million to the sales increase. Additionally, new business in Janitorial and Engineering and expanded service to existing Janitorial and Engineering customers contributed to the higher sales in the third quarter of 2004. However, these increases were partially offset by decreased project sales in Lighting.

     Operating Expenses and Cost of Goods Sold. As a percentage of sales, gross profit (sales minus operating expenses and cost of goods sold) was 11.0% for the third quarter of 2004 compared to 10.1% for the third quarter of 2003. The higher margins were primarily due to one fewer work day in the third quarter of 2004 compared to the same period of 2003 which favorably impacted fixed-price contracts in Janitorial due to lower labor and related expenses and the termination of unprofitable airport contracts in Parking.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses for the third quarter of 2004 were $46.0 million, compared to $41.4 million for the third quarter of 2003. The increase was primarily due to an increase of $2.9 million in selling, general and administrative expenses attributable to the fiscal year 2003 and year-to-date 2004 acquisitions, and higher professional fees primarily related to Sarbanes-Oxley Act compliance, as well as higher cost associated with two Chief Operating Officers with the transitioning in of the new Chief Operating Officer.

     Intangible Amortization. Intangible amortization was $1.3 million for the third quarter of 2004 compared to $0.3 million for the same period of 2003. The higher amortization was due to intangibles acquired in business combinations completed in fiscal year 2003 and nine months ended July 31, 2004. (See Note 5, “Goodwill and Other Intangibles.”)

     Interest Expense. Interest expense, which includes loan amortization and commitment fees for the revolving credit facility, was slightly higher in the third quarter of 2004 compared to the third quarter of 2003.

     Income Taxes. The effective tax rate for income from continuing operations was 35.7% for the third quarter of 2004, compared to 31.8% for the third quarter of 2003. The 35.7% effective tax rate was based on a higher estimated tax rate for income from continuing operations for fiscal 2004 of 37.3% compared to the estimated tax rate of 35.3% for fiscal 2003. The estimated tax rate for continuing operations for fiscal 2004 reflects a higher estimated state income tax rate due to the combined income tax return filing requirements in certain states where separate income tax returns were previously filed. The income tax provision for continuing operations for the third quarter of 2004 included a tax benefit of $0.6 million principally from adjusting the income tax liability accounts after filing the 2003 income tax returns and from filing amended tax returns primarily to claim higher tax credits, while the income tax provision for continuing operations for the third quarter of 2003 included a tax benefit of $0.7 million principally from adjusting the income tax liability accounts after filing the 2002 income tax returns.

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     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.

                         
    Three months ended July 31,
  Better
($ in thousands)
  2004
  2003
  (Worse)
Sales and other income:
                       
Janitorial
  $ 367,539     $ 343,314       7.1 %
Parking
    97,856       97,835       0.0 %
Engineering
    51,550       44,492       15.9 %
Security
    65,012       41,449       56.8 %
Lighting
    27,510       30,657       (10.3 )%
Other
    13,722       11,303       21.4 %
Corporate
    584       43        
 
   
 
     
 
     
 
 
 
  $ 623,773     $ 569,093       9.6 %
 
   
 
     
 
     
 
 
Operating profit:
                       
Janitorial
  $ 17,868     $ 13,859       28.9 %
Parking
    3,457       2,326       48.6 %
Engineering
    3,157       2,631       20.0 %
Security
    2,594       1,897       36.7 %
Lighting
    442       1,373       (67.8 )%
Other
    531       333       59.5 %
Corporate expense
    (6,963 )     (6,735 )     (3.4 )%
 
   
 
     
 
     
 
 
Operating profit
    21,086       15,684       34.4 %
Interest expense
    (255 )     (216 )     (18.1 )%
 
   
 
     
 
     
 
 
Income from continuing operations before income taxes
  $ 20,831     $ 15,468       34.7 %
 
   
 
     
 
     
 
 

     The results of operations from the Company’s segments for the three months ended July 31, 2004, compared to the same period in 2003, are more fully described below.

     Janitorial. Sales for Janitorial increased $24.2 million or 7.1% from the third quarter of 2003 to the third quarter of 2004. The increase in sales was primarily due to the $18.1 million increase in sales from the Horizon, HGO and Initial acquisitions. Additionally, sales increased due to new business in the Northern California and Southwest regions, price increases in the Southwest and Midwest regions and expanded scope of services to existing customers in the Northwest region. These sales increases were partially offset by decreased sales in the Northeast, South Central and Southeast regions primarily due to reduced scope of work and lower prices on services provided to existing customers.

     Operating profit increased $4.0 million or 28.9% in the third quarter of 2004 compared to the third quarter of 2003. Of the increase, $1.7 million was due to one fewer work day in the third quarter of 2004 than in the same period in 2003. Significant margin improvement in New York and the Northwest region and new business in Northern California, as well as lower bad debt expense contributed to the increased operating profits. The Horizon, HGO and Initial acquisitions contributed $0.8 million to the operating profit increase.

     Parking. Parking sales were essentially flat while operating profits increased by $1.1 million or 48.6% during the third quarter of 2004 compared to the third quarter of 2003. Although sales generally improved at remaining airport locations with improved airline travel, this was offset by the termination of unprofitable airport contracts after July 2003. The increase in operating profits resulted from the termination of unprofitable contracts, airline travel improvement and higher margins on renegotiated contracts, partially offset by higher state unemployment insurance expenses, especially in California.

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     Engineering. Sales for Engineering increased $7.1 million or 15.9% from the third quarter of 2003 to the third quarter of 2004 primarily due to new business in California. Additionally, as the economy recovered, customers began increasing the number of onsite engineers at their locations. Operating profit increased $0.5 million or 20.0% from the third quarter of 2003 to the third quarter of 2004 primarily due to increased sales in California.

     Security. Security sales increased $23.6 million or 56.8% due to the SSA acquisition, which contributed $23.0 million to the sales increase, and the award of several major contracts which started in the third quarter 2004. Operating profits increased $0.7 million or 36.7% due to the $0.6 million operating profit contribution from SSA, and slightly better margins resulting from a rate increase program. The SSA operating profit was net of $0.4 million of amortization of intangibles.

     Lighting. Lighting sales decreased $3.1 million or 10.3% for the third quarter of 2004 compared to the same period of 2003 and operating profits decreased $0.9 million or 67.8% due primarily to decrease in sales, partially offset by savings from staff reductions. The decrease in sales was due to significantly fewer retrofit projects in 2004 compared to 2003.

     Other. Sales for the Other Segment increased by $2.4 million or 21.4% for the third quarter of 2004 compared to the same period of 2003, while operating profit increased by $0.2 million or 59.5%. Higher sales in Facilities Services resulting from a new major contract and slightly higher Mechanical project sales contributed to the sales increase. The increase in operating profit was primarily due to higher sales in Facilities Services partially offset by lower operating profit at Mechanical despite staff reductions.

     Corporate. Corporate expenses for the third quarter of 2004 increased by $0.2 million or 3.4% compared to the same period of 2003 mainly due to higher professional fees primarily related to Sarbanes-Oxley Act compliance and higher cost associated with two Chief Operating Officers with the transitioning in of the new Chief Operating Officer.

Nine Months Ended July 31, 2004 vs. Nine Months Ended July 31, 2003

                                         
    Nine months           Nine months        
    ended   % of   ended   % of   Increase
($ in thousands)
  July 31, 2004
  Sales
  July 31, 2003
  Sales
  (Decrease)
Revenues
                                       
Sales and other income
  $ 1,784,941       100.0 %   $ 1,684,074       100.0 %     6.0 %
Expenses
                                       
Operating expenses and cost of goods sold
    1,605,307       89.9 %     1,520,980       90.3 %     5.5 %
Selling, general and administrative
    132,239       7.4 %     126,183       7.5 %     4.8 %
Intangible amortization
    4,138       0.2 %     844       0.1 %      
Interest
    746       0.0 %     503       0.0 %     48.3 %
 
   
 
     
 
     
 
     
 
     
 
 
Total expenses
    1,742,430       97.6 %     1,648,510       97.9 %     5.7 %
 
   
 
     
 
     
 
     
 
     
 
 
Income from continuing operations before income taxes
    42,511       2.4 %     35,564       2.1 %     19.5 %
Income taxes
    15,177       0.9 %     12,010       0.7 %     26.4 %
 
   
 
     
 
     
 
     
 
     
 
 
Income from continuing operations
  $ 27,334       1.5 %   $ 23,554       1.4 %     16.0 %
 
   
 
     
 
     
 
     
 
     
 
 

     Income From Continuing Operations. Income from continuing operations for the first nine months of 2004 increased 16.0% to $27.3 million ($0.55 per diluted share) from $23.6 million ($0.47 per diluted share) for the first nine months of 2003. The impact of the acquisitions completed in fiscal year 2003 and nine months ended July 31, 2004 and improved margins

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contributed to the increase in the first nine months of 2004. All operating segments showed improvement in income from continuing operations except for Lighting.

     Sales and Other Income. Sales and other income for the first nine months of 2004 of $1,784.9 million increased by $100.9 million or 6.0% from $1,684.1 million for the first nine months of 2003. Acquisitions completed in fiscal year 2003 and nine months ended July 31, 2004 contributed $96.5 million to the sales increase. Additionally, new business in Engineering and Janitorial contributed to the higher sales for the first nine months of 2004. However, these increases were partially offset by decreased project sales in Lighting and termination of unprofitable contracts in Janitorial, Parking and Lighting.

     Operating Expenses and Cost of Goods Sold. As a percentage of sales, gross profit was 10.1% for the first nine months of 2004 compared to 9.7% for the first nine months of 2003. The higher margins were primarily due to lower sick leave and other operating expenses in the Northeast region of Janitorial and the termination of unprofitable contracts in Janitorial, Parking and Lighting and successfully renegotiated contracts at Parking, partially offset by the loss of profitable contracts in the Janitorial Northeast and Southeast regions and higher state unemployment insurance expenses, especially in California.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses for the first nine months of 2004 were $132.2 million compared to $126.2 million for the corresponding nine months of 2003. The increase was primarily due to an increase of $5.3 million in selling, general and administrative expenses attributable to the fiscal year 2003 and year-to-date 2004 acquisitions, higher professional fees related to Sarbanes-Oxley Act compliance, as well as higher cost associated with two Chief Operating Officers with the transitioning in of the new Chief Operating Officer, partially offset by lower bad debt expense.

     Intangible Amortization. Intangible amortization was $4.1 million for the first nine months of 2004 compared to $0.8 million for the same period of 2003. The amortization for the first nine months of 2004 included a $0.9 million catch-up adjustment for fiscal 2003 described in Note 5, “Goodwill and Other Intangibles.”

     Interest Expense. Interest expense was $0.7 million for the first nine months of 2004 compared to $0.5 million for the first nine months of 2003. The increase was primarily due to higher loan commitment fees in the first quarter of 2004.

     Income Taxes. The effective tax rate for income from continuing operations was 35.7% for the first nine month of 2004 compared to 33.8% for the same period of 2003. The 35.7% effective tax rate was based on a higher estimated tax rate for income from continuing operations for fiscal 2004 of 37.3% compared to the estimated tax rate of 35.3% for fiscal 2003. The estimated tax rate for continuing operations for fiscal 2004 reflects a higher estimated state income tax rate due to the combined income tax return filing requirements in certain states where separate income tax returns were previously filed. Income tax provision for continuing operations for the first nine months of 2004 included a tax benefit of $0.6 million principally from adjusting the tax liability accounts after filing the 2003 income tax returns and from filing amended tax returns primarily to claim higher tax credits, while the income tax provision for continuing operations for the first nine months of 2003 included a tax benefit of $0.7 million principally from adjusting the tax liability accounts after filing the 2002 income tax 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.

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    Nine months ended July 31,
  Better
($ in thousands)
  2004
  2003
  (Worse)
Sales and other income:
                       
Janitorial
  $ 1,073,475     $ 1,017,671       5.5 %
Parking
    285,384       283,909       0.5 %
Engineering
    148,527       134,064       10.8 %
Security
    157,986       118,246       33.6 %
Lighting
    83,060       97,380       (14.7 )%
Other
    35,474       32,528       9.1 %
Corporate
    1,035       276        
 
   
 
     
 
     
 
 
 
  $ 1,784,941     $ 1,684,074       6.0 %
 
   
 
     
 
     
 
 
Operating profit:
                       
Janitorial
  $ 40,878     $ 37,236       9.8 %
Parking
    6,158       3,938       56.4 %
Engineering
    8,569       7,247       18.2 %
Security
    5,787       4,399       31.6 %
Lighting
    1,726       3,866       (55.4 )%
Other
    937       280        
Corporate expense
    (20,798 )     (20,899 )     0.5 %
 
   
 
     
 
     
 
 
Operating profit
    43,257       36,067       19.9 %
Interest expense
    (746 )     (503 )     (48.3 )%
 
   
 
     
 
     
 
 
Income from continuing operations before income taxes
  $ 42,511     $ 35,564       19.5 %
 
   
 
     
 
     
 
 

     The results of operations from the Company’s segments for the nine months ended July 31, 2004, compared to the same period in 2003, are more fully described below.

     Janitorial. Sales for Janitorial increased by $55.8 million or 5.5% from the first nine months of 2003 to the first nine months of 2004. The increase in sales was due to the $54.0 million in sales increase contributed by the Horizon, HGO and Initial acquisitions. Additionally, sales increased due to new business in the Northern California and Southwest regions and price increases in the Southwest and Midwest regions. However, these increases were partially offset by decreased sales in the Northeast and Southeast regions primarily due to loss of profitable contracts to competition as well as the termination of unprofitable contracts.

     Operating profit improved by $3.6 million or 9.8% in the first nine months of 2004 compared to the same period of 2003. The Northeast region contributed $2.1 million to the improvement over the prior year, without taking into account the Initial acquisition. This was due to lower sick leave, bad debt and legal expenses, the absence of costs associated with management changes which affected the first nine months of 2004, as well as termination of unprofitable contracts. The contribution to the operating profit increase of the Horizon, HGO and Initial acquisitions was $1.5 million. Operating profits for the Northwest and Midwest increased in the first nine months of 2004 from the same period in 2003 due to improved margins in the Northwest and increased prices in the Midwest. Operating profits for the Southeast, South Central, and Lakeside showed declines in the first nine months of 2004 from the same period in 2003 due to competitive pricing pressures and reduced work from existing customers.

     Parking. Parking sales increased by $1.5 million or 0.5% while operating profits increased by $2.2 million or 56.4% during the first nine months of 2004 compared to the first nine months of 2003. The Valet acquisition contributed $7.7 million to the sales increase. Although airport sales at each location generally improved with increases in airline travel, these improvements were more than offset by the termination of two airport contracts in 2003 and the impact of severe weather conditions in various parts of the country on travel and airport parking during the first six months of 2004. The

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increase in operating profits resulted from the termination of unprofitable airport contracts after July 2003, increased activity at remaining airport locations higher margins on renegotiated contracts and a $0.2 million contribution from Valet for the first nine months of 2004, partially offset by higher state unemployment insurance expense, especially in California.

     Engineering. Sales for Engineering increased $14.5 million or 10.8% from the first nine months of 2003 to the first nine months of 2004 due to an increase in customer base in California. Additionally, as the economy recovered, customers began increasing the number of onsite engineers at their locations. Operating profit increased $1.3 million or 18.2% from the first nine months of 2003 to the first nine months of 2004 due to higher sales, partially offset by higher state unemployment insurance expenses, especially in California.

     Security. Security sales increased $39.7 million or 33.6% primarily due to the SSA acquisition, which contributed $34.8 million to the sales increase, and the net effect of new business including several major contracts awarded in the third quarter of 2004. Operating profits increased $1.4 million or 31.6% primarily due to the $1.2 million profit contribution from SSA, increases in sales and slightly improved margins resulting from a rate increase program, partially offset by higher state unemployment insurance expenses, especially in California.

     Lighting. Lighting sales decreased $14.3 million or 14.7% during the first nine months of 2004 compared to the same nine months of 2003 and operating profits decreased $2.1 million or 55.4% due primarily to decrease in sales, partially offset by savings from staff reductions. The decrease in sales was primarily due to significantly fewer retrofit projects in 2004 compared to 2003 and the termination of certain underperforming national contracts after July 2003.

     Other. Sales for the Other Segment increased by $2.9 million or 9.1% for the nine months ended July 31, 2004 compared to the same period of 2003, while operating profit increased $0.7 million. Higher sales in Facilities Services resulting from a new major contract and an increase in project sales at Mechanical generated the sales increase. The increase in operating profit is primarily due to higher sales in Facilities Services from new contracts along with staff reductions.

     Corporate. Corporate expenses for the first nine months of 2004 decreased by $0.1 million or 0.5% compared to the same period of 2003. Corporate expenses in the first nine months of 2003 included fees related to the due diligence performed for a proposed acquisition that was not completed and fees related to the use of outside counsel while in the process of hiring a General Counsel. However, the absence of these expenses in the first nine months of 2004 was partially offset by increases in professional fees primarily related to Sarbanes-Oxley Act compliance in the first nine months of 2004 and higher cost associated with two Chief Operating Officers with the transitioning in of the new Chief Operating Officer.

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 which is net of $31.9 million of income taxes, of which $30.5 million was paid with the extension of the federal and state income tax returns on January 15, 2004.

     The operating results and cash flows of the Elevator segment 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.

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     The operating results of the discontinued operation for the three and nine months ended July 31 , 2003 are shown below.

                 
    Three months ended   Nine months ended
(In thousands)
  July 31, 2003
  July 31, 2003
Revenues
  $ 28,270     $ 83,744  
 
   
 
     
 
 
Income before income taxes
  $ 1,912     $ 3,906  
Income taxes
    730       1,492  
 
   
 
     
 
 
Net income
  $ 1,182     $ 2,414  
 
   
 
     
 
 

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 three environmental matters: one involving alleged potential soil contamination at a former Company facility in Arizona, one involving alleged potential soil and groundwater contamination at a Company facility in Florida, and one involving an alleged de minimis contribution to a landfill 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, 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

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, estimate of useful life of intangible assets, impairment of goodwill, and 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, commercial policies are obtained to provide 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 evaluate and estimate the range of the Company’s claim costs and liabilities annually. The Company accrues the minimum amount of the actuarial range of exposure. Using the annual actuarial report, management develops annual insurance costs for each operation, expressed

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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. Trend analysis is complex and highly subjective. The interpretation of trends requires the knowledge of all factors affecting the trends that may or may not be reflective of adverse development (e.g. change in statutory requirements and change in reserving methodology). If the trends suggest that the frequency or severity of claims incurred increased, the Company might be required to record additional expenses 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 fully 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 July 31, 2004, the net deferred tax asset was $71.8 million and no valuation allowance was recorded. Should future income be less than anticipated, the net deferred tax asset may not be fully recoverable.

     Other Intangible Assets Apart from Goodwill: The Company engages a third party valuation firm to independently appraise the value of intangible assets acquired in larger sized business combinations. For smaller acquisitions, the Company performs an internal valuation of the intangible assets using the discounted cash flow technique. At least annually, the Company will evaluate the remaining useful life of an intangible asset to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of the asset’s remaining useful life changes, the remaining carrying amount of the intangible asset would be amortized over the revised remaining useful life. Furthermore, the remaining unamortized book value of intangibles will be reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets.” The first step of an impairment test under SFAS No. 144 is a comparison of the future cash flows, undiscounted, to the remaining book value of the intangible. If the future cash flows are insufficient to recover the remaining value, a fair value of the asset, depending on its size, will be independently or internally determined and compared to the book value to determine if an impairment charge is required.

     Goodwill. In accordance with SFAS No. 142, “Goodwill and Other Intangibles,” goodwill is no longer amortized but is subject to at least an annual assessment for impairment. The Company is required to perform goodwill impairment tests on an annual basis using the two-step process prescribed in SFAS No. 142. The first step is to evaluate for potential impairment by comparing the reporting unit’s fair value with its book value. If the first step indicates potential impairment, the required second step allocates the fair value of the reporting unit to its assets and liabilities, including recognized and unrecognized intangibles. If the implied fair value of the reporting unit’s goodwill is lower than its carrying amount, goodwill is impaired and written down to its implied fair value. The impairment test is performed at least annually at fiscal year-end. The fair value of the reporting unit, if required to be determined, will be independently appraised.

     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

(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)

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     The disclosure and analysis in this Quarterly Report on Form 10-Q 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.

     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 list of all potential risks or uncertainties: (1) A decline in commercial office building occupancy and rental rates could affect the Company’s sales and profitability. (2) An increase in costs that the Company cannot pass on to customers could affect profitability. (3) The financial difficulties or bankruptcy of one or more of the Company’s major customers could adversely affect results. (4) The Company could experience major collective bargaining disputes that would lead to the loss of sales or expense increases. (5) The Company is subject to intense competition. (6) The Company’s success depends on its ability to preserve its long-term relationships with its customers. (7) Weakness in airline travel and the hospitality industry could adversely impact the Company’s Parking results. (8) Low levels of capital investments by customers could negatively impact the project sales of the Lighting and Mechanical segments. (9) Acquisition activity could slow or be unsuccessful. (10) The Company incurs significant accounting and other control costs, which could increase. (11) An inadequacy in the Company’s self-insurance reserves, or the cancellation or non-renewal of the Company’s primary insurance policies, could adversely impact the Company’s results. (12) Other issues and uncertainties which 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 and other intangible assets, 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, and inclement weather which could disrupt the Company in providing its services.

     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 listed above, any and all of which are inherently difficult to forecast. The Company’s Annual Report on Form 10-K for the year ended October 31, 2003, contains additional information with respect to the factors that could influence its business. The Company undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     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 July 31, 2004, the Company had no outstanding long-term debt. Although the Company’s assets included over $49.5 million in cash

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and cash equivalents at July 31, 2004, market rate risk associated with changing interest rates in the United States is not material.

Item 4. Controls and Procedures

     (a) Disclosure Controls and Procedures. Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, the Company’s principal executive officer and principal financial officer have concluded that these controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q were adequately designed to ensure that the information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

     (b) Changes in Internal Control Over Financial Reporting. No change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the Company’s third fiscal quarter has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. 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. The court later awarded costs of $0.7 million to the plaintiff and an additional $0.8 million to mitigate the federal tax impact of the plaintiff’s award. In the third quarter of 2004, the trial court reduced the tax mitigation amount to $0.4 million, a ruling that Forbes has challenged. The U.S. Supreme Court is currently deciding whether courts are permitted to award any amounts for mitigation for federal tax consequences in wrongful termination cases. ABM is appealing the jury’s verdict and the award of costs to the State Court of Appeals on the grounds that it was denied a fair trial and that Forbes failed to prove that ABM engaged in discrimination or retaliation. ABM has stayed enforcement of the judgment by procuring a $7.0 million letter of credit. ABM 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 and that it will prevail in a new trial, ABM has not recorded any liability in its financial statements associated with the judgment. However, there can be no assurance that ABM will prevail in this matter.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) Stock Repurchases

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                            (d) Maximum number
                    (c) Number of   (or approximate dollar
                    shares (or units)   value) of shares (or
    (a) Total number of   (b) Average price   purchased as part of   units) that may yet be
    shares (or units)   paid per share   publicly announced   purchased under the
Period
  purchased
  (or unit)
  plans or programs
  plans or programs (1)
5/1/2004-5/31/2004
                      2,000,000 shares  
6/1/2004-6/30/2004
    202,300 shares     $ 18.69       202,300 shares       1,797,700 shares  
7/1/2004-7/31/2004
    297,700 shares     $ 18.82       297,700 shares       1,500,000 shares  
 
   
 
     
 
     
 
     
 
 
Total
    500,000 shares     $ 18.77       500,000 shares       1,500,000 shares  
 
   
 
     
 
     
 
     
 
 

(1)   On December 9, 2003, the Board of Directors authorized 2,000,000 shares to be purchased at any time through December 31, 2004.

Item 6. Exhibits and Reports on Form 8-K

(a)   Exhibits:
         
Exhibit 31.1
  -   Certification of Chief Executive Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a)
 
       
Exhibit 31.2
  -   Certification of Chief Financial Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a)
 
       
Exhibit 32.1
  -   Certifications pursuant to Securities Exchange Act of 1934 Rule 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)   Reports on Form 8-K:

     The Company filed a report on Form 8-K dated June 8, 2004 pursuant to Item 5, which announced the declaration of its quarterly dividend and furnished in the same report pursuant to Item 12 its financial results related to the second quarter of fiscal year 2004.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

     
  ABM Industries Incorporated
 
   
September 9, 2004
  /s/ George B. Sundby
 
 
  George B. Sundby
  Executive Vice President and
  Chief Financial Officer
  Principal Financial Officer
 
   
September 9, 2004
  /s/ Maria De Martini
 
 
  Maria De Martini
  Vice President and Controller
  Chief Accounting Officer

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EXHIBIT INDEX

         
Exhibit No.
  Description
  31.1    
Certification of Chief Executive Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a)
       
 
  31.2    
Certification of Chief Financial Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a)
       
 
  32.1    
Certifications pursuant to Securities Exchange Act of 1934 Rule 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

33

exv31w1
 

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PERSUANT TO SECURITIES EXCHANGE ACT OF 1934
RULE 13a-14(a) OR 15d-14(a)

I, Henrik C. Slipsager, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of ABM Industries Incorporated;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
     
September 9, 2004
  /s/ Henrik C. Slipsager
 
 
  Henrik C. Slipsager
  Chief Executive Officer
  (Principal Executive Officer)

 

exv31w2
 

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PERSUANT TO SECURITIES EXCHANGE ACT OF 1934
RULE 13a-14(a) OR 15d-14(a)

I, George B. Sundby, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of ABM Industries Incorporated;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
     
September 9, 2004
  /s/ George B. Sundby
 
 
  George B. Sundby
  Chief Financial Officer
  (Principal Financial Officer)

 

exv32w1
 

EXHIBIT 32.1

CERTIFICATIONS PURSUANT TO SECURITIES EXCHANGE ACT OF 1934
RULE 13a-14(b) OR 15d-14(b) AND
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the quarterly report of ABM Industries Incorporated (the “Company”) on Form 10-Q for the period ended July 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Henrik C. Slipsager, Chief Executive Officer of the Company, and George B. Sundby, Chief Financial Officer of the Company, each certifies for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the Untied States Code, that:

(1)   the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and
 
(2)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
     
September 9, 2004
  /s/ Henrik C. Slipsager
 
 
  Henrik C. Slipsager
  Chief Executive Officer
  (Principal Executive Officer)
 
   
September 9, 2004
  /s/ George B. Sundby
 
 
  George B. Sundby
  Chief Financial Officer
  (Principal Financial Officer)

 

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