AMERICAN PLUMBING & MECHANICAL INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

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

COMMISSION FILE NO. 333-81139

AMERICAN PLUMBING & MECHANICAL, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 76-0577626
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)

1950 LOUIS HENNA BLVD.
ROUND ROCK, TEXAS 78664
(Address of principal executive offices) (Zip Code)

SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

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

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

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

As of March 28, 2003, there were 13,211,383 outstanding shares of common
stock and 331,116 shares of Class B common stock of the Registrant. The
aggregate market value of voting stock held by non-affiliates of the Registrant
is not determinable as such shares were privately placed and there is no public
market for such shares.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's Proxy Statement (the "Proxy Statement") are
incorporated by reference in Part III of this Annual Report on Form 10-K (the
"Form 10-K").
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TABLE OF CONTENTS

PART I
Item 1. Business.................................................... 2
Business Segments......................................... 2
Industry Overview......................................... 3
Long-term Strategy........................................ 4
Services.................................................. 5
Operations................................................ 6
Fleet and Equipment....................................... 7
Regulation................................................ 7
Employees................................................. 7
Risk Factors.............................................. 8
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 13

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 13
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Discontinued Operations................................... 16
Shutdown Operations....................................... 17
Ongoing Operations 2002 Compared to 2001.................. 17
Ongoing Operations 2001 Compared to 2000.................. 20
Liquidity and Capital Resources........................... 21
Recent Accounting Pronouncements.......................... 23
Critical Accounting Policies.............................. 25
Item 7-A. Quantitative and Qualitative Disclosures About Market
Risks....................................................... 26
Item 8. Financial Statements and Supplemental Data.................. 26
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure........................................ 50

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 50
Item 11. Executive Compensation...................................... 50
Item 12. Security Ownership of Certain Beneficial Owners of
Management.................................................. 50
Item 13. Certain Relationships and Related Transactions.............. 50
Item 14. Controls and Procedures..................................... 50

PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 51

1

FORWARD-LOOKING STATEMENTS

This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended ("Securities Act") and
Section 21E of the Exchange Act to be covered by safe harbors created thereby.
Such forward-looking statements are made only as of the date of this report and
involve known and unknown risks, uncertainties and other important factors that
could cause the actual results, performance or achievements of the Company, or
industry results, to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Readers
are cautioned that such information involves risks and uncertainties, including
those created by general market conditions, competition and the possibility that
events may occur which limit the ability of American Plumbing & Mechanical, Inc.
and subsidiaries ("AMPAM" or the "Company") to maintain or improve its operating
results. Such risks, uncertainties and other important factors include, among
others, retention of key management, a national economic downturn or one or more
regional downturns in construction, shortages of labor and specialty building
materials, difficulty in obtaining or increased costs associated with debt
financing, seasonal fluctuations in the demand for plumbing and HVAC systems,
and the use of incorrect estimates for bidding a fixed price contract. All
statements, other than statements of historical facts, included or incorporated
by reference in this report that address activities, events or developments that
the Company expects or anticipates will or may occur in the future, including
such things as future capital expenditures (including the amount and nature
thereof), business strategy and measures to implement such strategy, competitive
strengths, goals, expansion and growth of the Company's business and operations,
plans, references to future success, as well as other statements which include
words such as "anticipate," "believe," "plan," "estimate," "expect," and
"intend" and other similar expressions, constitute forward-looking statements.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and the inclusion of such information should
not be regarded as a representation that it will occur.

PART I

ITEM 1. BUSINESS

American Plumbing & Mechanical, Inc. is the largest company in the United
States focused primarily on residential plumbing and heating ventilation and air
conditioning ("HVAC") construction. The Company also provides commercial
plumbing and mechanical contracting services. AMPAM provides services to three
identifiable industry segments -- single family residential, multifamily
residential and commercial customers. American Plumbing & Mechanical, Inc. (a
Delaware corporation) was organized in June 1998, and acquired ten U.S.
businesses (the "Founding Companies") on April 1, 1999. The Founding Companies
operated as leading regional providers of plumbing and mechanical contracting
services for an average of approximately 31 years prior to being acquired by
AMPAM. AMPAM believes that by combining these regional leaders into one
organization, it has created a national provider capable of strengthening and
broadening relationships with its consolidating customer base and enhancing its
operating efficiency. Subsequent to the acquisition of the Founding Companies,
and through December 31, 2002, the Company acquired all of the outstanding stock
of three companies and the assets of a fourth, and opened several new locations
("Start-ups"). The Company currently serves its customers in 18 states out of 35
operating facilities.

BUSINESS SEGMENTS

During 2002, AMPAM derived approximately 54%, 28% and 18% of its revenue
from single family residential, multifamily residential and commercial
customers, respectively. These operating segments offer similar products and
services with differing complexities to distinct customer groups and have
different competitors. They are managed separately because each business
requires different operating and marketing strategies. All three reporting
segments operate domestically, with no intersegment or foreign sales. The
residential segments share similar growth strategies and provide plumbing and
HVAC services. Our commercial segment is focused on obtaining plumbing and
mechanical contracts with higher margins. For further discussion, see note 17 to
the consolidated financial statements.
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Single Family and Multifamily Residential. AMPAM provides plumbing and
HVAC construction services, as well as maintenance and repair services to single
family and multifamily residential customers. The single family residential
market includes housing projects, small condominium projects, and town house
development. The multifamily residential market includes large apartment
projects and condominiums. As of December 31, 2002, AMPAM had multifamily
residential backlog of $126 million, a significant portion of which is expected
to be completed during 2003. The single family and multifamily residential
customers include local, regional and national residential builders and
developers. Although AMPAM's single family and multifamily residential segments
have a diverse customer base, the largest single family customer accounted for
approximately 13% of revenue for the single family segment. AMPAM does not
believe the loss of this customer would have a material adverse effect on the
Company as a whole as revenue from this particular customer accounted for just
7% of the Company's consolidated revenue in 2002. No individual multifamily
residential customer represented more than 10% of the annual revenue for the
segment. Because of the variety of services provided by AMPAM's single family
and multifamily residential segments, including plumbing, HVAC and maintenance
and repair, the Company has many diverse competitors, which mostly consist of
local and regional contractors. The main areas of competition include price,
quality of services, insurance and bonding capacity and customer service.

Commercial. AMPAM provides plumbing, HVAC and mechanical contracting
services to commercial customers. The commercial market includes retail
establishments, office buildings, hotels, manufacturing plants and other
industrial complexes; and public and private institutional buildings including
schools, hospitals, dormitories, stadiums, airports and prisons. As of December
31, 2002, AMPAM had commercial backlog of $49 million. Commercial projects
typically take between one and two years to complete. Although AMPAM's
commercial segment has a diverse customer base, the two largest customers
combined, accounted for approximately 29% of the revenue for this segment. AMPAM
does not believe the loss of these customers would have a material adverse
effect on the Company as a whole as revenue from these particular customers
accounted for just 5% of the Company's consolidated revenue in 2002.

Because of the variety of services provided by AMPAM's commercial segment,
including plumbing, HVAC and maintenance and repair, the Company has many
diverse competitors, which mostly consist of local and regional contractors. The
main areas of competition include price, quality of services provided, insurance
and bonding capacity and customer service.

INDUSTRY OVERVIEW

General. Virtually all construction and renovation in the United States
generates demand for plumbing and mechanical contracting services. AMPAM
estimates that the plumbing and mechanical contracting work it performs accounts
for approximately 8% to 12% of the total construction cost of commercial
projects, and 5% to 10% of the total construction cost of residential projects.

The plumbing, HVAC and mechanical contracting service industry is highly
fragmented, and AMPAM estimates it to include at least 40,000 companies.
Generally, these companies are small, owner-operated, independent contractors
who serve customers in a local market, and have limited access to capital for
investment in infrastructure, technology and expansion. Calendar year 2002
marked the eleventh consecutive year of expansion for the construction industry.
Total construction advanced 1% during 2002 to $499 billion, down from 3% growth
in 2001 and 5% growth in 2000. For the construction industry as a whole, the
residential segment grew 12% during 2002, whereas the nonresidential building
construction segment was down 10% during 2002. Lower interest rates enhanced the
growth of the single family residential segment, whereas a weak economy
contributed to declined growth in the commercial segment.

AMPAM believes that its customers generally select plumbing and mechanical
contractors with a large, trained workforce that are able to meet their location
and scheduling requirements, while also providing reliable high-quality service
at a reasonable price. AMPAM obtains a significant portion of its contracts on
negotiated terms through existing customer relationships instead of through
competitive bid processes. Because many projects utilize repetitive floor plans,
AMPAM is able to prefabricate some of the material

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necessary to complete the project, which ultimately increases productivity,
quality and profitability by reducing construction time, labor costs and skill
requirements.

The level of construction activity depends on many factors, including
interest rates, tax considerations, demand for housing and general economic
conditions. AMPAM serves many of the more rapidly growing metropolitan areas,
including; Orlando, Tampa, Jacksonville, Naples, Sarasota, Ft Myers, Miami and
Pensacola, Florida; Atlanta, Georgia; Charlotte, North Carolina; Denver,
Colorado; Arlington, Virginia; Washington D.C.; Baltimore, Maryland; Austin,
Houston, Dallas, and San Antonio, Texas; Cincinnati and Columbus, Ohio; Phoenix
and Tucson, Arizona; Las Vegas, Nevada; Indianapolis, Indiana; Jersey City, New
Jersey; Riverside, Los Angeles, Orange County, San Diego, Sacramento, Corona,
Palm Springs and the San Fernando Valley, California, among others. The Company
also has the ability to mobilize its workforce to other geographic markets based
on the demands of its customers. These metropolitan areas have experienced
significant new construction activity over the last several years, and
demographic trends indicate continued growth in these areas.

LONG-TERM STRATEGY

Strategic Alliances with National Homebuilders. AMPAM has been in ongoing
discussions with several of the national homebuilders to convert its already
strong relationships to a more formalized strategic alliance. Currently, while
AMPAM is the only national provider of residential plumbing and HVAC new
construction services, it represents only a small percentage of the amount
national homebuilders spend on plumbing and HVAC services. Each of these
homebuilders build upwards of 15,000 homes per year but mainly deal with local
or regional contractors in one-off relationships, which limits the homebuilder's
ability to take advantage of its own scale. These homebuilders have been working
with AMPAM in order to take advantage of operational, logistical and pricing
synergies that would be provided by one national contract.

National Purchasing Initiative. AMPAM is beginning to take advantage of
its national presence and significant size to enhance its purchasing power and
economies of scale. No other residential plumbing and mechanical new
construction contractor can match AMPAM's volume. AMPAM's national account
strategy has created an opportunity for AMPAM to use its scale and purchasing
power to drive margins and growth.

AMPAM estimates that its cost of materials purchased currently represents
approximately 37.5% of AMPAM's revenue. AMPAM purchases copper, steel, cast
iron, PVC and ABS pipe, valves, hangers, fire protection and sprinkler systems,
plumbing fixtures, drains, water heaters, boilers, chillers, air handling units
and pumps, and other materials from a number of manufacturers. AMPAM purchases
these materials directly from the manufacturer or through wholesalers and other
distributors. AMPAM negotiates with its suppliers to receive discounts whenever
possible.

In June, 2002, in order to execute and enhance its material procurement
strategy, AMPAM implemented a strategy to actively reduce the number of
distributors from which it sources materials from 45 to five, with three primary
distributors, one each in the west, east and southwest United States. These
distributors provide a substantial portion of the necessary materials for
AMPAM's new construction services.

Start-ups. Over the past three years, AMPAM has entered new markets
through Start-ups. These Start-ups initially focus on serving existing customers
of AMPAM in the new market to build their base. From this base, these Start-ups
work to develop relationships with new customers. Over the past three years, the
Company has also grown by expanding the services it provides at its existing
locations. During 2000, AMPAM incorporated operating subsidiaries in Denver,
Colorado and Dallas, Texas. The Denver location provides multifamily plumbing
services, whereas the Dallas location provides single family plumbing services.
During 2001, the Company commenced single family plumbing operations in
Charlotte, North Carolina and in Sacramento, California. In addition, operations
were expanded in Houston, Texas to provide single family plumbing, and in
Orlando, Florida, Baltimore, Maryland, Atlanta, Georgia and Denver, Colorado to
provide multi-family HVAC. In 2002, the Company commenced no new Start-ups and
instead focused on improving the profitability of its Start-ups and expanding
services and locations serviced by existing subsidiaries.

4

For 2003, no new start-ups are planned. The Company intends to focus on
growth in its existing Start-ups markets through expansion of its national
account strategy. AMPAM will continue to evaluate additional markets to assess
the potential for future start-ups. All costs associated with Start-ups are
included in the results of operations as incurred.

SERVICES

Plumbing. Plumbing services provided by AMPAM, which represent
approximately 64% of revenue, are primarily the installation of systems that
convey domestic water throughout a building, systems that transport sanitary
waste out of a building to a sewer connection, and systems that supply natural
gas to various equipment or appliances such as heaters, boilers, ovens and
stoves. A domestic water system typically includes separate piping for hot and
cold water, as well as a number of fixtures such as sinks, bathtubs and showers.

Plumbing contracting projects begin with project design and engineering in
which the location, configuration and specifications for the plumbing systems to
be installed are determined. Whether the design is provided by the customer, or
produced by AMPAM, the type, size and design of piping, fittings, valves,
fixtures and other equipment is typically entered into AMPAM's computer systems
which handle estimation, materials ordering and job scheduling functions.
Substantially all of the equipment and component parts AMPAM installs are
purchased from third-party wholesale suppliers or directly from the
manufacturers and resold to the customer as part of the contracted installation.
Orders and deliveries are coordinated to match the project schedule. Whenever
possible, a significant portion of the plumbing and piping assembly is
prefabricated at AMPAM facilities in order to reduce on-site installation time,
increase quality control and reduce material costs and service time.

Once the job moves onto the construction site, connections are made to the
municipal sewage system, drainage piping is installed within the construction
"footings" along the building's perimeter and risers are installed to elevate
the piping above the level of the foundation. These risers are designed to
either be contained within the walls for extension into upper floors, or to
connect with fixtures to be installed in specified locations on ground level
floors. After the foundation is poured and the framing for the walls and floors
of the upper levels of the building is constructed, piping systems are extended
to supply the fixtures and systems throughout the building and venting systems
are installed. Once the walls have been covered, and the flooring, ceiling and
roofing completed, fixtures (including sinks, water heaters, toilets, baths,
faucets and spigots) are installed and the system is connected to the water main
and gas supply. During the construction process, municipal inspectors generally
tour a job site several times to assure compliance with the applicable plumbing
codes.

HVAC. In some regions, the Company also offers HVAC contracting services
which represent approximately 16% of revenue. HVAC systems typically involve air
duct systems and air-handling and condenser equipment. The equipment component
of an HVAC system includes heaters, furnaces, condensers, air handlers, package
units and blowers. Typically, HVAC installation projects begin with the customer
providing the architectural plans and mechanical drawings for the building to be
constructed. In response to customer demand, AMPAM may develop some or all of
the design parameters using its CAD programs, or AMPAM may "value engineer"
customer supplied specifications in order to suggest more efficient installation
configurations or lower cost components. Prefabrication at AMPAM facilities may
also be employed to pre-assemble various piping and airduct configurations prior
to deployment at the construction site.

Once the job has moved to the construction stage, the duct systems,
condensation drains and air handling equipment is installed within the walls and
joist spaces of the building. The refrigeration gas lines are also run from the
location of the external condenser to the location of the air handling unit
inside the building. After the walls have been covered, the air duct grills and
control units are installed. The external condenser is typically installed a
short time before occupancy of the building as a precaution against theft.
Immediately prior to occupancy, the system is charged with refrigeration gas,
checked for leaks, tested and air flow is balanced.

Mechanical. Mechanical contracting services, which represent approximately
18% of revenue, usually include the installation of complex plumbing systems
including the installation of mechanical and process
5

piping and tubing, including systems which convey hot and chilled water, steam,
medical gas, fuels and other liquid and gaseous substances, as well as the
installation of related equipment and fixtures which store, pump, regulate and
measure the distribution of these substances. In some cases, these mechanical
systems are critical to the underlying business of the future tenant, as in the
case of water treatment plants, chemical plants and medical laboratories.
Mechanical contracting services provided by AMPAM also include the installation
of the piping portion of HVAC systems, including the piping and tubing used to
convey hot and chilled water to the heating or cooling systems and the related
boilers, chillers, cooling towers, pumps, valves and control devices. Mechanical
contracting services are typically provided to commercial customers.

Mechanical contracting projects begin with project design and engineering,
which may be produced by AMPAM or specified by the customer. In response to
customer demand, AMPAM may develop some or all of the design parameters using
its CAD programs, or AMPAM may "value engineer" customer supplied specifications
in order to suggest more efficient installation configurations or lower cost
components. Prefabrication at AMPAM facilities may also be employed to
pre-assemble various piping and mechanical configurations prior to deployment at
the construction site. Most mechanical projects begin with the installation of
distribution piping and duct systems within the walls and between the floor and
ceilings in accordance with technical design specifications, after the
foundation has been poured. Once the distribution and main service lines have
been installed, service branches to various equipment are completed, and the
equipment and controls are then balanced and commissioned.

Maintenance and Repair. Maintenance and repair contracting services, which
represent approximately 2% of revenue, are generally provided on a fee per visit
basis. Revenue from repair and maintenance contracting services historically
represents a small portion of the overall revenue of the Company.

OPERATIONS

Contracting. Single family and multifamily residential work is generally
obtained through relationships with existing customers. Bids are generated for
the work and submitted to the customer. To the extent the customer receives bids
from other contractors, AMPAM may negotiate pricing with the customer to obtain
the work. In 2002, AMPAM installed plumbing systems in approximately 37,000
homes and 50,000 apartment units. Commercial work is typically awarded through a
competitive bid process, which is often limited to approved bidders who meet
bonding and other requirements. Contracts may provide precise specifications for
the work to be completed, require the contractor to design and build the
plumbing system, or may permit the contractor to provide revised specifications
for the project. AMPAM's construction contracts are generally structured on a
fixed cost basis. Revenue for a typical multifamily residential plumbing project
for installation in an apartment complex range from approximately $500,000 to
$1,500,000. Single family residential projects vary based on the size of the
development, and revenue for each home range from approximately $6,000 to
$15,000. Revenue from a single commercial mechanical contracting project
generally range from approximately $500,000 to $10,000,000, depending upon the
size of the building involved, the nature of the plumbing and mechanical
contracting services involved, and the specific equipment and fixtures to be
installed.

Engineering and Design. AMPAM has engineering and design capabilities
which enable it to offer a high level of service to its customers. These
capabilities may be offered "in-house" or obtained from third parties, as
appropriate. CAD systems may be used to "value engineer" the project by
providing cost saving alternatives to the specifications and designs provided by
the customer, or to actually design and build the plumbing and mechanical
systems to be installed. CAD systems can be used to automate the production of
blueprints and specifications, produce a schedule of required assemblies, and to
assist in selecting the materials and equipment to be used. AMPAM is further
developing its "value engineering" and design-and-build capabilities to help
capture higher margins resulting from the cost savings passed on to the
customer.

Management Information Systems. AMPAM has centralized the consolidated
accounting and financial reporting activities at its corporate headquarters
while basic accounting activities are conducted at the operating level. Several
of the acquired companies, serving both the residential and commercial markets,
possess software systems which handle estimation, materials ordering and job
scheduling functions.

6

Recruiting and Training. Recruiting and training primarily occur at the
local level for each operating unit of AMPAM, but are also supplemented by
national programs. In 2001 and continued in 2002, AMPAM initiated a new
management trainee program which focuses on promoting from within, as well as
providing college graduates with 1-2 years "hands on" experience in all facets
of their respective segment. AMPAM believes it is able to attract well qualified
candidates as a result of its national size, potential for growth and
advancement, as well as its health, disability and life insurance, and
retirement benefits.

Intellectual Property and Licensing. AMPAM has obtained certain trademarks
and trade names for its products and services to distinguish genuine AMPAM
products and services from its competitors' products and services. During 2001,
AMPAM undertook a national branding effort, renaming all locations to "AMPAM" to
promote nationwide name recognition.

Seasonality. The plumbing and mechanical contracting services industry is
influenced by seasonal factors, which generally result in lower activity during
winter months than in other periods. As a result, AMPAM expects that its revenue
and profits will generally be lower in the first and fourth quarters of each
fiscal year, and higher in the second and third quarters.

FLEET AND EQUIPMENT

AMPAM operates a fleet of approximately 2,000 owned and leased trucks, vans
and support vehicles, as well as heavy machinery including cranes, backhoes and
high-lifts. The Company believes these vehicles are adequate for AMPAM's current
operations.

REGULATION

Operations and Licensing. AMPAM's business is subject to various federal,
state and local laws, regulations, ordinances and policies relating to, among
other things:

- the licensing and certification of plumbers and HVAC technicians;

- AMPAM's advertising, warranties and disclosures to its customers;

- the bidding process required to obtain plumbing, HVAC and mechanical
contracts; and

- the applicable plumbing, mechanical and building codes with which AMPAM
must comply.

Most states require that at least one of AMPAM's employees be a licensed
master plumber, and many jurisdictions regulate the number and level of license
holders who must be present on a construction site during the installation of
plumbing and mechanical systems. Some jurisdictions require AMPAM to obtain a
building permit for each plumbing or mechanical project. In addition, AMPAM must
comply with labor laws and regulations, including those that relate to
verification by employers of legal immigration or work permit status of
employees.

Environmental Health and Safety. AMPAM is subject to safety standards
established and enforced by, among others, the Occupational Safety and Health
Administration. AMPAM is also subject to various environmental laws and
regulations relating to the use, storage, transportation and disposal of various
materials. To the extent that AMPAM performs work involving air conditioning and
refrigeration systems, it is subject to additional restrictions and regulations
governing the availability, handling and recycling of various refrigerants due
to the phase-out of ozone-depleting substances under the Montreal Protocol and
the Clean Air Act.

EMPLOYEES

At December 31, 2002, AMPAM had approximately 5,500 employees. Currently,
none of AMPAM's employees are members of unions or work under a collective
bargaining agreement. AMPAM believes that its relationship with its employees is
satisfactory.

7

RISK FACTORS

AMPAM faces numerous risks that could adversely impact the success of the
Company's business, financial position and results of operations. Many of these
factors are beyond the influence and control of management. Others are directly
influenced by the management team, however there is no assurance management will
be successful in adequately addressing and satisfactorily mitigating these
risks. The impact of any one or a combination of several of these items could
have significant negative consequences for the Company. This list covers those
risks management believes to be the most significant of the risks AMPAM faces in
it's operations, but is not intended to be all inclusive, although management
believes all material risks are included.

THE COMPANY'S SUBSTANTIAL DEBT COULD HAVE A SIGNIFICANT NEGATIVE EFFECT ON ITS
RESULTS OF OPERATIONS. AMPAM'S ABILITY TO SERVICE ITS INDEBTEDNESS AND FUND
WORKING CAPITAL REQUIREMENTS WILL REQUIRE ITS OPERATIONS TO GENERATE A
SIGNIFICANT AMOUNT OF CASH.

The Company's substantial indebtedness could:

- make it difficult to satisfy financial obligations;

- increase its vulnerability to general adverse economic, financial,
competitive, legislative, regulatory and industry conditions;

- limit its ability to fund future working capital, capital expenditures
and other general corporate requirements;

- limit its flexibility in planning for, or reacting to, changes in the
business and industry in which it operates;

- place it at a disadvantage compared to its competitors that have lower
levels of debt;

- limit its ability to refinance or extend its Credit Facility that expires
in March 2004, and;

- limit, along with the financial and other restrictive covenants in its
indebtedness, among other things, its ability to borrow additional funds.
Additionally, failing to comply with those covenants could result in an
event of default, which, if not cured or waived, could have a material
adverse effect on the Company.

The Company cannot assure that its business will generate sufficient cash
flow from operations or that future borrowings will be available in an amount
sufficient to pay current indebtedness, or to fund other liquidity needs. AMPAM
may need to refinance all or a portion of its indebtedness, on or before
maturity. The Company cannot assure it will be able to refinance its
indebtedness on commercially reasonable terms or at all. AMPAM's inability to
refinance its debt on commercially reasonable terms could have a material
adverse affect on its business. For a discussion of the Company's status on its
debt structure see Item 7.

DOWNTURNS IN THE LEVEL OF NEW CONSTRUCTION COULD ADVERSELY AFFECT THE COMPANY'S
BUSINESS AND FINANCIAL RESULTS.

Most of AMPAM's business involves the installation of plumbing and HVAC
systems in newly constructed residences, apartment buildings and plants.
Downturns in levels of housing starts or construction could have a material
adverse effect on its business, financial condition and results of operations.
The Company's ability to maintain or increase revenue will depend on the number
of new construction starts which can be cyclical in nature. The number of new
residential or building starts is affected by numerous factors, including the
following:

- interest rates and other factors affecting the availability and cost of
financing;

- employment and income levels;

- regional economic conditions;

- land availability;

8

- tax implications for homebuyers;

- consumer confidence;

- demand for apartment units; and

- housing demand.

A majority of AMPAM's business is focused in the southeastern, southwestern
and western portions of the United States, concentrating its exposure to local
economic conditions in those regions. Downturns in levels of construction or
housing starts in these geographic areas could result in a decline in the
Company's activity levels, which could negatively affect its business, financial
condition and results of operations.

COST AND MARGIN ESTIMATES USED IN PLACING BIDS COULD BE MATERIALLY INCORRECT
RESULTING IN MATERIAL LOSSES ON FIXED PRICE CONTRACTS.

The Company generates the majority of its revenue under fixed price
contracts. AMPAM's employees must estimate the costs of completing a particular
project to bid for these fixed price contracts. In many cases, the costs must be
estimated more than a year before the costs will be incurred. Accordingly, the
cost of labor and materials may vary from the costs used to develop the
estimate. Variances resulting from material price increases, labor rate
increases, inefficient utilization of labor resources or incorrect estimation of
the material quantities required to complete the work may result in actual costs
for a project differing from those originally estimated and could result in
losses on projects. Depending upon the size of the project, adverse variations
from estimated contract costs could have a significant adverse impact on AMPAM's
operating results.

EXISTING OR FUTURE CLAIMS AGAINST THE COMPANY COULD EXCEED LEVELS COVERED BY ITS
INSURANCE AND COULD SIGNIFICANTLY IMPACT ITS BUSINESS.

The nature of AMPAM's business exposes it to potential claims for personal
injury or death resulting from injuries to employees and other persons,
transportation accidents, property damage and negligence, intentional misconduct
or defective materials or workmanship in connection with the installation,
repair or maintenance of plumbing or HVAC systems. Claims arising from the
presence of mold in structures that contain plumbing or HVAC systems the Company
has installed have been asserted. While there is no clear evidence of
responsibility for the existence of mold, AMPAM has an active mold remediation
program in place to respond to these claims. There are no assurances that the
costs of mold claims will not exceed coverage limits for this type of claim.
Claims made by its customers may be based on the warranties we provide with
respect to materials or workmanship or may be based on common law or state
statutes relating to the conduct of contractors. Although AMPAM is covered by
comprehensive insurance, subject to deductibles and policy limits, certain types
of claims, such as claims for punitive damages or damages arising from
intentional misconduct, are generally not covered by insurance. The Company
cannot guarantee that existing or future claims would not exceed the current
level of insurance or that such insurance will continue to be available on
economically reasonable terms, if at all.

THE COMPANY'S OPERATIONS DEPEND ON ITS EXECUTIVE OFFICERS AND THE SENIOR
MANAGEMENT TEAMS OF ITS OPERATING LOCATIONS.

Because AMPAM's operations are managed on a decentralized basis, its
results of operations depend on the efforts, business contacts and experience of
the executive officers and the senior management teams of the operating
locations. The loss of key personnel or the inability to hire and retain
qualified management employees could have a material adverse effect on the
Company's business, financial condition and results of operations. AMPAM cannot
guarantee that any member of management at the corporate or operating level will
continue in their capacity for any particular period of time. If the Company
loses a group of key personnel, its operations could be adversely affected.
AMPAM does not maintain key man life insurance.

IF THE COMPANY IS UNABLE TO MANAGE ITS GROWTH SUCCESSFULLY, ITS RESULTS OF
OPERATIONS AND FINANCIAL CONDITION MAY SUFFER.

AMPAM expects to grow internally in existing markets and through start-ups
where appropriate. The Company expects to expend significant time and effort
managing and expanding existing operations. AMPAM
9

cannot guarantee that its systems, procedures and controls will be adequate to
support operations as they expand. As the Company grows, significant additional
responsibilities will be imposed on senior management, including the need to
identify, recruit and integrate new senior managers and executives. If AMPAM is
unable to manage growth, or if it is unable to attract and retain additional
qualified management, there could be a material adverse effect on its business,
financial condition and results of operations. For further discussion regarding
the Company's experience at its AMPAM Commercial Northwest Start-up, which is
being shut down, see Item 7.

THE PROFITABILITY OF AMPAM'S BUSINESS DEPENDS ON AN ADEQUATE SUPPLY OF SKILLED
LABOR.

AMPAM is dependent upon an adequate supply of skilled plumbers and HVAC
technicians to complete its contracts on time. There is currently a shortage of
qualified plumbers and HVAC technicians. The Company competes with other
plumbing and HVAC companies for a limited supply of skilled labor. Accordingly,
AMPAM's ability to increase productivity and profitability may be limited by its
ability to employ, train and retain skilled labor necessary to meet its
requirements. In addition, labor shortages could result in wage increases, which
could reduce operating margins and have a negative effect on the Company's
financial condition and results of operations. AMPAM's employees are currently
not subject to collective bargaining agreements. AMPAM believes it offers a
competitive compensation and benefits package; however, there are no assurances
that its employees will continue their employment under these terms. Accordingly
there can be no assurance, amongst other things, that:

- AMPAM will be able to maintain the skilled labor force necessary to
operate efficiently;

- AMPAM's labor expenses will not increase as a result of a shortage in the
skilled labor supply; and

- the Company will be able to grow due to a labor shortage.

SEASONALITY OF THE COMPANY'S INDUSTRY CAN HAVE AN ADVERSE EFFECT ON ITS
QUARTERLY OPERATING RESULTS.

The plumbing and HVAC industry is influenced by seasonal declines in
operations and demand that affect the construction business, particularly in
residential construction. These declines due to weather, buying trends and other
factors result in lower activity during the first and fourth quarters. There can
be no assurance that AMPAM's combined geographic, service and product mix will
be sufficient to overcome such declines that may occur in the future or that
other seasonal patterns will not emerge. The Company's quarterly results may
also be affected by the regional economic conditions. Accordingly, performance
in any particular quarter may not be indicative of the results that can be
expected for other quarters or for the entire year.

THE COMPANY'S INDUSTRY IS HIGHLY COMPETITIVE.

The plumbing contracting service industry is highly fragmented and
competitive. The industry is generally served by a large number of small,
owner-operated private companies, and several large regional companies. AMPAM
could also face competition in the future from other competitors entering the
market. AMPAM may also face competition from former employees who are familiar
with the Company's current employees, customers, pricing structure and
operational practices. Some of the Company's competitors offer a greater range
of services. Some of its competitors may have lower overhead cost structures and
may, therefore, be able to provide comparable services at lower rates. If AMPAM
is unable to offer its services at competitive prices or if it has to reduce
prices to remain competitive, the Company's profitability would be impaired.

THE COMPANY'S RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED AS A RESULT OF
GOODWILL IMPAIRMENT WRITE-OFFS.

The acquisitions of the founding companies were accounted for using the
purchase method of accounting and the total purchase price was allocated to the
assets and liabilities of the companies acquired based upon the fair values of
the assets and liabilities. The excess of the purchase price over the fair value
of the assets was recorded as "goodwill". In June, 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 142 "Goodwill and Other Intangible Assets." SFAS 142, effective
January 1, 2002 established new accounting and reporting requirements for
goodwill and other intangible assets and addressed the accounting and reporting
for acquired goodwill and other intangible assets.

10

It also provides that goodwill should not be amortized, but must be tested for
impairment annually or more frequently if circumstances indicate potential
impairment. SFAS 142 also required the Company to complete a transitional
goodwill impairment test within six months from the date of adoption and at
least annually thereafter. Under SFAS 142, the impairment adjustment, if any,
recognized at adoption of the new rules was to be reflected as a cumulative
effect of a change in accounting principle in the statement of income. Fair
value of the goodwill was initially determined using market multiples.
Prospectively, goodwill impairment will be assessed using a discounted cash flow
methodology. Impairment adjustments recorded subsequently will be required to be
recognized as operating expense.

Significant estimates used in the methodologies include estimates of future
cash flows, future short-term and long-term growth rates, weighted average cost
of capital and estimates of market multiples for each of the reportable units.
On an ongoing basis (absent any impairment indicators), the Company expects to
perform impairment tests annually.

In the first quarter of 2002, goodwill was tested for impairment by
comparing the fair value of each business segment with its carrying value. Based
on the impairment tests performed, the Company recognized a charge of $34.6
million, (net of tax), in the first quarter of 2002 to reduce the carrying value
of goodwill associated with the commercial segment to its implied fair value.
This adjustment was reflected as a cumulative effect of change in accounting
principle in the first quarter 2002 statement of operations.

Due to the deterioration of the commercial segment in 2002, AMPAM
re-evaluated the carrying value of the goodwill for each segment as of December
31, 2002. Upon completion of the evaluation, the Company recorded an impairment
of the remaining goodwill related to the commercial segment of $12.7 million in
December, 2002. Because the expensing of goodwill is almost entirely
non-deductible for tax purposes, neither of these expenses created a material
tax benefit for the Company. The Company cannot assure that it will not have
future impairment adjustments to the recorded goodwill.

The foregoing list is not exhaustive. There can be no assurance that AMPAM
has correctly identified and appropriately assessed all factors affecting its
business or that the publicly available and other information with respect to
these matters is complete and correct. Additional risks and uncertainties not
presently known to the Company or that it currently believes to be immaterial
also may adversely impact the Company. Should any risks and uncertainties
develop into actual events, these developments could have material adverse
effects on the Company's business, financial condition, and results of
operations. For these reasons, you are cautioned not to place undue reliance on
the Company's forward-looking statements.

ITEM 2. PROPERTIES

The Company's subsidiaries operate in 18 states out of 34 leased facilities
and one owned facility. The warehouses, administrative offices and shops are
generally covered by operating leases ranging from five to ten years, and are on
terms the Company believes to be commercially reasonable. AMPAM leases 17
facilities, and owns one facility for single family residential operations,
consisting of warehouse, office and shop space. The Company leases 12 facilities
for multifamily residential operations, also consisting of warehouse, office and
shop space. For commercial operations, the Company leases five locations,
consisting primarily of office and shop space. Certain of the facilities are
leased from related parties under "arms length" transactions. For further
discussion, see note 7 to the consolidated financial statements and Item 13
incorporated by reference from the Proxy Statement). AMPAM believes its
facilities are adequate for its present needs. AMPAM also believes that suitable
additional or replacement space will be available as required.

The Company leases its executive offices in Round Rock, Texas.

ITEM 3. LEGAL PROCEEDINGS

In October 2001, AMPAM and its operating subsidiary AMPAM Christianson,
L.P. filed suit against two former stockholders of Christianson Enterprises who
were holders of approximately one-half of AMPAM's Series A Redeemable Preferred
Stock ("preferred stock") alleging, among other things, breaches of certain
provisions of the underlying acquisition agreement pursuant to which AMPAM
purchased

11

Christianson Enterprises n/k/a AMPAM Christianson. In February 2002, the
defendants filed a counterclaim alleging, among other things, anticipatory
breach of the acquisition agreement. On April 1, 2002, the parties finalized a
settlement agreement and general release pursuant to which the defendants and
related parties tendered all of their preferred stock and AMPAM paid the
defendants and related parties $3.1 million. Upon transfer of consideration,
AMPAM retired the preferred stock and realized an increase in Additional Paid in
Capital of $3.8 million representing the liquidation value of the preferred
stock received net of the proceeds attributable to the preferred stock and costs
incurred to facilitate the settlement. On April 1, 2002, the defendants and
their related parties held 524,410 shares of preferred stock with a liquidation
value of $6.8 million and were due approximately $0.5 million for outstanding
but undeclared dividends, all of which were included in the settlement. The
parties have no further duties, obligations, or liabilities to each other
related to the acquisition agreement or preferred stock and have released any
and all claims against each other.

Three remaining holders of preferred stock hold 524,410 combined shares.
The remaining preferred stockholders have exercised their right under the terms
of the preferred stock designation to require the Company to purchase all of
their preferred stock. Restrictions within the terms of the Company's Credit
Facility preclude redemption of the preferred stock and the payment of further
dividends. Because the preferred stock has been "put" to AMPAM, the liquidation
value of these shares has been classified as "Other long-term liabilities" on
the balance sheet as of December 31, 2002. On or about January 22, 2003, the
remaining preferred stockholders initiated a binding arbitration proceeding
against the Company seeking, among other things, specific performance by the
Company to purchase all of their preferred stock. The Company intends to defend
the arbitration vigorously, but can make no representation as to the outcome of
the arbitration.

Additionally, because the Company has not purchased the preferred stock,
pursuant to the terms of the preferred stock designation, the Company may not
engage in the following activities without the affirmative vote of not less than
a majority of the holders of the preferred stock, voting together as a single
class:

(i) incur any additional indebtedness for borrowed money other than
borrowings under any credit facility to which the Company is a party at
such time and as in effect when any redemption payment becomes due and is
unpaid or at the time any dividend payment becomes due and is unpaid;

(ii) effect (or make any agreement or become obligated to effect) any
(a) sale, lease, assignment, transfer or other conveyance of the assets of
the Company or its subsidiaries which individually or in the aggregate
would constitute a significant subsidiary, (b) consolidation or merger
involving the Company or any of its subsidiaries, or (c) dissolution,
liquidation or winding-up of the Company or any of its subsidiaries;
provided however that in no event shall the Company effect any sale, lease,
assignment, transfer or other conveyance of the assets of the Company or
its subsidiaries to affiliates of the Company;

(iii) make (or permit any subsidiary to make) any loan or advance to,
or own any stock or other securities of, any subsidiary or other
corporation, partnership, or other entity unless it is wholly owned by the
Company and except for any such loans and advances which do not in the
aggregate exceed $250,000;

(iv) make any loan or advance to any person, including, without
limitation, any employee or director of the Company or any subsidiary,
except advances and similar expenditures in the ordinary course of
business; or

(v) acquire, by purchase, exchange, merger or otherwise, all or
substantially all of the properties or assets of any other corporation or
entity.

AMPAM also is, from time to time, a party to litigation arising in the
normal course of business. Most of the litigation involves claims for personal
injury, property damage, and/or warranty/defect claims incurred in connection
with its operations. Management believes that none of these "normal course of
business" actions, individually or in the aggregate, will have a material
adverse effect on the financial condition or results of operations of the
Company.

12

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of March 28, 2003, there were approximately 92 holders of the Company's
common stock and approximately 6 holders of the Company's Class B common stock,
neither of which has an established public trading market. See Part III, Item 12
for information regarding securities authorized for issuance under our equity
compensation plan.

AMPAM does not anticipate paying cash dividends on its common stock in the
foreseeable future. AMPAM expects that it will retain all available earnings
generated by its operations for the development and growth of its business. Any
future determination as to the payment of dividends will be made at the
discretion of the Company's Board of Directors and will depend upon the
Company's operating results, financial condition, debt covenants, capital
requirements, general business conditions and such other factors as the Board of
Directors deems relevant. The Company's debt instruments include certain
restrictions on the payment of cash dividends on the common stock. For further
discussion, see note 5 to the consolidated financial statements.

13

ITEM 6. SELECTED FINANCIAL DATA

The following selected historical financial data reflects the results and
financial position of Christianson Enterprises, the accounting acquiror, for the
periods prior to April 1, 1999. Results of operations for the year ended
December 31, 1999 represent Christianson's results for the three months ended
March 31, 1999, and the consolidated results of AMPAM for the remainder of the
year. Results of operations for the years ended December 31, 2000, 2001 and 2002
represent the consolidated results of AMPAM.

- ---------------

(a) The level of net income in periods prior to April 1, 1999 are primarily
attributable to the level of owner's compensation paid during those
periods.

(b) Upon adoption of SFAS 145, extraordinary losses recorded in 1999 and 2000
attributable to early extinguishments of debt are now recorded as a portion
of income before provision for (benefit from) income taxes. For further
discussion, see note 2 to the consolidated financial statements.

(c) Prior to the merger on April 1, 1999, Christianson elected S Corporation
status. Consequently, the provision for income taxes prior to April 1, 1999
consists of only state income taxes.

(d) Upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", on
January 1, 2002, the Company ceased goodwill amortization and incurred a
transitional implementation write-down of the goodwill associated with its
commercial operations. On December 31, 2002, in accordance with SFAS 142,
the Company re-evaluated the carrying values of the goodwill using a
discounted cash flow analysis and determined that a further write-down of
its goodwill associated with its commercial operations was necessary. For
further discussion, see note 2 to the consolidated financial statements.

(e) Includes the redeemable preferred stock of $13.6 million for 1999, 2000 and
2001 and $6.8 million for 2002.

(f) The Company's single family operations in Richmond, Virginia were
discontinued as of December 31, 2002. For further discussion, see note 15
to the consolidated financial statements.

(g) The Company's 2002 results reflect a pretax loss of $21.5 million
associated with operations the Company is in the process of shutting down.
The Company expects to present these losses as Discontinued Operations
during 2003. For further discussion, see note 16 to the consolidated
financial statements.

14

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

The following discussion should be read in conjunction with the
consolidated financial statements.

In the fourth quarter of 2001, we modified our internal organizational
structure and divided the business into three reporting segments: single family
residential, multifamily residential and commercial. These operating segments
offer similar products and services with differing complexities to distinct
customer groups and have different competitors. They are managed separately
because each business requires different operating and marketing strategies. All
three reporting segments operate domestically, with no intersegment or foreign
sales. The residential segments share similar growth strategies and provide
plumbing and HVAC services. Our commercial segment is focused on obtaining
plumbing and mechanical contracts with higher margins.

The single family residential market includes housing projects, small
condominium projects, and townhouse development. The multifamily residential
market includes large apartment and condominium projects. The commercial market
includes retail establishments, office buildings, hotels, manufacturing plants
and other industrial complexes and public and private institutional buildings
including schools, hospitals, dormitories, governmental facilities, stadiums,
airports and prisons.

The financial information presented for each segment does not include costs
for corporate overhead. Corporate expenses include costs related to executive
and operations management, sales and marketing, accounting and administrative
support. We measure performance of the segments based on income (loss) from
operations which is presented in the tables below for the years ended December
31, 2000, 2001 and 2002:

As further discussed below, we are in the process of shutting down two of
our commercial operations and have completed the shutdown of one of our small
single family locations.

DISCONTINUED OPERATIONS

In August 2002, management determined it was necessary to discontinue and
abandon our single family operations in southern Virginia. These operations were
completely discontinued as of December 31, 2002 and were treated as such in the
income statement for the years ended December 31, 2000, 2001 and 2002.

The results of these discontinued operations included in the statement of
income (loss) for the presented periods are as follows (in thousands):

No impairment of the goodwill associated with the single family residential
segment was necessitated by the shut down of these operations as they
represented less than 1% of the revenue of this segment in 2002. For additional
discussion, see note 15 to the consolidated financial statements.

16

SHUTDOWN OPERATIONS

Also in August 2002, management decided to shut down our commercial
operations in Sacramento, CA and Pensacola, FL. For the year ended December 31,
2002, these operations have collectively incurred operating losses of $21.5
million on a pretax basis. During 2003, management expects to incur an
additional $2.5 million to $3.5 million pretax loss related to the shut down of
these operations. The major portion of these losses relate to our commercial
operations in Sacramento, CA. This operation expanded rapidly in late 2001 and
early 2002 growing from approximately 150 employees at September 30, 2001 to
approximately 450 employees at June 30, 2002. The loss at the shutdown locations
resulted from underbidding jobs, unfavorable changes in job estimates, and poor
field performance. Management expects the shutdown locations' operations to be
virtually completed by June 30, 2003. Loss reserves of $3.3 million have been
recorded at December 31, 2002 to reflect expected costs in excess of contract
revenue at our AMPAM Commercial Northwest and AMPAM Commercial Southeast
locations. As of December 31, 2002, there are 20 active jobs as compared to 91
active jobs at June 30, 2002.

The results of these shutdown operations included in income from operations
for the presented periods are as follows (in thousands):

ONGOING OPERATIONS 2002 COMPARED TO 2001

Our ongoing operations reflect the results of the Company excluding the
shutdown operations and the discontinued operations.

SINGLE FAMILY SEGMENT

The results of the single family operations for the years ended 2001 and
2002 comparatively, were as follows (in thousands):

Revenue from continuing single family operations increased slightly to
$312.7 million in 2002 from $311.4 million in 2001. The increase in revenue was
due to an increased number of housing starts and modest

17

price increases in our southern California and Phoenix markets and the growth of
our Start-ups offset by weaker demand for services because of increased
competition in central Texas and Las Vegas. Single family residential Start-up
revenue increased $8.7 million from $8.2 million in 2001 to $16.9 million in
2002. Gross profit from single family operations decreased $6.2 million or 11.0%
from $56.4 million in 2001 to $50.2 million in 2002 as a result of a decrease in
gross margins. The decrease in gross margins from 18.1% in 2001 to 16.0% in 2002
was mainly due to declines in central Texas and Las Vegas offset by improvements
in Phoenix and Start-up markets as well as lower materials costs resulting from
the implementation of our national procurement strategy. The gross margin
declines in Las Vegas and central Texas were due to higher claims and labor
costs and relatively constant field overhead leveraged over lower revenue in
these markets.

General and administrative expenses for 2002 were $30.2 million versus
$26.6 million in 2001, an increase of $3.6 million or 13.5%. The increase in
general and administrative expenses was primarily due to higher business
insurance costs, higher costs associated with the additional volume at Start-up
locations and higher facility costs associated with new facilities in Phoenix
and Maryland. Due to the implementation of SFAS 142, goodwill amortization
decreased $1.8 million from 2001 to 2002.

Income from single family operations decreased $8.0 million or 28.6% from
$28.0 million in 2001 to $20.0 million in 2002.

MULTIFAMILY SEGMENT

The results of the multifamily operations for the years ended 2001 and 2002
comparatively, were as follows (in thousands):

Revenue from multifamily operations decreased $16.6 million or 9.4% from
$175.7 million to $159.1 million for the years ended December 31, 2001 and 2002,
respectively. The decrease in revenue was due mainly to lower levels of
multifamily construction in early 2002, particularly in central Florida and
southern California, offset by increased volume from Start-ups in 2002, which
increased revenue $7.3 million to $15.3 million. Gross profit from multifamily
operations decreased $4.3 million or 12.5% to $30.0 million in 2002 from $34.3
million in 2001. The decrease in gross profit was due to a relatively constant
level of field overhead leveraged over lower revenue which was offset by lower
materials costs resulting from the implementation of our national procurement
strategy. Gross margin decreased from 19.5% in 2001 to 18.9% in 2002. General
and administrative expenses for 2002 were $13.9 million versus $13.5 million in
2001, an increase of $0.4 million or 3.0%. The increase in general and
administrative expenses was primarily due to higher business insurance costs and
additional costs associated with Start-ups. Due to the implementation of SFAS
142, goodwill amortization decreased by $2.2 million from 2001 to 2002. Income
from multifamily operations decreased $2.6 million or 13.9% to $16.1 million in
2002 from the previous year's amount of $18.7 million. Included in the decrease
was a $1.5 million increase in income from operations generated by Start-ups.

18

COMMERCIAL SEGMENT

The results of the commercial operations for the years ended 2001 and 2002
comparatively, were as follows (in thousands):

Revenue from ongoing commercial operations decreased $27.4 million or 29.1%
from $94.1 million to $66.7 million for the years ended December 31, 2001 and
2002, respectively. The decrease in revenue was due to the general weakness of
the economy and a focus on higher margin jobs. Gross profit from ongoing
commercial operations decreased $1.9 million or 21.3% to $7.0 million in 2002
from $8.9 million in 2001. The decrease in gross profit was due to lower volume
offset by higher gross margins. Gross margin increased from 9.5% in 2001 to
10.5% in 2002. General and administrative expenses for 2002 were $5.7 million
versus $6.0 million in 2001, a decrease of $0.3 million or 5.0%. For calendar
year 2001, we recorded $1.7 million of goodwill amortization. In January 2002,
upon implementation of SFAS 142, we recorded a $34.6 million, net of tax,
goodwill impairment associated with our commercial segment as a change in
accounting principle and discontinued goodwill amortization in 2002. In December
2002, due to the further deterioration of our commercial segment, we
re-evaluated the carrying value of the goodwill associated with our commercial
segment. As a result, we recorded a goodwill impairment charge of $12.7 million
attributable to our commercial segment. Substantially all of the goodwill
associated with this segment has been written off. Income (loss) from ongoing
commercial operations decreased $12.7 million to a loss of $11.5 million in 2002
from the previous year's amount of $1.2 million.

CORPORATE

Selling, general and administrative expense at corporate decreased $4.7
million or 36.7% from $12.8 million to 2001 to $8.1 million in 2002. During
2001, we incurred approximately $4.6 million in additional insurance costs above
the amounts allocated to the segments. These costs were captured at corporate in
2001, but such costs were reflected in the rates charged to the segments in
2002.

OTHER CONSOLIDATED ITEMS REQUIRED TO RECONCILE TO NET INCOME

Other expense, net, remained basically unchanged from 2001 to 2002.
However, interest expense included in this line decreased from $18.3 million in
2001 to $16.9 million in 2002 reflecting lower interest rates.

The provision for income taxes decreased $12.5 million, reflecting the tax
benefit generated on our operating loss during 2002.

19

ONGOING OPERATIONS 2001 COMPARED TO 2000

SINGLE FAMILY SEGMENT

The results of the single family operations for the years ended 2000 and
2001 comparatively, were as follows (in thousands):

Revenue from continuing single family operations increased $29.8 million or
10.6% from $281.6 million in 2000 to $311.4 million in 2001. The increase in
revenue was due to our Start-ups, increased volume at existing locations and
modest price increases initiated to cover increased operating costs. The largest
revenue increases came from increased starts in our Phoenix and southern
California markets offset by decreases in our central Texas markets. The
Start-ups generated $8.2 million of revenue in 2001. Gross profit from
continuing single family operations increased $6.5 million or 13.0% from $49.9
million in 2000 to $56.4 million in 2001. The increase in gross profit was
mainly due to the increase in volume both at existing locations and the
Start-ups. Gross margin increased slightly from 17.7% in 2000 to 18.1% in 2001.
Selling, general and administrative expenses increased $6.7 million or 33.7%
from $19.9 million in 2000 to $26.6 million in 2001. The increase in selling,
general and administrative expenses was mainly due to the increase in health and
business insurance costs and additional costs associated with Start-ups.
Goodwill amortization increased slightly from $1.7 million in 2000 to $1.8
million in 2001. Income from single family operations decreased slightly from
$28.2 million in 2000 to $28.0 million in 2001.

MULTIFAMILY SEGMENT

The results of the multifamily operations for the years ended 2000 and 2001
comparatively, were as follows (in thousands):

Revenue from multifamily operations increased $28.8 million or 19.6% from
$146.9 million to $175.7 million for the years ended December 31, 2000 and 2001,
respectively. The increase in revenue was due to the general strength of our
southern California and central Florida markets offset by a lack of demand in
our Texas markets. Gross profit from multifamily operations decreased slightly
from $35.0 million in 2000 to $34.3 million in 2001. Gross margin decreased from
23.8% in 2000 to 19.5% in 2001. The decrease in gross margin was primarily
attributable to increased competition and increases in certain material and
labor costs. General and administrative expenses for 2001 were $13.5 million
versus $11.3 million in 2000, an increase of $2.2 million or 19.5% which was in
line with the revenue increase. Goodwill amortization increased slightly

20

from $2.1 million in 2000 to $2.2 million in 2001. Income from continuing
multifamily operations decreased $2.9 million or 13.4% to $18.7 million in 2001
from the previous year's amount of $21.6 million.

COMMERCIAL SEGMENT

The results of the commercial operations for the years ended 2000 and 2001
comparatively, were as follows (in thousands):

Revenue from ongoing commercial operations decreased $13.4 million or 12.5%
from $107.5 million to $94.1 million for the years ended December 31, 2000 and
2001, respectively. The decrease in revenue was mainly due to a segment-wide
focus on higher margin contracts starting mid-year 2001. Gross profit from
ongoing commercial operations decreased to $8.9 million in 2001 from $11.3
million in 2000, a reduction of $2.4 million or 21.2%. The decrease in gross
profit was primarily attributable to increased competition, lower demand and
increases in certain material and labor costs. Gross margin decreased from 10.5%
in 2000 to 9.5% in 2001. Selling, general and administrative expenses decreased
$0.7 million or 10.4% from $6.7 million in 2000 to $6.0 million in 2001. The
decrease in selling, general and administrative expenses from ongoing commercial
operations was due to reductions in personnel and other costs made to reduce
overhead costs at these locations. Goodwill amortization stayed constant at $1.7
million for both 2000 and 2001. Income from the ongoing commercial segment
operations decreased $1.7 million or 58.6% to $1.2 million in 2001 from the
previous year's amount of $2.9 million.

CORPORATE

Selling, general and administrative expense at corporate increased $5.9,
million from $6.9 million to 2000 to $12.8 million in 2001. During 2001, we
incurred approximately $4.6 million in additional insurance costs above the
amounts allocated to the segments. These costs were captured at corporate in
2001.

OTHER CONSOLIDATED ITEMS REQUIRED TO RECONCILE TO NET INCOME

Other expense, net, decreased $1.6 million, from $19.0 million to $17.4
million. The decrease is primarily due to a $1.4 million charge in 2000 related
to the write-off of transaction costs associated with the repurchase and early
extinguishment of $30.0 million of the Senior Subordinated Notes. This amount
was previously classified as an extraordinary loss on the early extinguishment
of debt, however, pursuant to SFAS 145, the amount was reclassified to Other
expense. For additional discussion, see note 2 to the consolidated financial
statements.

The provision for income taxes decreased $4.2 million reflecting our lower
taxable income in 2001.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2002, AMPAM had $51.1 million in working capital and
$154.7 million of outstanding indebtedness, including capital lease obligations
totaling $0.9 million.

21

For the year ended December 31, 2002, net cash provided by operating
activities was $6.8 million. Despite the $23.1 million loss before taxes in the
shutdown and discontinued operations, no additional net borrowings were
necessary from the bank under the Credit Facility. Cash used in investing
activities was $2.2 million for the year ended December 31, 2002, primarily for
purchases of property and equipment offset by proceeds received on the sale of
property and equipment. Cash used in financing activities for the year ended
December 31, 2002 was $3.6 million. The Company redeemed half of the Series A
Redeemable Preferred Shares. As discussed in Item 3., in settlement of a
lawsuit, the Company received all of the preferred stock held by the defendants
and related parties and the Company paid the defendants $3.1 million. As of
March 12, 2002, the defendants and their related parties held 524,410 shares of
preferred stock with a liquidation value of approximately $6.8 million. The
settlement also included approximately $0.5 million in undeclared preferred
dividends that were due to the defendants through March 31, 2002. The difference
between the settlement amount and par value of the preferred stock was reflected
as an increase in additional paid in capital.

For the year ended December 31, 2001, net cash provided by operating
activities was $22.6 million. Cash used in investing activities was $7.8 million
for the year ended December 31, 2001, primarily for purchases of property and
equipment and payments of earnout clauses contained in the purchase agreements
of the Founding Companies, offset by proceeds received on the sale of property
and equipment. No additional earnout payments are due the founders. Cash used in
financing activities for the year ended December 31, 2001 was $13.2 million. Net
repayments of the Bank Credit Facility of $10.0 million were made during the
year. Additionally, the Company made payments to the former stockholders of
Christianson, the accounting acquiror, under earnout agreements contained in the
purchase agreement. These payments were treated as distributions.

The Company's Credit Facility, with a total commitment of $84.0 million, as
amended, matures on March 31, 2004. Pursuant to the March 28, 2003 amendment,
the Credit Facility bears interest, at the option of the Company, at the base
rate of the arranging bank plus an applicable margin or at LIBOR, plus an
applicable margin. The applicable margin is 4.50% above LIBOR or 3.50% above the
agent bank's base rate. As of December 31, 2002, the Company had borrowings of
$60.0 million and outstanding letters of credit of $6.0 million, leaving $18.0
million available under the Credit Facility. As of February 28, 2003, the
Company had borrowings of $77.0 million and outstanding letters of credit of
$6.0 million, leaving $1.0 million available under the Credit Facility, however,
the Company also had cash on hand of $6.7 million. The Company makes semi-annual
interest payments on the Senior Subordinated Notes of $5.5 million on April 15
and October 15 of each year. Based on current cash flow projections, the Company
expects to have sufficient liquidity to make its April 15, 2003 semi-annual
interest payment on the Senior Subordinated Notes.

The Credit Facility requires the Company to maintain compliance with
certain specified financial covenants including maximum ratios of funded debt to
EBITDA, a minimum fixed charge coverage ratio, a minimum net worth, a capital
expenditure covenant, minimum EBITDA and other restrictive covenants.
Additionally, the terms of the Credit Facility limit the ability of the Company
to incur additional indebtedness, dispose of assets, make acquisitions or other
investments, and to make various other payments. Because losses from the
shutdown and discontinued operations exceeded the amount allowed in the amended
Credit Facility, the Company was not in compliance with its loan covenants as of
December 31, 2002. On March 28, 2003, an amendment to the Credit Facility was
executed which, among other things, waived the non-compliance that existed at
December 31, 2002 and amended certain covenants prospectively. The Company
believes that it will meet the amended covenants. As a condition of the
amendment, certain fees were paid and the interest rate on the Credit Facility
was increased by 0.5%. Additionally, if the Company does not repay its
obligation under the Credit Facility by July 31, 2003, an additional 1% fee will
be due the banks.

As of April 1, 2002, the holders of the remaining Series A Redeemable
Preferred Stock, "put" the shares to the Company in accordance with the terms of
designation of such shares in the Company's Certificate of Incorporation. The
redemption price per share will be equal to the liquidation value ($13 per
share) plus accrued and unpaid dividends through the date of redemption. At
December 31, 2002, there were undeclared dividends of approximately $0.3 million
as calculated pursuant to the Certificate. For further discussion, see notes 9
and 13 to the consolidated financial statements.

22

Restrictions within the terms of the Company's Credit Facility preclude
redemption of the preferred stock and the payment of further dividends. Because
the preferred stock has been put to AMPAM, the liquidation value of these shares
has been classified as "Other long-term liabilities" on the balance sheet as of
December 31, 2002. On or about January 22, 2003, the remaining preferred
stockholders initiated a binding arbitration proceeding against the Company
seeking, among other things, specific performance by the Company to purchase all
of their preferred stock. The Company intends to defend the arbitration
vigorously but can make no representation as to the outcome of the arbitration.

Additionally, because the Company has not purchased the preferred stock,
pursuant to the terms of the preferred stock designation, the Company may not
engage in the following activities without the affirmative vote of not less than
a majority of the holders of the preferred stock, voting together as a single
class:

(i) incur any additional indebtedness for borrowed money other than
borrowings under any credit facility to which the Company is a party at
such time and as in effect when any redemption payment becomes due and is
unpaid or at the time any dividend payment becomes due and is unpaid;

(ii) effect (or make any agreement or become obligated to effect) any
(a) sale, lease, assignment, transfer or other conveyance of the assets of
the Company or its subsidiaries which individually or in the aggregate
would constitute a significant subsidiary, (b) consolidation or merger
involving the Company or any of its subsidiaries, or (c) dissolution,
liquidation or winding-up of the Company or any of its subsidiaries;
provided however that in no event shall the Company effect any sale, lease,
assignment, transfer or other conveyance of the assets of the Company or
its subsidiaries to affiliates of the Company;

(iii) make (or permit any subsidiary to make) any loan or advance to,
or own any stock or other securities of, any subsidiary or other
corporation, partnership, or other entity unless it is wholly owned by the
Company and except for any such loans and advances which do not in the
aggregate exceed $250,000;

(iv) make any loan or advance to any person, including, without
limitation, any employee or director of the Company or any subsidiary,
except advances and similar expenditures in the ordinary course of
business; or

(v) acquire, by purchase, exchange, merger or otherwise, all or
substantially all of the properties or assets of any other corporation or
entity.

The Company's capital expenditure budget for 2003 is approximately $2.0
million. These expenditures primarily relate to the purchase of vehicles and
equipment. The capital expenditures are expected to be funded from cash flows
from operations and borrowings under the Credit Facility. Capital expenditures
for the year ended December 31, 2002, were approximately $3.7 million.

AMPAM is attempting to find alternative sources of borrowings to repay the
Credit Facility which is due March 31, 2004. There are no assurances that such
borrowings will be available to the Company. AMPAM utilizes its cash flow from
operations and borrowings under the Credit Facility to provide cash to enable
the Company to meet its working capital needs, debt service requirements and
planned capital expenditures for property and equipment

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets." SFAS 142, effective January 1, 2002, established new
accounting and reporting requirements for goodwill and other intangible assets
and addressed the accounting and reporting for acquired goodwill and other
intangible assets. It also provides that goodwill should not be amortized, but
must be tested for impairment annually or more frequently if circumstances
indicate potential impairment. SFAS 142 also required the Company to complete a
transitional goodwill impairment test within six months from the date of
adoption and at least annually thereafter. Under SFAS 142, the impairment
adjustment, if any, recognized at adoption of the new rules was to be reflected
as a cumulative effect of a change in accounting principle in the statement of
income. Impairment adjustments recorded subsequently are be required to be
recognized as an operating expense. On an ongoing basis (absent any impairment
indicators), the Company will perform impairment tests annually.

23

In the first quarter of 2002, goodwill was tested for impairment by
comparing the fair value of each business segment with its carrying value. Based
on the impairment tests performed, the Company recognized a charge of $34.6
million (net of tax benefit) in the first quarter of 2002 to reduce the carrying
value of goodwill associated with the commercial segment to its implied fair
value. This adjustment was reflected as a cumulative effect of change in
accounting principle in the first quarter 2002 statement of operations. Due to
the further deterioration of the commercial segment in 2002, AMPAM re-evaluated
the carrying value of the goodwill for each segment as of December 31, 2002.
Upon completion of the evaluation, the Company recorded an impairment of the
remaining goodwill related to the commercial segment of $12.7 million in
December 2002. Because the expensing of goodwill is almost entirely
non-deductible for tax purposes, neither of these expenses created a material
tax benefit for the Company. At December 31, 2002, the Company had $107.2
million of remaining goodwill on the balance sheet.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." It addresses the financial
accounting and reporting for the impairment of long-lived assets. This statement
supersedes Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
In accounting for the discontinued and shutdown operations, the Company has
followed the guidelines set forth by SFAS 144. For additional discussion, see
notes 15 and 16 to the consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, amends SFAS No. 4 and SFAS No.
64, to require that gains and losses from the extinguishment of debt generally
be classified within continuing operations. The provisions of SFAS No. 145 are
effective for fiscal years beginning after May 15, 2002 and early application is
encouraged. At December 31, 2002, "Other Noncurrent Assets" included $1.2
million of capitalized costs associated with the Credit Facility and $2.4
million of capitalized costs associated with the Senior Subordinated Notes.
Additionally, the discount related to the Senior Subordinated Notes was $1.2
million at December 31, 2002. These amounts are amortized as a component of
interest expense. Historically, these items were presented as an extraordinary
gain or loss upon early extinguishment of the related indebtedness. Under SFAS
No. 145, such items will be expensed within income from continuing operations if
the related indebtedness is retired. The Company has reclassified prior period
amounts to conform with SFAS 145.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging
Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity". This standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. This statement is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company has followed
the requirements of SFAS No. 146 in accounting for the discontinued and shutdown
locations. For additional discussion, see notes 15 and 16 to the consolidated
financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure an amendment of FASB Statement No.
123, 'Accounting for Stock-Based Compensation' ", to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. It also amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method of accounting for stock-based
compensation and the effect of the method used on reported results. Certain
disclosure requirements under SFAS No. 148 are effective for all financial
statements issued for fiscal years ending after December 15, 2002. This
statement did not have any impact on the Company's consolidated financial
statements as AMPAM has adopted the "disclosure only" provisions of SFAS No.
148.

24

CRITICAL ACCOUNTING POLICIES

In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," AMPAM has identified the most
critical accounting principles upon which the Company's financial statements
depend. AMPAM has determined the critical principles by considering accounting
policies that involve the most complex decisions or assessments. The Company
identified the most critical accounting policies to be those related to use of
estimates, revenue recognition and goodwill.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions by management in determining the reported amounts
of assets and liabilities, disclosures of contingent liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Significant estimates are used to determine the
Company's revenue on uncompleted contracts. These estimates also impact the
current asset "Costs and estimated earnings in excess of billings on uncompleted
contracts" and the current liability "Billings in excess of costs and estimated
earnings on uncompleted contracts". See REVENUE RECOGNITION for a further
discussion. Estimates of the ultimate liability for losses under self insured
insurance programs are also included in the Company's consolidated financial
statements. These estimates are developed based on the Company's historical
losses and industry standard claims growth factors. Significant estimates are
also used for goodwill impairment calculations, see GOODWILL for a further
discussion. Actual results could differ from those estimates.

REVENUE RECOGNITION

AMPAM recognizes revenue from construction contracts on the
percentage-of-completion method measured by the percentage of cost incurred to
total estimated costs for each contract. Contract costs include all direct
material and labor costs. Changes in job performance, job conditions, estimated
profitability, and final contract settlements may result in revisions to costs
and income, the effects of which are recognized in the period the revisions are
determined. If the revised estimated direct costs will result in a "loss"
contract, an accrual is made to record the future loss at that time. The current
asset, "Costs and estimated earnings in excess of billings on uncompleted
contracts," represents estimated revenue recognized in excess of amounts billed.
The current liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of estimated revenue
recognized.

GOODWILL

AMPAM evaluates the carrying value of its goodwill and other intangible
assets at least annually. Potential goodwill impairment is assessed using a
discounted cash flow methodology. The Company uses estimates to determine future
discounted cash flows. Estimates used include, estimates of future cash flows,
future short-term and long-term growth rates, and weighted average cost of
capital.

25

ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

AMPAM is exposed to various market risks primarily related to potential
adverse changes in interest rates as discussed below. In the normal course of
business, the Company employs established policies and procedures to manage this
risk.

The Company's exposure to changes in interest rates primarily results from
its short-term and long-term debt with both fixed and floating interest rates.
The Company's debt with fixed interest rates consists of Senior Subordinated
Notes and capital leases. Debt with variable interest rates consists primarily
of the Credit Facility. The following table presents the Company's future
payments under financial instruments, related average interest rates (if
applicable), minimum required payments due under existing operating leases by
period and the fair market value for each debt instrument as valued at December
31, 2002 ($ in thousands).

If market interest rates were to increase immediately and uniformly by 100
basis points from levels as of December 31, 2002, the related annual interest
expense would increase by approximately $0.6 million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

26

To the Board of Directors and Stockholders of American Plumbing & Mechanical,
Inc.:

We have audited the accompanying consolidated balance sheets of American
Plumbing & Mechanical, Inc. and its subsidiaries (the "Company") as of December
31, 2002 and 2001, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
2002 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for goodwill to conform with Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets."

DELOITTE & TOUCHE LLP

Houston, Texas
March 28, 2003

27

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial
statements.
28

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of these consolidated financial
statements.
29

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial
statements.
30

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of these consolidated financial
statements.
31

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION

American Plumbing & Mechanical, Inc. (collectively with its subsidiaries
"AMPAM" or the "Company"), is the largest company in the United States focused
primarily on the residential plumbing and heating, ventilation and air
conditioning (HVAC) contracting services industry. AMPAM also provides
commercial mechanical contracting services. American Plumbing & Mechanical, Inc.
(a Delaware corporation), was organized in June 1998, and acquired ten U.S.
businesses (the "Founding Companies") on April 1, 1999. The acquisitions were
accounted for using the purchase method of accounting with Christianson
Enterprises, Inc. and affiliates ("Christianson") being reflected as the
accounting acquiror. Subsequently, the Company acquired the outstanding stock of
three additional companies and the assets of a fourth company. The Company
currently serves its customers in 18 states out of 35 operating facilities.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

All significant intercompany transactions have been eliminated in
consolidation.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts reflected in the accompanying balance sheet for cash,
accounts receivable, costs and estimated earnings in excess of billings on
uncompleted contracts, accounts payable and accrued expenses, and billings in
excess of costs and estimated earnings on uncompleted contracts approximate fair
value due to the short term nature of the instruments. As of December 31, 2002,
the Senior Subordinated Notes traded at 30% of par value reflecting an
approximate fair value of $30 million. As the Credit Facility has a variable
interest rate, the Company believes its carrying value approximates fair value.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions by management in determining the reported amounts
of assets and liabilities, disclosures of contingent liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

INVENTORIES

Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market, which
approximates the first in, first out method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated over the expected life of
the asset. Upon retirement or disposition of property and equipment, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the statement of income.
32

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

LONG-LIVED ASSETS

In the event that facts and circumstances indicate that property and
equipment or other long-lived assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future discounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment is necessary. The effect
of any impairment would be to expense the difference between the estimated fair
value of such asset and its carrying value.

GOODWILL

The Company recorded as goodwill the excess of the purchase price paid for
business acquisitions over the fair value of the net assets acquired. Through
December 31, 2001, goodwill was amortized to income on a straight-line basis
over a 30 year period. On January 1, 2002, AMPAM adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets". See
"Recent Accounting Pronouncements" below.

DEBT ISSUANCE COSTS

Debt issuance costs as of December 31, 2001 and 2002 of approximately $3.6
million, related to AMPAM's Senior Subordinated Notes and the Bank Credit
Facility, are included in Other Noncurrent Assets. These capitalized costs are
amortized to interest expense over the scheduled maturity of the debt, which
approximates the effective interest method. For the years ended December 31,
2000, 2001 and 2002, approximately $0.9 million, $0.8 million and $1.2 million
was amortized to interest expense, respectively. In conjunction with the $30.0
million repurchase of the Senior Subordinated Notes in 2000, $1.4 million was
charged to expense pursuant to SFAS 145.

REVENUE RECOGNITION

AMPAM recognizes revenue from construction contracts on the
percentage-of-completion method measured by the percentage of cost incurred to
total estimated costs for each contract. Contract costs include all direct
material and labor costs. Changes in job performance, job conditions, estimated
profitability, and final contract settlements may result in revisions to costs
and income, the effects of which are recognized in the period the revisions are
determined. If the revised estimated direct costs will result in a "loss"
contract, an accrual is made to record the future loss at that time.

The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents estimated revenue recognized in excess of
amounts billed. The current liability, "Billings in excess of costs and
estimated earnings on uncompleted contracts," represents billings in excess of
estimated revenue recognized.

WARRANTY COSTS

For certain contracts, the Company warrants labor for one year after
completion of a plumbing or air conditioning installation. A reserve for
warranty costs is recorded based upon the historical level of warranty claims
and management's estimate of future costs. (See note 6).

PROVISION FOR DOUBTFUL ACCOUNTS

The Company provides an allowance for doubtful accounts based upon an
estimate of uncollectible accounts. (See note 6).

33

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

Deferred tax assets and liabilities are recorded for future tax
consequences of temporary differences between the financial reporting and tax
bases of assets and liabilities, and are measured using enacted tax rates. (See
note 8).

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board "FASB" issued
Statement of Financial Accounting Standards "SFAS" No. 142 "Goodwill and Other
Intangible Assets." SFAS 142, effective January 1, 2002 established new
accounting and reporting requirements for goodwill and other intangible assets
and addressed the accounting and reporting for acquired goodwill and other
intangible assets. It also provides that goodwill should not be amortized, but
must be tested for impairment annually or more frequently if circumstances
indicate potential impairment. SFAS 142 also required the Company to complete a
transitional goodwill impairment test within six months from the date of
adoption and at least annually thereafter. Under SFAS 142, the impairment
adjustment, if any, recognized at adoption of the new rules was to be reflected
as a cumulative effect of change in accounting principle in the statement of
income. Prospectively, goodwill impairment will be assessed using a discounted
cash flow methodology. Impairment adjustments recorded subsequently are required
to be recognized as an operating expense.

Significant estimates used in the methodologies include estimates of future
cash flows, future short-term and long-term growth rates, and weighted average
cost of capital. On an ongoing basis (absent any impairment indicators), the
Company will perform impairment tests annually.

In the first quarter of 2002, goodwill was tested for impairment by
comparing the fair value of each business segment with its carrying value. Based
on the impairment tests performed, the Company recognized a charge of $34.6
million (net of tax) in the first quarter of 2002 to reduce the carrying value
of goodwill associated with the commercial segment to its implied fair value.
This adjustment was reflected as a cumulative effect of a change in accounting
principle in the first quarter 2002 statement of income. Due to the
deterioration of the commercial segment in 2002, AMPAM re-evaluated the carrying
value of the goodwill for each segment as of December 31, 2002. Upon completion
of the evaluation, the Company recorded an impairment of the remaining goodwill
related to the commercial segment of $12.7 million in December 2002. Because the
expensing of goodwill is almost entirely non-deductible for tax purposes,
neither of these expenses created a material tax benefit for the Company. At
December 31, 2002, the Company had $107.2 million of goodwill remaining on the
balance sheet.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." It addresses the financial
accounting and reporting for the impairment of long-lived assets. This statement
supersedes Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
In accounting for the discontinued and shutdown operations, the Company has
followed the guidelines set forth by SFAS 144. (See notes 15 and 16).

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, amends SFAS No. 4 and SFAS No.
64, to require that gains and losses from the extinguishment of debt generally
be classified within continuing operations. The provisions of SFAS No. 145 are
effective for fiscal years beginning after May 15, 2002 and early application is
encouraged. At December 31, 2002, "Other Noncurrent Assets" included $1.2
million of capitalized costs associated with the Credit Facility and $2.4
million of capitalized costs associated with the Senior Subordinated Notes.
Additionally, the discount

34

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

related to the Senior Subordinated Notes was $1.2 million at December 31, 2002.
These amounts are amortized as a component of interest expense. Historically,
these items were presented as an extraordinary gain or loss upon early
extinguishment of the related indebtedness. Under SFAS No. 145, such items are
expensed within income from continuing operations if the related indebtedness is
retired. In 2000, $0.9 million loss from the early extinguishment of debt was
recorded as an extraordinary item, net of tax benefit of $0.5 million. In 2002,
the entire loss of $1.4 million was reflected in Other income (expense) with the
tax benefit in the provision for income tax.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging
Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity". This standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. This statement is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company has followed
the requirements of SFAS No. 146 in accounting for the discontinued location.
(See note 15).

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure an amendment of FASB Statement No.
123, 'Accounting for Stock-Based Compensation' ", to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. It also amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method of accounting for stock-based
compensation and the effect of the method used on reported results. Certain
disclosure requirements under SFAS No. 148 are effective for all financial
statements issued for fiscal years ending after December 15, 2002. This
statement did not have any impact on the Company's Consolidated Financial
Statements as we have adopted the "disclosure only" provisions of SFAS No. 148.
(See note 10).

OTHER COMPREHENSIVE INCOME

Other comprehensive income refers to revenue, expenses, gains and losses
that under generally accepted accounting principles are included in
comprehensive income but are excluded from net income as these amounts are
recorded directly as an adjustment to shareholders' equity. The Company's other
comprehensive loss in 2001 was attributed to adjustments for unrealized losses,
net of tax, on the interest rate swap. (See note 5).

USE OF DERIVATIVES

The Company may use derivative instruments, such as interest rate swaps, to
manage its exposure to variable interest rate risk. Net payments or receipts
under the Company's interest rate swap agreements are recorded as adjustments to
interest expense. At December 31, 2002, the company had no derivative
instruments.

RECLASSIFICATIONS

Certain reclassifications have been made to the prior-year financial
statements to conform to the current-year presentation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

Accounts receivable consist of the following (in thousands):

The Company usually collects amounts recorded as retainage within one year.

Installation contracts in progress are as follows (in thousands):

Accounts payable and accrued expenses consist of the following (in
thousands):

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AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consists of the following (in thousands):

Capital leases of approximately $2.6 million and $2.4 million as of
December 31, 2001, and 2002, are included in vehicles and machinery equipment
and building and leasehold improvements, as appropriate. The accompanying
consolidated statements of income reflect depreciation and amortization expense
of $5.2 million, $5.6 million and $5.3 million for the years ended December 31,
2000, 2001, and 2002, respectively. These amounts are exclusive of the
amortization of goodwill. Capital lease amortization expense of $0.6 million for
1999 and 2000 and $0.3 million for 2002 was included in depreciation expense.

5. LONG TERM DEBT

Long-term debt consists of the following (in thousands):

At December 31, 2002, future principal payments of long-term debt are as
follows (in thousands):

Year ending December 31 --
2003........................................................ $ 113
2004........................................................ 60,109
2005........................................................ 39
2006........................................................ 35
2007........................................................ 44
Thereafter................................................ 94,369
--------
$154,709
========

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AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SENIOR SUBORDINATED NOTES

On May 19, 1999, the Company completed an offering of $125.0 million of
11 5/8% senior subordinated notes due in 2008 (the "Senior Subordinated Notes").
The Senior Subordinated Notes are subordinated to all existing and future senior
indebtedness of the Company and are guaranteed by each of the Company's current
and future subsidiaries. Separate financial information of the subsidiary
guarantors is not presented as the parent company has no independent assets or
operations, and the guarantees as to the Senior Subordinated Notes are full and
unconditional and joint and several. There are no restrictions on the ability of
the parent company to obtain funds from the subsidiary guarantors. The Company
has the option to redeem the Senior Subordinated Notes at any time on or after
2004 at specified redemption prices. Additionally, the Company is required under
certain circumstances to offer to repurchase the Senior Subordinated Notes at
specified redemption prices in the event of a change in control. The terms of
the Senior Subordinated Notes limit the ability of the Company to, among other
things, incur additional indebtedness, dispose of assets, make acquisitions,
make other investments, pay dividends and to make various other payments. The
Senior Subordinated Notes are reflected in the accompanying balance sheet net of
an original issuance discount of approximately $1.2 million which is being
amortized to interest expense over the term of the bonds. The Company makes
semi-annual interest payments on the Senior Subordinated Notes of $5.5 million
on April 15 and October 15 of each year.

During the third and fourth quarters of 2000, AMPAM repurchased
approximately $30.0 million in face value of its outstanding 11 5/8% Senior
Subordinate Notes at various prices ranging from 95.5% to 100.0% of par value.
In conjunction with the repurchase, the Company recognized a loss of $1.4
million related to capitalized issuance costs attributable to the notes
repurchased and transaction costs associated with the repurchase. All notes
repurchased were retired.

THE BANK CREDIT FACILITY

The bank credit facility, as amended, (the "Credit Facility") is a senior
secured revolving commitment in an aggregate principal amount of $84.0 million.
The Credit Facility was used to (a) fund acquisitions, (b) repurchase Senior
Subordinate Notes, (c) repurchase Class B common stock (d) redeem preferred
stock and (e) provide working capital. The Credit Facility bears interest, at
the option of the Company, at the base rate of the arranging bank plus an
applicable margin or at LIBOR, plus an applicable margin. The applicable margin
is 4.50% above LIBOR or 3.50% above the agent bank's base rate. Interest on base
rate loans is payable monthly in arrears and interest on LIBOR loans is payable
at the end of each borrowing period. In 2001, the Company amended and restated
its Credit Facility to extend the maturity to March 31, 2004. All principal
amounts borrowed will be payable in full at maturity. The Credit Facility is
secured by (1) the accounts receivable, inventory, equipment and other personal
property of the Company, and (2) all of the capital stock owned by AMPAM of its
existing or later-formed domestic subsidiaries. The Company is required to make
prepayments or commitment reductions on the Credit Facility under certain
circumstances. As of December 31, 2002, the average interest rate on the Credit
Facility was 5.44%.

The Credit Facility requires the Company to maintain compliance with
certain specified financial covenants including maximum ratios of funded debt to
EBITDA, a minimum fixed charge coverage ratio, a minimum net worth, a capital
expenditure covenant, minimum EBITDA and other restrictive covenants.
Additionally, the terms of the Credit Facility limit the ability of the Company
to incur additional indebtedness, dispose of assets, make acquisitions or other
investments, and to make various other payments. Because losses from the
shutdown and discontinued operations exceeded the amount allowed in the amended
Credit Facility, the Company was not in compliance with its loan covenants as of
December 31, 2002. On March 28, 2003, an amendment to the Credit Facility was
executed which, among other things, waived the non-compliance that existed at
December 31, 2002 and amended certain covenants prospectively. The Company
believes that it will meet the amended covenants. As a condition of the
amendment, certain fees

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AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

were paid and the interest rate on the Credit Facility was increased by 0.5%.
Additionally, if the Company does not repay its obligation under the Credit
Facility by July 31, 2003, an additional 1% fee will be due the banks.

As of December 31, 2002, the Company had borrowings of $60.0 million and
outstanding letters of credit of $6.0 million, leaving $18.0 million in
availability under the Credit Facility.

INTEREST RATE SWAP

Effective January 2, 2001, and extended effective September 28, 2001, in
order to mitigate the interest rate risk associated with its variable rate debt,
the Company entered into an interest rate swap with a notional amount of $30.0
million that expired on September 28, 2002. At December 31, 2001, the Company
had a derivative liability of $0.3 million based on quoted market rates,
included in the accounts payable and accrued liabilities section of the balance
sheet. A corresponding amount, net of income tax benefit of $0.1 million was
recorded as a component of stockholders' equity as accumulated other
comprehensive loss. The comprehensive loss in 2001 was realized in 2002 as the
swap expired.

6. BALANCE SHEET RESERVE ACCOUNTS

WARRANTY RESERVE

The changes in the consolidated warranty liability are as follows:

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The changes in the consolidated allowance for doubtful accounts are as
follows:

39

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. OPERATING LEASES

The Company leases various facilities under noncancelable operating leases
from related parties and believes such leases to be commercially reasonable. The
Company also leases certain facilities, vehicles and equipment under operating
leases from third parties. Lease expiration dates vary, and future minimum lease
payments are as follows (in thousands):

Rent payments to related parties were $2.4 million, $2.0 million, and $2.4
million for the years ended December 31, 2000, 2001 and 2002, respectively.
Total rent expense was $5.7 million, $8.6 million, and $6.3 million for the
years ended December 31, 2000, 2001 and 2002, respectively.

8. INCOME TAXES

Federal and state income taxes are as follows (in thousands):

40

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 35 percent to income
before provision for income taxes as follows (in thousands):

Deferred income taxes result from temporary differences in the recognition
of income and expenses for financial reporting purposes and for tax purposes.
The tax effects of these temporary differences, representing deferred tax assets
and liabilities, result principally from the following (in thousands):

The net deferred tax assets and liabilities are comprised of the following
(in thousands):

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AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. STOCKHOLDERS' EQUITY

COMMON STOCK

At December 31, 2002, AMPAM's $.01 par value common stock was not traded on
a public market. It is held by private investors, management, founders and
relatives of founders, employees, and directors. Of these common shares,
100,000,000 shares are authorized and 13,211,383 shares are issued and
outstanding.

Pursuant to the terms of the acquisition agreements of the Founding
Companies and the three subsequent stock acquisitions, on the third anniversary
of their respective acquisitions, certain stockholders were entitled to require
the Company to repurchase up to ten percent of their stock on an annual basis
until their total paid cash consideration was equal to fifty percent of their
total consideration. The agreed upon repurchase price was $13 per share.
Effective as of March 26, 2002, the majority of the stockholders with such
repurchase rights amended their respective acquisition agreements to provide
that the repurchase will not occur until the Company has such funds available,
whether through one or more private or commercial borrowings, a public or
private sale of securities or assets of the Company, or any other method of
obtaining available funds deemed to be in the best interest of the Company by
its Board of Directors.

CLASS B COMMON STOCK

In connection with the organization and initial capitalization of AMPAM,
the Company issued 2,092,401 shares of Class B common stock at $.01 par value.
AMPAM subsequently issued 331,116 additional shares of Class B common stock to
certain management of AMPAM and other individuals. The shares of Class B common
stock have rights similar to shares of common stock, except the Class B shares
are entitled to elect one member of the board of directors, are entitled to
one-fourth of one vote for each share held on all other matters, and are
subordinate in liquidation to all other classes of stock.

Each share of Class B common stock will automatically convert to common
stock (as adjusted proportionately to give effect to any stock dividends,
combinations, splits or other similar events with respect to the common stock)
on a share-for-share basis in the event AMPAM consummates any of the following
events: (i) an initial public offering of common stock; (ii) any sale of all or
substantially all of the Company's assets in one transaction or a series of
related transactions; (iii) any merger or consolidation that involves AMPAM in
which AMPAM is not the surviving entity; or, (iv) any transaction after which
the common stock and common stock equivalents held by persons other than the
holders of common stock as of April 1, 1999 constitutes 50% or more of the
common stock outstanding as of the date of the consummation of such transaction.
Since April 1, 2002, AMPAM has had the option to redeem all outstanding shares
of Class B common stock for $.01 a share but has decided not to do so at this
time.

SERIES A REDEEMABLE PREFERRED STOCK

At December 31, 2002, 524,410 shares of preferred stock were outstanding.
The holders of the preferred stock are entitled to receive dividends at an
annual rate of 10% based on the liquidation value (as defined below). The
dividends are payable in cash semiannually in arrears. The dividend payment
dates are June 30 and December 31. The holders of the preferred stock are also
entitled to receive additional dividends on an equal share-for-share basis with
the common stock to the extent that the Company has paid cumulative dividends on
a base amount of $13.00 per share of common stock, as proportionately adjusted
for any stock dividends, combinations, splits or other similar events with
respect to such shares. However, the right of the holders of the preferred stock
to receive this preferential dividend will extinguish 40 days after the 25th day
following the date of the final prospectus related to an initial public offering
of the Company's common stock. After, such time, the holders will be entitled to
share equally, on a per share basis, in any dividends of the Company with the
holders of common stock. The preferred stock is senior to all other classes of
the Company's capital stock (including the common stock) in right of
liquidation, dividends and distributions.

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AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The liquidation value of the preferred stock is $13.00 per share, plus
accrued and unpaid dividends, as adjusted proportionately for any stock
dividends, combinations, splits, or other similar events with respect to such
shares, at liquidation value. In addition, the preferred stock shares equally,
on a per-share basis, with the common stock after each share is paid the common
stock base amount, plus a cumulative amount of dividends equal to 10% from the
later to occur on the date of issuance of the preferred stock or the date of the
issuance of such share of common stock.

Except under certain circumstances, the preferred stock is not entitled to
vote as a separate class, but votes together with the holders of shares of all
other classes of common stock of the Company as one class on all matters
submitted to a vote of the Company's stockholders. Each holder of shares of
preferred stock is entitled to the number of votes equal to the largest number
of full shares of common stock into which all shares of preferred stock held by
such holder could be converted at the record date for the determination of the
stockholders entitled to vote on such matters. In all cases where the holders of
shares of preferred stock are required by law to vote separately as a class,
such holders are entitled to one vote for each such share.

On April 1, 2002, the remaining holders of the preferred stock exercised
their right to "put" their shares to the Company to redeem the preferred stock.
In accordance with the revised bank covenants, dividends on the preferred stock
have not been declared or paid since June 30, 2002. At December 31, 2002
dividends in arrears approximated $0.3 million. (See note 13.)

10. STOCK-BASED COMPENSATION

In February 1999, the Company's board of directors and stockholders
approved the Company's 1999 Stock Plan, or the "stock plan," which provides for
the granting or awarding of incentive or nonqualified stock options, stock
appreciation rights, restricted or phantom stock, and other incentive awards to
directors, officers, key employees and consultants of the Company. The number of
shares authorized and reserved for issuance under the stock plan is the greater
of 3.7 million shares or 15% of the aggregate number of shares of common stock
outstanding. The terms of the option awards will be established by the
Compensation Committee of the Company's Board of Directors. All options vest at
the rate of 20 percent per year, commencing on the first anniversary of the
grant date and will expire at the earliest of ten years from the date of grant,
three months following termination of employment other than due to death or
disability, or one year following termination of employment due to death or
disability.

For the options granted at $7.00 per share, compensation expense is being
recognized for the excess of the fair market value of the stock over the grant
price (compensation expense of $0.50 per share), in accordance with Accounting
Principles Board Opinion No. 25 ("APB 25"): Accounting for Stock Issued to
Employees. Approximately $0.3 million, $0.2 million and $0.1 million was
recognized as compensation expense for the years ended December 31, 2000, 2001
and 2002 respectively. Approximately $0.2 million and $0.1 million of
unamortized deferred compensation expense existed at December 31, 2001 and 2002,
respectively.

The Company uses the Black-Scholes pricing model to measure the pro-forma
compensation expense attributable to stock options granted to employees, based
on the following assumptions:

The weighted average fair value of the options granted in 2000, 2001 and
2002 was $2.20, $2.21, and $2.07 respectively. The Company has elected to follow
the disclosure only requirements of SFAS 148 and thus

43

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

will not record compensation expense for option issuances. Therefore, in
accordance with SFAS 148, the Company must disclose the proforma amounts as if
compensation expense had been recorded for all option issuances consistent with
SFAS 148. The Company's net income (loss) would have been reduced to the pro
forma amounts indicated below (in thousands):

The following table summarizes activity under the Company's stock option
plan:

As of December 31, 2002, approximately 1.5 million options for common stock
are available for grant under the Company's stock option plan.

The Company has reserved 108,928 shares of its common stock for issuance to
certain current and former employees pursuant to the Founding Companies
acquisition agreements.

11. EMPLOYEE BENEFIT PLANS

Prior to July 1, 2000, some of the Acquired Companies had 401(k) and
defined contribution profit-sharing plans in place. These plans had varied
contribution rates and vesting schedules. On July 1, 2000, AMPAM combined the
assets of the various plans into a unified AMPAM 401(k) plan. The Company
matches employee contributions to the 401(k) plan at varying rates. Company
contributions to the various plans in 2000 were $2.1 million. Contributions to
the AMPAM 401(k) plan in 2001 and 2002 were $2.1 million and $2.2 million,
respectively.

12. ACQUISITIONS

The Company has accounted for all of its acquisitions using the purchase
method of accounting. The assets acquired and liabilities assumed were recorded
at fair value. The excess of the purchase price over the

44

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

fair value of the net assets acquired was recorded as goodwill. The results of
operations of the acquired companies were included in the accompanying financial
statements from the date of acquisition.

In 2000 and 2001, the Company paid certain former owners of the acquired
companies the remaining amounts due under earnout provisions of the acquisition
agreements. No additional payments of this type are due.

On March 1, 2000, the Company acquired the stock of Lindy Dennis Industries
and related affiliates (collectively "LDI," renamed "AMPAM LDI"), headquartered
in Corona, California. The consideration paid by the Company for AMPAM LDI
consisted of 1,346,154 shares of the Company's common stock and approximately
$12.0 million in cash. The cash portion of the consideration was funded through
borrowings under the Company's existing Credit Facility.

13. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

In October 2001, AMPAM and its operating subsidiary AMPAM Christianson,
L.P. filed suit against two former stockholders of Christianson Enterprises who
were holders of approximately one-half of AMPAM's Series A Redeemable Preferred
Stock ("preferred stock") alleging, among other things, breaches of certain
provisions of the underlying acquisition agreement pursuant to which AMPAM
purchased Christianson Enterprises n/k/a AMPAM Christianson. In February 2002,
the defendants filed a counterclaim alleging, among other things, anticipatory
breach of the acquisition agreement. On April 1, 2002, the parties finalized a
settlement agreement and general release pursuant to which the defendants and
related parties tendered all of their preferred stock and AMPAM paid the
defendants and related parties $3.1 million. Upon transfer of consideration,
AMPAM retired the preferred stock and realized an increase in Additional Paid in
Capital of $3.8 million representing the liquidation value of the preferred
stock received net of the proceeds attributable to the preferred stock and costs
incurred to facilitate the settlement. As of April 1, 2002, the defendants and
their related parties held 524,410 shares of preferred stock with a liquidation
value of $6.8 million and were due approximately $0.5 million for outstanding
but undeclared dividends, all of which were included in the settlement. The
parties have no further duties, obligations, or liabilities to each other
related to the acquisition agreement or preferred stock and have released any
and all claims against each other.

Three remaining holders of preferred stock hold 524,410 combined shares.
The remaining preferred stockholders have exercised their right under the terms
of the preferred stock designation to require the Company to purchase all of
their preferred stock. Restrictions within the terms of the Company's Credit
Facility preclude redemption of the preferred stock and the payment of further
dividends. Because the preferred stock has been put to AMPAM, the liquidation
value of these shares has been classified as "Other long-term liabilities" on
the balance sheet as of December 31, 2002. On or about January 22, 2003, the
remaining preferred stockholders initiated a binding arbitration proceeding
against the Company seeking, among other things, specific performance by the
Company to purchase all of their preferred stock. The Company intends to defend
the arbitration vigorously but can make no representation as to the outcome of
the arbitration.

Additionally, because the Company has not purchased the preferred stock,
pursuant to the terms of the preferred stock designation, the Company may not
engage in the following activities without the affirmative vote of not less than
a majority of the holders of the preferred stock, voting together as a single
class:

(i) incur any additional indebtedness for borrowed money other than
borrowings under any credit facility to which the Company is a party at
such time and as in effect when any redemption payment becomes due and is
unpaid or at the time any dividend payment becomes due and is unpaid;

45

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(ii) effect (or make any agreement or become obligated to effect) any
(a) sale, lease, assignment, transfer or other conveyance of the assets of
the Company or its subsidiaries which individually or in the aggregate
would constitute a significant subsidiary, (b) consolidation or merger
involving the Company or any of its subsidiaries, or (c) dissolution,
liquidation or winding-up of the Company or any of its subsidiaries;
provided however that in no event shall the Company effect any sale, lease,
assignment, transfer or other conveyance of the assets of the Company or
its subsidiaries to affiliates of the Company;

(iii) make (or permit any subsidiary to make) any loan or advance to,
or own any stock or other securities of, any subsidiary or other
corporation, partnership, or other entity unless it is wholly owned by the
Company and except for any such loans and advances which do not in the
aggregate exceed $250,000;

(iv) make any loan or advance to any person, including, without
limitation, any employee or director of the Company or any subsidiary,
except advances and similar expenditures in the ordinary course of
business; or

(v) acquire, by purchase, exchange, merger or otherwise, all or
substantially all of the properties or assets of any other corporation or
entity.

The Company is also involved in other disputes or legal actions arising in
the ordinary course of business. Management does not believe the outcome of such
"ordinary course" legal actions will have a material adverse effect on the
Company's financial position or results of operations.

INSURANCE

On January 1, 2000, the Company became self insured for health care,
workers' compensation, and general, property and auto liability up to
predetermined amounts above which third party insurance applies. As of December
31, 2002, the Company has fully accrued for the expected costs under the self
insured programs. These accruals are based on industry development factors that
may change based upon AMPAM's actual claim experience. The Company is insured
through third party insurance for other types of exposures including an umbrella
policy up to specific limits. (See note 3.)

14. MAJOR CUSTOMERS AND RISK CONCENTRATION

For the years ended December 31, 2000, 2001 and 2002, no customer exceeded
10% of total revenue for AMPAM. For the year ended 2002, no customer exceeded
10% of the revenue for the multifamily segment. Although AMPAM's single family
residential and commercial segment each have a diverse customer base, the
largest single family customers combined accounted for approximately 13% of
revenue for the single family segment and the two largest commercial segment
customers accounted for approximately 29% of the 2002 revenue for the commercial
segment. AMPAM does not believe the loss of any one of these customers would
have a material adverse effect on the Company as a whole as revenue from these
particular customers accounted for 12% of the Company's consolidated revenue in
2002 with the largest individual customer accounting for 7% of consolidated
revenue.

For the year ended 2001, no single family or multifamily residential
customer exceeded 10% of the single family or multifamily residential revenue.
However, for the commercial segment, one customer accounted for 14% of revenue
for this segment. Although the loss of this one particular customer would
negatively impact the earnings of the commercial segment, AMPAM does not believe
the loss of this customer would have a material adverse effect on the Company,
taken as a whole, as revenue from this particular customer accounted for less
than 3% of the Company's total revenue. For the year ended 2000, no customer
exceeded 10% of the revenue for any individual segment.

In general, the Company performs its services under contract terms that
entitle it to progress payments and is typically, by law, granted a lien
interest on the work until paid. The Company is exposed to potential

46

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

credit risk related to changes in business and economic factors. However,
management believes that its contract acceptance, and billing and collection
policies are adequate to minimize the potential credit risk.

The Company's customers are primarily in the construction industry.
Accordingly, the Company is exposed to risks of fluctuations in construction in
the areas in which it operates.

15. DISCONTINUED OPERATIONS

In August 2002, management decided to discontinue the single family
operations in southern Virginia. Following the standards set by SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS 144"),
the Company did not expense the estimated future costs of the discontinued
operation at the time the decision was made. Under SFAS 144, the costs are
recorded in the statement of income under operations until the impaired asset
has been either completely disposed of or abandoned and all costs associated
with it have been recorded. At December 31, 2002, the discontinued southern
Virginia business unit ceased to operate. Accordingly, the results of this
operation were reflected as a loss on discontinued operations, net of tax
benefit in the statement of income for the year ended December 31, 2002, and
retroactively for the years ended December 31, 2001 and 2000.

The results of the discontinued operations were as follows:

The discontinued operations were abandoned except for a fixed asset of $0.2
million related to leasehold improvements of the leased facility. This amount is
included in the consolidated balance sheet at December 31, 2002. The leased
facility is for sale by the owner who, upon sale of the facility, has verbally
agreed to reimburse the Company for the amount of the leasehold improvements.

16. SHUTDOWN OPERATIONS

Also in August 2002, management decided to shut down the Company's
commercial operations in Sacramento, CA and Pensacola, FL. For the year ended
December 31, 2002, these operations have collectively lost $21.5 million on a
pretax basis. During 2003, management expects to incur an additional $2.5
million to $3.5 million pretax loss related to the shut down of these
operations. The major portion of these losses relate to our commercial
operations in Sacramento, CA. This operation expanded rapidly in late 2001 and
early 2002 growing from approximately 150 employees at September 30, 2001 to
approximately 450 employees at June 30, 2002. The loss at the shutdown locations
resulted from underbidding jobs, unfavorable changes in job estimates, and poor
field performance. Management expects the shutdown locations' operations to be
virtually completed by June 30, 2003. Loss reserves of $3.3 million have been
recorded at December 31, 2002 to reflect expected costs in excess of contract
revenue at our AMPAM Commercial Northwest and

47

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

AMPAM Commercial Southeast locations. This amount is included in "Accounts
payable and accrued expenses" on the balance sheet. During 2003, management
expects the shutdown operations to incur an additional $2.5 million to $3.5
million pretax loss related to the shutdown of these operations. As of December
31, 2002, there are 20 active jobs as compared to 91 active jobs at June 30,
2002. The loss at the shutdown locations resulted from underbidding jobs,
unfavorable changes in job estimates and poor field performance.

17. OPERATING SEGMENTS

The Company modified its internal organizational structure during the
fourth quarter of 2001 and divided its business into the three reporting
segments: single family residential, multifamily residential and commercial. The
Company's reportable segments offer the same products and services to distinct
customer groups. They are managed separately because each business requires
different operating and marketing strategies. During 2002, AMPAM derived
approximately 54%, 28% and 18% of its revenue from single family residential,
multifamily residential and commercial customers. These three reporting segments
all operate domestically, with no intersegment or foreign sales. The residential
segments share the same growth strategies and provide plumbing and HVAC
services; however, these different segments provide services to different
customers and have different competitors. The commercial segment is focused on
obtaining plumbing and mechanical contracts with higher margins.

AMPAM provides plumbing, HVAC and maintenance and repair services to single
family and multifamily residential customers. The single family residential
market includes housing projects, small condominium projects, and town house
development. The multifamily residential market includes large condominiums and
apartment projects. AMPAM provides plumbing, HVAC, maintenance and repair, and
mechanical contracting services to commercial customers. The commercial market
includes retail establishments, office buildings, hotels, manufacturing plants
and other industrial complexes and public and private institutional buildings
including schools, hospitals, dormitories, stadiums, airports and prisons.

The financial information presented for each segment does not allocate
corporate overhead costs. Corporate expenses in the years presented included
costs related to executive and operations management, sales and marketing,
accounting and administrative support. Corporate assets primarily include cash,
deferred tax assets, debt issuance costs, intangible assets (other than
goodwill), fixed assets related to the Company's corporate office and non-trade
accounts receivables. The Company measures performance of the segments based on
income from operations. The goodwill associated with each segment is reflected
in total assets for the segment.

48

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Segment information for the years ended December 31, 2000, 2001 and 2002 is
as follows (in thousands):

18. QUARTERLY INFORMATION (UNAUDITED)

Quarterly financial information for the years ended December 31, 2002 and
2001 is summarized as follows (in thousands):

The plumbing and mechanical contracting services industry is influenced by
seasonal factors, which generally result in lower activity during winter months
than in other periods. As a result, AMPAM expects that its revenue and profits
will generally be lower in the first and fourth quarters of each fiscal year,
and higher in the second and third quarters.
49

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by these items is hereby incorporated by reference to
the Company's definitive proxy statement which will be filed with the Commission
within 120 days of December 31, 2002.

ITEM 14. CONTROLS AND PROCEDURES

Within the 90-day period before the filing of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of the Company's disclosure
controls and procedures. Based on that evaluation, the CEO and CFO have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
the Company files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms, and that such information is accumulated
and communicated to the Company's management, including the CEO and CFO, as
appropriate, to allow timely decisions regarding required disclosure.

AMPAM also maintains a system of internal accounting controls that are
designed to provide reasonable assurance that the books and records of the
Company accurately reflect the transactions of the Company and that the
Company's polices and procedures are followed. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect such controls since the most recent evaluation of these
controls, including any corrective actions with regard to significant
deficiencies or material weaknesses in the Company's internal controls.

50

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)Financial Statements and Supplementary Data, Financial Statement
Schedules and Exhibits

None

(b) Reports on Form 8-K

None

(c) Exhibits

- ---------------

* Filed herewith.

52

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

AMERICAN PLUMBING & MECHANICAL, INC.

By: /s/ ROBERT A. CHRISTIANSON*
------------------------------------
Robert A. Christianson,
Chairman of the Board of Directors
and Chief Executive Officer

Date: March 31, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
indicated on March 28, 2003.

53

CERTIFICATIONS

I, Robert A. Christianson, certify that:

1. I have reviewed this annual report on Form 10-K of American Plumbing &
Mechanical, Inc.;

2. Based on my knowledge, this annual 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 annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures 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 annual report is being
prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

/s/ ROBERT A. CHRISTIANSON
--------------------------------------
Robert A. Christianson,
Chief Executive Officer
(Principal Executive Officer)

Date: March 31, 2003

54

I, David C. Baggett, certify that:

1. I have reviewed this annual report on Form 10-K of American Plumbing &
Mechanical, Inc.;

2. Based on my knowledge, this annual 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 annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures 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 annual report is being
prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

/s/ DAVID C. BAGGETT
--------------------------------------
David C. Baggett,
Chief Financial Officer
(Principal Financial Officer)

Date: March 31, 2003

55

INDEX TO EXHIBITS

- ---------------

* Filed herewith.