AMERICAN PLUMBING & MECHANICAL INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

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

For the quarter ended June 30, 2003

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 (IRS Employer
of Incorporation or Organization) Identification No.)

1950 LOUIS HENNA BLVD.
ROUND ROCK, TEXAS 78664
(Address of Principal Executive Offices) (ZIP Code)

(512) 246-5260
(Registrant's telephone number, including area code)

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

As of August 14, 2003, there were outstanding 13,211,383 shares of
common stock and 331,116 shares of Class B common stock of the Registrant.

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AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003

TABLE OF CONTENTS

Part I - Financial Information........................................................................................2
Item 1. Financial Statements......................................................................................2
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................15
Item 3. Quantitative and Qualitative Disclosures About Market Risks..............................................27
Item 4. Controls and Procedures..................................................................................27
Part II - Other Information..........................................................................................28
Item 1. - Legal Proceedings.......................................................................................28
Item 2. - Changes in Securities and Use of Proceeds...............................................................29
Item 3. - Defaults Upon Senior Securities.........................................................................29
Item 4. - Submission of Matters to a Vote of Security Holders.....................................................29
Item 5. - Other Information.......................................................................................29
Item 6. - Exhibits and Reports on Form 8-K........................................................................30
SIGNATURES...........................................................................................................31

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PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

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

2

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands)
(Unaudited)

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

3

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)
(Unaudited)

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

4

AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. ORGANIZATION AND BASIS OF PRESENTATION

American Plumbing & Mechanical, Inc. and subsidiaries ("AMPAM" or the
"Company"), is the largest company in the United States focused primarily on the
residential plumbing, heating ventilation and air conditioning (HVAC)
contracting services industry. The Company also provides mechanical contracting
services. AMPAM provides plumbing, HVAC and mechanical installation services to
single family residential, multifamily residential and commercial construction
customers. The Company is exploring opportunities to divest its remaining
commercial operations through a sale to third parties and/or location
management. See note 5 for further discussion.

These unaudited interim statements should be read in conjunction with
the Company's historical consolidated financial statements and related notes
included in the Annual Report on Form 10-K as filed with the Securities and
Exchange Commission for the year ended December 31, 2002.

These unaudited interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and the rules and regulations of the Securities and Exchange Commission
for reporting interim financial information. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
Management believes all adjustments necessary for a fair presentation of these
interim statements have been included and are of a normal and recurring nature.
The results of operations for interim periods are not necessarily indicative of
the results for the fiscal year. As discussed more fully in note 7 and in
Managements Discussion and Analysis elsewhere in this document, the Company is
in the process of restructuring its capital structure. If sufficient working
capital is not available from operations to fund daily cash needs or if the
Company is unsuccessful in obtaining additional sources of capital or unable to
negotiate an extension of the Credit Facility, or otherwise obtain the
forbearance of the banks under the Credit Facility, prior to March 31, 2004, the
Company may find it necessary, among other options, to seek protection under the
United States Bankruptcy Code. Accordingly, there may be substantial doubt as to
the Company's ability to continue as a going concern.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 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 further
discussion. Actual results could differ from those estimates.

5

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, at the time of revision, the revised estimated direct costs
would result in a "loss" contract, an accrual is made to record the estimated
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. See note 9 for further discussion.

3. DISCONTINUED OPERATIONS

In August 2002, management decided to discontinue the single family
operations in southern Virginia. Following the standards set by Statement of
Financial Accounting Standards ("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. In the fourth
quarter of 2002, the discontinued southern Virginia business unit ceased to
operate. Accordingly, the results of this operation are reflected as a loss on
discontinued operations, net of tax benefit, in the statement of income.

The results of the discontinued operation for the presented periods are
as follows (in thousands):

6

4. SHUTDOWN OPERATIONS

Also in August 2002, management decided to shut down the commercial
operations in Sacramento, CA and Pensacola, FL. For the quarter ended June 30,
2003, these operations collectively incurred operating losses of $2.7 million on
a pretax basis. For the six months ended June 30, 2003, these operations
collectively incurred operating losses of $4.7 million on a pretax basis.
Management expects to incur an additional $0.5 million to $1.0 million pretax
loss related to the shut down of these operations. The major portion of these
losses relate to the Company's commercial operations in Sacramento, CA.

Management expects the shutdown locations' operations to be completed
by September 30, 2003. Loss reserves of $0.5 million have been recorded at June
30, 2003 to reflect expected costs in excess of contract revenue at our
Sacramento, CA and Pensacola, FL commercial operation locations. As of June 30,
2003, there were 12 active jobs as compared to 91 active jobs at June 30, 2002,
at these locations.

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

5. COMMERCIAL DIVESTITURE

In July 2003, management decided to explore a divestiture of the
Company's remaining commercial operations located in Ohio and San Diego, CA. The
Company intends to effect the divestiture through a sale to third party buyers
and/or location management. The net book value of these operations as of June
30, 2003 was $9.4 million. Initial discussions have taken place with several
parties, however pricing has not been determined. Depending upon the final terms
of the sale, the Company may record a loss on the disposal of this business
segment.

6. WARRANTY RESERVE

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.

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The changes in the consolidated warranty liability for the presented
periods are as follows:

7. LONG TERM DEBT

BANK CREDIT FACILITY

The bank credit facility, as amended, (the "Credit Facility") is a
senior secured revolving commitment in an aggregate principal amount of $83.9
million. The Credit Facility was used to (a) fund acquisitions, (b) repurchase
Senior Subordinated 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 agent 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 Company is
seeking alternative sources of capital to repay the amounts due under the Credit
Facility. Should AMPAM be unsuccessful in obtaining additional sources of
capital or unable to negotiate an extension of the Credit Facility or otherwise
obtain the forbearance of the banks under the Credit Facility, the Company may
find it necessary, among other options, to seek protection under the United
States Bankruptcy Code.

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 in 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 June 30,
2003, the average interest rate on the Credit Facility was 5.6%. Because the
maturity of the Credit Facility is less than one year from the end of the
reporting period, the outstanding amount of the Credit Facility has been
classified as a component of "Current maturities of long-term debt." As of June
30, 2003, the Company had borrowings under the Credit Facility of $76.9 million
and outstanding letters of credit of $7.0 million.

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. On March 28, 2003, an amendment
to the Credit Facility was executed which amended certain covenants
prospectively. The Company met the amended covenants as of June 30, 2003. As a
condition of the amendment, fees of $0.8 million were paid and the interest rate
on the Credit Facility was increased by 0.5%. Additionally, as a condition of
the amendment, the Company agreed that if it did not repay its obligation under
the Credit Facility by July 31, 2003, an additional 1% fee would be due the
banks. Because the Company did not repay the Credit Facility in full on July 31,
2003, the Company made a payment of $0.8 million to the banks on or about that
date. The Company's Credit Facility and Senior Subordinated Notes contain cross
default provisions.

8

AMPAM utilizes its cash flow from operations and to the extent
available, borrowings under the Credit Facility, to enable the Company to meet
its working capital needs, debt service requirements and planned capital
expenditures for property and equipment. As of July 31, 2003, the Company had
borrowings under the Credit Facility of $76.9 million, outstanding letters of
credit of $7.0 million and cash on hand of $12.5 million. As the Company is
fully borrowed under the Credit Facility, all future cash flow requirements must
be provided by operating activities and the existing cash on hand. If these
sources of funding are insufficient to meet the Company's operating cash
requirements, the Company will need to seek additional sources of liquidity or
take other actions, which may among other options include seeking protection
under the United States Bankruptcy Code.

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").
Subsequently, $30.0 million in face value of the outstanding Senior Subordinated
Notes were repurchased and retired. 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 $1.1 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. The Company's Credit Facility and
Senior Subordinated Notes contain cross default provisions.

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

8. 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,

9

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. 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. Upon transfer of consideration, AMPAM retired 524,410 shares of
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. 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.

The three remaining holders of AMPAM's preferred stock, together
holding 524,410 shares, 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 June 30, 2003. 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. On or about July 15, 2003, the parties agreed to a
settlement under which the preferred stockholders would tender all outstanding
shares of preferred stock and forgo any and all claims for dividends and damages
in exchange for a payment of $3.5 million. The payment, which is subject to
approval by the Company's lenders, is due on September 15, 2003.

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

10

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

The Company is self-insured for health care, workers' compensation, and
general, property and auto liability up to predetermined amounts above which
third party insurance applies up to policy limits. As of June 30, 2003, the
Company has 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. To the extent claims are made against the Company and coverage
is denied by the insurance carrier or the aggregate losses under the policy
exceed the policy limits, the Company may be liable for additional costs.

9. GOODWILL

In June 2001, the FASB issued 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. SFAS 142 required the Company to complete a transitional
goodwill impairment test within six months from the date of adoption. It also
provides that goodwill should not be amortized, but must be tested for
impairment annually or more frequently if circumstances indicate potential
impairment. 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 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
June 30, 2003, the Company had $107.2 million of goodwill remaining on the
balance sheet.

11

10. STOCK BASED COMPENSATION

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 and interim reporting periods
ending after December 15, 2002.

The Company has elected to follow the disclosure only requirements of
SFAS 148 and thus 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.
The Company uses the Black-Scholes pricing model to measure the pro-forma
compensation expense attributable to stock options granted to employees. If the
stock options granted had been expensed the Company's net income / (loss) would
have been decreased / (increased) to the pro forma amounts indicated below (in
thousands):

As of June 30, 2003, approximately 2.0 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. RELATED PARTY TRANSACTIONS

On or about April 23, 2003 Mr. David C. Baggett resigned his positions
as President, Chief Operating Officer and Chief Financial Officer of the
Company. In connection with Mr. Baggett's resignation, he received a lump sum
payment of $0.5 million in exchange for a one-year extension of his non-compete
agreement, a one-year consulting agreement, payment of accrued but unpaid
vacation and bonus amounts and a full release in favor of the Company from all
claims and damages. Additionally, Mr. Baggett will receive certain medical and
other benefits through May 1, 2004. Approximately $0.1 million associated with
accrued vacation and bonus expense were reflected in the statement of income for
the six months ended June 30, 2003. The remainder of the payment was capitalized
and is being expensed over the terms of the consulting and non-compete
agreements.

12. OPERATING SEGMENTS

AMPAM's internal organizational structure is divided into three
reporting segments: single family residential, multifamily residential and
commercial. The Company's reportable segments offer similar products and
services to distinct customer groups. Because each business segment requires

12

different operating and marketing strategies they are managed and reviewed
separately. During the second quarter of 2003, AMPAM derived approximately 59%,
28% and 13% of its revenue from single family residential, multifamily
residential and commercial customers, respectively. For the six months ended
June 30, 2003, AMPAM derived approximately 57%, 29% and 14% of its revenue from
single family residential, multifamily residential and commercial customers,
respectively. 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.
As discussed in note 5, the Company is exploring the divestiture of its
remaining commercial operations.

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, stadiums, airports and prisons.

The financial information presented for each segment does not allocate
corporate overhead costs. Corporate expenses in the periods presented include
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 receivable. The goodwill associated with each segment is reflected in
total assets for the segment. The Company measures performance of the segments
based on income (loss) from operations.

Segment information for the three months ended June 30, 2003 and 2002
is as follows (unaudited, in thousands):

El Paso

13

Segment information for the six months ended June 30, 2003 and 2002 is
as follows (unaudited, in thousands):

14

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE
IN THIS QUARTERLY REPORT ON FORM 10-Q AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND RELATED NOTES AND OTHER DETAILED INFORMATION REGARDING AMPAM INCLUDED IN OUR
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 AND OTHER
REPORTS FILED BY US WITH THE SECURITIES AND EXCHANGE COMMISSION.

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", the "Company", "we" or "us") 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, existing or future claims that could exceed the levels at
which the Company is insured by third parties, the Company's ability to obtain
performance bonds from third party sureties, the Company's ability to manage its
growth, the use of incorrect project cost estimates which are used to determine
our percentage of completion and revenue on uncompleted jobs and goodwill
impairment write-offs. For further details on these risks, refer to the Risk
Factor section of the Company's Form 10-K for the year ended December 31, 2002.
All statements, other than statements of historical facts, included or
incorporated by reference in this report that address activities, events or
developments that we expect or anticipate 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 our 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 we believe 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.

GENERAL

American Plumbing and Mechanical, Inc. and subsidiaries ("AMPAM", the
"Company", "we" or "us") is the largest company in the United States focused
primarily on the residential plumbing, heating, ventilation and air conditioning
("HVAC") contracting services industry. The Company also provides mechanical
contracting services. We provide plumbing, HVAC installation and mechanical
services to single family residential, multifamily residential and commercial
construction customers.

The core of our business reflects substantial improvement from last
year, however, our Company has faced and continues to face challenges. Income
from continuing operations reflects a $2.3 million, or 31.5%, increase from the
same quarter last year. Significant challenges, notably the maturity of our
Credit Facility on March 31, 2004, the changes in key management positions,
which are discussed in more detail below and in Item 5 of Part II, and the
shutdown of our unprofitable operations are being actively addressed by
management and the Board of Directors.

15

We are attempting to identify outside sources of capital to repay the
amount due under the Credit Facility. To that end, the Board of Directors has
engaged the restructuring firm of Conway, Del Genio, Gries & Co., LLC to assist
the Company in this effort. We are in ongoing discussions with several parties
interested in potentially providing financial resources to us. However, there
can be no assurances that such resources will be available to the Company on
reasonable terms. Should we be unsuccessful in obtaining additional sources of
capital on terms acceptable to key operating management personnel or unable to
negotiate an extension of the Credit Facility, or otherwise obtain the
forbearance of the banks under the Credit Facility, we may find it necessary,
among other options, to seek protection under the United States Bankruptcy Code.

Although we have had changes in key management positions, our remaining
management team is focused on creating an operationally driven organization with
the goal of returning our Company to previous levels of profitability. Our
former Chief Operating Officer, Bob Richey, has returned as President of our
Western Single Family Operations. We expect his influence to have a significant
positive impact on reversing the decline in profitability we have experienced in
those operations. On or about May 1, 2003, Mr. Robert M. Nagel was retained by
AMPAM as a consultant to assist in the development of a financial and
operational restructuring plan. On or about June 1, 2003, Mr. Nagel joined AMPAM
as Executive Vice President. We are also in the process of replacing the outside
directors that resigned earlier this year. It is unlikely, however, that we will
be successful in our efforts to add any new independent directors to our board
before we have finalized and implemented our restructuring plan.

The losses and cash outflows from the shutdown of unprofitable
operations are substantially complete. Additionally, in July 2003, management
decided to explore the divestiture of our remaining commercial operations to
focus on our core residential business. These operations, while profitable, do
not share the same operating synergies as our residential segments. Many of the
jobs performed by the commercial business require performance bonds issued by
third party sureties. Because of market conditions and the current nature of our
bank debt, we are required to provide significant collateral to obtain these
bonds. As we have limited bonding capacity in the current environment,
management believes these collateral resources are better utilized to provide
bonding on higher margin multifamily residential work. The Company intends to
effect the divestiture through a sale to third party buyers and/or location
management. Depending upon the final terms of the transaction, we may record a
loss on the disposal of this segment. Approval of the Company's bank group, bond
holders and preferred stockholders will be required to consummate the sale.

RESULTS OF CONSOLIDATED OPERATIONS

The following discussion of our operating results should be read in
conjunction with the consolidated financial statements.

Our internal organizational structure is divided 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. Because
each business segment requires different operating and marketing strategies they
are managed and reviewed separately. 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

16

plants and other industrial complexes and public and private institutional
buildings including schools, hospitals, dormitories, stadiums, airports and
prisons.

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. Our
operating results discussed below are separated into three sections representing
results from our ongoing operations, discontinued operations and shutdown
operations.

The financial information presented for each segment does not allocate
corporate overhead costs. Corporate expenses in the periods presented include
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 receivable. The goodwill associated with each segment is reflected in
total assets for the segment. The Company measures performance of the segments
based on income (loss) from operations which is presented in the tables below:

ONGOING OPERATIONS

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

Three months ended June 30, 2003 compared to the three months ended June 30,
2002

SINGLE FAMILY SEGMENT

The results of the continuing single family operations for the
presented periods were as follows (in thousands):

Revenue from continuing single family operations increased $10.1
million or 12.7% in the second quarter of 2003 compared to the second quarter of
2002. The increase in revenue was due to an increased number of housing starts
in our Phoenix, southern California and Sacramento markets offset by a slowdown
of service in our Las Vegas market. The decrease in volume in our Las Vegas
market is due to a deliberate reduction in volume in an effort to improve our
margins in the market. Gross profit increased $2.4 million or 18.6% in the
second quarter of 2003 compared to the second quarter of 2002, while gross
margins from single family operations increased from 16.3% in the quarter ended
June 30, 2002, to 17.1% in the quarter ended June 30, 2003. The increase in
gross margins was mainly due to improvements in the Phoenix and Sacramento
markets offset by declines in Las Vegas, northern Virginia and Maryland. The
lower margins in our Las Vegas, northern Virginia and Maryland markets were the
result of inefficiencies in our material utilization and higher labor costs.

18

General and administrative expenses increased $0.2 million or 2.1% in
the second quarter of 2003 compared to the second quarter of 2002 and, as a
percentage of revenue, general and administrative expenses decreased from 9.7%
for the quarter ended June 30, 2002 to 8.8% for the quarter ended June 30, 2003.
The decrease in general and administrative expenses as a percentage of revenue
is due to lower business insurance costs and overall cost cutting efforts.
Income from single family operations increased $2.2 million from in the second
quarter of 2003 when compared to the second quarter of 2002. As a percentage of
revenue, income from operations increased to 8.3% for the quarter ended June 30,
2003, from 6.5% for the quarter ended June 30, 2002, due to the factors
discussed above.

MULTIFAMILY SEGMENT

The results of the multifamily operations for the presented periods
were as follows (in thousands):

Revenue from multifamily operations increased slightly in the second
quarter of 2003 compared to the second quarter of 2002. While revenue for the
multifamily segment was relatively flat, we noted significant improvement in our
southern California and southeastern United States markets offset by lower
volume in our Maryland, Nevada and Colorado markets. Gross profit from
multifamily operations decreased $0.3 million or 3.9% in the second quarter of
2003 compared to the second quarter of 2002, while gross margins decreased from
18.5% in the quarter ended June 30, 2002, to 17.7% in the quarter ended June 30,
2003. The decrease in gross margins was due to higher levels of field overhead
leveraged over consistent volume offset by lower materials costs.

General and administrative expenses decreased slightly in the second
quarter of 2003, compared to the second quarter of 2002 and, as a percentage of
revenue, decreased from 8.6% in the quarter ended June 30, 2002, to 8.3% in the
quarter ended June 30, 2003. Income from multifamily operations decreased $0.2
million and, as a percentage of revenue, from 9.9% in the quarter ended June 30,
2002 to 9.5% in the quarter ended June 30, 2003 due to the factors discussed
above.

19

COMMERCIAL SEGMENT

The results of the commercial operations for the presented periods were
as follows (in thousands):

Revenue from ongoing commercial operations increased $4.4 million or
28.8% in the second quarter of 2003 compared to the second quarter of 2002. The
increase in revenue was due mainly to renewed strength in the commercial
construction industry in our southern California and Indianapolis markets. Gross
profit from ongoing commercial operations increased $0.6 million in the second
quarter of 2003, compared to the second quarter of 2002 while gross margins
increased from 10.6% in the quarter ended June 30, 2002 to 11.4% in the quarter
ended June 30, 2003. The increase in gross margins was due to lower overhead
expenses leveraged over higher volume.

General and administrative expenses increased $0.5 million and, as a
percentage of revenue, from 8.8% in the quarter ended June 30, 2002 to 9.3% in
the quarter ended June 30, 2003, as a percentage of revenue. The increase in
general and administrative costs was due to an increase in management and
personnel costs. Income from ongoing commercial operations increased slightly
and as a percentage of revenue increased from 1.9% in the quarter ended June 30,
2002 to 2.1% in the quarter ended June 30, 2003 due to the factors as discussed
above.

CORPORATE

General and administrative expenses at corporate decreased $0.5 million
from $2.9 million in the quarter ended June 30, 2002, to $2.4 million in the
quarter ended June 30, 2003. The decrease in general and administrative expenses
at corporate was mainly due to a reduction in personnel and overall cost cutting
efforts.

OTHER CONSOLIDATED ITEMS REQUIRED TO RECONCILE TO NET INCOME

Other expense, net, increased $0.2 million from $4.4 million in the
quarter ended June 30, 2002, to $4.6 million in the quarter ended June 30, 2003.
The increase was mainly due to increased interest expense resulting from the
higher interest rate that the Company pays on its variable rate debt.

The provision for income taxes increased $2.7 million from a tax
benefit of $1.9 million for the quarter ended June 30, 2002 to a tax provision
of $0.8 million for the quarter ended June 30, 2003. The tax benefit reflects
the Company's operating loss during the second quarter of 2002. Consolidated net
income increased $4.8 million from a loss of $3.6 million for the quarter ended
June 30, 2002, to net income of $1.2 million for the quarter ended June 30,
2003.

20

Six months ended June 30, 2002 compared to the six months ended June 30, 2003

SINGLE FAMILY SEGMENT

The results of the continuing single family operations for the
presented periods were as follows (in thousands):

Revenue from continuing single family operations increased $14.8
million or 9.8% for the six months ended June 30, 2003 compared to the six
months ended June 30, 2002. The increase in revenue was due to an increased
number of housing starts in our Phoenix, southern California and Sacramento
markets offset by a slowdown of service in our Las Vegas market. The decrease in
volume in our Las Vegas market is due to a deliberate reduction in volume in an
effort to improve our margins in the market. Gross profit increased by $0.5
million or 2.2% for the six months ended June 30, 2003 compared to the six
months ended June 30, 2002, while gross margins from single family operations
decreased from 16.7% for the six months ended June 30, 2002, to 15.6% for the
six months ended June 30, 2003. The decrease in gross margins was mainly due to
declines in Las Vegas, northern Virginia and Maryland offset by improvements in
the Phoenix and Sacramento markets. The lower margins in our Las Vegas, northern
Virginia and Maryland markets were the result of inefficiencies in our material
utilization and higher labor cost.

General and administrative expenses increased by $0.7 million or 4.4%
for the six months ended June 30, 2003, but as a percentage of revenue, general
and administrative expenses decreased from 10.3% for the six months ended June
30, 2002 to 9.8% for the six months ended June 30, 2003. The increase in general
and administrative expenses is due to higher occupancy and business insurance
expenses. The decrease in general and administrative expenses as a percentage of
revenue is due to slightly higher fixed expenses leveraged over higher volume.
Income from single family operations declined slightly for the six months ended
June 30, 2003, and as a percentage of revenue decreased from 6.5% for the six
months ended June 30, 2002 to 5.8% for the six months ended June 30, 2003 due to
the factors discussed above.

MULTIFAMILY SEGMENT

The results of the multifamily operations for the presented periods
were as follows (in thousands):

21

Revenue from multifamily operations increased $3.7 million or 4.5% for
the six months ended June 30, 2003 compared to the six months ended June 30,
2002. The increase in revenue was due mainly to increases in our southeastern
United States and southern California markets offset by lower volume in our
Maryland, Colorado and Nevada markets. The increase in our southeastern United
States and southern California markets is mainly due to increased levels of
multifamily construction and favorable changes in job cost estimates on jobs
completed in the first quarter of 2003 resulting in the recognition of the
remaining revenue on these jobs. Gross profit from multifamily operations
increased $1.7 million or 11.8% for the six months ended June 30, 2003 compared
to the six months ended June 30, 2002, while gross margins increased from 17.6%
for the six months ended June 30, 2002, to 18.8% for the six months ended June
30, 2003. The increase in gross margins was due to relatively constant levels of
field overhead leveraged over higher volume, favorable changes in jobs estimates
and lower materials costs.

General and administrative expenses increased slightly for the six
month period ended June 30, 2003 compared to the six month period ended June 30,
2002. As a percentage of revenue, general and administrative expenses decreased
from 9.0% for the six months ended June 30, 2002 to 8.8% for the six months
ended June 30, 2003. Income from multifamily operations increased $1.6 million
in the six months ended June 30, 2003 compared to the six months ended June 30,
2002. As a percentage of revenue, multifamily income from operations increased
from 8.6% for the six months ended June 30, 2002 to 10.0% for the six months
ended June 30, 2003 due to the factors discussed above.

COMMERCIAL SEGMENT

The results of the commercial operations for the presented periods were
as follows (in thousands):

Revenue from ongoing commercial operations increased $5.7 million or
17.0% for the six month period ended June 30, 2003 compared to the six month
period ended June 30, 2002. The increase in revenue was due mainly to renewed
strength in the commercial construction industry in our southern California
market. Gross profit from ongoing commercial operations increased $1.5 million
for the six month period ended June 30, 2003, compared to the six month period
ended June 30, 2002. Gross margins increased from 10.3% to 12.6% for the six
month periods ended June 30, 2002 and 2003, respectively. The increase in gross
margins was due to our continued focus on higher margin jobs, increased volume
and more efficient production.

General and administrative expenses increased $0.8 million for the six
months ended June 30, 2003 and, as a percentage of revenue, from 8.5% to 9.3%
for the six months ended June 30, 2002 and 2003, respectively. The increase in
general and administrative costs was due to an increase in management and
personnel costs. Income from ongoing commercial operations increased $0.7
million, or as a percentage of revenue, from 1.8% for the six month period ended
June 30, 2002 to 3.3% for the six month period ended June 30, 2003 due to the
factors discussed above.

22

CORPORATE

General and administrative expenses at corporate decreased $1.2 million
from $5.2 million to $4.0 million for the six month periods ended June 30, 2002
and 2003, respectively. The decrease in general and administrative expenses at
corporate was mainly due to a reduction in personnel and overall cost cutting
efforts.

OTHER CONSOLIDATED ITEMS REQUIRED TO RECONCILE TO NET INCOME

Other expense, net, increased $0.5 million from $8.3 million for the
six month period ended June 30, 2002, to $8.8 million for the six month period
ended June 30, 2003. The increase was mainly due to increased interest expense
resulting from the higher interest rate that the Company pays on its variable
rate debt.

The provision for income taxes increased $2.1 million from a tax
benefit of $1.4 million, generated by the Company's operating loss during the
first six month period of 2002, to a tax provision of $0.7 million for the six
month period ended June 30, 2003. Consolidated net income increased from a loss
of $37.7 million for the six month period ended June 30, 2002, to net income of
$0.8 million for the six months ended June 30, 2003. The net loss in the first
six month period of 2002 reflects the cumulative effect of a change in
accounting principle resulting from our adoption of SFAS 142.

DISCONTINUED OPERATIONS

In August 2002, management decided to discontinue the single family
operations in southern Virginia. Following the standards set by Statement of
Financial Accounting Standards ("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. In the fourth
quarter of 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.

The results of the discontinued operation for the presented periods are
as follows (in thousands):

23

SHUTDOWN OPERATIONS

Also in August 2002, management decided to shut down our commercial
operations in Sacramento, CA and Pensacola, FL. For the quarter ended June 30,
2003, these operations collectively incurred operating losses of $2.7 million on
a pretax basis. For the six months ended June 30, 2003, these operations
collectively incurred operating losses of $4.7 million on a pretax basis.
Management expects to incur an additional $0.5 million to $1.0 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 on prospective
contracts, unfavorable changes in job estimates and poor field performance.

Management expects the shutdown locations' operations to be completed
by September 30, 2003. Loss reserves of $0.5 million have been recorded at June
30, 2003 to reflect expected costs in excess of contract revenue at our
Sacramento, CA and Pensacola, FL commercial operation locations. As of June 30,
2003, there were 12 active jobs as compared to 91 active jobs at June 30, 2002,
at these locations.

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

SIGNIFICANT ACCOUNTING POLICIES

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

24

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 estimated remaining 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.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2003, the Company had cash on hand of $15.9 million.
However, current liabilities exceeded current assets by $6.9 million reflecting
the classification of the $76.9 million due under the Credit Facility maturing
on March 31, 2004 as a current liability. Additionally, the Company had $94.6
million of outstanding long-term indebtedness, including capital lease
obligations totaling $0.7 million. As previously discussed, the Company is
attempting to identify alternative sources of capital to repay the bank debt. To
that end, the Board of Directors has engaged the restructuring firm of Conway,
Del Genio, Gries & Co., LLC to assist the Company in this effort. We are in
ongoing discussions with several parties interested in potentially providing
financial resources to AMPAM. There can be no assurances that such borrowings
will be made available to the Company on reasonable terms. Should the Company be
unsuccessful in obtaining additional sources of capital on terms acceptable to
key operating management personnel or unable to negotiate an extension of the
Credit Facility or otherwise obtain the forbearance of the banks under the
Credit Facility, AMPAM may find it necessary, among other options, to seek
protection under the United States Bankruptcy Code.

Because of the seasonal nature of AMPAM's business, the Company
historically builds working capital in the first and second quarters of the year
with the increase in volume and then reduces the demand for working capital
through the third and fourth quarters as volume declines in the winter months.

For the six months ended June 30, 2003, net cash used in operating
activities was $3.3 million. This use of cash was primarily attributable to an
increase in working capital and losses incurred at shutdown locations offset by
income from ongoing operations. Cash used in investing activities was $0.3
million which primarily relates to capital expenditures of $0.4 million, offset
by proceeds from sales of property and equipment. Cash provided by financing
activities for the six months ended June 30, 2003, was $16.8 million and was
obtained from net borrowings on the Company's Credit Facility. Cash on hand at
June 30, 2003 was $15.9 million.

25

For the six months ended June 30, 2002, net cash used in operating
activities was $4.5 million. This use of cash was primarily attributable to
losses incurred at shutdown locations and to an increase in working capital.
Cash used in investing activities was $2.3 million which primarily relates to
the capital expenditures of $2.5 million, offset by proceeds from sales of
property and equipment. Cash provided by financing activities for the six months
ended June 30, 2002, was $8.5 million and was primarily obtained from net
borrowings on our Credit Facility offset by a $2.6 million payment for the
preferred shares received in the lawsuit discussed in note 8 to the consolidated
financial statements. Cash on hand at June 30, 2002 was $2.7 million.

The Company's Credit Facility, with a total commitment of $83.9 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 agent 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 June 30, 2003, the Company had outstanding letters
of credit of $7.0 million which lowers our borrowing capacity under the Credit
Facility.

AMPAM utilizes its cash flow from operations and to the extent
available, borrowings under the Credit Facility, to enable the Company to meet
its working capital needs, debt service requirements and planned capital
expenditures for property and equipment. As of July 31, 2003, the Company had
borrowings under the Credit Facility of $76.9 million, outstanding letters of
credit of $7.0 million and cash on hand of $12.5 million. As the Company is
fully borrowed under the Credit Facility, all future cash flow requirements must
be provided by operating activities. If cash flows from operations are
insufficient to meet the Company's operating cash requirements, the Company will
need to seek additional sources of liquidity or take other actions, which may,
among other options, include seeking protection provided under the United States
Bankruptcy Code. 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. The
Company made the April 15, 2003, interest payment as scheduled.

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. On March 28, 2003, an amendment
to the Credit Facility was executed which amended certain covenants
prospectively. The Company met the amended covenants as of June 30, 2003. As a
condition of the amendment, fees of $0.8 million were paid and the interest rate
on the Credit Facility was increased by 0.5%. Additionally, the amendment
provided that if the Company did not repay its obligation under the Credit
Facility by July 31, 2003, an additional 1% fee would be due the banks. Because
the Company did not repay the Credit Facility in full on July 31, 2003, the
Company made a payment of $0.8 million to the banks on or about that date. The
Company's Credit Facility and Senior Subordinated Notes contain cross default
provisions.

AMPAM has three remaining holders of preferred stock who cumulatively
hold 524,410 shares. As of June 30, 2003, the value of the outstanding preferred
shares was $6.8 million. Additionally, $0.7 million of accrued but undeclared
dividends is due as of June 30, 2003. The 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 June 30, 2003. For further
discussion regarding the outstanding preferred shares refer to Part II, Item I,
Legal Proceedings.

26

SEASONALITY

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 are due to weather, buying trends and
other factors resulting 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. Additionally, the
Company's working capital requirements fluctuate based upon the seasonal change
in volume with working capital increasing in the first and second quarters as
volume increases with a corresponding decline in working capital at the end of
the third quarter and into the fourth quarter as volume declines.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risks

We are exposed to various market risks primarily related to potential
adverse changes in interest rates. In the normal course of business, we employ
established policies and procedures to manage this risk. Our exposure to changes
in interest rates primarily results from our short-term and long-term debt with
both fixed and floating interest rates. AMPAM's debt with fixed interest rates
consists of Senior Subordinated Notes and capital leases. Our debt with variable
interest rates consists primarily of the Credit Facility.

If market interest rates were to increase immediately and uniformly by
100 basis points from levels as of June 30, 2003, the related annual interest
expense would increase by approximately $0.8 million.

Other than the items mentioned above, there were no other material
quantitative or qualitative changes during the first six months of 2003 in the
Company's market risk sensitive instruments.

ITEM 4. Controls and Procedures

Management with the participation of the Chief Executive Officer
("CEO") and Controller, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the
period covered by this report. Based on that evaluation, the CEO and Controller
have concluded that as of the end of such period, the Company's disclosure
controls and procedures were effective to ensure that information required to be
disclosed by the Company in reports that the Company files or submits under the
Securities Exchange Act of 1934 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 Controller, as appropriate, to
allow timely decisions regarding required disclosures.

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 not been any changes
in the Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

27

PART II - OTHER INFORMATION

ITEM 1. - 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. 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. Upon transfer of consideration, AMPAM retired 524,410 shares of
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. 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.

The three remaining holders of AMPAM's preferred stock, together
holding 524,410 shares, 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 June 30, 2003. 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. On or about July 15, 2003, the parties agreed to a
settlement under which the preferred stockholders would tender all outstanding
shares of preferred stock and forgo any and all claims for dividends and damages
in exchange for a payment of $3.5 million. The payment, which is subject to
approval by the Company's lenders, is due on September 15, 2003.

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:

(vi) 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;

(vii) 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;

28

(viii) 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;

(ix) 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

(x) 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.

ITEM 2. - Changes in Securities and Use of Proceeds

None

ITEM 3. - Defaults Upon Senior Securities

None

ITEM 4. - Submission of Matters to a Vote of Security Holders

The Annual Meeting of the Company's stockholders was held on May 29,
2003.

(a) The votes cast with respect to the election of three Class III
Directors are summarized as follows:

Consequently, the stockholders elected Lloyd C. Smith and Stephen F.
Turner to the Company's Board of Directors. Richard M. Pollard was not
re-elected by the stockholders to the Company's Board of Directors.

ITEM 5. - Other Information

On or about April 23, 2003 Mr. David C. Baggett resigned his positions
as President, Chief Operating Officer and Chief Financial Officer of the
Company. In connection with Mr. Baggett's resignation, he received a lump sum
payment of $0.5 million, in exchange for a one-year extension of his non-compete
agreement, a one-year consulting agreement, payment of accrued but unpaid
vacation and bonus amounts and a full release in favor of the Company from all
claims and damages. Additionally, Mr. Baggett will receive certain medical and
other benefits through May 1, 2004. On or about May 18, 2003, Mr. Lloyd C. Smith
was named as the Company's President and Chief Operating Officer, and assumed
Mr. Baggett's operations responsibilities. Mr. Paul Leleux, the Company's
Controller, has assumed Mr. Baggett's financial responsibilities until a
successor is identified and fills the position. On or about May 1, 2003, Mr.
Robert M. Nagel was retained by the Company as a consultant to assist in the
development of a financial and operational restructuring plan. On or about June
1, 2003, Mr. Nagel joined AMPAM as Executive Vice President.

29

On or about May 28, 2003 Mr. David Baggett tendered his resignation as
a Director of the Company. At the May 29, 2003 annual stockholders meeting,
Richard M. Pollard was not re-elected to the board seat he held. On or about May
30, 2003 Susan O. Rheney, Albert W. Niemi, Jr. and Michael E. Workman, the
remaining independent directors of the Company, tendered their resignation
effective as of that date. The Company is in the process of replacing the
outside directors that resigned earlier this year. It is unlikely, however, that
AMPAM will be successful in its efforts to add any new independent directors to
the Board of Directors before the restructuring plan has been finalized and
implemented. As of the date of this filing, these seats remain open and the
Board of Directors as a whole is acting as the Company's Audit Committee.

Stephen Turner resigned his director seat on or about June 20, 2003.
The Board of Directors appointed Mr. Robert C. Richey, a former director, to
serve the remainder of Mr. Turner's unexpired term. Mr. Richey has also accepted
the position of President of the Company's Western Single Family Operations.

ITEM 6. - Exhibits and Reports on Form 8-K

(a) The exhibits to this report are listed below

*3.1 Amended and Restated Certificate of Incorporation (American
Plumbing& Mechanical, Inc. Registration Statement on Form S-4
(File No. 333-81139), Exhibit 3.1).

*3.2 Amended and Restated Bylaws (American Plumbing & Mechanical,
Inc. Registration Statement on Form S-4 (File No. 333-81139),
Exhibit 3.2).

*3.3 Certificate of Designations of 10% Cumulative Redeemable
Convertible Preferred Stock, Series A (American Plumbing &
Mechanical, Inc. Registration Statement on Form S-4 (File No.
333-81139), Exhibit 3.3).

*4.1 Indenture, dated May 19, 1999, by and among American Plumbing
& Mechanical, Inc., State Street Bank and Trust Company and
the other parties named therein with respect to $125,000,000
11 5/8% Senior Subordinated Notes due 2008 (American Plumbing
& Mechanical, Inc. Registration Statement on Form S-4 (File
No. 333-81139), Exhibit 4.1).

31.1 Certification of Robert A. Christianson pursuant to Rule
13a-14(a)/15d-14(a).

31.2 Certification of Robert M. Nagle pursuant to Rule
13a-14(a)/15d-14(a).

31.3 Certification of Paul Leleux pursuant to Rule
13a-14(a)/15d-14(a).

32.1 Certification of Robert A. Christianson pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

32.2 Certification of Robert M. Nagel pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

32.3 Certification of Paul Leleux pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

*Incorporated by reference

(b) The registrant filed a report dated June 5, 2003, on Form 8-K,
announcing the reelection to the Registrant's Board of
Directors of Lloyd C. Smith and Stephen F. Turner and the
resignations of David C. Baggett, Susan O. Rheney, Albert W.
Niemi, Jr., and Michael E. Workman from the Registrant's Board
of Directors effective May 30, 2003.

30

SIGNATURES

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

AMERICAN PLUMBING AND MECHANICAL, INC.

Date: August 14, 2003 By: /s/ Robert A. Christianson
---------------------------
Robert A. Christianson,
Chief Executive Officer

Date: August 14, 2003 By: /s/ Robert M. Nagel
---------------------------
Robert M. Nagel,
Executive Vice President

Date: August 14, 2003 By: /s/ Paul Leleux
---------------------------
Paul Leleux,
Controller

31

EXHIBIT INDEX